Influence of Public Opinion on Investor Voting and Proxy Advisors
Reena Aggarwal
McDonough School of Business, Georgetown University
[email protected]
Isil Erel
Fisher College of Business, Ohio State University
[email protected]
Laura Starks
McCombs School of Business, University of Texas at Austin
[email protected]
April 2014
Abstract
We examine the evolution in voting patterns across firms over time. We find that investors have
become more independent in their voting decisions, voting less with the recommendations of
management or proxy advisors. Even when the proxy advisor recommends voting against a
proposal, we find that over time investors are more likely to ignore the recommendation.
Moreover, we also find that proxy advisory recommendations have become more supportive of
shareholder proposals. Our main contribution is to examine the role of public opinion in the
voting changes. We show that public opinion on corporate governance issues, as reflected in
media coverage and surveys, is strongly associated with investor voting, particularly mutual fund
voting. In addition, even proxy advisor’s recommendations are associated with public opinion.
Our analysis suggests that public opinion influences corporate governance through the voting
process.
JEL: G32; G34; G38;
Keywords: Public Opinion, Media, Proxy Advisors, Institutional Investors, Proxy Voting
“We rely on several sources of information to inform our voting. We do our own analysis based on
information published by companies, look at research done by proxy advisors, and follow media
coverage. Media coverage helps us keep in touch with a broad range of constituents’ views on corporate
governance issues."
Michelle Edkins, MD, Global Head, Corporate Governance and Responsible Investment, BlackRock
1. Introduction
Institutional investors have become the dominant shareholders in many firms. Their
ability to change the agenda through proposal submission and voting has evolved from having
little apparent importance to what many consider to be an important aspect of corporate
governance. In other words, institutional investors, whether activist investors or not, now have
the power of the vote to influence corporate policy. As considerations of best practices in
corporate governance have evolved, so have the opinions (and votes) of institutional investors.
Moreover, institutional investors do not operate in a vacuum; they have beneficiaries or their
own shareholders with opinions on how their investments should be managed and voted.
Because these beneficiaries’ and shareholders’ care about their institutions’ voting behavior, not
only mutual funds (which are required to do so by law) but also many other institutions now
publicly disclose their votes. Thus, there exists pressure or encouragement for institutions to vote
in particular ways, suggesting that institutional voting and its changes through time reflect public
opinion on corporate issues.
In this paper, we address the question of how public opinion influences the proxy voting
process. Our main contribution is to provide evidence suggesting a strong influence of public
opinion on the evolution in both investor voting behavior and proxy advisor recommendations.
Therefore, our results are consistent with the idea that a channel through which the public can
communicate with corporate management and potentially influence corporate behavior is
through the proxy voting process. Dyck, Volchkova and Zingales (2008) argue that media
attention can play a role in corporate governance by affecting the reputation of firms and their
executives. We provide evidence that the new channel, voting, also is a way in which media
coverage can influence firm behavior. This channel is important because media coverage
1
captures the attention of proxy advisors, institutional investors and individual investors, and is
thus reflected in recommendations and votes.
Large institutional investors face tens of thousands of proxy votes each year. For
example, BlackRock with more than $4.3 trillion under management, voted on 130,000
proposals, at more than 15,000 shareholder meetings, in 90 markets worldwide, and further
engaged with 1500 firms in 2013. Because of such large numbers of shareholdings and the
associated monitoring actions required, institutional investors need to gather information from
multiple sources in order to monitor firms and vote effectively. This information set includes
their own analysis, research conducted by sell-side analysts as well as proxy advisory firms, and
as indicated in the quote by Ms. Edkins of BlackRock, media coverage serves as an additional
external source of information about their portfolio firms. The media collects, aggregates, and
disseminates information as discussed by Dyck, Volchkova and Zingales (2008). Media
coverage would be expected to help calibrate the views of institutional investors about corporate
governance issues relative to general public opinion, or even to help them learn about the views
of other institutional investors. Ultimately, even large institutional investors are stewards of
capital for the wider public, and therefore need to pay attention to public opinion in addition to
their own research. Small institutional investors also need to rely on multiple sources of
information in their voting decision as they are more likely to lack the capacity to conduct their
own extensive research.
Previous studies have emphasized the influence of proxy advisory firms on voting by
institutional investors, finding a correlation between these firms’ recommendations and mutual
fund voting.1 Yet, the proxy advisory firms do not exist in a vacuum either. Both voting by
institutional investors and recommendations of proxy advisory firms can be influenced by the
economic and social climate of public opinion. In fact, this can be seen in the fact that one proxy
advisory firm, Institutional Shareholder Services (ISS), annually gathers feedback on their proxy
1
See, for example, Bethel and Gillan (2002), Ertimur, Ferri and Muslin (2011) and Iliev and Lowry (2013).
2
policies from institutional investors, corporate issuers and the wider corporate governance
community in advance of the proxy season. For example, the ISS U.S. Governance Policy 2012
updates dated November 17, 2011, state: “ISS reviews and updates its proxy voting guidelines
each year, taking into account emerging issues and trends, the evolution of market standards,
regulatory changes, and feedback provided by ISS' institutional clients.” Thus, as public opinion
changes so do the recommendations issued by ISS and voting by investors.
In order to better understand the role of public opinion in shaping the proxy voting
process, we examine trends in shareholder voting as well as changes in the underlying
influences. Our proxy for the public opinion that would be expected to be associated with
institutional voting is the magnitude and tone of media coverage about corporate governance. To
narrow this coverage down to a manageable number of news stories, we focus on the media
coverage of executive compensation. We also employ an alternative measure of public opinion
through Gallup surveys.
Although for many years there was little, if any, evidence showing direct consequences
of shareholder voting on proxy proposals (consistent with the Berle and Means (1932)
preliminary hypothesis on the role of shareholder democracy), in recent years several potential
influences have led to a higher importance of proxy voting. The potential influences include the
recently required disclosure of mutual fund voting records, the recent financial crisis with the
ensuing public attention to executive compensation, the apparent rise of influence of proxy
advisory firms, and better strategies on the part of sponsors of shareholder proposals. These
influences suggest higher votes in favor of shareholder proposals and against management
recommendations. In order to test the association between these influences and proxy voting, we
examine the changes in investor voting patterns in shareholder proposals from 2004 to 2010 with
a particular focus on the role of public opinion. Overall, our results indicate that shareholders
appear to take voting on proxy proposals seriously and that shareholder proposals are gaining
more positive votes. The increased votes in favor of these proposals suggest that shareholder
proposals are becoming a more important part of the governance process. Further, we find that in
3
recent years shareholders have become more independent in their voting. That is, they are less
likely to follow the recommendations of either management or proxy advisors. We argue that
part of this independence comes from receiving information through media coverage of firms.
Specifically, we find that while investor support for management proposals remains
relatively flat (from 81.6% in 2004 to 85.5% in 2010), investor support for shareholder proposals
has increased a large amount over our sample period. The mean support rate for shareholder
proposals increased from 23.6% in 2004 to 31.8% in 2010, after peaking at 37% in 2009. This
tendency is also observed in the rapid changes in the proportion of time investors voted with
management’s recommendation on shareholder proposals. In 2004, institutions voted in
agreement with management’s recommendation on shareholder proposals in 74% of all
proposals. However, by 2010, they voted in agreement with management in only 54% of the
proposals. These results at the firm level are consistent with those of Collins (2010) who
examines the 2007 to 2009 period at the mutual fund level and finds increasing support for
shareholder proposals by mutual funds. He concludes that one reason for this increasing support
rate is due to changes in proposal types. We find that even controlling for proposal types and
their changes, there has been an increase in support rate for shareholder proposals by all
investors as well as by mutual funds. We find the support rate was highest in 2009, following the
financial crisis. In contrast, the way in which investors vote on management proposals has not
significantly changed.
The changes in support for shareholder proposals are not driven by the recommendations
of the major proxy advisory firm, ISS. Strikingly, we find that while investors voted with ISS’s
recommendation 78.4% of the time in 2004, by 2010 the percentage in agreement with ISS was
down to 57.5%. This pattern is specifically driven by investors not following ISS’s
recommendation when the proxy advisor opposes shareholder proposals. In 2004, 60% of the
votes followed ISS’s opposition against proposals but by 2010 only 20% of the votes followed
the recommendation. Thus, shareholders appear to have become more independent of both
management and the proxy advisory firm. We find this decline in investor following of ISS’s
4
recommendation even though ISS’s support for shareholder proposals has increased over time. In
2004, the ratio of ISS’s “against” recommendations to “in-favor” recommendation was 159%,
and the ratio declined to 34% by 2010. One explanation for this result is that institutional
investors increasingly developed their own policies, requesting ISS to custom-design a voting
mechanism to implement the policy. At the same time, institutional investors have given more
attention to voting, and conduct their own analysis regarding the voting decision on a case by
case basis.
Our study is the first to show that public opinion matters in proxy voting by investors.
Specifically, we find that the increased support for shareholder proposals is associated with
public opinion. Since 2003, the voting for shareholder proposals, whether considered at the firm
level or the fund level, is related to public opinion. Further, this result holds for different
measures of public opinion, whether measured at the aggregate level through poll data from
Gallup surveys or media coverage, or measured at the firm-level through media coverage of
corporate governance news, specifically executive compensation. Moreover, our analysis
indicates that the recommendations of ISS are also related to public attention.
