This recent paper from the Rock Center for Corporate Governance at Stanford University, “Gadflies at the Gate: Why Do Individual Investors Sponsor Shareholder Resolutions?” attempts to answer a question I’ve been wondering about for quite a while: why do individual investors invest their time and energy pursuing shareholder proposals? Given how prolific some of these shareholders are—reportedly, the group associated with John Chevedden and James McRitchie accounted for approximately 70% of all proposals sponsored by individuals among Fortune 250 companies in 2014—these investments must be substantial. Since, in most cases, there’s not really any financial incentive involved, what drives them to do it? According to the paper, shareholder proposals sponsored by individuals represented about a quarter of the total number of shareholder proposals voted on each year, aggregating 1,123 proposals at Fortune 500 companies during the 10-year period from 2006 to 2015. And keep in mind that this data does not include all the proposals that the SEC allowed companies to exclude under Rule 14a-8 or that were withdrawn as a result of negotiations with the companies involved. These proposals related to a variety of topics: the largest proportion of proposals were devoted to advocating enhancements to shareholder rights (e.g., right to call special meetings, right to act by written consent, elimination of supermajority voting requirements), with the remainder fairly evenly split among proposals related to social policy (e.g., political spending disclosure, environmental issues), the board of directors (e.g., independent board chair) and executive compensation (e.g., say on pay, limitations on pay). Interestingly, many of the proposals that were submitted years ago—and considered highly controversial at the time—have now become commonplace proposals and, in some cases, routine corporate governance practices. Citing approvingly an article by Broc Romanek (of thecorporatecounsel.net), “The Pioneers of Corporate Governance,” Corporate Governance Advisor (November/December 2011), the paper traces the origins of individual shareholder activism to the 1930s and two brothers, John and Lewis Gilbert, who began to propose a number of resolutions to improve corporate governance standards and accountability and continued that activity for decades: among the issues they advocated were “the elimination of classified board structures, granting shareholders the right to ratify the public auditor, limits on executive compensation and pensions, the adoption of minimum equity ownership requirements for directors, and the relocation of the annual meeting to accessible venues.” Now, how many companies do not seek shareholder ratification of auditors?

While these shareholders have elicited admiration from many quarters and the process has been defended as essential to shareholder democracy, there are nonetheless critics who contend that individual shareholder activism is a nuisance and a waste of corporate time and money. According to this NYT DealBook column, the U.S. Chamber of Commerce estimates companies’ costs at $87,000 for each proposal, presumably reflecting costs of submitting no-action requests to the SEC, preparing statements in opposition for proxy statements, engaging with shareholders and sometimes even battling the proposals in court. As a result, it should come as no surprise that some of these critics advocate tightening of the criteria to submit shareholder proposals. In support of their contentions that the process is wasteful, these critics also point to the poor showing of most of these proposals. According to the paper, most of these proposals receive only minimal shareholder support — an average of only 29% of the vote over the 10-year period, with “only a handful of subject matters garner[ing] meaningful support, including the elimination of supermajority requirements, the elimination of staggered boards, and the removal of bylaw provisions that limit shareholder influence.” We might add proxy access to the list. “By contrast,” the paper observes, “voting support for most board, compensation, and social policy matters remains exceptionally low; over half of all categories of issues brought before individual shareholders never received majority support in any corporate meeting during the entire 10-year measurement period….” One of the activists acknowledged to the authors that some proposals are just too remote or too complex to appeal to many shareholders: “The simpler ideas resonate the most. Like ‘say on pay’—most people think that CEOs get paid too much money….When it gets to other issues, like supply chain reports, they don’t resonate with a lot of people.”

The authors of the paper spoke with nine shareholder proponents, including James McRitchie and one anonymous person. Seven focused on proposals related to environmental matters, human rights, diversity, socially conservative causes and limiting restricted stock grants, while two focused on corporate governance matters. Although some were affiliated with nonprofits, none actually collaborated with any large institutions. To avoid duplication, they typically deferred to large institutions that were planning to submit similar resolutions (and that typically would have greater resources). Pension or socially responsible funds may be sources of support in some cases, but none of the activists reported receiving support from big “mainstream” institutional holders, although they may communicate with them in an effort to enlist support. The paper reports that shareholder proponents “tend to have little interaction with management and none with the board of directors, outside of the annual meeting…. Generally, management and other shareholders are not receptive to their presence: ‘Most people there see proponents as a nuisance, regardless of the issues.’[One of the shareholder activists recounted that the] ‘CEO invited me to sell my shares. And by the way, thousands of people cheered for him. There were some shareholders that cheered for me, but most cheered for him.’”

Some individual activism apparently began in an effort to address a personal wrong that then morphed into something larger. According to the NYT, Chevedden, “started after being laid off,” with his first target being the parent of his employer to which he submitted a proposal asking the parent to disclose more information about the employment practices of Chevedden’s former employer. His current activism, he believes, “‘gives shareholders more of a say’ and potentially puts management on its toes and prevents it from lapsing into complacency.” The paper reports that, in many cases, these activists “were motivated to become involved in governance matters either because of issues they witnessed directly in their careers or because of social matters that strongly resonate with them.” Other activists, the paper reports, were “concerned about environmental risks, lack of gender diversity on boards, or human rights violations in foreign countries, and decided to file resolutions to change corporate practices.” Some view the proposal process as useful because the target companies “have to engage with you if you file.”

According to the paper, overall, these individual activists “see their activity as part of a broader process of bringing about change” and “take the long-term view that their participation in the governance process leads to positive change: ‘Sometimes it takes five, seven, ten years. You have to be very tenacious to bring about change.’” As a result, they are “not fazed by low voting support. It is more important to them to raise the issue, and clear the thresholds necessary to be able to reintroduce the resolution in future years.” According to one activist, every “material issue was once an immaterial issue brought by some shareholder of some company that said that this was important.” The paper reports, even if votes are not successful, activists take pride in successes such as convincing companies to use paper instead of Styrofoam or to add more women to the board. In a 2014 interview with The Corporate Crime Reporter, Chevedden affirmed that he was a believer in corporate democracy and that, notwithstanding the absence of financial incentive to submit these proposals, one reason for his actions was simply to improve governance: “‘These proposals have been adopted by many companies. Some of the ones that get big votes — like declassify [the board] and simple majority voting — when I go back to companies that have adopted these, they will point out that they have improved their governance by adopting these proposals, as if they did it without my suggesting it, and therefore they don’t need any more improvement. They are so good they don’t need to get any better.’”

Another reason, Chevedden admitted, is that it is a thrill to get a big vote.