Proxy Access and Event Studies

Steven M. Davidoff’s  The Heated Debate Over Proxy Access (WSJ, 11/2/2010) cites a new event study on proxy access (Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge) by Bo Becker, Daniel Bergstresser and Guhan Subramanian of Harvard Business School. Measuring around one event, the “unexpected announcement” of the SEC to delay the proxy access rules so that the court could first determine their validity. The study found

that firms that would have been most affected by proxy access, as measured by institutional ownership, lost value. The value drop was 17 basis points for a 10 percentage point change in large shareholder ownership, and 66 basis points for the same change in activist institution ownership.

I’m certainly a supporter of proxy access, having petitioned for it in the summer of 2002 with Les Greenberg. Yet, I’m skeptical of such event studies. The timing of the SEC’s “unexpected announcement” delaying proxy access may have been a surprise but not the delay. Rather than “event” studies attributing value to events that still have not led to proxy access, more focus should be placed on the success or failure of shareowner nominated board members. When they win, have companies performed better or worse?

A Proxy Governance study, Effectiveness of Hybrid Boards, found dissidents were able to gain representation at approximately 75% of the companies targeted. Total shareholder returns at ongoing companies with hybrid boards were 19.1% – 16.6 percentage points better than peers – from the beginning of the contest period through the hybrid board’s one year anniversary. However, most of the returns were as a result of the announcement.

Three year returns were more mixed. Of course, one of the problems is that dissidents generally go after failing companies, or at least companies in trouble. To be accurate, results shouldn’t be compared with the market as a whole but to other companies in similar circumstances. When that is done, my guess is that those with dissident board members do even better. If you further narrow those to cases with experienced or trained dissident directors, the track record would probably be still better.

I’m confident that proxy access will result in directors that are more accountable to shareowners and that will lead to higher valuations.

As a side note, Davidoff notes, the petitioners challenging proxy access received support from a paper by Joseph Grundfest arguing that the rules are likely invalid on arbitrary and capricious grounds. However, Grundfest’s paper on proxy access rules was before Dodd-Frank and before extensive revisions made to address legal concerns.

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