List Voting and the Role of Minority Shareholders at Controlled Companies

Given the need to strengthen protection for minority shareholders, Italy has moved towards a more efficient corporate governance system by introducing mandatory list voting for listed corporations. List voting in Italy requires the election of at least one director and one statutory auditor supported by minority shareholders, and at least two of each such minority-supported candidates if a company has more than seven directors. The greater minority representation on the board that this mechanism ensures is especially useful when a company’s shareholder base is concentrated.

The Italian system highlights the importance of board independence and allows shareholders to play a more active role in governance. As a result, that system has attracted attention in the United States and other countries. Italy’s experience has shown that list voting is effective in ensuring proportionality in the composition of boards, in reducing agency costs, and in refining the balance between different interests. A variation on list voting that is being debated would provide for multiple lists of board candidates submitted simultaneously to shareholders for a vote. One list would be prepared by majority shareholders, a second by minority shareholders, and third by the outgoing board.

In a recent study, we explore whether (1) the Italian system is unique, (2) it works only in concentrated ownership structures, and (3) it can be used at American companies where institutional investors often predominate. Thus, the findings are evaluated also in light of the ownership structure through the examination of the percentage of shares held by large investors in the examined period.

We use a hand-picked dataset of corporations and directors from 2005 to 2015. We find a positive correlation between a high number of minority-appointed directors and large dividends. Furthermore, our findings shed light on the practice of appointing independent directors on the basis of slates proposed by a minority of shareholders, and they provide evidence that list voting works not only in specific closely-held corporations, but also on a global scale – although the results suggest that list voting makes more sense in concentrated ownership scenarios.  In other words, the insights of the empirical analysis, while focused on the Italian case, are useful also for other jurisdictions.

In addition, list voting can to some degree be an indicator of agency costs. Looking at agency costs in companies with both dispersed and concentrated ownership, we find that, as to the former, (i) managers retain liquidity, (ii) the actual conflict is between managers and owners, and (iii) dividend payouts are very important, because paying out more dividends means less cash for managers to divert. At companies where ownership is concentrated, we find that (i) owners force the company into transactions that strip capital from minority owners, (ii) the real conflict is between majority and minority shareholders, and (iii) dividend payouts matter less than related-party transactions.

In our study, we also take into account (i) the frequency of M&A activities, (ii) leverage, and (iii) the amount of research and development and sales.  Results are not statistically significant, although the regression confirms that all the outcomes are (slightly) positive when company ownership is dispersed.

As for M&A activities, the outcome corroborates the results according to which board independence (but also CEO duality and CEO pay) positively influences the number of deals,

As for R&D, our findings are consistent with the (i) agency theory, (ii) resource dependence theory, and (iii) latest literature, which has also validated the beneficial effects of good governance on investment in innovation and productivity. R&D/sales activities are also used as proxies in the literature, according to which companies that invest a lot in development and innovation benefit most from the presence of a staggered board, and changes in governance arrangements are much more closely linked to changes in value for companies with a large customer.

Our findings provide evidence that list voting could be an effective way to improve corporate governance at broadly-held companies in the U.S. and elsewhere outside of Italy, especially where the ownership is concentrated. We caution, however, that no firm conclusions can be drawn from the data without further evidence from actual experience.

This post comes to us from Maria Lucia Passador, a research fellow in business law at Bocconi University. It is based on her recent article, “List Voting’s Travels: The Importance of Being Independent in the Boardroom,” available here.