73 Pages Posted: 5 Mar 2021 Last revised: 28 Sep 2021
Date Written: March 5, 2021
Shareholders of large public companies make frequent use of federal proxy voting rules to submit proposals on political, environmental, ethical, and social issues, from climate change and employee diversity to animal welfare and corporate political spending (“socially relevant proposals”). But why do investors in a business corporation concern themselves with socially relevant issues? And how should corporate and securities law address this phenomenon?
Based on the analysis of more than 2,400 socially relevant proposals filed over the past decade, including over 17,000 pages of documents from the decision record of the Securities Exchange Commission, this Article argues that shareholder activism on socially relevant issues (“stockholder politics”) should be understood as the response to an agency problem in corporate decisions with a significant public dimension. In this framework, shareholders are driven not only by financial motives, but also by prosocial and expressive motives. However, most shareholders do not have sufficient incentives to actively monitor and challenge management decisions on socially relevant issues; therefore, managers might make socially relevant corporate decisions that deviate from shareholders’ social and policy preferences.
A relatively small number of specialized players (“stockholder politics specialists”), cooperating across companies and industries, try to mitigate this agency problem by performing a two-sided role. They “sell” information and voting opportunities internally to other shareholders and they “sell” corporate voice externally to outside actors, including employees, consumers, and citizens concerned about corporate externalities. I show how this framework provides a better explanation of stockholder politics than the conventional theories, and I discuss the potential benefits and limits of this phenomenon.
Keywords: corporate governance, corporate social responsibility, ESG investing, shareholder proposals, corporate democracy
JEL Classification: D21, D23, G30, G34, G38, K22
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