Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

Efrat Dressler; Yevgeny Mugerman

doi:10.2139/ssrn.3785420

Dressler, Efrat;Mugerman, Yevgeny

2021-09-02 00:00:00

Employing a combined experimental and survey approach, we examine the effect of voting power on voting behavior at shareholder meetings. To avoid possible selection bias in archival voting data, we exogenously manipulate shareholder power to affect the outcome. Our findings suggest that in the approval of corporate decisions involving conflicts of interest, voting power nudges shareholders to oppose management and to choose the “right” alternative, that is, to vote against a proposal which ostensibly does not serve the company’s best interest. This effect emerges even when the dissenting vote stood in opposition to that of all their peers’ and even in opposition to the self-interest of the shareholder. Furthermore, we find that strategic voting among institutional investors is contingent on voting power: When in a position to affect the outcome, institutional investors tend to take fewer strategic considerations into account and follow fewer consistent patterns in their voting, relative to situations in which their ability to affect the outcome is limited. When confronting the prospect of a “bad” proposal coming before the general shareholders meeting, institutional investors prefer to negotiate terms with management, and vote against it only after such negotiations fail. Our results shed additional light on the ‘behind the scenes’ processes involved in shareholder voting and underscore the importance of institutional investor agency to corporate governance, accountability and minority shareholder representation. Keywords: Voting Power, Shareholder Voting, Business Ethics, Corporate Governance JEL Classification: G23, G30, G38. Electronic copy available at: https://ssrn.com/abstract=3785420 “With great power comes great responsibility.” Voltaire, Winston Churchill, Theodore Roosevelt, John A. Fitch, and others Introduction Voting in shareholder meetings is recognized as an important mechanism of corporate governance, and one of the primary means shareholders communicate with corporate management. As documented in the behavioral economics literature, a variety of factors have been shown to affect voter behavior, including outcome preferences, the position of other voters (peer effects), self- interest and normative factors, such as perceived moral imperatives, social considerations, or inequity aversion. It is argued here that voter behavior may also be affected by the ability of shareholders to determine the outcome (henceforth, “voting power”). How is one’s decision- making affected by one’s voting power? Are powerful shareholders more likely to vote against management than their less influential counterparts? Is “doing the right thing” contingent on the probability of affecting results? This study experimentally explores these questions and analyzes the potential impact of its findings on corporate governance and accountability to minority shareholders. Representing minority shareholders, institutional investors often hold large enough stakes to influence the outcome of a vote in the general meeting. They are, therefore, expected to act as gatekeepers and block the approval of bad, potentially expropriating deals proposed by management. When asked to vote on such proposals, shareholders – and especially institutional Electronic copy available at: https://ssrn.com/abstract=3785420 1 shareholders – face an ethical dilemma: should I go along and cast a management-friendly vote? or should I vote in accordance with what I believe is in the company’s and its shareholders’ best interests? We hypothesize that the answer to these questions depends in large part on the voting power held by the shareholder. The existing literature on shareholder voting based on ex-post observation may suffer from possible selection bias: Management only brings those transactions, which they estimate have a high probability of approval for a vote at the general shareholders meeting. This may be because they have already discussed the matter with shareholders, or because previous experience with similar proposals has shown their terms to be acceptable. Transactions lacking such prima facie agreement are typically negotiated behind the scenes. Thus, an observed harmony in voting decisions may be due, at least in part, to selection. The following scheme illustrates the typical process of a proposal slated for shareholder approval: Final version of Vote at Management Shareholders Negotiation the proposal is shareholders’ submits react in private between submitted meeting original conversations shareholders and proposal management Unobservable Observable In public companies, institutional investors may play a vital role in the unobservable stage of the decision-making process. In numerous “delicate” corporate governance situations, regulators may Management-friendly voting by institutional shareholders was documented by Hamdani and Yafeh (2013) and by Matvos and Ostrovsky (2010). For example, Ashraf et al. (2012), Cai, Garner and Walkling (2009), Davis and Kim (2007), and more. Electronic copy available at: https://ssrn.com/abstract=3785420 place their trust in institutional investors to act as gatekeepers to prevent or mitigate value expropriation. Our inquiry follows a regulatory change to the Israeli corporate law pertaining to corporate governance in public companies , which enhanced the special majority required for shareholder approval in such situations. Dressler (2020) shows that this amendment has led to the redistribution of shareholder power among disinterested shareholders and demonstrates that, on management-sponsored proposals, powerful institutional investors tend to vote with management. It is possible that this tendency is attributable to the selection bias mentioned above. Since a proposal is typically brought to the floor only after discussions with management, institutional shareholders will vote with management to approve it. However, institutional voting may also be a function of institutional investor agency, i.e., voting power, regardless of the salience preliminary negotiations may have on a proposal’s approval. Our research investigates the link between voting power and voting behavior, using two complementary methodologies: an experiment and a survey, to uncover the possible dynamics behind shareholder voting patterns. The experiment is controlled and does not involve sample selection or other obstacles associated with the empirical analysis of actual voting data. Unlike an ex-post analysis of results, it focuses on the first response of the shareholders to a management- sponsored proposal. Moreover, whereas an archival study “sees” only the final picture, an experiment has the potential to peek behind the scenes and examine the considerations weighed by institutional shareholders in the process of making voting decisions. The survey explores the options institutional investors have to influence corporate decision-making outside the confines of the general meeting by negotiating the terms of proposed resolutions with management prior to Amendment 16 to the Companies Law (Improving Corporate Governance)- 2011. The amendment requires a special majority on a variety of corporate decisions, including related party transactions with controlling shareholders. Electronic copy available at: https://ssrn.com/abstract=3785420 the vote on the floor. By focusing on these processes in tandem, this study closes a gap in the current literature stemming from a lack of data. The experiment is conducted in two phases. In phase one, M-Turk users across the US and Canada, were recruited as study participants. This group of respondents is representative of the general population. The second phase surveys investment professionals, in this case, the employees of institutional investors in Israel. The respondents in each phase were asked to react to a hypothetical scenario entailing shareholder approval of a clearly expropriating initiative. The participants were randomly assigned as either a pivotal voter or a voter with no impact on the votes’ outcome. However, the professional respondents were also requested to take a more in-depth survey on their actual voting behavior as well as to provide information on the institutions for which they work. The role of institutional investors in evaluating a firm’s corporate governance mechanisms is found to be significant (Picou and Rubach, 2006). In Israel, where corporate ownership is highly concentrated and controlling shareholders prevail even in publicly traded companies, institutional investors play another important role - as the protectors of minority shareholder interests (Hamdani and Yafeh, 2013). Consequently, examining our hypotheses among experts who operate in this ownership environment enables a broader and deeper understanding when analyzing the anatomy of voting decisions. The findings of phase one demonstrate that voting power prompt participants “to do the right thing”, from an ethical perspective. Under experimental conditions, in which they were able to affect the outcome of the vote, a significantly higher percentage of participants voted against the We manipulated the voting power in both the M-Turk and the survey experiments. However, in the M-Turk study we also examined the voting power effect under different peer voting and different self -interest to the participants. See study design section below. Similar methodology of an experiment followed by a survey of experts is taken, for example, by Libby and Rennekamp (2012), Kachelmeier et al. (2020). Electronic copy available at: https://ssrn.com/abstract=3785420 (apparently bad and unethical) proposal. The same pattern emerged under different conditions as well, one in which participants were told that all their peers had voted in favor of the proposal and another in which an element of self-interest was introduced (participants could personally benefit from voting in favor of the proposed deal). These additional conditions attest to the robustness of the voting-power effect, even in the face of peer effects and self-interest. Responsibility and morality were mentioned by participants as the main reason for their vote. In the second phase, our survey examines whether our experimental findings match the voting tendencies of institutional shareholders’ employees, and whether their beliefs about voting patterns in the real world match our hypothesized schematic process of proposal deliberation. We find that institutional investors tend to vote against bad proposals, even in the presence of a conflict of interest. We also find that