Not-So-Modest Proposals

For board members the choice is clear: support shareholder proposals that win a majority vote or risk losing the director seat.

Directors would do well to heed their shareholders, if only out of concern for their jobs, according to new research by a trio of business school professors. The study, which examined the results of 620 majority-vote proposals (all dealing with governance issues), found that directors who failed to respond to proposals that received a majority vote were more likely to lose their seats — at both the company in question and on other boards — than their more-receptive peers.

Because of the rise in campaigns urging shareholders to withhold their votes from unresponsive directors, “ignoring shareholder proposals now has an impact on individual directors when they are up for reelection. And even when they do get reelected, it is embarrassing from a reputation standpoint,” says Fabrizio Ferri, an assistant professor at Harvard Business School and one of the study’s co-authors (along with Yonca Ertimer of Duke University and Stephen Stubben of the University of North Carolina).

Shareholder proposals, although nonbinding, became much more influential during the period that Ferri and his colleagues reviewed (1997–2004). Boards acted on very few majority-vote proposals in 1997, but by 2004 they implemented more than 40 percent. “The cost of ignoring shareholder proposals has become extremely high in the post-Enron era,” says Ferri. “Companies don’t want to be on the front page of the paper for having ignored resolutions approved by 70 percent of their shareholders.” This is a marked contrast to years past, says Ferri, when companies sometimes ignored proposals for years.

While the study covers only 1997 to 2004, Ferri says recent data shows that the trend is continuing. “This is a systemic shift in terms of governance, and it seems to be permanent,” he says.

Percentage of shareholder proposals implemented

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