51���

In the U.S., shareholder voting and activism is increasingly used to influence firm policy. In a display of cross-border shareholder activism, a bloc of U.S. institutional investors forced the large Canadian railroad Canadian Pacific to make board and leadership changes in 2012. New research by 51��� Cox Finance Chair Darius Miller and co-authors suggests that shareholder voting can be an effective governance mechanism in countries outside the U.S. "This is important," says Miller, "since in many countries outside the U.S., the need for governance is greatest."

Investors exercise dissent voting when they fear expropriation. Given the well-documented potential for shareholder expropriation that exists in foreign firms, shareholders should also want to leverage voting to engage in activism. The authors set out to test shareholder activism in global markets in a first-of-its-kind, large-scale study. Their results suggest that, on average, the votes of minority "outside" shareholders are indeed relevant to the policies firms pursue. Prior to this paper, there was not any evidence on whether shareholder voting in other countries was effective or not.

Shareholder dissent

Past research shows that the voting process is an effective avenue for shareholder activism for U.S. firms because managers listen to dissent voting. This holds true even though shareholders’ votes are overwhelmingly cast in favor of management’s recommendations. U.S. institutional shareholders cast about 90% of their votes in favor of companies’ recommendations overall. However, these dissenting votes can impact changes in the board, management, compensation, or other policies over the next year. Miller says, "While the dissent votes are almost never enough to outvote management, it's the signal that it sends. Turns out that management listens to the signal. This is also what is found in the U.S."

Dissenting votes by outside shareholders of foreign firms can have an impact on firm policies, and those that have economic consequences. The larger the percentage of dissenting votes cast by shareholders, the higher the probability is that directors leave the board and mergers and acquisitions are withdrawn. Miller explains: "Given that shareholders are likely to oppose board members who they feel are not acting in their interest (that is, distorting shareholder value) and corporate actions that may destroy value, our results suggest that corporate governance is able to work through the voting process even outside the U.S."

Miller notes that in countries outside of the U.S., insiders often control large portions of firms. With large controlling positions, these insiders may be free to pursue their own objectives rather than maximizing shareholder value. "In fact, we find outside [non-local] shareholders are more likely to vote against management when they see large controlling positions or in countries where their rights are not protected," Miller observe. "Again, this suggests they are using the voting process to try to exercise governance." A case of U.S. institutional investors swayed three Japanese firms in their takeover defense policy votes in 2003.

Study particulars

The study used data on the votes cast by U.S. institutional investors for company elections, as well as subsequent director turnover and merger and acquisition (M&A) completion rates. This data was collected from 8,160 companies across 43 countries over the years 2003 to 2009. The study focused on U.S. institutional investors who report all votes they cast on corporate ballots for U.S. and foreign firms and to further policies that are in their clients' best interests. The majority of the study's investors are mutual funds.

The authors focus on director turnover and M&A deal completion rates because such votes are both mandatory and binding. This data is also important economically and consistently available across countries. According to the findings, managers appear to listen to the dissenting director and M&A votes cast by important shareholders. In these tests, dissent voting is important for governance outcomes in firms that have both high and low levels of institutional ownership.

The firms in the sample have average insider control of about 38.2% with significant variation. U.S. institutions hold an average stake of 4.5% of the equity of foreign firm, also with significant variation. The average firm size is $3.5 billion measured by market capitalization and $10.3 billion measured by total assets. Nearly eight percent of the sample firms are cross-listed on a U.S. exchange.

U.S. institutional investors choose to engage in activism more often in cases where they fear expropriation the most. This is most evident in countries with weak investor protections or highly entrenched managers. The research also notes that larger firms have greater information production that may shed light on actions that are harmful to outside shareholders. Thus rather than voting against proposals, investors vote with their dollars and sell their shares in the larger firms with deeper liquidity.

Importance of shareholder voting

The voting process is a fundamental tool to influence corporate governance around the world. The results have implications for private and public communication channels as well. Miller offers, "Large institutional investors can meet with management and express their concerns privately. However, we show that the very public mechanism of formal shareholder voting is a way that their concerns are directly mapped into firm actions." The vote that accompanies share ownership is really the main mechanism by which shareholders can voice their concerns, acknowledges Miller. "We directly test whether this works outside the U.S."

Stock exchanges and regulators around the world should pay attention to these findings. Reforms that enhance the ability of shareholders to vote are likely to be value enhancing. "One key policy ramification is that by opening up a country stock market for investors, this allows for improvements in governance, which many countries seek," says Miller. "Prior research has shown that firms with large foreign institutional investors are governed better than those with just local shareholders. Before our study, the mechanism through which this can occur was not known. It is through the voting mechanism that these institutional investors can improve governance.

In essence, shareholders are using their ballot box to voice and influence better governance in firms across the world.

The paper, "Shareholder Voting and Corporate Governance Around the World," by Caruth Chair in Finance Darius Miller, Cox School of Business, 51���; Peter Iliev, Pennsylvania State University; Karl V. Lins, University of Utah; and Lukas Roth, University of Alberta, is being revised for publication.

Written by Jennifer Warren.