Empty Voting Research Articles

Long‐term value versus short‐term profits: When do index funds recall loaned shares for voting?

AbstractResearch Question/IssueIn this paper, we examine the effects of share lending or recall on proxy voting, with a particular focus on the role of index funds.Research Findings/InsightsOur study reveals that higher index ownership in a firm is associated with an increased likelihood of share recall, particularly in the presence of higher institutional ownership, lower past return performance, smaller firm size, and when more shares are held by younger fund families with higher turnover ratios or higher management fees. Using the Russell 1000/2000 Index reconstitution as an exogenous shock, we establish a causal relationship between index ownership and share recall through instrumental variable (IV) analysis. Furthermore, we find a positive correlation between index ownership and share recall for proxy voting proposals related to compensation, director election, and those sponsored by management. In subsequent proxy votes, shareholder‐sponsored proposals and environmental, social, and governance (ESG) proposals receive more support in firms with higher index ownership, especially when share recall is more prevalent. Our analysis does not provide evidence to support the conjecture that firms with higher index ownership are more vulnerable to empty voting issues.Theoretical/Academic ImplicationsOur study enhances the understanding of how index funds recall shares during proxy voting and the impact of index ownership on voting outcomes. The findings support the practice of index funds recalling shares to actively engage in proxy voting, effectively addressing the conflict between short‐term profit‐seeking through securities lending and long‐term governance responsibilities.Practitioner/Policy ImplicationsWe contribute to a better understanding of the role of index funds in corporate governance and shed light on the consequences of securities lending in proxy votes. These findings have important implications for investors, policymakers, and market participants in managing the potential conflicts arising from securities lending activities and promoting effective corporate governance practices.

SPACs: Insider IPOs

Proponents have hailed special purpose acquisition companies (SPACs) as the democratization of capitalism. In a SPAC, a publicly traded shell corporation acquires a private target, thereby taking it public in a manner that circumvents the rigors of a traditional initial public offering (IPO). Known as the “poor man’s private equity,” SPACs have been touted for giving the masses an otherwise rare chance to invest in private companies, and thereby reap the high returns usually reserved for the wealthy. Our original hand-collected data tell a different story. We focus on two harms that SPACs present. First, they are singularly illiquid investments—even when nominally public, SPACs are generally owned and traded by the very few. Second, SPACs evolved to eliminate meaningful shareholder voice on the acquisition of a private target, using instead a species of “empty voting,” meaning that any such vote had no economic impact. By rendering the shareholder vote a nullity, SPACs can now virtually guarantee that a target will go public. This laxity of process creates the risk that subpar firms will trade side by side with quality public companies, tarnishing the market as a whole. We are the first to examine this absence of liquidity and shareholder power, both of which are products of SPACs’ domination by insiders. This Article’s original data on SPACs’ empty voting, delinquent public filings, and thin-to-nonexistent trading provide empirical evidence that a small group of insiders use SPACs to manipulate the merger process, free of traditional IPO safeguards. We conclude with a reform proposal to reunite shareholders’ economic interest with voting power. This potential reform addresses the concerns of liquidity and lack of selectivity, while also providing a viable alternative to the traditional IPO.

The Impact of the Digital Transformation of Business on Corporate Governance. An Overview of Recent Studies

