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Shareholder activism

Paper co-authored at Cambridge Judge finds that institutional shareholders recall shares to oppose management in proxy votes.

Shareholder activism
Institutional investors often recall loaned shares prior to proxy votes when they want to express lack of support for management, according to research co-authored at Cambridge Judge Business School that was named best paper in a corporate governance award.

The article “The role of institutional investors in voting: evidence from the securities lending market” was named best paper this month in the Global Challenge for Innovation in Corporate Governance by investment management firm BlackRock and the National Association of Corporate Directors (NACD) in the US.

Dr Pedro Saffi

Dr Pedro Saffi

The research co-authored by Pedro Saffi, University Lecturer in Finance at Cambridge Judge, breaks new ground in showing how institutional investors influence the proxy voting process through share recall. The paper will be published in a forthcoming issue of the prestigious Journal of Finance.

“The research shows that institutional investors care about exercising their voting rights, especially when there are important proposals on the ballot like those related to compensation policies and M&A,” said Saffi.

“We were able to show this by using a unique dataset from the equity lending market. Institutions are the biggest lenders of shares to short sellers but, in exchange for a fee, they also transfer their voting rights during the duration of the loan. Thus, on the voting record date they have to decide if they care enough about voting to recall the shares lent out and forgo the fee. We use this to estimate the value of voting and how it varies according to what is on the ballot.”

The researchers “highlight the mechanisms used by institutional investors to impact corporate governance, mechanisms that are typically imperceptible and thus difficult to study,” BlackRock and NACD said.

This research is particularly relevant during a period that has seen increased emphasis on shareholder activism.

The paper finds that during proxy voting periods institutional investors often recall their loaned shares prior to the record date in order to exercise their voting rights, and that there is a correlation between share recall and investors’ lack of support for management in the outcome of proxy votes.

Specifically, the research found higher share recall for firms with weaker performance or corporate governance, and when executive pay or merger issues are on the ballot. In examining the subsequent votes, the researchers found that higher recall is associated with more votes for activist shareholder proposals and fewer votes for management.

“Our findings imply that institutional investors value their vote and use the proxy voting process as an important channel for affecting corporate governance,” says the paper, which was co-authored by Saffi, Reena Aggarwal of Georgetown University and Jason Sturgess of DePaul University.

The paper’s conclusions “show the need for investors to be well informed about proxy items long before the record date,” said BlackRock and NACD. “They also suggest the need for corporations and their leaders to be proactive in conveying relevant information in a timely manner.”