Should the Board Have Control over Shareholder Proposals? Evidence from China

Abstract

This Article empirically investigates the impacts of the board’s rejection of shareholder proposals on corporate value and the appropriate approach to regulation. The study utilizes a dataset of such incidents in China, where the board enjoys significant discretion in rejecting proposals due to the inadequacy of legal enforcement mechanisms. The findings provide suggestive evidence that the market reacts negatively to the announcement of proposal rejections, leading to a significant decline in a firm’s stock value. The most adverse effects are associated with rejections of director nomination proposals and blockholder-sponsored proposals. The inclusion of external legal opinions can help alleviate these adverse consequences. Additionally, the research uncovers that while the two stock exchanges in China demonstrate overall competence in identifying harmful rejection decisions, the effectiveness of their regulatory actions via comment letters is hindered by the inherent weakness of the soft law approach. Drawing upon these results, this study posits that the critical value of the shareholder proposal regime lies in providing a low-cost approach for dissident shareholders to replace poorly performing management and facilitating the constructive engagement of large shareholders and the management. Furthermore, it is recommended that China establish an SEC-style review process for board rejection decisions, with the exchanges as the ultimate authority permitting the exclusion of shareholder proposals.