This article presents a survey of recent studies on the impact of digitalisation, and particularly blockchain technology, oncorporate governance and the principal-agent conflict in companies. The principal-agent conflict has been a centerpieceof the corporate governance research for more than 40 years. However, recent technological developments, andblockchain in particular, has created new avenues for exploration.We survey the implications of blockchain for the principal-agent conflict in three parts: 1) the organisationalenvironment, and the creation of the conflict; 2) common observable instances of conflict; 3) actions necessary tomaximise the value of blockchain implementation. We limit the studied conflict to the relationship between shareholdersand management. We also limit the blockchain use cases to those currently in testing. The applications for blockchain insecurities trading and for corporate functions automation via ‘smart’ contracts are both analysed. We also evaluate theimplications for investor activism.Our results indicate that passive investor behaviour is at the core of the environment that creates conflict. One of thekey drivers of low activity is a non-transparent voting process resulting in low participation rates. Studies indicate thatblockchain can solve this issue, thus mitigating the conflict, and is an attractive proposition for board members. Themost frequent instances of conflict are related to the composition of boards of directors and compensation schemesobserved at shareholder voting. Using blockchain for settlement would eliminate ambiguity in shareholder registersand prevent such strategies as “empty voting”. Smart contracts promise automation of governance functions like audit,which also weakens conflict. Even skeptics agree that voting is a promising application for blockchain. However, thereis evidence that blockchain poses its own problems, and that smart contracts are associated with practical risks. Somecritics argue that blockchain is less efficient than conventional corporate procedures.Blockchain is among the top digital technologies that business leaders have to monitor closely. As such, this overview ofthe most up-to-date thinking on the subject is relevant for anyone interested in the future of corporate governance andthe digitalisation of business processes. This evaluation serves to highlight the current status of this innovative resource,outlining for both professionals and newcomers what exactly blockchain’s potential uses and implications are, while alsooutlining where a lack of quantitative research creates opportunities for further contributions to the research field. Thisstudy will also be instructive for those investigating blockchain implementation and the optimal characteristics of thesolution.

Shareholder Rights and Responsibilities in the Context of Corporate Social Responsibility

In this article the authors reflect in more detail on shareholder rights and responsibilities, highlighting two recent developments that could give rise to further debate, namely: shareholder’s activist conduct in the general meetings of systemic enterprises and shareholder responsibility as to voting without having an economic interest in the company in which the votes are casted (“empty voting”). Empty voting is problematic in that it allows parties to vote who do not or to a small extent bear the ultimate risk of a company. In doing so, it blurs the traditional ratio along the lines of which the shareholders are the ultimate risk bearers in a company and best placed to assess what is in the interest of the company. More in general, shareholder activism may have negative consequences for the target company, for example when activism leads to a higher risk profile of the target company. Rather than curtailing the shareholder rights, the authors plea for greater shareholder involvement in the decision-making of a (systemic) company as a counterbalance against aggressive activists.

Tackling Empty Voting in the EU: The Shareholders’ Rights Directive and the Revised Transparency Directive

The rise of the capital market creates new, less noticeable forms of holdings of shares. These holdings could be acquired with the aim of influencing a company’s decision-making process without the intention to hold shares for the long term. One of the forms is new vote buying which can appear either as empty voting or as hidden ownership. Empty voting refers to voting by a shareholder without the corresponding financial interest in the company involved. The reverse situation is hidden ownership whereby a party is not the shareholder but is entitled to exercise influence and eventually vote as if he/she were a shareholder. If a shareholder has an ownership interest in the company in which he/she votes, his/her voting would be aligned with the interests of the company. If a shareholder votes for a decision contrary to the company’s interest, it would affect his/her own economic interests because the shares could have been sold even before the shareholder’s meeting occurred. There are many techniques that lead to empty voting. Those most commonly used are: borrowing shares, using equity swaps or buying shares on a date close to the record date and then selling them again right after the record date has elapsed. As a result, a person casting their vote at the general meeting might not be the ‘actual’ shareholder. The admissibility of these votes and their effects have been discussed in well-known judicial cases. Having noticed a rise of abusive situations created by using empty voting techniques at the EU level, the revised Transparency Directive set out to deal with these issues. It entered into force on 26 November 2013 with the deadline for implementation set at 26 November 2015. However, since the Transparency Directive is a minimum harmonisation Directive, Member States have substantial liberty in its implementation which might lead to a divergent level of investor protection. Further, since the development of capital markets leads to the appearance of new forms of derivatives and other financial instruments which could create an ‘empty voting’ effect, EU Member States would be tempted to set rules that would, as far as possible, embrace all forms of empty voting in a so-called ‘catch all’ provision. This paper aims to examine how national legislators of the EU Member States have dealt with the issue of empty voting in light of the solutions provided in the Shareholders Rights Directive of 2007 and in the revised EU Transparency Directive of 2013.

