Shareholder Voting Research Articles

Board Diversity and Shareholder Voting

The lack of board diversity across gender and race has been one of the most controversial topics in corporate board governance in recent years. Given the central role that shareholders have in approving director appointments, we investigate whether shareholders value diversity on corporate boards by analyzing their voting patterns in director elections. Despite many shareholders’ public commitments of supporting board diversity, we show that shareholders have not historically been proactive in using their votes to motivate companies to increase diversity among corporate boards. This finding persists over time and across key shareholders who have been some of the most outspoken proponents of board diversity.

Comment Letter to the DOL: Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (RIN 1210-AB91)

This comment letter provides support for the Department of Labor's proposed rule, Fiduciary Duties Regarding Proxy Voting and Shareholder Rights (RIN 1210-AB91). Part I of this comment letter provides a theoretical framework for shareholder voting and the creation of voting recommendations. This Part focuses on the collective action problem found in shareholder voting and its ramifications for both voting and the creation of voting recommendations by proxy advisors. I discuss this framework in more detail in my law review article The Risks and Rewards of Shareholder Voting (forthcoming, SMU Law Review). Part II recommends, as a means to help mitigate the collective action problem found in shareholder voting, that proxy advisors, such as Institutional Shareholder Services (ISS) and Glass Lewis, be designated investment advice fiduciaries under Section 3(21)(A)(ii) of ERISA. This is something I discuss in detail in my law review article Now Is the Time to Designate Proxy Advisors as Fiduciaries under ERISA (Stanford Journal of Law, Business and Finance). Part III supports the proposed rule’s approach of increasing the role of board voting recommendations in the voting policies of ERISA plans. My support is based mainly on another recent law review article I wrote, Enhancing the Value of Shareholder Voting Recommendations (Tennessee Law Review). Part IV provides support for the proposed rule’s approach to shareholder voting proposals. Part V discusses an issue that is not currently in the proposed rule but that should be considered for inclusion, i.e., how an ERISA plan manager is to incorporate into its decision-making the shareholder activism of investment advisers of mutual funds and exchange-traded funds (ETFs) with large amounts of delegated voting authority. This activism is reflected in an investment advisor’s rhetoric disclosing the objectives of its activism, shareholder voting, and engagement with portfolio companies. The incorporation of this new consideration would occur when deciding to invest in such funds or considering them as options for self-directed accounts. This Part argues that a plan manager’s duty of prudence requires it to investigate how this shareholder activism will be used prior to making these decisions. The fiduciary objective in this investigation is to ensure that the investment adviser is utilizing shareholder activism consistent with a plan manager’s duty of loyalty, i.e., “solely in the interest of the participants and beneficiaries” and for the exclusive purpose of providing financial benefits to them. If that is not happening, these funds should be excluded from an ERISA plan. This Part has at its foundation a recent white paper that I wrote, The Conflict between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties.

Index-Fund Governance: An Empirical Study of the Lending-Voting Tradeoff

Institutional investors' role in shareholder voting is among the most hotly debated subjects in corporate governance. Some argue that institutions lack adequate incentives to effectively monitor managers; others contend that the largest institutions have developed analytical resources that produce informed votes. But little attention has been paid to the tradeoff these institutions face between voting their shares and earning profits—both for themselves and for the ultimate beneficiary of institutional funds—by lending those shares. Using a unique dataset and a recent change in SEC rules as an empirical setting, we document a substantial increase in the degree to which large institutions lend shares rather than cast votes in corporate elections. We show that, after the SEC clarified funds’ power to lend shares rather than vote them at shareholder meetings, institutions supplied 58\% more shares for lending immediately prior to those meetings. The change is concentrated in stocks with high index fund ownership; a difference-in-differences approach shows that supply increases from 15.6\% to 22.3\% in those stocks. Even when it comes to proxy fights, we show, stocks with high index ownership see a marked increase in shares available for lending immediately prior to the meeting. Overall, we show that loosening the legal constraints on institutional share lending has had significant implications for how index funds balance the lending-voting tradeoff.

Hedge fund activism, CEO turnover and compensation

This paper examines the governance role of hedge fund activists by analyzing the impact of these activists on CEO turnover, CEO pay, and CEO pay-performance link in targeted companies. Using the difference-in-difference approach, we first find significantly higher CEO turnover following hedge fund activism. After we split target companies into the CEO-turnover and non-CEO-turnover sub-samples, we find that only new CEOs in targeted companies get more compensation following hedge fund activism while incumbent CEO pay does not significantly change. The relationship between CEO bonuses and return on assets following hedge fund activism also differs across the subsamples split by CEO turnover. Pay-performance relationship is enhanced by hedge fund activism for new CEOs, but not for incumbent CEOs. In additional analyses, we document that CEO turnover is positively associated with Tobin’s Q and shareholder votes on Say on Pay in target companies after hedge fund activism.

