Governance Proposals
/Governance proposals and the role of individual investors
Governance engagements seek to ensure that a well-functioning board can effectively oversee the interests of shareholders. For example, proposals to increase the independence of the audit or risk committee have the potential to reduce accounting fraud risk. Likewise, engagements to increase the holding period of equity-based pay reduce management incentives to manipulate short-term earnings.
Governance shareholder proposals can also increase investors’ ability to engage with companies. It has been shown that it is more costly for investors to engage with companies with entrenched managers.14 The entrenchment of management is principally measured and affected by the corporate governance infrastructure including whether the company has characteristics such as:
Staggered boards
Limits to shareholder by-law amendments
Supermajority requirements for mergers
Supermajority requirements for charter amendments
Poison pills
Golden parachutes
Shareholder proposals that improve corporate governance structures on these aspects are frequently part of an overall strategy by investors to provide a better balance of power between investors and a company’s management and board.