How to Curb Short-Termism in Corporate America

Although some criticisms of corporate short-termism are warranted, others are exaggerated. Institutional investors—the dominant holder of publicly traded stock—have supported long-term plans of companies with good track records. Nevertheless, certain reforms are needed to curb short-termism, such as shorter filing periods for 13D notices and limits on empty voting. Most importantly, corporate officials can reduce the focus on short-term results by ending their public projections of quarterly earnings and extending the time horizon of executive compensation.

Securities lending, empty voting and corporate governance

This paper examines the corporate governance implications of securities loans, in particular the impact of securities loans on shareholders' voting rights and the control of listed Australian companies. The paper considers whether the current regulatory framework for securities loans in Australia adequately addresses the concerns associated with securities loans and whether reform is required in order to protect the interests of shareholders in listed Australian companies and to ensure that the governance of these companies is not undermined by securities loans.

Shareholder Decisionmaking in the Presence of Empty Voting and Hidden Ownership

We consider securities markets in which economic interests in firms and shareholder voting rights are traded independently; such markets allow for voters who hold voting rights in a firm that exceed their economic interests. We demonstrate that, in such settings, competitive equilibria generally do not exist and may be inefficient even when they do exist. As the competitive equilibrium solution concept does not provide useful predictions in the presence of empty voting, we focus on cooperative game-theoretic outcomes. We show that core outcomes always exist, are always efficient, and can be reached from any initial allocation through voluntary trading; moreover, at a core outcome, agents have efficient incentives with regards to information revelation.

Securities Lending, Empty Voting and Corporate Governance

This paper examines the corporate governance implications of securities loans, in particular the impact of securities loans on shareholders’ voting rights and the control of listed Australian companies. The paper considers whether the current regulatory framework for securities loans in Australia adequately addresses the concerns associated with securities loans and whether reform is required in order to protect the interests of shareholders in listed Australian companies and to ensure that the governance of these companies is not undermined by securities loans.

The Dividing Line Between Shareholder Democracy and Board Autonomy: Inherent Conflicts of Interest as Normative Criterion

In the past decades, shareholder democracy has been the center of attention in corporate governance research. Academic commentators have lined up on both sides of the debate and have fiercely advocated either increasing or limiting shareholder power. Yet, the scope of many of these arguments has so far been unclear, so that they could in fact always be used again for even more, or even less, shareholder democracy, until the board or the shareholder meeting is entirely depleted of authority. This article explores the dividing line between shareholder say and board autonomy in public companies and puts forward a normative criterion that can be consistently applied to the various subject matters of corporate decision-making. A criterion based on “inherent” conflicts of interest of directors, I argue, is economically efficient and meets the underlying rationale of existing corporate law systems in Europe and the United States. Specifically, shareholder power should comprise, but also be limited to, matters in which directors face an inherent conflict of interest. The problems of shareholder passivity, short-termism and empty voting and the concern about stakeholder interests do not call for a further reduction of shareholder power beyond this limitation.