institutional investors negotiate the terms of seemingly bad proposals with management. Finally, when empowered, they tend to vote sincerely rather than strategically. Our findings allow for a certain degree of optimism from the standpoint of corporate governance. The regulatory change that was implemented in Israel has given some institutional investors greater power to affect the outcome of shareholder decisions, particularly with regards to related- party transactions, appointment of independent directors and other matters which may expropriate value from the company in favor of its majority shareholders. Our results suggest that this power may in fact be used well. We can now claim to have stronger grounds to expect that regulatory changes which empower institutional investors are likely to further the goal of consolidating their gatekeeping role in enforcing good governance and corporate accountability in their portfolio companies. Electronic copy available at: https://ssrn.com/abstract=3785420 Related literature and hypotheses development Our research builds on three related bodies of literature: the archival and experimental literature in behavioral economics, experimental psychology literature, and the corporate governance literature focusing on institutional voting behavior. The behavioral economics literature and the psychology literature, both examine the factors affecting individual voting behavior. We examine individual (rather than organizational) decision-making in our experiment for two reasons. First, we are interested in examining a fundamental psychological effect rather than reactions to specific structural dynamics (Chen, Rennekamp, and Zhou, 2015). Second, from several discussions with institutional investor employees and managers (some of the survey participants), we understand that the voting decision is more often than not taken by an individual rather than being dictated by the organization. Several models have emerged to explain the motivations behind (individual) voting behavior. “Instrumental voting,” which assumes that a voter’s behavior is rational and designed to maximize value, leading to voter preferences determined by the desired outcome, is the central tenet on which the leading approach elaborated in this body of literature is based. The concept of “expressive voting”, in contrast, posits that the motivation for voting may be related not only to one’s concern about the ultimate outcome but also to the significance of the very act of the voting (reviewed in Hamlin and Jennings, 2011). Through voting, one may express not only one’s position on the perceived outcome of a given issue, but social identity (Shayo 2009), social norms (Yin et al. 2021), inequity aversion, moral stance, and one’s self-image (Shayo and Harel, 2012) as well. The empirical literature on voting refers either to political voting or to shareholder voting in the general meeting of a public company. In the political science literature, this gives rise to a paradox, inasmuch as the probability that a vote will decide the outcome of an election is low, suggesting that voting is irrational. See Ferejohn and Fiorina (1974). Electronic copy available at: https://ssrn.com/abstract=3785420 Central to the expressive voting model is the premise that voting power matters; one may well vote differently if one believes that he/she can make a difference (Kamenica and Brad 2014). These models give rise to the prediction that the greater the ability a voter has to determine the outcome, the more their vote will be motivated by “selfishness”. Kamenica and Brad (2014), however, found the opposite to be true. Specifically, they find that the probability of one’s vote being pivotal does not affect the tendency to vote in one’s material self-interest. Shayo and Harel (2012), on the other hand, confirm the predicted pattern whereby self-interested voting is enhanced by greater voting power. The study by Shayo and Harel (2012) is particularly relevant for our study; the authors emphasize the importance of non-consequentialist motivations when the voter’s effect on the outcome (the probability of being pivotal) is low. The non-consequentialist motivations behind voting identified by them include self-image, morality, and expressive voting. Their experiment is designed, such that the morally “right” decision directly contradicts the participant’s economic interest, therefore the non-consequentialist motivations affected participant’s votes only when their probability to affect the outcome was very low. At the same time, however, they demonstrate that among observers who decide on behalf of others, the higher probability of being the pivotal vote results in a higher percentage of voters opting for an ethical, rather than self-serving alternative. The experimental psychology literature questions the impact of power on individual preferences and decision-making. As mentioned above, Kipnis (1972) suggests that power has an intrinsically corruptive influence. Keltner, Gruenfeld, and Anderson (2003) review the research exploring the consequences of power on social behavior and argue that power stimulates an orientation towards action. Galinsky, Gruenfeld, and Magee (2003) demonstrate the relation between power and action and conclude that “those who are primed with high power display greater action” (p. 453). Finally, Choshen-Hillel and Yaniv (2011) demonstrate that an individual’s preferences may differ as a Electronic copy available at: https://ssrn.com/abstract=3785420 function of his or her role in determining the outcome. They assign importance to the degree an individual possesses agency in the decision-making process. The psychological literature addressing the affect of power on voting behavior does not offer definitive predictions regarding shareholders in general and minority shareholders in particular. Following the rationale developed by Galinsky et al. (2003), greater power will drive a shareholder to activism, which is likely to lead to active opposition to proposals initiated by management, if those proposals are likely to expropriate value from minority shareholders. In contrast, following Kipnis (1972), powerful shareholders tend to support management in an effort to obtain perks in exchange for their support on the floor. Following Shayo and Harel (2012) on the dominance of the moral option, we derive and test the following hypotheses, which we call ‘the voting power effect’: H1a: voting power drives voters to act responsibly, i.e., to vote against management on a value-expropriating proposal. The literature on institutional voting behavior points to three salient factors governing shareholder voting. Matvos and Ostrovsky (2010), followed by Mugerman et al. (2014), and Dressler (2020), demonstrate that peer effects come into play in shareholder voting. The higher the probability that others vote either for or against a proposal, the higher the likelihood that a shareholder will vote likewise. Matvos and Ostrovsky (2010) and Dressler (2020) also find voting consistency in what they call: “management friendliness”, i.e., the tendency to support management. Furthermore, Hamdani and Yafeh (2013), Cvijanovic et al. (2016), among others, show that institutional This effect is sometimes called “herding behavior”, and found by Gonzalez, Modernell, and Paris (2006) and Yin et al. (2021) in board of directors’ voting behavior. Electronic copy available at: https://ssrn.com/abstract=3785420 investors vote in shareholder meetings according to the business ties they or the group they are affiliated with have with their portfolio companies. Following the voting patterns presented by institutional investors, and confronting them with the regulation that the empowers those institutions and place the responsibility of gate keeping on them (in this case, – the prevention of value expropriation), we test whether the voting power effect is stronger than those counter forces identified in prior literature as affecting shareholder voting: H1b: Voting power drives voters to act responsibly and vote against management, even if this entails voting against the shareholders’ peers. H1c: Voting power drives voters to act responsibly and vote against management, even in the presence of self-interest. Strategic voting The theoretical literature on shareholder voting strategy suggests that not all shareholders always vote sincerely. Maug and Rydqvist (2009) argue that the tendency of shareholders to vote strategically is largely based on whether their votes are pivotal. Levit and Malenko (2011) contend that shareholders vote against management only when their vote is likely to affect the outcome. Following these two theoretical papers, we expect that those shareholders, who have the power to affect the outcome, tend to vote less strategically especially when the decision to vote involves opposing management. Ginzburg, Guerra, and Lekfuangfu (2020) also examine strategic voting, maintaining that shareholders can vote against their favored result if they can derive utility from the act of voting itself. This behavior is relevant only if the shareholder is small enough and knows A “sincere vote” is based solely on the private information the individual has regarding the merits of a proposal. Electronic copy available at: https://ssrn.com/abstract=3785420 that its vote will not affect the outcome of the vote. Our second set of hypotheses is derived from this theoretic argument: H2a: Pivotal shareholders vote sincerely, taking strategic considerations less into account than shareholders with no power to affect the outcome of the vote. Passive voting Passive voting is an institutional voting pattern defined by Iliev and Lowry (2015) as “completely relying on proxy advisory recommendations”, whereas active institutional voting is based on the independent assessment and evaluation of the issues up for consideration (p.447). The reliance on proxy advisory recommendations has concerned regulators as to whether voting based solely on the proxy advisor’s recommendations truly fulfills the institutional investors’ fiduciary duty toward their clients. Following this concern, we expect institutional investors who have greater agency and responsibility to rely more heavily on their assessment and become more active voters, relative to institutions who have a lower probability of affecting the outcome of the vote. H2b: Pivotal shareholders vote actively, exhibiting less passive voting patterns than shareholders with little or no power to affect the outcome of the vote. Behind the scenes activity of institutional investors Understanding that the votes taken at shareholders’ meeting suffer from sample selection and do not show the entire picture