Political Origins of Shareholder Activism€¦ · of shareholder activism, the role of shareholder...

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Political Origins of Shareholder Activism: Corporate Political Spending and Shareholder Proposals * Geeyoung Min Hye Young You Abstract Corporate political activity has become a top concern of shareholders. We ex- amine whether corporate political activity is associated with one particular type of shareholder activism: shareholder proposal submission. Using data on S&P 500 companies during the period between 2007 through 2013, we find that public pen- sion fund and labor union shareholders are more likely to target firms that donate more to the Republican Party even after controlling for the firms’ financial perfor- mance, governance characteristics, and ownership structures. This finding suggests that corporate political activity may intensify tensions between management and some shareholders and, ultimately lead to more activism by these shareholders. * We thank Jonathan Ashley, Joshua Clinton, Michael Gilbert, Eric Helland, John Matsusaka, Daniel Wolfenzon, and participants at the 2015 American Law and Economics Association Annual Meeting and the 2015 Conference on Empirical Legal Studies for useful comments and suggestions. Research Assistant Professor, University of Virginia School of Law and Postdoctoral Fellow at the Millstein Center, Columbia Law School. [email protected] Assistant Professor, Vanderbilt University. [email protected] 1

Transcript of Political Origins of Shareholder Activism€¦ · of shareholder activism, the role of shareholder...

Page 1: Political Origins of Shareholder Activism€¦ · of shareholder activism, the role of shareholder proposals in corporate governance has beenextensivelystudied. 2 Despite the mounting

Political Origins of Shareholder Activism:

Corporate Political Spending and Shareholder Proposals∗

Geeyoung Min† Hye Young You‡

Abstract

Corporate political activity has become a top concern of shareholders. We ex-amine whether corporate political activity is associated with one particular typeof shareholder activism: shareholder proposal submission. Using data on S&P 500companies during the period between 2007 through 2013, we find that public pen-sion fund and labor union shareholders are more likely to target firms that donatemore to the Republican Party even after controlling for the firms’ financial perfor-mance, governance characteristics, and ownership structures. This finding suggeststhat corporate political activity may intensify tensions between management andsome shareholders and, ultimately lead to more activism by these shareholders.

∗We thank Jonathan Ashley, Joshua Clinton, Michael Gilbert, Eric Helland, John Matsusaka, DanielWolfenzon, and participants at the 2015 American Law and Economics Association Annual Meeting andthe 2015 Conference on Empirical Legal Studies for useful comments and suggestions.†Research Assistant Professor, University of Virginia School of Law and Postdoctoral Fellow at the

Millstein Center, Columbia Law School. [email protected]‡Assistant Professor, Vanderbilt University. [email protected]

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1 Introduction

Shareholders’ concerns over corporate political spending have risen in recent years,

especially after the Supreme Court’s decision of Citizens United v. Federal Election Com-

mission (Bebchuk and Jackson 2010, 2013; Copland 2013). During the 2014 and 2015

proxy seasons, the most common topic among proposals submitted by shareholders con-

cerned political and lobbying activities, which easily outpaced corporate governance issues

such as independent chair and board declassifications.1

Shareholder activism - both theoretically (Bebchuk 2005; Bainbridge 2006; Strine 2006;

Bebchuk 2007; Stout 2007; Harris and Raviv 2010) and empirically (Smith 1996; Guercio

and Hawkins 1999; Brav and Thomas 2008; Clifford 2008; Klein and Zur 2009; Ertimur,

Ferri, and Muslu 2010; Prevost, Rao, and Williams 2012) - is one of the most widely

discussed topics of corporate governance in recent years. And, among the different types

of shareholder activism, the role of shareholder proposals in corporate governance has

been extensively studied.2

Despite the mounting interest in corporate political spending among shareholders,

there has been a lack of systematic research into the relationship between corporate polit-

ical activity and shareholder activism. Recent debates regarding whether the Security and

Exchange Commission (SEC) should mandate disclosure of corporate political spending

demonstrates why understanding the link between corporate political spending and share-

holder activism matters. Proponents of the rule-making argue that more transparency1Elizabeth Ising, “Shareholder Proposal Developments During the 2015 Proxy Season,” (July 17, 2015)

available at http://corpgov.law.harvard.edu/2015/07/17/shareholder-proposal-developments-during-the-2015-proxy-season/

2See 17 CFR 14a-8. A shareholder who has continuously held at least $2,000 in market value or 1%of stocks at least one year is eligible to submit a shareholder proposal for consideration at the company’sshareholder meeting. The company may exclude certain proposals on the grounds noted in Rule 14a-8.Along with the rise of shareholder activism, not only has the volume of shareholder proposals increasedover time, it has become harder for directors to ignore shareholder proposals despite their non-legally-binding status. Although shareholder proposals approved by the majority of votes cast are not legallybinding - and, thus, directors have no obligation to take action following the proposals - if directors are notresponsive to those proposals, proxy advisory firms such as Institutional Shareholder Services Inc.(ISS)will use the lack of responsiveness negatively in their proxy voting recommendations to the company.

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in disclosure of corporate political spending will provide better information on firms’ in-

volvement in the political process to their shareholders, but, opponents are concerned

that disclosed information on corporate political spending can trigger more activism by

shareholders such as public pension funds and labor unions because of their political in-

terests. Despite the intense debates, we know little about how corporate political activity

relates to shareholder activism.

While the number of shareholder proposals on corporate political spending has in-

creased over time, studies on shareholder proposals have exclusively focused on how cor-

porate governance and firm performance affect targeting by shareholders, not whether

corporate political activity drives shareholder activism. Another limitation is that most

studies focus on proposals related to corporate governance, neglecting proposals on social

resolution issues (hereafter “SRI”) - including corporate political activity. This is partic-

ularly problematic since shareholder proposals on social issues such as corporate political

spending and environmental policy have increased significantly in recent years. With-

out taking these proposals into account, it is impossible to fully understand the scope of

shareholder activism.

On the other hand, empirical analysis of corporate political activity has focused on

the relationship between lobbying and campaign spending by firms and corporate gov-

ernance, stock market returns, taxes, firm values, or CEO compensation (Claessens and

Laeven 2008; Richter and Timmons 2009; Cooper, Gulen, and Ovtchinnikov 2010; Aggar-

wal, Meschke, and Wang 2012; Coates 2012; Skaife, Veenman, and Werner 2013; Lee, Lee,

and Nagarajan 2014). They also tend to focus on how corporate political activity affects

“outcomes,” such as firm values and tax rates, instead of “processes,” such as how share-

holders respond to management’s political activities. As such, the link between corporate

political activity and shareholder activism is still not well understood.

To advance our understanding, we collect data on market performance, governance

structure, ownership structure, shareholder proposals submitted on corporate governance

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and SRI, and political activity for the firms listed in the S&P 500 between 2007 through

2013. With this comprehensive data, we pursue three goals. First, we examine whether

firms targeted by shareholder proposals are systematically different from firms that are

not targeted in terms of corporate governance structure and other firm characteristics.

We also consider whether factors that affect targeting differ across different types of pro-

posals. Second, we investigate the difference in corporate political activities between

firms targeted by shareholder proposals and non-targeted firms. Third, we investigate

whether different sponsors of shareholder proposals target different firms in terms of their

partisan orientation by focusing on two types of shareholders: public pension funds and

labor unions. These are shareholders who are active in shareholder proposal submissions

(Thomas and Martin 1998) and they are particularly active in submitting proposals on

corporate political spending. They also have a clear political stance and their goals as

special interest groups can come into conflict with corporations that show a starkly differ-

ent stance in the political activity of their managements.3 Given public pension and labor

union shareholders’ political orientation, we particularly examine whether sponsors who

are associated with public pension funds and unions disproportionately target Republican-

leaning firms, as measured by campaign contributions made by the firms’ Political Action

Committees (PACs) and board of directors.

First, we find that firms with higher sales and larger assets are more likely to receive

shareholder proposals. Firms with lower insiders’ control and with dominance of institu-

tional investors are more likely to be targets of shareholder activism. Components of the

widely-used entrenchment index (Bebchuk, Cohen, and Ferrell 2009), such as classified

boards or poison pills, are negatively associated with submissions of shareholder propos-

als. Second, firms that spend more in campaign contributions and lobbying are more

likely to be targeted by both governance and SRI proposals. Third, we find that public3During the 2013-2014 election cycle, 92% ($14 million) of public sector union workers and organi-

zations’ contributions went to Democrats. Building trade unions (87%), industrial unions (97%), andtransportation unions (77%) showed a similar pattern. Source: www.opensecrets.org.

