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  1. 1. Determinants and Consequences of Proxy Voting by Mutual Funds on Shareholder Proposals Rasha Ashraf Narayanan Jayaraman December 13, 2006
  2. 2. Motivation <ul><li>An important corporate governance mechanism is voting rights of shareholders </li></ul><ul><li>Institutional investors take the responsibility to vote on behalf of individual investors. </li></ul><ul><li>Institutional investors hold 66% of U.S. stocks. </li></ul><ul><li>Total assets of mutual funds </li></ul><ul><ul><li>1950 : $2 billion </li></ul></ul><ul><ul><li>2006 : $10 trillion </li></ul></ul>
  3. 3. Motivation <ul><li>With more than 25% of all U.S. stocks under their control, mutual funds could practically run the business world, working with other large investors to throw out overpaid CEOs and force corporate overhauls. But they don't. </li></ul><ul><ul><li>WSJ, October 3, 2006 </li></ul></ul><ul><li>Fidelity holds a 10% or greater stake in at least 100 of the nation's largest 1,000 companies and, controls at least $1.3 trillion, more than all hedge funds combined. But Fidelity rarely exercises its unprecedented muscle to push for improved corporate governance. </li></ul><ul><ul><li>Business Week, October 16, 2006 </li></ul></ul>
  4. 4. Objective <ul><li>Study the determinants of mutual funds’ voting policies across firms. </li></ul><ul><li>Examine the incentive structure of mutual funds to undertake activist role in voting behavior. </li></ul><ul><li>Investigate whether mutual funds engage in “Wall Street Walk” when dissatisfied with management. </li></ul>
  5. 5. <ul><li>In 2002 SEC Reports: </li></ul><ul><li>“ Traditionally mutual funds have been viewed as largely passive investors, reluctant to challenge corporate management on issues such as corporate governance. Funds have often followed the so called “Wall Street Rule” according to which an investor should either vote as management recommends or if dissatisfied with management, sell the stock.” </li></ul>
  6. 6. History of Mutual Funds Disclosure Policy <ul><li>In December 2000: SEC started to examine the proxy vote disclosure issue for mutual funds </li></ul><ul><li>In September, 2002: SEC propose to consider requiring mutual funds to disclose their proxy voting policies and actual votes cast. </li></ul><ul><li>There was unanimous opposition by the mutual funds on this proposal. </li></ul><ul><li>In January, 2003: SEC adopt new rule which made disclosure of proxy voting policies and procedures mandatory </li></ul><ul><ul><li>File new Form N-PX, containing proxy voting records for the 12-month period ended June 30 by no later than August 31 of each year. </li></ul></ul>
  7. 7. Literature: Mutual Funds’ Voting Behavior <ul><li>Rothberg and Lilien (2005): analysis of the largest 10 fund families’ proxy voting policies. </li></ul><ul><li>Davis and Kim (2005): conflict of interests of mutual funds in their voting behavior </li></ul>
  8. 8. Shareholder Proposals and Shareholder Activism <ul><li>Survey: </li></ul><ul><ul><li>Gillan & Starks (1998) </li></ul></ul><ul><ul><li>Karpoff (2001) </li></ul></ul><ul><ul><li>Black (1998) </li></ul></ul><ul><ul><li>Romano (2001) </li></ul></ul><ul><li>Other Studies: </li></ul><ul><ul><li>Karpoff, Maletesta, & Walking (1996) </li></ul></ul><ul><ul><li>Ertimur, Ferri and Stubben (2005) </li></ul></ul>
