Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals
Executive Summary — How well do boards of directors respond to shareholder concerns? The recent wave of corporate scandals has raised questions about the effectiveness of boards in their monitoring role. The subsequent reform debate focused on enhancing boards' independence from management, increasing their accountability to shareholders through a different board election system, and improving boards' internal processes and practices. One direct example of this alleged lack of responsiveness to shareholder concerns is the historically low frequency of adoption of non-binding shareholder proposals receiving a majority vote, even when the vote is overwhelmingly in favor of the proposal and has been repeated for a number of years. Ignoring majority-vote shareholder proposals may be increasingly expensive, however, both for the targeted firms and for the individual directors. HBS professor Ferri and coauthors analyze the frequency of implementation of non-binding, majority-vote shareholder proposals and examine the determinants and consequences of the boards' implementation decisions. Key concepts include:
- A dramatic increase in the frequency of implementation of non-binding, majority-vote shareholder proposals is consistent with a structural shift in the governance environment and assertions of a new atmosphere in boardrooms.
- The likelihood of implementation of majority-vote shareholder proposals is higher when shareholder pressure and peer pressure are stronger.
- Firms whose peers recently implemented a similar majority-vote shareholder proposal are more likely to follow suit.
- Outside directors implementing a majority-vote shareholder proposal are more likely to retain their board seat and to experience gains (or lower losses) in other directorships.
Using a sample of 620 non-binding, majority-vote (MV) shareholder proposals between 1997 and 2004, we analyze the frequency, determinants and consequences of boards' implementation decisions. The frequency of implementation has almost doubled after 2002, reaching more than 40%. Shareholder pressure (e.g. the voting outcome and the influence of the proponent) and the type of proposals are the main determinants of the implementation decision, while traditional governance indicators do not seem to matter. Outside directors implementing MV shareholder proposals experience a one-fifth reduction in the likelihood of losing their board seat and in the likelihood of losing other directorships.