University of Nebraska-Lincoln Assistant Professor of Management Chris Tuggle and colleagues study how the passage of federal regulation, making it easier for some shareholders to make board nominations, improved the value of company shares the day the ruling was passed.
The findings indicate that the U.S. Securities and Exchange Commission’s rule 14a-11, known as the proxy access rule, helped the share values of companies on August 25, 2010, when it was approved. However, the rule never took effect because it was struck down by a federal appeals court in 2011.
The proxy access rule was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. The rule allowed shareholders who held three percent of a company’s voting stock for at least three consecutive years to nominate a limited number of board members, other than those listed on the company’s proxy statement. Board candidates are typically nominated by incumbent board members. The stocks studied were selected from Standard & Poor’s 500 index, which is a gauge of the large cap U.S. equities market. Results showed a gain of 16 times the average daily upswing for the year – a substantial increase in market value. Despite this positive financial effect, some organizations opposed the rule.
The U.S. Chamber of Commerce and the Business Roundtable – the latter is a group of chief executives of leading U.S. companies – filed a legal challenge to the rule, asking the U.S. Court of Appeals for the District of Columbia Circuit to review the order. The SEC suspended the rule while the litigation was underway. The president of the U.S. Chamber of Commerce Tom Donohue said the suspension of the rule was good for investors as it prevented special-interest politics from being injected into the boardroom.
Ultimately, in April 2011, the appeals court vacated the rule on the basis that it was arbitrary and capricious. The court agreed with the petitioners that the SEC had insufficient empirical data to conclude that the rule increased shareholder value by “facilitating the election of dissident shareholder nominees.” The study provides this data, and the findings show that the rule benefited shareholders, especially firms with lower board independence and or greater CEO control (potential governance concerns). The findings suggest that shareholders are concerned about how a company’s management can control a board’s makeup.
This study was published in the December issue of the Strategic Management Journal
. Coauthors of the study include Joanna Campbell of University of Arkansas-Fayetteville, Colin Campbell of Miami University in Ohio, Len Bierman of Texas A&M University and David Sirmon of the University of Washington.
Research located at http://onlinelibrary.wiley.com/doi/10.1002/smj.1989/full