Back the the Future? Reclaiming Shareholder Democracy Through Virtual Annual Meetings

From demanding greater executive accountability to lobbying for social and environmental policies, shareholders today influence how managers run American companies. In corporate doctrine, the principal venue reserved for shareholders to exert their influence and engage with management and each other is the annual shareholders meeting. At one time the annual meeting was a vibrant forum for shareholder democracy and occasionally even a platform for debating pressing social issues. For decades, however, the role of the annual meeting in corporate governance has been in decline. Today’s annual meetings are largely pro forma: only a handful of shareholders attend the meeting and voting results are largely determined in advance. This Article explores how the integration of technology can resurrect the annual meeting as the deliberative touchstone of shareholder democracy it once was as well as open new avenues for engagement. The widespread use of virtual annual meetings in response to COVID-19 provides an opportunity to critically rethink and re-envision the practice and purpose of the annual meeting. If structured properly, virtual meetings can re-engage historically absent shareholder demographics while maintaining the efficiencies of proxy voting. Additionally, virtual meetings can serve as vehicle through which companies can begin to address ESG issues and heightened public expectations that companies will work toward meaningful engagement with their varied stakeholders. This Article makes three key contributions to the existing literature. First, it provides a detailed account of state reactions to COVID-19 and of the impact that the move to virtual meetings had on shareholder voting. Second, it provides a detailed account of how annual meetings have drifted away from their democratic function. Finally, this Article argues that technology can revive shareholder democracy and bolster ESG efforts through facilitating retail shareholder and corporate stakeholder engagement, and underscores how virtual meetings can meet these important goals.

An investigation of corporate directors' responses to CEO pay ratio disclosures and say‐on‐pay votes

AbstractThe purpose of this study is to shed light on the effects of the CEO pay ratio and say‐on‐pay votes on directors' concerns about CEO pay equity. Investigation of the pay ratio disclosure rule offers opportunities to gain insights into whether equity perceptions associated with mandated pay ratio disclosure have significant effects on remuneration decisions in organizations. We conduct an online experiment with practicing corporate directors to examine the effects of CEO pay ratio disclosures and say‐on‐pay (SOP) votes on director decisions. Results indicate that CEO pay ratio disclosures significantly influence directors' decisions regarding executive compensation, leading directors to be less willing to increase CEO pay when the pay ratio is above the industry average pay ratio. Results also demonstrate that say‐on‐pay votes only influence directors' compensation decisions when the CEO pay ratio is above the industry average. Directors in firms with pay ratios that are above the industry average are less willing to increase CEO pay when they anticipate shareholder votes against a CEO pay increase than when they anticipate positive SOP voting outcomes. Directors in firms with CEO pay ratios that are below the industry average, however, are willing to increase CEO pay regardless of SOP voting outcomes.

The Separation of Voting and Control: The Role of Contract in Corporate Governance

The default rules of corporate law make shareholders’ control rights a function of their voting power. Whether a director is elected or a merger is approved depends on how shareholders vote. Yet, in private corporations, shareholders routinely alter their rights by contract. This phenomenon of shareholder agreements—contracts among the owners of a firm—has received far less attention than it deserves, mainly because detailed data about the actual contents of shareholder agreements has been lacking. Private companies disclose little, and shareholder agreements are thought to play a trivial or nonexistent role in public companies. I show that this is false—15% of corporations that go public in recent years do so subject to a shareholder agreement. With this dataset in hand, I show the dramatic extent to which these shareholders redefine their control rights by contract. Shareholders restrict the sale of shares and waive aspects of the duty of loyalty. Above all, however, shareholders use their agreements to bargain with each other over votes for directors, and to bargain with the corporation itself for other control rights, such as vetoes over major corporate actions. In essence, while statutory corporate law makes control rights a function of voting power, shareholder agreements make control rights a function of contract instead, separating voting and control. Studying this phenomenon raises new questions of doctrine, theory, and empirics that go to foundational issues in corporate law. Is it desirable to let shareholders redesign corporate control rights wholesale by contract? What should be the law that governs their contracts when they do so? I provide a novel account of shareholder agreements’ use in public firms, before offering preliminary views on their welfare effects, implications for corporate theory, and on their governing law, which remains strikingly underdeveloped.

