Determinants of commitment and opportunism of institutional investors’ behaviour: an empirical investigation on Robo-voting Phenomenon
Purpose of the paper: Recent research identifies a troubling number of institutional investors that automatically follow the advice of their proxy advisors so that they can prove to have complied with their fiduciary duties in a practice known as robo-voting. Therefore, our central research questions are: How could the characteristics of institutional investors affect robo-voting phenomenon? How could robo-voting phenomenon favour the creation of new opportunistic behaviour, changing the scope of shareholder engagement?
Methodology: Our paper directly addresses these questions by using ANCOVA (Analysis of Covariance) to test the effect of characteristics of institutional investors on the dependent variable under study. We use a manually constructed sample of coverage information from 123 Annual General Meetings held by large Italian companies in the 4-year period 2015 to 2018 and the voting reports of three proxy advisors.
Findings: We show that such voting based on robo-voting phenomenon is restricted to specific types of institutional investors and it may be highlighted as a negative aspect of a duty to ‘demonstrate’ engagement on the part of institutional investors. Specifically, this duty could depend on location, strategy and category of institutional investors.
Research limits: We refer only to the Italian market and it may be considered as a peripheral market by investors.
Practical implications: We argue that legal enforcement of the conceptual and operational spectrum of engagement duties currently sits uncomfortably upon institutional investors and proxy advisors.
Originality of the paper: We think it is important to consider how to promote shareholder engagement in general in a European context and at the same time curb negative activism by some shareholders.
ABDIOGLU N., BAMIATZI V., CAVUSGIL S.T., KHURSHED A., STATHOPOULOS K. (2015), “Information asymmetry, disclosure and foreign institutional investment: An empirical investigation of the impact of the Sarbanes-Oxley Act”, International Business Review, vol. 24, n. 5, pp. 902-915.
AGGARWAL R., EREL I., STARKS L.T. (2014), “Influence of public opinion on investor voting and proxy advisors”, Fisher College of Business Working Paper, No. WP, 03-12.
AHERN D. (2018), “The mythical value of voice and stewardship in the EU Directive on long-term shareholder engagement: rights do not an engaged shareholder make”, Cambridge Yearbook of European Legal Studies, vol. 20, pp. 88-115.
ALMAZÀN A., HARTZELL J.C., STARKS L.T. (2005), “Active institutional shareholders and costs of monitoring: Evidence from executive compensation”, Financial management, vol. 34, n. 4, pp. 5-34.
ARIKAN A.T. (2020), “Opportunism is in the Eye of the Beholder: Antecedents of Subjective Opportunism Judgments”, Journal of Business Ethics, vol. 161, n. 3, pp. 573-589
ARJOON S. (2005), “Corporate governance: An ethical perspective”, Journal of Business Ethics, vol. 61, n. 4, pp. 343-352.
ARJOON S. (2006), “Striking a balance between rules and principles-based approaches for effective governance: A risk-based approach”, Journal of Business Ethics, vol. 68, n. 1, pp. 53-82.
BALSAM S., BOONE J., LIU H., YIN J. (2016), “The impact of say-on-pay on executive compensation”, Journal of Accounting and Public Policy, vol. 35, n. 2, pp. 162-191.
BEBCHUK L.A., COHEN A., HIRST S. (2017), “The agency problems of institutional investors”, Journal of Economic Perspectives, vol. 31, n. 3, pp. 89-102.
BELCREDI M., BOZZI S., CIAVARELLA A., NOVEMBRE V. (2017), “Institutional investors’ activism under concentrated ownership and the role of proxy advisors. Evidence from the Italian say-on-pay”, Corporate Ownership and Control, vol. 14, n. 4, pp. 41-57.
BELINFANTI T.C. (2010), “The proxy advisory and corporate governance industry: The case for increased oversight and control”, Stanford Journal of Law, Business, and Finance, vol. 14, pp. 384-439.
BENNETT J.A., SIAS R.W., STARKS L.T. (2003), “Greener pastures and the impact of dynamic institutional preferences”, Review of Financial Studies, vol. 16, n. 4, pp. 1203-1238.
BETHEL J.E., GILLAN S.L. (2002), “The impact of the institutional and regulatory environment on shareholder voting”, Financial Management, vol. 31, n. 4, pp. 29-54.
