Invigorating the shareholder proposal process is a top priority for corporate governance reformers. But the possibility that self-interested shareholders could use proposals to harass or pressure managers to accommodate their interests is a cause for concern. Union shareholders attract more critical comments than any other group: as pension fund managers they have an incentive to press for higher investment returns, but as worker representatives they also want wage and compensation policies that benefit current members. While some observers have argued that – for statutory and strategic reasons – unions will not use the proposal process for private purposes, there is a lack of empirical evidence on whether and how often unions make proposals for private purposes.
In a new study, “Opportunistic Proposals by Union Shareholders,” now in working paper form, we provide what we believe is the first systematic evidence that unions do in fact use the proposal process for private purposes, and such use is not a rare occurrence. Identifying opportunistic proposals is difficult because sponsors are not going to admit that their proposals have an ulterior motive. Our strategy is to look for heightened proposal activity during times when a proposal is particularly likely to provide an ulterior benefit for unions. Specifically, we examine whether unions make more proposals in years when the company is negotiating a collective bargaining agreement. We conjecture that unions might make proposals to create bargaining chips; they can withdraw their proposal before it comes to a vote if management offers a suitable contract. Since there is no obvious reason for proposals to jump during negotiation years other than private benefits for the union, there is a good circumstantial case for believing that extra proposals in negotiation years are intended to influence contract negotiations.
We examine all proposals received by 256 large companies during the period 1997-2013. Our main finding is that union proposals spike precisely during years in which a company is involved in collective bargaining. In a normal year, a company receives a proposal 22 percent of the time; we find that the probability of a proposal rises in negotiation years to 27 percent, about a one-quarter increase. We also find that in contentious negotiations – defined as those that involve a strike or lockout – the probability of a proposal jumps to 37 percent. For comparison purposes, we also track proposals by nonunion shareholders, such as hedge funds, individuals, and religious groups; we do not observe an increase in proposals by those groups in contract negotiation years. A natural interpretation of this evidence is that some union proposals in negotiation years are being made as bargaining chips. In support of this, we find that a proposal appears to be as much a precursor as an end to negotiations with management: over 40 percent of all proposals are withdrawn before going to a vote.
If unions are really using proposals as bargaining chips, we expect their proposals to be targeted at subjects that threaten to hit managers where it hurts them the most. Consistent with this idea, we find that unions are much more likely than other shareholders to make proposals that restrict executive or director compensation, and proposals that change the election, tenure, and retention of directors. Subjects like social issues, poison pills, auditors, and so forth that interest nonunion shareholders hold little interest for unions. Not only do we find a high level of compensation and board election proposals by unions, we find that the frequency of those particular types of proposals increases during contract negotiation years.
A question of great interest is how shareholder proposals affect firm value? There is a healthy empirical literature on this question but the evidence is decidedly mixed, and most studies lack convincing research designs. We aren’t able to move the ball on this issue very much, but we do attempt to determine how opportunistic proposals influence collective bargaining outcomes. The data on contract settlements is less complete than the data for shareholder proposals, but we find some evidence that wage settlements are modestly higher following negotiations in which the union made a proposal that it later withdrew (suggesting an agreement) than when the union made a proposal that went to a vote (suggesting failure to reach an understanding).
Even if union proposals are opportunistic, they still may be beneficial for shareholders. The pressure from unions might force managers to make concessions to improve their governance practices at the same time the managers make wage concessions. Here again we do not have the best data, so can only offer suggestive results, but we do find evidence that governance-related union proposals increase the chance that a company will reform the targeted governance practice in the direction favored by “good governance” reformers in the following year, although the effects are not precisely estimated. So while opportunistic proposals may benefit unions in their negotiations, it also seems they may help shareholders at large.
We hope our findings will contribute to ongoing discussions about corporate governance in several ways. First, in rejecting the SEC’s new proxy access rules in 2011, the U.S. Court of Appeals for the District of Columbia criticized the SEC for failing to follow its responsibilities under the Administrative Procedure Act to conduct a rigorous benefit-cost analysis of its proposed rules (Business Roundtable v. Securities and Exchange Commission). The Court concluded that while the benefit side had been studied, at most a cursory attempt had been made to quantify the cost side. Our study can help inform future rule-making by offering a quantification of one particular cost; together with research quantifying other costs, this will help build an empirical foundation for a rigorous analysis of the economic effects of proxy access.
Second, our study suggests that the possibility of there being downsides to enhanced shareholder rights should be taken seriously. Much of the argumentation, particularly in the academic sphere where we reside, has focused on agency problems in the CEO’s office, and the power of shareholder rights to curtail managerial misbehavior. We are convinced by the large body of evidence that agency problems are real, and believe that controlling agency problems is a good justification for enhancing shareholder rights and giving shareholders more power to intervene in corporate affairs. However, it is also important to recognize that shareholder rights can be abused, and to design smart regulations that mitigate the risk of abuse.
Along these lines, our evidence offers some thoughts on the design of an optimal shareholder proposal process. If future research produces findings similar to ours, one implication would be that proposal processes should be designed to limit opportunistic proposals. An ideal policy would preclude proposals by parties that are engaged in negotiations with management, be they unions or suppliers or customers or potential acquirers. Whether such a rule could be implemented in practice is an open question – it would not be difficult, for example, for a union to engage a nominally independent individual or a different union to make a proposal on its behalf. While our evidence does not point to an immediate policy prescription, it does suggest some paths that ought to be explored. Of course, more evidence on benefits and costs is needed to draw any conclusions with a high degree of confidence.
The preceding post comes to us from John G. Matsusaka, Charles F. Sexton Chair in American Enterprise; Oguzhan Ozbas, Associate Professor of Finance and Business Economics; and Irene Yi, Ph.D. student in finance, all at the University of Southern California’s Marshall School of Business. The post is based on their working paper, “Opportunistic Proposals by Union Shareholders,” available here.