Blockholder Voting

Joel Shapiro is Associate Professor of Finance at University of Oxford Saïd Business School; and Heski Bar-Isaac is Professor of Integrative Thinking and Business Economics at University of Toronto Rotman School of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here); and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Blockholders play an important role in the governance of firms, and the SEC has taken great interest in their voting behavior. In this paper, we adapt a standard model of voting by introducing a voter who has multiple votes. This allows us to explore the role of blockholders, how their presence might affect the behaviour of other shareholders, and possible consequences of the SEC’s rules on voting.

We establish several striking results. First, if a blockholder is unbiased, she may not vote with all of her shares. This is efficient behaviour and benefits all. Second, if this blockholder can announce her vote before the vote takes place, other shareholders may ignore their information and vote with the blockholder. This would also enhance efficiency. Third, if the blockholder is biased, some shareholders will try to counter the blockholder’s vote. This suggests that regulations discouraging or prohibiting abstention, strategic behavior, and/or coordination may reduce efficiency.

We begin by supposing that the blockholder and all the small shareholders are unbiased—they have perfectly aligned interests to maximize the value of the firm. Since everyone has imperfect information about whether or not they will benefit from adopting a proposal, a vote plays an important role in aggregating information. However, doing so most effectively need not involve all voters voting in line with their own information.

In particular, a blockholder may prefer not to vote with all of her shares. If the blockholder does not have very precise information but has a sizeable amount of shares, then she might prefer that others’ information is not drowned out by her votes. A trivial example of this is when the blockholder owns 51% of the firm. In this case, no other information will be incorporated into the vote if the blockholder votes all of its shares. Given that evidence suggests that many investment advisers try to satisfy SEC requirements by voting with all their shares in line with the recommendation of proxy advisers (Iliev and Lowry, 2015, and Malenko and Shen, 2016), our result suggests that such rules may be inefficient.

A second result considers an activist blockholder, who can announce her voting intentions before other shareholders vote. When the blockholder has very precise information but few shares, smaller shareholders might rationally ignore their inferior information and vote with the blockholder. This is, in effect, supplementing the blockholder’s shares with the shareholders’ shares so that the vote reflects the information more efficiently. However, the remaining shareholders should vote in line with their own information. It follows that there is value to coordination by groups of investors in order to determine who votes with the blockholder. This illustrates a beneficial role for coordination in contrast to regulatory concerns about coordination and the role of “wolf packs”.

These observations highlight the role of strategic voting. Allowing the blockholder and shareholders to vote strategically, by abstaining, by ignoring their own information, or by coordinating can lead to more efficient outcomes.

Such strategic voting can also be beneficial when the blockholder has a bias (for example, if the blockholder is a manager or has business dealings with the firm that depend on good relationships with management). In this case, more informative outcomes arise when some shareholders vote to counter the blockholder’s vote, even in opposition to their own private information. Again, coordinated behaviour among shareholders can lead to better outcomes.

The analysis in the paper is quite stark; but we allow for further extensions to make it more realistic. Specifically, while the baseline model takes the blockholder’s information as given, we also allow for the blockholder to invest in better information. Further, while the baseline model takes the blockholder’s shareholdings as fixed, we extend to model to allow for trading. These extensions explain why a blockholder will not simply trade shares that it does not vote with: the blockholder might face a lemons discount when it sells shares as investors may infer that the blockholder did not acquire information.

Despite the fact that our results suggest that the current interpretation of SEC rules on blockholder voting are inefficient, we discuss one efficiency enhancing role for the rules. Consider a simplistic interpretation that SEC rules force blockholders to vote all of their shares in line with their information. This could incentivize a blockholder to acquire information, as not doing so could have a serious negative impact on the accuracy of the vote. Nevertheless, if the blockholder does not have trading restrictions (e.g. trying to minimize tracking error), this beneficial role for the rules will disappear, as the blockholder will simply trade its excess shares.

In summary, we highlight that strategic voting—either through abstention or through voting in opposition to one’s information—can increase the informativeness of a vote. Moreover, coordinating shareholder behavior can also lead to better outcomes.

The full paper is available for download here.


Iliev, P., and M. Lowry, 2015, Are mutual funds active voters? Review of Financial Studies 28, 446-485.

Malenko, N., and Y. Shen (2016). The role of proxy advisory firms: Evidence from regression-discontinuity design, Review of Financial Studies, forthcoming.

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