BILINSKI P., CUMMING D., HASS L., STATHOPOULOS K., WALKER M. (2019), “Strategic distortions in analyst forecasts in the presence of short-term institutional investors”, Accounting and Business Research, vol. 49, n. 3, pp. 305-341.
BIRKMOSE H.S. (2018), “Forcing shareholder engagement: Theoretical underpinning and political ambitions”, European Business Law Review, vol. 29, n. 4, pp. 613-642.
BOONE A., GILLAN S.L., TOWNER M. (2019), “The role of proxy advisors and large passive funds in shareholder voting: Lions or lambs?” 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference.
BRICKLEY J.A., LEASE R.C., SMITH JR C.W. (1988), “Ownership structure and voting on antitakeover amendments”, Journal of Financial Economics, vol. 20, pp. 267-291.
BROWN L.D., CALL A.C., CLEMENT M.B., SHARP N.Y. (2015), “Inside the ‘black box’ of sell-side financial analysts”, Journal of Accounting Research, vol. 53, n. 1, pp. 1-47.
BUSHEE B.J. (2001), “Do institutional investors prefer near-term earnings over long-run value?”, Contemporary Accounting Research, vol. 18, n. 2, pp. 207-246.
CAI J., GARNER J.L., WALKLING R.A. (2009), “Electing directors”, The Journal of Finance, vol. 64, n. 5, pp. 2389-2421.
CALLUZZO P., KEDIA S. (2019), “Mutual fund board connections and proxy voting”, Journal of Financial Economics, vol. 134, n. 3, pp. 669-688
ÇELIK S., ISAKSSON M. (2014), “Institutional investors and ownership engagement”, OECD Journal: Financial Market Trends, vol. 2013, n. 2, pp. 93-114.
CHEN V.Z. (2019), “Shareholder wealth effects of cultural diversity among blockholders: Evidence from cross border acquisitions by US listed companies”, Corporate Governance: An International Review, vol. 27, n. 3, pp. 186-209.
CHIU I., KATELOUZOU D. (2017), “From shareholder stewardship to shareholder duties: Is the time ripe?”, in Birkmose H. (edited by), Shareholders’ duties (European Company Law Series; Vol. 12), Kluwer Law International, the Netherlands.
CHOI S., FISCH J.E., KAHAN M. (2010), “The power of proxy advisors: Myth or reality?”, Emory Law Journal, vol. 59, n. 4, pp. 869-918.
CIAMPI F. (2015), “Corporate governance characteristics and default prediction modeling for small enterprises. An empirical analysis of Italian firms”, Journal of Business Research, vol. 68, n. 5, pp. 1012-1025.
COATES IV J.C., (2015), “Thirty years of evolution in the roles of institutional investors in corporate governance”, in Hill J.G., Thomas R.S. (edited by), Research handbook on shareholder power, Edward Elgar Publishing, Cheltenham, UK
COX P., BRAMMER S., MILLINGTON A. (2004), “An empirical examination of institutional investor preferences for corporate social performance”, Journal of Business Ethics, vol. 52, n. 1, pp. 27-43.
CUCARI N. (2018), Lo shareholder engagement negli studi di corporate governance. Un’analisi empirica mediante la Qualitative Comparative Analysis, Franco Angeli, Milano, pp. 1-156
CUCARI N., CARBONARA S., ESPOSITO DE FALCO S., SERGAKIS K. (2019), “Robo-voting phenomena: an empirical analysis of institutional investors’ Voting and Proxy Advisors’ Recommendations”, EURAM conference 2019. Exploring the future of management: Facts, fashion and fado, University of Lisbon, 26-28 June.
DALTON D.R., HITT M.A., CERTO S.T., DALTON C.M. (2007), “The fundamental agency problem and its mitigation: independence, equity, and the market for corporate control”, Academy of Management annals, vol. 1, n. 1, pp. 1-64.
DENT G.W. (2014), “A defense of proxy advisors”, Michigan State Law Review, vol. 1287, pp. 1291-1296.
DONG M., OZKAN A. (2008), “Institutional investors and director pay: An empirical study of UK companies”, Journal of Multinational Financial Management, vol. 18, n. 1, pp. 16-29.
DOYLE T.M. (2018), “The realities of robo-voting”, American Council for Capital Formation (ACCF), accessed at: http://accfcorpgov.org/wp-content/uploads/ACCFRoboVoting-Report_11_8_FINAL.pdf
ELYASIANI E., JIA J.J., MAO C.X. (2010), “Institutional ownership stability and the cost of debt”, Journal of Financial Markets, vol. 13, n. 4, pp. 475-500.
