Shareholder Voting Research Articles

Dual Ownership and Risk-Taking Incentives in Managerial Compensation

Abstract This article studies how the three-way interaction among shareholders, creditors, and managers shapes firms’ executive compensation. Firms with a higher ownership share by “dual holders”—institutional investors that simultaneously hold equity and bond of the company—adopt a less risk-inducing compensation structure: less stock options and more inside debt. Exploiting financial institution mergers that increase or decrease dual ownership for portfolio companies, we identify a causal link between dual ownership and CEO compensation policies. Mutual fund proxy voting data suggest that shareholder voting is an important channel for dual holders to implement less convex contracts.

Corporate Governance and Its Impact on Equity Performance

Corporate governance is a complex and multifaceted subject. Furthermore, governance data are hard to collect and measure on a large scale. The classic approach to examine governance issues relies generally on the existence of allegedly good governance programs. In contrast to this approach, the authors use granular quantitative measures to assess the difficult-to-interpret aggregated governance framework with the aim to explore the relationship between corporate governance and equity performance. By digging into this dataset, they were able to establish a profile of effective and good corporate governance quantitatively, with a range of board characteristics, chief executive officer compensation, and shareholder voting rights from the point of view of investors.

Voting on Auditor Ratification by Shareholder Type: Impact of Institutional Shareholder Dissent on NAS Fees and Audit Quality

Institutional investors have a better understanding of corporate performance than non-institutional investors, and their presence tends to improve the overall governance mechanism of a company and discipline top management against taking self-serving or myopic decisions. In this study, we examine shareholder voting patterns on auditor reappointments in Indian companies and examine whether institutional shareholder dissent on auditor reappointment acts as a disciplining mechanism on subsequent auditor actions and leads to improvement in audit quality. Our results indicate that institutional shareholder dissent on auditor reappointment is positively related to relative magnitude of non-audit services (NAS) fees in the previous year. More importantly, we observe that auditors are sensitive to institutional dissent and respond by charging a lower amount of NAS fees and providing superior audit quality in the subsequent year to signal increased independence and objectivity. Similar results are not observed in the case of retail shareholders. Our findings reinforce the role of institutional shareholders as important monitors in the corporate governance process and call for regulation to mandate the participation of shareholders in the auditor appointment process.

Shareholder Voting and Disclosure in M&As

Shareholder Voting and Disclosure in M&As

The Changing Landscape of Corporate Governance Disclosure: Impact on Shareholder Voting

The Changing Landscape of Corporate Governance Disclosure: Impact on Shareholder Voting

Home bias in shareholder voting

Home bias in shareholder voting

Who Do You Vote for? Same-Race Preferences in Shareholder Voting

Who Do You Vote for? Same-Race Preferences in Shareholder Voting

Does board diversity really matter to shareholders?

Does board diversity really matter to shareholders? To answer this question, we depart from the traditional approach of analysing the impact of board diversity on firm value to instead concentrate on shareholder voting outcomes in annual director elections. By exploring a hand-collected dataset, we identify that diversity matters to shareholders. New to the literature, we find that shareholders’ greater support for diverse directors is driven by votes for minority directors. Specifically, we show that non-Caucasian female directors can fully explain the greater shareholder approval for female directors. Our study has implications for board selection and shows that board diversity is valuable to shareholders.

Shareholder Voting Behavior and Its Impact on Firm Performance: a Configurational Approach

Shareholder Voting Behavior and Its Impact on Firm Performance: a Configurational Approach

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.

Minority shareholder voting and dividend policy

We find that minority shareholders’ voting opposition to dividend proposals is associated with significantly higher cash dividend payout in the following year for stocks listed in Shanghai Stock Exchange. When minority shareholders’ voting opposition increases, the likelihood and frequency of regulatory penalties increase. The reverse happens after firms increase dividend payout. Minority shareholders’ voting opposition has a stronger positive effect on cash dividend payout when they post more messages in stock forums and when independent directors express dissenting opinions. The effect is weaker if the board chair or CEO has political connections. Minority shareholders’ voting opposition does not have significant effects on the growth rate of earnings and the level of earnings management. But we do find evidence that minority shareholder voting opposition reduces expropriation by major shareholders. The evidence supports a hypothesis that regulators use the minority shareholder voting results to screen out possible cases of shareholder oppression.

CSR and Firm Risk: Is Shareholder Activism a Double-Edged Sword?