  9. 9. Data <ul><li>Proxy voting records in shareholders’ proposals for the period July 1, 2003 to June 30, 2004. </li></ul><ul><li>Proxy voting record in Form N-PX would include </li></ul><ul><ul><li>Identification of the company and the proposal </li></ul></ul><ul><ul><li>Sponsor of the proposal: management or shareholder </li></ul></ul><ul><ul><li>Whether the fund voted on the proposal or not. </li></ul></ul><ul><ul><li>How the fund voted: “for” “against” “abstain” “unknown” </li></ul></ul><ul><ul><li>Whether the fund voted for or against management: “for” “against” “unknown” </li></ul></ul><ul><li>24 biggest fund families based on the total net assets for the year 2004. </li></ul><ul><li>433 mutual funds </li></ul><ul><li>Over 29,000 observations covering 528 firms. </li></ul>
  10. 10. Data <ul><li>CRSP mutual fund database: fund performance and characteristic data </li></ul><ul><li>Thomson Financial Mutual Fund Holding Database: mutual fund holdings data. </li></ul><ul><li>CDA-Spectrum 13-f filings: Mutual fund families’ holdings data </li></ul><ul><li>CRSP: Returns, share outstanding and market capitalization </li></ul><ul><li>COMPUSTAT: firms’ earnings data </li></ul><ul><li>Compact Disclosure SEC data source: Blockholder and insider holdings data </li></ul><ul><li>Gompers-Ishii-Metrick governance score data </li></ul>
  11. 11. Types of Shareholder Proposals <ul><li>Total 74 types of shareholder proposals </li></ul><ul><li>Seven broad categories </li></ul><ul><ul><li>Anti-takeover </li></ul></ul><ul><ul><li>Voting Issues </li></ul></ul><ul><ul><li>Shareholder Wealth and Rights </li></ul></ul><ul><ul><li>Executive Compensation </li></ul></ul><ul><ul><li>Director Related </li></ul></ul><ul><ul><li>Audit Committee </li></ul></ul><ul><ul><li>Other Social and Ethical Issues </li></ul></ul>
  12. 12. Anti-takeover <ul><li>Supermajority Provision : Shareholder vote requirements are higher than the minimum levels set by state law to approve a merger or other business combination. </li></ul><ul><li>Poison Pill: Shareholders are issued rights to purchase stock in their own company or in the acquiring company at a steep discount if a hostile bidder acquires company’s shares. </li></ul><ul><li>Classify Board: It is also known as staggered board. The board is divided into classes, with the directors in each class serving overlapping terms. </li></ul><ul><li>Golden Parachutes: A contract specifying that executive will receive large benefits in the event that the company is acquired and the executive's employment is terminated. </li></ul><ul><li>Opt Out of State Takeover Statute: Most state anti-takeover provisions allow companies to &quot;opt in&quot; or to &quot;opt out&quot; of coverage by stating their intention in their charters. </li></ul>
  13. 13. Table 2: Descriptive Statistics of Sample Fund Family Voting 0.003 0.060 0.715 0.221 29795 Total Number of Proposals 0.005 0.001 0.754 0.241 1445 T Rowe Price Associates Inc. 24 0.000 0.000 0.660 0.340 970 JPMorgan Fleming Asset Management 23 0.000 0.026 0.671 0.302 453 Banc One Investment Advisors 22 0.000 0.022 0.817 0.161 460 ING Investments LLC 21 0.003 0.005 0.873 0.119 869 American Express Financial Advisors 20 0.003 0.007 0.838 0.153 1213 Morgan Stanley Investment Advisors 19 0.000 0.000 0.756 0.244 78 Goldman Sachs Asset Management 18 0.002 0.060 0.582 0.356 402 Columbia Management Group Inc. 17 0.000 0.013 0.858 0.129 1587 MFS Investment Management 16 0.000 0.373 0.472 0.155 1027 OppenheimerFunds 15 0.000 0.010 0.785 0.206 817 Merrill Lynch Investment Managers 14 0.000 0.020 0.513 0.467 448 Allianz Dresdner Asset Mgmt 13 0.000 0.159 0.572 0.269 1055 Prudential Securities Incorporated 12 0.000 0.048 0.710 0.241 290 Alliance Capital Management Corp. 11 0.001 0.011 0.830 0.158 1456 Putnam Investment Mgmt