There have been a large number of studies on shareholder proxy voting and on mutual
fund voting.2 These studies have generally found that voting depends on firm and fund
characteristics. Many of these studies have limited the number of firms and the number of funds,
whereas we consider proposals at any of the Russell 3000 companies, and in our analysis of
mutual fund voting, we include 475 fund families and 13,313 individual funds. Thus, we
examine a broad array of firms and mutual fund families. Beyond our contribution using such a
large sample and examining changes over time, we also contribute by showing that investor
voting has become more independent of ISS recommendations, counter to what many
researchers and commentators believe. This change is surprising, given that over time the
support by ISS has increased for shareholder proposals.
2
For a review, see Gillan and Starks (2007). For a review of more recent papers, see Cotter, Palmiter and Thomas
(2010).
5
Our most novel contribution is the examination of the relation between public opinion and
voting decisions at both the firm and fund level across time. Public opinion provides institutional
vote with power because there is a lot more than just the individual institutional investor behind
the vote, the vote reflects wider public sentiment. In that sense aggregate public opinion can play
the role of the activist investor envisioned by Levit and Malenko (2011) to aid in changes caused
by the nonbinding voting on shareholder proxies.
2. Shareholder Involvement, Voting and Public Opinion
An important question is whether shareholder involvement, such as through the voting
process, even matters to a firm’s valuation or managerial process. One argument maintains that if
shareholders have more voice through the corporate democratic process, agency costs will be
lowered.3 The counterargument is that shareholders should delegate their authority to the board
of directors due to the greater efficiency in the delegated model for the governance process.4 For
example, Bainbridge (2006) argues that in publicly held corporations there exist numerous
shareholders with diverse preferences, and these shareholders lack “both the knowledge and the
incentives necessary to exercise an informed vote.” In such a situation he argues that it makes
sense for there to be a complete separation of ownership and control. Similarly, Easterbrook and
Fischel (1983) state that this type of argument implies that shareholders’ interests are protected
not by voting but by the market for the firm’s stock and the managers’ need to raise capital, the
labor market, and the product markets. Further, “it would make little difference if shareholders,
like bondholders, could not vote at all. Funds spent providing shareholders with a more effective
voice are wasted at best and harmful beyond their costs if they hamper the firms’ effective
pursuit of profits.”
Despite these arguments, shareholder voting has become an increasingly important aspect
of corporate governance and shareholder ownership.5 For example, shareholders now approve a
3
e.g., Bebchuk, 2005
See, for example, Hayden and Bodie (2010).
5
For an explanation of the operational issues of shareholder voting, see Kahan and Rock (2008).
4
6
number of managerial decisions such as the selection of the auditors, employee stock plans or
executive compensation plans. Similarly, many firms have revised their charters to require a
majority shareholder vote for directors.6 Maug and Rydqvist (2011) provide theoretical and
empirical evidence that shareholders vote strategically on management proposals. Christoffersen,
Geczy, Musto and Reed (2007) provide evidence of proxy vote trading and conclude that the
vote trading occurs more often for firms with more asymmetric information, worse performance,
and that it corresponds to support for shareholder proposals and opposition for management
proposals. Furthermore, federal agencies have stressed the need for institutional investors to
consider proxy voting as part of their fiduciary duties.7 In 1994 the Department of Labor, which
has oversight of corporate pension funds under ERISA, stated that a responsible pension fund
fiduciary should engage in active monitoring, which would include voting of proxies.8 Similarly,
the SEC issued a new rule in 2003 requiring mutual funds to disclose their proxy voting record
on an individual holdings basis.
Shareholder involvement encompasses the ways in which shareholder and investor input
are communicated to management. Such input can be communicated through direct engagement
with management. Institutional investors often consider the changes to a company’s governance
structure to be a long-term process. Consequently, they often work behind the scenes to effect
the changes.9 However, if management is not open to such communications or remains
intransigent (at least from the investors’ view), the shareholder has other tools. Another form of
involvement by shareholders is the submission of proxy proposals. Since the proxy proposal is a
way of communication with management and other shareholders, a majority vote is not always
the ultimate intention. In fact, shareholder proposals are often withdrawn because the shareholder
is able to reach an agreement with management.
6
For analyses of voting on directors or majority voting proposals, see Cai, Garner, and Walkling (2009; 2011).
See, for example, Lublin (2002).
8
See Department of Labor’s Interpretative Bulletin 94-2.
10
For example, management can influence the participation in the vote and the voting outcome through the efforts
of hired proxy solicitors (Pound, 1988; Gillan and Starks, 2007).
7
7
One aspect of shareholder proposals that has been highlighted is that they are advisory to
the board’s deliberations. Thus, in concept, a firm’s board and management can ignore the voting
outcome even if the proposal receives a majority positive vote. Moreover, in some cases
shareholder proposals do not receive majority votes because management has the ability to affect
the voting outcome.10 However, given the increasing attention on many of the shareholder
proposals by the media and investors, it is not necessary for the proposal to win a majority vote
to have an influence.
Similarly, shareholders may expect that a significant vote in favor of a shareholder
proposal (or against a management proposal) is a signal that management should consider
making changes. For example, in a recent survey ISS found that managers expect to make
changes if a say-on-pay proposal receives more than 40% negative vote, but their institutional
investor clients set an even low bar, expecting to see the board or management make changes if
the proposal receives greater than 30% negative vote. Thus, it is not just a matter of whether a
particular proposal passes (receives majority vote), but rather it is a method through which
shareholders can communicate in aggregate with the board and management.
Aggregate changes in shareholder proposals and voting on those proposals can have
indirect effects as well. First, they can engender a regulatory response, for example, Congress
can change laws or the SEC can change rules, which can be costly for firms in terms of new
constraints or compliance costs. An example would be the Dodd-Frank requirements regarding
say-on-pay. On an individual firm level, changes in the submission of shareholder proposals and
the subsequent shareholder voting on those proposals can have negative effects on investors’
perceptions of and willingness to hold the firm’s shares, which can increase the firm’s cost of
capital. Similarly, lenders may also be less willing to provide capital if those investors view
management as being difficult. Thus, it is not just the vote itself, but the power of the vote and
what is implied behind it – institutional investor and regulatory muscle. Levit and Malenko
10
For example, management can influence the participation in the vote and the voting outcome through the efforts
of hired proxy solicitors (Pound, 1988; Gillan and Starks, 2007).
8
(2011) argue that the nonbinding voting on shareholder proxies needs an activist investor to have
effects. We hypothesize that aggregate public opinion can itself play the role of activist investor
in forcing companies to make changes. Cvijanovic, Dasgupta, and Zachariadis (2014) in the
context of lawsuits conclude that investor attention plays a role in corporate governance via its
effect on institutional investors.
3.
3.1
Changes in Proxy Proposals and Voting
Proposal Characteristics
We obtain data from several different sources. Voting records for each proxy proposal for
each firm in the Russell 3000 Index are obtained from ISS for the period January 2004 through
November 2010. The information in these records include the date of the meeting, a description
of the proposal, whether the proposal is sponsored by management or shareholders, and
recommendations regarding how investors should vote on the proposal from management and
from ISS. The records also provide the number of shares outstanding, the number of shares voted
for/against/abstain, requirements for the proposal to pass, and the final voting outcome.
Shareholder proposals are classified into four categories: 1) Board, 2) Corporate
Governance (e.g., supermajority voting, preemptive rights, and poison pills), 3) Executive and
Director Compensation, and 4) Other (e.g., proposals dealing with social issues, human rights,
health, and environment). For limited comparisons, we also examine five categories of
management-sponsored proposals: 1) Board, 2) Capitalization, 3) Mergers and Restructuring, 4)
Executive and Director Compensation, and 5) Anti-takeover. Any management-sponsored
proposal related to board elections or defined as “routine business” is excluded from our
analysis.11
11
Board proposals include issues such as board size, classified/staggered board, authority to appoint committees,
term limits and proxy access; capitalization proposals deal with issues such as authorizing issuance of new stock,
stock split and share repurchase; merger proposals address reorganization and mergers; compensation proposals
relate to executive, director and employee compensation involving option plans, repricing of options, restricted
stock, bonus, and loans; anti-takeover proposals deal with amendments to articles, charter, bylaws, written consent,
supermajority voting and special meetings.
9
Table 1 provides descriptive statistics regarding the 18,438 proposals in our sample, of
which 14,448 (78.4%) are sponsored by management and 3,990 (21.7%) by shareholders.12 The
highest proportion of proposals that are sponsored by shareholders is in 2007 at 24.5% and the
lowest in 2005 at 19.9%. However, the maximum number of proposals is in 2009, following the
financial crisis. A major part of the increase dealt with issues related to board mechanisms such
as majority voting, the separation of the board chair from the CEO, and the right to call a
meeting. The participation rate, defined as the number of shares voted as a percentage of the
shares outstanding, varies within a tight range of 78% to 81% for management proposals and
70% to 75% for shareholder proposals. Institutional investors have a fiduciary responsibility to
exercise their vote in most circumstances, and given their dominance in share ownership, we
would expect to see a high participation rate.13
Table 2 reports the times series frequencies of the major categories of proposals. Panel A
shows that of the 3,390 proposals sponsored by shareholders during our sample period, 38% are
in the OTHERS category that aggregates proposals related to social, environmental and health
issues. The remainder consists of proposals addressing issues regarding the firm’s compensation,
board, and corporate governance. As shown in Panel B of Table 2, the majority of the
management-sponsored proposals fall in the compensation category, with other proposals on
capitalization, the board, anti-takeover amendments, and reorganization/mergers. As mentioned
earlier, routine and director election proposals are not included. The striking reduction in the last
category is primarily due to the fact that the financial crisis resulted in reduced M&A activity,
hence a reduction in related proposals.
