The Role of Passive Investors in Corporate Governance and Socially Responsible Investing: Evidence from Shareholder Proposals

Abstract

We study whether the substantial rise in passive ownership reshapes activist shareholders’ behavior in sponsoring shareholder proposals, which shareholders use to address issues they believe are crucial for the sustainable growth of a company. Our findings reveal a positive impact of passive investors on the initiation of governance, socially responsible investing (SRI), and an aggregate of both proposals. Interestingly, we show that managerial ability and board co-option potentially moderate their link. In the subsequent analysis, we note a constructive influence of passive investors on post-initiation outcomes, evidenced by an increase in withdrawal and voting percentage of proposals corresponding to heightened levels of passive ownership. These findings suggest that passive investors foster communication between activists and management and endorse the case even when it progresses to the voting stage. More importantly, the market values these proposals positively as reflected in higher observed buy-and-hold returns. Finally, our results are robust to instrumental variable analysis using Russell reconstitution as an exogenous shock. Taken together, our study offers broad implications that passive investors can indirectly engage in promoting sustainable practices by encouraging activist investors to sponsor governance and socially responsible proposals, a collaborative approach where shareholders contribute to sustainability efforts.