Good Versus Bad Capitalism: A Call for a Governance Revolution

This paper examines a number of inter-related questions, which portend a different kind of corporate governance than the accumulation and refinement of fiduciary responsibilities heaped upon boards over the last twenty years.• Is short-termism in corporate management a truly serious problem? If so, why has it come about?A pernicious combination of factors may well bring about a short-term perspective in corporate management: 1. Financial players threatening actions against management if it does not deliver increased share price; 2. Boards of directors intimidated by activist hedge funds and proxy advisers; 3. Warped incentive systems prodding and “bribing” management to take actions to boost short-term stock price.• Are activist investors and hedge funds really short-term players whose actions have a negative impact on corporations in the longer term?According to Cremers, Pareek, and Sautner [“Stock Duration and Misvaluation”, SSRN No.2190437, December 2012], the average share holding period of institutional investors has barely changed since 1985; it hovers between 1.2 and 1.5 years. Remarkably, some have concluded from these results that institutional investors are not short-term holders! Since when holding shares for 1.5 years turns one into a long-term holder? These results actually show that the trend to shorter holding period has been in place since the 1980’s. By 1985, the average holding period had already dropped to some 1.5 years; the further drop (to under one year) may be the product of speed traders and others; but there is no doubt that shares were held for a much longer period of time before the first wave (since the 1920s) of short-term “investors” appeared in the 1980s.• Do boards really need to be better insulated from the actions of “activist” investors as well as from unwanted takeovers?Canada is very different from the U.S. in matters of corporate ownership and board empowerment. The three “betes noires” of U.S. activist institutional funds and proxy advisers are non-issues in Canada: 1. Splitting the roles of Chair and CEO (Only 41% of SP fully 85% of Canadian companies have divided the roles of Chair and CEO, an important principle in situations of conflicts with shareholders); 2. Eliminating staggered boards and electing all members every year. A third of the SP staggered boards are practically non-existent in Canada; 3. Curtailing the role and duration of poison pills as a defense mechanism against takeovers; these attempts have been largely unsuccessful in the U.S., particularly in States which grant very specific and extensive powers to the board of directors in situations of attempted takeover; none of these defenses are available to Canadian companies as a result of decrees by the securities commissions.The result is that Canadian boards are less empowered than the board of any run-of-the mill American corporation. American activists would hail Canada as the Promised Land for shareholder rights.• Who owns the publicly listed corporations? Society at large may rightfully claim that it has a stake in companies operating in its midst, a stake just as important as that of shareholders (Brennan, 2005). No doubt that a fickle, volatile, ever-changing shareholding base provides arguments for a different concept of “who owns the company”.The basic assumption underlying “corporate democracy”, the one-share-one vote mantra, has become questionable. In a world of “empty voting”, total return swaps, record date capture, speed-trading, transient share flippers, arbitrageurs, speculators and game players, the question arises: are any and all shareholders the legitimate owners of publicly traded corporations?In all decent societies, “Tourists don’t vote!” and “Gamblers don’t own the casino!”Every democracy imposes a minimum period of time before a newcomer acquires the full rights of citizenship, particularly the right to vote. Corporate democracy likewise should call for a modicum of commitment from a shareholder before he or she can influence the destiny of the corporation, for example a one-year holding period.The long-run welfare of societies and the economic vigor of industrial companies are more important than the spurious lure of “shareholder value” and the freedom to practice financial sleights-of-hand.

SECURITIES LENDING AROUND PROXIES: IS THE INCREASE IN LENDING DUE TO PROXY ABUSE OR A RESULT OF DIVIDENDS?

AbstractThe notion of empty voting, or borrowing shares of stock to vote without an equivalent economic interest, has captured the attention of both the financial press and financial researchers. We investigate the securities lending market around proxy record dates for evidence of proxy abuse. We verify a weak statistical effect for share capture at the proxy. However, after controlling for dividend record dates (when more stock lending activity occurs), incremental equity lending activity at the proxy is indistinguishable from zero.