3.2
Changes in Support Rate for Proposals
We use two measures of proposal success: 1) the mean support rate for the proposals, and
2) the percentage of proposals that pass, i.e., have a shareholder vote of greater than 50%. We
12
It is clear that a little less half of the firms have a substantive management proposal or a shareholder proposal in a
given year. Although the vast majority of firms have their annual meetings in the spring, the coverage for 2010 is
not complete because the data ends in November 2010.
13
If institutional investors lend out their shares on the record date then they cannot vote as discussed by Aggarwal,
Saffi and Sturgess (2013).
10
calculate the support rate as the ratio of FOR votes to the total votes or outstanding shares,
depending on the voting criterion for the proposal. Total votes may include only FOR and
AGAINST votes or also ABSTAIN votes. We report the mean support rate in Table 3 for
shareholder-sponsored and management-sponsored proposals. The mean support rate for
shareholder proposals increased over time with an average of 29.4% for the full sample period,
implying that 29.4% of all votes were in support of the shareholder-sponsored proposal. This rate
can be contrasted with the average support rate for management proposals of 83.4%. Following
the financial crisis, shareholder proposals in 2009 obtain the highest support rate of 37%.
On average, only 16.9% of shareholder proposals pass, i.e., receive favorable votes of
greater than 50%. Again this can be contrasted with the pass rate for management-sponsored
proposals, 97.4% of all management-sponsored proposals pass.
The proxy season in 2008 was already over by the time the financial crisis was in full
force. Therefore, the response to the financial crisis is captured primarily in the 2009 proxy
season. The largest number of both management and shareholder proposals is in 2009. The
results of voting on these proposals suggest that there was less support for management and more
support for shareholders in response to the financial crisis. Moreover, the highest pass rate for
shareholder proposals occurs in 2009 with 25.9% of the proposals passing. That year also has the
largest pass rate for board and compensation proposals, in fact, almost half of all board-related
proposals pass. There is also a large increase in board and compensation proposals sponsored by
shareholders in 2009. There is evidence of less support for management in 2009 with lower mean
pass rate for board and anti-takeover proposals sponsored by management.
The effects of the financial crisis on the 2009 proxy season are underscored by the trend
reversal in 2010, when management proposals had their highest pass rate at 98.2% and the pass
rate for shareholder proposals dropped to 16%.
3.3
Influence of Management and Proxy Advisor Recommendations
Voting patterns of investors have exhibited influence of management as well as proxy
advisors. For each firm in our sample, we obtain the general recommendation issued by ISS for
11
each proposal on the ballot.14 We find that in the earlier years of our sample, investor voting
tends to be closely associated with the recommendations of management and proxy advisors.
However, Figure 1 and Table 3 show that over time investors have become more independent in
their voting, such that they are less likely to follow the recommendations of either ISS or
management when they vote on shareholder-sponsored proposals. From 2004 to 2010, the
percentage of votes following management’s recommendation has declined as has the percentage
of votes following ISS’s recommendation. The percentage of votes following management’s
recommendation in shareholder-sponsored proposals has decreased from 73.7% in 2004 to
53.6% in 2010, the lowest support being in 2009. Similarly, the percentage of votes following
ISS’s recommendation has declined from 78.4% in 2004 to 57.5% in 2010. In Figure 1b, we split
voting with ISS based on proposals that the proxy advisor supports or opposes. As shown in the
figure, voting independently of ISS is occurring for shareholder proposals that ISS opposes and
not for proposals that ISS supports. 60% of all votes followed ISS’s negative recommendation in
2004 but by 2010 only 20% of the votes followed the negative recommendation. This trend is not
observed for proposals that ISS supports. The pattern indicates that over time investors are
voting in favor of shareholder proposals even though ISS puts out a negative recommendation.
Interestingly, while ISS has veered sharply away from management’s recommendations on
shareholder proposals, shareholders have been less willing to support the negative
recommendation by ISS. That is, investors have become more independent of both ISS and
management recommendations.
Two potential explanations for the independence results are that investors have become
more sophisticated about proxy voting with many institutional investors conducting their own
analysis and that other proxy advisory firms are also providing independent analyses (e.g., Glass
Lewis, Egan-Jones, and Proxy Governance) and sometimes their recommendations differ.
Evidence tends to support the former explanation as during our sample period, more institutional
14
Every year, ISS Governance Services makes its overall proxy voting guidelines on specific proxy issues available.
As mentioned earlier, ISS may also provide a custom-based recommendation and analysis to individual clients based
on the client’s proxy policies and procedures.
12
investors stopped relying on ISS’s generic recommendation, and instead ISS developed
customized voting guidelines based on the institution’s preferences.
Table 4 shows the number of ISS’s positive and negative vote recommendations, for each
year, for shareholder and management-sponsored proposals. These recommendations come in the
form of mostly FOR or Against. Other recommendations, which happen rather infrequently,
include withhold, abstain, and do not vote. Since there exist very few withhold
recommendations, they are not reported in the table. In 2004, ISS recommended voting against
366 shareholder-sponsored proposals and voting for 234 proposals. The proportion of proposals
that ISS opposed compared to those they supported was 156.4%. Similarly, in 2005, ISS
recommended
voting
against
more
shareholder-sponsored
proposals
than
they
had
recommendations to vote for the proposals. However, as shown in Figure 2, from 2004 onwards
there exists a clear trend, ISS has become increasingly supportive of shareholder-sponsored
proposals. The proportion of proposals opposed compared to those supported has steadily
declined from 156.4% in 2004 to 30.5% in 2010. ISS has become more supportive of shareholder
proposals while management rarely supports shareholder proposals, therefore it is not surprising
that the opinion of ISS and management has drifted apart over time. There exist several potential
explanations for ISS’ increasing support of shareholder proposals. First, the types of proposals
being submitted by shareholders have changed over time which means that newer proposals are
more acceptable to ISS. Second, it is possible that the shareholder proposers have become more
sophisticated about the wording of proposals, hence garnering support from ISS. Finally, public
opinion about corporate governance issues has changed, and is reflected in the proxy advisor’s
recommendations.
This change in ISS support for shareholder proposals can be compared to their relatively
steady support for management proposals over time as ISS has always supported a large
proportion of management proposals. The proportion of Against relative to FOR
recommendations for management-sponsored proposals varies from a low of 17.2% in 2008 to a
high of 24.4% in 2009. Again, we see an apparent impact of the financial crisis, with lower
13
support for management proposals in 2009, where the proportion of Against to FOR
recommendations peaked. Although we have not included the management-sponsored proposals
defined as routine in our sample, many of the remaining management-sponsored proposals are
fairly routine. Hence it is not surprising that ISS supports a large majority of management
proposals, and investors vote in favor of these proposals.
3.4
Public Opinion
As discussed earlier, we hypothesize that an explanation for the changes over time in
investor voting behavior and proxy advisory firm recommendations is the influence of public
opinion. In order to examine this hypothesis, we develop four proxies for public opinion. Three
of these proxies capture public opinion and general dissatisfaction with executives at a broad
economy-wide level, while the third measure is firm-specific. The first measure, CONFIDENCE,
is derived from the annual Gallup Poll Survey of confidence in different institutions of American
society, one of which reflects the percentage confidence in banks.15 This measure reflects a broad
opinion about the financial sector in general. The Gallup Survey asks how much confidence
individuals have in each institution with responses being: a great deal, quite a lot, some, or very
little. We combine the percentage of the top two responses: “great deal” and “quite a lot”. Figure
3 shows that during our sample period the highest confidence in banks occurred in 2004 when
53% had high confidence in banks. Not surprisingly given the financial crisis and the ill-will that
was engendered toward financial institutions, the lowest confidence level of 22% occurred in
2009.
The second measure of public opinion we develop is based on media coverage of
executive compensation. We focus the media coverage on executive compensation because it is
the general corporate governance proxy with a long history of being a concern of the public.16
We count the number of articles from major news and business publications from the Factiva
15
The institutions included are the church or organized religion, the military, the U.S. Supreme Court, banks, public
schools, newspapers, Congress, television news, organized labor, the presidency, police, medical system, criminal
justice system, big business, small business (added in 2007), and health maintenance organizations.
16
See, for example, Murphy (2013).
14
news database that contain at least one of the following keywords: "CEO compensation", "CEO
salary", "CEO pay", "executive compensation", "executive salary", and "executive pay". During
the sample period, 2004-2010, there are 31,802 articles on executive compensation. As shown in
Figure 4, the number of compensation-related articles peaked in 2009. Our measure is based on
the aggregate monthly count of these articles. That is, MEDIA is the natural log of the monthly
number of articles related to compensation based on a search of major news and business
publications on Factiva. The third measure, MEDIA-NEGATIVE, is the natural log of the
percentage of words in the articles related to compensation that match the negative words
proposed by Kuhnen and Niessen (2012) or Loughran and McDonald (2011).
