Does Managerial Control of the Proxy Process Disenfranchise Shareholders?
Posted: 10 Apr 2000
Date Written: February 22, 2000
A rise in shareholder activism and recent changes in the SEC's proxy rules have been accompanied by an increase in shareholders' use of the proxy process. However, because of managers' control of the proxy process, issues remain concerning shareholders' ability to initiate change by voting. More generally, we hypothesize that certain features of the institutional and regulatory environment may allow managers to influence shareholder voting turnout and results. To the extent managers may strategically influence votes, they may disenfranchise shareholders and, conceivably, reduce the control rights of shares.
We find evidence suggesting that managers hire proxy solicitors when ballots include nonroutine management or shareholder proposals, and bundle nonroutine management or difficult-to-pass issues with others in joint proposals. Managers also appear to craft proposals to be classified as routine to increase the number of votes cast in support of their proposals. We find routine management proposals were associated with increases of 13.55% of affirmatively cast votes. As many as 4.69% of management proposals might not have passed had they been classified nonroutine rather than routine.
Some institutional features, however, appear to constrain managers' ability to gain shareholder votes. Notably, against recommendations from ISS, an advisory service providing voting recommendations to many institutional investors, were associated with 13.63% to 20.56% fewer affirmative votes for management proposals, depending on the specific type. Despite this type of constraint, however, we find evidence strongly suggesting that managers control the proxy process and receive a vote-getting advantage from doing so.
JEL Classification: G30
Suggested Citation: Suggested Citation