by Michael Connor
The Securities and Exchange Commission’s unexpected October 2010 decision to delay implementation of a new rule that increased shareholder access to corporate proxies provided “statistically significant” evidence that financial markets place a “positive value” on greater shareholder access, according to a new academic study.
In August 2010, following passage of the Dodd-Frank financial reform law, the SEC enacted a rule which would give institutional investors greater proxy access. Shareholder activists have asserted that access to the corporate proxy, which avoids the need for a costly and complicated separate proxy solicitation, is needed to effectively challenge entrenched and unresponsive directors and officers.
In September, two business groups – the Business Roundtable and the U.S. Chamber of Commerce – filed legal challenges to the rule. As a result, in October the SEC said it would put implementation of the rule on hold until the legal questions were resolved.
The SEC’s delay in implementing the rule created an opportunity for a “natural experiment,” according to a paper published by three professors at the Harvard Business School and Harvard Law School and published on the Harvard Law School Forum on Corporate Governance and Financial Regulation.
The study found that in a one-day “event window” around October 4, when the SEC announced its delay, share prices of companies that would have been most exposed to shareholder access declined significantly – about 42 basis points – compared to share prices of companies that would have been most insulated from the rule.
“Taken as a whole, our empirical results suggest that proxy access was assigned a positive value by the stock market, that this value was associated with both the presence of the large active owners (who are plausible users of proxy access) and with poor firm track records (indicating possible room for improvement),” the study says.
“This result suggests that boards of public corporations can be useful tools for mediating shareholder-manager agency conflict, when shareholders influence board appointments,” the study adds. “The result highlights the importance of the process for nominating and electing directors.”
The Harvard paper states that its findings “have important policy implications” by providing evidence that the SEC’s proposed proxy access “satisfies the requirements of the Securities and Exchange Act and the Administrative Procedure Act,” undercutting legal arguments made by the Business Roundtable and the U.S. Chamber of Commerce.