Does auditor ratification matter to bondholders? Evidence from new bond issues

We investigate the relation between shareholder votes on auditor ratification and the client’s credit risk, using both parametric and nonparametric regression techniques. Using data from 2006 to 2016, we show that the proportion of shareholder disapproval for auditors heterogeneously impacts credit risk, as shown by bond spread and bond rating. The results suggest that higher shareholder disapproval of the auditor has an adverse effect on yield spread and bond ratings after controlling for firm characteristics associated with audit quality, such as auditor size and tenure.

Are ISS Recommendations Informative? Evidence from Assessments of Compensation Practices

Using detailed information from the largest proxy advisor in the U.S., Institutional Shareholder Services (ISS), we examine whether proxy advisors’ assessments of firms’ compensation practices are able to identify poor compensation practices as measured by subsequent performance. While prior research provides consistent evidence of an association between shareholder voting outcomes and proxy advisors’ Say-on-Pay recommendations, the evidence is mixed over whether their recommendations are informative about the quality of firms’ compensation practices. We find that ISS “Against” recommendations and negative assessments are associated with worse future accounting performance, consistent with ISS being able to detect low quality compensation packages. However, workload compression has an effect, as we find that the relation between assessments and future performance only occurs during the off season (i.e. for firms with non-December fiscal year ends).

The Effects of Table Versus Formula Presentation Formats on Investors’ Judgment about Executive Compensation

We investigate how the data presentation format of executive compensation disclosures affects investors’ compensation- and investment-related judgment and decisions. We examine the effects of these formats and their underlying mechanisms via laboratory experiments. We compare bonus schemes presented in the table and formula formats and find an interaction effect between data presentation format and compensation favorability. When a manager receives unfavorable compensation due to missed performance targets, the table format is easier to understand than the formula format, whereas the latter appears more scientific than the former. These two effects work in opposite directions and therefore, result in an insignificant difference in approval ratings when the table, versus the formula, format is used. However, when the manager receives favorable compensation for beating performance targets, investors do not pay much attention to the disclosure’s understandability but still favor the formula format, as it has a scientific appearance. Therefore, we find that investors’ approval ratings are higher when using the formula format than the table format. We contribute to several research areas such as information understandability, the halo effect, compensation disclosures, and shareholder voting. Our findings also have practical implications for both managers and investors.

The Case for Non-Binary, Contingent, Shareholder Action

Shareholder action is exercised mainly through a binary system: for example, the shareholders vote either to approve a proposal or to reject it. They either follow the recommendation of management and vote with management or vote against it. In case of contention between incumbents and insurgents, shareholders need to determine whom to trust. Disclosures and proxy advisory firms’ recommendations add to the information the shareholders might consider before casting their binary vote. However, retail investors as well as small investors are generally underequipped and restricted economically from reaching an informed and educated shareholder decision, and thus vote infrequently. Abuse of insider information further disadvantages retail investors. Yet, corporate decisions are based on the choice of the majority of the shareholder vote and retail investors are assumed to rely on disclosed information when making investment decisions. The new generation of Special Purpose Acquisition Companies (SPACs), currently representing about half of the U.S. going-public transactions, is one example that illustrates the weakness of the binary system and the consequent vulnerability of small and unsophisticated shareholders. Remarkably, investors in SPACs can vote yes on management proposed acquisition transactions and, nonetheless, simultaneously choose to redeem their shares. Unsophisticated retail investors may not realize that they, as well, will be better off if they redeem their shares even though the transaction received the approval of the majority of the shareholder vote. This Article puts forward a proposal to amend the law and allow shareholders to act in a way that is contingent upon a simultaneous non-contingent action by other shareholders. For example, a shareholder of a SPAC should be able to choose to redeem her shares iff at least a specified percentage of redemption rights are exercised unconditionally. Similarly, a shareholder who has preemptive rights should have the right to exercise her rights with a limit that caps her participation and maintains her percentage holdings in the company. Generally, shareholders should have the option to act contingently when they are exercising a shareholder right, such as preemptive rights, appraisal rights, and when they are given a choice to participate in transactions such as tender offers and stock-buybacks. Unlike mandatory disclosure rules imposed on insiders, the proposed non-binary, contingent, shareholder action treats all shareholders equally and increases the power of the shareholder's action without incurring high costs of collaboration and communication among the shareholders..

