Shareholder activism through proposals: The European perspective

Luc Renneboog, P.G. Szilagyi, Peter Cziraki

Research output: Chapter in Book/Report/Conference proceedingChapterScientificpeer-review

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.
Original languageEnglish
Title of host publicationInstitutional Investor Activism Hedge Funds nad Private Equity, Economics and Regulation
EditorsW. Bratton, J. McCahery
Place of PublicationOxford
PublisherOxford University Press
Pages105-150
ISBN (Print)9780198723936
Publication statusPublished - Aug 2015

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  • Research Output

    • 1 Discussion paper

    Shareholder Activism through Proxy Proposals: The European Perspective

    Cziraki, P., Renneboog, L. D. R. & Szilagyi, P. G., 2009, Tilburg: Finance, 52 p. (CentER Discussion Paper; vol. 2009-44).

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    Renneboog, L., Szilagyi, P. G., & Cziraki, P. (2015). Shareholder activism through proposals: The European perspective. In W. Bratton, & J. McCahery (Eds.), Institutional Investor Activism Hedge Funds nad Private Equity, Economics and Regulation (pp. 105-150). Oxford University Press.