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pension fund and union sponsors disproportionately target Republican-leaning firms, after

controlling for firms’ financial performance, ownership, and governance structures.

We provide three explanations for the third finding. First, public pension and labor

union shareholders face a more severe agency problem against those firms due to prefer-

ence divergence with management. We provide suggestive evidence on this based on the

data from campaign contributions made by public pension and labor union shareholders.

We identify a salient difference in terms of political orientation of contributions between

management and activist union shareholders. Second, Republican-leaning firms spend

relatively more on campaign contributions than policy-oriented lobbying activities. This

is consistent with the argument that electoral engagement is a type of corporate political

activity where the conflict of interest between management and public pension and labor

union shareholders is more salient than lobbying activities. Third, we show that firms

targeted by activist union shareholders tend to have a higher number of cases of “Unfair

Labor Practice” charges submitted to the National Labor Relations Board. This is con-

sistent with the argument that union shareholders use shareholder proposals to leverage

their bargaining with employers.

Given that corporate political spending is an area where managements’ interest can

diverge significantly from the interests of public pension funds or union shareholders, this

finding suggests that increasing corporate political activity can intensify tensions between

management and public pension fund and labor union shareholders and lead to more

activism by these shareholders.

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2 Citizens United and the Debate on Disclosure of

Corporate Political Activity

The Supreme Court Decision of Citizens United v. Federal Election Commission (here-

after, “Citizens United”) in 2010 made a fundamental change in campaign finance law.4

Citizens United struck down traditional campaign finance law that prevented corpora-

tions and unions from using their treasuries to sponsor electioneering activities during

campaigns. In theory, after Citizens United, corporations can use their corporate bud-

gets to sponsor issue advocacy groups that only engage in independent expenditures and

do not coordinate with candidates, so called “super PACs.” (Kang 2010, 2012; Briffault

2012).

Critics of Citizens United expected that corporations would unleash their massive

resources on the political system. Indeed, the episode of Target Corporation spending

$150,000 on independent expenditures in support of Minnesota gubernatorial candidate

Tom Emmer in the 2010 midterm election - right after the Citizens United decision -

seemed to support this prediction (Kang 2012). However, there is little additional evidence

that this prediction has come to pass. Publicly traded companies gave less than one half

of one percent of all the contributions raised by the most active super PACs in the 2012

election cycle,5 and if we were to assume that all the expenditures from non-disclosing

501(c) non-profit organizations came from corporate treasuries, the amount - $318 million

in the 2012 cycle - is far short of the expectation (Bonica 2014).

Although there is a seemingly “lack” of corporate involvement in elections, shareholder

proposals requesting disclosure of corporate political spending visibly increased after Cit-

izens United, becoming the most frequently submitted shareholder proposal agenda both

in the 2014 and 2015 proxy seasons. During the 2014 proxy season, 126 shareholder pro-4130 S.Ct. 876, 558 U.S. 310 (2010)5Anna Palmer and Abby Philip, “Corporations don’t pony up for super PACs,” Politico, March 8,

2012.

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posals were submitted on corporate political and lobbying activities, while 110 proposals

were submitted in 2015 on the same issue. With respect to the contents of the proposals,

among the 126 shareholder proposals on corporate political spending in 2014, 112 pro-

posals requested greater disclosures and 6 asked for adopting board oversight or required

shareholder approvals of all political spending. Furthermore, 8 proposals barred compa-

nies from any political spending.6 ISS, a proxy advisory firm that mainly provides voting

recommendations to institutional investors, has recommended that companies should vote

for a proposal requesting greater disclosure and vote against a proposal barring corpo-

rate political spending.7 Among 300 of the largest companies in the S&P 500, 160 have

been formally engaged by shareholder proposals on corporate political spending and 99

of those companies have reached an agreement to disclose their direct and indirect polit-

ical spending.8 Also, even without any history of shareholder proposals, some companies

voluntarily disclose full or partial information on their political spending.

Despite the expansion of voluntary disclosures on corporate political spending, some

scholars have expressed concerns about the low quality and variant types of information

that companies provide on their political involvements (Bebchuk and Jackson 2013). They

argue that although federal and state laws require firms to disclose their contributions to

candidates and independent expenditure organizations, we have no information about con-

tributions from companies to trade associations and 501(c) social welfare groups because

they do not need to disclose their donors’ identities. Thus, they brought a rule-making

petition requesting that the SEC mandate all public companies disclose their corporate

political spending.9 Along with shareholders’ rising concerns about corporate political

activity, the petition soon attracted massive public attention and the SEC has received6As You Sow, “Proxy Preview Report 2014,” p.39 (2014).7ISS, “2015 US Summary Proxy Voting Guidelines,” p.64 (2015).8Center for Political Accountability, “The 2014 CPA-Zicklin index of Corporate Political Disclosure

and Accountability,” p. 23 (September 24, 2014)9Lucian A. Bebchuk et al., Committee on Disclosure of Corporate Political Spending Petition for

Rulemaking (August 3, 2011).

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more than one million comment letters - the highest amount in its history.10

The SEC, however, has explicitly excluded the rulemaking of mandatory disclosure

on corporate political spending from its agenda by saying that it must attend to more

urgent rulemaking matters. One SEC official used the fact that shareholder proposals on

corporate political spending have not received enough shareholder support to undermine

the significance of the rulemaking.11 His interpretation is that, whereas the number of

shareholder proposals on the issue has increased, the voting results show that shareholders

do not care about corporate political spending or do not want to waste corporate money

on its disclosure.

However, mandatory disclosure of corporate political spending has entered a new phase

because prominent politicians such as presidential candidate Hillary Clinton and 44 US

Democratic Senators expressed their support for the rulemaking that would require public

companies to disclose their political spending.12 In addition, two former chairmen of the

SEC, Arthur Levitt and William Donaldson, also urged the agency to require companies

to disclose their political expenditures.13 On the other hand, Republican lawmakers tried

prevent the SEC from requiring public companies to disclose corporate political spending

by including a section that explicitly prohibits the SEC from implementing a rule to

require political spending disclosure in the Fiscal Year 2016 Financial Services Bill.14

10Lucian A. Bebchuk and Rober J. Jackson Jr., “The Million-Comment-Letter Petition: The Rule-making on Disclosure of Political Spending Attracts More than 1,000,000 SEC Comment Letters,” TheHarvard Law School Forum on Corporate Governance and Financial Regulation (Sep 4, 2014).

11Daniel M. Gallagher, “Corporate Disclosure of Political Donations,” The New York Times, Nov.7, 2014. “According to a recent analysis by Institutional Shareholder Services, there were 47 politicalcontribution disclosure proposals submitted by shareholders associated with a particular special interestgroup during the 2014 proxy season. Of these proposals, 32 were voted upon, receiving an average ofonly 28.5% support. During the 2013 proxy season, there were 50 such proposals, receiving an averageof only 31.5% support.”

12Lucian Bebchuck and Robert J. Jackson, “Hillary Clinton Announces Support for SEC rulemakingon Corporate Political Spending,” (September 8, 2015), Harvard Law School Forum on Corporate Gov-ernance and Financial Regulation; Emily Chasan, “Senate Democrats Ask SEC to Revisit CorporatePolitical Spending,” (September 1, 2015), The Wall Street Journal.

13Dave Michaels, “SEC Should Require Political-Spending Reports, Ex-Chairs Say,” (May 27, 2015)BloombergBusiness.

14Emily Chasan, “House Aims to Prevent SEC from Requiring Corporate Political Disclosures Again,”(June 19, 2015) The Wall Street Journal.

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Republicans argue that the SEC should stay away from the issue because shareholders

have disapproved of the proposals on political spending disclosure by a large margin and

mandating political spending disclosure is far from the commission’s mission to protect

investors and ensure market efficiency (Copland 2013).

In addition to a lower support level for proposals on disclosure of political spending,

the opponents of SEC rulemaking worry that some activist shareholders will use the

disclosed information on corporate political spending to pursue their special interests

instead of pursuing maximizing firm values. Leading filers of shareholder proposals on

corporate political spending, such as public pension funds and labor unions, have been

accused of simply pursuing their own interests by silencing corporate voices so that they

can dominate politics to a greater extent (Bainbridge 2012; Copland 2013). In the next

section, we focus on shareholder activism by public pension funds and labor unions and

examine potential conflicts of interest issues in detail.

