By Konstantinos E. Zachariadis

As Kahan & Rock (2007) note “Never has voting been more important in corporate law”. Participation in corporate voting is the main mechanism via which most shareholders voice their opinion and affect management. As part of a general rise in attention to shareholder voting and shareholder activism, regulators have called for greater participation to ensure more representative voting results and better monitoring. However, conventional wisdom questions the usefulness of such requests. Do shareholders vote—unless they own large blocks or they are legally required to vote? There is little guidance, theoretical or empirical, to this discussion. We offer the first comprehensive study of voting participation by shareholders.

To set the stage, we document substantial participation in US corporate voting contests between 2003 and 2013. The average turnout rate is 77%, and 73% among voters who are not required to vote. This compares to turnout rates of up to 57% in the US presidential elections between 2000 and 2016. We argue that ownership heterogeneity accounts for many of the differences between corporate and political elections. First, voting power in corporate elections is determined by the size of the holdings, which are not equally distributed (one-share-one-vote). Second, many voters are institutions (e.g., mutual funds, hedge funds, banks, pension funds, etc.) rather than individuals.

In our paper, we show how shareholders decide whether to vote. In a rational choice model we illustrate how preferences, beliefs, and ownership structure affect participation, accounting for the observed heterogeneity in shareholder characteristics. In particular, the model considers two groups of shareholders in terms of voting participation: the first who always vote, henceforth regular voters (or committed voters), and the second who choose whether to do so, henceforth discretionary (or intermittent voters). We can interpret the first group as either institutional shareholders that are legally bound to vote, or blockholders that hold such a large fraction that voting is always beneficial to them. The second group can be thought of as dispersed shareholders who choose to vote or not. For example, in the US, institutional investors have a fiduciary duty to vote in their portfolio firms. Moreover, custodians of retail investments (such as mutual funds) must report actual votes and voting policies in N-PX forms. In our application of the model to the data, we use the characteristics of these investors to describe regular voters. However, our model is also applicable to a broader setting, more pertinent to countries outside the US and the UK, where regular voters are family owners whose preferences are known and who own sufficiently large blocks so that they always vote.

The model unravels the effects of ownership structure and preferences on discretionary participation. When discretionary voters have ex-ante similar preferences to regular voters, that is they agree, they free-ride on regular voters, leading to lower participation. The effect is comparable to that in the context of takeover bids as in the seminal Grossman & Hart (1980), with the difference that in our voting contest, discretionary shareholders can have a positive probability of being pivotal but still free-ride. In contrast, when discretionary shareholders disagree with regular voters, they have a higher chance of being pivotal and therefore there is greater (discretionary) participation, or an underdog effect.

In our model shareholders are partisan. In the corporate context, such partisanship is analogous to disagreement between shareholders, which is a widespread phenomenon amongst participants in firms. Disagreement may arise due to conflicts of interest, difference in beliefs, and difference in incentives, amongst others.

The insights from the model guide our empirical design: we use the model’s closed-form solutions to calculate the implied importance (benefit-cost ratio) of voting from observable variables, such as total voting participation. Using those estimates we can moreover calculate: the participation rates for supporters per voter type (for vs. against), and the probability of being pivotal in such a contest. To the best of our knowledge this is the first time these quantities are calculated from voting data.

Our data consists of a sample of 18,520 proposals put forward in Russell 3000 firms between 2003 and 2011. To estimate the preferences of the different owner groups we use the institutional setting in the US, where many institutional investors, notably mutual funds, have a fiduciary duty to vote (SEC Final Rule IA-2106) and publicize their votes annually in form N-PX. Proxy filing data on beneficiary ownership over 5% shows that the vast majority of block ownership in the US is actually institutional. Indeed, non-institutional block ownership is so rare (2% of all block ownership) that it is unlikely that their preferences are common knowledge (there is no voting history available for non-institutional owners in the US). We take advantage of this disclosure setting and use the N-PX (filing) owners and their voting history to estimate preferences of regular voters, and their complement, that is, the non-N-PX ones, to estimate preferences of discretionary voters.

Consistent with the comparative statics of the model, we first show that discretionary shareholders are less likely to vote when N-PX voters strongly support the proposal, and when the distribution of preferences is more dispersed (i.e., shareholders know less about each other’s preferences). We also show evidence for the free-rider effect and the underdog effect: participation in elections with more N-PX ownership is higher when the two groups disagree with each other and lower when they agree. We then use the formula generated by the model to estimate per-voter importance of proposals.

We establish a number of stylized facts on the importance of proposals. In general, shareholder proposals are more important than management proposals. This may reflect the legal requirement for management to have shareholders decide upon certain topics even if they may be trivial in that specific case. Among shareholder proposals, restructuring (i.e., share issuance, spinoffs, mergers, etc.) related proposals are the most important, followed by CSR and business- related proposals. The least important shareholder proposals are on takeover defense mechanisms and corporate governance. The order reverses for management proposals: governance related management proposals are the most important management proposals and CSR are the least important. Finally, within shareholder proposals, we rank sponsor types. Differences between sponsor types are not statistically significant with the exception of pension funds and individual activists: pension fund sponsored proposals are more important than those sponsored by activists.

In summary, we analyze how shareholders decide whether to vote by proposing a rational choice model where the participation decision depends on the probability of being pivotal and the costs and benefits of voting. We show that more homogeneity in ex-ante preferences among shareholders yields lower participation rates (free-rider effect), while higher disagreement yields higher participation rates (underdog effect). The model allows us to calculate hitherto unobserved statistics on the turnout, as well as, the perceived importance of proposals, isolated from other variables that affect the probability of being pivotal such as the ownership structure. We document a number of novel stylized facts: shareholder proposals are perceived as more important than management proposals and the most important shareholder proposals are about restructuring.


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