LLC 10 0.002 0.009 0.713 0.276 1004 Smith Barney Asset Management 9 0.002 0.167 0.645 0.185 1368 AIM Advisors Inc. 8 0.000 0.005 0.934 0.061 623 Federated Investment Management Co 7 0.013 0.031 0.759 0.197 1290 Franklin Advisers Inc. 6 0.000 0.324 0.484 0.192 3350 Vanguard Group Investment Co. 5 0.000 0.002 0.677 0.321 2456 Deutsche Asset Management 4 0.036 0.009 0.774 0.181 2245 Capital Research & Management Co. 3 0.000 0.025 0.784 0.192 971 Dreyfus Corporation 2 0.005 0.123 0.705 0.167 3844 Fidelity Management Research 1 % Vote Cast “ unknown” % Vote Cast “ abstain” % Vote Cast “ against” % Vote Cast “ for” Total Number of Voting Records in Sample Management Name
  14. 14. 0.058 0.219 0.233 0.113 0.256 0.249 0.690 Mean Percentage Support 0.043 0.286 0.288 0.255 0.190 0.500 0.813 T Rowe Price Associates Inc. 24 0.200 1.000 0.300 0.158 0.400 0.571 0.833 JPMorgan Fleming Asset Management 23 0.180 0.179 0.234 0.376 0.600 0.538 Banc One Investment Advisors 22 0.024 0.000 0.105 0.006 0.049 0.227 0.708 ING Investments LLC 21 0.010 0.000 0.292 0.011 0.193 0.118 0.678 American Express Financial Advisors 20 0.027 0.250 0.283 0.074 0.288 0.100 0.467 Morgan Stanley Investment Advisors 19 0.135 0.500 0.283 0.357 0.000 0.800 Goldman Sachs Asset Management 18 0.133 0.250 0.472 0.229 0.549 0.056 0.735 Columbia Management Group Inc. 17 0.000 0.000 0.063 0.028 0.021 0.028 0.847 MFS Investment Management 16 0.017 0.000 0.179 0.064 0.167 0.067 0.637 OppenheimerFunds 15 0.062 0.500 0.188 0.147 0.162 0.308 0.548 Merrill Lynch Investment Managers 14 0.083 0.250 0.417 0.131 0.512 0.333 0.648 Allianz Dresdner Asset Mgmt 13 0.010 0.747 0.377 0.150 0.316 0.424 0.786 Prudential Securities Incorporated 12 0.059 0.333 0.200 0.255 0.333 0.250 0.500 Alliance Capital Management Corp. 11 0.008 0.000 0.194 0.009 0.072 0.053 0.865 Putnam Investment Mgmt LLC 10 0.090 0.143 0.200 0.122 0.342 0.406 0.765 Smith Barney Asset Management 9 0.056 0.092 0.239 0.110 0.129 0.450 0.681 AIM Advisors Inc. 8 0.000 0.000 0.000 0.000 0.000 0.021 0.472 Federated Investment Management 7 0.025 0.333 0.385 0.182 0.282 0.433 0.559 Franklin Advisers Inc. 6 0.056 0.294 0.065 0.017 0.247 0.041 0.636 Vanguard Group Investment Co. 5 0.080 0.200 0.310 0.083 0.515 0.321 0.826 Deutsche Asset Management 4 0.053 0.100 0.119 0.022 0.244 0.509 0.680 Capital Research & Management Co. 3 0.031 0.250 0.111 0.067 0.172 0.056 0.770 Dreyfus Corporation 2 0.007 0.224 0.139 0.087 0.219 0.112 0.756 Fidelity Management Research 1 OTHERS AUDIT DIRECTOR RELATED EXECUTIVE COMPENSATION SHAREHOLDER WEALTH AND RIGHTS VOTING ISSUES ANTITAKEOVER Management Name Table 3: Percentage of Vote in Support for Different Types of Shareholder Proposals by Fund Families
  15. 15. Fund Voting Behavior with Respect to Investment Horizon
  16. 16. Table 4: Distribution of Shareholder Proposals Voting Records Based on Fund Style 0.014 0.053 0.740 0.192 5507 71 Others 0.003 0.113 0.733 0.151 2453 16 Balanced 0.004 0.093 0.703 0.199 8934 41 Blend 0.000 0.066 0.760 0.173 5641 61 Growth 0.003 0.055 0.728 0.214 6012 39 Value % Vote Cast “ unknown” % Vote Cast “abstain” % Vote Cast “ against” % Vote Cast “for” Number of Voting Records Number of Funds Fund Style Table 4: Panel A
  17. 17. Research Questions <ul><li>Determinants of mutual funds’ voting policies across firms. </li></ul><ul><li>Examine the incentive structure of mutual funds to undertake activist role in voting behavior. </li></ul><ul><li>Investigate whether mutual funds engage in “Wall Street Walk” when dissatisfied with management. </li></ul>
