Public versus Private Provision of Governance: The Case of Proxy Access
July 24, 2015
Tara Bhandari, Peter Iliev, and Jonathan Kalodimos
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We use a unique setting to study the tradeoffs between universal regulatory mandates and private contracting in the field of corporate governance. Events surrounding the legal challenge of a 2010 proxy access rule allow us to benchmark the market’s expectation of the benefits of universally mandated proxy access even though this rule never came into effect. At the same time, a 2010 rule amendment facilitating shareholder proposals for proxy access opened a new channel for proxy access through "private ordering." We document that this private channel has been active, spawning about 160 proxy access proposals, and use the unexpected announcement of a major private ordering initiative to identify a 0.5 percent increase in shareholder value for the targeted firms. However, our findings also underscore that private ordering may lead to a second best outcome. We find that proponents do not selectively target those firms that were expected to benefit the most from universally mandated proxy access, and that tailoring of proposal terms is limited. Moreover, management is more likely to challenge proposals at firms that stand to benefit more. Overall, we find that private ordering creates value, but it may not efficiently deliver proxy access at the firms that need it most.