Shareholder Activism through Proxy Proposals: The European Perspective

50 Pages Posted: 3 Jun 2009 Last revised: 17 Mar 2010

Peter Cziraki

University of Toronto - Department of Economics; Tilburg Law and Economics Center (TILEC)

Luc Renneboog

Tilburg University - Department of Finance; European Corporate Governance Institute (ECGI); Tilburg Law and Economics Center (TILEC)

Peter G. Szilagyi

CEU Business School - Central European University; Judge Business School - University of Cambridge

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Date Written: December 16, 2009

Abstract

This paper is the first to investigate the corporate governance role of shareholderinitiated proxy proposals in European firms. While proposals in the US are nonbinding even if they pass the shareholder vote, they are legally binding in the UK and most of Continental Europe. Nonetheless, submissions remain relatively infrequent in Continental Europe in particular, with major variations across countries in ownership structures, monitoring incentives, and the laws and regulations governing shareholder access to the proxy. We use sample selection models to analyze target selection and proposal success in terms of the voting outcomes and the stock price effects, and make several contributions to the literature. First, proposal submissions remain infrequent compared to the US in Continental Europe in particular. In the UK proposals typically relate to a proxy contest seeking board changes, while in Continental Europe they are more focused on specific governance issues. Second, there is some evidence that the proposal sponsors are valuable monitors, because the target firms tend to underperform and have low leverage. The sponsors also observe the identity of the voting shareholders, because proposal probability increases in the target’s ownership concentration and the equity stake of institutional investors. Third, while proposals enjoy limited voting success across Europe, they are relatively more successful in the UK. The outcomes are strongest for proposals targeting the board but are also affected by the target characteristics including the CEO’s pay-performance sensitivity. Finally, proposals are met with strong negative stock price effects when they are voted upon at general meetings. This suggests that rather than attribute them control benefits, the market often interprets proposals and their failure to pass the vote as a negative signal of governance concerns. Indeed, the market responds better to proposals submitted against large firms with low leverage, which is consistent with agency considerations. However, the stock price effects are most negative for poorly performing firms with low market-to-book ratios, which implies that the proposal outcomes only intensify the market’s concerns over firms that have previously underperformed.

Keywords: Shareholder activism, shareholder proposals, corporate governance, sample selection

JEL Classification: G34

Suggested Citation

Cziraki, Peter and Renneboog, Luc and Szilagyi, Peter G., Shareholder Activism through Proxy Proposals: The European Perspective (December 16, 2009). TILEC Discussion Paper No. 2009-019; ECGI - Finance Working Paper No. 252/2009. Available at SSRN: https://ssrn.com/abstract=1413125 or http://dx.doi.org/10.2139/ssrn.1413125

Peter Cziraki (Contact Author)

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada
+1 416 946 3298 (Phone)

HOME PAGE: http://www.economics.utoronto.ca/petercziraki

Luc Renneboog

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Warandelaan 2
5000 LE Tilburg
Netherlands
+13 31 466 8210 (Phone)
+13 31 466 2875 (Fax)

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Tilburg Law and Economics Center (TILEC)

Warandelaan 2
Tilburg, 5000 LE
Netherlands

Peter G. Szilagyi

CEU Business School - Central European University ( email )

Nador utca 9.
Budapest, 1051
Hungary
+36-1-887-5092 (Phone)
+36-1-887-5005 (Fax)

HOME PAGE: http://business.ceu.edu/directory-of-faculty-and-staff/163-Peter-Szilagyi

Judge Business School - University of Cambridge ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom
+44-1223-764-026 (Phone)
+44-1223-339-701 (Fax)

HOME PAGE: http://www.jbs.cam.ac.uk/faculty-research/fellows-associates-a-z/peter-g-szilagyi/

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