determinants and consequences of proxy voting by mutual funds on shareholder proposals
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Determinants and Consequences of Proxy Voting by Mutual Funds on
Shareholder Proposals
Rasha Ashraf
Narayanan Jayaraman
December 13, 2006
Motivation
An important corporate governance mechanism is voting rights of shareholders
Institutional investors take the responsibility to vote on behalf of individual investors.
Institutional investors hold 66% of U.S. stocks.
Total assets of mutual funds 1950 : $2 billion 2006 : $10 trillion
Motivation With more than 25% of all U.S. stocks under their
control, mutual funds could practically run the business world, working with other large investors to throw out overpaid CEOs and force corporate overhauls. But they don't.
WSJ, October 3, 2006
Fidelity holds a 10% or greater stake in at least 100 of the nation's largest 1,000 companies and, controls at least $1.3 trillion, more than all hedge funds combined. But Fidelity rarely exercises its unprecedented muscle to push for improved corporate governance.
Business Week, October 16, 2006
Objective
Study the determinants of mutual funds’ voting policies across firms.
Examine the incentive structure of mutual funds to undertake activist role in voting behavior.
Investigate whether mutual funds engage in “Wall Street Walk” when dissatisfied with management.
In 2002 SEC Reports: “Traditionally mutual funds have been viewed as largely
passive investors, reluctant to challenge corporate management on issues such as corporate governance. Funds have often followed the so called “Wall Street Rule” according to which an investor should either vote as management recommends or if dissatisfied with management, sell the stock.”
History of Mutual Funds Disclosure Policy
In December 2000: SEC started to examine the proxy vote disclosure issue for mutual funds
In September, 2002: SEC propose to consider requiring mutual funds to disclose their proxy voting policies and actual votes cast.
There was unanimous opposition by the mutual funds on this proposal.
In January, 2003: SEC adopt new rule which made disclosure of proxy voting policies and procedures mandatory
File new Form N-PX, containing proxy voting records for the 12-month period ended June 30 by no later than August 31 of each year.
Literature: Mutual Funds’ Voting Behavior
Rothberg and Lilien (2005): analysis of the largest 10 fund families’ proxy voting policies.
Davis and Kim (2005): conflict of interests of mutual funds in their voting behavior
Shareholder Proposals and Shareholder Activism
Survey: Gillan & Starks (1998) Karpoff (2001) Black (1998) Romano (2001)
Other Studies: Karpoff, Maletesta, & Walking (1996) Ertimur, Ferri and Stubben (2005)
Data Proxy voting records in shareholders’ proposals for the period July 1, 2003 to
June 30, 2004. Proxy voting record in Form N-PX would include
Identification of the company and the proposal
Sponsor of the proposal: management or shareholder
Whether the fund voted on the proposal or not.
How the fund voted: “for” “against” “abstain” “unknown”
Whether the fund voted for or against management: “for” “against” “unknown”
24 biggest fund families based on the total net assets for the year 2004.
433 mutual funds
Over 29,000 observations covering 528 firms.
Data
CRSP mutual fund database: fund performance and characteristic data
Thomson Financial Mutual Fund Holding Database: mutual fund holdings data.
CDA-Spectrum 13-f filings: Mutual fund families’ holdings data
CRSP: Returns, share outstanding and market capitalization
COMPUSTAT: firms’ earnings data
Compact Disclosure SEC data source: Blockholder and insider holdings data
Gompers-Ishii-Metrick governance score data
Types of Shareholder Proposals
Total 74 types of shareholder proposals
Seven broad categories Anti-takeover Voting Issues Shareholder Wealth and Rights Executive Compensation Director Related Audit Committee Other Social and Ethical Issues
Anti-takeover
1. Supermajority Provision: Shareholder vote requirements are higher than the minimum levels set by state law to approve a merger or other business combination.
2. Poison Pill: Shareholders are issued rights to purchase stock in their own company or in the acquiring company at a steep discount if a hostile bidder acquires company’s shares.
