On the Potential and Limitations of Proxy Voting: Delegation with Incomplete Votes

Research Question/IssueIn this paper, we examine the effects of share lending or recall on proxy voting, with a particular focus on the role of index funds.Research Findings/InsightsOur study reveals that higher index ownership in a firm is associated with an increased likelihood of share recall, particularly in the presence of higher institutional ownership, lower past return performance, smaller firm size, and when more shares are held by younger fund families with higher turnover ratios or higher management fees. Using the Russell 1000/2000 Index reconstitution as an exogenous shock, we establish a causal relationship between index ownership and share recall through instrumental variable (IV) analysis. Furthermore, we find a positive correlation between index ownership and share recall for proxy voting proposals related to compensation, director election, and those sponsored by management. In subsequent proxy votes, shareholder‐sponsored proposals and environmental, social, and governance (ESG) proposals receive more support in firms with higher index ownership, especially when share recall is more prevalent. Our analysis does not provide evidence to support the conjecture that firms with higher index ownership are more vulnerable to empty voting issues.Theoretical/Academic ImplicationsOur study enhances the understanding of how index funds recall shares during proxy voting and the impact of index ownership on voting outcomes. The findings support the practice of index funds recalling shares to actively engage in proxy voting, effectively addressing the conflict between short‐term profit‐seeking through securities lending and long‐term governance responsibilities.Practitioner/Policy ImplicationsWe contribute to a better understanding of the role of index funds in corporate governance and shed light on the consequences of securities lending in proxy votes. These findings have important implications for investors, policymakers, and market participants in managing the potential conflicts arising from securities lending activities and promoting effective corporate governance practices.

This paper examines mutual fund families’ proxy voting records to analyze their choices between voting against management (“voice”) and voting with their feet (“exit”). Even though proxy voting is particularly conducive to governance through voice rather than exit, we provide evidence that both exit and voice are important governance mechanisms when Institutional Shareholder Services recommends voting against management. Funds with smaller ownership blocks and shorter investment horizons are more likely to exit, and funds are more likely to exit small, liquid firms with greater insider ownership.

PurposeThis study aims to examine the role of institutional investors (using proxy voting and voice) in influencing the decisions and governance landscape of their investee firms.Design/methodology/approachThe authors use exploratory research design due to the underdevelopment of the problem phenomena, especially in the context of emerging economies. Using asset management companies (AMC) as a proxy for institutional investors, the authors use a multiple case study design. This design was relevant in the setting as it assured triangulation by studying the same phenomenon across firms with distinct characteristics. The authors sourced the data for the multiple cases from primary sources (such as semi-structured interviews) and secondary sources (such as official Webpages and social media pages of AMC and examination of archival documents). Finally, the authors used qualitative content analysis to analyse the data.FindingsThe findings suggest that shareholder activism by institutional investors has grown in India over the period, particularly in matters related to corporate governance, related party transactions, remuneration and compensation. These AMC in India use proxy voting services for advising on voting resolutions in their investee companies. However, voting by AMC does not generally affect resolution results. This is particularly true in the presence of a high concentration of promoter holdings in investee companies.Originality/valueThe study is a novel attempt in an emerging market context to explore the role of institutional investors in influencing firm decisions and improving the governance landscape of the company using proxy voting and voice. This is especially important as the institutional framework in emerging markets is not as strong as in developed markets.

