The Impact of the Institutional and Regulatory Environment on Shareholder Voting

By Bethel, Jennifer E.; Gillan, Stuart L. | Financial Management, Winter 2002 | Go to article overview

The Impact of the Institutional and Regulatory Environment on Shareholder Voting


Bethel, Jennifer E., Gillan, Stuart L., Financial Management


We document that certain features of the institutional and regulatory environment governing shareholder voting can affect the co-location of shares' voting and cash-flow rights. We show that "routine" management proposals, for which brokers can vote shares held in "street name" if investors fail to vote, receive more votes favorable to management than "nonroutine" proposals. Some proposals may pass because of a routine classification. Moreover, negative recommendations from the leading shareholder-voting advisory service are associated with fewer votes cast favorable to management. We also find voting results are related to ownership structure, the use ofproxy solicitors, and other firm characteristics.

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A characteristic often associated with strong corporate governance is the co-location of shares' voting and cash-flow rights. However, the institutional and regulatory environment in which shareholder voting occurs can dislocate these rights, perhaps affecting voting outcomes. In this paper, we examine the impact on shareholder voting of the so-called "broker vote," which is one feature of the institutional landscape that may dislocate voting rights. State and federal securities laws and the rules of the securities exchanges classify management proposals that are included on proxy ballots as either "routine" or "non-routine." If management proposals are classified as routine, then brokers may vote shares held in "street name" if investors fail to vote their shares; that is, there is a broker vote. However, if management proposals are classified as non-routine, brokers cannot vote street name shares and firms report a "broker non-vote." To the extent that brokers vote shares for which they do not own cash-flow rights, voting and cash-flow rights are dislocated. Managers, thus, may have incentives to craft proposals so they are classified as routine, rather than non-routine to influence voting outcomes.

Other features of the environment may also influence shareholder voting. Institutional investors' reliance on common sources of voting information and proxy analysis may concentrate their votes. We explore the effect of recommendations by the leading shareholder advisory service on voting results. We also examine the relations between shareholder voting and the corporate use of firms that solicit shareholder votes, share ownership structure, and other firm characteristics.

We analyze the impact of these features on shareholder voting and proposal passage for a broad set of proposals of Standard & Poor's Super-Composite 1,500 companies during the 1998 proxy season. The S&P Super-Composite 1,500 includes firms in the S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indexes. By focusing on these proposals, we explore the impact on shareholder voting and proposal passage of certain features of firms' institutional and regulatory environment that could not otherwise be studied. We find that in a number of instances, state and federal securities laws and the rules of the securities exchanges that govern the voting of shares held by brokers in street name affected shareholder voting and proposal passage. Routine management proposals received, on average, 8% more votes favorable to management than non-routine proposals and 10.3% higher voting turnout. The passage of as many as 73 routine proposals in 1998 may have been swung because they were classified as routine, rather than non-routine , proposals.

We note that the term "routine" is unfortunate, because it may connote "unimportant." This is not the case. Routine proposals include authorizations of additional common equity and approvals of stock-option plans that increasingly are controversial. For proposals seeking the authorization of additional common equity and whose passage was likely swung by broker votes in 1998, we find the median proposed increase in authorized common exceeded 200% of current shares outstanding. …

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