Our fourth measure of public opinion, MEDIA-FIRM, is a proxy for public opinion at the
firm-level. In addition to the keywords used for MEDIA, we also include different versions of a
firm’s name in order to pick-up media coverage for the specific company. MEDIA-FIRM is
measured as the percentage of the number of articles related to compensation on a specific firm
in a given month, normalized by the total number of articles related to compensation on this firm
over the time period 2004-2010. As shown in Figure 5, the firm-level media count also peaked in
2009 in response to the financial crisis. The plot suggests more media coverage about
compensation around the proxy voting season in April. Firms must disclose executive and
director compensation in their proxies.
3.5
Firm Characteristics
We obtain firm characteristics from Compustat and CRSP. We use several firm-specific
control variables in our analysis: log of total assets in U.S. dollars (SIZE), debt to assets (DEBT),
cash holdings to assets (CASH), capital expenditure to assets (CAPEX), return on assets (ROA)
and annual stock return minus the value-weighted stock market return (EXCESS RET). We
winsorize firm-level accounting variables other than SIZE, namely DEBT, CASH, CAPEX, and
ROA as well as EXCESS RET, at the upper and lower 1% levels.
We use the firm-level corporate governance index GOV41 as in Aggarwal, Erel, Ferreira and
Matos (2011). GOV41 assigns a value of one to each of 41 governance attributes if the company
15
meets minimally acceptable governance guidelines on that attribute, and zero otherwise. Table 5
shows that the median firm in the sample with shareholder proposals is more than ten times
larger than the median firm with management proposals. Firms with shareholder proposals have
higher median governance, higher median returns on assets and higher median debt. Wilcoxon
rank sum test shows that differences in medians are significant at the 1% level.
4.
Voting Behavior of Investors and Public Opinion
4.1 Changes in Voting Pattern over Time
Earlier in Figure 1, we saw changes in voting pattern over time for proposals, which indicate
that investors have become more independent in their voting, particularly with respect to
shareholder-sponsored proposals. That is, shareholders have been voting less with the
recommendations of proxy advisory firm ISS, and also with the recommendations of
management. We examine the relation between the support rate for a shareholder-sponsored
proposal and year dummies in order to examine the time trend in the voting. The dependent
variable is the support rate for the proposal and the independent variables consist of dummy
variables for each of the years from 2005 to 2010, with 2004 as the benchmark year. In Table 5
column 1 we report the results with industry fixed effects; in column 2 we add proposal fixed
effects; and in column 3 we include only firm fixed effects. We use the four proposal types
discussed earlier: Board, Corporate Governance, Compensation, and Others.
In column 1 of Table 6, each of the year dummies is positive and significant at the 1% level,
implying that relative to 2004, there is higher support for shareholder-sponsored proposals, in
subsequent years. The coefficient of the 2009 year dummy is the largest at 0.214, which is also
economically significant. In order to examine whether the increase in support rate for
shareholder-sponsored proposals is due to proposal type changing over time, in column 2 we
control for the four categories of proposal fixed effects. The coefficients continue to be
significant for the years, 2006 and 2010. Once we control for firm fixed effects in Column 3, we
16
find that all the year dummies are still significantly positive, indicating that for individual firms
voting in support of shareholder proposals is increasing over time.
In addition to year dummies, columns 4-6 of Table 6 include firm-level characteristics from
the preceding fiscal year as controls. The firm-level controls include SIZE, log of total assets;
ROA, return on assets; CAPEX, capital expenditure to assets; CASH, cash to assets; DEBT, debt
to assets; EXCESS RETURNS, annual stock market return minus market return; and GOV41,
firm-level measure of corporate governance. The results suggest less support for shareholder
proposals in larger firms as the coefficient of SIZE is negative and significant in two of the three
models. However, typically shareholder proposals are submitted only for the largest firms. Firmlevel corporate governance is not significant in explaining the support for shareholder proposals.
ROA becomes positive and significant when firm fixed effects are included. Even after including
firm-level characteristics as controls, we continue to find that the support rate for shareholder
proposals has increased relative to 2004. There is clearly a 2009 effect reflecting the response to
the financial crisis of 2008 and the declining confidence that year as indicated by the confidence
in banks. The inclusion of proposal and firm fixed effects increases the explanatory power of the
model as measured by adjusted R2.
4.2 Voting and the Role of Public Opinion
In the past decade or so there has been much public debate about corporate scandals and
more fundamentally, corporate governance issues.
This debate started after the financial
scandals at Enron and Worldcom, and more recently picked up steam as a result of the financial
crisis of 2008. As anecdotal evidence and Figure 3 suggest, these scandals and crises appear to
have shaken investor confidence. We examine the impact of public opinion on voting patterns in
shareholder-sponsored proposals by including three different measures of public sentiment as
independent variables: CONFIDENCE, the percentage confidence in banks from the annual
Gallup Poll Survey, MEDIA, a measure of the public concern regarding executive compensation,
which is defined as the number of articles related to compensation, and MEDIA-NEGATIVE, is
the percentage of words in the articles related to compensation that match the negative words
17
proposed by Kuhnen and Niessen (2012) or Loughran and McDonald (2011). CONFIDENCE is
from the fiscal year just prior to the vote; MEDIA and MEDIA-NEGATIVE are from the month
preceding the vote month.
Columns 1-9 of Table 7 report the results. The sample includes types of shareholdersponsored proposals with at least 65 observations (the median count for director and executive
compensation-related proposals) between 2004 and 2010. However, results are similar using the
full sample of proposals. The primary independent variable in columns 1-3 is CONFIDENCE
and in columns 4-6 is MEDIA, and in columns 7-9 is MEDIA-NEGATIVE. In column 1, the
coefficient of CONFIDENCE is -0.309, significant at the 1% level. The negative coefficient
implies that there is more support for shareholder-sponsored proposals when confidence in the
banking system is low. The coefficient is negative and significant when proposal fixed effects
are included in column 2, suggesting that the significant effect of media continues even after
controlling for proposal types. The coefficient is negative and significant even when firm fixed
effects are included in column 3.
MEDIA is used as the measure of public opinion as shown in columns 4-6, has a positive and
significant coefficient in columns 4 and 6 at the 1% level. Similar results are reported in columns
7-9 using MEDIA-NEGATIVE as the proxy for public opinion. We find that more discussion
about executive compensation in the media results in less support for management, hence more
support for shareholder proposals. Votes in support of shareholder proposals are effectively votes
against management because it is rare to have management supporting shareholder proposals.
There is some indication that support for shareholder proposals is lower in larger firms as
indicated by the negative coefficient of the SIZE variable. Support for shareholder proposals is
higher at firms that have stronger corporate governance.
In Table 8, for robustness, we repeat the above analysis for only compensation proposals.
The sample size is much smaller when we limit the analysis to only this type of proposal. We
find an even stronger association between media coverage and voting for this sample compared
18
to the sample of all proposals. The coefficient of the media variables are larger for compensation
proposals relative to all proposals.
4.3 Voting and Firm-Level Media Coverage
We next examine the firm-level media coverage of compensation, the results of which are
provided in Table 9. Public opinion at the firm level, MEDIA-FIRM, is measured as the
percentage of the number of articles related to compensation on a specific firm in a given month,
normalized by the total number of articles related to compensation on this firm over the time
period 2004-2010. The dependent variable in these regressions is the support rate, the percent of
votes cast in favor of the proposal. Columns 1, 3 and 5 show the results with only industry and
year fixed effects while columns 2, 4 and 6 also include proposal fixed effects. We do not
include firm fixed effects because the variation in the public opinion proxy is at the firm level.
As can be seen from Table 9, the support rate for shareholder proposals is increasing in the
relative amount of firm-level media coverage, again suggesting that public opinion regarding
executive compensation is influencing the voting on shareholder proxies. The inclusion of the
explanatory variables GOV41 or ISS does not change this finding. As seen in columns 5 and 6, if
ISS supports a proposal then the proposal is more likely to receive higher support. However, the
coefficient of MEDIA-FIRM continues to be positive and significant. Therefore, even after
controlling for ISS’s recommendation and proposal type, we find that public opinion influences
voting. The coefficient is 0.40 in column 5 with industry fixed effects, and 0.34 in column 6 with
both industry and proposal fixed effects. The standard deviation of the variable, MEDIA-FIRM,
is 0.079 suggesting that, on average, support for shareholder proposals increases by 3.15%2.69% if there is a one standard deviation increase in media coverage. We consider these results
to be economically meaningful.
5.
Public Opinion and the Recommendations of Proxy Advisors
In this section we examine whether public opinion is associated with the recommendations
of proxy advisors themselves. ISS has an extensive proxy policy formulation process which
19
includes conducting an annual policy survey of both the proxy voters (institutional investors) as
well as management and other market participants. They also receive additional feedback
through industry roundtables and feedback during the proxy season.
The draft policies are put out for comments that are then incorporated before the final update
is released. Therefore, ISS attempts to incorporate the views of the corporate governance
community and the market in formulating its policies. If public opinion reflects the views of the
market then this sentiment should get reflected in ISS’s recommendations. Not surprisingly,
earlier we saw that a positive recommendation by the proxy advisor is associated with a higher
support rate for the proposal. However, this correlation does not necessarily imply causation as
both ISS’s recommendations and investors’ voting decisions could be affected by other
influences such as public opinion.