The Troubling Case of Proxy Advisors: Some Policy Recommendations

Proxy advisory firms and their influence on the proxy voting process have recently become the subject of great attention for the Securities and Exchange Commission (“SEC”) among other constituencies. A glance at recent proxy season recaps and reports, many of which devote space to discussing proxy advisory firm recommendations, reveal the significance of this influence on institutional voting. As Sagiv Edelman puts it, “proxy advisory firms exist at the nexus of some of the most high-profile corporate law discussions—most notably, the shareholder voting process, which has recently been the subject of much scholarly and legal debate.” The SEC has responded by announcing that it intends to reform the regulations, or lack thereof, surrounding proxy advisory firms. Recently, the SEC issued proposed amendments to Exchange Act Rule 14(a)-1 which would effectively codify their earlier interpretation of solicitation under this rule. The proposed amendment would “condition the availability of certain existing exemptions from the information and filing requirements . . . for proxy voting advice businesses upon compliance with additional disclosures and procedural requirements.” Furthermore, the amendments would clarify when a lack of disclosure of certain information in proxy voting advice compromises the accuracy of the advice and misleads within the meaning of the rule. The SEC believes that these extra requirements will “help ensure that investors who use proxy voting advice receive more accurate, transparent, and complete information on which to make their voting decisions.” Based on this proposal, it is apparent that the SEC is intent on rectifying some of the problems of transparency and conflicts of interest associated with proxy advisory firms. Given the increasing influence of proxy advisory firms, the misalignment of incentives between proxy firms and the institutional shareholders who use proxy firm services is troubling. This Note identifies inherent problems and concerns with proxy advisory firms and offers solutions to these issues with a focus on eliminating conflicts of interest. Using Henry Hansmann’s theory of ownership, this Note argues that nonprofit ownership of proxy advisory firms eliminates both information asymmetry and conflicts of interest inherent to the current ownership structure. Part I provides a brief overview of the problems and concerns associated with proxy advisory firms. Part II suggests two potential solutions: that Rule 206(4)-6 of the Investment Adviser Act of 1940 should be repealed or alternatively, that nonprofit ownership through investment company associations is a more effective way for investment management companies to comply with their fiduciary duties. Because profit incentive has created conflicts of interest that lead to proxy advice that may not always be in the best interest of investment manager clients, nonprofit ownership promotes transparency that allows parties who rely on the advice to make more independent decisions. Part III argues that nonprofit ownership is the most viable alternative to the status quo.

This article examines the adoption of voting methods designed to support individuals with intellectual disabilities in elections. It focuses on two widely used approaches, frequently explored in scholarly discourse: assisted voting and proxy voting. Both of these voting methods rely on third-party involvement and therefore require the consideration of the prohibition of plural voting in the Australian Constitution. The article concludes that while assisted voting and a limited form of proxy voting-where the proxy must strictly follow the elector’s explicit instructions-are constitutional, proxy voting becomes unconstitutional if the elector is unable to communicate their electoral judgment. Assisted voting therefore emerges as the most practical and constitutionally compliant option.

The Role of Mutual Funds in Corporate Governance: Evidence from Mutual Funds' Proxy Voting and Trading Behavior

ABSTRACTWe investigate whether business ties with portfolio firms influence mutual funds' proxy voting using a comprehensive data set spanning 2003 to 2011. In contrast to prior literature, we find that business ties significantly influence promanagement voting at the level of individual pairs of fund families and firms after controlling for Institutional Shareholder Services (ISS) recommendations and holdings. The association is significant only for shareholder‐sponsored proposals and stronger for those that pass or fail by relatively narrow margins. Our findings are consistent with a demand‐driven model of biased voting in which company managers use existing business ties with funds to influence how they vote.

Because mutual funds are the largest equity holders and because the retirement assets that are managed by mutual funds have been growing, mutual fund managers may have more incentives to support management in order to attract and retain pension business. I explore whether pension business ties have an impact on voting behaviors of mutual funds by examining the link pension business ties between mutual funds and the firms to actual mutual fund voting outcomes. At the fund family level, I find a positive relation between pension ties and mutual funds’ voting support for management. This relation becomes stronger when there is a voting divergence among funds within the same families. At the individual fund level, I find that individual funds are more likely to vote with management if they are included as one of the investment options of the pension plan of their portfolio firms. This suggests that the SEC should at least consider the recent petition from the AFL-CIO proposing that the SEC require mutual funds to disclose business ties with the firms in which they invest.