3. Classify Board: It is also known as staggered board. The board is divided into classes, with the directors in each class serving overlapping terms.
4. Golden Parachutes: A contract specifying that executive will receive large benefits in the event that the company is acquired and the executive's employment is terminated.
5. Opt Out of State Takeover Statute: Most state anti-takeover provisions allow companies to "opt in" or to "opt out" of coverage by stating their intention in their charters.
Management NameTotal Number of
Voting Records in Sample
% Vote Cast
“for”
% Vote Cas
t“against”
% Vote Cast
“abstain”
% Vote Cast“unknown”
1 Fidelity Management Research 3844 0.167 0.705 0.123 0.005
2 Dreyfus Corporation 971 0.192 0.784 0.025 0.000
3Capital Research &
Management Co. 2245 0.181 0.774 0.009 0.036
4 Deutsche Asset Management 2456 0.321 0.677 0.002 0.000
5 Vanguard Group Investment Co. 3350 0.192 0.484 0.324 0.000
6 Franklin Advisers Inc. 1290 0.197 0.759 0.031 0.013
7Federated Investment
Management Co 623 0.061 0.934 0.005 0.000
8 AIM Advisors Inc. 1368 0.185 0.645 0.167 0.002
9Smith Barney Asset
Management 1004 0.276 0.713 0.009 0.002
10 Putnam Investment Mgmt LLC 1456 0.158 0.830 0.011 0.001
11Alliance Capital Management
Corp. 290 0.241 0.710 0.048 0.000
12Prudential Securities
Incorporated 1055 0.269 0.572 0.159 0.000
13 Allianz Dresdner Asset Mgmt 448 0.467 0.513 0.020 0.000
14Merrill Lynch Investment
Managers 817 0.206 0.785 0.010 0.000
15 OppenheimerFunds 1027 0.155 0.472 0.373 0.000
16 MFS Investment Management 1587 0.129 0.858 0.013 0.000
17Columbia Management Group
Inc. 402 0.356 0.582 0.060 0.002
18Goldman Sachs Asset
Management 78 0.244 0.756 0.000 0.000
19Morgan Stanley Investment
Advisors 1213 0.153 0.838 0.007 0.003
20American Express Financial
Advisors 869 0.119 0.873 0.005 0.003
21 ING Investments LLC 460 0.161 0.817 0.022 0.000
22 Banc One Investment Advisors 453 0.302 0.671 0.026 0.000
23JPMorgan Fleming Asset
Management 970 0.340 0.660 0.000 0.000
24 T Rowe Price Associates Inc. 1445 0.241 0.754 0.001 0.005
Total Number of Proposals 29795 0.221 0.715 0.060 0.003
Table 2: Descriptive Statistics of Sample Fund Family Voting
Table 3: Percentage of Vote in Support for Different Types of Shareholder Proposals by Fund Families
Management NameANTITAKEOVE
RVOTING ISSUES
SHAREHOLDER WEALTH AND
RIGHTS
EXECUTIVE COMPENSATIO
N
DIRECTOR
RELATEDAUDIT
OTHERS
1Fidelity Management
Research0.756 0.112 0.219 0.087 0.139 0.224 0.007
2 Dreyfus Corporation 0.770 0.056 0.172 0.067 0.111 0.250 0.031
3Capital Research &
Management Co.0.680 0.509 0.244 0.022 0.119 0.100 0.053
4 Deutsche Asset Management 0.826 0.321 0.515 0.083 0.310 0.200 0.080
5Vanguard Group Investment
Co.0.636 0.041 0.247 0.017 0.065 0.294 0.056
6 Franklin Advisers Inc. 0.559 0.433 0.282 0.182 0.385 0.333 0.025
7Federated Investment
Management 0.472 0.021 0.000 0.000 0.000 0.000 0.000
8 AIM Advisors Inc. 0.681 0.450 0.129 0.110 0.239 0.092 0.056
9Smith Barney Asset
