THE RISE OF CORPORATE GUIDELINES IN THE UNITES STATES, 2005-2021: THEORY AND EVIDENCE

Abstract

Institutional investors are legally obliged to be faithful stewards of their portfolio companies. Yet, the conventional wisdom among commentators is that institutional investors have failed to perform this obligation as they are not incentivized to make adequate investments in corporate governance. This Article contends that this criticism is based on an incomplete analysis that misses a critical aspect of the operation of institutional investors. The critics focus exclusively on institutional investors’ efforts in actively engaging with the managements of their portfolio companies. They ignore, however, an important passive governance tool that institutional investors routinely use: corporate guidelines. Corporate guidelines are published by institutional investors to articulate their stance on governance issues and justify their voting decisions in annual meetings. Corporate guidelines have become increasingly popular not only among investors, but also among other market actors who interact with investors in shaping corporations’ governance regimes, such as the corporations’ managements and other shareholders, proxy advisory firms, and law firms.
This Article demonstrates how corporate guidelines exert a profound effect on corporate governance. For institutional investors, corporate guidelines constitute an ideal tool for balancing the investors’ governance-related duties and the need for cost minimization. The promulgation and use of guidelines is less costly than active engagements, and unlike outsourcing voting decisions to proxy advisory firms, it is regarded as a valid way to fulfill the investors’ duties as corporate stewards. For the managements, aligning governance policies with corporate guidelines signals their commitment to sound governance practices, helping them fend off challenges by activist shareholders. Activist shareholders, for their part, routinely cite corporate guidelines to support their proposals. The Article empirically substantiates these claims by analyzing the ways in which the guidelines were used by corporations and activist shareholders in proxy statements published by S&P 500 corporations. Initially, I focused on the years 2019–2021. Consecutive to my initial findings, I expanded the scope to the years 2005 and 2010. Finally, in order to get a more comprehensive outlook, I expanded the scope of my research, continuing with a focus on the S&P 500 top 100 corporations during the years 2005–2021. This expansion examined the number of explicit references made by corporations, and resulted in a significant spike in such references between 2015–2021. Furthermore, although the amount of explicit references made by activist shareholders was not consistent along these years, still such references were made frequently. Importantly, my analysis notes that in certain years under assessment, when the corporate proxy statements of the 100 largest companies are examined, almost 40% of such statements included explicit references to corporate guidelines. This fact can not be dismissed when examining institutional investors stewardship.
Ovrall, I collected data from 3,313 proxy statements published by S&P 500 corporations in these years. The Article therefore offers the first comprehensive theoretical and empirical examination of coroporate guidelines and their effect on corporate impact.
 

Keywords: Institutional Investors; Guidelines; Portfolio Companies; Incentives; Monitoring