3 Shareholder Activism by Public Pension Funds and

Labor Unions

Public pension funds and labor unions are key players in corporate America. According

to the US Census Bureau, there were 3,992 state- and locally administered pension systems

in the US as of 2013 and their total cash and investment holdings were $3.3 trillion. In

terms of distribution of assets by value, domestic corporate stocks and corporate bonds

comprise 36.3% and 12% of those holdings, respectively.15 Public pension funds held

approximately 20% of publicly traded US equity as of 2005 (Choi and Fisch 2008). The

California Public Employment Pension System (CalPERS), the biggest public pension

fund in the US, alone held $295.8 billion of assets in 2014.16 Labor unions also have15US Census Bureau, “Annual Survey of Public Pensions: State- and Locally- Administered Defend

Benefit Data Summary Report: 2013.” available at http://www2.census.gov/govs/retire/g13-aspp-sl.pdf16www.calpers.ca.gov

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significant presence in the capital market. For example, the AFL-CIO has a diverse set of

investment portfolios, ranging from equity index funds to building investment trusts, and

it recently announced that its equity index fund surpassed $5 billion in market value.17

Armed with massive assets, both public pension funds and labor unions have been

influential players in shareholder activism and there has been extensive research on their

activism in various venues such as litigation, corporate campaigns, and sponsoring share-

holder proposals (Karpoff, Malatesta, and Walkling 1996; Schwab and Thomas 1998;

Gillan and Starks 2000; Choi and Fisch 2008; Perino 2012).

Scholars have proposed two different motives behind public pension funds and labor

unions’ activism in corporate matters (Romano 1993; Smith 1996; Wahal 1996; Guer-

cio and Hawkins 1999; Agrawal 2011; Prevost, Rao, and Williams 2012). One perspec-

tive depicts public pension funds and unions as shareholders who want to maximize the

firms’ value, which is a goal consistent with that of other shareholders. According to this

view, public pension funds and labor unions are not different from other shareholders.

Their activism is mainly guided by concerns over value maximization and Guercio and

Hawkins (1999) find no evidence to support motivations other than fund value maxi-

mization. CalPERS publicly stated that its investment strategy was based on identifying

underperforming companies with poor governance structures and working to change those

governance practices and improve performance (Choi and Fisch 2008).

The other perspective describes public pension funds and unions as self-interested

groups who promote their own prerogatives, which can potentially conflict with those

of other shareholders. As Romano (1993) points out, the structure of public pension

fund boards and the political affiliation of fund trustees make public pension funds more

vulnerable to political pressures than other types of shareholders. Hess (2005) finds,

with some cautions, that public pension fund systems were more likely to be active when

more trustee members were elected by pension holders and at least some of the plan17www.aflcio.org

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members were unionized. Agrawal (2011) shows that AFL-CIO-affiliated shareholders

become significantly less opposed to directors when the AFL-CIO no longer represents

a firm’s workers and cites this as suggestive evidence that union shareholders pursue

workers’ interests, rather than being solely interested in maximizing shareholder value.

If addressing issues regarding union members or public sector workers is consistent

with maximizing the valuation of firms in which public pension funds and labor unions

invest, there may be no conflict between the two different motives. However, these two

motivations can frequently come into conflict, and the degree of conflict can be intensified

as corporations become more deeply involved in politics. Given that public pension funds

and unions have very strong and clear preferences in politics, divergence in preferences

between these shareholders and management can loom large, eclipsing other governance

issues. The data shows that labor-related PACs contributed $59 million during the 2013-

2014 cycle, and 89% went to Democratic candidates. Business-related PACs spent $381

million and only 38% went to Democratic candidates during the same time period.18

Increased political involvement by corporate managers may be threatening to public

pension funds and labor unions if increased contributions are used to sponsor candidates

who pursue policies that could potentially harm the interests of labor and public sector

workers. For example, the AFL-CIO pressed ConocoPhillips in coordination with other

shareholders to adopt steps to reduce the risk of worker accidents.19 Republicans have

been supporters of less regulation and smaller government, while labor unions and public

sector workers have had a hostile relationship with the Republican Party. Therefore, labor

unions and public pension funds are incentivized by self-interest to be concerned about

corporate political activities if firms where they invested sponsor Republican candidates.

However, targeting companies whose contribution amounts disproportionately go to

Republican candidates does not necessarily indicate that public pension funds and unions18Center for Responsive Politics19Casey Wooten, “AFL-CIO Goes After Conoco, Marathon with Proxy Vote on Safety,” Houston

Business Journal, May 3, 2011.

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solely pursue their own self-interests. If a partisan pattern of campaign contributions are

systematically associated with worse corporate governance or firm performance, targeting

Republican-leaning firms can also enhance other shareholders’ value, provided shareholder

activism improves corporate governance structure and market performance.

As long as the political orientation of a firm is not associated with its governance

structure or market performance, we should expect that the firm’s political orientation

would not predict whether the firm becomes the target of pension fund activism, if public

pension fund and union shareholders behave as if they solely wish to maximize the firm’s

value. Factors such as governance structure, ownership structure, or annual financial

performance should guide their decision to submit proposals. However, if public pension

funds and labor unions pursue their own interests, they may have an incentive to target

firms that lean toward the Republican Party in terms of their campaign contributions,

since those corporations’ political activities are in conflict with their interest as a group

by indirectly threatening their stake.

The conflicting nature of two different motives becomes more widespread in an era

when corporations have become unprecedentedly active in politics because corporate po-

litical spending can reveal the preference of the firms’ management. Revealing firm prefer-

ences through corporate political spending can trigger more shareholder activism if some

of shareholders possess different political preferences. This is particularly true for public

pension and labor union-affiliated shareholders. In the next section, we empirically inves-

tigate whether corporate political spending is associated with shareholder activism and

whether public pension and labor union related shareholders are particularly responsive

to certain types of corporate political activity.

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4 Data and Stylized Facts

We focus on firms in the S&P 500 as of 2013 and collect various data from multi-

ple sources about those companies for the years between 2007 through 2013. Among

the multiple sources from which we draw our data, we first collect information about

shareholder proposals submitted to these firms from RiskMetrics shareholder proposal

data. Second, we gather corporate governance information from RiskMetrics governance

database. Third, firm-specific characteristics such as annual sales and employment come

from COMPUSTAT Fundamental Annual. Fourth, we collect data on ownership structure

from MSCI. Fifth, we collect information on corporate political activity from the Center

for Responsive Politics (www.opensecrets.org) for the period between 2006 through 2014.

For lobbying activities, we calculated the total annual lobbying expenditures for each

year. For campaign contributions, we collect corporate PACs’ contribution data for elec-

tion cycles. PACs contribute both to individual candidates and to other PACs, but the

transfer to other PACs - despite its significant volume - has been ignored in the literature.

To overcome this limitation and to capture corporate political activities in elections more

accurately, in this study we include PACs’ transfers to other PACs in addition to their

contributions to candidates.20 We also collect non-individual shareholders’ campaign con-

tributions for the corresponding period from the Center for Responsive Politics. Finally,

we collect the cases submitted to the National Labor Relations Board on “Unfair Labor

Practice” against the S&P 500 firms during the period between 2007 through 2013.21

The data includes 500 firms, 3,184 firm-year observations, 4,566 submitted proposals,

and 5,957 firm-year-proposal combinations.22 Our data is distinctive in that previous lit-

erature has exclusively focused on shareholder proposals related to corporate governance.20By the authors’ own analysis of the Federal Election Committee data, 87% of PACs did not contribute

to individuals but only transferred money to other PACs in the 2012 election cycle. For odd years whenthere was no federal election, we impute campaign contribution data from the following election year.

21https://www.nlrb.gov/news-outreach/graphs-data/recent-filings22Theoretically, total firm-year observations should be 3,500 because we cover 500 firms for seven years.

However, RiskMetrics corporate governance data and COMPUSTAT data are missing for some firms forsome years. Therefore, the total number of firm-year observation is less than 3,500.

