Mutual Fund Voting Research Articles

Political Affinity and Mutual Fund Voting

Political Affinity and Mutual Fund Voting

The CFA Program and Mutual Fund Voting on Environmental and Social Proposals

The CFA Program and Mutual Fund Voting on Environmental and Social Proposals

ESG Mutual Fund Voting on Executive Compensation Shareholder Proposals

ABSTRACT We investigate how mutual funds with environmental, social, and governance (ESG) objectives vote on shareholder proposals related to executive compensation. Using a sample of 94,695 votes by 2,354 mutual funds from 2012 to 2021, we find ESG funds are 9.4 percent more likely than non-ESG funds to vote in favor of such proposals, and the likelihood increases to 19.2 percent for proposals aligning executive compensation with environmental and social (ES) objectives. ESG funds are also 14.9 percent more likely to support proposals to improve transparency, but only 7.0 percent more likely to support proposals about redesigning compensation. Our results are consistent with ESG funds perceiving greater net benefits from supporting shareholder compensation proposals, particularly those related to ES objectives and transparency. Additionally, funds committed to ESG objectives in regulatory filings are more likely to support such proposals than fund families that voluntarily signed the United Nations’ Principles of Responsible Investment. JEL Classifications: G23; G30; M12; M14.

Shareholder Monitoring through Voting: New Evidence from Proxy Contests

Abstract We present the first comprehensive study of mutual fund voting in proxy contests. Among contests where voting takes place, passive funds are 10 percentage points less likely than active funds to vote for dissidents. The gap shrinks significantly when accounting for votes withheld from management nominees, settled contests, and votes by non-“Big-Three” fund families. Passive and active funds are equally informed about firm fundamentals, although passive funds view contest-related SEC filings more often than active funds during contests, in absolute levels and incrementally relative to noncontest periods. We conclude that passive funds are engaged shareholders in high-stakes voting events. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Analyst Recommendations and Mutual Fund Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals

Analyst Recommendations and Mutual Fund Voting: Evidence from Shareholder-Sponsored Corporate Governance Proposals

Climate Change and Mutual Fund Voting on Environmental Proposals

Climate Change and Mutual Fund Voting on Environmental Proposals

The Party Structure of Mutual Funds

Abstract We investigate the structure of mutual funds’ corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze mutual funds’ votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The dimensions capture competing visions of corporate governance and are related to the leading proxy advisors’ recommendations. Cluster analysis shows that mutual funds are organized into three “parties”—the Traditional Governance Party, Shareholder Reform Party, and Shareholder Protest Party—that follow distinctive philosophies of corporate governance and shareholders’ role. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Political Affinity and Mutual Fund Voting Schizophrenia

We study whether mutual fund managers' voting behavior is affected by their political affinity with the portfolio firms' CEOs. We document that common political affinity induces the fund manager to come to the CEO's help when such help is required – i.e., especially during contentious proxy proposals. Such support is not driven by a quid pro quo that provides the fund manager with better performance – either in the form of higher investment value or better information-based trading strategy – but due to the desire to aid a politically affine CEO. Given that such help is difficult to justify, the politically motivated asset managers tend to engage in signal jamming by on average not providing detectable assistance. Such behavior is more potent when the prevailing political power in the White House is of a different color, as well as in the presence of greater reputational concerns – i.e., supporting CEOs of firms with worse ESG rankings. Political affinity, by distorting the voting incentives of mutual funds, reduces firm value.

The Meeting before the Meeting: Governance Roadshows and Mutual Fund Voting

The Meeting before the Meeting: Governance Roadshows and Mutual Fund Voting

Walk the Talk: ESG Mutual Fund Voting on Shareholder Proposals

We document evidence that mutual funds designated as “Sustainable Investment Overall” by Morningstar (which we classify as ESG mutual funds) are no more likely than other mutual funds to support shareholder proposals. We find, however, that ESG mutual funds are more likely than non-ESG mutual funds to support environmental and social (ES) shareholder proposals. We also find that ESG mutual fund support for ES proposals is more pronounced in ESG index funds than in ESG active funds and in the ESG funds of small rather than large fund families. These results imply that mutual fund investment constraints and access to investor demand may shape how ESG mutual funds influence portfolio firms’ environmental and social action choices.