of the decision-making process, a growing body of literature focuses on the “behind-the-scenes” actions taken by institutional investors prior to shareholder voting. Clarck and Van Buren (2013) highlight the conflicts of interest that proxy advisory firms have as the main concern. Malenko, Malenko and Spatt (2021) mention the incentive of proxy advisers to produce a biased recommendation as a main concern, Ma and Xiong (2021) show that monopolist advisory firm skews its recommendations. Electronic copy available at: https://ssrn.com/abstract=3785420 McCahery, Sautner, and Starks (2016) survey the corporate governance preferences of institutional investors and their alternatives to engage with management when they are dissatisfied with the performance of a portfolio firm or are otherwise considering divesting interest in it. Lauterbach and Mugerman (2020), for example, show that negotiations between institutional investors and management are effective in increasing premiums for shareholders in accepted “freeze-out” tender offers. Their findings suggest that institutional investors make their voice heard loud and clear behind the scenes. Logsdon and Van Buren (2009) analyze dialogues between corporations and activist shareholders, which occur behind the scenes and spark social change. We assume that management cannot negotiate the terms of proposals with all shareholders, therefore it tries to access those shareholders which can affect the outcome by their vote alone, or by leading other shareholders in a common voice. These shareholders, aware of their possible impact, will then use their power to negotiate the terms of a proposal. H3: Pivotal shareholders negotiate the terms of a proposal prior to the actual vote at the shareholders meeting. First Phase: M-Turk Experiment Design (3 studies) In the first phase of the study, a questionnaire (presented in online Appendix A ) was distributed over Amazon’s Mechanical Turk (M-Turk) platform. All participants were English speakers residing in the US and Canada and ranked very high (above 95%) on the Amazon approval rating scale . M-Turk holds various advantages over a laboratory. It provides access to a wider and more diverse population and is more expedient, inexpensive, and easier to operate. By replicating Cox, Brammer, and Millington (2004) also examine the preferences of institutional investors. Please see “Appendix A: M-Turk questionnaire,” as an addition to the online article. The approval rating is a grade referring to the quality of work rendered by M-Turk workers as submitted by previous work providers. Electronic copy available at: https://ssrn.com/abstract=3785420 qualitative and quantitative experiments with well-known results, Paolacci et al. (2010) and Horton et al. (2011) show that the results from online experiments can be just as valid and robust as those from laboratory or field experiments. They also find that M-Turk subjects tend to behave similarly to individuals in actual laboratory settings . All in all, recent years have been marked by a significant increase in academic journal publications of studies using this online labor market. All participants were presented with the following scenario: “Imagine you are a shareholder in a big corporation (you own some of its stocks). The company is about to elect a new CEO (a senior manager). The Chairman of the Board suggests the appointment of a candidate whom you do not know, apart from some outstanding CV details that were mentioned. The salary suggested for the new CEO is four times larger than the salary of the former CEO. You are troubled by this increase in salary and suspect that the Chairman (who has initiated the proposal) has some other connections with this candidate but you are unsure. In order to make the appointment, the corporation must get the approval of its 9 shareholders.” The participants were then asked to vote either in favor of or against the proposed nomination and were also given the option of commenting, in response to an open question, on the reason(s) for their vote. For each participant, information was collected about their sex, age, and education (number of years). To verify that the participants had understood the content of the survey, we Furthermore, Chandler and Kapelner (2013) attest to M-Turk’s suitability for natural field experiments in economics, Farrell et al. (2017) focus on the accounting research designs that entail more demanding tasks and find that M-Turk workers are just as effective as student research subjects. See for example Shen, Lee, and Cheung (2014), Daly and Nataraajan (2015), Schmidt and Jettinghof (2016). Electronic copy available at: https://ssrn.com/abstract=3785420 asked two comprehension questions. We ensured that no participant could answer the survey more than once, as the target was a single decision, and the subjects must not have more information than that given to the specific group to which they were assigned. The above scenario was designed to mimic a typical vote in which institutional investors are regularly required to participate with regard to their portfolio companies. Moreover, as described in the scenario, the proposal involved two suspicious elements: the nominee’s salary would be much higher than that of the former CEO, and an allusion is made to the possibility of “other connections” between the chairman and the nominee. The much higher salary for the same job clearly contravenes social norms and is meant to elicit inequity aversion and the personal connections make the nomination looks like less morally legitimate corporate behavior. On the other side of the scale is the norm known in the industry that high paid CEOs are worth to the company more than what is paid as their salary, therefore it might be worth paying unproportionally high salaries to these rare talented managers. The “other connections” with the chairman indicate that the nomination is not arms-length and therefore, there is a greater probability that the appointment would not maximize the company’s value. The phrasing of the proposal made it clear that it might not be in the company’s (and, by extension, its shareholders’) best interests, and that therefore the “right choice” based on merit would be to reject the proposal. The remark regarding the candidate’s outstanding credentials (as per CV) muddies the water a bit, serving as a counterbalance which could justify voting in favor of the nominee. The reason for this addition is that, in real life, management-sponsored proposals are usually presented as beneficial for the company, even if they result in expropriating shareholder value. A non-balanced proposal Branzei et al. 2018 mention that immorally legitimate corporate behavior might cause a damage to the firm’s reputation and over time such a behavior will affect firms cost of capital or risk premium. Lest some participants think that a much higher salary might indicate a super-talented CEO, who will ultimately create value, even at such a high cost. Electronic copy available at: https://ssrn.com/abstract=3785420 would have elicited a very high proportion of “no” votes, creating a ceiling effect which could cloud the potential impact voting power may have on the decision. We informed participants that their vote would be publicized, to ensure that reputation factors into their considerations. Institutional shareholders care about reputation risk, and therefore the publication of their vote adds accountability to their voting preferences. By including this information in the questionnaire, we were able to control for this effect for all participants. In actual shareholder voting, it is common for institutional investors to purchase a proxy advisor’s recommendation. Since institutions hold diverse portfolios, they are obliged to cast a vote on a very large number of proposals for every portfolio company. Therefore, institutional investors often buy the services of proxy advisors, who analyze and make recommendations on each and every proposal. Malenko and Shen (2016) show that proxy advisors indeed have a large impact on the outcome of corporate voting. In order to keep the questionnaire as simple as possible, and because a proxy advisor’s recommendation is expected to have the same impact as peer voting, we excluded such recommendations from the study. Ceteris paribus, a recommendation to vote in favor of a proposal will cause a higher percentage of participants to cast such a vote, and a recommendation to vote against one will raise the percentage of “against” votes. We test the same hypothesis regarding the peer effects in all the studies described in the following section. To replicate conditions in real shareholder meetings in Israel, we added a stipulation that all participants must vote either for or against the proposal. In Israel, all institutional investors are required to cast a vote (abstentions are not allowed) on certain issues. The regulatory aim is to compel institutional investors to play an active role in their portfolio companies and be accountable for their part in corporate decision-making. In the online questionnaire, this particular stipulation Electronic copy available at: https://ssrn.com/abstract=3785420 receives monetary reinforcement, since respondents to the survey do not receive payment without venturing an opinion on the issue at hand. Using Qualtrics software, the participants in the experiment were randomly assigned to one of six groups (see Table 1). After assignment, they received the following information: the way all their peers (other shareholders present at the meeting) have voted, and their respective voting power, that is, the probability of their vote affecting the outcome. Table 1 describes the additional information participants received according to the group to which they were assigned. Summary statistics on the respondents for all studies and groups are presented in Table 2. We compared group averages for all objective personal characteristics to affirm the randomness of respondent assignment. The responses of participants who provided the wrong answers to both comprehension questions were excluded from the analysis. It is likely that those participants filled out the questionnaire solely to receive the payment and therefore may not have read the text carefully. Accordingly, their answers possibly did not reflect their true opinion on the subject. Insert Table 1 here Insert Table 2 here We tested three conditions and, accordingly, ran three studies, as described in the following section. The table summarizes all three. Study 1 Electronic copy available at: https://ssrn.com/abstract=3785420 We began by testing for the peer effect, which has been well documented and extensively described in the literature. The robustness of this effect in previous studies verifies that the participants had understood the survey as intended and that the preferred alternative from the standpoint of preventing value expropriation up for a vote is clear. Initially, we ran a basic survey in which the participants were assigned to one of three groups: 1, 3, or 5. The first group did not receive any information other than the scenario presented above and were asked to vote based only on the strength of its content. Group 3 was told in addition, the following: You see that the eight other shareholders have voted in favor of the appointment. Thus, the appointment is going to be approved, regardless of your vote. Group 5 was told the following: You see that the other eight shareholders have voted against the appointment. Thus, the appointment is going to be rejected, regardless of your vote. The questionnaire was sent to 150 participants. We expected a high percentage of “against” votes in Groups 1 and 5, but in line with the unmitigated peer effect, a lower percentage of “against” votes in Group 3. Study 1 Results and discussion. Group 1 served as a control group in which we expected to observe the net opinion on the proposal, unaffected by any effects that were to be tested subsequently. 