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In contrast, our study also includes proposals on social issues such as corporate political

spending or the environment. Given that the proportion of shareholder proposals on so-

cial issues has been increasing and extensively debated in recent years, it is important to

include shareholder proposals on social issues to fully understand shareholder activism.

This comprehensive data allows us to discern similarities and differences across various

types of proposals in terms of target-firm characteristics.

Also, previous literature concerning shareholder proposals mainly focused on propos-

als voted on by shareholders. However, the probability of a submitted proposal being

voted on is not random and the reasons for withdrawal or omission may be related to

specific company characteristics, particularly the relationship between management and

shareholders. Therefore, examining only the proposals voted on may ignore a possible

selection bias.23 In this study, we consider all shareholder proposals submitted and make

a distinction between the proposals submitted but not voted on and the proposals sub-

mitted and voted on.24 Combined, this constitutes one of the most comprehensive sets of

data on shareholder activism through shareholder proposal submissions.

Table 1 presents the summary statistics of activities on shareholder proposals. Panel

A shows the summary statistics for all types of shareholder proposals submitted to S&P

500 firms between 2007 through 2013.

The table shows the number of submitted proposals and the number of proposals put

to a vote each year. Some proposals are withdrawn or excluded after submission because

management and shareholders reached an agreement or the SEC sent no action letters.

There is variation across years but on average, 58% of submitted proposals were voted

on. On average, governance-related proposals make up around 61% of total submitted

proposals and 64% of total voted proposals. Over time, while the number of submitted23Renneboog and Szilagyi (2011) note that “Proposals are sometimes withdrawn because the sponsor

has negotiated a satisfactory resolution, or the SEC has allowed the firm to reject the submission due tothe improper subject matter or technical reasons.”

24RiskMetrics data indicate the status of the proposal as: voted, withdrawn, not in proxy, and omitted.From this information, we can infer whether a proposal is voted.

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Table 1: Number of Submitted and Voted Shareholder Proposals, 2007-2013

All Governancea SRIb CPAc

Submitd Votee Submit Vote Submit Vote Submit Vote

Panel A. Submission Year2007 739 425 481 284 264 141 45 232008 718 353 461 208 280 145 41 202009 719 404 481 279 263 125 42 232010 655 380 461 255 229 125 43 302011 605 332 369 198 250 134 69 462012 554 358 362 218 221 140 94 652013 576 415 340 260 254 155 114 83

Panel B. Sponsor TypeIndividual 1,465 943 1,270 821 195 122 30 21Public Pension Funds 570 301 207 128 363 173 129 83Unions 1,129 637 953 536 176 101 76 55Investment Funds 671 354 231 129 440 225 164 99Special Interestf 269 159 31 22 238 137 8 5Religious 422 246 95 52 327 194 37 23Other 40 27 18 14 22 13 4 4

Total 4,566 2,667 2,805 1,702 1,761 965 448 290

Note: a = Corporate governance-related proposals, b = Social resolution issue-related proposals, c = Cor-porate political activity (sub-category of SRI)-related proposals, d = number of proposals submitted , e= number of proposals being voted, f = “Special Interest” refers to groups such as People for the EthicalTreatment of Animals (PETA).

and voted governance-related proposals has been declining, the number of proposals on

social issues has remained constant and the number of social issues being voted on has

increased. Therefore, among the proposals being voted on, the ratio of SRI proposals to

governance proposals has risen over time.

Proposals on corporate political activity (CPA) are categorized under the SRI type but

we provide a separate summary statistic. Until the early 2000s, very few proposals had

been submitted on this issue; but the number of proposals on CPA has been increasing

since then, and in 2013 and 2014, proposals on CPA were ranked as the most frequently

voted topic. In 2013, for example, over half of the SRI proposals voted on were related to

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CPA. This indicates two important trends in the relationship between shareholders and

firms. First, activist shareholders now focus not just on corporate governance issues but

also on other issues such as the political activities of firms. Second, this phenomenon may

have been driven partly by the fact that corporate political activity has been dramatically

increasing over the last decades (Drutman 2015) and the Supreme Court’s decisions - such

as Citizens United - may affect shareholders’ perceptions of corporate political involvement

and its potential consequences for firm values (Coates 2012).

Panel B of Table 1 shows the identity of proposal sponsors. Individuals are the most

active proposal sponsors but their proposals mainly concern corporate governance issues.

Unions are the second most active sponsors and they also mainly focus on corporate

governance issues. On the other hand, sponsors such as public pension funds, investment

funds, and religious groups submitted more proposals on social issues than corporate

governance. With respect to proposals on corporate political spending, investment funds

submitted the most proposals, followed by public pension funds and unions.25

Panel A of Table 2 presents the voting outcomes by year and by issue that are addressed

in the proposals. First, the average support level for governance-related proposals has

always been higher than the number of proposals on social issues. The average share of

votes that supports proposals on corporate governance is 39.5%, whereas the average vote

percentage that supports proposals on SRI is 17.3%. In terms of voting outcomes for

corporate political activity - a sub-category of proposals on SRI - the average percentage

of votes supporting the proposal is 24%, which is higher than proposals on other SRIs.

Panel B of Table 2 presents the voting outcomes by different sponsors, which reveals

several patterns. First, proposals submitted by individuals, public pension funds, and

unions enjoy a higher level of support, on average, than proposals submitted by investment

funds, special interest groups, and religious groups. Second, regardless of the type of

sponsor, proposals on governance always have greater support than SRI proposals. Third,25Appendix B shows the top five shareholders who submitted the most proposals in each category.

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Table 2: Voting Outcomes on Shareholder Proposals, 2007-2013

All Governancea SRIb CPAc

Mean(%)d (N)e Mean (N) Mean (N) Mean (N)

Panel A. Submission Year2007 28.1 425 35.1 284 14.2 141 20.1 232008 27.1 353 36.5 208 13.7 145 22.6 202009 34.0 404 41.9 279 16.4 125 28.0 232010 32.7 480 39.8 255 18.2 125 25.5 302011 32.7 332 41.9 198 19.1 134 27.0 462012 33.6 358 43.4 218 18.3 149 21.0 652013 32.4 415 39.0 260 21.3 155 24.2 83

Panel B. Sponsor TypeIndividual 34.3 943 38.2 821 8.2 122 14.2 21Public Pension Fund 37.9 301 55.0 128 25.1 173 28.2 83Union 35.5 637 38.4 536 20.4 101 25.7 55Investment Fund 29.6 354 43.0 129 21.9 225 21.4 99Special Interest 11.1 159 28.6 22 8.2 137 17.3 5Religious 19.0 246 30.7 52 15.9 194 27.0 23Other/Unknown 27.3 27 39.1 14 14.5 13 15.8 4

Total 31.5 2,667 39.5 1,702 17.3 965 23.9 290

Note: a = Corporate governance issues, b = Social resolution issues, c = Corporate political activity(sub-category of SRI), d = Voting percentage for the proposal as percentage of votes cast, e = number ofproposals being voted.

proposals on social issues submitted by individuals and special interest groups show a

particularly lower level of support. This is also true for proposals on corporate political

activity, which can be related to the fact that individuals and special interest groups

have narrower interests than other types of sponsors and those social issues may be very

peculiar. Fourth, support for proposals on corporate political activity is higher than

support for other social issues in general for most types of sponsors. Overall, the results

in Table 2 indicate that shareholders have more heterogeneous preferences over proposals

on social issues than proposals on corporate governance, and therefore, attracting support

from other shareholders on SRI proposals is more difficult.

Now, we investigate whether firms targeted by shareholder proposals are different

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from non-targeted firms in terms of their governance characteristics and their financial

and ownership structures. We also investigate whether there is any difference in corporate

political activity between targeted and non-targeted firms using campaign contributions

and lobbying expenditures data. We convert the data into each firm and each year level.

In total, there are 3,149 observations (firm × year). Then we divide firms into two groups:

firms that received more than one proposal and firms that did not receive any proposals

in a given year. Table 3 presents the comparison between these two groups in various

characteristics.

First, Panel A of Table 3 shows how targeted firms are different from non-targeted

firms in financial performance and ownership structure. Targeted firms are larger in both

assets and sales and have higher debt. Targeted firms have a higher market value in

total but have a lower Tobin’s Q. The differences in means are all statistically significant.

Targeted firms and non-targeted firms are significantly different in many dimensions of

their ownership structures. Targeted firms are less likely to have insider control and more

likely to have a majority of outstanding shares held by institutions. This may indicate

that shareholders have more room to exert their influence in this environment and that

may be revealed through the number of shareholder proposals submitted.

