The ripple effect of shareholder activism – the deceptive power of submitted proposals

The exponential growth of shareholder activism is having a complex impact on the non-financial performance of firms that goes beyond traditional stakeholder theory.

The corporate board is the linchpin between purpose and strategy. It defines why the firm exists and the stakeholders it serves, and develops clear policies that align with the collective overall goals.

Within this fundamental relationship between board and stakeholders, the power and legitimacy of stakeholders influences the issues tackled by the board. According to traditional stakeholder theory, shareholders are primary drivers of a firms’ financial stability: managing and responding to their proposals is an integral function of corporate governance. 

Shareholders have multiple strategies at their disposal to influence firm’s strategic direction. Money talks and walking away from shares in a firm that fails to deliver on its promises or drifts from its corporate purpose will hit where it hurts. Media campaigns, protests and boycotts are all tools also used frequently to influence and manipulate firm policy.

But formal proposals are the trump card of the shareholder. The non-binding requests submitted to annual shareholder meetings have significant consequences for firms’ practices and give shareholders the power to hold boards and executives to account. Ignoring this very visible aspect of shareholder activism can breed uncertainty and distrust.

The impact of shareholder activism on financial performance has been studied extensively – but the landscape is changing. Interestingly, corporate governance proposals related to board practices are no longer the dominant force: in 2023, 56.7 percent of shareholder proposals in US publicly traded firms were related to social and environmental issues. This shift is more pronounced in relation to environmental proposals: climate change is the most common topic, with social aspects such as gender and racial pay gaps and civil rights all under the shareholders’ spotlight.

In a working paper with colleagues from the University of Granada (Maria Ruiz-Castillo, Alberto Aragón-Correa, and Nuria Hurtado-Torres), we analyzed 8474 shareholder proposals received by S&P 500 firms between 2006 and 2020. Data and insights were gathered from Refinitiv Eikon, the Institutional Shareholder Services (ISS) database, Thomson Reuters Institutional (13F) Holdings and the RepRisk database. By dividing the proposals into governance and socio-environmental categories, we were able to uncover firm strategic responses that extended beyond governance concerns and addressed socio-environmental issues. 

Of the total proposals submitted, 5133 proceeded to vote – with just 11 percent approved. Within S&P 1500 companies, the total approval rate of all proposals over the same period is just one per cent.

So where is the benefit? What effects do these shareholder proposals have on firms’ non-financial performance, and what are the mechanisms driving this relationship?

To provide an answer, our research develops a novel theoretical perspective that integrates established stakeholder theory with a socio-cognitive perspective. And our analysis shows that while the majority of shareholder proposals may fail at the first hurdle, there is a much wider benefit: boards and executives are paying attention. 

Shareholder activism – which traditionally represents minority groups - signals the issues at play to both fellow shareholders and other stakeholders. While firms may dismiss the specific issues brought up in most of the proposals they receive, they will engage indirectly with the concerns to seek to establish social approval and legitimacy. Our empirical study reveals the willingness of firms to engage with activists to bring about both governance as well as social and environmental change.

This social approval within a broader environment serves to reduce stakeholder uncertainty and can have wider implications for the interpretation of, and influence on, strategy. Ultimately, the firms are incentivized by the issues presented in the proposals – the more intense the activism is, the more likely it is that firms will take measures to improve their non-financial performance. We observe clear association between governance proposals and firm governance improvements in succeeding years as well as between socio-environmental proposals and firm improvements in socio-environmental performance. 

This impact can be clearly illustrated with high-profile examples identified within our analysis. For example, during the period we examined, Goldman Sachs received 13 governance proposals calling for greater independence. None of the proposals were approved in the annual shareholder meeting, but subsequent corporate governance performance was enhanced by 84 percent according to some governance KPIs, as defined by the firm.

Even more significantly, multinational consumer goods firm Colgate received 23 governance and six environmental and social shareholder proposals during the same period. And, while governance performance improved by 22 percent, their socio-environmental performance increased by a huge 227 percent according to some socio-environmental KPIs, as defined by the firm.

Our research advances traditional stakeholder theory to reveal a paradigm shift in awareness, transparency and accountability. We have refined the understanding of the indirect effects of shareholder activism and can draw clear conclusions regarding the intricate dynamics between activism and firms’ non-financial performance.

Interestingly, we reveal that firms are open to progress on environmental and social performance as an indirect consequence of governance-based proposals, particularly when they are subject to environmental reputational risk. 

Our study also has significant implications on policy. The sheer number of shareholder proposals and their ripple effects generates extra pressure on publicly listed firms and their need to provide globally appropriate responses. Understanding the impact of environmental and social activism is crucial for both the activists and the firms they target. 

Our work provides novel insights into these challenges, and we welcome further research that considers the nuances of different institutional settings and the interactions between executives, boards and shareholders.

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By Ruth V. Aguilera, Northeastern University

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