It's difficult for large shareholders to get one of their representatives elected to a board of directors. The rules have been stacked against proxy contests for a long time. Business organizations such as the US Chamber of Commerce argue this is actually a good thing because so-called activist board members hurt the firm's value by giving too much power to special interest groups.
But is that really true? Does the market really respond negatively when a major investor such as a CALPERS manages to get one of its own elected to the board of a portfolio firm?
Recent evidence suggests just the opposite, according to three researchers at Harvard Business School: Bo Becker, Daniel B. Bergstresser and Guhan Subramanian. In a clever "natural experiment," the trio studied the share prices of companies after the Securities and Exchange Commission suspended a rule that would have made it easier for long-term shareholders to win a board seat.
On the day of the SEC's announcement to postpone the rule, the researchers watched the resulting stock stock prices of companies where investors known for being activists, such as hedge funds, held large stakes. "Presumably, these were the shareholders who would have been most likely to nominate new board members if the SEC hadn't delayed the rule," reports HBS Working Knowledge. Would shareholders buy or sell on the news?
The result: Share prices of companies that would have been most exposed to shareholder access declined significantly compared to share prices of companies that would have been most insulated from the rule.
"The biggest conclusion we draw from this is that allowing owners to have more power and influence with corporate decision-making, on balance, seems to be valuable in the eyes of the stock market," Becker relates. "And this particular rule or some similar rule seems like it might be one way to do it."
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