Few can argue with the notion that corporations should at least consider corporate social responsibility (CSR) to better understand the impact of their operations on society. However, recent empirical tests suggest CSR has an ambiguous impact on firm performance. To shed new light on this debate, we examine the extent to which voting support for nonbinding shareholder-initiated CSR proposals is empirically linked to changes in firms’ underlying systematic risks. Using a rich dataset of proposals in the US from 1998 to 2011, we contribute several novel findings. First, we show that shareholder voting support is nonlinearly linked to changes in systematic risk. Specifically, proposals with low voting support increase risk while those with high support decrease risk. This nonlinearity is particularly pronounced for consumer-sensitive firms that cater primarily to individual consumers rather than for firms in non-consumer-sensitive industries that produce goods or services meant for industrial or governmental use. Second, the 2007–2009 financial crisis exacerbated increases in firms’ systematic risks for proposals with low voting support. Our results, which highlight asymmetry regarding firms’ CSR initiatives, remain robust when controlling for firm-specific factors as well as shifts in investor sentiment. From a risk management perspective, our findings suggest that CSR initiatives need strong shareholder support to realize benefits from the so-called ‘risk-reduction hypothesis’.

Heterogeneity in shareholder activism: Evidence from Japan

We examine heterogeneity in activist shareholder campaigns targeting Japanese companies following corporate governance reforms. In doing so we explore how both market reactions to activism and shareholder voting opposition to director appointments vary with activist and campaign characteristics. We find that market reactions to the revelation of the initial investment vary with heterogeneity across activists and their campaigns. We document similar variation in market reactions to the public announcement of activist demands, an issue that is relatively unexplored in prior work. Additionally, we find that voting opposition to director appointments tends to be larger in the presence of activists and varies with heterogeneity in activist shareholder characteristics.

Symbolic Shareholder Democracy: Toward a Behavioral Understanding of the Role of Shareholder Voting in CEO Dismissals

We investigate the effect of expressive shareholder dissent voting, in which shareholders use their votes symbolically to express their discontent with management, on subsequent chief executive officer (CEO) dismissals. Using the routine but highly symbolic executive board discharge proposal voted on at the annual shareholder meetings of German firms, we argue that the board of directors understands these votes as a “vote of confidence in management” that challenges the CEO’s mandate to lead the firm. Arguing that board chairs are uniquely positioned to take up the stance of a steward of the firm and its leadership, we examine how independent and family board chairs moderate the board’s response to expressive voting dissent. Using a sample of German public firms over the period 2008–2015, we find that expressive voting dissent increases the chance of CEO dismissal increasingly with the level of dissent expressed. Contrary to prevailing agency theoretical expectations, we do not find that independent chairs are more responsive to expressive voting dissent, nor that this relationship is strengthened by the degree of minority institutional investor ownership of the firm. Consistent with the symbolic perspective on shareholder voting that we seek to develop, however, we find that family chairs are more likely to lead the board to dismiss the CEO due to the intrinsic disvalue they incur from symbolic leadership legitimacy challenges in their firms, and that the positive effect of having a family chair on the dissent induced chance of CEO dismissal is strengthened by the level of family ownership in the firm.Funding: A University of Illinois at Chicago Summer Research Grant is gratefully acknowledged for S. Sauerwald.

Who monitors the monitors? An examination of listed companies in an emerging market context

The growing number of corporate scandals globally highlights the importance of effective corporate governance mechanisms. Many of the corporate governance frameworks that are rooted in the agency theory advocate the election of independent non-executive directors, an independent chairperson, and a lead independent director. Shareholder voting on the election or re-election of directors (hereafter referred to as ‘director re-elections’) has been largely unexplored in South Africa—a country widely recognised as a pioneer in the corporate governance field and yet marred by several corporate scandals in recent years. In this study, an unbalanced panel data set was thus constructed comprising voting outcomes and board-level characteristics of companies listed on the Johannesburg Stock Exchange from 2014 to 2020. Significant positive relationships were noted between shareholder voting opposition to director re-elections and both board size and board tenure. Shareholders who cast opposing votes mainly did so because of their concerns about the lack of director independence, at board, committee, and nominee level. The findings of this study were explained in the context of the agency, stakeholder, stewardship, and resource dependence theories. It is recommended that nomination committees use more robust selection criteria for directors. Shareholders are also encouraged to vote more actively on director re-elections to monitor these monitors.

