Paul Calluzzo is assistant professor of finance at Queen’s University Smith School of Business and Simi Kedia is the Albert R. Gamper Chair in Business at Rutgers Business School. This post is based on their recent article, forthcoming in the Journal of Financial Economics. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Fund and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).
Mutual funds own 24 percent of the U.S equity market and are dominant players in proxy voting. If mutual funds were to vote their proxies to maximize firm value, they would play an important role in corporate governance. However, many funds may not find it optimal to invest resources to get informed about specific votes. Proxy advisory firms like Institutional Shareholder Services (ISS) fill this gap by gathering information across firms to guide mutual funds in their voting decisions.
ISS recommendations have an important impact on voting patterns and a negative ISS recommendation will significantly reduce the aggregate support for management. Even if management wins the vote, low management support has consequences. The proxy vote has increasingly become a referendum on a firm’s performance with investors using their vote to express concerns about firm policies or stewardship.
The Prescience of 5% of Investors: A Monsanto Case Study
More from: Sanford Lewis, Shareholder Rights Group
Sanford Lewis is Director at the Shareholder Rights Group. This post is based on a Shareholder Rights Group publication by Mr. Lewis, and was adapted from comments submitted by the Shareholder Rights Group to the Securities and Exchange Commission in response to remarks made at the SEC’s Roundtable on the Proxy Process.
Even though a proposal receives only a fraction of shareholder support, it may still be the best available opportunity to bring more foresight to investors, board, and management on an issue that may eventually prove costly to a company. Only a small portion of investors may be exercising prescience on risk management or governance issues that will, in fact, prove to be material for the long-term well-being of the company.
In the roundtable discussion and correspondence, corporate representatives have been implying that 3% or 5% of investors supporting a proposal is insignificant, such that the resubmission thresholds should be altered to disallow this minority from having the ability to require continued debate and attention to an issue on the annual proxy. Yet, recent developments at Monsanto demonstrate that a subgroup of this size may be prescient in their divergent or contrarian perspective. Allowing them to bring continuing attention and debate could mean the difference between a company that succeeds, and one which fails to take in crucial input beyond the insular boardroom and executive suites.
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