Institutional Investors and Proxy Voting

In our paper, Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation, Martijn Cremers and I examine the impact of the mutual fund voting disclosure rule on corporate governance by examining its effect on proxy voting outcomes. We presented our paper at the National Bureau of Economic Research Conference on Corporate Law and Investor Protection on July 28th, 2008.

In January 2003, the U.S. Securities and Exchange Commission (SEC) required mutual funds to disclose how they voted on proxy proposals presented at shareholder meetings. To assess the impact of this rule on voting behavior, we construct a sample of firms that experienced similar proposals, sponsored either by management or shareholders, both before and after the 2003 rule change using data gathered from the Investor Responsibility Research Center’s (IRRC) database of proxy voting.

We find that voting support for management has been declining for close to a decade and that mutual funds appear to support management less frequently than other investors. However, we find no evidence that the rule decreased mutual funds’ voting in support of management. Indeed, some of our results suggest that mutual funds’ support for management increased after the rule’s adoption, particularly for executive equity incentive compensation plan (EEIC) proposals. We further find that these results are not affected by other features of the voting environment, such as confidential voting and the elimination of the New York Stock Exchange (NYSE)’s rule permitting brokers to vote shares on certain compensation plans. Finally, taking into account mutual fund characteristics and the largest mutual fund families’ ownership does not change our results.

As the decision to put up an EEIC proposal is clearly a choice by management, we investigate to what extent selection issues could potentially explain our findings. We find some evidence that the firms sponsoring EEIC proposals both before and after the rule change are different from those that sponsored such a proposal before but not within two years after the rule change. In addition, we find that some takeover defenses decrease support for management, results independent of the rule change, but the results are so varied across defenses, and within and across proposals, that we cannot draw a conclusion regarding the relation between defenses and voting outcomes.

The full paper is available for download here.