"Low-Cost" Activism More Effective Since Enron

Ferri, Fabrizio, ‘Low Cost’ Shareholder Activism: A Review of the Evidence (December 1, 2010). Research Handbook on the Economics of Corporate Law, Claire Hill & Brett McDonnell, eds., Elgar Publishers, Forthcoming. Available at SSRN.  Ferria looks at studies of shareholder proposals filed under Rule 14a-8 and shareholder votes on uncontested director elections. He finds that “collectively, these studies suggest that low-cost activism has become a more powerful tool, capable of driving governance changes at target firms, promoting market-wide adoption of governance practices, and influencing key policy reforms.”

The decisions of proxy advisors appear to be key in many of the outcomes. Here are a few interesting tidbits:

  • A puzzling result in Choi et al. (2009) is that proxy advisors do not seem to take into account the conduct that led to a withhold recommendation for a director at firm A in issuing a recommendation for the same director at the annual meeting of firm B. Consistent with this result, Ertimur et al. (2010a) report that none of the directors of firms involved in the backdating scandal received a WH (withhold) recommendation from ISS/RM when up for election at another firm (and they were not penalized in terms of votes withheld), even when ISS/RM recommended to withhold votes from them at the backdating firm. If proxy advisors and shareholders do not take into account directors‘ conduct at other firms when, respectively, issuing recommendations and casting votes, then the reputation penalties for monitoring failures are limited.
  • Studies suggest that shareholder dissatisfaction expressed through director elections is followed by value-enhancing choices and a reduction in agency costs.
  • Ertimur et al. (2010b) find significant voting support for proposals aimed at affecting the pay setting process (e.g., proposals requesting shareholder approval of large severance payments), lower support for proposals aimed at micromanaging pay (e.g. proposals to adopt specific levels and structure of pay) and almost no support for more  ̳radical‘ proposals arguably reflecting objectives other than shareholder value (e.g., proposals to link executive pay to social criteria or to abolish incentive pay).
  • Shareholder proposals have become an effective activism tool in prompting firms to modify their governance practices. Firms are more likely to expense stock options (Ferri and Sandino 2009), declassify boards (Guo Kruse and Noel 2008; Cai et al. 2009), and remove poison pills (Akyol and Carroll 2006; Cai et al. 2009) after receiving a shareholder proposal requesting these actions.

  • Ertimur et al. (2010c) report an implementation rate of 31% for proposals winning a majority vote and only 3% for proposals receiving between 30% and 50% of the votes cast.

  • Ertimur et al. (2010c) report a rate of implementation of 40-42% of majority vote proposals in 2003-2004 versus 16%-24% in 1997-2002.

  • There is little doubt that shareholder proposals and shareholder votes have become a more effective tool in the post-Enron period (see also Section 2.2), with boards listening to shareholder ―voice‖ more than ever before.
  • Cuñat et al. (2010) find that approved shareholder proposals yield an abnormal return of 1.3% over the ones not approved, with a more pronounced price reaction for proposals related to anti-takeover provisions.

A recent example of such activism can be found at Zoran: Shareholder Activist as Catalyst, SeekingAlpha, 1/23/2011.

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