Corporate voting was most important as a mechanism to change control of the board of directors. We offer a positive theory that explains what we observe in the world about the role of the shareholder franchise. Shareholders receive most of the marginal profits and bear most of the marginal costs.
So the right to vote arises from a shareholder's claim on the residual value of the company and this right extends to any issue that has not been expressly agreed upon within the company. Superficially, you might think so, but it depends on the nature of the transaction between the shareholders and the corporation. There is one way in which shareholders are unique in their relationship to the corporation—they are the only stakeholders whose return on investment is closely related to the corporation's stock price.
7 Accordingly, shareholders are the only corporate stakeholders whose returns depend on both the residual value of the company and the provision of accurate information to the stock market. So it is in the interests of the shareholders that the residual value of the company is maximized and that this value is accurately reflected in the market. The fact that shareholders are motivated by the residual value of the firm and dependent on efficient capital markets has associated social benefits.
WHEN SHOULD SHAREHOLDERS VOTE?
INCENTIVES TO VOTE (OR NOT VOTE) AND RESPONSES TO THOSE INCENTIVES
To have developed a theory of shareholder voting that justifies giving the rights to shareholders and delineated the types of issues that. Non-voting, always a concern of individual mom-and-pop shareholders, remains an equal challenge for institutional investors, who have become the dominant players in the shareholder world over the past four decades. Second, even if these intermediaries overcome the obstacles to voting, conflicts of interest may cause them to vote in ways that do not maximize the firm's value.
For shareholder voting to play its proper role, there must be adequate answers to both of these problems. There are agency advantages that come from possible specialization and economies of scale that come from hiring agents. But we must weigh these benefits against the costs of monitoring the agents and the losses.
We then examine (1) the government's response to this inertia by mandating fiduciary voice, and (2) a key market response to this regulatory mandate: the growth of new market entrants – proxy advisory firms – that provide information and services deliver to meet this mandate. obligation. The final section evaluates the conflicts faced by each of the institutions and how public policy should address them.
WHY DON'T SHAREHOLDERS VOTE?
Proxy Advisory Firms' Conflicts
The SEC's 2010 draft publication suggested that it could further examine proxy firms' disclosures to determine whether they "adequately alert shareholders to the existence of a potential conflict with respect to a particular proposal." 99 ISS has taken steps to isolate that part of its business from advisory recommendations; a Government Accountability Office survey shows that most ISS customers are satisfied with the steps they have taken in that regard.20 0. See BEW & FIELDS, supra note 17, at 6-7 ("In their comments to in response to the SEC's draft release In evaluating the proxy industry, corporate issuers cited specific instances in which recommendations from proxy advisors appeared to dramatically influence voting."). Individual investors: institutional shareholder services 'Voting advice often conflicts with the wishes of the average diversified investor, WALL ST.
Funds employ various hedging techniques that can eliminate their financial stake in a company while still retaining voting rights, using what is commonly referred to as "empty voting."201 The most notorious example of this phenomenon occurred during Mylan Laboratories' ( "Mylan") acquisition of King Pharmaceuticals ("King") in a merger that required a vote of Mylan shareholders.202 Richard Perry's hedge fund, Perry Capital, owned stock in King and was eager to get the deal done. It was then able to vote those shares in the Mylan merger election.203 The parties' termination of the agreement after King announced an earnings restatement called the vote into question,204 but the point had been made—sophisticated financial techniques can be used to separate voting rights from financial interests and greatly undermines the effectiveness of shareholder voting. To cover their potential exposure if their side of the swap generated liabilities, the banks bought an equivalent number of CSX shares.
By holding shares in a corporation while selling them short, an investor can retain a vote in the corporation but still benefit from a decline in the stock price. Such transactions have the potential to completely separate voting rights from economic interest in the corporation and represent a real threat to the basis of shareholder exclusivity.207. We should emphasize that this is not a principal-agent problem between hedge funds and their investors, since the blank vote benefits investors in the hedge fund.
Our theory suggests that blank voting is not a legitimate exercise of the franchise and should be banned. In addition, enforcing such a ban may be prohibitively expensive due to the line-drawing problems associated with the definition of a blank vote, and the sophistication of the derivatives market will make it difficult to determine when this occurs. 208 A mixture of disclosure and restrictions is the second best option in such an environment,209 but we recognize that a blank ballot could reduce the effectiveness of shareholder voting.210. Hu & Bernard Black, Voting and Hidden (Transformative) Ownership: Taxonomy, Implications, and Reforms, 61 BUS.