  18. 18. Determinants of Voting Policies Across Firms <ul><li>Mutual funds voting pattern varies across firms for a particular proposal type </li></ul><ul><li>Voting behavior is not influenced by the business ties (Davis and Kim (2005) </li></ul><ul><li>Gordon and Pound (1993) examine the determinants of voting outcome of shareholders’ proposals </li></ul><ul><li>We examine fund family voting behavior across firms and study whether voting is influenced by </li></ul><ul><ul><li>Family Characteristics </li></ul></ul><ul><ul><li>Firm Characteristics and Performance </li></ul></ul><ul><ul><li>Governance Structure of Firm </li></ul></ul><ul><ul><li>Types of Proposals </li></ul></ul><ul><ul><li>Ownership Structure of the Firm </li></ul></ul><ul><li>Dependent Variable: Percentage of votes cast in support for shareholder proposal p of firm i by all funds in family f . </li></ul>
  19. 19. Table 6: Mean (Median) Percentage Support on Shareholder Proposals in Extreme Portfolios Based on Size, Book-to-Market and Performance 0.03 (0.24) 0.359 (0.20) 0.524 (0.50) HISTORICAL LONG RUN EXCESS RETURN 0.05 (0.03) 0.377 (0.268) 0.521 (0.520) BOOK TO MKT <0.0001 (0.38) 0.213 (0.138) 0.480 (0.50) FIRM SIZE “ for” or “abstain” 0.25 (0.50) 0.330 (0.141) 0.423 (0.382) HISTORICAL LONG RUN EXCESS RETURN 0.14 (0.42) 0.336 (0.146) 0.451 (0.50) BOOK TO MKT 0.0003 (0.18) 0.154 (0.019) 0.393 (0.125 FIRM SIZE “ for” P-value for difference (t-test for difference) P10 Mean (Median) P1 Mean (Median) Variable for Portfolio Construction Votes Cast as Support of Proposals
  20. 20. Table 7: Mean (Median) Percentage Support on Shareholder Proposals and Governance Indices 0.35 (0.33) 0.179 (0.034) 0.266 (0.026) BCF 0.01 (0.008) 0.117 (0.0) 0.356 (0.333) GIM DIRECTOR RELATED 0.03 (0.01) 0.110 (0.0) 0.041 (0.0) BCF 0.33 (0.22) 0.103 (0.0) 0.07 (0.0) GIM EXECUTIVE COMPENSATION 0.69 (0.13) 0.273 (0.198) 0.252 (0.035) BCF 0.35 (0.22) 0.235 (0.084) 0.285 (0.176) GIM SHAREHOLDER WEALTH AND RIGHTS 0.98 (0.47) 0.238 (0.160) 0.240 (0.021) BCF 0.31 (0.32) 0.204 (0.154) 0.304 (0.021) GIM VOTING ISSUES 0.0002 (0.002) 0.620 (0.6) 0.823 (0.875) BCF 0.007 (0.004) 0.635 (0.694) 0.819 (0.875) GIM ANTITAKEOVER <0.0001 (0.001) 0.224 (0.040) 0.351 (0.143) BCF 0.0001 (0.001) 0.229 (0.019) 0.345 (0.148) GIM All P-value for difference ( t-test for difference ) Low ATP Mean (Median) [N] High ATP Mean (Median) [N] GOVERNANCE INDEX PROPOSAL TYPE “ for” as support of shareholder proposals
  21. 21. Table 8: Determinants of Voting Policies across Firms : Vote cast “for” Considered as Support 4392 4392 6133 4395 4395 5814 Number of Observations 0.37 0.14 0.12 0.37 0.14 0.12 YES YES YES YES YES YES Family Fixed Effects 0.013 0.004 DIRECTOR RELATED -0.064 ** -0.071 ** EXECUTIVE COMPENSATION 0.057 * 0.049 SHAREHOLDER WEALTH RIGHTS 0.070 ** 0.065 * VOTING ISSUES 0.526 *** 0.519 *** ANTITAKEOVER 0.002 *** 0.002 *** 0.002 *** 0.003 *** INSIDER HOLD 0.001 * 0.002 *** 0.001 0.002 *** BLOCKHOLDER HOLD -0.678 ** -0.393 -0.698 ** -0.446 PERCENT SHARE HOLD -0.041 * -0.115 *** -0.041 * -0.114 *** DUAL CLASS 0.012 ** 0.047 *** 0.039 *** BCF 0.008 *** 0.021 *** 0.019 *** GIM 0.005 *** 0.005 *** 0.004 *** 0.006 *** 0.005 *** 0.005 *** NUMBER OF PROPOSALS 0.137 ** 0.199 *** 0.208 *** 0.128 ** 0.187 *** 0.205 *** MAJOR STOCK LISTING 0.013 ** 0.005 0.018 *** 0.012 ** 0.003 0.018 *** HISTORICAL LONG RUN EXCESS RETURN -0.135 *** -0.134 *** -0.164 *** -0.129 *** -0.120 *** -0.148 *** BOOK TO MKT -0.053 *** -0.057 *** -0.078 *** -0.055 *** -0.072 *** -0.089 *** FIRM SIZE -0.088 *** -0.073 ** -0.062 ** -0.084 *** -0.062 * -0.055 * BUSINESS TIES FAMILIES -0.117 *** -0.139 *** -0.133 *** -0.117 *** -0.139 *** -0.139 *** FAMILY SIZE 2.119 2.421 2.594 2.106 2.489 2.681 Intercept Model 6 Model 5 Model 4 Model 3 Model 2 Model 1