Second, Panel B of Table 3 compares governance characteristics between targeted and

non-targeted firms. Targeted firms and non-targeted firms show stark differences that are

more pronounced in governance variables than in ownership structures. First, six gover-

nance variables are selected based on the work by Bebchuk, Cohen, and Ferrell (2009).

The last three variables - limiting shareholders’ ability to call special meetings (LimitCall-

toSpecialMeeting), limiting shareholders’ ability to act by written consent (LimitAbility-

toActbyWritten), and electing directors by majority vote (MajorityVoteforDirectorElec-

tion) - were selected because they have been the most frequently discussed corporate

governance issues in recent years. Targeted firms are less entrenched in the sense that

they are less likely than non-targeted firms to have classified boards, golden parachutes,

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Table 3: Descriptive Statistics of Targeted and Non-Targeted Firms

Targets Nontargets Difference

N Mean SD. N Mean SD. in Means

A. Financial/Ownership

Assets ($B) 1741 84.1 259.1 1377 22.2 56.7 61.8∗∗∗

Sales ($B) 1741 28.1 47.8 1377 8.5 13.7 19.5∗∗∗

Debt ($B) 1499 12.9 41.5 1256 2.9 6.5 9.9∗∗∗

Book Value per share ($) 1741 21.5 21.1 1377 20.2 23. 8 1.3Market Value Total ($B) 1615 36.5 56.8 1235 13.0 19.6 23.4∗∗∗

Tobin’s Q 1609 3.6 4.3 1232 5.0 6.7 -1.4∗∗∗

Insiders control 1738 .01 .11 1360 .02 .14 -.007Institutional majority 1758 .49 .50 1391 .42 .49 .07∗∗∗

B. Governance

Entrenchment (E) Index 1758 2.3 1.4 1391 2.6 1.5 -.27∗∗∗

Classified board 1758 .34 .47 1391 .43 .49 -.08∗∗∗

Golden parachutes 1758 .68 .46 1391 .71 .45 -.03∗

Poison pill 1758 .14 .35 1391 .21 .41 -.07∗∗∗

Super majority to merger 1758 .50 .50 1391 .57 .49 -.07∗∗∗

LimitAbilitytoAmendBylaws 1758 .35 .47 1391 .35 .47 .00LimitAbilitytoAmendCharter 1758 36. .48 1391 .37 .48 -0.01LimitCalltoSpecialMeeting 1758 .22 .42 1391 .22 .41 0.01LimitAbilitytoActbyWritten 1758 .49 .50 1391 .48 .49 0.01MajorityVoteforDirectorElection 1758 .63 .48 1391 .53 .49 .10∗∗∗

C. Political Activity

Corporate PAC Spending ($K) 1758 354.6 619.8 1391 96.6 238.3 257.9∗∗∗

Corporate PAC to Republican (%) 1208 60.0 17.3 648 58.4 17.9 1.6∗

Director Contribution ($K) 1366 506.2 559.4 692 250.9 1140.9 255.3Director Contribution to Republican (%) 1366 45.1 27.6 692 45.0 29.6 0.01Lobbying spending ($K) 1758 3,250.5 5,213.5 1391 1,033.3 1,906.1 2,221.7∗∗∗

PAC/Lobbying Spending Ratio 1591 0.40 5.07 1115 0.23 1.8 0.17

Note: The variables are described in Appendix A. This table compares the characteristics of firms that aretargeted versus those not targeted by shareholder proposals in a given year. The number of observations isdetermined by firm × year × proposal. Targeted means a proposal was submitted in a given year, regardlessof whether it was voted on. The difference in means t-test assumes unequal variances. ∗, ∗∗ and ∗ ∗ ∗ denotesignificance at 10%, 5% and 1% level, respectively.

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poison pill, and super majority requirements to mergers. Targeted firms are also more

likely to have the requirement of a majority vote to elect their boards of directors. On

the other hand, there is no significant difference in terms of limiting shareholders’ ability

to act by written consent.

Panel C of Table 3 presents the results of corporate political activity. We collect two

types of information on corporate political activity: campaign contributions and lobbying

expenditures. Campaign contributions mainly target electoral politics, while lobbying

expenditures include the cost of hiring lobbying and law firms to influence governments

on specific legislation or regulations (Ansolabehere, Snyder, and Tripathi 2002; Bertrand,

Bombardini, and Trebbi 2014). We collect each firm’s PAC’s total contribution to federal

candidates and total transfer to other PACs for the 2008, 2010, 2012, and 2014 election

cycles. Previous research on corporate PACs’ electoral activities has exclusively focused

on PACs’ contributions to individual candidates (Milyo, Primo, and Groseclose 2000;

Jayachandran 2006; Cooper, Gulen, and Ovtchinnikov 2010) and ignored PAC-to-PAC

transfers, which comprises a significant portion of corporate PACs’ spending.26 By col-

lecting PAC-to-PAC transfers in addition to PAC contributions to individual candidates,

we provide a more comprehensive description of firms’ activities in the electoral process.

We then calculate the percentage given to Republican candidates and Republican Party-

associated PACs. This provides information as to whether a firm involved in electoral

politics is Democratic- or Republican-leaning in its contribution behavior. We also col-

lected information on firms’ annual lobbying expenditures between 2007 through 2013

from the webpage of the Center for Responsive Politics.

The results presented in Panel C indicate that targeted firms spend more than non-

targeted firms, both in campaign contributions and lobbying, by a large margin. In

addition to the differences in total spending on political activities, there is an interesting26During the period of our study, the average PAC contribution to individual candidates in a given

election cycle was $299,561.00, while the average PAC-to-PACs transfer was $134,834.00, conditional onpositive contributions. Given that PAC-to-PAC contributions are almost half the size of PAC-to-candidatecontributions, it is important to include PAC-to-PAC transfers.

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pattern in terms of partisanship. Targeted firms gave more money to Republican candi-

dates and Republican PACs by 1.6% compared to non-targeted firms. For approximately

300 firms listed both in the S&P 500 and Fortune 500, we also compare campaign con-

tributions by the board of directors.27 On average, board members in the targeted firms

contribute more to campaigns but there is significant variation even within the targeted

firms and the difference between the targeted and the non-targeted firms is not statisti-

cally significant. Finally, we calculate the ratio between electoral spending and lobbying

spending at each firm level to compare their relative focus in corporate political activities.

Most firms in the sample have higher lobbying spending than campaign contributions but

the ratio is higher among the targeted firms than the non-targeted firms.

5 Empirical Analysis

In this section, we provide a regression analysis addressing the characteristics of firms

that are associated with the targeted selection process, the types of proposal selection

processes, and the probability of a proposal being voted on. Specifically, we are interested

in whether a firm’s political activity is associated with shareholder activism by different

sponsors.

We investigate the determinants of targeting by shareholder proposals. The empirical

specification for the target selection process is as follows:28

yist = β0 + β1 × Political Activityist + β2 × Zist + αs + γt + εist (1)

, where yist is a dependent variable in terms of shareholder proposal submission. Political

Activityist includes a firm i’s total campaign contributions by its corporate PAC and its

board of directors, political orientation of its contribution, measured by a percent con-

tribution given to Republican candidates and PACs, and its lobbying spending in year t.27We thank Adam Bonica for sharing the data on board of director contributions.28Table 7 in Appendix presents the summary statistics for the variables.

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We take log on campaign contributions and lobbying spendings. Zist includes information

about financial performance, ownership structure, and governance characteristics. We

also include an industry fixed effect and a year fixed effect.29 Since not every firm and its

directors in a given year makes campaign contributions, if we include a variable such as

the percent of corporate PAC’s and their directors’ contribution to republicans, it drops

almost 40% of the observations, and we can analyze the sample with positive campaign

contributions. Therefore, we impute the campaign contribution ratio going to republicans

for the firms that do not spend money on campaign contributions or whose directors do

not spend money on campaign contributions. We assume the percent of contributions

going to Republicans in those case 50% and run separate regressions.30

Table 4 presents the result. Column (1) shows the logit regression result for all types

of sponsors. Columns (2) through (6) present the results for different sponsors. Year fixed

effect and industry fixed effect at SIC two-digits are included in all model specifications.

