Shareholder Engagement and Corporate Behavior

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This paper investigates how firms respond to shareholder engagement. The shareholder-sponsored proposals is a governance mechanism that allows shareholders to raise issues with firm management on various environmental or social issues that affect firm stakeholders. Using the data on shareholder-sponsored proposals compiled by RiskMetrics for the S&P 1500 universe, we look at how firms react to the submitted proposals and in particular how their extra-financial performance (as proxied by the KLD ratings) changes following a voted or a withdrawn proposal. The submission process may be affected by endogeneity issues (e.g. firms with worse extra-financial performance may be more likely to be targeted by shareholders in the first place), which is why we adopt the two-stage least squares (2SLS) framework under which we instrument the fact of being targeted by the level of extra-financial performance and lagged targeted data from the previous year.

We find that being targeted on both Environmental and Social topics in the same year is generally associated with improvements in extra-financial performance, both in the short term (at 2 and 3 years) and in the long term (at 5 years). This suggests that shareholder engagement on a broad set of issues is more conducive to changes in the extra-financial performance of firms. Examining the intensity of shareholder pressure, we find that a higher number of voted or withdrawn proposals, as well as a higher proportion of favorable votes in annual general meetings are associated with improvements in the extra-financial performance (in the short term). The findings are strongest relative to decreases in environmental or social concerns, or to increases in net environmental or net social performance. The findings are similar for the aggregate measures of extra-financial performance. For environmental issues, the fitted models suggest that a low number of withdrawn and voted proposals (with average voting support of about 10%) are needed to induce meaningful changes in firms.

Author(s):

Liviu Andronic    
University of Toulouse Capitole
France