Shareholder Voting and Corporate Governance Around the World

The following post comes to us from Peter Iliev of the Finance Department at Penn State University; Karl Lins of the Finance Department at the University of Utah; Darius Miller, Professor of Finance at Southern Methodist University; and Lukas Roth of the Finance Department at the University of Alberta.

In the paper, Shareholder Voting and Corporate Governance around the World, which was recently made publicly available on SSRN, we study the votes cast by U.S. institutional investors in elections to assess the impact of internal (firm-level) and external (country-level) corporate governance on shareholder voting patterns. The right to vote is arguably the most fundamental tool behind shareholder corporate governance. The impact of shareholder voting can potentially be much greater outside of the U.S. as such firms face a far greater range of shareholder protection and corporate disclosure which makes the proper exercise of corporate governance by shareholders both more difficult and more important. Nonetheless, academic research has largely ignored this form of governance for firms outside of the U.S.

To our knowledge, this paper conducts the first empirical study assessing voting patterns for a large sample of non-U.S. firms. Our sample, obtained from the ISS Voting Analytics database, comprises more than 2.3 million proxy votes cast by U.S. institutional investors over the 2003 to 2009 period for more than 5,200 non-U.S. firms from 46 different countries. We further employ a proprietary BNYMellon database of ADR-holders’ votes that enables us to quantify the impact of independent proxy recommendations on the way shareholders vote their positions held in non-U.S. firms. Such data are not contained in the ISS Voting Analytics database.

We document that shareholders are actively voting against the management’s recommendations for non-U.S. firms. The votes against the management’s recommendations are positively and significantly related to Insider control, suggesting that U.S. institutional investors are more likely to oppose management’s recommendations in cases of entrenched management and potential shareholder expropriation. Compared to U.S. studies, we document a larger correlation between poor governance and the propensity to vote against management. A one standard deviation increase in our entrenchment measure corresponds to a 6.8% increase in overall voting against management, and a 17.5% increase in votes that go against management’s recommendation for director elections in particular, which is considerably greater than the 6.6% increase documented for U.S. firms (see Cai et al. (2009)). We find in some models that greater analyst coverage corresponds to less frequent voting against management, which provides moderate support for the idea that analysts provide external monitoring that might deter shareholder expropriation.

Further, we document that differences in governance quality across countries affect shareholder voting. We find that shareholders’ propensity to vote against management’s recommendations when insider control is higher is on average about three times as large when firms are domiciled in low shareholder protection countries, as measured by Anti-self-dealing, Securities regulation, Disclosure requirements, and not-Common law origin. This suggests that institutions are more interested in exercising corporate governance through the voting mechanism when portfolio firms are from countries with weak external governance.

When we analyze the BNYMellon database of the votes cast in the first half of 2009 by shareholders of 134 American Depository Receipts, we find results underscoring the impact of proxy advisory firms’ recommendations regarding the elections held by non-U.S. firms. First, we document that investors rely heavily on the ISS recommendations when voting their stakes in firms domiciled outside of the U.S. In more than 90% of the cases when the ADR holders reject the management recommendation, they follow ISS. Further, this very strong correlation between ISS recommendations and institutions’ voting patterns is confirmed in a regression framework, and the linkage is even stronger when external country-level shareholder protection is weakest.

Overall, our empirical results show that investors not only exercise their right to vote their shares held in non-U.S. firms, but they also choose to challenge management more often in cases of entrenched management and low analyst coverage. It also appears that their voting patterns rely heavily on independent proxy recommendations. Overall, our results suggest that the process of shareholder voting plays a significant role in the exercise of corporate governance outside the United States.

The full paper is available for download here.

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