Important new research finds that politically motivated shareholder activism does not create value for the owners of a company’s stock and, in some cases, leads to a decline in share price.
Political, Social, and Environmental Shareholder Resolutions: Do They Create or Destroy Shareholder Value?, an academic paper commissioned by the National Association of Manufacturers, examines shareholder resolutions that require companies to achieve political or social goals over which a given company may have little or no ultimate influence.
Proponents of these resolutions often argue that if a company discloses particular facts or takes certain actions, management and investors will be more aware of potential risks and better able to respond to challenges, leading to an increase in shareholder value.
An economic analysis shows that the opposite is true. The authors examined nine instances in which a shareholder proposal on climate change requiring a report or other disclosure was put forward at a public company. They then performed four separate event studies for each proposal to determine the effect on stock prices. These analyses tested the economic effect on the date the shareholder proposal was filed, the date on which the proposal received a vote and the relationship between the company stock, the stock of its peers and the overall market during both a one-year and six-month period surrounding the filing and vote.
None of the 36 event studies found that shareholder value increased. In 34 studies, there was “no statistical basis to conclude the shareholder proposals had any effect on the company share price.” Two other studies found a statistically significant decrease in shareholder value of more than 2 percent.
The paper also explores the role of institutional investors in promoting activism. If politically motivated proposals do not increase value, why do mutual funds, pension funds and other financial industry players sometimes support them? According to the authors, the evidence suggests that asset managers are acting in their own self-interest in an attempt to increase the amount of funds under their control.
One of the paper’s authors, Professor Joseph Kalt of Harvard University, noted that the study “should not be interpreted as suggesting that shareholders should ignore the problems of climate change and other social issues. But effectively responding to such problems is more properly the role of public policy, not ad hoc shareholder resolutions.”
“While frustration with slow progress is understandably accompanied by the desire to ‘do something,’ doing something effective is ultimately the task of our political institutions. The politicization of the shareholder proposal process is an ineffective substitute for policymaking via the political institutions of democracy,” said Kalt.
When manufacturers can invest for growth, America prospers. Often that prosperity takes the form of higher wages and more jobs. Just as important is the financial security of hardworking families who depend on the value of stocks held in their retirement accounts. As this paper shows, politically motivated activism does little to enhance shareholder value.
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