Study: Stocks reacted to rule

Board-nominee edict struck down

— A study by a University of Arkansas professor concludes that passage of a federal regulation making it easier for some shareholders to make board nominations improved the value of company shares the day the ruling was passed by a federal commission. But the rule never took effect because it was struck down by a federal appeals court in 2011.

Joanna T. Campbell, a management professor at the Sam M. Walton College of Business in Fayetteville, said her 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 Aug. 25, 2010, when it was approved.

Campbell said the stocks studied, selected from the Standard & Poor’s 500 index, showed a gain of 16 times the average daily upswing for the year.

“From a finance perspective, that’s a great increase in market value,” Campbell said Monday in an e-mail. Her study looks at the type of data that a judge said wasn’t available when the rule was struck down.

The study was published in the December issue of Strategic Management Journal. Campbell, the lead author, was at Texas A&M University when she completed the study. She has been at the UA since July.

Co-authors of the study included Colin Campbell of Miami University in Ohio, David Sirmon of the University of Washington, Leonard Bierman of Texas A&M University and Christopher Tuggle of the University of Nebraska.

The SEC’s proxy access rule allowed shareholders who had held 3 percent of a company’s voting stock for three years to nominate a limited number of board members, other than those listed in the company’s proxy statement. Board candidates are typically nominated by incumbent board members.

The proxy access rule was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in July 2010.

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 under way.

Lisa Burgess, director of media relations for the U.S. Chamber of Commerce, said Monday that the group had not seen the full study and could not comment.

When the rule was vacated, Tom Donohue, president of the U.S. Chamber of Commerce, said the ruling was a big win for investors as it prevented special-interest politics from being injected into the boardroom.

In vacating the rule in April 2011, the appeals court said 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.”

Joanna Campbell said her study provides that data.

“Our findings consistently show that the rule benefited shareholders, especially for firms with lower board independence or greater CEO control,” she said in a news release Monday.

In an interview, Campbell said the study’s findings showed shareholders are concerned about how a company’s management can control a board’s makeup.

She said the study also looked at the reaction of bondholders, since they often have conflicting interests when compared with shareholders. She said that while a negative reaction to the rule could be expected, instead the bond market reaction to the rule was positive, though smaller. She said the study shows both groups see overly powerful management as harming share value.

“The enemy of my enemy is my friend concept applies,” Campbell said.

But Jill E. Fisch, co-director of the Institute for Law and Economics at the University of Pennsylvania Law School, said that while she wasn’t familiar with the details of the study, she’s dubious of “event studies” in general, which use statistical methods to measure the impact of a single event on the value of a company.

She said it is too difficult to quantify the reason the stock market moves.

“Event studies are a crude tool,” she said.

Campbell said event studies are sophisticated and take into consideration a wide variety factors. She said when properly performed event studies are conservative, reliable and accepted across multiple disciplines.

Business, Pages 23 on 12/18/2012

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