The right of shareholders to vote is essential for maximizing the value of their shares and good corporate governance. However, in a diffusely held corporation, few shareholders have the incentive to monitor management at their own cost, leading to a lack of informed voting. The emergence of large shareholders, such as investment funds, partially alleviates this problem, but the agency conflict between funds’ managers and investors can result in under-investment in stewardship and monitoring.
In a new paper, we examine the effectiveness of voting record disclosure (VRD) policies, which are designed to enhance transparency and accountability in shareholder voting. In 2003, the U.S. Securities and Exchange Commission (SEC) adopted Form N-PX, which requires mutual funds to periodically disclose their voting records, in response to growing concerns about transparency and governance in the wake of corporate scandals. By the end of 2020, more than 20 jurisdictions had adopted VRD policies requiring fund managers to disclose their voting records. In principle, the disclosed information should enable investors and other stakeholders to better monitor funds’ involvement in their portfolio companies’ governance. However, despite the conceptual appeal of VRD, there is limited empirical evidence suggesting that its theoretical benefits materialize.
Using a large international sample of public companies, we examine the effects of VRD policies on voting outcomes. Our sample encompasses jurisdictions that adopted VRD regulations during 2013-2021 and those that had not adopted such policies by 2021. We collect the data on VRD policies from the Corporate Governance Factbook series (CGF), a biannual publication by the Organization for Economic Co-operation and Development. We also use the text of the specific regulation or standard cited in CGF to validate the information in CGF. We obtain proposal-level voting outcome and recommendation data from Institutional Shareholder Services (ISS).
Our baseline analysis examines the relationship between the voting outcomes of management-sponsored proposals and the adoption of VRD policies. We find that, after the adoption, management-sponsored proposals in the affected jurisdictions are more likely to face significant dissent or defeat. In a separate analysis, we also find an increase in the proportion of shares voted on by shareholders after the adoption of VRD rules. These results suggest that VRD policies can lead to a higher level of monitoring in shareholder voting, consistent with justifications for these rules. The findings are robust to using a matched sample, controlling for the types of proposals, the exclusion of any specific jurisdiction, and utilizing a recently developed staggered difference-in-differences estimation technique.
Next, we investigate whether the incremental shareholder dissent incorporates publicly available information on proposal quality. Specifically, we examine how the effect of VRD adoption interacts with proxy adviser recommendations. We observe that the increase in dissent is particularly pronounced for proposals that receive negative recommendations from ISS. This result holds across different voting outcome measures and various fixed effects structures, implying that the incremental dissenting votes following VRD adoption incorporate readily available proposal-quality information. The results suggest that the incremental shareholder dissent likely stems from institutional investors, who are the primary consumers of proxy advisers’ analyses and recommendations. Furthermore, this finding implies that the potential benefits of VRD policies may hinge on the quality of proxy advisers’ information.
Lastly, we separately examine whether the adoption of VRD policies affects shareholder-sponsored proposals. We find that the frequencies of voted on and adopted proposals increase following the enactment of VRD policies. This result suggests that the ability to monitor the votes of investment funds may motivate certain investors to initiate shareholder proposals. However, within the voted shareholder-sponsored proposals, we observe no significant changes in the average voting outcomes.
Globally, a growing number of jurisdictions have adopted VRD regulations aimed at enhancing fund managers’ monitoring incentives. However, the efficacy of these policies is not yet well understood. Our study attempts to fill this gap by empirically examining the adoption of VRD policies on shareholder voting outcomes. The findings highlight the potential of transparency regulations in motivating corporate governance and improving shareholder democracy. Our results also suggest that the governance benefits of VRD policies likely depend on the quality of proxy advisers’ information. Given that regulators such as the SEC are actively revising and enhancing their VRD rules, we believe work is needed to better understand how to best design and implement these regulations to maximize their governance benefits.
Our study also contributes to the literature on the economic consequences of disclosure regulation. Despite the crucial role of investment funds in capital allocation and corporate governance, evidence on the governance effect of disclosure regulations in this industry is limited. Our findings provide evidence that disclosure mandates influence the way fund managers exercise governance, which can meaningfully shape the policies and directions of public companies.
This post comes to us from Nan Li and Yeo Sang (Johnny) Yoon at the University of Minnesota’s Carlson School of Management. It is based on their recent paper, “Every Vote Counts: Mandatory Disclosure and Voting Outcomes,” available here.