Panel A shows the result when a dependent variable in Equation (1) is whether a pro-

posal is submitted. Panel B shows the result whether a governance-related proposal is

submitted. Panel C shows the result whether a social issue-related proposal is submitted,

and Panel D shows the result whether a corporate political spending-related proposal (a

sub-category of an SRI proposal) is submitted. We only present the results regarding

corporate political activity variables here; Appendix presents the full regression results.

The results between the original data and the imputed data are similar so we present the

results from the imputed data.

Overall, politically active firms in both campaign contributions and lobbying spending29A firm fixed effect would be desirable if there is enough variation in political activities within the firm

and our focus is to identify whether changes in political activities affect shareholder activism. However,firms do not show sufficient within-variation in their political activities and our focus is on cross-sectionaldifferences, such as, determining the types of firms that receive more shareholder proposals. Therefore, weinclude an industry fixed effect to control unobservable but time-invariant industry-specific characteristicsusing two-digit SIC codes.

30The rationale behind of assuming a 50-50 split in their contributions for firms that do not spendany money in campaign contributions comes from the assumption that these firms do not have a clearpartisan orientation. We ran the analysis without imputation which limits the sample to the firms thatmade positive campaign contributions and the result is similar.

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Table 4: Regression Results

(1) (2) (3) (4) (5) (6)

Variables All Individual Public Pension Union Fund Religious

A. Proposal Submission(ln) PAC Contribution 0.00444∗ 0.00492∗ 0.00348∗∗ 0.000982 0.00223 0.00327∗∗∗

(1.94) (1.90) (2.04) (0.40) (1.06) (2.83)PAC Rep % 0.145 -0.0358 0.164∗∗∗ 0.0934 0.00989 0.0765

(1.53) (-0.58) (2.73) (1.31) (0.14) (1.44)(ln) Director Contribution 0.00905∗∗∗ -0.000794 0.00174 -0.000661 -0.00421∗ -0.00322

(2.99) (-0.30) (0.89) (-0.20) (-1.67) (-1.53)Director Rep % 0.0209 -0.113∗ 0.0710 0.107∗∗∗ 0.0259 -0.00286

(0.43) (-1.77) (1.61) (3.21) (0.52) (-0.07)(ln) Lobbying Spending 0.00286 0.00552∗∗ 0.00159 0.00284 0.000679 -0.000587

(1.14) (2.48) (1.21) (1.11) (0.35) (-0.62)

B. Governance Proposal(ln) PAC Contribution 0.00308 0.00275 0.000325 -0.0000336 0.00159 0.00150∗∗∗

(0.99) (0.88) (0.31) (-0.02) (1.55) (2.83)PAC Rep % 0.0630 0.0250 0.128∗∗∗ 0.132∗∗ -0.0947∗ -0.0396

(0.69) (0.35) (3.22) (2.19) (-1.90) (-1.62)(ln) Director Contribution 0.00308 -0.00235 -0.000599 0.000563 -0.000552 -0.00115

(0.89) (-0.82) (-0.44) (0.18) (-0.35) (-1.21)Director Rep % 0.0319 -0.0827 -0.00938 0.0857∗∗ 0.0457 -0.0156

(0.53) (-1.29) (-0.39) (2.51) (1.35) (-0.77)(ln) Lobbying Spending 0.00423∗ 0.00494∗∗ 0.0000738 0.00230 0.00111 0.000330

(1.91) (2.20) (0.07) (1.05) (0.93) (0.63)

C. SRI Proposal(ln) PAC Contribution 0.00469∗∗ 0.00121 0.00324∗ -0.000113 0.00104 0.00176

(2.07) (0.94) (1.99) (-0.09) (0.55) (1.45)PAC Rep % 0.107 -0.0817∗∗ 0.0659 -0.0149 0.107∗ 0.123∗∗

(1.18) (-2.41) (1.20) (-0.38) (1.77) (2.25)(ln) Director Contribution 0.00364 -0.00211 0.00176 -0.00141 -0.00420 -0.00255

(1.05) (-1.32) (0.86) (-1.62) (-1.62) (-1.40)Director Rep % 0.0633 -0.0307 0.0816∗ 0.0271 -0.0159 0.00540

(1.21) (-1.16) (1.90) (0.94) (-0.43) (0.15)(ln) Lobbying Spending 0.00145 0.000384 0.00206∗ 0.00113 0.0000345 -0.000822

(0.65) (0.46) (1.70) (1.28) (0.02) (-0.97)

D. CPA Proposal(ln) PAC Contribution 0.00497∗∗ 0.000971∗∗∗ 0.00207∗∗ -0.000890 0.00212∗∗ 0.000382

(2.52) (2.72) (2.02) (-0.81) (2.19) (0.92)PAC Rep % 0.0213 -0.0258∗ 0.00844 0.0176 -0.0101 0.0247

(0.36) (-1.69) (0.38) (0.83) (-0.33) (1.42)(ln) Director Contribution -0.00497 -0.000623∗ 0.00166 -0.000553 -0.00650∗∗ -0.000564

(-1.60) (-1.85) (1.15) (-0.92) (-2.56) (-0.97)Director Rep % 0.0950∗∗ 0.0129 0.0331 0.00502 0.0399 0.00656

(2.02) (1.33) (1.15) (0.27) (1.52) (0.68)(ln) Lobbying Spending 0.00255 -0.000513 0.00116 0.000690∗ 0.000891 0.000349

(1.63) (-1.37) (1.28) (1.88) (1.20) (0.91)

Firm Characteristics Control Y Y Y Y Y YYear Fixed Effect Y Y Y Y Y YIndustry Fixed Effect Y Y Y Y Y Y

N 2,804 2,804 2,804 2,804 2,804 2,804

Note: Numbers in parentheses are t-statistics. ∗p < 0.10, ∗ ∗ p < 0.05, ∗ ∗ ∗p < 0.01.

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are more likely to be targeted by shareholders, controlling for other firm characteristics.

However, the political orientation of campaign contributions by corporate PAC and board

of director members have heterogeneous effects on different shareholders. Individual share-

holders target firms active in both campaign contributions and lobbying, but they tend

to submit more proposals to firms whose board members contribute to Democratic can-

didates and organizations. For public pension funds and labor union shareholders, we

observe an opposite pattern. Public pension funds and labor unions are more likely to

submit proposals to firms whose PACs contribute more money to Republican candidates

or Republican-affiliated PACs.31 Interestingly, these patterns are not more salient on

corporate political spending-related proposals.

Why are pension fund and labor union shareholders more likely to submit shareholder

proposals targeting Republican-leaning firms? Since we control for corporate governance,

financial performance, and ownership structure in the empirical analysis, the argument

that Republican-leaning firms have a systematically different governance or ownership

structure or market performance can be ruled out. There are potential alternatives to

explain this pattern.

First, from the shareholder’s perspective, the agency problem to control management

is most severe when the preference divergence between the shareholder and management

is maximized (Matsusaka and Ozbas 2014). Shareholders cannot observe the true pref-

erence of management but they can use corporate political spending, a decision made by

management, as a tool to discern the preference of management. Active public pension

and labor union shareholders whose political orientation is mostly aligned with Democrats

and whose board members are usually Democrats may perceive Republican-favoring con-

tribution patterns by corporate PAC and board members as an indicator of a potential

agency problem. We collect information on campaign contributions of non-individual31Religious groups tend to target firms where their corporate PAC contributes more to Republican

candidates and PACs but their activism may be driven by the fact that major religious shareholders areCatholic groups.

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shareholders that submitted at least one proposal for the 2008, 2010, 2012, and the 2014

election cycles and examine whether a preference divergence gap, measured by the dif-

ference in contributions given to Democrats, between management and public pension

and labor unions shareholders are salient.32 Figure 1 presents the histograms on the po-

litical preference difference between corporate PACs’ contributions given to Democrats

(left) or board of director members’ campaign contributions given to Democrats (right)

and proposal-submitting public pension and labor union shareholders’ contributions given

to Democrats. Both distributions of political preference divergence clearly indicate that

public pension and labor union shareholders are much more Democratic-leaning than

management.

Figure 1: Contribution Pattern Difference between Management and Public Pen-sion/Union Shareholders

0.5

11.

52

Den

sity

-1 -.5 0 .5 1PAC Dem % - Pension and Union Dem %

0.5

11.

