A Comparative Analysis of Shareholder Proposals in the US and UK Bonnie Buchanan, Seattle University Tina Yang, Clemson University/Villanova University European Financial Management Symposium – Cambridge University, April 10, 2009

-- Aaron A. Dhir (2006), American Business Law Journal Shareholder-initiated proposals occupy a unique place in corporate law, as they provide the shareholder with a mechanism by which to initiate corporate action, as opposed to merely reacting to the actions of management. -- Aaron A. Dhir (2006), American Business Law Journal "The recent market turmoil has clearly shown that if more shareholders had been activist it would have led to management being more accountable, fewer mistakes would have been made and shareholder value would have been preserved…". -- Philip Rice, CEO of SRM Global 1/23/2018

US regulators are debating over proxy reform to empower shareholders Motivation US regulators are debating over proxy reform to empower shareholders 2003. The SEC directed the Division of Corporation Finance to examine proxy regulations and develop possible changes to those regulations  2003. The SEC amend the Investment Company Act of 1940, requiring mutual funds to disclose their voting decisions. 2007. The SEC issued a proposal that would allow shareholder access to company proxy statements for director nominations. As evidence, post Enron, US regulators has implemented several important governance reforms and initiated review of proxy rules with the objective to make shareholder proposal a more effective way for shareholders to exercise their rights as corporate owners and to play the role of active monitors. 1/23/2018

Objectives Compare US and UK shareholder proposals to shed light on the current policy debate in the US We conduct a comparative analysis of US and UK shareholder proposals to address the research question: How do the rules governing shareholder proposals impact the actions taken by shareholders? How do firms respond to the different proxy rules and corresponding shareholder actions? Update the US evidence on the efficacy of shareholder proposals Provide the first in-depth analysis on UK shareholder proposals Policy implication Proxy reform in the US Tentative evidence on global shareholder activism 1/23/2018

A Comparison of US and UK Governance Systems Legal regime Common-law Ownership structure Dispersed Capital markets Well-developed, liquid Institutional ownership Large Shareholder Protection Good Takeover markets Active 1/23/2018

Key Differences in US and UK Proxy Rules and Practices Ownership requirement >1% >5% (AGM) >10% (EGM) Who bear circulation costs? Firms Shareholders Can shareholders call special meetings? No Yes Can shareholders nominate or elect directors? Is resolution binding? Are institutions obligated to vote? Are firms obligated to release voting results? Electronic vote although the proxy rules are less onerous on sponsors in the US than in the UK in terms of ownership requirement and circulation costs, they confer UK shareholders greater power because of their ability to call special meetings, the relative ease for shareholders to remove directors, and the binding power of shareholder proposals. 1/23/2018

Part I Analysis - How do the rules governing shareholder proposals impact the actions taken by shareholders?

Sample description (Table 1) US Sample #Prpl #Firm years #Firms IRRC universe (2000-2006) 6,762 2,985 1,077 #obs. Exl. due to missing voting outcome 2,950 956 313 Initial sample 3,812 2,029 764 #obs. Exl. due to missing financial data 623 312 68 #obs. Exl. due to missing match 1,230 514 126 #obs. Exl. due to missing board data 131 83 41 Final sample 1,828 1,120 529 US data sources: CRSP (stock prices), COMPUSTAT (financial statement data), Execucomp (CEO compensation data), IRRC (board data), Disclosure (ownership data). We manually collect 1,101 firm years of board data and 496 firm years of ownership data to supplement missing in IRRC and Disclosure. UK data Thomson, Factiva, Hoovers, Lexis-Nexis. ISS gives us proposal data. UK Sample #Prpl #Firm years #Firms Initial sample/ISS universe (2000-2006) 509 99 85 #obs. Exl. due to missing financial data 207 36 34 #obs. Exl. SIC=6726 or 6799 52 9 Final sample 250 54 42

Research Question How do proxy rules result in systematic differences in How responsive is the proposal process? The types proposals requisitioned? Who sponsors the shareholder proposals? 1/23/2018

#Shareholder proposals and shareholder meetings (Table 2) US UK Potential reasons %prpl related to a proxy contest 0% 60% Much easier for UK shareholders than for US shareholders to nominate and elect directors. #prpl per firm in a given year 1.9 5.1 %special meetings <1% 72% US shareholders cannot call special meetings; UK shareholders can. %incidences where a firm holds more than one shareholder meeting per year 8% First we examine whether shareholder proposals in the US and UK exhibit systematic differences in terms of submission frequency, proposal types, proposal sponsors and voting outcomes. We classify a proposal as proxy-contest related, if a shareholder submits multiple proposals to one shareholder meeting, which, if passed, have the effect of replacing the entire board. It appears UK shareholders choose a proxy contest as a mechanism to trigger corporate changes.

