Though shareholder activism is a pivotally important corporate governance topic, historical analysis of shareholder engagement with publicly traded companies has generally been cursory. In a recent paper I do much to correct matters for the United States in the first half of the 20th century by drawing upon a hand-collected dataset of proxy contests in public companies compiled through searches of major daily newspapers from 1900 to 1949. In such firms, most shares are voted by proxy, so proxy battles provide highly salient evidence of shareholder engagement.
With respect to the paper focusing on the first half of the 20th century, 1900 is a logical place to begin because at that point industrial company shares were starting to transform U.S. equity markets, which railway securities had monopolized. 1949 is an apt end point. Beginning in the 1950s, source material on shareholder engagement in public companies is quite well developed.
There was a realistic possibility that newspaper archive searches for proxy contests between 1900 to 1949 would have revealed little activity. Adolf Berle and Gardiner Means famously claimed in The Modern Corporation and Private Property, their classic 1932 study of large American corporations, that shareholder indifference made a separation of ownership and control a hallmark of big business. The newspaper-derived dataset that provides the departure point for my paper indicates that in fact shareholder engagement did occur with some regularity in public companies during the first half of the 20th century, and often with corporate control in play.
The strategy for compiling the proxy contest dataset was to carry out searches of the New York Times and the Wall Street Journal for each year from 1900 to 1949 to identify and investigate all stories potentially involving proxy battles in public companies. The resulting dataset, which is comprised of 279 proxy contests, is, for reasons the paper elaborates upon, underinclusive to some degree. Nevertheless, the dataset is the only one available to gauge the nature and extent of shareholder activism in U.S. public companies during the first half of the 20th century.
With the companies involved in the 279 proxy contests in the dataset, they operated in a wide range of sectors, with railways featuring prominently. The firms affected included a substantial number of what were very large companies for the time. There was an appreciable number of activism incidents in each of the decades the dataset covers, but the proxy contests clustered in the 1930s and 1940s.
As for what shareholder dissidents were seeking to achieve, nearly three-fifths of the activism incidents in the proxy contest dataset put board control in play, meaning the stakes could not have been higher. With modern-style hostile tender offers to shareholders being essentially unknown during the first half of the 20th century, these de facto takeover attempts dominated the market for corporate control. In approximately one-quarter of the proxy contests in the dataset, the insurgents were seeking board representation, but there was no evidence board control was in play. With just under one-fifth of the proxy battles, the shareholder activists were focusing on a topic other than directorships.
If shareholder insurgents rarely succeeded with their proxy contest forays in U.S. companies during the first half of the 20th century, this would have muted considerably the impact shareholder activism had in practice. The proxy contest dataset indicates success was by no means guaranteed, but it was more than occasional. Shareholder insurgents achieved their objectives fully in more than one out of three instances and were partially successful just over one-eighth of the time. Proceeding via a stockholder committee did not affect success levels. On the other hand, the success rate was higher in the minority of occasions when the activist was “offensive,” in the sense that the protagonist lacked any detectable, enduring prior connection to the company affected by the proxy contest the protagonist launched.
A plausible explanation why activism incidents were more common in the 1930s and 1940s than they were in previous decades is that there were considerably more companies traded on the stock market in those decades than there were in earlier decades. To the extent that laws protecting shareholders afford a congenial environment for shareholder activism, the introduction of federal securities law in the mid-1930s also may have fostered shareholder interventions. The proxy contest dataset chronology casts doubt, however, on this conjecture. This is because, with 1930s proxy contests in the dataset, the number occurring before and after federal securities law was in place was similar.
There is another way in which federal securities law failed to have the impact on shareholder activism that might be expected. The direct forerunner of Securities and Exchange Act Rule 14a-8, which currently provides the platform for voting on hundreds of shareholder proposals every year, was introduced in 1942. It might have been anticipated that a by-product would have been a substantial increase in the number of proxy contests, but this did not occur.
It is important to remember in this context that the shareholder proposal regime introduced in 1942 was, as with Rule 14a-8, subject to a crucial qualification, namely that those advancing proposals could not put boardroom seats in play. Given this, if the SEC shareholder proposal regime in fact served as the catalyst for proxy contests, the proportion in the dataset where there was no attempt to secure a board seat should have been higher after 1942 than before. There was no such time trend, which implies the introduction of Rule 14a-8’s forerunner did not affect proxy contest activity materially up to 1950.
Berle and Means and various other commentators attributed an alleged docility on the part of shareholders in U.S. public companies during the first half of the 20th century to diffuse share ownership. When share ownership is thoroughly dispersed in a publicly traded company there indeed is a compelling logic underpinning a hands-off approach. Why, then, did proxy contests occur with some regularity between 1900 and 1949?
If there are shareholder insurgents who are willing to step forward despite deterrents to intervening, this can do much to break the shareholder activism logjam. This is because, for otherwise neutral stockholders who have misgivings about a company, backing a shareholder insurgency involves little more than supplying proxy documentation to authorize the voting of their shares. When, though, might stockholder insurgents step forward?
Berle and Means themselves identified a practically significant scenario where shareholders might be prepared to intervene, namely where the shareholders in question own a sufficiently large equity stake to exercise “minority control” and fall out with the management team or other shareholders with a substantial equity stake in the company. One might have assumed, with Berle and Means famously claiming that there was a separation of ownership and control in corporate America, that shareholders owning enough shares to exercise minority control in publicly traded companies were a rarity during the first half of the 20th century. In fact, there is empirical evidence indicating that sizeable share-ownership stakes were quite common in such firms during Berle and Means’ era. The pattern of ownership and control in corporate America thus provides at least a partial explanation for the shareholder activism that occurred between 1900 and 1949.
In sum, while proxy contests were by no means an everyday occurrence during the first half of the 20th century, meaningful shareholder engagement did occur. Moreover, large companies were frequently involved, the stakes typically were high with corporate control often being in play, and success was by no means a rarity. It follows that shareholder activism merits attention as part of any fully rounded account of U.S. corporate history during the first half of the 20th century.
Brian Cheffins is the S.J. Berwin Professor of Corporate Law at the University of Cambridge – Faculty of Law. This post is based on his recent paper, “Opening History’s Shareholder Activism Black Box,” available here.