We have shown the positive influence of public opinion and ISS’s recommendation on
voting. Next, we analyze whether there is any association between public opinion and the
recommendation of ISS itself. In Table 10 the dependent variable is a dummy equal to one if ISS
recommends voting for the proposal. The explanatory variables include firm characteristics as
controls. In columns 1-3, public opinion is measured by CONFIDENCE, in columns 4-6 by
MEDIA, and in columns 7-9 by negative media coverage MEDIA-NEGATIVE. As in our
previous regressions, the analysis is done with industry and year firm effects, with industry, firm
and proposal fixed effects and with year and firm fixed effects. The coefficient of
CONFIDENCE is negative and significant at the 1% level in all three estimations. The results
imply that low confidence in the banking system, which could be interpreted as low confidence
in corporations in general, is associated with ISS being more supportive of shareholder
proposals.
As seen in columns 4-6, the coefficient of MEDIA is positive and significant at the 1% level
in each model. Similarly, the coefficient of MEDIA-NEGATIVE is positive and significant.
Therefore, we conclude that more media coverage about issues dealing with executive
compensation is associated with ISS being more supportive of shareholder-sponsored proposals.
20
In unreported results, we find the association between firm-level media coverage and ISS’s
recommendation to be far weaker and not significant in two of the three models. This result is
not surprising, we would expect the association to be stronger between the proxy advisor’s
recommendation and the broader proxies of public opinion because ISS obtains feedback from
market participants on its benchmark policies, and not on recommendations for individual firms.
6. Voting by Mutual Funds
If public opinion is primarily responsible for the changes in voting on shareholder
proposals, then we would expect to find it particularly important in the voting behavior of a
group of institutional investors most likely to be influenced by public opinion. Given that mutual
funds have direct dealings with a large number of retail investors and they are required to
disclose how they voted, they make an ideal sample in which to further test our hypotheses.
Fund management companies typically have an oversight process, with the fund’s board
involvement, to monitor the funds’ proxy voting. The passage of Rule 206(4)-6 of the Securities
and Exchange Commission (SEC) in 2003, requires funds to adopt and implement proxy voting
policies and procedures, and make voting record available to clients.17 Funds must file Form NPX, which identifies specific proposals on which the fund has voted their portfolio securities and
discloses how the fund voted on each, whether for, against or withhold. Proxy voting records for
the twelve-month period ending June 30, have to be filed by no later than August 31 of each
year. According to the SEC, “This disclosure enables fund shareholders to monitor their funds’
involvement in the governance activities of portfolio companies.”18
17
These policies include information on issues such as corporate governance matters (including
changes in the state of incorporation, mergers and other corporate restructurings, and anti-takeover
provisions, i.e., staggered boards, poison pills, and supermajority provisions); changes to capital structure
(including increases and decreases of capital and preferred stock issuance); stock option plans and other
management compensation issues; and social and corporate responsibility issues. See
http://www.sec.gov/rules/final/33-8188.htm
18
http://www.sec.gov/answers/mfinfo.htm
21
We merge the mutual fund NP-X voting data with the CRSP mutual fund data by
matching based on fund name. Our sample includes voting by 13,313 individual funds that are
part of 475 mutual fund families from 2004 to 2010.
Table 11 shows the total number of votes by mutual funds each year for both
management and shareholder proposals. There are a total of 4,283,930 votes, of which 1,844,636
are for shareholder proposals and 2,439,294 are for management proposals. The largest number
of votes cast is in 2009, driven by large increases in board and compensation proposals in that
year.
Table 11 shows that, consistent with our earlier analysis of voting by all shareholders,
over time mutual funds have become less likely to follow the recommendation of management or
the proxy advisor for shareholder-sponsored proposals. For these proposals, funds voted with
management’s recommendation 73.6% of the time but by 2010 the support had decreased to
53.9%. Funds are more likely to follow the recommendation of ISS than that of management but
here also we see that over time, funds are less likely to follow the recommendation of ISS. In
2004 they voted with ISS 78.6% of the time but by 2010 the number had dropped to 59.2%. The
results also suggest that, particularly during the financial crisis, mutual funds were even more
likely to vote differently from the recommendation of management and ISS. These results can be
contrasted with the results for management-sponsored proposals in which we find no consistent
pattern of changes in voting with management or the proxy advisor. However, it should again be
noted that many of the management proposals are noncontroversial so it is not surprising to
observe such high support rates.
We test our hypotheses regarding the association of mutual fund voting with public opinion
by regressing a favorable vote on a shareholder proposal against our four measures of public
opinion, CONFIDENCE, MEDIA, MEDIA-NEGATIVE and MEDIA-FIRM. The results of the
tests between voting by mutual funds on shareholder proposals and the role of public opinion are
reported in Table 12. The sample includes types of shareholders-sponsored proposals with at
least 65 observations (the median count for director and executive compensation-related
22
proposals) between 2004 and 2010.19 The dependent variable is a dummy equal to one if the
mutual fund voted in favor of the proposal. For each of the three proxies of public opinion, we
report results with and without proposal fixed effects. We include fund and firm characteristics
including the governance index as explanatory variables (although due to space limitations we do
not report the coefficients for the firm characteristics). Each estimation includes industry, fund
and proposal fixed effects. Standard errors are corrected for clustering of observations at the fund
level.
Table 12 shows that the coefficient of CONFIDENCE is negative and significant implying a
negative relation between mutual fund support for shareholder-sponsored proposals and public
confidence in banks. If investors have a low opinion about the banking system (and presumably
corporations in general), then this low opinion gets reflected in their voting behavior. In columns
2 and 3, the results show that more total media coverage (MEDIA) or negative media coverage
(MEDIA-NEGATIVE) about executive compensation is associated with more support for
shareholder proposals. The table also shows that fund characteristics matter in how mutual funds
vote. The coefficient of INDEX is negative and significant in all six estimations suggesting that
index funds tend to passive and are less likely to vote against management, therefore are less
likely to support shareholder-sponsored proposals.
Finally, in results not shown, we find that the recommendation of the proxy advisory firm
has a strong association with how funds vote. If ISS recommends voting for the proposal then the
proposal is more likely to receive the support of mutual funds, however, as pointed out earlier,
this correlation does not necessarily mean causation. Even after including the ISS
recommendation, the role of public opinion continues to be significant.
19
The median number of proposals during this time period is 149 for Board proposals, 98 for Corporate Governance
proposals, and 67 for Others.
23
7.
Conclusions
In this paper we consider the association between public opinion and the evolution in
corporate governance perceptions shown in proxy voting by examining voting on proxy
proposals in general and by mutual funds, in particular. We examine the changes in investor
voting patterns from 2004 to 2010 and find that, on average, shareholders, particularly
institutional investors, are participating in proxy voting at high rates and that their support for
shareholder proposals has been increasing. The high participation rates and increasing support
for shareholder proposals suggest that shareholder proposals are becoming a more important part
of the governance process. This result is consistent with the result of Aggarwal, Saffi, and
Sturgess (2013) that institutional investors are recalling shares from their securities lending
portfolios, at the time of proxy voting, in order to vote their proxies.
We also find that shareholders have become more independent of both management and
the proxy advisory firm. Investors are not following the proxy advisor’s recommendation
specifically when the recommendation is negative. Moreover, we find that the changes in voting
behavior can be partially explained by changes in proposal types, the financial crisis, and most
importantly, public opinion.
Our results suggest that public opinion, as measured through either Gallup Poll survey or
media coverage at the aggregate and firm level, influences shareholder voting. The implications
of these results are that financial intermediaries, such as mutual funds, pay attention to their
shareholders’ preferences regarding corporate governance. These results hold even after
controlling for the recommendations of the proxy advisor.
24
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26
Figure 1
Voting with Management and Proxy Advisors
The figure shows the total percentage of votes cast following the recommendation of management and the
proxy advisory firm, ISS for the period January 2004 to November 2010. Percentages are shown
separately for shareholder-sponsored and management-sponsored proposals.
Percentage Votes with Management and ISS Recommendations
100%
90%
80%
70%
60%
50%
40%
2004
2005
2006
2007
2008
2009
2010
% of Votes with MGMT Rec: Management‐Sponsored Proposals
% of Votes with MGMT Rec: Shareholder‐Sponsored Proposals
% of Votes with ISS Rec: Management‐Sponsored Proposals
% of Votes with ISS Rec: Shareholder‐Sponsored Proposals
Figure 1b
Voting with Proxy Advisor’s FOR and AGAINST Recommendation
The figure shows the total percentage of votes cast following ISS’s FOR and AGAINST
recommendations for shareholder-sponsored proposals during the period January 2004 to November
2010.
Percentage Votes with Proxy Advisor FOR and AGAINST Recommendations
70%
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
%ofVoteswithISSFORRecommendation
2008
2009
2010
%ofVoteswithISSAGAINSTRecommendation
0
Figure 2
Change in ISS’s Recommendations
The figure shows the percentage of proposals that ISS supports and recommends voting in favor for the
period January 2004 to November 2010. Percentages are shown separately for shareholder-sponsored and
management-sponsored proposals.