How do passive funds act as active owners? Evidence from mutual fund voting records

The rise of passive institutional investors in the U.S. stock market raises questions about the governance implications to their portfolio firms. While the existing literature documents positive governance changes when passive institutional ownership displaces retail ownership, it remains unclear how passive institutional ownership approaches corporate governance differently than their active peers. This paper compares the proxy voting behaviors between same-family passive and active mutual funds with identical investment styles. We find that passive funds are not more likely to vote in favor of governance reforms than active funds. We also provide suggestive evidence that besides voting, the influence of passive funds on corporate governance also operates through a “behind the scenes” channel.

The Easy Life of Superstar CEOS: Evidence from Shareholder Proposals and Mutual Fund Voting

This paper examines the influence of CEO reputation on corporate proxy voting. Relying on prestigious business awards (through which the CEO is elevated to superstar status) as salient shocks to CEO reputation, we find that shareholders in aggregate, and mutual funds in particular, are more likely to vote with management (i.e., against shareholder proposals) when the CEO is a superstar. We use a battery of matching procedures to mitigate the concern that these results are driven by selection. We further show that shareholder proposals, especially contested ones and those with positive ISS recommendations, are significantly more likely to fail when the CEO is a superstar. Our results suggest that investors are sensitive to the external appraisal conveyed by the superstar status and prefer not to oppose management.

Why Do Institutional Investors Oppose Shareholder Activism? Evidence from Voting in Proxy Contests

This paper documents significant heterogeneity in institutional investors' support for shareholder activism in proxy contests and examines the following question: why do institutional shareholders frequently vote against activists when the activists’ actions increase the value of target firms? I propose that the voting decisions of institutional investors depend on the effect of shareholder activism on the return of the institutions’ combined shareholdings in both targets and their rival firms. Because institutions underweight target firms and activism could adversely affect the values of rival firms, institutional investors often lack incentives to support activists when gains on targets are diluted or offset by losses on rival firms. Using hand-collected data of mutual and pension fund voting in proxy contests, I find evidence that institutions that benefit less from activism events are less likely to support the activists, even when the activist’s effect on the target firm’s stock price is positive. Furthermore, when target firms do not have publicly-traded competitors, institutional investors are more likely to support activists. The evidence is consistent with the hypothesis that institutional investors’ portfolio returns explain whether or not they support activists.

Mutual Fund Voting on Environmental and Social Proposals

While shareholder proposals related to ES issues nearly always fail, we show that investors’ support for these proposals contains information regarding future risks that firms face. Support levels are informative regarding the probability of negative tail returns that stem from future ES incidents. Examining the economic channels underlying this finding, we find that agency frictions contribute to proposal failure, leading to predictable tail events. Contrasting ES versus non-ES failed proposals within the same firm, we find that predictability is unique to ES initiatives; this is consistent with higher uncertainty regarding the value of ES initiatives exacerbating agency frictions.

THE EFFECTS OF MUTUAL FUNDS ON M&A COMPENSATION

AbstractMotivated 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.

The Party Structure of Mutual Funds

We investigate the structure of mutual funds’ corporate governance preferences as revealed by how they vote their shares in portfolio companies. We apply unsupervised learning tools from the machine learning literature to analyze a comprehensive dataset of mutual funds’ votes and find that a parsimonious two-dimensional model can explain the bulk of mutual fund voting. The two dimensions capture competing visions of corporate governance and are closely related to the recommendations of the leading proxy advisors. Model-based cluster analysis shows that mutual funds are organized into three ‘parties’—the Traditional Governance Party, the Shareholder Reform Party, and the Shareholder Protest Party—that follow distinctive philosophies of corporate governance and shareholders’ role. Our preference measures for mutual funds generate a range of insights about the broader system of corporate governance.

Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

This paper provides the first comprehensive study of mutual fund voting in proxy contests. Funds tend to vote against incumbent management at firms with weak operating and financial performance, and in favor of dissidents with credible track records. Passive funds are active monitors although they are more supportive of incumbent management than active funds. We document a positive selection effect: dissidents are more likely to initiate contests and proceed to voting when shareholders are expected to be more supportive based on observable and unobservable event characteristics as well as inherent pro-activist investor stance. Overall, institutional investors play a pivotal role in shaping the initiation and outcomes of proxy contests.

Mutual Fund Voting and Pension Ties : Evidence from Proxy Voting

Because mutual funds are the largest equity holders and because the retirement assets that are managed by mutual funds have been growing, mutual fund managers may have more incentives to support management in order to attract and retain pension business. I explore whether pension business ties have an impact on voting behaviors of mutual funds by examining the link pension business ties between mutual funds and the firms to actual mutual fund voting outcomes. At the fund family level, I find a positive relation between pension ties and mutual funds’ voting support for management. This relation becomes stronger when there is a voting divergence among funds within the same families. At the individual fund level, I find that individual funds are more likely to vote with management if they are included as one of the investment options of the pension plan of their portfolio firms. This suggests that the SEC should at least consider the recent petition from the AFL-CIO proposing that the SEC require mutual funds to disclose business ties with the firms in which they invest.

The Impact of the SEC’s 2003 Mutual Fund Voting Disclosure Rule

The Impact of the SEC’s 2003 Mutual Fund Voting Disclosure Rule

Voting Through Agents: How Mutual Funds Vote on Director Elections

Shareholder voting has become an increasingly important focus of corporate governance, and mutual funds control a substantial percentage of shareholder voting power. The manner in which mutual funds exercise that power, however, is poorly understood. In particular, because neither mutual funds nor their advisors are beneficial owners of their portfolio holdings, there is concern that mutual fund voting may be uninformed or tainted by conflicts of interest. These concerns, if true, hamper the potential effectiveness of regulatory reforms such as proxy access and say on pay. This article analyzes mutual fund voting decisions in uncontested director elections. We find that mutual funds use a variety of strategies to economize on the costs of making voting decisions, including having funds in the same fund family vote in lockstep, voting virtually always in accordance with management recommendations, and voting virtually always in accordance with recommendations of ISS. Smaller fund families employ these strategies to a greater extent than larger families. We further adduce evidence on how ISS recommendations affect fund voting. Funds that account for less than 10% of the assets in our sample exhibit a strong tendency to follow ISS recommendations, a much smaller percentage than funds that virtually always follow management recommendations (approximately 25% of assets). A much larger percentage (36% of the assets) votes in accordance with ISS withhold recommendations in approximately 50% of the cases. We conclude that the influence of ISS is due more to funds’ measured evaluation of the ISS recommendations rather than to funds blindly following these recommendations. We find no evidence that funds in families that are affiliated with commercial banks, investment banks, or insurance companies have a stronger proclivity than independent funds to vote in accordance with management recommendations or to shield their votes from criticism in order to maintain good business relations or generate new business for their affiliates. The largest fund families - Vanguard, Fidelity, and American Funds, each of which individually accounts for roughly 11% of total mutual fund assets - vote substantially differently both from each other and from ISS recommendations. This is strong evidence of heterogeneity in the voting behavior of mutual funds in director elections. Finally, we examine the factors associated with high (in excess of 30%) withhold votes in director elections. An ISS withhold recommendation, in conjunction with at least one of four factors - a withhold vote by Fidelity, the director missing 25% of board meetings, the company having ignored a shareholder resolution that received majority support, and a Vanguard withhold vote on outside directors with business ties to the company - is associated with a 49% probability of receiving a high withhold vote. Directors in these groups account for 48% of all directors who received high withhold votes. By contrast, an ISS withhold recommendation that is not combined with one of these factors is associated with only a 21% probability of a high withhold vote, and the general probability of a high withhold vote is a mere 2%. These findings suggest steps that companies and directors should take to try to avoid high withhold votes. They are also evidence that not all ISS recommendations have the same impact on voting outcomes.