84.9% of the participants in this Our initial requirement was a minimum of 50 completed forms for each group. The final number varied to some extent, as witnessed in Table 2. The results of the first study support previous literature, therefore are not tabulated and will be provided on request. Electronic copy available at: https://ssrn.com/abstract=3785420 group voted against the proposal, therefore support our first assumption regarding the “right” alternative in the given situation, which is voting against the proposal and against the company’s board of directors. This confirms that the participants understood that rejection of the proposal was the right thing to do. In Group 3, under the experimental condition that all other shareholders had voted in favor of the proposal, only 64% voted against it. The difference between the responses of the two groups is significant at 5%, illustrating the well-documented peer effect. This pattern did not emerge in the other direction: when told that all other shareholders had voted against the proposal, 84.2% of the respondents in Group 5 voted against the proposal as well. We attribute this to a ceiling effect: since the percentage of “against” votes in the control group was so high, the marginal rejection rate in Group 5 was not statistically significant at 5%. After mapping the control group findings, we test for possible voting-power effects as phrased in H1 a-c, which is the main focus of this study. We were interested in seeing if and how results changed as the pivotality of the participant’s vote to the outcome increased. Study 2 Study 2 is designed to test for the voting-power effect, while controlling for the peer effect (H1b). Repeating the three groups of Study 1, we added three new groups – 2, 4, and 6. Group 2 received no information regarding the votes of the other shareholders, while Groups 4 and 6 received contradictory information regarding the others’ vote, equivalent to the information given to Groups 3 and 5. All three groups were told that they had the sole ability to affect the outcome through the following statement: Electronic copy available at: https://ssrn.com/abstract=3785420 Since you own more stocks in the company than the other shareholders, your vote is pivotal and will determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. The possibility that each participant in the five groups (all but the control group) to affect the outcome was clearly binary: s/he either does or does not affect it. This design precludes any discrepancy which may arise between perceived and actual voting power. The voting-power effect is expected to be expressed through the distinctions in the proportion of “against” votes between groups 1 vs. 2, 3 vs. 4, and 5 vs. 6. The groups in each of these pairs share the same information about the way the other shareholders have voted (no information, all voted for, or all voted against) but differ in the information regarding the impact the participants’ votes on the outcome. This study involved 591 respondents; approximately 100 per group (see Table 3). We expected the voting-power effect to influence the direction of the shareholders’ votes towards rejection, given that they were cognizant of the fact that opposing management was the right thing to do. In other words, we expected a higher proportion of votes against the proposal in the groups that were told that they would affect the outcome. Study 2 Results and discussion. Insert Table 3 here The results of Study 2 are presented in Table 3. The ceiling effect was observed in the groups that had not received any information about the votes of other shareholders: 92.9% of participants in Group 1 (unknown power to affect the outcome) voted against the proposal, compared with 92.1% The participants in Group 1 did have a small probability to affect the outcome, since they did not know anything about their peers’ vote, and no further information regarding their probability to affect the vote was mentioned . However, this probability was low, since each participant was only one of nine shareholders, as stipulated in the questionnaire. Electronic copy available at: https://ssrn.com/abstract=3785420 in Group 2 (full power to affect the outcome). The rate for both groups is almost identical, and very high, such that a voting-power effect cannot be clearly discerned. The same however, does not hold true for the comparisons between the other pairs. The voting- power effect emerges quite clearly in the comparison between the “against” votes in the two groups that were told that all the other shareholders “had voted” in favor of the proposal. Only 62.5% of the participants in Group 3 (disenfranchised) voted against the proposal, while 79% in Group 4 (pivotal vote) voted to reject the proposal. The difference between these findings is statistically significant at 1%. Thus, our results suggest that the voting-power effect is strong and significant: 16.5% percentage points higher proportion of participants voted according to what they perceived to be the right choice, even when they stood alone against all the other shareholders. The voting-power effect was also observed when it reinforced the peer effect, i.e., even when there was a very high proportion of votes against to begin with. When all the other shareholders had voted against the proposal, 84.2% of the participants in Group 5 (disenfranchised) voted against while 92.1% of the participants in Group 6 (pivotal) voted against as well. The 7.9% higher proportion in Group 6 relative to Group 5 is significant at 5%. The results of Study 2 support hypotheses H1a and H1b, and our prediction regarding the role of voting power: the ability to affect the results fosters a sense of responsibility and induces individuals to vote according to what they see as the substantively better choice for the company and its shareholders. Study 3 In Study 1, the participants had to choose between supporting management, on the one hand, and voting in the best interests of the company and its shareholders in opposition to management, on the other. In some of the groups in Study 2, one scenario also required opposing the stand taken Electronic copy available at: https://ssrn.com/abstract=3785420 by all the other shareholders. In both Studies 1 and 2, one’s choice affected one’s personal wealth solely through stock ownership; and therefore, the company’s and the shareholder’s self-interest converged. Study 3 tests if the voting-power effect, as demonstrated by the results of the second study, holds also when the decision involves a conflict between the company’s interest and the shareholder’s personal interest (H1c), so that a participant’s direct interest would be best served by voting in favor of the bad proposal and against the benefit of the company as a whole. This type of conflict may arise in reality when a shareholder’s interests are anchored in considerations other than the company’s wellbeing and converge with those of the corporate management initiating the proposal. Study 3, like Study 2 had six groups, comprising a total of 585 participants, who received the following additional information: You know that the proposed CEO intends to hire your good friend, whom you care deeply about, as a personal assistant. A comparison of this study’s results to those of Study 2 reveals the effect of self-interest on voting behavior. Assuming that this effect would emerge, we expected the proportion of votes against the proposal to decline relative to Study 2 in all the six groups. Of special interest in this scenario is the examination of whether the voting power effect endures in cases involving a conflict of interest. We anticipate that the voting-power effect will be observed, even in face of conflicts of interest, as testament to the cognizance of the responsibility that comes with voting power. Study 3 Results and discussion. Insert Table 4 here Electronic copy available at: https://ssrn.com/abstract=3785420 Table 4 reports the results of Study 3. In Groups 1 and 2, participants had no information regarding the vote of their peers. As expected, we observed a steep decline in both groups in the willingness of the respondents to cast a “no vote” when a possible conflict with their personal interest was introduced. In the disenfranchised group, for which the probability of participants’ vote proving pivotal was low (Group 1), 61.1% voted against the proposal. In the group where participants had pivotal power to affect the outcome (Group 2), 72.4% voted against the proposal. The difference between the two groups is significant at 5%. The above gap supports the existence of a voting- power effect in Study 3 where it was not observed in Study 2. The voting-power effect also emerged in the groups where the other shareholders had voted in favor of the proposal. Here again, the willingness to reject management’s “bad” proposal dropped precipitously once the conflict of interest for the shareholder was introduced; by 25.5% in the case of Group 3 and 21.7% for Group 4. More important for our analysis, however, the distinction between those without voting power and those with increased, once a conflict of interest was introduced. In Group 3, the disenfranchised group, 37% voted against the proposal, while in Group 4, individuals invested with pivotal voting power, 57.3% voted against. This 20.3% difference (statistically significant at 1%) is even larger