Nonbinding Voting for Shareholder Proposals

Shareholder proposals are a common form of shareholder activism. Voting for shareholder proposals, however, is nonbinding since management has the authority to reject the proposal even if it received majority support from shareholders. We analyze whether nonbinding voting is an effective mechanism for conveying shareholder expectations. We show that, unlike binding voting, nonbinding voting generally fails to convey shareholder views when manager and shareholder interests are not aligned. Surprisingly, the presence of an activist investor who can discipline the manager may enhance the advisory role of nonbinding voting only if conflicts of interest between shareholders and the activist are substantial.     

Public pension fund ownership and firm performance

Equity ownership by public pension funds (PPFs) is widely used in the literature (see, e.g., Cremers and Nair 2005; Dittmar and Mahrt-Smith 2007) as a measure of the strength of shareholder monitoring/governance. This paper raises caution on such practices by illustrating an inverted-U shape relationship between PPF ownership and firms’ future performance, measured by stock returns and operating performance: during 1985–2005, future performance first increases, then declines in aggregate equity ownership by PPFs. Our results suggest that PPFs’ presence is consistent with shareholder value maximization when they have moderate influence on firm management, whereas excessive PPF ownership may facilitate PPF managers’ pursuits of political interests and destroy shareholder value. Therefore, it is important to impose an upper bound to PPF ownership when measuring the strength of shareholder monitoring/governance.     

The real effects of proxy advisors on the firm

This paper examines the influence of proxy advisors (PA) on firm voting outcomes, policies, and value. We measure PA influence with shareholders' historical propensity to follow PA recommendations. PA influence increases the impact of PA recommendations on proxy voting outcomes and firm policies. When shareholders have private incentives to engage in costly research in the absence of a proxy advisor, PA influence neither harms nor benefits shareholder value. However, at firms with dispersed shareholders PA influence can increase value. Our findings are consistent with theories of voting in which proxy advisors compete with private information acquisition efforts by large shareholders.     

Firm performance and mutual fund voting

We employ a new comprehensive proxy voting records database to investigate whether mutual funds consider prior firm performance when they vote on a diverse range of management- and shareholder-sponsored proposals relating to governance, compensation, and director election. We argue that prior firm performance plays a role in the monitoring effort of mutual funds as they fulfill their fiduciary duties. Results show that voting is related to prior firm performance for selected management and shareholder proposals and that it is consistent with Institutional Shareholder Services’ recommendations. Mutual funds support management (shareholder) proposals less (more) when prior firm performance has been weak. Furthermore, even when mutual funds deviate from their fund family’s voting policies, they attach importance to prior firm performance, and their voting is, to a certain degree, affected by business ties.     

Large Shareholder Entrenchment and Performance: Empirical Evidence from Canada

Abstract:  Recent empirical evidence indicates that the largest publicly traded companies throughout the world have concentrated ownership. This is the case in Canada where voting rights are often concentrated in the hands of large shareholders, mostly wealthy families. Such concentrated ownership structures can generate specific agency problems, such as large shareholders expropriating wealth from minority shareholders. These costs are aggravated when large shareholders don't bear the full costs of their decisions because of the presence of mechanisms (dual class voting shares, pyramids) which lead to voting rights being greater than the cash flow rights (separation). We assess the impact of separation on various performance metrics while controlling for situations when the large shareholder has (1) the opportunity to expropriate (high free cash flows in the firm) and (2) the incentive to expropriate (low cash flow rights). We also control for when the large shareholder has the power to expropriate (high voting rights, outright control and insider management) and for the presence of family ownership. The results support our hypotheses and indicate that firm performance is lower when large shareholders have both the incentives and the opportunity to expropriate minority shareholders.     

Does regulatory reform of cumulative voting promote a more balanced power distribution in the boardroom?