ERTIMUR Y., FERRI F., MUSLU V. (2010), “Shareholder activism and CEO pay”, The Review of Financial Studies, vol. 24, n. 2, pp. 535-592.
ERTIMUR Y., FERRI F., OESCH D. (2013), “Shareholder votes and proxy advisors: Evidence from say on pay”, Journal of Accounting Research, vol. 51, n. 5, pp. 951-996.
ESPOSITO DE FALCO S. (2017), I rapporti di potere nel sistema proprietario. Il difficile equilibrio tra maggioranza e minoranza, Cedam Wolters Kluwer, Padova, pp. 1-153.
FOTAKI M., LIOUKAS S., VOUDOURIS I. (2020), “Ethos is destiny: Organizational values and compliance in corporate governance”, Journal of Business Ethics, vol. 166, n. 1, pp. 19-37
GARCÍA-MECA E., LÓPEZ-ITURRIAGA F., TEJERINA-GAITE F. (2017), “Institutional investors on boards: Does their behavior influence corporate finance?”, Journal of Business Ethics, vol. 146, n. 2, pp. 365-382.
GOMTSIAN S. (2018), “Passive fund managers get active: shareholder engagement in the times of index investing”, paper presented at the Society of Legal Scholars annual conference, Queen Mary University of London, 4-7 September 2018.
GOODWIN J. (2003), “The relationship between the audit committee and the internal audit function: Evidence from Australia and New Zealand”, International Journal of Auditing, vol. 7, n. 3, pp. 263-278.
HEINEN V., KOCH C., SCHARFBILLIG M. (2018), “Exporting corporate governance: Do foreign and local proxy advisors differ?”, Working Papers 1810, Gutenberg School of Management and Economics, Johannes Gutenberg University of Mainz.
HITZ J.M., LEHMANN N. (2018), “Empirical evidence on the role of proxy advisors in European capital markets”, European Accounting Review, vol. 27, n. 4, pp. 713-745.
HOSKISSON R.E., HITT M.A., JOHNSON R.A., GROSSMAN W. (2002), “Conflicting voices: The effects of institutional ownership heterogeneity and internal governance on corporate innovation strategies”, Academy of Management Journal, vol. 45, n. 4, pp. 697-716.
ILIEV P., LOWRY M. (2015), “Are mutual funds active voters?”, The Review of Financial Studies, vol. 28, n. 2, pp. 446-485.
IVANOVA M.R. (2017), “Institutional investors as stewards of the corporation: Exploring the challenges to the monitoring hypothesis”, Business Ethics: A European Review, vol. 26, n. 2, pp. 175-188.
JAHNKE P. (2019), “Asset manager stewardship and the tension between fiduciary duty and social License”, available at SSRN: https://ssrn.com/abstract=3307172
JENSEN M.C., MECKLING W.H. (1976), “Theory of the firm: Managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, vol. 3, n. 4, pp. 305-360.
KANG J.K., LUO J., NA H.S. (2018), “Are institutional investors with multiple blockholdings effective monitors?”, Journal of Financial Economics, vol. 128, n. 3, pp. 576-602.
KEMPF E., MANCONI A., SPALT O. (2017), “Distracted shareholders and corporate actions”, The Review of Financial Studies, vol. 30, n. 5, pp. 1660-1695.
LARCKER D.F., MCCALL A.L., ORMAZABAL G. (2015), “Outsourcing shareholder voting to proxy advisory firms”, The Journal of Law and Economics, vol. 58, n. 1, pp. 173-204.
LI T. (2018), “Outsourcing corporate governance: Conflicts of interest within the proxy advisory industry”, Management Science, vol. 64, n. 6, pp. 2951-2971.
LONGSTAFF S. (1986), The ethical dimension of Corporate Governance.
MALENKO A., MALENKO N. (2019), “Proxy advisory firms: The economics of selling information to voters”, The Journal of Finance, vol. 74, n. 5, pp. 2441-2490.
MALENKO N., SHEN Y. (2016), “The role of proxy advisory firms: Evidence from a regression-discontinuity design”, The Review of Financial Studies, vol. 29, n. 12, pp. 3394-3427.
