Shareholder Activism through Proxy Proposals: The European Perspective

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.Shareholder activism;shareholder proposals;corporate governance;sample selection

Quieting the Sharholders\u27 Voice: Empirical Evidence of Pervasive Bundling in Proxy Solicitations

The integrity of shareholder voting is critical to the legitimacy of corporate law. One threat to this process is proxy “bundling,” or the joinder of more than one separate item into a single proxy proposal. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote and forces them to either reject the entire proposal or approve items they might not otherwise want implemented. In this Paper, we provide the first comprehensive evaluation of the anti-bundling rules adopted by the Securities and Exchange Commission (“SEC”) in 1992. While we find that the courts have carefully developed a framework for the proper scope and application of the rules, the SEC and proxy advisory firms have been less vigilant in defending this instrumental shareholder right. In particular, we note that the most recent SEC interpretive guidance has undercut the effectiveness of the existing rules, and that, surprisingly, proxy advisory firms do not have well-defined heuristics to discourage bundling. Building on the theoretical framework, this Article provides the first large-scale empirical study of bundling of management proposals. We develop four possible definitions of impermissible bundling and, utilizing a data set of over 1,300 management proposals, show that the frequency of bundling in our sample ranges from 6.2 percent to 28.8 percent (depending on which of the four bundling definitions is used). It is apparent that bundling occurs far more frequently than indicated by prior studies. We further examine our data to report the items that are most frequently bundled and to analyze the proxy advisors’ recommendations and the voting patterns associated with bundled proposals. This Article concludes with important implications for the SEC, proxy advisors, and institutional investors as to how each party can more effectively deter impermissible bundling and thus better protect the shareholder franchise

Corporate Voting and the Takeover Debate

For many years academics have debated whether it is better to permit hostile acquirers to use tender offers to gain control over unwilling target companies, or to force them to use corporate elections of boards of directors in these efforts. The Delaware courts have expressed a strong preference for shareholder voting as a change of control device in hostile acquisitions. To force acquirers to accept their preferences, the Delaware courts have developed a jurisprudence permitting the effective classified board (ECB), a poison pill combined with a classified board, to protect target company management from removal by a hostile tender offer alone, or through a single corporate election. For companies with ECBs, this means that a determined acquirer must engage in two corporate elections over a period of two years to force entrenched managers to give up power. In this Article, Professors Edelman and Thomas examine whether proxy contests, tender offers, or combined proxy contest/tender offers are more likely to result in value maximizing outcomes for shareholders when target companies are able to deploy defensive tactics. The authors begin by showing that prior work suffers from serious flaws involving the use of voting models that are inappropriate for analyzing proxy contests. To develop a more realistic approach to these questions, the authors employ a probabilistic version of a standard weighted voting model that explicitly incorporates two critical features of corporate voting: first, that shares are normally voted in large blocks rather than in single shares; and second, that independent third party proxy voting advisors play an important, and often pivotal, role in determining the outcome of corporate elections. In addition, the authors explicitly incorporate information about the size of different corporate constituencies and their voting preferences. Using their model, Professors Edelman and Thomas show experimentally how the distribution of shares among various investor constituencies will affect the outcome of different types of voting contests. Using this model, and these different sets of assumptions, the authors find that neither proxy contests, tender offers, nor combined proxy contests and tender offers will always lead to the desirable outcome for target company shareholders in any scenario. With each type of acquisition technique, bidders succeed in obtaining control of the target company in some value decreasing transactions, and are defeated in their acquisition efforts in some value increasing transactions. These results hold whether the authors permit existing defensive tactics or eliminate them. Professors Edelman and Thomas conclude that in order to properly analyze the role of defensive tactics, courts must take into account the underlying shareholder ownership patterns. This requires them to engage in a fact sensitive analysis of whether defensive tactics are impeding or facilitating the maximization of shareholder value. When the authors examine the Delaware Chancery Court\u27s decisions, the reasonableness analysis that the courts have employed to decide whether to overturn defensive tactics permits them to do so. The authors recommend that the courts continue to apply this type of analysis in the future with more direct consideration of the impact of the underlying ownership structure in determining whether the defenses are being used to maximize shareholder value

On Rational Delegations in Liquid Democracy

Liquid democracy is a proxy voting method where proxies are delegable. We propose and study a game-theoretic model of liquid democracy to address the following question: when is it rational for a voter to delegate her vote? We study the existence of pure-strategy Nash equilibria in this model, and how group accuracy is affected by them. We complement these theoretical results by means of agent-based simulations to study the effects of delegations on group's accuracy on variously structured social networks.Comment: 17 pages, 3 figures. This paper (without Appendix) appears in the proceedings of AAAI'1

The Usefulness of Corruptible Elections

The belief that elections reduce rent seeking by government officials is widely held, likewise the belief that rent seeking decreases as elections are less subject to corruption. In this paper we develop and test a model in which these beliefs are carefully examined. Our model indicates that, while elections may provide a disincentive for rent seeking, this disincentive (1) need not actually materialise, and (2), is not necessarily correlated with the integrity of the electoral protocol. We next consider the ability of village-level elections in rural China to reduce rent seeking, and the extent to which this ability varies as the elections are more or less corruptible. We find that in practice, even elections that appear quite corruptible provide a strong disincentive to rent seeking. Moreover, our results indicate which types of electoral reform lead to more effective popular oversight of leaders, and which do not.http://deepblue.lib.umich.edu/bitstream/2027.42/39988/3/wp602.pd

The Impact of Equity Engagement Evaluating the Impact of Shareholder Engagement in Public Equity Investing