% of Proposals Supported by ISS
90%
80%
70%
60%
50%
40%
30%
2004
2005
2006
2007
Management-Sponsored Proposals
2008
2009
2010
Shareholder-Sponsored Proposals
1
Figure 3
Public Opinion over Time
Public opinion is measured yearly as the percentage confidence in banks from the Gallup Poll Survey of
confidence in institutions. The Gallup Survey asks Americans how much confidence they have in each
institution – a great deal, quite a lot, some, or very little. The institutions included are the church or
organized religion, the military, the U.S. Supreme Court, banks, public schools, newspapers, Congress,
television news, organized labor, the presidency, police, medical system, criminal justice system, big
business, small business, and health maintenance organizations. We combine the % of “great deal” and
“quite a lot” responses for banks. Public Opinion - Confidence in Banks
60%
50%
40%
30%
20%
10%
0%
2004
2005
2006
2007
2008
2
2009
2010
2011
Figure 4
Aggregate Media Coverage about Compensation
The figure shows the number of articles per month, discussing executive compensation. The results are
based on searching major news and business publications on Factiva. The keyword searched include CEO
compensation or CEO salary or executive compensation or executive salary.
Aggregate Media Coverage about Compensation
1600
1400
1200
1000
800
600
400
200
0
Figure 5
Firm-Level Media Coverage about Compensation
The figure shows the number of articles per month, discussing executive compensation at the firm. The
results are based on searching major news and business publications on Factiva. The keyword searched
include CEO compensation or CEO salary or executive compensation or executive salary.
Firm-Level Media Coverage about Compensation
20
18
16
14
12
10
8
6
4
2
0
3
Table 1
Number of Proposals by Year
The sample consists of 18,439 proxy proposals during the period January 2004-November 2010. Each
proposal is sponsored either by shareholders (SH) or by management (MGMT). We do not include
director election proposals sponsored by management that tend to be routine. The percentage of proposals
that are shareholder-sponsored is also reported. Two measures for voting outcome are reported for
shareholder-sponsored and management-sponsored proposals. Mean support rate based on percentage of
votes in favor of the proposal, and the percentage of proposals that passed.
Year
# of
Firms
# of
Proposals
# of SH
Sponsored
# of MGMT
Sponsored
% SH
Proposals
2004
2005
2006
2007
2008
2009
2010
Total
1,638
1,456
1,474
1,323
1,389
1,625
1,290
10,195
2,926
2,534
2,599
2,469
2,539
3,074
2,297
18,438
605
504
556
604
559
653
509
3,990
2,321
2,030
2,043
1,865
1,980
2,421
1,788
14,448
20.7%
19.9%
21.4%
24.5%
22.0%
21.2%
22.2%
21.7%
4
Participation
Rate for SHSponsored
75.4%
74.0%
74.9%
74.8%
73.6%
70.2%
74.1%
78.80%
Participation Rate
for MGMTSponsored
81.2%
78.1%
78.0%
79.1%
78.8%
77.6%
78.7%
73.78%
Table 2
Type of Proposal by Year
Shareholder-sponsored proposals during the period January 2004-November 2010 are categorized into
four sub-categories: board, corporate governance, compensation and others, as shown in Panel A. The
sample of management-sponsored proposals is categorized into five sub-categories: board, capitalization,
reorganization/merger, compensation, and anti-takeover, as shown in Panel B. Proposals in the others
category include proposals related to social issues, human rights and general economic issues.
Panel A: Shareholder-Sponsored Proposals
Board
Corp Governance
Compensation
Others
Total
2004
63
118
159
265
605
2005
96
84
120
204
504
2006
141
106
96
213
556
2007
124
92
181
207
604
2008
141
66
146
206
559
2009
244
92
144
173
653
2010
136
84
125
164
509
Total
945
642
971
1,432
3990
225
286
40
1,734
136
2,421
133
196
56
1,252
151
1,788
1,105
1,741
660
10,155
787
14,448
Panel B: Management-Sponsored Proposals
Board
Capitalization
Reorg/Merger
Compensation
Anti-Takeover
Total
126
293
178
1,634
90
2,321
126
243
73
1,531
57
2,030
121
258
108
1,445
111
2,043
160
221
130
1,226
128
1,865
5
214
244
75
1,333
114
1,980
Table 3
Voting with Management and Proxy Advisors
The table shows the support rate and percentage of proposals that pass. Support rate is the ratio of FOR votes to the total votes or
outstanding shares, depending on the proposal-type. Also included is the percentage of votes that followed management’s recommendation,
and the percentage of votes that followed the proxy advisory firm, ISS’s recommendation. Each proposal is sponsored either by shareholders (SH)
or by management (MGMT).
Support Rate
Year
2004
2005
2006
2007
2008
2009
2010
SHSponsored
23.6%
25.4%
28.8%
28.4%
29.3%
37.0%
31.8%
MGMTSponsored
81.6%
82.1%
83.7%
83.7%
85.5%
83.4%
85.5%
% of Proposals that Pass
SHSponsored
15.5%
14.1%
15.4%
14.5%
15.1%
25.9%
16.0%
MGMTSponsored
97.2%
97.2%
97.9%
97.2%
97.6%
96.8%
98.2%
6
Voting with Management
SH-Sponsored
73.7%
69.8%
60.8%
60.4%
61.2%
51.3%
53.6%
MGMTSponsored
78.9%
80.5%
82.9%
86.1%
85.1%
81.4%
85.5%
Voting with
ISS
SHMGMTSponsored
Sponsored
78.4%
83.9%
71.9%
85.4%
69.6%
86.8%
66.4%
88.8%
62.8%
88.3%
60.6%
85.1%
57.5%
87.7%
Table 4
Proxy Advisory Firm’s Recommendation
The proxy advisory firm, ISS, provides a recommendation for each shareholder and management
sponsored proposal on the ballot. ISS mainly recommends “FOR” or “Against” vote for a given
recommendation. Other recommendations that happen rarely include withhold, do not vote, and abstain.
A recommendation FOR a shareholder proposal typically implies that ISS is making a recommendation
against management’s recommendation. The table shows the number of recommendations Against, FOR,
and the ratio of Against to FOR recommendations, by year for shareholder and management-sponsored
proposals.
Year
Shareholder-Sponsored
Against
2004
2005
2006
2007
2008
2009
2010
366
252
235
247
198
146
116
FOR
234
248
319
349
326
440
380
Management-Sponsored
% Against/FOR
Against
156.4%
101.6%
73.7%
70.8%
60.7%
33.2%
30.5%
354
345
309
318
285
462
304
7
FOR
1,938
1,668
1,729
1,529
1,661
1,897
1,478
% Against/FOR
18.3%
20.7%
17.9%
20.8%
17.2%
24.4%
20.6%
Table 5
Firm Characteristics by Proposal Type
The table provides descriptive statistics for firms with shareholder and management-sponsored proposals.
Median values are reported for total assets, return on assets, capital expenditure to total assets, cash and
short-term assets to total assets, debt to total assets, excess return, defined as annual stock return minus
the value-weighted market return, and GOV41. GOV41 is the percentage of the 41 governance attributes
that a firm meets, an index of 1 means that a firm has adopted all 41 governance provisions. ***
represents statistical significance at the 1% level, using Wilcoxon rank-sum test for the difference in
medians.
ShareholderSponsored
(1)
ManagementSponsored
(2)
Difference
(1) – (2)
$12, 680
$1,238
$11,442***
Return on Assets
Capital Expd. to
Assets
Cash to Assets
8.13%
6.75%
1.38%***
3.53%
2.63%
0.91%***
4.88%
6.29%
-1.41%***
Debt to Assets
24.73%
18.49%
6.24%***
Excess Return
-4.69%
-2.40%
2.29%***
0.68
0.63
0.05***
Total Assets (MM)
GOV41
8
Table 6
Changes in Voting Pattern
This table shows estimates of panel regressions for shareholder-sponsored proposals, during the period January
2004 to November 2010. The dependent variable is the support rate, percent of votes cast in favor of the proposal.
In columns 1-3, the only independent variables are the year dummies for each year from 2005 to 2010. Columns 46 include firm-level attributes from the preceding fiscal year as controls. SIZE is log of total assets; ROA is return
on assets; CAPEX is capital expenditure divided by total assets; CASH is cash and short-term assets divided by total
assets; DEBT is debt to total assets; and EXCESS RET is annual stock return minus the stock market return. They
are all winsorized at 1%. GOV41 assigns a value of one to each of 41 governance attributes if the company meets
minimally acceptable governance guidelines on that attribute, and zero otherwise. Column 1and 4 reports results
without any fixed effects; columns 2 and 5 include proposal type fixed effects; and column 3 and 6 include firmlevel fixed effects. The models reported in columns 4 and 5 also include industry fixed effects. Errors are corrected
for clustering at the firm level. *, **, *** reflect statistical significance at the 10 percent, 5 percent, and 1 percent
levels.