In the presence of dominant shareholders, it remains uncertain whether the introduction of cumulative voting (CV) in board elections can elevate board representation of non-controlling substantial shareholders and curb the expropriation of minority shareholders by dominant shareholders. With hand-collected director-level data, we conduct DID-style analysis of China's CV reform. We find that non-controlling substantial shareholders cooperated in voting to raise their board representation, and CV implementation curbed tunneling activities and enhanced firm value. The results are especially strong in a subsample of firms whose second largest shareholder has a sufficiently large ownership proportion to elect her/his favored candidates onto boards.     

Do shareholder agreements affect market valuation?: Evidence from Brazilian listed firms

Shareholder agreements are contracts that govern the relationship among different shareholders in a firm. This article uses a unique dataset to analyze shareholder agreements in listed companies and shows how they affect firm valuation. While shareholder agreements may be used to expropriate value from non-controlling investors, they can also mitigate conflicts of interest and protect minority shareholders. The analysis of a broad time-series and cross-section of Brazilian listed firms provides evidence that the latter effect dominates. We build a shareholder agreement index in order to measure on a firm-level basis the degree of investor protection granted by shareholder agreements. Companies with shareholder agreements have higher valuation and the degree of investor protection granted by shareholder agreements is positively related to firm value, even after controlling for the endogeneity of the firm's decision to adopt shareholder agreements.     

Shareholder Activism through Proxy Proposals: The European Perspective

This paper is the first to investigate the corporate governance role of shareholder‐initiated proxy proposals in European firms. Proposal submissions in Europe remain infrequent compared to the USA, especially in Continental Europe. In the UK proposals typically relate to a proxy contest seeking board changes, while in Continental Europe they are more focused on specific governance issues. There is some evidence that proposal sponsors are valuable monitors, because the target firms tend to underperform and have low leverage. Sponsors also consider the ownership structure of the firm, because proposal probability increases in the target's ownership concentration and the equity stake of institutional investors. While proposals enjoy limited voting success across Europe, they are relatively more successful in the UK. The outcomes are strongest for proposals targeting the board but are also affected by the target characteristics including the CEO's pay‐performance sensitivity. Proposals are met with a significant negative abnormal return of ?1.23%, when they are voted upon at general meetings. The low voting support gathered by proposals and the strongly adverse market reaction suggest that shareholders of European companies use proposals as an emergency brake rather than a steering wheel.     

The dark side of strengthened minority voting power: An innovation perspective

Based on the 2014 regulatory reforms aimed at strengthening the protection of legitimate rights and interests of minority investors in China, we investigate minority shareholders’ short-termism and how minority voting impacts firm innovation. We find that the 2014 reforms effectively motivate minority shareholders to attend shareholder meetings and greatly enhance their voting influence. We also find that enhanced minority voting power after the reforms lowers the number of firms’ patent applications, and this effect is more pronounced for the firms that see the greatest increase in shareholder attendance at shareholder meetings. Moreover, enhanced minority voting power boosts executive turnover-performance sensitivity, thereby undermining firm innovation. Finally, we show that different types of minority shareholders have distinct impacts on firm innovation, depending on their investment horizons. The negative effect of minority voting power is more pronounced for state-owned enterprises (SOEs) than for non-SOEs.     

Voice and power: Do institutional shareholders make use of their voting power?

I investigate the role of voting power – the ability to influence a vote's outcome – in the voting behavior of institutional shareholders. Using hand-collected data from Israel, an environment with concentrated ownership, I employ a power index borrowed from the political science literature to examine the voting power wielded by institutional shareholders and the voting patterns they display. I find that institutional shareholders' voting power is negatively related to their tendency to vote against management: the stronger the shareholder, the higher the probability they will vote in favor of a management-sponsored proposal. Based on evidence obtained here, this behavior is attributable to pre-vote negotiations as well as to the voting strategy of “counting on my vote not counting.” Next, I use detailed data on shareholders' votes to identify the channel through which a voting rule affects minority shareholder protection. I find that powerful institutional shareholders almost never use their voting power to vote against management, not even when signals of poor governance are discernible. I conclude that the effect of a voting rule on minority shareholder protection operates through proposal selection, rather than through direct voting.     

