In this summary of CFA Institute findings, we take a brief look at the history of proxy access, discuss the pertinent academic studies, examine the benefits and limits of cost–benefit analysis, analyze the use of proxy access in non-US jurisdictions, and draw some conclusions.
How We Got Here
Proxy access refers to the ability of shareowners to place their nominees for director on a company’s proxy ballot. This right is available in many markets, though not in the United States. Supporters of proxy access argue that it increases the accountability of corporate boards by allowing shareowners to nominate a limited number of board directors. Afraid that special-interest groups could hijack the process, opponents of proxy access are also concerned about its cost and are not convinced that proxy access would improve either company or board performance.
The US Securities and Exchange Commission (SEC) most recently attempted to give shareowners proxy access in 2010, when it passed a proxy access rule (Rule 14a-11)1 pursuant to section 971 of the Dodd–Frank Act. A lawsuit challenging the rule succeeded when the US Court of Appeals for the District of Columbia Circuit vacated the SEC’s proposed rule, holding that the SEC had failed to adequately assess the economic effects of the proposed rule.2 The SEC did not appeal the court’s decision.
This report attempts to address the questions raised by the DC Circuit Court by analyzing event studies, other data, and examples of proxy access in non-US jurisdictions with respect to the costs and benefits of proxy access. Taken together, the event studies analyzed in this report examine whether proxy access, on the particular event date, would have been beneficial or harmful to market performance, stock performance, and board performance and whether the potential use of proxy access by special-interest groups would have reduced shareowner wealth.
Proxy Access In The United States – Academic Studies
In conducting this research, CFA Institute retained the services of Industrial Economics, Incorporated (IEc), to assess the economic impacts associated with the SEC’s proposed proxy access rule. The remainder of this report, 2Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission, slip op. 10-1305 (DC Cir., 22 July 2011).
following this executive summary, comprises IEc’s analysis and discussion. Table 1 summarizes the results of the five event studies3 reviewed by IEc in the context of five shortcomings of the SEC’s economic analysis of Rule 14a-11, as identified by the DC Circuit Court.
The event studies cited in Table 1 attempt to identify empirically whether proxy access benefits or harms shareowners. Using econometric methods, these studies estimate firm-level abnormal returns, defined as the deviation of the actual return from its expected value on an array of event dates. Each study focuses on an event window relevant to the availability of proxy access rights that the authors contend is economically significant and generally unexpected by the market. On the basis of their findings, the authors conclude whether proxy access creates or destroys shareowner wealth.
Three studies offer evidence that proxy access reform enhances board performance. Of the three studies that assess whether the use of proxy access by special-interest groups reduces shareowner wealth, two studies provide evidence that it does not. Finally, only one event study assesses the impact of increased proxy contest costs on shareowner wealth; the results of this study show evidence that increased proxy contest costs do not appear to reduce shareowner wealth.
With respect to the relative distribution of findings across studies, four studies affirm that proxy access contributes to an increase in shareowner wealth and one study does not affirm this hypothesis (Figure 1). Two studies are excluded from the analysis because the estimated abnormal returns reflect event dates that are not specific to the SEC’s vacated proxy access rule and thus likely do not reflect the market’s reaction to the specifics of Rule 14a-11. The results of these two studies4 are omitted from Figure 1 and Figure 2, and a discussion of their methodological shortcomings in the context of this impact assessment is provided in Appendix A.