Equity Decoupling and Empty Voting: The Telus Zero-Premium Share Swap

In a series of articles, Henry Hu and I developed and defined the concept of empty voting. TELUS Corp. has separate classes of voting and nonvoting shares. It proposes to combine them, with a zero premium for voting shares. Mason Capital has taken a (long voting shares, short nonvoting shares) position, is thus long the value of TELUS voting rights, and is campaigning for a share-swap plan which assigns a reasonable value to those rights. TELUS has claimed that Mason is engaging in “empty voting”, and has persuaded a British Columbia court of this (TELUS is incorporated in BC). I discuss here some aspects of this dispute. For a vote which involves the value of voting rights: (i) Mason has an economic interest in this outcome, and thus is not an empty voter; (ii) many other TELUS shareholders are empty voters, because they have negative or near- zero economic interest in TELUS votes; (iii) TELUS management is conflicted, because they hold mostly nonvoting shares; (iv) voting rights are valuable, and the market premium accorded to TELUS voting shares is a reasonable estimate of their value; in contrast, zero is not a reasonable value; (v) by valuing voting rights at zero, the TELUS board is likely violating its fiduciary duty to treat both share classes fairly; and (vi) if the TELUS voting shareholders reject the zero-premium share-swap, it would likely be a further breach of fiduciary duty for TELUS not to propose a swap on terms which assign a reasonable value to votes.

Hedge Funds and Risk-Decoupling – The Empty Voting Problem in the European Union

Negative risk-decoupling, otherwise known as empty voting, is a popular strategy amongst hedge funds and other activist investors. In short, it is the attempt to decouple the economic risk from the share’s ownership position, retaining in particular the voting right without risk. This paper uses three perspectives to analyse the problems created by negative risk-decoupling: an agency costs approach, an analysis of information costs, and a perspective from corporate finance. It shows how risk-decoupling is a type of market behaviour that creates significant costs for market participants, in particular existing shareholders and potential investors. The paper then develops regulatory responses, envisaged particularly for EU level lawmaking, but also raises underlying issues on a more general level. Whilst several proposed regulatory tools are rejected, the paper prefers a solution that uses continuous transparency as the cornerstone. In addition, it suggests that in certain individual cases, national regulators should be empowered to suspend activists’ voting rights. The paper concludes by offering a concrete legislative proposal, amending the European Transparency Directive.

On Derivatives Markets and Social Welfare: A Theory of Empty Voting and Hidden Ownership

In the past twenty-five years, derivatives markets have grown exponentially. Large, modern derivatives markets increasingly enable investors to hold economic interests in corporations without owning voting rights, and vice versa. This leads to both empty voters — investors whose voting rights in a corporation exceed their economic interests — and hidden owners — investors whose economic interests exceed their voting rights. We present formal models that show how, when financial markets are opaque, empty voting and hidden ownership can render financial markets unpredictable, unstable, and inefficient. By contrast, we show that when financial markets are transparent, empty voting and hidden ownership have dramatically different effects: they follow predictable patterns, encourage stable outcomes, and promote efficiency. Our analysis lends insight into the operation of securities markets in general and derivatives markets in particular. It also provides a new justification for a robust mandatory disclosure regime and facilitates analysis of proposed substantive securities regulations.

Empty Voting and Social Welfare

Recent work (Hu and Black (2005, 2007, 2008); Dekel and Wolinsky (2012)) has detailed the twin issues of empty voting and hidden/morphable ownership. The former arises when an actor has control rights over a corporation but no economic interest in that corporation, such as when an investor borrows shares. The latter arises when a shareholder has an economic or voting interest in a corporation but avoids regulatory disclosure requirements through derivatives transactions. Both off er significant challenges to financial regulatory systems. The lack of a framework for analyzing the problem has hindered attempts to respond to these challenges. Most economic models of financial markets do not incorporate control rights. And, once control rights are introduced, the standard competitive equilibrium concept is unsatisfactory: We show that once control rights are introduced, competitive equilibria may fail to exist and may be inefficient if they do exist. Allowing the transfer of control rights, such as through transactions in corporate stock, only exacerbates the problem. We show that if control rights may be traded independently of economic ownership rights - as modern derivatives markets increasingly allow - competitive equilibria essentially never exist. We propose an alternative equilibrium concept, the Core Outcome. A Core Outcome consists of an allocation of economic ownership, an allocation of control rights, and a set of voting behaviors such that no group of actors can improve the utility of its members by deviating. We show that Core Outcomes have several desirable properties as an equilibrium concept: They always exist, are always efficient, and can be reached through voluntary trading. Our model has strong implications for the regulation of securities markets in general and of derivatives markets in particular. We conclude that there are strong efficiency justifications in favor of an effective mandatory disclosure regime. We also find that, in certain circumstances, empty voting can act as a backstop to public regulation, allowing private actors to block socially inefficient actions that public regulation would permit.

