In the U.S., shareholder voting and activism is increasingly
used to influence firm policy. In a display of cross-border shareholder activism, a
bloc of U.S. institutional investors forced the large Canadian railroad
Canadian Pacific to make
board and leadership changes in 2012. New research by SMU Cox Finance
Chair Darius Miller and co-authors suggests that shareholder voting can be an effective
governance mechanism in countries outside the U.S. "This is important,"
says Miller, "since in many countries outside the U.S., the need for
governance is greatest."
Investors exercise dissent voting when they fear
expropriation. Given the well-documented potential for shareholder
expropriation that exists in foreign firms, shareholders should also want to leverage
voting to engage in activism. The authors set out to test shareholder activism
in global markets in a first-of-its-kind, large-scale study. Their results suggest
that, on average, the votes of minority "outside" shareholders are
indeed relevant to the policies firms pursue. Prior to this paper, there was
not any evidence on whether shareholder voting in other countries was effective
or not.
Shareholder
dissent
Past research
shows that the voting process is an effective avenue for shareholder activism
for U.S. firms because managers listen to dissent voting. This holds true even
though shareholders’ votes are overwhelmingly cast in favor of management’s
recommendations. U.S. institutional shareholders cast about 90% of their votes in
favor of companies’ recommendations overall. However, these dissenting votes can
impact changes in the board, management, compensation, or other policies over
the next year. Miller says, "While the dissent votes are almost never enough
to outvote management, it's the signal that it sends. Turns out that management
listens to the signal. This is also what is found in the U.S."
Dissenting votes by outside shareholders of foreign firms
can have an impact on firm policies, and those that have economic consequences. The larger the percentage of dissenting
votes cast by shareholders, the higher the probability is that directors leave
the board and mergers and acquisitions are withdrawn. Miller explains: "Given
that shareholders are likely to oppose board members who they feel are not
acting in their interest (that is, distorting shareholder value) and corporate
actions that may destroy value, our results suggest that corporate governance
is able to work through the voting process even outside the U.S."
Miller notes that in countries outside of the U.S., insiders often control
large portions of firms. With large controlling positions, these insiders may
be free to pursue their own objectives rather than maximizing shareholder
value. "In fact, we find outside [non-local] shareholders are more likely
to vote against management when they see large controlling positions or in
countries where their rights are not protected," Miller observe. "Again,
this suggests they are using the voting process to try to exercise governance."
A case of U.S. institutional investors swayed three Japanese firms in their
takeover defense policy votes in 2003.
Study particulars
The study used data on the votes cast by U.S. institutional
investors for company elections, as well as subsequent director turnover and
merger and acquisition (M&A) completion rates. This data was collected from
8,160 companies across 43 countries over the years 2003 to 2009. The study
focused on U.S. institutional investors who report all votes they cast on
corporate ballots for U.S. and foreign firms and to further policies that are
in their clients' best interests. The majority of the study's investors are
mutual funds.
The authors focus on director turnover and M&A deal
completion rates because such votes are both mandatory and binding. This data
is also important economically and consistently available across countries. According
to the findings, managers appear to listen to the dissenting director and
M&A votes cast by important shareholders. In these tests, dissent voting is
important for governance outcomes in firms that have both high and low levels
of institutional ownership.
The firms in the sample have average insider control of
about 38.2% with significant variation. U.S. institutions hold an average stake
of 4.5% of the equity of foreign firm, also with significant variation. The
average firm size is $3.5 billion measured by market capitalization and $10.3
billion measured by total assets. Nearly
eight percent of the sample firms are cross-listed on a U.S. exchange.
U.S. institutional investors choose to engage in activism
more often in cases where they fear expropriation the most. This is most
evident in countries with weak investor protections or highly entrenched
managers. The research also notes that larger firms have greater information
production that may shed light on actions that are harmful to outside
shareholders. Thus rather than voting against proposals, investors vote with
their dollars and sell their shares in the larger firms with deeper liquidity.
Importance of
shareholder voting
The voting process is a fundamental tool to influence
corporate governance around the world. The results have implications for
private and public communication channels as well. Miller offers, "Large
institutional investors can meet with management and express their concerns
privately. However, we show that the very public mechanism of formal
shareholder voting is a way that their concerns are directly mapped into firm
actions." The vote that accompanies
share ownership is really the main mechanism by which shareholders can voice
their concerns, acknowledges Miller. "We directly test whether this works
outside the U.S."
Stock exchanges and regulators around the world should pay
attention to these findings. Reforms that enhance the ability of shareholders to
vote are likely to be value enhancing. "One key policy ramification is that by
opening up a country stock market for investors, this allows for improvements
in governance, which many countries seek," says Miller. "Prior
research has shown that firms with large foreign institutional investors are
governed better than those with just local shareholders. Before our study, the
mechanism through which this can occur was not known. It is through the voting
mechanism that these institutional investors can improve governance.
In essence, shareholders are using their ballot box to voice
and influence better governance in firms across the world.
The paper, "Shareholder Voting and Corporate Governance
Around the World," by Caruth Chair in Finance Darius Miller, Cox School of
Business, SMU; Peter Iliev, Pennsylvania State University; Karl V. Lins,
University of Utah; and Lukas Roth, University of Alberta, is being revised for
publication.
Written by Jennifer Warren.