Shareholder Stewardship in the Netherlands: The Role of Institutional Investors in a Stakeholder Oriented Jurisdiction

We study institutional investors’ voice in the Netherlands, focusing on shareholder voting in particular. The Dutch Stewardship Code, developed by institutional investor platform Eumedion, came into force in January 2019, emphasises engagement and responsibilities of institutional investors in Dutch listed companies and should further boost the engagement with the investees. With a new dataset, we observe that institutional investors critically consider (non) current voting items which could negatively affect shareholder rights, like some of the amendments of the articles of association as well as remuneration packages of directors that contain insufficient or inappropriate incentives. Compared to other investors, institutional investors show significantly higher opposition rates. Particularly, Eumedion members show even higher opposition rates than other institutional investors. However, there may still be room for a stronger focus on the activities and outcomes of stewardship, including changing the behaviour of companies, and not just policy statements. An edited version of the paper will be published as a chapter in “Global Shareholder Stewardship: Complexities, Challenges and Possibilities (Dionysia Katelouzou & Dan W. Puchniak eds, Cambridge University Press, forthcoming)

Private benefits of control: evidence from a new measure of the value of shareholder voting rights

ABSTRACT Prior studies indicate that controlling shareholders’ private benefits are linked to the value of voting rights. We estimate this value in terms of two events known to increase the private benefits of control enjoyed by controlling shareholders: the period prior to annual shareholder meetings and after the announcements of share repurchase and disposal. We find a statistically significant increase in the value of voting rights of 1% prior to annual shareholder meetings and of approximately 0.4% after announcements of share repurchase and disposal. Our study provides insights into how the private benefits of control can be identified by examining specific corporate events.

Shareholder Voting: A Complementary Mechanism to Mandatory Disclosure Regulation

We offer that, when regulators require firms to obtain stakeholder approval of a corporate decision through voting on a resolution, firms disclose additional information that is needed for stakeholders to understand the optimal nature of the proposal and to vote in favor of it. We suggest that this indirect regulatory approach to disclosure can improve transparency over and beyond that achieved through mandated disclosures alone. The study documents the effectiveness of this indirect regulatory mechanism in the context of Say-on-Pay rules relating to executive compensation. The analyses reveal that, even though firms were previously required to provide detailed compensation-related disclosures, the passage of the SoP rule increased disclosures further, especially among firms that had seemingly excessive pay packages. Also, firms that had previously failed their SoP voting or had received an ‘Against’ recommendation from a proxy advisor increase their compensation-related disclosures disproportionately. These additional disclosures also help the firms achieve better subsequent SoP voting outcomes. We conclude that stakeholder-voting regulations can be an effective tool to improve corporate transparency.

Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence from the Equity Lending Market

We show that conflicts of interests between shareholders and creditors affect limits-to-arbitrage through short-sale constraints. Using mergers of financial institutions as a shock to dual ownership, we show that dual holdings of debt and equity increases equity lending supply and reduces short-sale constraints. Shareholders are also less likely to restrict lending supply before shareholder votes when dual holders are present. Further, dual holdings are associated with faster corrections of mispricing, consistent with lower shareholder-creditor conflicts enhancing market efficiency. Our results suggest that shareholder-creditor conflicts give rise to limits to arbitrage and have a real effect on market efficiency.

Is Blockholder Diversity Detrimental?

We find that diversity among large blockholders is detrimental to firm performance. Specifically, we show that lagged disclosure, on exogenous predetermined dates, revealing an increase in block diversity, is followed by a negative market reaction. Similarly, an unexpected decrease in block diversity, due to an individual’s death or retirement, or to the 2003 mutual fund scandal, is followed by an increase in firm performance. Overall, firms held by a heterogeneous blockholder base consistently perform worse than firms held by homogeneous blockholders. Disagreement among shareholders (e.g., as reflected in shareholder votes) increases when the blockholder base is diverse. Data on blockholders (described in this study) can be obtained at: https://www.dropbox.com/s/yp2r7graixxus7r/Blocks.csv?dl=0

Monitoring Spillovers Between Competing Passive and Active Asset Managers

We examine monitoring interactions and spillovers between passive and active funds. In our model, funds use fees and monitoring capacities to compete with each other over fund flows from a set of heterogeneous risk-averse investors. We show that passive funds find positive monitoring optimal in equilibrium. We provide conditions for when passive and active fund monitoring are strategic complements, leading to monitoring of the same firms, or strategic substitutes, leading to monitoring of different firms. Additional results speak to the corporate governance implications of restrictions on passive or active shareholder voting and limits on disclosure of active fund portfolios.

