Research Retrieved: March 2018
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In recent years, shareholders have become much more active in submitting shareholder proposals. In particular, environmental topics frequently appear on voting agendas. Classical financial theory suggests that shareholders’ main concern is the maximization of firm value, and that this determines their voting behaviour. However, the records actually suggest that shareholders disagree substantially when it comes to the vote on governance, social, and environmental proposals, and more than financial theory would predict. Bolton, Li, Ravina, and Rosenthal (2018) develop a novel quantitative measure of institutional voting behaviour, and thereby confirm this notion.
1. Shareholders are not unanimous. The applied scaling method quantifies how similar or different shareholders, managers, and proxy advisors vote across a large number of proposals, and maps them according to their votes on a left-right scale. Investors, managers, and advisors with similar patterns are located close to each other, while larger distances imply that their revealed preferences differ systematically. This scaling reveals a whole spectrum of ideologies, and it appears unlikely that the diversity of voting patterns can be explained by differing risk preferences or perceptions of potential agency problems alone.
2. If the cluster of explicitly socially-concerned investors is defined as the left end of the scale, Vanguard, Blackrock, and management recommendations make up the far right of the spectrum. In relation to these endpoints, ISS voting recommendations are located center-left, and left to most institutional investors.
3. Proxy advisors play an important role, and resemble political parties. The scaling shows a strong clustering of funds who vote alongside ISS’ recommendations. Glass Lewis, in contrast, appears to have fewer followers.
The study at hand is novel beyond the quantitative ideology estimate, as it combines the data on aggregate voting outcomes, mutual and pension fund voting records, as well as management and proxy advisor recommendations. The results highlight that active owners have to be aware of how heterogeneous investor preferences are, and that costly engagement strategies might only be effective if mutual shareholders are likeminded. Besides, the findings could help investors reassess whether their revealed voting preferences are in line with their stewardship strategy.