Conflict of Interest and Proxy Voting by Institutional Investors

Abstract

Political pressures can bias public pension funds toward activist shareholders. The pension business ties mutual funds have with portfolio firms can bias them toward firm management. We examine how these contrasting conflicts of interest affect institutional investors’ proxy voting behavior and show public pension funds (mutual funds) are considerably more supportive of activist shareholders (firm management) in voting, even if doing so may harm investment value. The biases are more pronounced when incentive conflicts are stronger. Public pension funds support shareholder (management) proposals more (less) when Democrats gain more power in the fund’s home state. Conflicted public pension funds are particularly active in supporting value reducing shareholder proposals.

Keywords: conflict of interest; public pension funds; institutional investors; proxy voting

JEL Classification: G23; G34