(1)
0.055***
(3.95)
0.102***
(6.44)
0.075***
(4.94)
0.129***
(4.68)
0.214***
(7.83)
0.110***
(7.10)
(2)
0.026**
(2.06)
0.052***
(3.63)
0.044***
(3.32)
0.069***
(3.21)
0.114***
(5.49)
0.051***
(3.37)
(3)
0.044***
(2.63)
0.098***
(5.10)
0.073***
(4.17)
0.108***
(5.40)
0.164***
(8.12)
0.109***
(5.84)
Constant
0.129***
(2.82)
0.247***
(18.58)
Fixed Effects
Industry
Firm
Industry
Observations
Adj. R2
2425
0.091
0.222***
(5.54)
Industry &
Proposal
2425
0.320
(4)
0.043***
(2.69)
0.091***
(4.76)
0.064***
(3.28)
0.114***
(3.66)
0.184***
(7.49)
0.100***
(4.79)
-0.030***
(-5.85)
-0.186
(-1.53)
0.115
(0.45)
-0.117
(-1.04)
-0.048
(-0.99)
-0.006
(-0.31)
0.107
(1.16)
0.373***
(4.93)
2462
0.387
2237
0.129
2005
2006
2007
2008
2009
2010
SIZE
ROA
CAPEX
CASH
DEBT
EXCESS RET
GOV41
9
(5)
0.023
(1.63)
0.050***
(2.97)
0.042**
(2.50)
0.066***
(2.61)
0.100***
(4.41)
0.051***
(2.74)
-0.019***
(-4.34)
-0.124
(-1.30)
0.223
(1.11)
-0.054
(-0.56)
-0.068*
(-1.72)
0.008
(0.54)
0.030
(0.41)
0.391***
(6.12)
Industry &
Proposal
2237
0.339
(6)
0.041**
(1.97)
0.105***
(4.22)
0.083***
(3.05)
0.130***
(4.30)
0.185***
(5.92)
0.134***
(4.53)
-0.018
(-0.61)
0.440***
(3.19)
-0.464
(-1.28)
0.036
(0.25)
0.022
(0.21)
0.018
(1.19)
-0.201
(-1.39)
0.534*
(1.74)
Firm
2237
0.372
Table 7
All Proposals: Influence of Public Opinion on Voting
This table shows estimates of panel regressions of voting support rate on role of public opinion, for all shareholder-sponsored proposals, during the period
January 2004 to November 2010. The dependent variable is the support rate, percent of votes cast in favor of the proposal. Public opinion is measured using
three proxies from the month or year preceding the vote. CONFIDENCE is the percentage confidence in banks from the annual Gallup Poll Survey of
confidence in institutions. MEDIA is the natural log of the number of articles related to compensation based on monthly search of major news and business
publications on Factiva. MEDIA-NEGATIVE is the monthly percentage of words in the articles related to compensation (MEDIA) that match the negative
words proposed by Kuhnen and Niessen (2012) or Loughran and McDonald (2011). The keyword searched included CEO compensation or CEO salary or
executive compensation or executive salary. Errors are clustered at the firm level. *, **, *** reflect statistical significance at the 10 percent, 5 percent, and 1
percent levels.
CONFIDENCE
(1)
-0.309***
(-5.73)
(2)
-0.145***
(-3.12)
(3)
-0.251***
(-4.26)
MEDIA
(4)
(5)
(6)
(7)
(8)
(9)
0.054***
(3.74)
0.026**
(1.98)
0.042***
(3.71)
0.028
(0.93)
0.442***
(3.15)
-0.207
(-0.53)
0.140
(0.86)
0.098
(0.81)
0.021
(1.33)
0.264**
(2.33)
-0.451
(-1.54)
0.057***
(3.80)
-0.035***
(-6.61)
-0.199
(-1.58)
0.257
(0.96)
-0.093
(-0.81)
-0.040
(-0.80)
-0.008
(-0.40)
0.337***
(3.77)
0.249***
(3.61)
0.039***
(3.35)
0.030
(1.01)
0.444***
(3.12)
-0.188
(-0.48)
0.143
(0.86)
0.101
(0.83)
0.023
(1.42)
0.286**
(2.55)
-0.313
(-1.07)
Firm
Industry
2237
0.356
2237
0.098
0.026*
(1.92)
-0.021***
(-4.82)
-0.128
(-1.35)
0.303
(1.50)
-0.042
(-0.44)
-0.065
(-1.61)
0.007
(0.48)
0.155**
(2.29)
0.330***
(5.45)
Industry &
Proposal
2237
0.331
MEDIA-NEGATIVE
SIZE
ROA
CAPEX
CASH
DEBT
EXCESS RET
GOV41
Constant
-0.034***
(-6.44)
-0.189
(-1.45)
0.261
(0.93)
-0.128
(-1.09)
-0.043
(-0.87)
-0.008
(-0.40)
0.279***
(3.07)
0.514***
(6.17)
Fixed Effects
Industry
Observations
Adj. R2
2237
0.103
-0.020***
(-4.75)
-0.124
(-1.26)
0.305
(1.47)
-0.059
(-0.60)
-0.067*
(-1.66)
0.007
(0.49)
0.129*
(1.87)
0.454***
(6.31)
Industry &
Proposal
2237
0.332
0.009
(0.28)
0.515***
(3.34)
-0.086
(-0.22)
0.070
(0.43)
0.102
(0.89)
0.025
(1.59)
0.183
(1.62)
0.149
(0.45)
-0.035***
(-6.64)
-0.199
(-1.59)
0.254
(0.95)
-0.089
(-0.78)
-0.041
(-0.83)
-0.009
(-0.43)
0.329***
(3.60)
0.048
(0.55)
Firm
Industry
2237
0.357
2237
0.099
10
-0.021***
(-4.84)
-0.128
(-1.35)
0.299
(1.48)
-0.041
(-0.42)
-0.066
(-1.63)
0.007
(0.44)
0.150**
(2.17)
0.231***
(2.86)
Industry &
Proposal
2237
0.331
Firm
2237
0.355
Table 8
Compensation Proposals - Influence of Public Opinion on Voting
This table shows estimates of panel regressions of voting support rate on role of public opinion, for shareholder-sponsored compensation proposals, during
the period January 2004 to November 2010. The dependent variable is the support rate, percent of votes cast in favor of the proposal. Public opinion is
measured using three proxies from the month or year preceding the vote. CONFIDENCE is the percentage confidence in banks from the annual Gallup Poll
Survey of confidence in institutions. MEDIA is the natural log of the number of articles related to compensation based on monthly search of major news and
business publications on Factiva. MEDIA-NEGATIVE is the monthly percentage of words in the articles related to compensation (MEDIA) that match the
negative words proposed by Kuhnen and Niessen (2012) or Loughran and McDonald (2011). The keyword searched included CEO compensation or CEO
salary or executive compensation or executive salary. Errors are clustered at the firm level. *, **, *** reflect statistical significance at the 10 percent, 5
percent, and 1 percent levels.
CONFIDENCE
(1)
-0.618***
(-7.89)
(2)
-0.417***
(-2.87)
MEDIA
(3)
(4)
0.077***
(5.30)
0.061***
(3.12)
MEDIA-NEGATIVE
SIZE
ROA
CAPEX
CASH
DEBT
EXCESS RET
GOV41
Constant
Fixed Effects
Observations
Adj. R2
-0.023***
(-3.58)
0.027
(0.37)
0.097
(0.53)
-0.124
(-1.43)
-0.105*
(-1.94)
-0.006
(-0.29)
0.406***
(4.65)
0.402***
(3.86)
Industry
526
0.243
0.118**
(2.37)
0.590*
(1.73)
0.204
(0.30)
-0.112
(-0.34)
0.036
(0.15)
0.015
(0.47)
0.336
(1.10)
-1.014**
(-2.16)
Firm
526
0.432
-0.021***
(-3.29)
-0.068
(-0.80)
0.216
(0.98)
-0.050
(-0.53)
-0.089
(-1.58)
-0.009
(-0.41)
0.560***
(6.39)
-0.453***
(-3.57)
Industry
526
0.170
11
0.153***
(3.50)
0.454
(1.43)
-0.119
(-0.17)
0.070
(0.21)
0.021
(0.08)
0.009
(0.27)
0.485
(1.62)
-2.012***
(-4.73)
Firm
526
0.421
(5)
(6)
0.085***
(5.50)
-0.021***
(-3.33)
-0.051
(-0.60)
0.216
(0.99)
-0.058
(-0.62)
-0.088
(-1.57)
-0.009
0.062***
(2.94)
0.156***
(3.58)
0.471
(1.51)
-0.146
(-0.21)
0.061
(0.18)
0.021
(0.08)
0.009
(-0.41)
(0.25)
0.572***
(6.50)
-0.167
(-1.60)
Industry
526
0.171
0.504*
(1.67)
-1.813***
(-4.42)
Firm
526
0.419
Table 9
Firm-Level Media Coverage and Voting
This table shows estimates of panel regressions of voting support rate on role of public opinion, for all shareholder-sponsored proposals, during the period January
2004 to November 2010. The dependent variable is the support rate, percent of votes cast in favor of the proposal. Firm-level media coverage, MEDIA-FIRM, is
measured as the percentage of the number of articles related to compensation on a specific firm in the month preceding the vote, normalized by the total number of
articles related to compensation on this firm over the sample time period. The keyword searched included CEO compensation or CEO salary or executive
compensation or executive salary, and the firm’s name. Errors are clustered at the firm level. *, **, *** reflect statistical significance at the 10 percent, 5 percent,
and 1 percent levels.
