January 17, 2012

The Law and Economics of Shareholder Voting Reform and the Costs of Proxy Access

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This working paper has been published in the Stanford Law Review

Proxy access is a controversial legal rule to permit shareholders of publicly traded companies to place nominees onto the corporate proxy card in certain situations. Proponents of proxy access have long argued that it will make companies more accountable to their shareholders. Critics have warned that it instead risks empowering shareholders whose motives may conflict with maximizing shareholder value. For example, union pension funds and state pension funds that function under the influence of elected officials may wish to use their new powers to pursue politically motivated goals at the expense of shareholder returns for other investors.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 gave the U.S. Securities and Exchange Commission (SEC) the authority to adopt a proxy access rule. Though the legislation urged an exemption for companies with less than $75 million in market capitalization, the SEC unexpectedly failed to provide a permanent exemption from the rule for those companies.

We use that unanticipated event to test the effect of proxy access on firms with less than $75 million in market capitalization. This working paper summarizes our results, and we report them in detail in an article forthcoming in the Stanford Law Review. We find that, for the roughly 900 publicly traded companies we study with under $75 million in market capitalization, the proxy access rule caused on the order of $335 million in shareholder losses. This finding urges caution in the SEC’s continued efforts to adopt proxy access and other corporate governance reforms broadly designed to empower shareholders.

A version of this work is forthcoming in the Stanford Law Review. See Thomas Stratmann and J.W. Verret, under the title “Does
Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies?” 64 Stanford Law Review (forthcoming 2012). When
possible and appropriate, please cite to that version. For information, visit http://lawreview.stanford.edu.

A version of this work is forthcoming in the Stanford Law Review. See Thomas Stratmann and J.W. Verret, under the title “Does Shareholder Proxy Access Damage Share Value in Small Publicly Traded Companies?” 64 Stanford Law Review (forthcoming 2012). The full paper is available at: http://ssrn.com/abstract=1960792.