Proxies for Politics

Abstract

The shareholder proposal process is being reconsidered. Critics argue that the process has been captured by a small group of activist proponents at the expense of shareholder value. Regulators have implemented various reforms, and further changes may follow. Defenders of proposals, for their part, have characterized these reforms as attacks on shareholder rights.

To help inform the path forward, we offer a textured picture of how the shareholder proposal process works in practice. We focus on shareholder proposals requesting disclosure of corporate political activity – proposals that have drawn consistent shareholder support but have been the subject of limited study. Our research methodology combines empirical analysis and qualitative methods to offer new insights into the shareholder proposal process, including the nature of the proponents, the role of governance entrepreneurs, the targeting of issuers and the consequences of the proposal process, including the substantial role of proposals that are settled and withdrawn.

Our bottom line is that political disclosure proposals reflect a multi-year initiative involving a diverse array of investors, often working in tandem, and that they target issuers for varying but plausibly rational reasons. While these actors often frame their rationale in terms of material financial risk, our analysis suggests that multiple motives are at play. Although we cannot demonstrate causation, the consistent use of political disclosure proposals during the period of our study is correlated with increased political transparency by issuers. 

The normative implications of our findings are unclear. Current empirical research fails to establish a relationship between political transparency and economic value. At the same time, our study demonstrates that, at least with respect to political disclosure, shareholder proposals seem to be effective in changing issuer behavior. Our findings offer important insights about the role of these proposals in the corporate governance landscape.

Keywords: shareholder rights, shareholder voting process, corporate law, corporate governance, governance entrepreneurs, corporate political activity, shareholder proposal rule, firms, Securities and Exchange Commission, SEC

JEL Classification: D22, K20, K22, K23, L22