How Retail Investors shaped Corporate Governance
/Many corporate governance policies that today are viewed widely as best practice were initially driven by the shareholder proposals of small individual “Main Street” investors—not large institutions—and then expanded to common adoption by markets.
Going back to the 1940’s, a small, dedicated group of individual investors have played a leading role in the filing of governance-related shareholder proposals that received high levels of investor support and drove many reforms covering a range of governance topics. These reforms have enhanced capital markets by strengthening the ability of boards to oversee shareholder interests and by addressing power imbalances between investors and company boards and management, proof that many constructive ideas have come from smaller individual investors.
It has driven many reforms covering a range of governance topics, including eliminating staggered director terms, reducing supermajority voting thresholds, requiring an independent board chair, eliminating dual class voting, requiring shareholder approval of bylaw amendments, requiring majority voting in uncontested director elections, and proxy access for shareholder director candidates. The governance-related proposals of individual investors attracted, on average, 47.8% shareholder support between 2005 and 2018, and accounted for a large portion of the passed proposals, an indication that these proposals were receiving widespread support from larger investors. Many of these issues were also adopted by major investors in their proxy voting guidelines and corporate engagements, by market exchanges, and by companies— compelling evidence that constructive ideas have come from these smaller individual investors.
Some examples of corporate governance policies that today are viewed widely as best practice and that were initially driven by shareholder proposals and then expanded to common adoption by companies and markets, include:
Independent Directors and Board Recruitment: Shareholder proposals have encouraged norms such as independent directors constituting a majority of the board, independent board leadership, transparency of board recruitment and qualifications, and annual elections for all directors. For example, in 2013, shareholders submitted approximately 70 proposals requesting the adoption of a policy requiring that the company’s board chair be an independent director.
Electing Directors by Majority Vote: Shareholder proposals have encouraged electing directors by majority vote, rather than by plurality—a radical idea a decade ago when shareholders pressed for it in proposals, and now the norm at 90% of large-cap U.S. companies.29 In 2011, Apple was one of 58 companies the California Public Employees Retirement System urged to adopt majority rather than plurality voting, which more evenly balances power between the company and its investors.30 The proposal had majority support from shareholders at Apple and many other companies.
“Say-on-pay”vote requirements: Now mandated by the Dodd-Frank Act—say on pay vote requirements originally resulted from shareholder proposals. The Say-on-Pay vote asks investors to vote on the compensation of the top executives of the company—the CEO, the Chief Financial Officer, and at least three other most highly compensated executives (“named executive officers”).