MEDIA-FIRM
SIZE
ROA
CAPEX
CASH
DEBT
EXCESS RET
(1)
0.272**
(2.36)
-0.028***
(-6.11)
-0.155*
(-1.71)
0.085
(0.39)
-0.138
(-1.24)
-0.044
(-0.92)
-0.003
(-0.14)
(2)
0.225***
(2.74)
-0.018***
(-4.49)
-0.085
(-1.11)
0.166
(0.86)
-0.069
(-0.71)
-0.064
(-1.64)
0.013
(0.83)
(3)
0.287**
(2.46)
-0.030***
(-5.90)
-0.163*
(-1.73)
-0.042
(-0.22)
-0.160
(-1.40)
-0.063
(-1.34)
-0.002
(-0.12)
0.069
(0.80)
(4)
0.236***
(2.85)
-0.018****
(-4.13)
-0.097
(-1.23)
0.088
(0.53)
-0.086
(-0.86)
-0.081**
(-2.10)
0.015
(0.91)
0.004
(0.06)
0.403***
(6.13)
0.386***
(6.62)
Industry, Year
& Proposal
2209
0.343
0.392***
(5.09)
0.397***
(5.97)
Industry, Year
& Proposal
2137
0.342
GOV41
ISS
Constant
Fixed Effects
Industry, Year
Observations
Adj. R2
2209
0.138
Industry, Year
2137
0.135
12
(5)
0.400***
(2.87)
-0.031***
(-6.16)
-0.190**
(-2.08)
0.064
(0.33)
-0.196*
(-1.91)
-0.112***
(-2.61)
-0.009
(-0.43)
0.153*
(1.75)
0.271***
(18.68)
0.323***
(4.12)
Industry, Year
2137
0.414
(6)
0.341***
(3.18)
-0.022***
(-5.27)
-0.138*
(-1.80)
0.123
(0.73)
-0.128
(-1.40)
-0.113***
(-3.02)
0.004
(0.25)
0.106
(1.46)
0.219***
(14.06)
0.323***
(4.96)
Industry, Year &
Proposal
2137
0.502
Table 10
Influence of Public Opinion on Proxy Advisory Recommendation
This table shows estimates of panel regressions of recommendations by ISS and role of public opinion, for all shareholder-sponsored proposals, during the period
January 2004 to November 2010. The dependent variable is a dummy variable that equals one if ISS recommends voting for the proposal. Public opinion is
measured using three proxies. Public opinion is measured using three proxies from the month or year preceding the vote. CONFIDENCE is the percentage
confidence in banks from the annual Gallup Poll Survey of confidence in institutions. MEDIA is the natural log of the number of articles related to compensation
based on monthly search of major news and business publications on Factiva. MEDIA-NEGATIVE is the monthly percentage of words in the articles related to
compensation (MEDIA) that match the negative words proposed by Kuhnen and Niessen (2012) or Loughran and McDonald (2011). The keyword searched
included CEO compensation or CEO salary or executive compensation or executive salary, and salary. Errors are clustered at the firm level. . *, **, *** reflect
statistical significance at the 10 percent, 5 percent, and 1 percent levels.
CONFIDENCE
(1)
-0.974***
(-7.65)
(2)
-0.674***
(-5.35)
(3)
-1.137***
(-8.00)
MEDIA
(4)
(5)
(6)
0.122***
(4.24)
0.073**
(2.47)
0.156***
(5.51)
0.186***
(2.63)
0.908**
(2.41)
0.047
(0.05)
0.906**
(2.14)
0.628*
(1.87)
-0.017
(-0.40)
-2.462***
(-3.42)
0.111**
(3.71)
0.004
(0.44)
0.128
(0.75)
-0.674*
(-1.80)
0.188
(1.05)
0.173**
(1.98)
0.015
(0.41)
0.154
(1.22)
Firm
Industry
2369
0.198
2369
0.036
MEDIA-NEGATIVE
SIZE
ROA
CAPEX
CASH
DEBT
EXCESS RET
Constant
0.002
(0.24)
0.202
(1.19)
-0.790**
(-2.25)
0.047
(0.26)
0.173**
(1.97)
0.017
(0.47)
0.794***
(5.33)
Fixed Effects
Industry
Observations
Adj. R2
2369
0.067
0.015
(1.59)
0.292
(1.50)
-0.747*
(-1.83)
0.111
(0.59)
0.141
(1.62)
0.041
(1.05)
0.623***
(3.61)
Industry &
Proposal
2369
0.173
0.061
(0.83)
1.243***
(3.23)
0.241
(0.26)
0.510
(1.28)
0.632**
(2.11)
-0.007
(-0.17)
0.210
(0.28)
0.004
(0.39)
0.132
(0.77)
-0.705*
(-1.85)
0.191
(1.08)
0.169*
(1.93)
0.012
(0.33)
-0.332*
(-1.81)
Firm
Industry
2369
0.218
2369
0.041
13
0.016*
(1.77)
0.246
(1.24)
-0.681
(-1.60)
0.214
(1.15)
0.139
(1.61)
0.039
(1.04)
-0.095
(-0.46)
Industry &
Proposal
2369
0.160
(7)
(8)
0.057*
(1.82)
0.017*
(1.82)
0.240
(1.21)
-0.649
(-1.54)
0.214
(1.15)
0.143*
(1.66)
0.042
(1.11)
0.211
(1.36)
Industry &
Proposal
2369
0.157
(9)
0.143***
(4.84)
0.202***
(2.84)
0.919**
(2.39)
0.164
(0.16)
0.928**
(2.13)
0.641*
(1.86)
-0.013
(-0.29)
-1.973***
(-2.74)
Firm
2369
0.194
Table 11
Voting by Mutual Funds
The total number of mutual fund families and funds are shown in the table for each year 2004 to 2010, the data for 2010 ends in November and does not
include the full year. For shareholder-sponsored and management-sponsored proposals, the number of proposals voted, percentage voted with management,
and percentage voted with the proxy advisory firm ISS are also shown.
Year
2004
2005
2006
2007
2008
2009
2010
# of Fund
Families
110
291
259
265
282
275
219
# of Funds
Voting
3,585
5,335
5,989
4,950
5,445
5,120
3,624
# of Votes Cast
255,676
194,841
258,995
286,434
287,381
310,942
250,367
Shareholder Proposals
Voting with
Voting with Proxy
MGMT
Advisor
73.6%
78.6%
69.1%
72.6%
60.1%
69.7%
59.8%
68.3%
61.0%
64.0%
52.0%
61.9%
53.9%
59.2%
14
Management Proposals
Voting with Voting with Proxy
# of Votes Cast
MGMT
Advisor
80.2%
329,918
84.8%
81.3%
276,230
85.5%
83.2%
304,785
87.2%
85.7%
315,099
88.8%
85.7%
377,078
88.8%
82.1%
85.9%
489,684
86.3%
88.2%
346,500
Table 12
Voting by Mutual Funds and Public Opinion
The table shows the relation between voting by mutual funds and public opinion. The sample includes
types of shareholders-sponsored proposals between 2004 and 2010. The dependent variable is a dummy
equal to one if the mutual fund voted FOR the proposal. Public opinion is measured using three proxies
from the month or year preceding the vote. CONFIDENCE is the percentage confidence in banks from
the annual Gallup Poll Survey of confidence in institutions. MEDIA is the natural log of the number of
articles related to compensation based on monthly search of major news and business publications on
Factiva. MEDIA-NEGATIVE is the monthly percentage of words in the articles related to compensation
(MEDIA) that match the negative words proposed by Kuhnen and Niessen (2012) or Loughran and
McDonald (2011). Firm-level media coverage, MEDIA-FIRM, is measured as the percentage of the
number of articles related to compensation on a specific firm in the month preceding the vote, normalized
by the total number of articles related to compensation on this firm over the sample time period. Mutual
fund characteristics include FUNDSIZE, measured as log of total assets under management, EXPRATIO
is expense ratio, TURNOVER is fund turnover, INSTITUTION is a dummy if the mutual fund has
institutional business and INDEX is a dummy equal to one if the fund is an index fund. In addition, firmlevel controls are included but not shown. Standard errors are corrected for clustering of observations at
the fund level. *, **, *** reflect statistical significance at the 10 percent, 5 percent, and 1 percent levels.
(1)
CONFIDENCE
(2)
-0.228***
(-6.38)
0.037***
(8.73)
MEDIA
MEDIA-NEGATIVE
FUNDSIZE
EXPRATIO
TURNOVER
INSTITUTION
INDEX
Constant
Fixed Effects
Observations
Adj. R2
(3)
-0.004
(-0.77)
-1.288
(-1.32)
0.004
(0.70)
0.013*
(1.87)
-0.057***
(-4.83)
0. 903***
(24.18)
Industry, Fund &
Proposal
413133
0.368
15
-0.003
(-0.63)
-1.727*
(-1.75)
0.008
(1.26)
0.012
(1.64)
-0.046***
(-4.24)
0.568***
(10.74)
Industry, Fund &
Proposal
413133
0.368
0.035***
(6.92)
-0.004
(-0.66)
-1.730
(-1.75)
0.008
(1.28)
0.012
(1.65)
-0.044***
(-4.02)
0.725***
(16.56)
Industry, Fund &
Proposal
413133
0.368