Should the Board Have Control Over Shareholder Proposals? Evidence from China

This article empirically investigates the impacts of the board’s rejection of shareholder proposals on corporate value and the appropriate approach to regulation. Using a hand-collected dataset on shareholder-proposal-rejection incidents in China, I find that a rejection decision would on average cause a corporation to lose 1.59% to 1.95% of its market value. The market’s negative responses are largely caused by the rejections of director nomination proposals, rejections of blockholder-sponsored proposals, and rejections unsupported by external legal counsels. I further find that the two stock exchanges in China are overall capable of identifying the rejection decisions that are detrimental to corporate value, but the effectiveness of their regulatory actions via comment letters is hindered by the inherent weakness of the soft law approach. Based on the results, I propose that the critical value of the shareholder proposal regime is providing a lost-cost approach for dissident shareholders to replace poorly performing management, and facilitating the constructive engagement of large shareholders and the management. The board’s control over shareholder proposals should thus be regulated to prevent the impediment of value creation. I also recommend China establish an SEC-style review process for the board’s rejection decisions, with the exchanges as the ultimate authority permitting the shareholder proposals to be excluded