1. 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

2. -- 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
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3. 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.
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4. 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
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5. 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
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6. 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.
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7. Part I Analysis - How do the rules governing shareholder proposals impact the actions taken by shareholders?

8. Sample description (Table 1)
US Sample
#Prpl
#Firm years
#Firms
IRRC universe ( )
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 ( )
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

9. 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?
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10. #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.

11. 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.

12. 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.

13. UK shareholder proposals by proposal types (Table 3. Panel B)
Board proposals constitute 84% of all UK shareholder proposals between 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%)

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

15. Shareholder proposals by sponsor typesUS 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.

16. 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%)
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17. Part II Analysis - How do firms respond to the different proxy rules and corresponding shareholder actions?

18. 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)
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19. Part II Analysis - Impact Under US Proxy Rules

20. 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

21. 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

22. 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).

23. 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

24. Impact on CEO turnover

25. Impact of Shareholder Proposals on Board Structure - Under US Proxy Rules
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26. 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
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27. Part II Analysis - Impact Under UK Proxy Rules

28. 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.

29. 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
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30. 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
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31. How Do the Rules Governing Shareholder Proposals Impact Firms?
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