than the difference observed in Study 2 (16.5%), where no self-interest was involved. The third comparison, between the groups where all the other shareholders had voted against the proposal, does not show a significant voting-power effect. Here, too, when devoid of any power to affect the outcome, the initial proportion of votes against the proposal is high enough (83.7%) for the ceiling effect to overshadow any voting-power effect. While a strong majority of empowered shareholders continue to opt for “doing the right thing”, there is a minor, not statistically significant 4.1% retreat in the willingness to do so. Electronic copy available at: https://ssrn.com/abstract=3785420 Overall, the results support the stronger prediction of the voting-power effect, as phrased in hypothesis H1c. Even in a situation where a shareholder’s individual self-interest is pitted against the wellbeing of the company and its shareholders, the voting-power effect could still be observed. Ceteris paribus, individuals possessing the power to affect the outcome of a vote seem to resist self-serving considerations and propel their choice in the “right” direction – in this case, to vote in favor of the company/shareholders’ best interest. We recognize the limitations of our study and the vulnerability of the results, particularly given that the potency of self-interest may well be a determinative factor. Public Choice Theory (PCT) and Behavioral Ethics (BE) predict that both public officials and small interest groups often display self-interested behavior (Zamir and Sulitzeanu -Kenan, 2018). According to PCT, such behavior is more pronounced as self-interest increases, based on the assumption that one acts rationally to maximize one’s own utility. BE suggests that the prevalence of self-interested behavior is subject to automatic and primarily unconscious psychological processes. However, when a conflict of interest is clear and unmistakable, officials are more likely to recognize the conflict and control the ostensibly automatic tendency to advance their own interests. In light of the above two approaches, it is possible that a more clear-cut, monetary interest than the version used in the study questionnaire (the willingness of the evidently over-paid CEO candidate to employ a friend) would have either mitigated or accentuated the voting-power effect. If the participants’ behavior aligned with PCT, the voting power effect would become weaker. If, on the other hand, BE prevailed, the voting power effect would be augmented, and even fewer votes would be cast in favor of the proposal. Our experiment did not test for a threshold beyond which the voting-power effect prevails over self-interest. We tested two different versions of self-interest, Electronic copy available at: https://ssrn.com/abstract=3785420 but neither involved actual and meaningful monetary incentives, the results must therefore be regarded as tentative. Nonetheless, self-interest was clearly inserted into the scenario presented to the participants, as reflected in the sharp decline in the number of respondents willing to vote against the proposal (see the left side of Figure 1 as compared with the right side). A more detailed investigation of this issue must be left for future research. The following sections summarize the overall results of all the three studies and discuss in more detail the effect of voting power on voting behavior. Summary of First Phase Results and General Discussion Figure 1 summarizes the results of Studies 2 and 3, which tested for the voting-power effect. Study 2 tested the hypothesis that giving a shareholder the power to affect the outcome of a vote will induce the choice that promotes the best interest of the company and its shareholders (H1a), even when this entails voting contrary to all peers (H1b). Study 3 tested a stronger hypothesis (H1c), that the power to affect the outcome of a vote will induce a shareholder to vote “right”, even when that choice conflicts with self-interest. Insert Figure 1 here Figure 1 presents the proportion of participants who voted against the proposal. In the first and fourth columns, representing the participants who know nothing about their peers’ vote, it can be safely assumed that the proposal is judged solely on its merits and the responses are relatively unaffected by extraneous considerations. The key results regarding the voting-power effect are displayed in the second and fifth columns, where the “right” choice goes against peer preference, as well as against one’s self-interest (left side of the figure). The third and sixth columns show the proportion of “against” votes when all peers vote “against” as well (i.e., peer effect and voting- Electronic copy available at: https://ssrn.com/abstract=3785420 power effect are aligned). Altogether, hypotheses H1a, H1b, and H1c are accepted. The voting- power effect emerged as significant in four out of six tests and was absent only when the initial proportion of votes against the proposal was very high (the ceiling effect). Insert Table 5 here Table 5 outlines the results of logistic regression estimates of voting power on the probability of voting against management. The first four columns represent estimates that incorporate all observations, including questionnaires both ‘containing’ and ‘devoid of’ self-interest (all studies). Columns 5 and 6 are estimates based solely on the data from Study 3 questionnaires, in which self- interest is introduced. The voting power effect is consistent and significant across all estimates; voting power has a positive impact on the probability that an “against” vote will be cast in favor of the better alternative. The same pattern is displayed in Figure 1. The voting-power effect remains significant in the face of both peer effects (columns 2–6) and self-interest (columns 3 and 4, and also 5 and 6). The participants’ responses regarding the reasons behind their vote invoke the responsibility that comes with being the largest shareholder and having the power to affect the outcome of the vote. This sense of responsibility appears to be what induced them “to do the right thing”. This finding also demonstrates that shareholders with greater voting power are more likely relative to disenfranchised shareholders to vote against management. This outcome apparently contradicts the results of Dressler’s (2020) archival analysis of institutional shareholder voting behavior on special majority decision, which shows that the more powerful shareholders tend to vote in favor of management. This seeming contradiction may be attributable to several factors. First, an experimental setting does not allow one to replicate some of the determinants of voting behavior of actual shareholders, for example, the long-term relationship between institutional shareholders Electronic copy available at: https://ssrn.com/abstract=3785420 and corporate management. Crucially, in the experiment presented here, powerful shareholders were not given the option to negotiate with management prior to casting their vote and therefore, had to vote on the original version of the proposal, a scenario that often differs from reality. Herein, however, lies the advantage of an experimental study. By controlling all other factors, it allows researchers to examine stages in the voting process which elude actual voting data. Hypothetically, we can expect the corporate voting process, whereby a proposal initiated by management is either approved or rejected by shareholders, to comprise five stages (see the schematic representation in the introduction above). In the first stage, management submits its original proposal for shareholder comments; in the second, the shareholders react to it, usually in private conversations. In the third stage, negotiations take place between management and shareholders, culminating in the drafting of a final version of the proposal and a shareholder vote – the fourth and fifth stages, respectively. In reality, the first three stages are unobservable, so an archival analysis is necessarily limited to the final version of the proposal and the final vote (the fourth and fifth stages, respectively). An experimental study, however, enables one to analyze the shareholders’ initial reaction to management proposals, particularly the “bad” ones, which are often the subject of debate. Accordingly, it may contribute to our understanding of the unobserved private negotiations undertaken prior to the vote. The regression results in Table 5 above, show that other than age, the personal characteristics of shareholders have little impact on their decision. The propensity of older people to make the ethically right decision is higher than for younger people. In our study, interactions between the voting-power effect and age (not reported here) show that the voting power effect does not vary with age. Electronic copy available at: https://ssrn.com/abstract=3785420 Our study also attests to the existence of the peer effects in shareholder voting. One’s propensity to vote like other persons present at a vote is known in the psychology literature as ‘social influence’ or ‘conformity’ (Asch, 1956 followed by many), and in the economic and financial literature as ‘peer effects’ (Matvos and Ostrovsky 2010, Mugerman et al., 2014). The present study has found supporting evidence for this effect: The impact of peer voting, whether in favor of, or against the proposal, was found significant in all the estimations, as shown in Table 6 and in Figure 1. This phenomenon has also been demonstrated among institutional shareholders in real-life meetings. Voting data of Israeli firms show that the probability that a shareholder will vote in favor of a proposal is higher when another shareholder who is likely to support it is present at the vote, and vice versa. However, other elements may come into play. An experimental study has an advantage over archival research based on empirical data in that it allows one to isolate this effect and distinguish it from other factors affecting the vote. The results presented here regarding voting power align with some of those obtained by Shayo and Harel (2012), who found that the tendency to vote for the ethical alternative increases with the probability of the vote being pivotal, but only for those voters who are not driven by self-interest. We demonstrated that effect to hold for all participants, interested and disinterested alike. Broadly speaking, our study adds to the literature by taking a close look at the role of voting power as a factor in voting decision-making, and by showing evidence for the mitigating role it has on those factors that have been found to affect institutional shareholder voting. Specifically, we