Who Withdraws Shareholder Proposals and Does It Matter? An Analysis of Sponsor Identity and Pay Practices

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: We study more than 12,000 shareholder proposals that were filed to S&P1500 companies from 1997 to 2009, and investigate the determinants of proposal withdrawal by the sponsoring shareholder. We also study the effectiveness of withdrawn proposals as a corporate governance device. Research Findings/Insights: We find that proposals filed by influential investors are more likely to be withdrawn than proposals filed by private investors. Our empirical results show that institutional ownership (in particular by long-term, passively investing institutions) is positively related to the likelihood of a proposal's withdrawal if the sponsoring shareholder is an institutional investor. We also document a negative relation between CEO ownership and the likelihood of withdrawal. This effect is most pronounced for corporate governance proposals. We also show that withdrawn proposals on executive compensation change subsequent corporate pay practices. Theoretical/Academic Implications: Our paper provides the first comprehensive evidence on withdrawn shareholder proposals. We show that withdrawn proposals are a strong and important category of proposals because managers proactively prevent them from being put to a vote. Hence, our results imply that researchers should also account for withdrawn shareholder proposals when making inferences about the effectiveness of proxy proposals. Practitioner/Policy Implications: Our empirical evidence points to the importance of withdrawn shareholder proposals as a governance mechanism. Managers try to protect their own power and reputation by preventing filed shareholder proposals from being put to a vote during the annual general meeting: They enter into private negotiations with the sponsors of the proposals to accomplish a withdrawal.

Shareholder Activism and Voluntary Disclosure Initiation: The Case of Political Spending

“…First, we find that agency problems at target firms motivate the target decisions of other activists to a greater degree than for pension funds. Second, unlike extant research that finds pension funds are more likely to be successful in negotiations with management by having their proposals withdrawn (Chidambaran and Woidtke 1999;Bauer et al 2015), we find the opposite. Finally, the negative investor reaction to implementation decisions for proposals sponsored by pension funds sheds some light on the value implications of pension fund activism in this setting.…”

“…Chidambaran and Woidtke (1999) find that in a broad set of proposals filed during 1989-1995, proposals sponsored by institutional shareholders and coordinated groups are more likely to be withdrawn, as larger entities have greater ability to negotiate. Similarly, Bauer et al (2015) argue that individual shareholders (or "gadfly investors") have a relatively low impact on proposal outcomes. Therefore, we predict that proposals initiated by individuals are less likely to be withdrawn.…”

“…6. Bauer et al (2015) examine 12,000 proposals submitted to S&P 1500 firms between 1997 and 2009, and report the relative frequency: governance (48 percent), social (28 percent), compensation (21 percent), and other (3 percent). Michelon et al (2016) report that 53 percent of all social proposals relate to disclosure and that 38 percent of these relate to political spending.…”

Shareholder Activism on Sustainability Issues

“…Shareholder proposals might be unsuccessful because their voting outcomes are very low and because they are non-binding such that the board can still refuse to adopt the proposal's recommendations even when votes in support exceed 50 percent (Bauer et al, 2015). Studies from the 1990s mostly fail to find evidence that shareholder proposals improve operating performance or influence firm policies, and document insignificant or negative stock market reactions to governance proposals (Black, 1998;Karpoff, 2001;Gillian and Starks, 2007).…”

“…Figure III graphically illustrates this set of results. Bauer et al (2015) notes that ESG proposals are withdrawn relatively more often than corporate governance proposals, suggesting either an increased level of mutual understanding and/or specific action taken by the company, or symbolic actions taken to placate shareholders that ultimately do not result in ESG performance changes. As such, we replicate the main results of Table 5 and 6 by excluding withdrawn proposals from our sample in Table 7, Columns 3 and 4.…”