Management0.765 0.406 0.342 0.122 0.200 0.143 0.090
10Putnam Investment Mgmt
LLC0.865 0.053 0.072 0.009 0.194 0.000 0.008
11Alliance Capital Management
Corp.0.500 0.250 0.333 0.255 0.200 0.333 0.059
12Prudential Securities
Incorporated0.786 0.424 0.316 0.150 0.377 0.747 0.010
13 Allianz Dresdner Asset Mgmt 0.648 0.333 0.512 0.131 0.417 0.250 0.083
14Merrill Lynch Investment
Managers0.548 0.308 0.162 0.147 0.188 0.500 0.062
15 OppenheimerFunds 0.637 0.067 0.167 0.064 0.179 0.000 0.017
16MFS Investment
Management0.847 0.028 0.021 0.028 0.063 0.000 0.000
17Columbia Management
Group Inc.0.735 0.056 0.549 0.229 0.472 0.250 0.133
18Goldman Sachs Asset
Management0.800 0.000 0.357 0.283 0.500 0.135
19Morgan Stanley Investment
Advisors0.467 0.100 0.288 0.074 0.283 0.250 0.027
20American Express Financial
Advisors0.678 0.118 0.193 0.011 0.292 0.000 0.010
21 ING Investments LLC 0.708 0.227 0.049 0.006 0.105 0.000 0.024
22Banc One Investment
Advisors0.538 0.600 0.376 0.234 0.179 0.180
23JPMorgan Fleming Asset
Management0.833 0.571 0.400 0.158 0.300 1.000 0.200
24 T Rowe Price Associates Inc. 0.813 0.500 0.190 0.255 0.288 0.286 0.043
Mean Percentage Support 0.690 0.249 0.256 0.113 0.233 0.219 0.058
Figure 1A: Percentage Vote For Shareholder Proposals vs. Turnover Decile
0
0.05
0.1
0.15
0.2
0.25
0.3
1 2 3 4 5 6 7 8 9 10
Fund Turnover Decile
%V
ote
Fo
r P
rop
os
al
%for proposal
fitted line
Figure 1B: Percentage Vote Against Shareholder Proposals vs. Turnover Decile
0.7
0.72
0.74
0.76
0.78
0.8
0.82
0.84
0.86
1 2 3 4 5 6 7 8 9 10
Fund Turnover Decile
% V
ote
Ag
ain
st
Pro
po
sa
l
%against proposal
fitted line
Fund Voting Behavior with Respect to Investment Horizon
Table 4: Panel A
Fund Style Number of Funds
Number of Voting
Records
% Vote Cast “for”
% Vote Cast “against”
% Vote Cast “abstain”
% Vote Cast“unknown”
Value 39 6012 0.214 0.728 0.055 0.003
Growth 61 5641 0.173 0.760 0.066 0.000
Blend 41 8934 0.199 0.703 0.093 0.004
Balanced 16 2453 0.151 0.733 0.113 0.003
Others 71 5507 0.192 0.740 0.053 0.014
Table 4: Distribution of Shareholder Proposals Voting Records Based on Fund Style
Research Questions
Determinants of mutual funds’ voting policies across firms.
Examine the incentive structure of mutual funds to undertake activist role in voting behavior.
Investigate whether mutual funds engage in “Wall Street Walk” when dissatisfied with management.
Determinants of Voting Policies Across Firms
Mutual funds voting pattern varies across firms for a particular proposal type
Voting behavior is not influenced by the business ties (Davis and Kim (2005)
Gordon and Pound (1993) examine the determinants of voting outcome of shareholders’ proposals
We examine fund family voting behavior across firms and study whether voting is influenced by
Family Characteristics Firm Characteristics and Performance Governance Structure of Firm Types of Proposals Ownership Structure of the Firm
Dependent Variable: Percentage of votes cast in support for shareholder proposal p of firm i by all funds in family f.
