Influence of Public Opinion on Investor Voting and Proxy Advisors

The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Isil Erel of the Department of Finance at Ohio State University; and Laura Starks, Professor of Finance at the University of Texas at Austin.

In our paper, Influence of Public Opinion on Investor Voting and Proxy Advisors, which was recently made publicly available on SSRN, we address the question of how public opinion influences the proxy voting process. We find strong influence of public opinion on the evolution in both investor voting behavior and proxy advisor recommendations. Therefore, our results suggest that an additional channel through which the public can communicate with corporate management (and potentially influence corporate behavior) is the proxy voting process. We provide new evidence that media coverage can also influence firm behavior through the voting channel. This channel is important because media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.

Our findings are consistent with the quote of Michelle Edkins of BlackRock:

“We rely on several sources of information to inform our voting. We do our own analysis based on information published by companies, look at research done by proxy advisors, and follow media coverage. Media coverage helps us keep in touch with a broad range of constituents’ views on corporate governance issues.”

In order to better understand the role of public opinion in shaping the proxy voting process, we examine trends in shareholder voting as well as changes in the underlying influences. Our proxy for the public opinion that would be expected to be associated with institutional voting is the magnitude and tone of media coverage about corporate governance. To narrow this coverage down to a manageable number of news stories, we focus on the media coverage of executive compensation. We also employ an alternative measure of public opinion through Gallup surveys.

Our study is the first to show that investors’ proxy voting is associated with public opinion. Specifically, we find that the increased support for shareholder proposals is associated with measures of public opinion including polls and increased media coverage. Our empirical analysis shows that voting for shareholder proposals, whether considered at the firm or fund level, is related to public opinion. Further, this result holds for different measures of public opinion, whether measured at the aggregate level (through poll data from Gallup surveys or general media coverage), or measured at the firm level (through media coverage of corporate governance news, specifically executive compensation). Moreover, our analysis suggests that the recommendations of ISS are also related to public attention (which is consistent with their process of soliciting input from clients when updating their policy).

Beyond our contribution using such a large sample and examining changes over time, we also contribute by showing that investor voting has become more independent of ISS recommendations, counter to what many researchers and commentators believe. This change is surprising, given that over time the support by ISS has increased for shareholder proposals.

Our most novel contribution is the examination of the relation between public opinion and voting decisions at both the firm and fund level across time. Public opinion provides institutional vote with power because there is a lot more than just the individual institutional investor behind the vote, the vote reflects wider public sentiment.

Institutional investors, whether activist investors or not, now have the power of the vote to influence corporate policy. As considerations of best practices in corporate governance have evolved, so have the opinions (and votes) of institutional investors. Moreover, institutional investors do not operate in a vacuum; they have beneficiaries or their own shareholders with opinions on how their investments should be managed and voted. Because these beneficiaries and shareholders care about their institutions’ voting behavior, not only mutual funds managers (who are required to do so by law) but also other institutions publicly disclose their votes. Thus, there exists pressure or encouragement for institutions to vote in particular ways, suggesting that institutional voting and its changes through time reflect public opinion on corporate issues. Further, the proxy advisory firms do not exist in a vacuum either. We find that voting by institutional investors and recommendations of proxy advisory firms can be influenced by the economic and social climate of public opinion.

The full paper is available for download here.

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