Previous research on shareholder voting has placed most of the emphasis on the role of institutional shareholders. In our recent study, Managerial Reliance on the Retail Shareholder Vote: Evidence from Proxy Delivery Methods, we provide evidence that managers strategically rely on the support offered by retail shareholders to ensure that their agenda passes and to communicate strong overall shareholder support during times of poor performance.
Our study is designed around the introduction of electronic proxy delivery. In 2007, the Securities and Exchange Commission (SEC) implemented rules allowing for electronic delivery of proxy materials. The revised system allows firms to choose between the traditional, mailed ‘full-set delivery’ of proxy materials and the ‘notice-only’ option, which only requires a mailed notification informing shareholders of the internet availability of proxy materials. The new notice-only option is designed to cut substantial costs of delivering proxy materials, but the adoption of the new rules has had unintended consequences. We find that notice-only delivery of proxy materials significantly reduces the voting response rate; this effect is primarily driven by the lower likelihood of response from retail shareholders.
We test whether the delivery method affects the outcome of shareholder voting. We focus on a subset of contested issues where incremental retail voting is most likely to affect the outcome: ballot issues on which management and proxy adviser ISS disagree. We first document that retail shareholders are strong supporters of management. Management-recommended proposals receive significantly more voting support when retail shareholders comprise a larger percentage of the investor base. We then find that these proposals receive even higher levels of support when the full-set delivery option is used. Finally, management receives higher support for recommended proposals when a large retail base is combined with the full-set delivery method. The results are consistent when we focus on management-opposed proposals that are supported by ISS. In these cases, we find a negative effect of retail shareholders on voting outcomes that becomes stronger when the firm opts for full-set delivery of proxy materials.
The evidence in our study indicates that retail shareholders differ from institutional shareholders by offering much stronger support of management regardless of firm performance, and managers are aware of these tendencies and take advantage of them. We find that managers are more likely to opt for the mailed full-set delivery following periods of low returns, indicating managers’ incentive to communicate strong overall shareholder support during times of poor performance, and following years of abnormally high CEO compensation levels, consistent with the notion that managers aim to report higher levels of approval to justify their higher compensation.
Lastly, we examine managers’ choice of delivery method based on items included on the ballot. We find that managers opt for full-set delivery when the ballot contains executive compensation related issues, including say-on-pay votes. We also find that managers opt for full-set delivery when proposing to reduce shareholder rights, including proposals to add a poison pill, increase supermajority voting requirements, or create other impediments to shareholder action.
Our study improves the understanding of the SEC electronic proxy regulation and its unintended uses and consequences while documenting concerns regarding the use of electronic proxy access. These concerns exist regardless of how we choose to view the importance of the retail vote. If we argue that firms should be attempting to maximize voter response rates, then the notice-only method of proxy delivery falls short in accomplishing this. If, on the other hand, we argue that the retail vote is unimportant, thereby relying on institutional investors to more effectively perform the monitoring role, then we raise concerns about management manipulating the manager-friendly retail vote in order to ensure defeat of third-party proposals. Regardless of which stance we take on the role of retail voters in an ideal governance structure, the delivery method remains a relevant concern. Given recent attention to these issues, our findings may be used to improve the regulatory mechanisms in the United States as well as other countries that have introduced an electronic proxy delivery system.
This post has also appeared here.
Choonsik Lee is an Assistant Professor of Finance at Quinnipiac University.
Matthew E. Souther is an Assistant Professor of Finance at the University of Missouri.