Corporate Boards Responding More To Shareholders

Last Updated Mar 10, 2008 1:43 PM EDT

Thanks to the Enron-style management lapses and collapses, shareholders suddenly find their collective voices being heard more than ever by boards of directors.

For any investor who has ever suffered through an annual meeting, you know that shareholder proposals almost routinely get shot shot down by directors, even proposals that carry a majority vote from other shareholders and reappear on the agenda year-after-year.

But in recent times, directors are suddenly paying more than lip service to what their investors have to say.

This is documented in a recent research report by Yonca Ertimur, Duke University; Fabrizio Ferri, Harvard Business School; and Stephen R. Stubben, University of North Carolina at Chapel Hill.

The research team measured implementation of non-binding, majority-vote shareholder proposals in the period before and after Enron. Between 1997 and 2002, only 22 percent of the proposals under study won board backing. But in the 2003-2004 period, the number nearly doubled, to 41 percent support.

Can You Hear Me Now?
Why the increase? It's not because of more vigorous activism.

Instead, the research team concludes, firms and individual board members are paying a higher penalty in loss of reputation when they say no.

"Firms ignoring majority votes on shareholders resolutions receive lower ratings from governance services, such as The Corporate Library, are more likely to end up on CalPERS' "focus list" of poor finance and governance performers, and attract negative press coverage. These effects reflect increased investors concerns with 'governance risks' after the Enron-type scandals."
Individual directors are penalized as well. Researchers found that outside directors who favored majority-vote shareholder proposals were more likely to retain their seat and receive more offers to join other boards.

Now let's ask a question: Is this a good trend? The results suggest (at least to me) that boards are acting out of fear of reprisals rather than toward good corporate governance. Are they voting in favor of proposals they believe are counter to the best interests of the company?

The answer probably awaits more research. But you can voice your opinion now. What do you think?

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.