An international study of shareholder protection in freeze-out M&A transactions

Freeze-out M&A transactions are those initiated by controlling shareholders to acquire minority shareholders' ownership in the firm. We compare international freeze-out mergers in 35 countries in merger premium, choice of payment, and completion probability. We find greater merger premium and probability of cash payment but lower deal completion rates in countries with stronger minority shareholder protection. Using detailed minority shareholder protection indexes, we find some evidence that the ex-post anti-self-dealing law enforcement is more important than the ex-ante anti-self-dealing law regulation in protecting minority shareholder value. Our study provides new evidence of minority shareholder protection in the setting of conflicts of interest between majority and minority shareholders.     

Shareholder election of CSR committee members and its effects on CSR performance

We examine the election of directors to corporate social responsibility (CSR) committees and whether shareholder votes influence CSR committee effectiveness. Our study is motivated by the importance that shareholders place on CSR and the responsibilities of the board in overseeing a firm's CSR practices. We find that CSR committee members receive greater shareholder support than other directors. We further find that among CSR committee members, those who are more experienced and skilled receive greater shareholder support. Furthermore, when a firm's CSR performance is poorer (better), CSR committee members receive lower (greater) shareholder support compared with other directors. Finally, we find that through voting, shareholders can increase the efficacy of the CSR committee, leading to improvements in CSR committee structure and performance. Overall, our results suggest that shareholders value the services and expertise of CSR committee members and hold them accountable for CSR performance. Shareholder votes are also effective in enhancing CSR performance.     

THE EFFECTS OF MUTUAL FUNDS ON M&A COMPENSATION

Motivated by shareholders’ interest in combating executive wealth expropriation through the merger and acqusition (M&A) process, we study how mutual funds influence firm behavior around an acquisition through votes against management proposals. We find that mutual funds reduce the chief executive officer's ability to extract rents during the M&A process by voting against management‐sponsored compensation proposals after the acquisition, thus lowering both excess compensation and increasing pay‐for‐performance sensitivity. Furthermore, mutual fund voting magnifies the impact on negatively performing firms and firms with a larger amount of the mutual fund's holdings in the firm.     

Shareholder proposals in the new millennium: Shareholder support,board response,and market reaction

Although the owners of publicly traded companies have had the right to offer shareholder proposals using Rule 14a-8 for several decades, the effectiveness of the rule has been frequently questioned because few of these proposals received substantial support from other shareholders and even fewer have been implemented by boards. Using new data from the 2002–2004 proxy seasons, we analyze shareholder voting patterns on these proposals, board reactions to them, and market responses. We find some big changes from earlier periods: many more proposals are receiving majority shareholder support during our sample period relative to earlier studies, and this support has translated into directors implementing more of the actions called for by shareholders. In particular, boards are increasingly willing to remove important anti-takeover defenses, such as the classified board and poison pill, in response to shareholders' requests, something rarely seen in the past. Despite the increase in support for shareholder proposals and board action in response, we find small and insignificant stock market reaction. We conclude that shareholder proposals under Rule 14a-8 have an emerging role in reducing agency costs by increasing director responsiveness to shareholder concerns to open the market more fully to corporate control.     

Does Mandatory Shareholder Voting Prevent Bad Acquisitions? The Case of the United Kingdom