demonstrate that as a shareholder’s vote becomes more pivotal, it is less likely to be influenced by peers, management-friendliness or self-interest. In addition to the alternative explored in the existing literature between self-serving and ethical behavior, we examined the choice between conveniently supporting corporate management on one hand, and bucking management by opting Electronic copy available at: https://ssrn.com/abstract=3785420 to “do the right thing”, on the other. We control for self-interest and the peer effects, allowing us to draw conclusions as to the impact of voting power above and beyond other factors. Second Phase: Institutional Investor Employee Survey One limitation of this experiment is its applicability to institutional investors voting in real-life situations. Although the experiment is designed to simulate the position of an individual voter in a shareholders meeting, its external validity, that is, the ability of the results to be extrapolated to the voting behavior of institutional investors, who often serve as the voice of minority shareholders, is not clear. To validate our results, we conducted a survey, in which we asked employees of institutional investors in Israel the same question asked of respondents to the first study, with some minor adaptations to the scenario. To adjust for the expertise of the institutional respondents, we deleted the number of shareholders (originally 9) and lowered the salary proposed to the new CEO to 50% higher than that of the former CEO. We suspected that the four times higher salary offered in the questionnaire for the general population would undermine the credibility of the scenario in the eyes of professionals, as this salary hike is beyond normal. Due to the limited number of expected respondents, we had to lower the number of treated groups, therefore we dropped the peer condition and left the voting power condition, with and without the element of self-interest. This left us with a total of four groups rather than twelve. Survey Design Electronic copy available at: https://ssrn.com/abstract=3785420 22 The questionnaire (presented in online Appendix B ) is composed of four sections. Section A compiles the data regarding the specific institution employing the respondent: the kind of institution, the value of assets under management, the investment strategy (whether active or passively managed), and the typical stock holding period. Part B repeats the experiment in the M- Turk study, with small adjustments to the scenarios presented based on the specific respondent group characteristics, as mentioned above. In addition to the voting question, we added a negotiation question, to test for hypothesis H3. Part C includes questions regarding the issues that may affect the institution’s investment and voting policies, for example – the firms’ characteristics, and its use of he proxy advisors’ recommendations. Those questions are meant to explore any possible correlation between investment policy and voting patterns, to verify the honesty of the answers, using already established voting patterns, and to test for hypotheses H2a-b. The fourth and final part of the survey includes statements about voting decisions and voting patterns, to which the institutional investor employees were asked to indicate how often the statements truly describe their decision-making regarding voting in shareholder’s meeting. These questions are also meant to test for hypotheses H2a-b and H3 regarding the difference of voting patterns as a function of varying voting power. Some of these statements were derived from theoretical papers on strategic voting (Levit and Malenko, 2011; Maug and Redqvist, 2009), and others from the empirical findings in Dressler (2020). To avoid biased answers, the questions appeared in a random order. We also indicated a percentage range for every answer to avoid perceived differences in verbal descriptions. For ethical reasons, we did not require definite Please see “Appendix B: The survey questionnaire,” as an addition to the online article. The categories of institutional investors in Israel are detailed in Table 6. We followed Hamdani et al. (2017) on the categorization. Electronic copy available at: https://ssrn.com/abstract=3785420 answers for most of the questions, other than the experiment scenario question appearing in part B. In order to mitigate concerns about receiving dishonest answers, we kept the questionnaire anonymous. We left the option to leave an e-mail address if someone wanted to receive a summary report but kept the e-mail addresses separate from the individual responses to the survey. We relied solely on an online version of the survey, since the Covid-19 pandemic has turned every conference into a Zoom meeting. We had to limit our respondent population to a very specific and well-defined group, employees of institutional investors holding the following job-titles: members of the board of directors, senior management (including CEO, CIO, CFO), investment managers, members of the investment committee, and analysts. We limited the list to focus on the persons who most directly deal with decision-making regarding the institution’s portfolio companies and are likely to be involved in the voting decision process. We distributed the survey over several online channels using “Google Forms”. First, we sent the survey to the e-mail addresses of the institutional investor employees found on lists of fund managers posted on the regulators’ website. A second mode of distribution was the LinkedIn network, in which we sent direct messages to people according to their job title. If the title included any of the Hebrew words for “investment house”, “pension fund”,” insurance company”, “mutual fund”, or “VC”. Third, we used a private distribution list of a contact person who worked in the financial services industry, as well as the authors’ own private lists of contacts. Fourth, we recorded a lecture on the l topic of institutional shareholder voting. The lecture was built in two separate video files, with the online survey connecting between the two parts. The first video contained a link to the survey, and the survey contained a link to the second part of the lecture. The second link, however, appeared only after the submission of the survey. The second part of the lecture Electronic copy available at: https://ssrn.com/abstract=3785420 included the details and the results of the M-Turk study discussed in the previous sections. We made sure that the results video could not be accessed before the survey was filed, in order not to bias the responses. We sent the link to the first part of the lecture to a person who organizes an annual conference for institutional investors. The conference could not take place on a physical basis in 2020 because of the Covid-19 pandemic, so the lectures were distributed online to the conference’s usual participants – mainly the employees of the relatively small employer-owned funds (small, independent funds, which are not affiliated with Israel’s large investment houses). Finally, we contacted the CEO of an organization called the “Investment Houses Association”, an umbrella organization for ten investment houses in Israel. We received his cooperation on distributing the survey among the member investment houses. Altogether, we sent e-mails with links to the survey directly to 255 institutional investor employees, and an unknown number of employees who received the lecture or the link to the survey through a third party. We received 38 responses; not all of which included answers to all questions. The fact that the survey was only distributed online may affect the results relative to a paper survey, if the respondents choose not to pay attention to all the details or to not commit to answering in full. In addition, survey participants were not paid for their participation, unlike the participants of the M-Turk questionnaire. However, we believe that their motivation to give correct and honest answers was not affected by the lack of remuneration, since they were asked professional questions in the area of their expertise. Insert Table 6 here Survey results and discussion Doing The Right Thing: The Voting Power Effect. Electronic copy available at: https://ssrn.com/abstract=3785420 Since the survey respondents split into four groups of the study, we unfortunately did not have enough respondents within each group to draw definitive conclusions regarding the impact of voting power on voting behavior in this experiment. However, we do discern several other patterns worth discussing. The responses to the experiment were placed on a scale of 1-7, with 1 indicating “I would definitely vote against the appointment” and 7 being “I would definitely vote in favor of the appointment”; 4 indicates “not sure/do not know”. The average vote is 3.21 on this scale and is significantly different from (lower than) 4. Thus, the institutional investors surveyed indicated that they would vote against a proposal which seems bad for the company, even in the presence of self-interest. This finding is consistent with the institutional investors’ role as gatekeepers, and what we call “doing the right thing.” Though investors do not admit that connections with management affect their voting decision, 26% of respondents agreed (answers 5-7) that this consideration is taken into account. The non- trivial percentage of respondents agreeing that this factor exists requires further examination. Comparing the distribution of answers by two groups to this question (using a Z test) shows that the group of respondents that had the power to affect the outcome of the vote in part B of the survey, tended to disagree with the assertion of the “connections” factor, (mean score=2.7, statistically lower than 4), while the mean answer in the group devoid of voting power was 3.9, not significantly different than the neutral response of 4. Furthermore, the same finding appears in the question regarding voting consistently in favor of management-sponsored proposals, in the question regarding following the proxy advisors’ recommendation, and in the time-saving strategy of voting either with or against management on most issues. The respondents with pivotal voting power had significantly lower mean scores on these questions than those in the disenfranchised group (tested using a T test - see Table 7) and lower distributions (tested using Z tests - see Figure Electronic copy available at: https://ssrn.com/abstract=3785420 2). As a robustness test to this result, we also compare the distribution of respondents’ answers from large versus small institutional investors, as measured by assets under management, using a Z test. The