Highlights
- The analysis was based on an analysis of over 780,000 voting rationales from institutional investors worldwide, for votes cast in US companies’ annual shareholders meetings between July 2013 and June 2022. The primary reasons for voting against company directors are a lack of board independence and insufficient board diversity. The study also notes a rising trend in citing environmental and social issues as grounds for dissent.
- Voting rationales are identified as an effective, low-cost strategy that transforms a dissenting vote from a blunt signal into a precise feedback tool. This amplified communication significantly increases a firm’s responsiveness, leading to tangible changes in corporate governance on the specific issues raised by investors.
- The research concludes that these stated rationales are not “rationale-washing” but are well-grounded, consistent with actual investor voting behaviour, and reflect genuine governance weaknesses within the firms. This suggests that institutional investors conduct independent research rather than simply following the recommendations of proxy advisors.
Voting is a critical aspect of corporate governance that allows shareholders to influence the direction of a company. Because institutional investors hold more than 70% of the outstanding shares of publicly traded companies in the US, the effectiveness of the governance system critically relies on these investors diligently exercising their voting authority. However, since votes are binary—either for or against—it is challenging to understand why any given investor voted a certain way on a company’s director elections. The researchers studied why institutional investors vote the way they do, and they provided direct evidence behind these decisions by studying the explanations these investors provided through the mechanism of ‘voting rationales’ – stated reasons behind why investors voted the way they did.
The investigation was centred on three main questions. First, what are the main reasons institutional investors state for votes against directors? Second, do these voting rationales reflect actual governance issues, and are they consistent with investors’ voting behaviour, or do they merely reflect ‘rationale-washing’? Third, is the specific information in voting rationales associated with subsequent company responses, beyond the information conveyed by the dissent itself?
To address this, the study used a novel dataset of voting rationales, including 780,429 rationales for director elections from 273 investors worldwide for votes cast in US companies between July 2013 and June 2022 (Figure 1). The data is economically meaningful, as it included nine of the twenty largest asset managers, who collectively managed over $37 trillion in 2022. Using Bidirectional Encoder Representations from Transformers (BERT), the rationales were categorised into 12 different topics to capture the main reasons for dissent.
Figure 1: Relative Frequency of the Various Rationales over Time
*Note: The figure shows the relative frequency of the different rationales for votes against directors over the 2014–2022 proxy seasons. The ‘Rarely’ mentioned category is excluded, as it combines observations that do not fit into any specific categories and do not contribute meaningful insights.
The analysis revealed that the main reasons for dissent were a lack of independence and board diversity. The results also indicated that institutional investors are increasingly stating concerns over environmental and social issues (ES/CSR) as reasons for voting against some directors.
The findings suggest that these rationales are well grounded and consistent with institutional investors’ voting behaviour.
For example, companies with fewer women on their boards received a higher fraction of voting rationales related to board diversity. Investors that frequently mention board diversity in their rationales were more likely to vote against directors on less diverse boards.
The analyses also revealed that observed changes were not driven by governance weaknesses that firms could have discovered on their own. Moreover, there was no evidence indicating that there was rationale-washing, which refers to an investor’s attempts to project a particular narrative or image.
A crucial question remains:
Are these rationales associated with changes in corporate governance?
A crucial question remains: Are these rationales associated with changes in corporate governance? The study analysed whether companies that received rationales on a specific issue exhibited changes in that issue in the following year. The results suggest that disclosed voting rationales convey unique and actionable information, which allows firms to understand better and respond to specific governance concerns.
The novel contribution of this study is that it demonstrates that rationales amplify the effectiveness of dissent: high dissent alone may offer limited guidance, but dissent accompanied by explicit rationales significantly increases a firm’s responsiveness, such as reacting to issues around a board’s gender or diversity.
Voting rationales constitute a distinct mechanism through which shareholders enhance their voice, transforming voting from a blunt signalling mechanism into a precise feedback tool to effectively communicate governance concerns.
The findings also contribute to the literature on low-cost shareholder activism strategies, highlighting the role of voting rationales as an effective strategy that institutional investors can use to influence corporate governance.
The paper contributes to the literature on the governance role of institutional investors by identifying which governance issues they prioritise, such as independence and diversity. The findings also contribute to the literature on low-cost shareholder activism strategies, highlighting the role of voting rationales as an effective strategy that institutional investors can use to influence corporate governance.
The study demonstrates that a wide range of investors make informed and independent voting decisions, and conduct their own research rather than merely rubber-stamping proxy advisors’ recommendations. This suggests that attention to voting decisions by institutional investors is probably more widespread than previously documented and that these investors play an important and independent role in monitoring a firm’s governance.
The findings also contribute to ongoing policy discussions regarding accountability and transparency in fund voting. Enhanced transparency via communicating voting rationales not only clarifies the reasons behind institutional investors’ voting decisions but also strengthens alignment between investor expectations and subsequent governance changes. Disclosing voting rationales could also help companies understand their institutional investors’ voting decisions, enhancing transparency and improving stewardship.
In companies that addressed concerns raised by voting rationales, there was a meaningful reduction in shareholder dissent towards directors in the following years.
Lastly, although the analysis focused on US companies, the growing global practice of disclosing voting rationales – especially among non-US institutional investors – suggests these communications mechanisms may be relevant in other markets.
Keywords:
Institutional investors, Voting, Voting rationales, Corporate governance
* Learn more from the full research article here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4521854
