April 03, 2008
Do Your Proxy Votes Really Count?
by Anne Moore Odell
A new report examines how boards of directors respond to shareholder concerns by adopting or
ignoring non-binding shareholder proposals.
Shareholder proposals are prickly documents. Shareholders have the right to have their concerns
heard by the companies they are part owners in. Yet for a non-binding shareholder proposal to get
all the way to proxy voters, it has to have been presented to the company's board of directors and
basically rejected by the board. Shareholder proposals that have been presented to the board and
adopted aren't voted on. Neither is a proposal that is withdrawn after an agreement between the
proposal's presenters and the board of directors (which can happen before or after the proxy ballot
has been printed).
What happens to non-binding shareholder resolutions after they
are voted on by shareholders? It is up to the board to implement or ignore these resolutions,
which the board has already usually rejected. Boards of directors have no legal responsibility to
act on non-binding shareholder proposals even when the majority of shareholders vote for them,
subject to state-by-state jurisdiction.
A new report examines how often boards implement
non-binding majority-vote (MV) shareholder proposals and finds that boards are implementing more
non-binding proposals than previously. Entitled "Board of Directors' Responsiveness to
Shareholders: Evidence from Shareholder Proposals," the report looks at the reasons why boards act
on proposals and what are the costs for both the directors and the companies for not responding to
The report's authors--Yonca Ertimur, Assistant Professor of Accounting at
Duke University's Fuqua School of Business, Fabrizio Ferri at Harvard Business School and Steve
Stubben at University of North Carolina at Chapel Hill--looked at 620 non-binding MV proposals that
were presented at 273 distinct S&P 1500 firms over the 1997-2004 proxy seasons. The data used were
from the Investor Responsibility Research Center (IRRC), which has recorded information on
shareholder proposals since 1986. The authors found that the rate of implementation of these
proposals almost doubled, from about 22% in 1997-2002 seasons to over 40% in 2003-2004 proxy
"While we do not have direct evidence on the boardrooms' discussions leading to
the decision to act or not to act on the proposals, our empirical analysis suggests that the major
factors affecting that decision are the degree of voting support for the proposal, the influence of
the shareholders supporting the proposal, the behavior of peer firms and the type of proposal,"
said co-author Yonca Ertimur.
The report finds that proposals with higher percentages of
votes cast in favor, proposals presented by larger shareholders, proposals adopted by peer firms,
and proposals dealing with removing anti-takeover defenses and instituting certain shareholder
rights are more likely to be implemented.
Another reason for the increase in
implementation of MV non-binding resolutions is that shareholder activism is on the rise, with more
shareholders directly addressing the issues of governance and shareholder engagement. Issues such
as initiatives concerning directors' election system, expensing of stock options and giving
shareholders a vote on compensation have engaged shareholders in recent proxy seasons.
capture the extent of shareholder pressure exerted on the board, the authors looked at the degree
of voting support for the proposals (i.e. the percentage of votes cast in favor of the proposal at
the annual meeting) and the influence of the shareholders supporting the proposal. The report
states that large institutional shareholders such as CalPERS are more effective at initiating
Among MV proposals, shareholder rights proposals have the highest rate
of implementation (45% of the cases), followed by proposals that relate to defense and executive
compensation (30%). Furthermore, the rate of implementation for defense and shareholder rights
proposals has increased significantly in 2003-2004 period relative to the 1997-2002 period.
"We assume that certain type of shareholders (public pension funds, unions' pension funds) have
more influence due to their resources (relative to individual investors)," explained Ertimur.
"Also, we assume that shareholders with a larger stake in the firm will be able to put more
pressure on the board. We also consider another source of direct shareholder pressure on boards:
the voting outcome of individual directors' election."
The authors furthermore examine
implementation trends across peer companies. They reason that companies that have peers
implementing similar proposals will face more pressure to implement non-binding MV proposals.
Whether or not there has been a systemic and structural shift in the way large-cap companies
address shareholders, the report's authors think it is too early to tell, although their results
are consistent with a structural shift. However, there is still work to be done on governance and
board oversight matters.
Ertimur told SocialFunds.com, "The recent sub-prime crisis
suggests there are significant economy-wide governance issues to be addressed, not only in terms of
corporate governance, but at the level of market institutions."
Ignoring MV non-binding
proposals could be increasingly expensive for firms and for individual directors. The authors
looked at other academic literature and at anecdotal evidence to back up this claim. For example,
one study finds that directors failing to implement MV proposals have often been targeted by
vote-no campaigns. The authors also note that directors who ignore MV proposals often receive a
"withhold vote" recommendation by the Institutional Shareholder Services (ISS) (now Risk Metrics),
the influential proxy voting service.
"As for firms, those ignoring MV proposals end up on
CalPERS' 'focus list' of poor financial and governance performers, receive lower ratings from
governance services, such as The Corporate Library, and attract negative press coverage," explained
Ertimur. "Our results on director turnover are consistent with it being costly for individual
directors to ignore (respond to) majority-vote shareholder proposals."
activists will be heartened by the evidence found in this report that indicates shareholder
proposals are becoming a more effective mechanism for exacting policy change. The issue of
executive compensation, the report notes, has lead to a great increase in the number of shareholder
proposals, while, at the same time, there has also been an increase in the implementation of
shareholder rights proposals.
Ertimur concluded: "The 'good news' for socially responsible
investors is that the higher level of directors' engagement with, and responsiveness, to
shareholders on governance matters may translate to proposals dealing with social and environmental
issues. The 'bad news' is that a high degree of voting support across shareholders seems a
necessary condition for that level of engagement. The challenge for proposals dealing with social
issues is to find stronger support across all shareholders."