Empty Voting: A European Perspective

After analyzing the causes and dangers of “empty voting”, i.e. the decoupling of voting rights and economic rights (risk) in listed companies, this article discusses measures to address the current lack of transparency as well as other more far-reaching measures to prevent abuses. This article focuses on a number of EU directives and regulations in the fields of company and financial law which have been adopted or amended recently or which are currently being prepared or reviewed. The main finding is that, so far, the European Commission has focused its attention largely on the problem of hidden ownership (through cash-settled derivatives) – which is the mirror image of empty voting – but, wrongly, not on empty voting itself. A number of avenues for regulation, and their respective costs and benefits, are explored. In addition, relevant national developments for Belgium, France, Germany, the Netherlands, the UK and the US are considered.

Securities Lending Around Proxies: Is the Increase in Lending Due to Proxy Abuse, or a Result of Dividends?

The notion of empty voting, or borrowing shares of stock in order to vote without an equivalent economic interest, has captured the attention of both the financial press and financial researchers. We investigate the securities lending market around proxy record dates for evidence of proxy abuse. We find that the significance of share capture at the proxy has diminished both from an economic and statistical standpoint. In fact, after controlling for dividend record dates (when more stock lending activity occurs), incremental equity lending activity at the proxy is indistinguishable from zero. In addition, contrary to prior research, we find evidence that lending agents have begun to increase loan fees on proxy record dates, potentially dampening equity lending activity.

The Mechanisms of Voting Efficiency

In the wake of the financial crisis, shareholders are increasingly relied upon to monitor directors. But while much has been written about directors’ flawed judgments, remarkably little is known about shareholders’ ability to make accurate judgments. What determines whether shareholders make the right decision when asked to vote on, say, a merger? The Article takes a novel approach to this question by drawing an analogy between corporate voting and another system for aggregating information on estimated values: stock trading. Using insights on stock market efficiency, the Article makes three contributions to our understanding of voting efficiency. First, the Article identifies and explores four key mechanisms of voting efficiency: (1) informed voting, which implies that shareholders have some information upon which to base their voting decisions; (2) rational voting, which implies that such information is processed in a rational, unbiased way; (3) independent voting, which implies that each shareholder arrives at a judgment by making use of his or her personal cognitive skills; and (4) sincere voting, which implies that shareholders vote with a view to furthering the common interest of maximizing shareholder value rather than their own private interests. Second, the Article shows that share trading, proxy solicitation, and vote buying can usefully be viewed as arbitrage techniques that reallocate voting power in the hands of shareholders with superior information and processing skills, and with appropriate incentives. By reducing information asymmetry, arbitrage techniques potentially play an important role in improving voting efficiency. In practice, however, they are subject to cost constraints as well as legal constraints. The limits of voting arbitrage are significant, and affect voting efficiency much in the same way as limits of securities arbitrage affect market efficiency. Third and finally, the Article analyzes two issues that are currently being studied by the U.S. Securities and Exchange Commission and policymakers around the world: voting without corresponding financial interest (“empty voting”) and the major influence of proxy advisers. By showing that these issues each involve a trade off between the various mechanisms of voting efficiency, their costs and benefits are brought into sharper focus. Several policy options are then presented to mitigate the costs while fostering the benefits.

Empty Voting and the Bylaw Response of Full Disclosure of Economic Ownership

Empty Voting and the Bylaw Response of Full Disclosure of Economic Ownership