Over the last decade, growing numbers of investors have become increasingly concerned with the environmental and social impact of their investments across asset classes. This trend has recently been driven by new waves of "impact investors" proactively seeking measurable social and environmental impact in addition to financial returns, and by "responsible investors" making commitments to engage on environmental, social, and governance (ESG) issues through initiatives such as the United Nations-backed Principles for Responsible Investment (PRI). At the same time, engaged shareholders have had long-standing experience using "the power of the proxy" and their voices as investors to hold companies accountable for the impacts they have on employees, stakeholders, communities, and ecosystems.While investor interest in shareholder engagement has grown, our understanding of the impacts associated with engagement activities remains largely anecdotal.In 2012, an important study on Total Portfolio Activation provided a new conceptual and analytical framework for investors to pursue environmental and social impact across all asset classes commonly found in a diversified investment portfolio. Building upon the insights of Total Portfolio Activation, the Impact of Equity Engagement (IE2) initiative seeks to deepen our understanding of the nature of impact in one specific asset class—public equities— where investors' engagement activities have generated meaningful social and environmental impacts.Given the large social and environmental footprints of publicly traded corporations and the persistently high allocation to public equities in most investor portfolios, public equity investing presents a major opportunity for impact investing. Yet impact investing, as currently practiced, has concentrated primarily on smallscale direct investments in private equity and debt, where many investors perceive that social and environmental impact can be more readily observed than in publicly traded companies where ownership is intermediated, diluted, and diffused through secondary capital markets.Indeed, the nature of impact within public equity investing remains poorly understood and insufficiently documented. Because of this, many investors may be overlooking readily available opportunities for generating impact within their existing investment portfolios.To address these misperceptions and missed opportunities, the IE2 initiative is developing a more rigorous framework for documenting the impact of engagement within the public equity asset class.

Sequential Voting Promotes Collective Discovery in Social Recommendation Systems

One goal of online social recommendation systems is to harness the wisdom of crowds in order to identify high quality content. Yet the sequential voting mechanisms that are commonly used by these systems are at odds with existing theoretical and empirical literature on optimal aggregation. This literature suggests that sequential voting will promote herding---the tendency for individuals to copy the decisions of others around them---and hence lead to suboptimal content recommendation. Is there a problem with our practice, or a problem with our theory? Previous attempts at answering this question have been limited by a lack of objective measurements of content quality. Quality is typically defined endogenously as the popularity of content in absence of social influence. The flaw of this metric is its presupposition that the preferences of the crowd are aligned with underlying quality. Domains in which content quality can be defined exogenously and measured objectively are thus needed in order to better assess the design choices of social recommendation systems. In this work, we look to the domain of education, where content quality can be measured via how well students are able to learn from the material presented to them. Through a behavioral experiment involving a simulated massive open online course (MOOC) run on Amazon Mechanical Turk, we show that sequential voting systems can surface better content than systems that elicit independent votes.Comment: To be published in the 10th International AAAI Conference on Web and Social Media (ICWSM) 201

Plural Voting for the Twenty-First Century

Recent political developments cast doubt on the wisdom of democratic decision-making. Brexit, the Colombian people's (initial) rejection of peace with the FARC, and the election of Donald Trump suggest that the time is right to explore alternatives to democracy. In this essay, I describe and defend the epistocratic system of government which is, given current theoretical and empirical knowledge, most likely to produce optimal political outcomes—or at least better outcomes than democracy produces. To wit, we should expand the suffrage as wide as possible and weight citizens’ votes in accordance with their competence. As it turns out, the optimal system is closely related to J. S. Mill's plural voting proposal. I also explain how voters’ competences can be precisely determined, without reference to an objective standard of correctness and without generating invidious comparisons between voters

Confronting the Peppercorn Settlement in Merger Litigation: An Empirical Analysis and a Proposal for Reform

Shareholder litigation challenging corporate mergers is ubiquitous, with the likelihood of a shareholder suit exceeding 90%. The value of this litigation, however, is questionable. The vast majority of merger cases settle for nothing more than supplemental disclosures in the merger proxy statement. The attorneys that bring these lawsuits are compensated for their efforts with a court-awarded fee. This leads critics to charge that merger litigation benefits only the lawyers who bring the claims, not the shareholders they represent. In response, defenders of merger litigation argue that the lawsuits serve a useful oversight function and that the improved disclosures that result are beneficial to shareholders. This Article offers a new approach to assessing the value of these claims by empirically testing the relationship between merger litigation and shareholder voting on the merger. If the supplemental disclosures produced by the settlement of merger litigation are valuable, they should affect shareholder voting behavior. Specifically, supplemental disclosures that are, in effect, “compelled” by settlement should produce new and unfavorable information about the merger and lead to a lower percentage of shares voted in favor of it. Applying this hypothesis to a hand-collected sample of 453 large public company mergers from 2005-2012, we find no such effect. We find no significant evidence that disclosure-only settlements affect shareholder voting. These findings warrant a reconsideration of Delaware merger law. Specifically, under current law, supplemental disclosures are viewed by courts as providing a substantial benefit to the shareholder class. In turn, this substantial benefit entitles the plaintiffs’ lawyers to an award of attorneys’ fees. Our evidence suggests that this legal analysis is misguided and that supplemental disclosures do not in fact constitute a substantial benefit. As a result, and in light of the substantial costs generated by public company merger litigation, we argue that courts should reject disclosure settlements as a basis for attorney fee awards. Our approach responds to critiques of merger litigation as excessive and frivolous by reducing the incentive for plaintiffs’ lawyers to bring weak cases, but it would have an additional benefit. Current practice drags state court judges into the task of indirectly promulgating disclosure standards in connection with the approval of fee awards. We argue, instead, for a more efficient specialization between state and federal courts in the regulation of mergers: public company merger disclosure should be policed by the federal securities laws while state corporate law focuses on substantive fairness