Study: Institutions Use Proxy Voting To Voice Corporate Governance Concerns

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By Yin Wilczek

June 12 — Institutional investors actively use the proxy voting process to influence corporate governance and policies at individual companies, a soon-to-published study finds.

Institutional investors such as pension or mutual funds tend to be secretive about their corporate governance preferences, often conducting their interactions behind closed doors. However, using data on the securities lending market, a study by academics from Georgetown University and Cambridge University found that institutional investors restrict or call back their loaned shares before the record date to exercise their voting rights.

And there is higher share recall for companies with weaker corporate governance, weaker performance and higher institutional ownership, as well as those facing votes on antitakeover or compensation proposals.

‘Contentious Events.'

“The recall is most pronounced for contentious events such as proxy fights, mergers, negative changes in [Institutional Shareholder Services Inc.'s] recommendation, and close votes in the previous year,” the study states.

Moreover, in examining the vote outcomes, higher recalls were associated with fewer “for” votes for management and more “for” votes for shareholder proposals.

The study, “The Role of Institutional Investors in Voting: Evidence from the Securities Lending Market,” is slated to be published in the Journal of Finance. It was authored by Georgetown University's Reena Aggarwal and Jason Sturgess, and Cambridge University's Pedro Saffi.

Most large institutional investors have a securities lending program in which they loan their equities to borrowers such as hedge funds in exchange for collateral. The institutions recall their lending supply ahead of the proxy record date so they can vote on measures. According to the study, while some institutions always recall their shares before a vote, the majority do this selectively based on the balloted proposals.

The study examined proprietary lending data from January 2007 to December 2009.

Important Implications 

Aggarwal, a finance and business administration professor at Georgetown University's McDonough School of Business, June 11 told Bloomberg BNA that in the age of increasing shareholder activism, the study has important implications for companies, shareholders and policy makers.

Aggarwal said in an e-mail that for companies, the message is that institutional investors are voting to voice their concerns rather than simply exiting firms when unhappy with the company and its management. “Institutional investors will oppose management in firms that have weak corporate governance and weak performance,” Aggarwal said, adding that these are issues that management can rectify.

For institutional investors, the implication is that “voice matters” and they should take voting seriously, Aggarwal said.

Policy Makers 

Meanwhile, policy makers should take comfort from the fact that the proxy voting mechanism works, Aggarwal said. However, retail investors still are not participating in proxy voting, so “an important voice is missing.”

The study also suggested that policy makers should address the need for investors to learn about proxy items before the record date so they can decide whether to lend their shares.

In other findings, the study stated that the influence wielded by ISS is “evident” from the vote outcomes. It noted that if ISS opposes a company's management, there is a higher recall associated with more “for” votes for shareholder proposals and fewer “for” votes for management.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The study is available at

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