The Proxy Problem: Using Nonprofits to Solve Misaligned Incentives in the Proxy Voting Process

Proxy advisory firms and their influence on the proxy voting process have recently become the subject of great attention for the Securities and Exchange Commission (“SEC”) among other constituencies. A glance at recent proxy season recaps and reports, many of which devote space to discussing proxy advisory firm recommendations, reveal the significance of this influence on institutional voting. As Sagiv Edelman puts it, “proxy advisory firms exist at the nexus of some of the most high-profile corporate law discussions—most notably, the shareholder voting process, which has recently been the subject of much scholarly and legal debate.” The SEC has responded by announcing that it intends to reform the regulations, or lack thereof, surrounding proxy advisory firms. Recently, the SEC issued proposed amendments to Exchange Act Rule 14(a)-1 which would effectively codify their earlier interpretation of solicitation under this rule. The proposed amendment would “condition the availability of certain existing exemptions from the information and filing requirements . . . for proxy voting advice businesses upon compliance with additional disclosures and procedural requirements.” Furthermore, the amendments would clarify when a lack of disclosure of certain information in proxy voting advice compromises the accuracy of the advice and misleads within the meaning of the rule. The SEC believes that these extra requirements will “help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions.” Based on this proposal, it is apparent that the SEC is intent on rectifying some of the problems of transparency and conflicts of interest associated with proxy advisory firms. Given the increasing influence of proxy advisory firms, the misalignment of incentives between proxy firms and the institutional shareholders who use proxy firm services is troubling. This Note identifies inherent problems and concerns with proxy advisory firms and offers solutions to these issues with a focus on eliminating conflicts of interest. Using Henry Hansmann’s theory of ownership, this Note argues that nonprofit ownership of proxy advisory firms eliminates both information asymmetry and conflicts of interest inherent to the current ownership structure. Part I provides a brief overview of the problems and concerns associated with proxy advisory firms. Part II suggests two potential solutions: that Rule 206(4)-6 of the Investment Adviser Act of 1940 should be repealed or alternatively, that nonprofit ownership through investment company associations is a more effective way for investment management companies to comply with their fiduciary duties. Because profit incentive has created conflicts of interest that lead to proxy advice that may not always be in the best interest of investment manager clients, nonprofit ownership promotes transparency that allows parties who rely on the advice to make more independent decisions. Part III argues that nonprofit ownership is the most viable alternative to the status quo.

Importing Activists: Determinants and Consequences of Increased Cross-border Shareholder Activism

We use a comprehensive sample of nearly 7,000 shareholder activism campaigns across 56 countries to examine how corporate governance regulations interact with activism to drive changes in real corporate-sector outcomes. We develop a novel country-level framework of regulatory characteristics that serve as necessary precursors for minority shareholders to influence firm governance. We find that the incidence of both foreign and domestic activism, as measured by the number of campaigns, increases by over 60% (95%) following reforms that increase shareholder voting rights (board independence). Using these shareholder-empowering changes to governance regulation as shocks to the threat of activism, and the presence of independent institutional investors to identify high-activism-risk firms, we find that firms facing a high threat of activism (including non-targeted firms) increase profitability, reduce investment, and increase payouts. These effects are concentrated in countries where the preexisting corporate governance regulations are weaker and the level of activism was relatively low; we find little evidence of significant changes in countries with historically higher levels of activism. Overall, our results suggest that, when shareholder-empowering governance regulations give activists a way to gain access to untapped markets, they can serve as catalysts for widespread changes in corporate activities.

The impact of Japan’s stewardship code on shareholder voting

This study investigates the impact of Japan’s Stewardship Code on the shareholder voting behavior of institutional investors. The stewardship code is not mandatory with legally binding regulations, but it encourages institutional investors to exercise their voting rights and monitor their investee firms to improve their investee firm value. I find that Japan’s Stewardship Code leads trust banks and insurance companies that accept the code and do not lend money to their investee firms to become more likely to vote against the appointment of representative directors and CEOs in firms with lower profitability. Furthermore, after the code, pension funds and foreign shareholders become more likely to vote against the appointment of representative directors and CEO appointments in firms with lower profitability. These results suggest that Japan’s Stewardship Code promotes voting activities of institutional investors.