Institutional Investors and Voting Practices: an international comparison

Abstract

The potential influence of groups of large shareholders was identified in the 1930s when Berle and Means (1932) highlighted the impact of the separation of ownership and control in corporations. Over sixty years later, institutional investors own large portions of equity in many companies across the world, and play a key role in the corporate governance arena. Corporate governance is defined in the Cadbury Report (1992) as “the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place”. In order to help satisfy this role, institutional shareholders engage in regular dialogue with companies; they also have the right to vote at companies’ annual general meetings. However evidence (Mallin 1995, 1996; PIRC 1998, 1999) shows that there is a much lower level of voting by institutional investors in the UK than might be expected.In the UK, the existing proxy voting system is generally viewed as slow and overly‐complicated with many players in the chain and with little flexibility. By comparison, the US has, for a number of years, had in place state and federal legislation to allow proxy votes to be cast using modern media. Corporations have changed their articles as appropriate to take advantage of these revisions, and to enable them to be enacted in their own corporations. Legislation making similar provisions was also enacted in Australia in 1998. Increasingly it is seen as desirable, and eminently sensible, for the UK to follow suit (NAPF Inquiry, 1999).This paper discusses the concept of the vote being a “fiduciary duty”, and compares the voting systems in several countries, including the UK, US, Australia, and Germany. The emerging trends in the area are discussed and the development of voting in the next millennium explored.