Academic

A recent Investment Company Institute report revealed that sponsorship of shareholder proposals was relatively concentrated in the hands of a few individuals and groups.  Thus, the report revealed that in 2007, just five individuals accounted for about half of the proposals submitted by individuals, while only three unions accounted for about half of the proposals submitted by unions.  So, what do these figures mean?

In what he called his last formal speech, SEC Commissioner Paul Atkins specifically pointed out these figures and suggested that there were both troubling and indicative of some shareholders? abusive use of the proposal process.  Similarly, while the ICI report indicated that many people submitted proposals in order to benefit the corporation, it also suggested that the figures confirmed research revealing that some shareholders used the proposal process to advance their own personal agenda.  Indeed, at first, and even second, glance, these figures seem to confirm the notion that shareholder activism reflects agitation by a narrow segment of the shareholder population, and that such activism may be antithetical to the interests of the broader shareholder class and the corporation.  In this regard, the figures appear to raise questions about the legitimacy of the recent increase in shareholder activism.

Of course, the figures can be viewed in another, and perhaps less troubling, light.  First, to the extent that shareholder activism represents a kind of activist movement, isn?t it the case that all movements need their leaders?  Moreover, given the natural apathy of shareholders, shouldn?t we expect shareholders to rely on a select few within their group to put forth shareholder proposals?  From this perspective, we should have expected that a small group of shareholders would bear the responsibility of submitting most of the shareholder proposals, and hence we should not be overly alarmed by the fact that they do.  Second, why should sponsorship matter when measuring the legitimacy of shareholder proposals and activism more generally?  Instead, shouldn?t the focus be on the percentage of shareholders who approve shareholder proposals?  In this regard, the fact that many shareholder proposals in the recent past were actually approved by a majority of shareholders seems to reveal that such proposals have a broad cross-section of support.  So who cares that they were submitted by the same few individuals or group of individuals?  Moreover, even if shareholders? approval only reflects their dissatisfaction with the status quo, as opposed to their support of the issue embedded in the specific shareholder proposal, broad shareholder support of the proposal nevertheless appears to be an important signal to managers?and a signal being conveyed by a significant percentage of the shareholder base. These observations suggest that the fact that a relatively few shareholders sponsor shareholder proposals should not be seen as problematic.

Alas, of course, the troubling aspect of the sponsorship figures has little to do with the issue of shareholder approval of a given proposal. Instead, as Atkins points out, sometimes shareholders are able to wield significant influence over corporate affairs even when a proposal is not approved?and in fact some sponsors have no desire for a proposal to appear on the proxy statement for a vote. Thus, Atkins noted that some shareholders acknowledged that they sponsor proposals as a tactic to gain leverage to achieve their objectives ?behind closed doors and out of the public eye.? He called such a tactic ?appalling.?  This ability of shareholders to use the proposal process as an indirect means to influence corporate decision-making does cast a more sinister light on the sponsorship figures.

Ultimately, of course, it is difficult to know to what extent shareholders use the proposal process to negotiate behind closed doors (the doors are closed after all!), and thus it is difficult to know the extent of the problem. However, the possibility of such a phenomenon makes the sponsorship figures much more troubling than they otherwise would be, suggesting that at least some aspect of the recent increase in shareholder activism reflects increased power of a small and potentially unrepresentative sample of the shareholder class.