PurposeThe purpose of this paper is to study the impact of institutional shareholdings on earnings management activities of their portfolio firms.Design/methodology/approachUsing a final sample of 94 top firms on the Bursa Malaysia based on market capitalization as at 31 December 2007, this paper uses the magnitude of discretionary accruals as the proxy for earnings management. The paper measures the aggregate institutional ownership percentage of shareholdings of the five top institutional investors which are further divided into two categories: pressure sensitive consisting of percentage ownership by banks and insurance companies; and pressure insensitive institutional investor consisting of percentage shareholdings by unit trusts, pension funds and state‐owned institutions. Data were collected over a six‐year period from 2002 to 2007. The year it started was also when all the listed companies in Bursa Malaysia started adopting the MCCG requirements as mandatory reporting in annual reports.FindingsThe results show that only Malaysia Shareholders Watchdog Group (MSWG) institutional shareholdings are effective in mitigating self‐serving earnings management behavior of their portfolio firms. Within MSWG shareholdings, Permodalan National Berhad (PNB) is the most effective institutional shareholder in mitigating opportunistic earnings management behavior. Overall, the findings suggest that ownership may not be enough to mitigate earnings management. Firms may have to engage in shareholder activism such as through proxy voting and establishing direct dialogues with management in order to preserve the value of their investments.Research limitations/implicationsOne of the limitations in this study is measurement error which is a critical problem for studies on earnings management. Hence, this study inherits all the limitations of the Jones model although it is noted that it and the modified Jones model are extensively used in earnings management literature. Overall, this study provides empirical evidence to assess the merits of calls for institutional investors to play a greater role in portfolio firms' corporate governance practice in Malaysia. In essence, the results from the study provide evidence that ownership alone is not enough and institutional investors need to be involved in shareholder activism in order to be effective as an external monitor. In other words, by engaging in shareholder activism, institutional investors would be better able to safeguard the value of their investment. Moreover, the size of their shareholdings should provide powerful incentive for them to monitor their investee firms.Originality/valueThis is the first published paper that focuses on institutional investors and earnings management in Malaysia, as previous studies have focused more on developed countries. This study aims to provide empirical evidence on the effectiveness of institutional investors in mitigating opportunistic earnings management, in order to ascertain their generalizability to developing countries like Malaysia.

Proxy Voting by Directors at the Board Meeting and Board of Directors' Resolution without Meeting

Smart Contracts for Securities Transactions on the DLT Platform (Blockchain): Legal Obstacles and Regulatory Challenges

The paper analyzes tender offers and proxy contests as alternative means of resolving corporate governance conflicts between dissidents and incumbent management. We show that when a dissident shareholder is sufficiently confident about the potential benefits from changing corporate policy, he will seek majority control by making a tender offer rather than initiating a proxy contest. When the dissident is relatively uninformed, however, he may opt for a proxy contest, thereby utilizing the information of other shareholders to implement the better policy. Consistent with empirical evidence, the model predicts that announcements of tender offers will tend to be associated with larger positive stockprice reactions than announcements of proxy contests. The model is easily extended to allow for promanagement bias in proxy voting by institutional investors. Empirical observations that have been viewed as evidence of such promanagement bias are shown to be quite consistent with the absence of such bias. Policy issues are discussed as well. An interesting result is that even policies targeted at reducing the costs of conducting proxy contests may have ambiguous social consequences, given the possibility of substitution between tender offers and proxy contests.

Proxy voting and the SEC: Investor protection versus market efficiency

Special voting arrangements intended to increase the convenience of voting—such as early voting, mobile ballot boxes, postal voting, remote online voting, and proxy voting—are widely implemented across the world alongside traditional voting at polling stations on election day. These vote facilitation instruments are designed to assist voters who face difficulties in reaching polling stations on election day, whether due to geographic distance, time constraints, or health conditions. However, voting outside the controlled environment of polling stations typically involves more relaxed administrative procedures, which can raise concerns about electoral integrity. This chapter introduces special voting arrangements and presents their implementation worldwide. It also systematizes current research on their effects, drawing on two key theoretical frameworks: rational choice theory and the human reflexivity approach. The review of existing research indicates that while these voting arrangements have a limited effect on increasing electoral participation, the relaxation of administrative rules—despite limited evidence suggesting it complicates adjudication of electoral regulations—undermines perception of electoral integrity among some voters. Thus, election authorities must carefully balance the goal of increasing convenience, which may potentially lead to higher participation, with the imperative of safeguarding electoral integrity.