A central challenge to the effectiveness of shareholder voting is the collective action problem, where dispersed individual shareholders lack sufficient incentives to use their voting rights effectively. The problem is prevalent among retail investors, whose small ownership stakes and minimal expectations for benefits from voting result in low rates of participation (“disengaged retail voters”). Regulators and academics typically view low retail-investor participation as a challenge to shareholder monitoring that exacerbates managerial agency costs. However, little attention has been given to whether and how it constrains firms’ ability to meet thresholds for voter participation. This lack of attention is primarily attributable to firms’ historically limited exposure to disengaged retail voters.

Under New York Stock Exchange (NYSE) Rule 452, brokerages maintain the authority to cast votes for routine proposals on behalf of retail clients who do not provide voting instructions. This practice, formally known as discretionary voting, is intended to limit firms’ exposure to disengaged retail voters by ensuring that unvoted retail-investor shares do not reduce the proportion of shares represented at shareholder meetings. Firms with a substantial number of retail investors rely on brokerages to exercise their discretionary voting authority to meet participation thresholds, which include establishing a quorum and passing stock-related routine proposals.

Recently, two of the largest brokerages, Charles Schwab and TD Ameritrade, abruptly discontinued their discretionary voting practices. The move increased firms’ exposure to disengaged retail voters, leading many firms to face, for the first time, the possibility of failing to fulfill essential governance functions due to low retail investor participation. I use these discontinuations to provide novel evidence on how an increasingly important aspect of the proxy voting system – the extent to which firms are exposed to disengaged retail voters – affects firms’ governance.

I find that these discontinuations significantly increase firms’ exposure to disengaged retail voters, with the most affected firms experiencing a 10.1 percent decline in the proportion of shares represented at shareholder meetings. I plot the distribution of differences between the proportion of shares represented at shareholder meetings and firms’ quorum thresholds for the periods before and after the brokerages’ discontinuations. These differences represent how close firms are to quorum failure, with values approaching zero signaling greater risk. The distribution of these differences shifts significantly towards zero following the brokerages’ discontinuations. Notably, the number of shareholder meetings that fall within 10 percent of the quorum threshold increases from 51 prior to the brokerages’ discontinuations to 204 after the  discontinuations. This shift likely understates the proximate effect of the discontinuations because firms may respond by increasing retail turnout or lowering their quorum requirements to increase participation relative to quorum.

This decline makes it more difficult for firms to achieve quorum and pass stock-related proposals, as evidenced by more meeting adjournments and stock-related proposal failures,  fundamentally altering firms’ incentives to engage with and encourage retail-investor participation in shareholder voting. In response, firms enhance their retail-investor engagement efforts by hiring proxy solicitors, issuing multiple voting disclosures for shareholder meetings, and diversifying how they disseminate voting information to include platforms familiar to retail investors, such as social media. These strategies appear effective, as firms experience increases in voting participation, and these increases are positively associated with their adoption of retail investor engagement strategies. However, these firms also experience declines in votes cast in alignment with management recommendations, suggesting that increased retail participation lowers management support.

Beyond encouraging retail participation, firms also adopt governance practices traditionally viewed as weakening shareholder rights. Exposed firms are more likely to lower quorum requirements and include adjournment proposals on ballots – practices that grant management greater control over voting outcomes. The decision to reduce quorum thresholds appears driven by three factors: financial constraints, lower shareholder support for voting matters, and recent near-quorum failures. These decisions suggest that exposure to disengaged retail voters pushes firms toward steps that, while addressing participation challenges, may ultimately weaken corporate governance by enabling smaller groups of investors to control outcomes.

These findings have important implications for policy discussions about proxy voting. Absent increased retail-investor participation or regulatory intervention, firms with substantial retail ownership will face difficulties fulfilling essential governance functions. Importantly, exposure to disengaged retail voters will rise as major asset managers begin delegating voting authority to retail clients and as direct indexing grows in popularity. By documenting how exposure to disengaged retail voters affects firms’ governance, this study provides timely evidence for regulators, governance scholars, and practitioners.

 This post comes to us from Professor Christian Hutzler at the University of Texas at Austin. It is based on his recent article, “Exposure to Disengaged Retail Voters,” available here.