MALLIN C. (2001), “Institutional investors and voting practices: An international comparison”, Corporate Governance: An International Review, vol. 9, n. 2, pp. 118-126.
MCCAHERY J.A., SAUTNER Z., STARKS L.T. (2016), “Behind the scenes: The corporate governance preferences of institutional investors”, The Journal of Finance, vol. 71, n. 6, pp. 2905-2932.
MCNULTY T., NORDBERG D. (2016), “Ownership, activism and engagement: Institutional investors as active owners”, Corporate Governance: An International Review, vol. 24, n. 3, pp. 346-358.
MORGAN A., POULSEN A., WOLF J. (2006), “The evolution of shareholder voting for executive compensation schemes”, Journal of Corporate Finance, vol. 12, n. 4, pp. 715-737.
PERROW C. (1986), “Economic theories of organization”, Theory and Society, vol. 15, n.1, pp. 11-45.
POPOV E.V., SIMONOVA V.L. (2006), “Forms of opportunism between principals and agents”, International Advances in Economic Research, vol. 12, n. 1, pp. 115-123.
ROSE P. (2019), “Robovoting and proxy vote disclosure”, available at SSRN: https://ssrn.com/abstract=3486322
RYAN L.V., SCHNEIDER M. (2002), “The antecedents of institutional investor activism”, Academy of Management Review, vol. 27, n. 4, pp. 554-573.
SAMA L.M., SHOAF V. (2005), “Reconciling rules and principles: An ethics-based approach to corporate governance”, Journal of Business Ethics, vol. 58, n. 1-3, pp. 177-185.
SANCETTA G., CUCARI N., ESPOSITO DE FALCO S. (2018), “Positive or negative voting premium: What happened to private benefits in Italy”, Corporate Ownership and Control, vol. 15, n. 3, pp. 92-100.
SAUERWALD S., VAN OOSTERHOUT J., VAN ESSEN M., PENG M.W. (2018), “Proxy advisors and shareholder dissent: A cross-country comparative study”, Journal of Management, vol. 44, n. 8, pp. 3364-3394.
SERGAKIS K. (2019), “Legal vs social enforcement of shareholder duties”, in Birkmose H.S., Sergakis K., (edited by), Enforcing shareholders’ duties, Edward Elgar Publishing, Cheltenham, UK
SHAPIRO S.P. (2005), “Agency theory”, Annual review of sociology, vol. 31, pp. 263–84.
SHAPIRO LUND D. (2018), “The case against passive shareholder voting”, Journal of Corporation Law, vol. 43, n. 3, pp. 493-536
SHEN C. (2019), “Research on the relationship between institutional investor heterogeneity and corporate environmental responsibility”, in IOP Conference Series: Materials Science and Engineering, vol. 688, n. 5, pp. 1-6
SHERMAN H., BELDONA S., JOSHI M. (1998), “Institutional investor heterogeneity: implications for strategic decisions”, Corporate Governance: An International Review, vol. 6, n. 3, pp. 166-173.
SOBOL M. (2016), “Principal-agent analysis and pathological delegation: the (almost) untold story”, Governance, vol. 29, n. 3, pp. 335-350
SONG S., XU X., YI Y. (2020), “Shareholder voting in China: the role of large shareholders and institutional investors”, Corporate Governance: An International Review, vol. 28, n. 1, pp. 69-87
VERHEZEN P. (2010), “Giving voice in a culture of silence. From a culture of compliance to a culture of integrity”, Journal of Business Ethics, vol. 96, n. 2, pp. 187-206
WALSH J.P., SEWARD J.K. (1990), “On the efficiency of internal and external corporate control mechanisms”, Academy of Management Review, vol. 15, n.3, pp. 421-458
WEBB R., BECK M., MCKINNON R. (2003), “Problems and limitations of institutional investor participation in corporate governance”, Corporate Governance: An International Review, vol. 11, n. 1, pp. 65-73.
YOUNG M.N., PENG M.W., AHLSTROM D., BRUTON G.D., JIANG Y. (2008). “Corporate governance in emerging economies: A review of the principal-principal perspective”, Journal of Management Studies, vol. 1, pp. 196-220.
ZARDKOOHI A., HARRISON J.S., JOSEFY M.A. (2017), “Conflict and confluence: The multidimensionality of opportunism in principal-agent relationships”, Journal of Business Ethics, vol. 146, n. 2, pp. 405-417.