Paul Hodgson: How shareholder proposals have led to improvements in corporate governance

The governance improvements over the last 30 years in the US have been as a result of shareholder proposals; this is the conclusion of a new paper from ISS Analytics’ Kosmas Papadopoulos, entitled: The Long View: The Role of Shareholder Proposals in Shaping US Corporate Governance.
The list is impressive: annual director elections, majority vote rules for director elections, shareholder approval for poison pills, and proxy access bylaws are just a few of the improved governance practices that have become common due to investor support for shareholder proposal campaigns, and sometimes despite lack of investor support.
The paper gives a useful timeline of the campaigns. In the late 1980s, responding to the “widespread adoption of poison pills, payments of ‘greenmail’” and other board entrenchment efforts in the face of a wave of hostile takeovers, shareholder proposals worked to remove these. In the 1990s, other governance concerns resulted in a different list of governance proposals, including on executive pay, poison pills, and declassifying boards (i.e. removing staggered elections).
Following the Sarbanes-Oxley Act of 2002 – the result of the dot.com and accounting scandals of the early years of the millennium – the number of governance shareholder proposals rose by 50% in 2003. The remainder of the decade saw a succession of successful shareholder proposal campaigns requiring majority vote standards for uncontested director elections, and advisory votes on compensation.
Then, between 2011 and 2014, Harvard professor Lucian Bebchuk ran his Shareholder Rights Project that led to the declassification of at least 100 boards of large companies. Then, from 2014 on, campaigns led by the New York City Comptroller and several individual proponents led to proposals requesting proxy access (whereby shareholders can nominate directors) gaining significant support.
As many of these practices have been adopted by the vast majority of large companies, proponents have turned their attention to other governance topics, such as independent board chairs and the right to call a special meeting or written consent rights. But, as the paper notes, these topics “do not appear to have reached consensus”.

As a result, in 2018, the percentage of majority-supported governance shareholder proposals dropped to its lowest level since 1999, after spiking in the early 2000s. But activity has not slowed. In the past two years, proposals dealing with environmental and social issues have surpassed governance proposals.Though, unlike E&S proposals, governance proposals are more likely to make it to the ballot, but are less successful at getting adopted prior to a vote.

The paper classifies campaigns in four different categories: high support and easily adopted, such as majority voting for directors; medium support and/or difficult to enact, such as reducing supermajority vote requirements; high support followed by market-wide mandate, such as expensing options or say on pay votes; and lack of traction, for example, proxy access proposals had no success in the early 2000s.

“Has it led to the creation of two different sets of governance standards?”

The paper warns, however, that shareholder proposal success can lead to a different kind of problem. Shareholder proposals tend to decline once the issues that they champion have been adopted by, for example, two-thirds or three-quarters of the S&P 500.
Says Papadopoulos: “With proposal filings decreasing once a practice is widely adopted among large firms, one wonders whether the private ordering approach to corporate governance has inadvertently led to the creation of two different sets of governance standards: higher standards for larger companies, and lower standards for smaller companies.”

On the other hand, the paper hypothesises that with “the rise of stewardship among large institutional investors, it appears possible that larger shareholders may pick up the baton from individual proponents and advance governance improvements through engagement at small-capitalization companies.” Such a development remains to be seen, however.
Finally, the paper discusses one of the issues that has not captured consensus – the independent chair. Median support has remained relatively steady at around 30%, and only 31 of the 701 proposals that went to a vote receiving majority support since 2000. Board leadership structures are evolving, however, as investors, companies, and regulators engage on the issue.
“The SEC’s 2009 enhanced disclosure rules,” says the paper, “on board leadership structure likely contributed to changes in practice. As of 2018, 91% of S&P 500 companies had independent board leadership through either an independent chair or an independent lead director (up from 68% in 2008).”
But there has been some success for the campaign; the percentage of S&P 500 companies with an independent chair increased from 8% in 2005 to 28% in 2018.