distinctions hold: larger institutions are less likely to vote consistently, to follow the proxy recommendation or to trust the board without further investigation. We therefore accept hypothesis H2b (based on Z test to answers to questions D1, D4, D6, D18, D19). This is consistent with our main hypothesis that voting power compels investors do the right thing. In this case, “doing the right thing” includes investing the required resources in analyzing every proposal on its merits and using less consistent voting patterns. Insert Table 7 here Insert Figure 2 here In response to a direct question regarding the voting power effect, among institutional investors, 45% of respondents were not sure if their vote would change if they had the power to affect the result. The average answer was exactly 4 (= not sure), 29% said that pivotal voting power would affect their vote (answers 5-7), while 26% thought that voting power would not affect their vote (answers 1-3). Thus, since the Stage One experiment did demonstrate a significant voting-power effect, it is possible that the difference in the framing of the two questions is responsible for the effect’s disappearance in the direct question in Part C. Whereas in the Stage 1 experiment and in Part B of the survey the participants were told in no uncertain terms that their vote “will determine the outcome”, the survey question (#C8) posed to the institutional investors was phrased “my ability to affect the results of the vote”. Electronic copy available at: https://ssrn.com/abstract=3785420 Several other factors are taken into consideration in institutional investor voting. Surprisingly, the respondents indicated that the relative share of a portfolio company’s stock in an institutional investor’s portfolio (mean answer = 4.06), and the investor’s holdings in bonds (mean answer = 4.03) were not significant in affecting voting decisions. In addition, the survey revealed that the leading local proxy advisor has a greater impact on institutional investor voting than foreign proxy advisors. The portfolio company’s assessed quality of risk management, corporate governance and accounting methods are also taken into account in institutional investor voting. Firm size, however, is not a significant factor. Overall, despite the methodological limitations, the results are consistent with the M-Turk study conducted in Phase 1 and with our H1a hypothesis in demonstrating the voting-power effect in voting decisions made by institutional investors. Strategic voting In our survey, we asked several questions which try to determine whether the institutional investors vote strategically or sincerely, weighing each decision solely by its merits. Table 7 summarizes the results of these questions. We find that institutional investors claim not to take strategic considerations into account when voting. They claim not to change their vote in accordance with the majority requirement (panel A, columns 5 and 6), not to vote against proposals solely for utilitarian reasons if they want the proposal to be approved (panel A, columns 3 and 4), and not to take into account the probability of approval regardless of their stance for or against a proposal (panel A, columns 1 and 2). Nonetheless, when we split the response into two groups, based on the assigned voting power of the respondents, and compare the distributions of answers by those two groups, using a Z test, it becomes clearer that strategic voting is significantly less prevalent when the shareholder has the power to affect the outcome, consistent with hypothesis H2a, which Electronic copy available at: https://ssrn.com/abstract=3785420 is therefore accepted, (based on Z test to answers to question D14). Overall, it appears that institutional investors tend to consider every proposal in detail, particularly if they have the power to affect the outcome. Insert Table 8 here Table 8 summarizes the regression of institutional investor characteristics against their answers to the statements on voting decisions appeared in Part D. We employed both ordered logistic and OLS regressions. The dependent variable distribution ranges between 1-7, where 1 stands for “almost never true” and 7 stands for “almost always true”. We also added a dummy variable “power” to the list of independent variables, to examine its correlation with strategic voting. As mentioned above, we find that the power to affect the results is negatively correlated with the adoption of a strategy to vote consistently for or against certain proposals. Similarly, we find a negative correlation between voting power and adoption of a policy to consistently follow the board of directors’ recommendations. We conclude that, even though the fiduciary duty owed their clients already requires institutional investors to exhibit shareholder activism, the power to affect the results drives home the responsibility they bear to examine every vote on its merits. Another significant characteristic observed in the institutional responses relates directly to investment rather than voting policy. It appears that the proportion of an institution’s portfolio which is actively managed (as opposed to passively tracking a given index) matters. According to the survey, the higher the rate of actively managed assets in a portfolio, the lower the tendency for those institutions’ employees to agree with the statements regarding strategic voting or voting consistently in favor of management for any reason. Interestingly enough, the opposite is not necessarily true in the case of voting consistently against management, indicating that institutions engaging heavily in active investment management are keenly aware of their monitoring role. Electronic copy available at: https://ssrn.com/abstract=3785420 Behind The Scenes Negotiations. Since the archival and the experiment results contradicted each other, we hypothesized that the contradiction stems from an unobserved phase in the institutional investor’s response to the management-sponsored proposal. While the archival dataset captures the response at the end of the process, the experiment reflects the shareholders’ opinion on the proposal throughout the process. As suggested by McCahery, Sautner and Starks (2016), institutional shareholders do engage with management and are expected to negotiate the terms of proposals to which they object. If the shareholder is strong enough to affect the result of the vote, management is likely to be more willing to listen and negotiate, in an attempt to avoid the proposal’s defeat (Fos and Tsoutsoura, 2014). We summarize this in hypothesis H3. In the survey of institutional investors, we asked about their engagement in negotiating the terms of management proposals prior to their being brought for shareholder approval. The majority (59%) of the respondents indicated that they regularly contact management regarding their expected vote prior to the general meeting, regardless of their position on the proposal. The results of the survey (presented in Table 9) suggest that (1) most institutional investors will try to negotiate the terms of a proposal in which a “bad” transaction is proposed: 67% ranked the probability of engagement ranged from “decent” to “very high” regarding the scenario presented in Part B. The average rating is 4.92 on a scale of 7, significantly higher than the neutral vote 4 (in this case indicating “I might negotiate”). And (2) their vote will be affected by their personal participation in or absence from the negotiations (see Table 9, columns 7 and 8). Insert Table 9 here Electronic copy available at: https://ssrn.com/abstract=3785420 When combined, these results go far to explain the contradictory directions of the correlations between voting power and voting behavior in the experimental study and the ex-post archival study based on actual votes. If management proposes an expropriating transaction, shareholders are inclined to oppose it, even if they have an interest in the transaction. This is reflected in the survey, as well as in the experiment, but is not usually observable, since the objections are usually voiced behind the scenes. The shareholders next step depends on their voting power. Strong shareholders will try to negotiate terms and then, after reaching agreement, will vote in favor of the proposal (as showed in Dressler 2020). Small, disenfranchised shareholders, who were not part of the negotiations or, in most cases, not even aware of them will vote against. However, our results do not show a significant difference between participants that held pivotal voting power versus the disenfranchised participants in their willingness to negotiate with management, rejecting our hypothesis H3. We suggest that negotiation between management and powerful shareholders occurs as a result of management selection, who pursue reaching an agreement with those shareholders that hold the highest probability of affecting the vote outcome. We further investigate the negotiation option by comparing the answers of the survey participants from the large versus small institutions, as measured in assets under management. Specifically, we compare the answers to the question regarding their vote in case the negotiation between the institution and the company’s management resulted in disagreement. While the average answer of participants from small institutions (manage less than NIS 1B) is not statistically different from 4 (neutral), the average answer by large institutions is significantly higher than 4; meaning that voting against management in controversial votes is common. This result suggests that large, usually empowered institutional investors, are aware of their voting power, as well as their negotiation power. Electronic copy available at: https://ssrn.com/abstract=3785420 Conclusions This study demonstrates that voting power may induce institutional shareholders to vote against management in favor of the better good of the company. This voting-power effect endures in the face of the peer effects (when all other shareholders voted in the opposite way), as well as in the face of self-interest. We also contend that the tendency for institutional investors to undertake strategic voting is also influenced by voting power and is less likely to occur when the institutional shareholder’s vote is pivotal. Second, we find that voting is influenced by ethical considerations (“non-consequentialist voting”), not only when one is unlikely to affect the outcome (“counting on my vote not counting”), but particularly when one does possess the power to do so. All in all, in light of the results presented here, there are good reasons to believe that if the vote of an institutional investor in a shareholders meeting is motivated, inter-alia, by improper interests, the voting-power effect may work (ceteris paribus) as a moderating factor mitigating these interests. Our results allow for some optimism in the context of corporate governance. 