Proposal Types – Definitions Board related proposals Compensation related proposals e.g. expensing stock options Governance related proposals e.g. submitting shareholder rights plan (poison pill) to shareholder vote. Social related proposals e.g. reporting on political contributions Environmental proposals e.g. reporting on greenhouse gas emissions. Business-related proposals e.g. targeted at changing the firm’s operations or strategies. I should clarify what an ordinary shareholder proposal is. An ordinary shareholder proposal is a recommendation or requirement that the company and/or its board of directors take action, which you intend to present at the meeting of the company’s shareholders. A proxy contest, is if a shareholder submits multiple proposals to one shareholder meeting, which, if passed, have the effect of replacing the entire board.

US shareholder proposals by proposal types (Table 3. Panel A) Board proposals appear most frequently (30%) Followed by compensation (20%) Social (18%) And governance (15%) proposals Board proposals are the main driver behind the increase, 41% of the total proposals in 2006 vs. 32% in 2000.

UK shareholder proposals by proposal types (Table 3. Panel B) Board proposals constitute 84% of all UK shareholder proposals between 2000-2006 vs. 30% for the US sample. Business proposals have the second highest submission rate in the UK (10.2%) but the lowest submission rate in the US (3.6%)

U.S./UK shareholder proposals by proposal types (Table 3. Panel B)

Shareholder proposals by sponsor types US UK Institutions 17.3% 46.1% Individuals (activists + occasional) 40.5% (24.1%+16.4%) 0% Social/environmental groups 22.4% 1.4% Unions 19.2% 0.4% Private investors <1% 16.3% Former executives/directors 24.1% Associated companies 8.6% Evelyn Davis sponsored 450 shareholder proposals in our US sample. Former executives: for the UK 94% of that figured tended to be either retured or previously ousted. UK – only 2 are sponsored by a union.

What Do We Learn So Far? How do the rules governing shareholder proposals impact the actions taken by shareholders? UK shareholders utilize the greater power granted to them under the UK proxy rules to advance their agenda US UK %Proposals to pass 19% 39% %Passed proposals that are binding 0% 100% %Proposals target at electing/removing directors 98% %Special meetings 72% Shareholder group that sponsor the most proposals Individual investors (40%) Institutional investors (46%) 1/23/2018

Part II Analysis - How do firms respond to the different proxy rules and corresponding shareholder actions?

Research Design To assess the impact of shareholder proposals, we compare sample firms’ Performance CEO turnover Board structure to those of the industry and a control sample (matched on Fama-French industry, ROA, and market value of equity) 1/23/2018

Part II Analysis - Impact Under US Proxy Rules

Univariate Results - US Sample (Table 5) US sample firms are: Larger (in terms of MVE and total book assts) Older (32 years) Smaller MTB and net sales growth (suggesting they have lower market valuation and relatively poor growth prospects) Inferior accounting performance

Univariate Results - US Sample (Table 5) Sample firms have: Higher leverage ratios Lower payout ratios Less FCF Larger boards More likely to have the CEO be Chair Lower CEO ownership No significant difference between sample and matching firm on institutional ownership

Impact on firm performance – the US evidence (Table 8) In panel A the stock return result is quite contrary to the existing literature. For firms with complete four-year data: stock returns increase by more than 14% within 2 years of receiving shareholder proposals (and is statistically significant).

Impact on corporate policies – the US evidence (Table 9, 10) Compared to peers (prior to proposal): Poor growth prospects More levered Lower payout Less CEO pay, smaller pay-for-performance sensitivity Lower spending; Deterioration of growth prospects (MTB, capital expenditure) Lower debt Different story on payout

Impact on CEO turnover

Impact of Shareholder Proposals on Board Structure - Under US Proxy Rules 1/23/2018

What Do We Learn from the US Study? After a proposing event, US firms exhibit: Higher stock returns Key proposals have greater impact Higher CEO turnover Greater likelihood to appoint an independent Chairman 1/23/2018

Part II Analysis - Impact Under UK Proxy Rules

Impact on firm performance and corporate policy - the UK evidence (Table 11. A) Lower sales growth and higher leverage after the proposing event Increase dividend payout and improve sock and accounting performance after receiving a shareholder proposal.

Impact on Board Structure and CEO Turnover – Under UK Proxy Rules Dif %Non-executive directors on the board 57% 58% 2% CEO is the Chairman 17% 13% -4% Board size 7.9 7.6 -0.3 1/23/2018

What Do We Learn from the UK Study? The economic impact of UK shareholder proposals is … ROA and stock returns are lower Less borrowing, more payout 1/23/2018

How Do the Rules Governing Shareholder Proposals Impact Firms? 1/23/2018