Voting at annual general shareholder meetings (AGMs) has been shown to be valuable. This makes perfect sense as voting gives shareholders a say on important corporate decisions, such as the composition of the board of directors and the approval of mergers and acquisitions. It also enables shareholders to express their support or dissent of the current management. Surprisingly though, voter turnout at AGMs across the world is relatively low with an average of slightly less than 60 percent of voting shares. Nevertheless, there is variation across countries with voter turnout ranging from a low of 41 percent in New Zealand to a high of 100 percent in Cyprus. In addition, the average approval rates for management-initiated proposals range between 84 percent and 100 percent, indicating that shareholders are less likely to show dissent to the firm’s management in some countries compared to others. What explains these variations across countries?
In a paper entitled ‘Trust and Shareholder Voting’, we argue that a specific aspect of culture—the level of trust in others that prevails in a country—has an effect on shareholder voting. We base ourselves on the economics literature (eg Zak and Knack 2001), which has found that trust improves economic performance, as proxied by GDP growth. This literature argues that in countries where high trust prevails economic agents are able to spend less time on monitoring each other and therefore have more time to spend on productive tasks. Hence, there should be a positive effect of trust on economic performance. Again, the economics literature finds empirical support of this argument. We perform a more direct test of this argument by investigating whether trust affects shareholder monitoring of management, as proxied by voter turnout at AGMs and support of management-initiated proposals.
Trust in others varies substantially across countries, with 74 percent of Norwegians agreeing that others can be trusted against only 3 percent of Filipinos. We examine the voting outcomes at ordinary and extraordinary AGMs of companies from 47 different countries. We find empirical support of our main hypothesis according to which shareholders in countries with high trust spend less time monitoring the management of their companies.
More specifically, there is empirical support that in countries with high trust voter turnout at AGMs is significantly lower and the approval rate for management-initiated proposals is significantly higher. Importantly, we also find that, on average, the firms’ managers do not exploit the lower levels of shareholder voting or monitoring in high-trust countries. While low voter turnout and high approval rates for management proposals are generally associated with lower future stock performance, this negative effect is cancelled out in countries with high levels of trust. This result suggests that in high-trust countries it is optimal for shareholders to trust management more and monitor less.
Overall, the results of our study help proxy advisors, investors and politicians understand and evaluate the reasons behind cross-country differences in voter turnout at AGMs as well as differences in the support for management-initiated proposals. Importantly, we find that a major cultural factor, ie trust in others, influences corporate governance and partly explains some differences in voting practices across the world. Finally, our results indicate that the optimal level of shareholder monitoring differs not only across firms, but also across countries.
Simon Lesmeister is a Research Assistant and a PhD student at the Department of Business Administration and Finance of the University of Cologne and Centre for Financial Research (CfR).
Peter Limbach is an Assistant Professor at the Department of Business Administration and Finance of the University of Cologne, and a Professor for Investments at Centre for Financial Research (CfR).
Marc Goergen is a Professor of Finance at the IE Business School and a Research Member of the European Corporate Governance Institute.