Votes Cast as Support of
Proposals
Variable for Portfolio Construction
P1Mean
(Median)
P10Mean
(Median)
P-value for difference
(t-test for difference)
“ for”
FIRM SIZE0.393(0.125
0.154(0.019)
0.0003(0.18)
BOOK TO MKT0.451(0.50)
0.336(0.146)
0.14(0.42)
HISTORICAL LONG RUN EXCESS RETURN
0.423(0.382)
0.330(0.141)
0.25(0.50)
“ for” or “abstain”
FIRM SIZE0.480(0.50)
0.213(0.138)
<0.0001(0.38)
BOOK TO MKT0.521
(0.520)0.377
(0.268)0.05
(0.03)
HISTORICAL LONG RUN EXCESS RETURN
0.524(0.50)
0.359(0.20)
0.03(0.24)
Table 6: Mean (Median) Percentage Support on Shareholder Proposals in Extreme Portfolios Based on Size, Book-to-Market and Performance
“ for” as support of shareholder proposals
PROPOSAL TYPEGOVERNANCE
INDEX
High ATP Mean
(Median)[N]
Low ATPMean
(Median)[N]
P-value for difference(t-test for difference)
All
GIM0.345
(0.148)0.229
(0.019)0.0001(0.001)
BCF0.351
(0.143)0.224
(0.040)<0.0001(0.001)
ANTITAKEOVER
GIM0.819
(0.875)0.635
(0.694)0.007
(0.004)
BCF0.823
(0.875)0.620(0.6)
0.0002(0.002)
VOTING ISSUES
GIM0.304
(0.021)0.204
(0.154)0.31
(0.32)
BCF0.240
(0.021)0.238
(0.160)0.98
(0.47)
SHAREHOLDER WEALTH AND RIGHTS
GIM0.285
(0.176)0.235
(0.084)0.35
(0.22)
BCF0.252
(0.035)0.273
(0.198)0.69
(0.13)
EXECUTIVE COMPENSATION
GIM0.07(0.0)
0.103(0.0)
0.33(0.22)
BCF0.041(0.0)
0.110(0.0)
0.03(0.01)
DIRECTOR RELATED
GIM0.356
(0.333)0.117(0.0)
0.01(0.008)
BCF0.266
(0.026)0.179
(0.034)0.35
(0.33)
Table 7: Mean (Median) Percentage Support on Shareholder Proposals and Governance Indices
2R
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
Intercept 2.681 2.489 2.106 2.594 2.421 2.119
FAMILY SIZE -0.139 *** -0.139 *** -0.117 *** -0.133 *** -0.139 *** -0.117 ***
BUSINESS TIES FAMILIES -0.055 * -0.062 * -0.084 *** -0.062 ** -0.073 ** -0.088 ***
FIRM SIZE -0.089 *** -0.072 *** -0.055 *** -0.078 *** -0.057 *** -0.053 ***
BOOK TO MKT -0.148 *** -0.120 *** -0.129 *** -0.164 *** -0.134 *** -0.135 ***
HISTORICAL LONG RUN EXCESS RETURN
0.018 *** 0.003 0.012 ** 0.018 *** 0.005 0.013 **
MAJOR STOCK LISTING 0.205 *** 0.187 *** 0.128 ** 0.208 *** 0.199 *** 0.137 **
NUMBER OF PROPOSALS 0.005 *** 0.005 *** 0.006 *** 0.004 *** 0.005 *** 0.005 ***
GIM 0.019 *** 0.021 *** 0.008 ***
BCF 0.039 *** 0.047 *** 0.012 **
DUAL CLASS -0.114 *** -0.041 * -0.115 *** -0.041 *
PERCENT SHARE HOLD -0.446 -0.698 ** -0.393 -0.678 **
BLOCKHOLDER HOLD 0.002 *** 0.001 0.002 *** 0.001 *
INSIDER HOLD 0.003 *** 0.002 *** 0.002 *** 0.002 ***
ANTITAKEOVER 0.519 *** 0.526 ***
VOTING ISSUES 0.065 * 0.070 **
SHAREHOLDER WEALTH RIGHTS
0.049 0.057 *
EXECUTIVE COMPENSATION -0.071 ** -0.064 **
DIRECTOR RELATED 0.004 0.013
Family Fixed Effects YES YES YES YES YES YES
0.12 0.14 0.37 0.12 0.14 0.37
Number of Observations 5814 4395 4395 6133 4392 4392
Table 8: Determinants of Voting Policies across Firms : Vote cast “for” Considered as Support
Effect of Voting Records Release on Funds’ Reputation
Whether there exist any direct reputational effect for undertaking activist role in voting mechanism
Observe the next year funds’ asset flow after voting record release.
