Who Withdraws Shareholder Proposals and Does It Matter? An Analysis of Sponsor Identity and Pay Practices

• DOI: http://doi.org/10.1111/corg.12109
• Date: 01 November 2015
• Published date: 01 November 2015

Who Withdraws Shareholder Proposals and Does

It Matter? An Analysis of Sponsor Identity and Pay

Practices

Rob Bauer, Frank Moers and Michael Viehs*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We studymore than 12,000 shareholder proposals that were filed to S&P1500 companies from 1997

to 2009, and investigate the determinants of proposal withdrawal by the sponsoring shareholder. We also study the effective-

ness of withdrawn proposals as a corporate governance device.

Research Findings/Insights: We find that proposals filed by influential investors are more likely to be withdrawn than pro-

posals filed by privateinvestors. Our empirical results showthat institutional ownership (in particular by long-term, passively

investing institutions) is positively related to thelikelihood of a proposal’s withdrawal if the sponsoring shareholder isan insti-

tutional investor.We also document a negative relationbetween CEO ownership and the likelihood of withdrawal.This effect is

most pronounced for corporate governance proposals. We also show that withdrawn proposals on executive compensation

change subsequent corporate pay practices.

Theoretical/Academic Implications: Our paper provides the first comprehensive evidence on withdrawn shareholder pro-

posals. We show that withdrawn proposalsare a strong and important categoryof proposals becausemanagers proactively pre-

vent them from being put to a vote. Hence, our results imply that researchers should also account for withdrawn shareholder

proposals when making inferences about the effectiveness of proxy proposals.

Practitioner/Pol icy Implications: Our empirical evidence points to the importance of withdrawn shareholder proposals as a

governance mechanism. Managers try to protect their own power and reputation by preventing filed shareholder proposals

from being put to a voteduring the annual general meeting: They enter into privatenegotiations with the sponsors of the pro-

posals to accomplish a withdrawal.

Keywords: Corporate Governance, Shareholder Proposals, Private Negotiations, Institutional Ownership

INTRODUCTION

Corporationsin the United States oftenface engaged share-

holders who strive for change in the corporate gover-

nance (CG) structures or corporate behavior with respect to

corporate environmental or social policies. One particular

form of engagement is through proposals that shareholders

submit and that are then put to a vote during the annual gen-

eral meeting (AGM). However, under special circumstances,

the submitting shareholder (i.e., the proposal sponsor) with-

draws the proposal prior to the AGM, generally after private

negotiations with the management(Chidambaran & Woidtke,

1999). Corporations frequently invite activist shareholders to

private negotiations following a shareholder-initiated pro-

posal,because some proposalsmight adverselyaffect the man-

agers’interests or reputation; thus, the managers would not

want to put them to a vote during the AGM (e.g., Renneboog

& Szilagyi, 2011). Moreover, managers could evaluate

shareholder proposals as being not beneficial to the firm, and

hence enter private negotiations for a proposal’swithdrawal.

Thus, when managers convince the sponsoring shareholder

to withdraw a proposal, the implication is not necessarilythat

the decision to enter private negotiations violates share-

holders’interests (Matsusaka & Ozbas, 2014).

When the negotiations between the sponsoring share-

holder and the man agement are succe ssful, the share-

holder voluntar ily withdraws the proposal. Howe ver, if

the negotiations are not successful, the proposal will be

put to a vote during the AG M. We define a successful ne-

gotiation as one in which both parties reach an amicable

arrangement (henceforth: settlement) that leads to the

proposal’s withdrawal. Such a settlement can materialize

in a couple of ways, the most straightforward of which

is when the board implements the proposal, either

completely or partially, and thereby satisfies the sponsor,

who then withdraw s the proposal. As Lan dier and Nair

**Address for correspondence: Michael Viehs, Smith School of Enterprise and the

Environment, University of Oxford,OUCE, South Parks Road, Oxford OX1 3QY,UK.

Telephone: +44 (0)1865614 938; E-mail: michael.viehs@smithschool.ox.ac.uk

© 2015 JohnWiley & Sons Ltd

doi:10.1111/corg.12109

472

Corporate Governance: An International Review, 2015, 23(6): 472–488

(2009) point out, a withdrawal indicates the manage-

ment’s willingness to implement the proposal’s requests.

Another possibility is when the management offers to

make symbolic changes in the corporation other than

those originally requested in the proposal. These sym-

bolicchanges,or“lip service”(Landier & Nair, 2009),

are usually less uncomfortable for managers but are suffi-

cient to satisfy the sponsor and convince him or her to

withdraw the proposal.

