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Voting is a more powerful investor tool than meets the eye, as even small levels of dissent can lead to major changes further down the road, says a leading researcher on the subject.
“Even a tiny percentage of 4% dissent can be as a signal for the firm to start engagement, and for managers to care more about that engagement,” says Hans van Oosterhout, Professor of Corporate Governance and Responsibility at the Rotterdam School of Management of Erasmus University.
“If you look at the chain of events, from behind-the-scenes discussions to actual voting, the bottom line is that investor activity can make a difference, particularly when it’s focused upon strategic issues. Up until recently, we all thought that voting doesn’t matter, but we have recently come to understand that it is one of the most potentially effective and powerful mechanisms of public engagement.”
Van Oosterhout’s work attempts to make a quantifiable connection between shareholder voting and the end-result. “Much has changed over the last decade or so, since especially institutional investors have started taking their voting rights seriously,” he says. “We have also started to use new research methods to capture the effects of voting, and that really shows interesting new insights.”
“If you take a casual look, shareholders always seem to vote with management, and on average approval rates are extremely high, with more than 90% voting in favor of most proposals,” he says. “In my own studies, the average rate of dissent is about 4% on all proposals combined, so the conclusion that shareholder meetings are like a North Korean parliament is certainly understandable.”
“But in recent research, we’ve seen that voting does have an influence, even when there is more than 90% approval. The small amount of dissent that there is can be a sign that might prompt management to do something about the issue. Sometimes this leads to CEO or board turnover, the abolition of poison pills or other takeover defenses, or even to less value-destroying mergers and fewer but more profitable acquisitions.”
‘Voting does have an influence, even when there is more than 90% approval’
The results of Van Oosterhout’s academic research are also borne out by experience on the ground, says Michiel van Esch, an engagement specialist with Robeco’s Governance & Active Ownership team, which uses voting to try to change contentious company policies.
“We have seen an increase in shareholders taking their voting rights seriously. We also see increased appetite from our clients, as more and more of them now ask detailed questions about how we have exercised their voting rights, while asking for our rationale on certain voting decisions and the nature of our policies. Increasingly clients, even have their own policies or principles and expect us to act on them. Shareholder dissent can lead to changes, but its success depends on the process around it.”
“It’s true that there are very few agenda items that actually get voted down, but we often find that some sort of reaction still occurs, and often indirectly. We recently had a company where 30% of shareholders voted against a proposal that tried to restrict formal decision making on capital management to the board only, so they didn’t need to go to an AGM to get their dividend approved. It didn’t seem very controversial.”
“But after the meeting, the company sent letters to its shareholders acknowledging that there appeared to be some issues with their capital management, and they wanted to meet to talk about this. All of a sudden, even though the actual voting result didn’t lead to changes, it led to a process where they started talking to their shareholders about the need to change things.”
Van Esch says it’s also interesting to see agenda items that are canceled ahead of a vote. “If management gets a sense that something controversial might not pass, it can cancel it – which is also a result for us at that point.”
Van Oosterhout says sometimes companies view shareholder dissent as ‘votes of no confidence’ that are dealt with politically rather than financially. “Even proposals that may have nothing to do with economics could make managers more responsive, because they consider voting outcomes to be part of a political process; they don’t ignore the vote,” he says.
“We’re only beginning to unravel how this works. We can see the outcomes, but not yet the causal mechanisms. The consequences are there; we just have to join the dots.”