Subject: File No. S7-10-09
From: Tina Yang
Affiliation: Professor of Finance, Villanova University

January 19, 2010

In our study, Proxy Rules and Proxy Practices: An Empirical Study of US and UK Shareholder Proposals, we analyze all publicly-available data on shareholder proposals in the US and UK for the period 2000-2006. We also include in our study those events where investors nominate their directors for election. US and UK have very similar legal, governance and capital market systems, but very different proxy rules. For example, UK investors can use corporate proxy materials to nominate directors. UK shareholder proposals, once passed, are binding. UK shareholders can call special meetings. We find that 70% of UK proposals are presented at special meetings and 80% of all proposals target director election. For comparison, US investors currently cannot use corporate proxy materials to nominate an alternative slate. US proposals are not binding. Lastly, corporate governance documents adopted under state laws frequently prohibit or limit US shareholders' ability to call special meetings. Thus, all US shareholder proposals and 81% contested proxy solicitations are presented at annual shareholder meetings.

We find that UK proposals have a potential negative impact on firm performance. In contrast, US proposals have a significant and positive impact on firm stock performance and the positive impact is larger if the proposal is sponsored by large blockholders or if the proposal targets issues with positive shareholder wealth predictions. We also find that, after receiving a shareholder proposal, firms are also more likely to exhibit CEO turnover. Previous studies on US shareholder proposals have found that proposals have no effect on firm performance and CEO turnover. We find that the average institutional investors who submit shareholder proposals in the US own more than 1% of the target firm. Average investors who solicit contested proxies own nearly 10% of the target firm. Thus, the current proposed ownership requirements should not pose as a constraint on shareholders to become eligible for the proxy access process, especially if shareholders can form groups to nominate directors.

Therefore, our study suggests that proxy voting is just one element of the complex governance system, whose mechanisms work together, in relation to each other, for greater corporate efficiency and higher shareholder value. Our UK evidence suggests that giving shareholders more power does not necessarily lead to higher firm value. Our US findings suggest that recent corporate governance reforms and initiatives such as the 2002 Sarbanes-Oxley Act and the 2003 SEC Rules (Release No.33-8188) are taking effect. These governance initiatives are making boards more responsive to shareholder actions and are having a positive effect on shareholder wealth.

Our paper is available for download at

(Attached File #1: s71009-608.pdf)