  22. 22. Effect of Voting Records Release on Funds’ Reputation <ul><li>Whether there exist any direct reputational effect for undertaking activist role in voting mechanism </li></ul><ul><ul><li>Observe the next year funds’ asset flow after voting record release. </li></ul></ul><ul><ul><li>Dependent variable: Objective adjusted net asset flow of a fund over the next year of the mutual fund voting record release date. </li></ul></ul><ul><ul><li>Independent variable: Median percentage support by a fund over all shareholder proposals </li></ul></ul>
  23. 23. Table 9: Effect of Mutual Funds’ Support of Shareholder Proposals on Fund Flow 205 205 210 210 Number of Observations 0.47 0.47 0.46 0.47 YES YES YES YES Style Fixed Effects 0.294 *** 0.294 *** 0.293 *** 0.285 *** PREV YEAR AVG NAF 0.227 *** 0.196 ** 4FACTOR ALPHA 0.113 * 0.117 ** OAR 0.002 0.002 0.003 0.003 S&P STAR 0.006 0.006 0.022 0.020 FEE 0.004 * 0.004 0.003 0.003 FUND AGE 0.00001 0.00001 0.00001 0.00001 FAMILY SIZE -0.003 0.0008 0.001 0.002 FUND SIZE 0.014 ** 0.024 ** 0.011 * 0.024 ** MEDIAN PERCENT SUPPORT BY FUND -0.018 -0.026 -0.051 -0.056 Intercept Model 4 Support Shareholder: “ for” or “abstain” Model 3: Support Shareholder: “for” Model 2 Support Shareholder: “ for” or “abstain” Model 1 Support Shareholder: “ for”
  24. 24. Mutual Funds’ Trading Behavior after Voting Records Release <ul><li>Examine: Whether mutual funds engage in “Wall Street Walk” when dissatisfied with management. </li></ul><ul><li>Results: Mutual funds sell off their shares when they provide higher support in shareholders’ proposals. </li></ul><ul><li>Implications: </li></ul><ul><ul><li>Mutual funds who support shareholders’ proposals are not very optimistic about the final outcome. </li></ul></ul><ul><ul><li>When they dislike managements’ policy they engage in “Wall Street Walk” </li></ul></ul><ul><ul><li>However, they undertake activist role before selling off their shares. </li></ul></ul>
  25. 25. Table 10: Analysis of Mutual Fund Trading Behavior after Voting Records Release 4873 4873 Number of Observations 0.07 0.07 YES YES Fund Style Fixed Effects YES YES Family Fixed Effects -0.0002 -0.0002 NUMBER OF PROPOSALS -0.0002 -0.0002 GIM -0.0003 -0.0003 INSIDER HOLD 0.0001 0.0001 BLOCKHOLDER HOLD -4.36 *** -4.36 *** PREV QTR PERC HOLD BY FUND -0.003 -0.002 ALL INST HOLD 0.076 *** 0.078 *** MAJOR STOCK LISTING -0.036 *** -0.036 *** RETURN PAST 90 DAYS 0.031 0.030 EARNING-PRICE-RATIO -0.015 ** -0.015 ** BOOK TO MKT -0.004 ** -0.004 ** FIRM SIZE -0.011 ** -0.016 *** PERCENTGAE SUPPORT TO SHRHLD 0.026 0.026 Intercept Model 2: Vote Cast: “ for” or “abstain” Model 1: Vote Cast: “ for”
  26. 26. Conclusions <ul><li>Mutual funds undertake monitoring role </li></ul><ul><ul><li>For proposals that are likely to increase shareholders’ wealth and rights. </li></ul></ul><ul><ul><li>In firms with weaker external monitoring mechanism </li></ul></ul><ul><ul><li>In firms with entrenched management </li></ul></ul><ul><ul><li>In firms where they are likely to have higher influence. </li></ul></ul><ul><li>Mutual funds experience a positive reputational effect for undertaking an activist role in their voting behavior </li></ul><ul><li>If they disapprove managements’ policy they sell off their shares but before doing so they provide support to shareholders’ proposals. </li></ul>
  27. 27. <ul><li>THANK YOU! </li></ul>

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