A large number of studies have shown that many companies have made large acquisitions that their own shareholders probably would not have approved if given the opportunity to do so. In this article, which summarizes the findings of their study published recently in the Review of Financial Studies, the authors present evidence that suggests the effectiveness of shareholder voting as a corporate governance mechanism designed to prevent such value‐reducing acquisitions from taking place. The authors' study focused on acquisitions in the U.K. where proposed transactions that exceed a series of 25% relative size (target's as a percentage of the acquirer's) thresholds are defined as “Class 1” transactions and require shareholder approval. The authors found strikingly positive stock market reactions to the announcements of such Class 1 acquisitions—as compared to zero if not negative average announcement returns for Class 2 transactions that were not subject to a shareholder vote. And when the authors extended their analysis to U.S. M&A markets, they found that the larger (again, in relative size) U.S. deals—large enough that they would have required a shareholder vote in the U.K.—provided returns to their shareholders that were negative, and thus significantly lower than those of their U.K counterparts. In terms of the economic significance of their findings, the authors found that Class 1 transactions were associated with aggregate gains to acquirer shareholders of $13.6 billion. By contrast, U.S. transactions of similar size, which again were not subject to shareholder approval, were associated with aggregate losses of $210 billion for acquirer shareholders; and Class 2 U.K. transactions, also not subject to shareholder approval, were associated with aggregate losses of $3 billion. In a further series of tests designed to shed light on how mandatory shareholder voting generates such substantial value improvements for acquirer shareholders, the authors also found evidence suggesting that when faced with the requirement of a shareholder vote, CEOs and boards are more likely to resist the temptation to overpay to close a deal. And the fact that the shareholders of the Class 1 acquirers did not end up blocking a single transaction that was submitted to a vote suggests that this mechanism works without the need for shareholders to actually vote down a deal. In other words, mandatory shareholder voting on acquisitions is a powerful deterrent to “bad deals” because, first of all, the vote is triggered automatically by the relative size tests and, second, CEOs and boards, with the help of their bankers, have a pretty good idea well in advance of the vote whether their shareholders are going to vote “no”—and such a vote would be viewed by top management as a major rejection, a strong vote of no confidence.     

Equity‐based incentives and shareholder say‐on‐pay

We study the relationship between CEO pay‐performance sensitivity, pay‐risk sensitivity, and shareholder voting outcomes as part of the “say‐on‐pay” provision of the 2010 US Dodd‐Frank Act. Consistent with our hypothesis, we provide evidence that shareholders tend to approve of compensation packages that are more sensitive to changes in stock price (pay‐performance sensitivity). Our findings are consistent with theoretical predictions that outside owners approve of equity incentives as a means of aligning managers' interests with those of shareholders. We also document that future changes to equity‐based incentives are related to voting outcomes and that shareholders incorporate CFO incentives into their votes. Collectively, these results provide evidence of the importance of equity‐based incentives from the perspective of those most concerned with firm value and of the effectiveness of say‐on‐pay as a governance mechanism.     

Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions

This paper investigates the effects on acquisitions of creditor-director presence on corporate boards. Using a hand-collected dataset for boards of large U.S. corporations, we find that companies with creditor-directors are more likely to engage in acquisitions with attributes that are unfavorable to shareholders and favorable to creditors (more diversifying and fewer cash-financed acquisitions). Consistent with these patterns, acquisition announcements are associated with lower shareholder value, higher creditor value, and lower overall firm value when a creditor is present. These results support the hypothesis that conflicts of interest between shareholders and creditors can result in value-destroying acquisitions. In addition, commercial bankers with no lending relationship are not affected by conflicts of interest. Where appropriate, our estimation strategy takes into account that there may be self selection of bankers onto corporate boards.     

The Rise of Agency Capitalism and the Role of Shareholder Activists in Making It Work

