Peer Information and Empowered Voters: Evidence from Voting on Shareholder Proposals

Xiao Li is an assistant professor at Central University of Finance and Economics; Jeffrey Ng is a professor at The Hong Kong Polytechnic University; and Hong Wu is an assistant professor at The Hong Kong Polytechnic University. This post is based on their recent paper.

Corporate voting on shareholder proposals, an exercise in corporate democracy, is an important mechanism through which shareholders try to influence how a firm is run (e.g. McCahery, Sautner, & Starks, 2016). Increasing evidence points to shareholder proposals leading to changes in compensation policy, firm strategy, corporate governance, and corporate social responsibility (e.g. Ertimur, Ferri, & Muslu, 2010; Flammer, 2015). Shareholder proposals, which are often based on actual or perceived underperformance relative to peer firms, can generate significant tension between shareholders and the firm’s board of directors and management. Soltes, Srinivasan, and Vijayaraghavan (2016) find that managers sought to exclude a large proportion of shareholder proposals from being voted on and provided evidence that managers often sought to exclude legitimate shareholder interests from such votes. In recommending against a shareholder proposal calling for the independence of the board chairman, the board of Ashford Hospitality Trust, Inc. stated, “There is no established consensus that having an independent chairman or separating the roles of the chief executive officer and chairman enhances returns for stockholders. … In fact, in the case of our company, we have materially and consistently outperformed our peer average on the basis of total stockholder returns and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins over the past three (3) years, while having a non-independent chairman.” [1] If accounting numbers are used in peer comparisons, the comparability of peer information becomes an important issue (De Franco, Kothari, & Verdi, 2011). In this paper, we seek to examine the role of comparable accounting information about peer firms in empowering shareholders to vote on shareholder proposals.

Political science theory and empirical studies predicts and finds that citizens who are better informed about political issues tend to vote more frequently than those who lack information. Moreover, political campaigns often engage in time-series and cross-sectional comparisons to advocate for their policies. Voters themselves also rely on such comparisons to understand more about the choices. In terms of policy campaigns, a common reason used to push for reforms in a country is that the country is underperforming other similar countries (e.g., other developed countries, other developing countries, and neighboring countries) in aspects such as economic growth, human rights, and environmental protection. Hence, making comparisons is an important feature in voting. As part of a general increase in attention to shareholder voting, regulators have called for greater participation to ensure more representative voting results. The availability of comparable financial information about peer firms can affect voter turnout for several reasons. First, when measures of financial performance (e.g., earnings) are comparable across peer firms, information acquisition and processing costs are likely to be lower for investors. Investors are likely to be more informed and thus more convinced that the firm is underperforming when the measure indicates that the firm underperforms relative to peer firms. Pressure exists for changes when underperformance is suggested, even changes that have no definitive link to improvement in performance. Hence, one can expect a higher voter turnout to push for (or against) reforms within the firm. In addition, the outcomes of peers that have undertaken the proposed actions offer useful inputs for the voting decision. The comparability of peer information can facilitate shareholders’ evaluation of the need for changes in shareholder proposals and the potential consequences of a proposal’s adoption or non-adoption. It can also allow shareholder proposal campaigns to use the information to solicit votes and for shareholders to use it to justify their voting decisions.

Using a sample of 2,334 shareholder-initiated corporate governance proposals from 2001 to 2014, we find that more comparable peer information is associated with higher voter participation, which is consistent with the theory that information can empower voters and encourage voter participation. Economically, an increase of one standard deviation in comparability is associated with a 13.1% increase in participation in shareholder proxy voting. Compared with the average participation rate of 67% for a typical governance proposal, this increase in participation appears economically significant.

We conduct several cross-sectional analyses of the moderating effects of investor profile, information environment, and investors’ uncertainty about the firm. We find that the positive association between comparability and voter participation is stronger when investors have a longer-run focus, whose interests are more aligned with objectives of the governance proposals. Second, consistent with a substitution effect between private and public information, we find that the positive association between comparability and voter participation diminishes when investors have private information through cross-ownership. As commonly highlighted in textbooks on financial statement analyses, financial statements need to be reliable in the first place to permit a meaningful analysis, which typically includes comparisons with peer firms (Penman, 2007). We find that the relation between comparability and voter participation is stronger for firms with no recent restatements or for those with no internal control weaknesses. Finally, shareholders are likely to abstain from voting in circumstances of greater uncertainty about the firm, especially in terms of how possible voting outcomes affect future firm performance and value. Consistent with this idea, we find the positive relation between comparability and voter participation to be greater when there is a larger information gap between investors and the firm.

In additional analyses, we move beyond voter participation and examine voting outcomes. First, we posit that more comparable peer information not only empowers voting but also convinces the board of the need for changes after proposals are passed. Consistent with our argument, we find that the passing and implementation of governance proposals is positively associated with comparability. Furthermore, to the extent that comparability facilitates identification of the merits of shareholder proposals and the passing of governance proposals that are, on average, value enhancing (Cuñat et al., 2012), we expect and find after the passing of governance proposals, the increases in Tobin’s Q and ROA are significantly larger for firms with more comparable peer information.

We contribute to the academic literature in two important ways. First, our study is the first to examine the role of comparable peer information in corporate voter participation. Just like voters in the political arena, voters in a corporate setting like to rely on comparisons in the voting process. Our study offers a first attempt to explain how the comparability of peer information empowers shareholders to vote. We show that, consistent with canonical economic and political theory, comparable accounting information facilitates the identification of the merits of governance proposals and increases shareholder participation in voting. Second, we contribute to the recent literature on peer information (e.g. De Franco et al., 2011). Our paper focuses on the effects of peer information on shareholders’ responses to the moral hazards (specifically, agency problems) that they face and wish to address via corporate democracy. In doing so, we add a new perspective to the discussion of when peer information matters. Finally, we contribute to the recent policy discussions on participation in proxy voting by illustrating the importance of accounting systems in aiding shareholders cast their votes.

The complete paper is available for download here.


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