52

Den

sity

-1 -.5 0 .5 1Directors Dem % - Pension and Union Dem %

Contribution Preference Divergence Between Management and Public Pension/Union Shareholders

Second, public pension and labor union shareholders may respond to certain types

of political activity. Among political engagement through campaign contributions and

lobbying, those shareholders may express more concerns on electoral activities by man-

agement than lobbying activities. This is because lobbying activities, such as seeking a32To fully explore this logic, we need to collect every shareholder’s political activity, regardless of

whether they submitted a proposal or not, and examine whether political preference divergence is posi-tively associated with a number of proposals that shareholders submit.

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better tax treatment to maximize the firm value, that are supported by both management

and public pension or labor union shareholders, is hardly the case with respect to electoral

activities, given the divergence of political preference between management and those ac-

tivist shareholders. Therefore, if Republican-leaning firms tend to focus relatively more

on electoral activities than lobbying activities, public pension and labor union sharehold-

ers can be motivated to submit more proposals to address agency problems to protect

their interests. To examine this possibility, we calculate the ratio between PAC spending

and lobbying spending among the firms that showed positive spending in both political

activities.33

The 2,656 firm × year observations where both positive in corporate PAC and lobbying

spending, the average ratio is 0.13 and there is a strong positive correlation between the

ratio and corporate PACs that contributed to Republicans. In other words, Republican-

leaning firms tend to spend relatively more money on electoral activities than lobbying.

The average ratio of a firm in a given year when there was at least one public pension

fund or labor union proposal submitted is 0.15, while the average ratio of a firm in a given

year without any proposals submitted by these two types of shareholders is 0.11 and these

two numbers are statistically different at the 1% level. The result confirms the hypothesis

that public pension and labor union shareholders tend to target firms whose corporate

political activity is geared relatively more toward electoral activities than policy-oriented

lobbying activities.

Third, it is possible that public pension and labor union shareholders may target firms

where labor-related disputes occur more often. Matsusaka, Ozbas, and Yi (2015) show

that activist union shareholders tend to submit more proposals right before their collective

bargaining negotiations to increase their bargaining leverage. In line with this argument,

it is possible that union shareholders submit more proposals when there are on-going33There are a few cases where the ratio is above 2 (i.e., corporate PAC spending is twice as large as

total lobbying spending in a given year). This is a very unusual case and therefore we drop the caseswhere the ratio is greater than 2 since some outliers make the distribution less comparable.

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labor-related disputes. To test this hypothesis, we use data on charges of ”Unfair Labor

Practices” filed by individuals, unions, or employers to National Labor Relations Board

(NLRB) regional offices. We collect the data from the NLRB’s webpage and analyze

whether there is a significant correlation between the number of charges submitted to the

NLRB and the proposal submission by union shareholders.

On average, there are 0.8 cases per firm each year in our sample but it ranges from 0

to 116.34 For the firms that did not receive any proposals from public pension or union

shareholders, the average number of labor disputes is 0.61, while the mean of labor dispute

cases submitted to NLRB for the firms that received at least one proposal from public

pension or labor shareholders is 1.3. The difference in means between these two groups

of firms is statistically significant at the 1% level. This result suggests that shareholder

proposal submissions by public pension or labor union shareholders may be closely related

to a firm level conflict between management and union-member employees.35

6 Conclusion

Corporate political activity is becoming one of the most important issues to share-

holder activists. The most frequently submitted shareholder proposals in both 2013 and

2014 were on corporate political spending. But there is a dearth of empirical research

examining the relationship between corporate political activity and shareholder activism.

This research advances our understanding of the relationship between corporate polit-

ical activity and shareholder activism. We find that politically active firms, measured

by corporate PACs’ campaign spending and lobbying expenditures, are more likely to be

targeted by shareholder proposals. We also find that after controlling for firms’ finan-

cial performances, ownership structures, and governance characteristics, public pension

funds and labor unions consistently submit more shareholder proposals targeting firms34UPS in 2011 had 116 cases.35We will check whether this pattern is more salient in firms where the employee-union rate is higher.

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that donate more to Republicans.

This implies that increased corporate political activity reveals information about man-

agement’s political orientation, which sparks activism by certain shareholders who have

the opposite political orientation. This has an important implication for the long-held

discussion on the role of pension funds and unions as shareholders. However, the fact that

public pension fund and labor union shareholders tend to target Republican-leaning firms

does not necessarily mean that these shareholders act as special interest groups. If the

activism is motivated by politically-oriented boards of trustees of public pension funds or

labor unions due to their career concerns, politically-biased activism could be a revela-

tion of their motivations as special interest groups, which could potentially harm other

shareholders. However, if firms with certain political orientations have systemic issues

concerning firm-labor relationships at the plant level and this leads to producing lower

quality products, public pension and labor union shareholder activism can potentially

benefit other shareholders by improving the corporate governance of management.36 To

answer this question, we need more empirical research on the long-term effect of public

pension and labor union shareholders’ activism.

Our results can be applied to other types of sponsors, such as religious groups, since

their interests may be in conflict with management’s decisions on specific issues (e.g.,

whether a firm’s health care policy will cover contraceptives) and can be one of the driving

forces behind religious shareholders’ activism. As social and political issues become more

important in shareholder activism, it is crucial to recognize that the social and political

dimension matters in determining shareholder activism. Although the majority opinion

in Citizen United expected that “the procedures of corporate democracy” will govern

decisions on corporate political activity, in reality, directors and executives solely decide

the degree of their political speech, like other ordinary business decisions (Bebchuk and

Jackson 2010). Therefore, regardless of the scope of corporate political activity, as far as36Krueger and Mas (2004) show that labor strife at the plant level is related to lower product quality.

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the divergence of interests between management and some shareholders exists, corporate

political activity will spark shareholder activism in the future.

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Page 34: Political Origins of Shareholder Activism€¦ · of shareholder activism, the role of shareholder proposals in corporate governance has beenextensivelystudied. 2 Despite the mounting

Appendix A

Table 5: Description of Variables

Variable Name Description

Assets ($M) Total assets.Sales ($M) Sales/Turnover (Net).Debt ($M) Total debt including current.Insiders control A majority of outstanding shares are held by top managers and/or directors.Insiders pctg Estimated percentage of outstanding shares held by top mangers and directors.Insiders pluspctg The sum of estimated percentage of shares held by top management and directors,

and estimated percentage of shares held by 5% or greater shareholdersInstitutional majority A majority of outstanding shares are held by institutions.Owners five percent pctg Estimated percentage of outstanding shares held by any 5% or greater shareholdersClassified board Staggered board (1) or not.Golden Parachutes A severance agreement between a company and an CEO on a change in corporate controlLimitAbilitytoAmendBylaws Limit shareholders’ ability to amend bylawsLimitAbilitytoAmendCharter Limit shareholders’ ability to amend charterPoison pill Potential bidders to negotiate with a target company’s board of directorsSuper majority Supermajority requirements for mergersLimitCalltoSpecialMeeting Limit shareholders’ ability to call special meetingLimitAbilitytoActbyWritten Limit shareholders’ ability to act by written consentMajorityVoteforDiectorElection Directors are elected by majority votePAC Total ($K) Firm’s political action committee(PAC) contribution to federal candidates and other PACsPAC Republican pct (%) Pct of PAC contributions given to republican candidates and PACs associated with republicansLobbying spending ($K) Firm’s lobbying spending in a given year

Appendix B

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Table 6: Top Five Shareholders in terms of Number of Proposal Submitted

Rank Individual Public Pension Labor Union Investment Fund Religious Group

A. Governance1 John Chevedden (249) NYC Funds (47) UBCJA (273) Cummings Foundation (43) UUA (16)2 William Steiner (139) IL State (25) AFSCME (144) LongView (29) Mercy Investment (8)3 Kenneth Steiner (134) NC State (20) AFL-CIO (119) Walden Asset (27) MOMI (7)4 Rossi Family (129) CalPers (19) SMW (54) Needmor (16) Marianist Society (5)5 Evelyn Davis (102) NY State (10) IBEW (43) Ram Trust (16) SCSE (5)

B. SRI1 John Harrington (54) NYC Funds (200) AFL-CIO (81) Trillium Asset (90) St. Joseph (27)2 Evelyn Davis (23) NY State (97) Teamsters (30) Calvert (64) UUA (22)3 Thomas Strobhar (13) CalSTRS (20) AFSCME (22) Walden Asset (56) SCSE (20)4 James Mackie (6) Kansas City Firefighters (14) IU (6) Green Century Capital (41) Presby. Church (17)5 C. Woodard (6) Miam Firefighters (8) SEIU (5) Northstar Asset (41) Mercy Investment (16)