The past 50 years have seen a fundamental change in the ownership of U.S. public companies, one in which the relatively small holdings of many individual shareholders have been supplanted by the large holdings of institutional investors, such as pension funds, mutual funds, and bank trust departments. Such large institutional investors are now said to own over 70% of the stock of the largest 1,000 U.S. public corporations; and in many of these companies, as the authors go on to note, “as few as two dozen institutional investors” own enough shares “to exert substantial influence, if not effective control.” But this reconcentration of ownership does not represent a complete solution to the “agency” problems arising from the “separation of ownership and control” that troubled Berle and Means, the relative powerlessness of shareholders in the face of a class of “professional” corporate managers who owned little if any stock. As the authors note, this shift from an era of “managerial capitalism” to one they identify as “agency capitalism” has come with a somewhat new and different set of “agency conflicts” and associated costs. The fact that most institutional investors hold highly diversified portfolios and compete (and are compensated) on the basis of “relative performance” provides them with little incentive to engage in the vigorous monitoring of corporate performance and investor activism that could address shortfalls in such performance. As a consequence, such large institutional investors—not to mention the large and growing body of indexers like Vanguard and BlackRock—are likely to appear “rationally apathetic” about corporate governance. But, as the authors also point out, there is a solution to this agency conflict—and to the corporate governance “vacuum” that has been said to result from the alleged apathy of well‐diversified (and indexed) institutional investors: the emergence of shareholder activists. The activist hedge funds and other specialized activists who have come on the scene during the last 15 or 20 years are now playing an important role in supporting this relatively new ownership structure. Instead of taking control positions, the activists “tee‐up” strategic business and financing choices that are then decided upon by the vote of institutional shareholders that are best characterized not as apathetic, but as rationally “reticent”; that is, they allow the activists, if not to do their talking for them, then to serve as a catalyst for the expression of institutional shareholder voice. The institutions are by no means rubber stamps for activists' proposals; in some cases voting for the activists' proposals, in many cases against them, the institutions function as the long‐term arbiters of whether such proposals should and will go forward. In the closing section of the article, the authors discuss a number of recent legal decisions that appear to recognize this relatively new role played by activists and the institutions that choose to support them (or not)—legal decisions that appear to confirm investors' competence and right to be entrusted with such authority over corporate decision‐making.     

WHEN SHAREHOLDERS CHOOSE NOT TO MAXIMIZE VALUE: THE UNION BANK OF SWITZERLAND'S 1994 PROXY FIGHT

This paper examines the fight over a share reunification plan that pitted Swiss financier Martin Ebner against Union Bank of Switzerland (UBS), once the largest Swiss bank and a global leader in asset management. In the U.S. corporate governance debate, large shareholders are often held up as a possible solution to corporate governance problems. But this examination of the UBS proxy fight shows why some large shareholders can themselves be a source of governance problems. The share reunification plan was designed to combine the firm's two classes of stock: registered (voting) shares and bearer (non-voting) shares. As its motive for the plan, the UBS board cited a desire both to increase liquidity and to prevent a control change. The majority of the holders of the company's registered stock—many of whom had other financial ties to the bank—ended up voting for a proposal that caused them to lose 11% of the value of their shares during the three trading days following its announcement, and eventually almost twice as much. Moreover, even the holders of the bearer stock hurt themselves by approving the reunification plan. Although the plan clearly transferred value from the registered to the bearer shares, the redistribution benefits from the plan for the bearer shareholders were not sufficient to offset their losses from the reduced probability of a control change. Although it did not succeed in accomplishing its immediate goal, the UBS proxy fight is today recognized as a watershed event in Swiss corporate governance. Until recently, Switzerland's economy has been dominated by cartels, with closely overlapping boards of directors. Hostile takeovers were essentially unheard of, and criticism of management by shareholders was highly unusual. Ebner's activities have had the effect of stimulating public debate about shareholders' rights and shareholder activism. In so doing, they have made it more acceptable for shareholders to criticize management and established shareholder value as a “politically correct” goal for Swiss corporations.     

Costs of voting and firm performance: Evidence from RegTech adoption in Chinese listed firms

Employing the 2014 mandatory adoption of online shareholder voting in China, we show that the reduction of voting costs through online voting is positively related to participation in shareholder meetings and future firm performance. Our mechanism analysis suggests that the improved firm performance is mainly driven by the enhanced governance role played by informed investors and institutional investors. Further analysis shows that online shareholder voting makes the firms more attractive to mutual fund managers who are far away from the firms. Moreover, we find that the improved firm performance is concentrated in firms with low controlling shareholder ownership, and that online shareholder voting is associated with an increased likelihood of vetoing proposals and lower tunneling.