Shareholder activism of the worst kind
For investors focused on maximizing portfolio value, there are some significant questions raised by recent empirical research indicating that shareholder proposals submitted by public-pension funds and labor-union-related entities may not have the objective of enhancing shareholder value.
How to respond? More importantly, how should institutional investors, the owners of approximately 70 percent of all U.S. equities, protect the interests of their investors and/or beneficiaries? Answering these questions requires providing shareholders some commonsense guidance on how to vote.
In a paper from the Manhattan Institute, Traci Woidtke examined the relationship between public-pension funds engaged in shareholder activism and firm value during 2001–13. She had three key findings:
- Ownership by public-pension funds engaged in social-issue shareholder-proposal activism correlates negatively to firm value.
- Ownership by the New York State Common Retirement System, specifically, correlates negatively to firm value during periods in which the fund was actively engaged in sponsoring shareholder proposals related to social issues.
- There is no significant relationship between public-pension-fund ownership and firm value for funds engaged in shareholder-proposal activism focused on corporate governance rules. If the proposals were intended to enhance shareholder wealth, you would expect some positive relationship.
These findings are consistent with a recently published empirical study by staff economists in the U.S. Securities and Exchange Commission’s Division of Economic and Risk Analysis of the proxy-access initiative from the Office of the Comptroller of New York City. The city’s comptroller is the custodian and investment adviser to the New York City Pension Funds. During the recent proxy season, the office submitted 75 of the 108 proxy access proposals that were received by publicly traded companies. The study found that “firms targeted by the NYC Comptroller did not exhibit statistically significant stock market underperformance relative to the control group.” If these proposals were related to enhancing shareholder wealth, one would expect the proposals to target underperforming companies, but they were not.
In another recent paper, John G. Matsusaka, Oguzhan Ozbas and Irene Yi examined the use of shareholder proposals by labor-union-related entities. Essentially, they found that shareholder proposals were being used as “bargaining chips in contract negotiations.” They found that “during contract negotiation years, unions increase the number of proposals they make by about one-quarter (and by about two-thirds during contentious negotiations), and change the subject of proposals to focus on matters personally costly to managers.” The authors conclude that”
The evidence suggests that some union proposals are intended to influence collective bargaining outcomes rather than maximize shareholder value, and that increasing proposal rights will not necessarily help shareholders at large if some shareholders use those rights to advance their private interests.
To answer the question of what an investor should do in response to the information provided by these empirical studies, I propose that shareholders start with the presumption that these proposals do not have as their objective the enhancement of shareholder wealth. Moreover, the burden of proof is on those making the proposals to provide conclusive proof that their proposals actually do meet the objective of enhancing shareholder value.
Until that is done, there is nothing for shareholders to consider and a no vote should be rendered. This approach to voting should also be taken by proxy advisory services if they truly want to enhance shareholder wealth for their clients.
