Shareholder Activism through Proxy Proposals

The European Perspective

P. Cziraki, L.D.R. Renneboog, P.G. Szilagyi

Research output: Working paperDiscussion paperOther research output

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
Place of PublicationTilburg
PublisherTILEC
Number of pages52
Volume2009-019
Publication statusPublished - 2009

Publication series

NameTILEC Discussion Paper
Volume2009-019

Fingerprint

Shareholder activism
Stock prices
Price effects
Governance
Sponsor
Leverage
Shareholders
Vote
Voting
Ownership concentration
Sample selection model
Equity
Pay-performance sensitivity
Shareholder voting
Book-to-market ratio
Corporate governance
Institutional investors
Monitoring
European firms
Ownership structure

Keywords

  • Shareholder activism
  • shareholder proposals
  • corporate governance
  • sample selection

Cite this

Cziraki, P., Renneboog, L. D. R., & Szilagyi, P. G. (2009). Shareholder Activism through Proxy Proposals: The European Perspective. (TILEC Discussion Paper; Vol. 2009-019). Tilburg: TILEC.
Cziraki, P. ; Renneboog, L.D.R. ; Szilagyi, P.G. / Shareholder Activism through Proxy Proposals : The European Perspective. Tilburg : TILEC, 2009. (TILEC Discussion Paper).
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Cziraki, P, Renneboog, LDR & Szilagyi, PG 2009 'Shareholder Activism through Proxy Proposals: The European Perspective' TILEC Discussion Paper, vol. 2009-019, TILEC, Tilburg.

Shareholder Activism through Proxy Proposals : The European Perspective. / Cziraki, P.; Renneboog, L.D.R.; Szilagyi, P.G.

Tilburg : TILEC, 2009. (TILEC Discussion Paper; Vol. 2009-019).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Shareholder Activism through Proxy Proposals

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AU - Renneboog, L.D.R.

AU - Szilagyi, P.G.

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AB - 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.

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Cziraki P, Renneboog LDR, Szilagyi PG. Shareholder Activism through Proxy Proposals: The European Perspective. Tilburg: TILEC. 2009. (TILEC Discussion Paper).