In this paper, we investigate the determinants of the

likelihood of th e proposal’s withdrawal. Our evidence in-

dicates that more than 20 percent of all filed shareholder

proposals in the US are withdrawn during the sample

period of 1997–2009. Notably, corporate social responsi-

bility (CSR) proposals are withdrawn relatively more of-

ten than CG proposals. Consistent with our empirical

predictions, the results of our empirical analyses show

that proposals spo nsored by influenti al shareholders ,

such as institutional investors, and labor unions are most

likely to be withdrawn. Our results also show that insti-

tutional ownership is positively correlated with a pro-

posal’s likelihood of withdrawal if the sponsoring

shareholder is an institutional investor. This result is most

pronounced for the ownership stake of long-term, pas-

sively investing institutions (quasi-indexers). Further, we

find that insider ownership is negatively correlated with

the likelihood of withdrawal. Our robustness tests reveal

that firms that exhibit high chief executive officer (CEO)

ownership drive this relation, and this effect is most pro-

nounced for CG proposals. We do not find a significant

relation between insider ownership and the likelihood of

the withdrawal of CSR proposals. Furthermore, we show

that withdrawn pro posals on execut ive compensati on

issues are effective CG tools. Adopting a propensity-

score-matching approach, we find that withdrawn

compensation proposals have the potential to change

the compensation structures relative to compensation

proposals that do not gain many votes during the AGM.

Moreover, we show that the proxy proposal process itself

is an important CG mechanism. The importance of voice

engagement through shareholder proposals manifests itself

in the fact that in our sample period, shareholders have

increasingly been filing proposals with US corporations –

even though such proposals are not binding. Not only do

we observe a consistently high number of filed proposals;

we also observe a consistently high number of withdrawn

proposals. This observation implies that shareholders expect

to promote corporate changes through proposals, as well as

awareness among other shareholder groups that certain

firms are not managed efficiently. Without these expecta-

tions, shareholders would not spend the time, money, and

effort on filing proposals.

The academic literature also shows a growing interest in

shareholder engagement by means of proposals. This litera-

ture looks at voting outcomes as a measure of the success of

proposals (e.g., Gillan & Starks, 2000; Gordon & Pound,

1993), the extent to which the board implements proposals

(e.g., Renneboog & Szilagyi, 2011), the role of shareholder

proposals as a substitute for other governance mechanisms

(e.g., Bauer, Braun, & Viehs, 2010), and the voting behavior

of institutionalshareholders (e.g., Ashraf,Jayaraman, & Ryan,

2012; Davis & Kim, 2007). Most of these studies conclude the

proposalsare relatively unsuccessfulbecause their voting out-

comes average less than 50 percent. Even more important is

the fact that shareholder proposals are only advisory. The

board can still refuse to adopt the proposal’s recommenda-

tions, even if the voting outcome is higher than 50 percent.

Furthermore, several studies investigate specific subsamples

of voted shareholder proposals to draw conclusions about

their ability to promote corporate changes (e.g., Buchanan,

Netter, Poulsen, & Yang, 2012; Ertimur, Ferri, & Muslu,

2011). However, these studies have largely neglected the

special class of withdrawn proposals. We contribute to the

literature on shareholder engagement through shareholder

proposals by investigating the determinants of withdrawn

shareholder proposals and their corresponding power to

promote change in corporations.

To our knowledge, only two studies directly address

private negotiations and proposal withdrawals: Carleton,

Nelson, and Weisbach (1998) and Chidambaran and

Woidtke (1999). Carleton et al. (1998) investigate the CG en-

gagements of the Teachers Insurance Annuity Association-

College Retirement Equities Fund (TIAA-CREF), a major

institutional investor in the US. The authors find that

TIAA-CREF successfully negotiated a compromise with

target companies in 71 percent of the cases –even before

a proposal was put to a vote –and that a proposal with-

drawal followed. Carleton et al. (1998) also document that

in 87 percent of the withdrawals, target firms implemented

TIAA-CREF’s requests. This finding is consistent with our

argumentation that a withdrawal of a shareholder proposal

represents a successful engagement.

Chidambaran and Woidtke (1999) also explicitly inves-

tigate withdraw n shareholder proposals. They exami ne

the determinants of proposal withdrawals in the context

of the Securities and Exchange Commission (SEC) proxy

reforms in 1992. The a uthors find that insider ownership

is negatively rela ted to the likeliho od of CG proposals

being withdrawn post 1992. Further, their results do

not reveal a significant relation between the likelihood

of a withdrawal of CG proposals and institutional

ownership.

Our study differs from Carleton et al. (1998) and

Chidambaran and Woidtke (1999) in several respects. First,

we investigate all proposals that shareholders filed to all

S&P1500 companies over a much longer time horizon. That

is, we not only look at the engagements and negotiations of

one shareholder with several target firms, but rather we

analyze all negotiations that occurred after the firms in our

sample received shareholder proposals. Furthermore, in

addition to CG proposal withdrawals, we study the determi-

nants of CSR proposal withdrawals, whereas Carleton et al.

(1998) focus exclusively on CG proposal withdrawals. Also,

Chidambaran and Woidtke (1999) do not study social issue

proposals in their empirical analysis. Another distinctive

feature of our study is that we investigate the importance of

institutional investors in the shareholder proposal process in

a time of increased institutional shareholder activism on CG

and CSR issues.

The implications of our study are the following. We

shed light on the imp ortance of the ent ire shareholder

proposal process by considering voted, withdrawn, and

473WITHDRAWN SHAREHOLDER PROPOSALS

© 2015 JohnWiley & Sons Ltd Volume 23 Number 6 November 2015