Expressive Voting and Irrational Outcomes in Corporate Elections

Over the past three decades, shareholders have steadily been provided with greater voting power over corporate decisions. A great academic debate has arisen about the character and outcomes of the shareholder franchise. All parties to this debate start with the assumption that shareholders will vote rationally, and generally in their economic interests. There is a large empirical literature in political science, however, that finds that where the marginal value of a vote is low, information is processed and votes cast on the basis of strongly held prejudices, tribal loyalty, mood-affiliation, and a desire to flatter the voter’s self-image. In other words, the voter behaves irrationally from the standpoint of the real-world impact of their vote. This article reviews the empirical literature around shareholder voting to show that irrational voting characterizes the corporate franchise as well. Shareholders give their voting rights almost no value and their voting patterns do not reflect the economic performance of the company. Moreover, shareholders vote in ways that contradict their economic views (measured by looking at their trading decisions), and their voting is primarily driven by empirically questionable and deliberately ineffective corporate governance practices. Fortunately, the empirical political science literature provides some direction for reforming the corporate franchise.

How Does Market Competition Affect Shareholder Voting? Evidence from Branching Deregulation in the U.S. Banking Market

Exploiting interstate branching deregulations during 1994–2005 as exogenous shocks to banking market competition, we examine the impact of increased market competition on shareholder voting in the U.S. banking industry. Voting is one of the primary mechanisms through which shareholders participate in corporate governance and “voice” their opinions to company management, yet little is known about how external market environments shape shareholder voting behavior. Using a difference-in-differences design, and a sample of 596 banks (17,783 bank-year proposals), we are the first to provide large-sample, systematic evidence that the intensification of market competition leads to an increase in rates of disapproval for management proposals. We further document that the relation between the two is more pronounced among states with higher degrees of deregulation and weaker levels of pre-deregulation competition. Overall, our findings are consistent with the notion that increased competition among U.S. banks induces more shareholders to vote against management proposals.

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

AbstractWe 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 Rejected Threat of Corporate Vote Suppression: The Rise and Fall of the Anti-Activist Pill

As disciplinary takeovers are replaced by activist shareholder campaigns, managements may well want to turn to the “anti-activist pill” as shelter from the storm. The economic shock from the widespread shutdown to combat the Covid-19 pandemic produced dozens of so-called “crisis pills.” The defense of these pills as avoiding “disruption” and “distraction” of managements can be seen as a test run for broader use of poison pills to fend off shareholder activism. The Delaware courts, first Chancery and then the Supreme Court, rejected this managerial defense tactic in a way that clarifies the role of the poison pill in corporate governance. In the context of a hostile tender offer, the pill may be legitimated as protecting the statutory “two-step” for a merger: first, screening and negotiating by the board, followed by a shareholder vote on a proposed merger. Delaware’s board-centric model relies on another statutory mechanism—a director election contest—as the appropriate avenue for managerial accountability. Various elements of the poison pill—the cap on share ownership and a definition of “beneficial owner” that goes beyond “record owner”—have unfortunate side effects on election contests but are necessary to prevent unvetted shifts in control via tender offer or the gradual accumulation of stock (a “creeping tender offer”) either directly or with confederates. An anti-activist pill converts these side effects into its very mechanism, precisely to block a successful director election contest. An election contest is different from a tender offer in this critical respect: Success requires persuasion of a shareholder majority who will remain shareholders after the event. A low pill trigger reduces the activist’s economic incentives and can reduce its credibility; a capacious definition of beneficial ownership burdens its task of persuasion. The Delaware Courts’ reaffirmation of the legitimating role of the shareholder franchise is particularly important now, as the set of shareholder activists expands to include ESG activists who will use director election contests to propose broader conceptions of corporate purpose and shareholder value pursuit.

Bucking the trend: Why do IPOs choose controversial governance structures and why do investors let them?

While the percentage of mature firms with classified boards or dual class shares has declined by more than 40% since 1990, the percentage of IPO firms with these structures has doubled over this period. We test whether IPO firms implement these structures optimally or whether they are utilized to allow managers to protect their private benefits of control. Both shareholder voting patterns and changes in firm types going public suggest that the Agency Hypothesis best explains IPO firm's use of dual class, particularly when there is a large voting-cash flow wedge. In contrast, among firms with high information asymmetry, classified board structures are better explained by the Optimal Governance hypothesis.