In a recent court case, Henry Hu and Bernard Black, authors of some of the original papers on blank voting, found themselves on opposite sides of the question of whether it had occurred. For a broader point about how limitations in the technology of voice should lead to less use of voice, see Marcel Kahan & Edward B.
APPLYING OUR VOTING THEORY IN THE WORLD OF INTERMEDIARY CAPITALISM
Fourth, the increasing inflow of institutional fund money into hedge funds increases the ex ante effect. Finally, hedge funds effectively lobby brokerage advisory firms to increase their returns by voting institutional investors. Shadab, The Law and Economics of Hedge Funds: Financial Innovation and Investor Protection, 6 BERKELEY BUS.
In their monitoring capacity, activist hedge funds encourage management to take corporate action to generate high returns. Some investors prefer to hold a portfolio of hedge funds rather than invest in a single hedge fund. These funds of hedge funds tend to have higher fees than individual hedge funds because they include an additional management fee charged by the firm that organizes them.
Ellis, Hedge Funds and Discretionary Liquidity Restrictions, J. forthcoming) (manuscript at 2-4) (finding that hedge funds imposed discretionary liquidity restrictions after poor performance and when their assets were more illiquid). While wolf packs can force targeted companies to capitulate to the hedge funds' demands, the result will not always be value-enhancing. Which of these effects dominates will depend on how influential hedge funds' views are to institutional investors.
More importantly for our purposes, this suggests that institutional investors have another interest in supporting hedge fund activism beyond the returns they generate on any given firm by voting for activist agendas—the direct return on their investments in the hedge funds themselves. . In any case, these investment vehicles will have strong incentives to support hedge funds in general, especially when they engage in hedge fund activism. In summary, institutions with interests in activist hedge funds will have two distinct interests in their activism: (1) their direct interest in maximizing the value of their portfolio companies and (2) their indirect interest in maximizing the value of their investment in the hedge fund.
A final group of important players in hedge fund voting activism are brokerage advisory firms. In summary, hedge funds have been the nucleus of high-dollar immediate shareholder activism.
LOW-DOLLAR IMMEDIATE-VALUE VOTING SITUATIONS
In 2012, Hess shareholders cast only 58 percent of their votes in favor of management's Say on Pay proposal, signaling to the market that the company's shareholders were unhappy. The Say on Pay vote can also be seen as a vote on the long-term value of the firm, because compensation practices reflect the quality of corporate governance: firms with weak governance structures often suffer from poor performance and high levels of managerial compensation.313. Say over pay can affect governance and compensation in firms for a number of reasons, which we identify here and discuss in the remainder of this section.
Thomas, The First Year of Say-on-Pay under Dodd-Frank: An Empirical Analysis and Outlook, 81 GEO. See also GEORGESON, REPORT: FACTS BEHIND 2013 FAILED SAY ON PAY VOTES (2013), available at http://www.computershare-na.com/sharedweb/. The research also shows that 55 percent of companies that received negative ISS vote recommendations reported compensation plan changes in response to Say on Pay votes, and that their responsiveness increased as the number of negative shareholder votes increased.
However, the research shows that there has been no stock market response to changes in remuneration implemented following the Say on Pay vote.325. Peter Iliey & Svetla Vitanova, The Effect of the Say-on-Pay Vote in the US Ricardo Correa & Ugur Lel, Say on Pay Laws, Executive Compensation, Pay Slice and Firm Value Around the World 2-3 (April 2014), available at http://papers.ssm.com/sol3/papers.cfm.
Correa and Lel also find that Say on Pay laws are associated with lower levels of executive compensation, higher performance-sensitive pay, and lower pay inequality among executives. In the United States, Say on Pay has not led to lower levels of executive pay or changes in its composition. TIMES (June PM), http://dealbook.nytimes.com in-shareholder-say-on-pay-votes-more-whispers-than-shouts/ (reporting that executive pay levels continue to rise stable even after the implementation of Say with payment).
Martin Conyon & Graham Sadler, Shareholder Voting and Directors' Remuneration Report Legislation: A Say on Pay in the UK, 18 CORP. A failed Say on Pay vote will signal to the board of directors that they need to pay more attention to these issues, and may even signal to hedge funds that the firm is a good target.3 53.