Dependent variable: Objective adjusted net asset flow of a fund over the next year of the mutual fund voting record release date.
Independent variable: Median percentage support by a fund over all shareholder proposals
2R
Model 1Support
Shareholder:“for”
Model 2Support
Shareholder:“for” or “abstain”
Model 3:Support
Shareholder: “for”
Model 4Support
Shareholder:“for” or “abstain”
Intercept -0.056 -0.051 -0.026 -0.018
MEDIAN PERCENT SUPPORT BY FUND
0.024 ** 0.011 * 0.024 ** 0.014 **
FUND SIZE 0.002 0.001 0.0008 -0.003
FAMILY SIZE 0.00001 0.00001 0.00001 0.00001
FUND AGE 0.003 0.003 0.004 0.004 *
FEE 0.020 0.022 0.006 0.006
S&P STAR 0.003 0.003 0.002 0.002
OAR 0.117 ** 0.113 *
4FACTOR ALPHA 0.196 ** 0.227 ***
PREV YEAR AVG NAF 0.285 *** 0.293 *** 0.294 *** 0.294 ***
Style Fixed Effects YES YES YES YES
0.47 0.46 0.47 0.47
Number of Observations 210 210 205 205
Table 9: Effect of Mutual Funds’ Support of Shareholder Proposals on Fund Flow
Mutual Funds’ Trading Behavior after Voting Records Release
Examine: Whether mutual funds engage in “Wall Street Walk” when dissatisfied with management.
Results: Mutual funds sell off their shares when they provide higher support in shareholders’ proposals.
Implications: Mutual funds who support shareholders’ proposals are not very
optimistic about the final outcome.
When they dislike managements’ policy they engage in “Wall Street Walk”
However, they undertake activist role before selling off their shares.
2R
Model 1: Vote Cast:“for”
Model 2: Vote Cast: “for” or “abstain”
Intercept 0.026 0.026
PERCENTGAE SUPPORT TO SHRHLD -0.016 *** -0.011 **
FIRM SIZE -0.004 ** -0.004 **
BOOK TO MKT -0.015 ** -0.015 **
EARNING-PRICE-RATIO 0.030 0.031
RETURN PAST 90 DAYS -0.036 *** -0.036 ***
MAJOR STOCK LISTING 0.078 *** 0.076 ***
ALL INST HOLD -0.002 -0.003
PREV QTR PERC HOLD BY FUND -4.36 *** -4.36 ***
BLOCKHOLDER HOLD 0.0001 0.0001
INSIDER HOLD -0.0003 -0.0003
GIM -0.0002 -0.0002
NUMBER OF PROPOSALS -0.0002 -0.0002
Family Fixed Effects YES YES
Fund Style Fixed Effects YES YES
0.07 0.07
Number of Observations 4873 4873
Table 10: Analysis of Mutual Fund Trading Behavior after Voting Records Release
Conclusions
Mutual funds undertake monitoring role
For proposals that are likely to increase shareholders’ wealth and rights.
In firms with weaker external monitoring mechanism In firms with entrenched management In firms where they are likely to have higher influence.
Mutual funds experience a positive reputational effect for undertaking an activist role in their voting behavior
If they disapprove managements’ policy they sell off their shares but before doing so they provide support to shareholders’ proposals.
THANK YOU!
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