C. CPA1 Evelyn Davis (9) NYC Funds (52) AFSCME (19) Trillium Asset (29) Mercy Investment (8)2 James Mackie (6) NY State (44) AFL-CIO (17) Walden Asset (23) St. Joseph (4)3 John Harrington (3) Kansas City Firefighters (16) Teamsters (16) Northstar Asset (20) SSFP (4)4 MIchael Loeb (2) Miami Firefighters (8) CWA (5) Cummings Foundation (17) UUA (3)5 Marie Bodga (1) Philadelphia Firefighters (3) MA Labor (3) Green Century Capital (16) Benedictine Sisters (2)

Note: a. Numbers in parentheses indicate the number of proposals submitted by each sponsor under each category. b. Abbreviations: UBCJA = UnitedBrotherhood of Carpenters and Joiners of America, AFSCME = American Federation of State, County and Municipal Emplohyees Pension Plan, SMW =Sheet Metal Workers, IBEW = International Brotherhood of Electrical Workers, IU = Laborers’ International Union, SEIU = Service Employees InternationalUnion, CWA = Communication Workers of America, UUA = Unitarian Universalist Association, MOMI = Missionary Oblates of Mary Immaculate, SCSE= Sisters of Charity of St. Elizabeth, St. Joseph = Capuchin Province of St. Joseph, SSFP = Sisters of St. Francis, Philadelphia.

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Appendix C: Tables

Table 7: Summary Statistics of Variabes

Variables Obs. Mean S.D. Min. Max.

No. Proposal 3149 1.4 2.3 0 27No. Governance Proposal 3149 .89 1.6 0 16No. SRI Proposal 3149 .55 1.1 0 12No. CPA Proposal 3149 .14 .38 0 2No. Voting 3149 .84 1.5 0 17No. Governance Voting 3149 .54 1.0 0 12No. SRI Voting 3149 .30 .78 0 10No. CPA Voting 3149 .09 .31 0 2PAC Contribution ($K) 3149 240.6 505.9 0 4931.7PAC Democrat Pct. 1856 59.5 17.5 5.6 100Directors Contribution($K) 2058 420.4 406.6 .75 144,453.5Directors Democrat Pct. 2058 45.0 28.3 0 100Lobbying Spending ($M) 3184 2.2 4.2 0 49.1PAC/Lobbying Ratio 2706 0.3 4.0 0 192.7E Index 3149 2.5 1.4 0 6Classified Board 3149 .38 .48 0 1Golden Parachutes 3149 .69 .45 0 1Poison Pills 3149 .17 .38 0 1Super Majority to Merger 3149 .53 .49 0 1LimitAbilityToAmendBylaws 3149 .35 .47 0 1LimitAbilityToAmendCharter 3149 .36 .48 0 1LimitAbilityToCallMeeting 3149 .22 .41 0 1LimitAbilityToActbyWritten 3149 .49 .49 0 1MajorityVoteforDirectorElection 3149 .58 .49 0 1Asset ($B) 3118 56.8 199.6 .54 2415.6Sale ($B) 3118 19.4 38.1 .10 474.2Tobin’s Q 2841 4.2 5.5 .10 474.2InsiderControl 3098 .01 .12 0 1Institution Dominance 3149 .46 .49 0 1

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Table 8: Full Regression Result (Panel A)(1) (2) (3) (4) (5) (6)All Individual Public Pension Union Fund Religious

(ln) Assets 0.0508 0.0663∗∗ 0.0309∗ 0.0389 0.0434∗∗ 0.0370(1.46) (2.02) (1.76) (1.67) (2.09) (1.63)

(ln) Sales 0.0873∗∗ 0.0966∗∗∗ 0.0156 0.0816∗∗∗ 0.0742∗∗∗ 0.0589∗∗∗

(2.55) (2.92) (0.78) (3.43) (3.89) (2.92)

Tobin’s Q 0.000989 0.000522 0.00213 0.00000918 0.000925 0.00124(0.68) (0.29) (1.26) (0.01) (0.63) (1.41)

Insider -0.0695 -0.0852∗ 0.0769∗ -0.148∗∗∗ -0.0862∗ -0.0567Control (-1.13) (-1.77) (1.71) (-3.41) (-1.72) (-1.28)

Institution -0.00579 -0.0114 -0.00717 -0.0178 0.00568 -0.00899Dominance (-0.25) (-0.58) (-0.58) (-1.08) (0.30) (-0.62)

Classified 0.0218 -0.0376∗ 0.0524∗∗ -0.0195 0.0127 -0.0214Board (0.73) (-1.72) (2.18) (-0.76) (0.67) (-1.20)

Golden -0.0102 -0.0539∗ -0.0153 0.0188 -0.0209 -0.00616Parachutes (-0.36) (-1.78) (-0.61) (0.89) (-0.84) (-0.42)

Poison -0.0892∗∗ -0.0538∗∗ -0.0394∗ -0.0125 0.00160 -0.0296Pill (-2.02) (-2.24) (-1.82) (-0.43) (0.05) (-1.50)

Super Majority -0.0289∗ -0.0300∗ -0.0236 -0.0195 0.0167 0.00586to Merger (-1.83) (-1.92) (-1.63) (-0.79) (0.99) (0.47)

Limit Ability to 0.0573 0.0520 -0.0114 0.0834∗∗ 0.0452 0.0109Amend bylaws (1.35) (1.30) (-0.50) (2.14) (1.35) (0.41)

Limit Ability to -0.0245 -0.0516∗ 0.00685 0.0936∗∗ -0.0439 0.0471∗

Amend Charter (-0.56) (-1.70) (0.24) (2.39) (-1.10) (1.78)

Limit Ability to 0.0130 0.0486 -0.0319∗∗ -0.0165 0.0316 0.0425∗∗

Call Meeting (0.44) (1.65) (-2.07) (-0.64) (1.65) (2.15)

Limit Ability to -0.00814 -0.0406 0.00465 -0.0321 0.00585 -0.00146by Written Consents (-0.29) (-1.63) (0.30) (-1.63) (0.24) (-0.09)

Majority Vote 0.0384 0.00591 0.0166 -0.0590∗∗ 0.0222 0.00103Requirement (1.42) (0.23) (0.94) (-2.19) (1.21) (0.08)

Constant -0.758∗∗∗ -1.325∗∗∗ -0.230∗ -0.809∗∗∗ -0.925∗∗∗ -0.760∗∗∗

(-4.97) (-10.45) (-1.93) (-4.32) (-4.92) (-4.82)N 2804 2804 2804 2804 2804 2804adj. R2 0.233 0.279 0.080 0.195 0.138 0.224Industry Fixed Effect Y Y Y Y Y YYear Fixed Effect Y Y Y Y Y Yt statistics in parentheses. Results for political variables are omitted. ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01

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Appendix D: Figures

Figure 2: Lobbying Spending and PAC Contributions

0

1000

2000

3000

4000

5000

0 10000 20000 30000 40000 50000Lobbying Spending ($K)

PAC

Spe

ndin

g ($

K)

totalproposal

0

10

20

Figure 2 presents the relationship between total lobbying spending and total Political

Action Committee (PAC) spending in 2007-2013 at the firm level. Dot size is weighted

by the number of shareholder proposals submitted to each firm.

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Figure 3: Heterogenous Political Engagement and Political Ideology of Firms

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Staples

Pepco

Honeywell

25

50

75

100

0 1000 2000 3000 4000 5000Pac Spending ($K)

Per

cent

PA

C C

ontr

ibut

ions

to R

epub

lican

s

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Expedia

E*Trade

AT&T

Boeing

25

50

75

100

0 10000 20000 30000Lobbying Spending ($K)

Per

cent

PA

C C

ontr

ibut

ion

to R

epub

lican

s

Figure 3 presents the relationship between levels of political engagement, measured

by PAC spending and lobbying spending in 2007-2013, and political ideology, measured

by percent PAC contributions going to Republican candidates and PACs at firm level.

Firms with active political engagement tend to give contributions to both Democrats and

Republicans but there is significant variation across firms in their political giving patterns.

39