Does Shareholder Proxy Access Improve Firm Value? Evidence from the Business Roundtable Challenge

by Bo Becker, Daniel B. Bergstresser & Guhan Subramanian

Overview — In August 2010, the Security and Exchange Commission announced a highly anticipated rule that would make it easier for investors to nominate new board members and get rid of existing ones. It allowed shareholders to have their board candidates included in the company's proxy materials--if those shareholders had owned at least 3 percent of the firm's shares for at least the prior three years. On October 4, the SEC unexpectedly and indefinitely postponed the implementation of that rule, pending the outcome of a lawsuit aimed at overturning it. This paper gauges the significance of the proxy access rule by measuring whether certain firms gained or lost market value on news of the delay. Research was conducted by Harvard Business School professors Bo Becker, Daniel Bergstresser, and Guhan Subramanian. Key concepts include:

Firms that would have been most affected by the proxy access rule, based on institutional ownership, lost value on October 4, 2010, following the news of the rule's delay. This suggests that financial markets placed positive value on shareholders' access to the board.
The loss in value was greatest at firms that had large positions held by activist investors.
The paper's findings may help prove that the SEC has met the federal rule mandating that all proposed rules "will promote efficiency, competition, and capital formation."

Author Abstract

We measure the value of shareholder proxy access by using a recent development in the ability of shareholders to nominate candidates for board seats. We use the SEC's October 4, 2010 announcement that it would significantly delay implementation of its August 2010 proxy access rule as a natural experiment. Because firms with substantial institutional ownership would have been most affected by the SEC's now-delayed changes, we use the share and composition of institutional investors to sort firms into those more and less affected by the October 4 news. Firms that would have been most affected by proxy access, as measured by institutional ownership, lost value on that day. The value drop was 55 basis points for a 10 percentage point change in activist institution ownership. These results suggest that financial markets placed a positive value on shareholder access, as implemented in the SEC's August 2010 rule.