Shareholder Activism through Proxy Proposals: The European Perspective

Abstract

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.

The role of shareholder proposals in corporate governance

“…3 Buchanan et al (2010) examine shareholder proposals submitted in both the US and the UK. Evidence on Continental European proposals is provided by Cziraki et al (2010). 4 Bizjak and Marquette (1998) and Gordon and Pound (1993) Previous studies argue that the stock price effects of shareholder proposals should be examined around the dates the proxy statements are mailed, because the market should have reasonable expectations on the eventual outcome (Bhagat, 1983), and there is otherwise no systematic market response to proxies that do not contain shareholder proposals (Brickley, 1996).…”

Managerial compensation

“…Alternatively, this may be achieved via shareholder activism such as proxy proposals (Cziraki et al, 2010;Renneboog and Szilagyi, 2008), pressure on the management by shareholder coalitions (Becht et al, 2010;Crespi and Renneboog, 2010), and the threat of a disciplinary takeover (Franks et al, 2001). However, shareholder monitoring is costly and only generates a sufficient payoff if the monitoring shareholder has a large enough share stake.…”

Is (Institutional) Shareholder Activism New? Evidence from UK Shareholder Coalitions in the Pre‐Cadbury Era

“…Two recent working papers (Cziraki, Renneboog, and Szilagyi (2009) for Europe and Renneboog and Szilagyi (2008) for the US) focus on observable shareholder activism, namely the voting behavior of shareholder on the annual meeting. For UK and continental European firms, Cziraki et al (2009) investigate the corporate governance role of shareholder-initiated proxy proposals.…”

“…For UK and continental European firms, Cziraki et al (2009) investigate the corporate governance role of shareholder-initiated proxy proposals. These proposals are legally binding in the UK and most of continental Europe.…”