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Corporate Governance International Review, 29, 110– 133. https://doi.org/10.1111/corg.12353 Zamir, E., & Sulitzeanu-Kenan, R. (2018). Explaining self-interested behavior of public-spirited policymakers. Public Administration Review, 78, 579-592. Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 1 Experimental design Participants in the survey were assigned to one of six groups, differing in voting power and the information they received about the way the other shareholders at the meeting had voted. The voting-power effect is measured by comparing the voting results of Groups 1 vs. 2; 3 vs. 4; and 5 vs. 6. Information about peer voting Group 1: Group 3: Group 5: Unknown power, No power, No power, No information about All peers vote in All peers vote Power to affect the peers favor against outcome Group 2: Group 4: Group 6: Pivotal power, Pivotal power, Pivotal power, No information about All peers vote in All peers vote peers favor against Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 2 Studies (1-3) statistics The three studies involved the three different questionnaires that we ran on the M-Turk platform. Study 1 comprised only Groups 1, 3 and 5, which differed in terms of the information participants received regarding the putative votes of all their peers. Study 2 comprised the entire six groups, paired off (no power vs. pivotal power) to cover all alternative states of information about peer voting (no information, all peers vote in favor of the proposal, and all peers voted against); see Table 1. Study 3 was similar to Study 2, with the exception of the introduction of a conflict of interest. The management-sponsored proposal (nomination of an exceedingly well-compensated CEO) was presented to participants across all groups as well. Study 1 Study 2 Study 3 N 147 591 584 Female (%) 43% 47% 51% Age (years) 35.0 35.3 36.5 Years of education 15.1 15.4 15.5 Excluded observations 5 11 17 (3.3%) (1.8%) (2.8%) Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 N 246 199 246 196 237 198 Female (%) 48.4% 51.8% 54.5% 46.4% 44.7% 42.9% Age (years) 36.5 35.9 35.7 35.9 35.4 35.3 Years of education 15.6 15.2 15.4 15.3 15.6 15.2 Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 3 Study 2 results The percentage of votes against the proposal in each group. In parenthesis, the number of participants who have completed the questionnaire. The power to affect the outcome in Group 1 is unknown since nothing is mentioned in the questionnaire regarding the direction or weight of the votes of other shareholders. T statistics and p values are representing the test for hypothesis H1a-b: the voting power effect, comparing groups 1 and 2, 3 and 4, 5 and 6. Group 1 Group 3 Group 5 Unknown power to affect No power to affect the No power to affect the the outcome, outcome, outcome, No information about All peers vote in favor All peers vote against peers % of votes 92.9% 62.5% 84.2% "against" (98) (96) (95) t=0.21 t=-2.57 t=-1.71 P value=0.58 P value=0.0054 P value=0.044 Group 2 Group 4 Group 6 Pivotal power to affect the Pivotal power to affect Pivotal power to affect results, the results, the results, No information about All peers vote in favor All peers vote against peers % of votes 92.1% 79.0% 92.1% "against" (101) (100) (101) Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 4 Study 3 results, Self-interest introduced The percentage of votes against the proposal in each group. In parenthesis, the number of participants who have completed the questionnaire. The power to affect the outcome in Group 1 is unknown since nothing is mentioned in the questionnaire regarding the direction or weight of the votes of the shareholders. T statistics and p values are representing the test for hypotheses H1c: the voting power effect, comparing groups 1 and 2, 3 and 4, 5 and 6. Group 1 Group 3 Group 5 Unknown power to affect No power to affect the No power to affect the the outcome, outcome, outcome, No information about All peers vote in favor All peers vote against peers % of votes 61.1% 37.0% 83.7% "against" (95) (100) (98) t=-2.89 t=0.59 t=-1.68 P value=0.002 P value=0.72 P value=0.047 Group 2 Group 4 Group 6 Pivotal power to affect the Pivotal power to affect Pivotal power to affect results, the results, the results, No information about All peers vote in favor All peers vote against peers % of votes 72.4% 57.3% 79.6% "against" (98) (96) (98) Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 5 The effect of voting power on the probability of voting against the proposal This table presents logistic regressions; the dependent variable is the “against” vote (1=against, 0=in favor). Columns 1–4 include observations from all 3 studies. Columns 5 and 6 include observations from Study 3 alone, in which the voter’s judgment was potentially swayed by self-interest. Std. errors are in parentheses. The asterisk symbols *, ** and *** stand for significance at the 10, 5, and 1 percent levels, respectively. All observations Only self-interested (1) (2) (3) (4) (5) (6) Voting power 0.385*** 0.423** 0.555*** 0.791*** 0.50*** 0.722*** (0.13) (0.138) (0.143) (0.25) (0.189) (0.219) Peers vote 0.431** 0.471** 0.658*** 0.888*** 1.319*** against (0.186) (0.191) (0.239) (0.247) (0.335) Peers vote for -0.999*** -1.072*** -1.079*** -0.886*** -0.893*** (0.158) (0.164) (0.165) (0.218) (0.22) Self-interest -1.207*** -1.158*** (0.145) (0.187) Voting power -0.207 x self-interest (0.32) VP x Peers -0.664 -0.901** against (0.479) (0.438) VP x Peers 0.304 against x SELF (0.523) Age 0.031*** 0.036*** 0.036*** 0.043*** 0.044*** (0.007) (0.007) (0.007) (0.009) (0.009) Education 0.046 0.057* 0.057* 0.045 0.042 (0.029) (0.03) (0.03) (0.039) (0.039) Female -0.118 -0.063 -0.065 0.008 0.004 (0.138) (0.143) (0.143) (0.192) (0.193) N 1,322 1,297 1,297 1,297 583 583 Pseudo R 0.006 0.082 0.133 0.135 0.116 0.121 Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 6 Institutional investor respondent summary statistics Institution Type (N=36) N percentage Pension funds 4 11% Insurance companies 7 20% Investment houses 16 44% Mutual funds 4 11% Employer / labor union- owned funds 3 8% Hedge funds 2 6% Assets Under Management (N=36) Less than NIS 100 m 4 11% NIS 100 m – 500 m 6 17% NIS 500 m – 1b 5 14% NIS 1b – 50b 11 31% More than NIS 50b 10 28% Average Holding Period (N=35) Short – less than 2 years 1 3% Medium – 2-5 years 19 54% Long – more than 5 years 15 43% % of actively managed assets (N=26) 0%- 25% 5 19% 26%-50% 6 23% 51%-75% 9 35% 76%-100% 6 23% Individual respondent Sex (N=38) Male 34 89% Female 4 11% Position (N=37) Board of directors 1 3% Senior management 5 14% Investment committee 8 22% Analysts 9 24% Portfolio managers/investment 13 35% managers Other 1 3% Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 7 Strategic voting The answers are taken from Part D of the questionnaire, where the question was how often are the following statements true in describing your decision-making regarding voting in shareholders’ meeting? The possible answers are ranked on a scale of 1-7, where 1 means “almost never true (less than 10% of the votes)”, 4 means “occasionally true (40-60%), and 7 stands for “almost always true (more than 90% of the votes)”. The asterisk symbols *, ** and *** stand for significance at the 10. 5, and 1 percent levels, respectively. T values are in parentheses. Panel A: Strategic considerations Strategic considerations “Counting on my vote not Different vote for counting” different majority requirement N % N % N % Not true (answers 1-3) 21 70% 27 90% 23 77% Neutral (answer=4) 7 23% 2 7% 5 16% True (answers 5-7) 2 7% 1 3% 2 7% Total N 30 30 30 mean 2.7 2.23 2.63 H0: mean score=4 ***(t=-5.64) ***(t=-8.76) ***(t=-6.15) Voting power = 0 2.91 2.91 2.73 Voting power = 1 2.58 1.84 2.58 (t=0.68) (t=0.32) H0: diff = 0 **(t=2.85) Electronic copy available at: https://ssrn.com/abstract=3785420 Panel B: Consistent voting Consistent Consistent Consistent Consistent Consistent Consistent vote against vote against vote with vote with vote against vote with management related-party management or against management management in transactions to keep good manageme to save time to save time compensation involving relations nt in most and effort and effort proposals controlling issues shareholders N % N % N % N % N % N % Not true (answers 1-3) 24 76% 10 33% 26 86% 18 62% 28 90% 28 90% Neutral (answer=4) 6 21% 10 33% 3 11% 5 17% 3 10% 1 3% True (answers 5-7) 1 3% 10 33% 1 3% 6 21% 0 0% 2 7% Total N 31 30 30 29 31 31 mean 2.71 3.9 2.17 3.0 1.84 2.0 H0: mean score=4 (t=-0.4) ***(t=-6.71) ***(t=-8.14) **(t=-3.23) ***(t=-11.99) ***(t=-8.46) H0: mean score<4 *** *** ** *** *** Mean, Voting power = 0 2.83 4.09 2.82 3.36 2.25 2.92 Mean, Voting power = 1 2.63 3.79 1.79 2.78 1.58 1.42 H0: diff = 0 (t=0.57) (t=0.57) (t=0.91) **(t=2.37) **(t=1.89) ***(t=3.66) Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 8 Institution characteristics and voting Ordered logistic and OLS regressions. Dependent variables are ordered on a scale of 1-7, where 1 means “almost never true (less than 10% of the votes)”, and 7 stands for “almost always true (more than 90% of the votes)”. The asterisk symbols *, ** and *** stand for significance at the 10, 5, and 1 percent levels, respectively. Z statistics (in Ordered logit regressions) or t statistics (in OLS) are in parentheses. “Power” is a dummy variable, which equals 1 if the respondent was assigned pivotal voting power in part B of the survey. AUM is an ordered variable on the scale of 1-5, where 1 stands for “less than NIS 100m”, and 5 stands for “more than NIS 50b”. Actively managed rate ranges between 0-100. Holding period is an ordered variable on the scale of 1-3, when 1 stands for “short term (up to 2 years)”, and 3 stands for “long term (more than 5 years)”. Trust the board Vote with management Strategic vote for Consistent vote Consistent vote for decisions to keep good relations (bad proposal) against to save time management to save and effort time and effort Ordered OLS Ordered OLS Ordered OLS Logit Logit Logit Power -0.74* Negative -0.7* -0.73*** Negative (-1.70) (-1.21) (-1.76) (-3.08) *(-1.94) AUM Negative -0.91*** Negative -0.59*** -0.11 (-3.83) (-2.92) (-0.9) ***(-2.95) ***(-2.67) Actively managed rate Negative Negative Negative 0.01 Negative -0.01** (1.29) (-2.36) ** (-2.29) **(-2.08) **(-1.99) *** Holding period 0.87 0.63 -0.07 (1.66) (1.46) (-0.26) CHI /F test *** *** ** ** ** * *** *** (Pseudo/Adjusted) R 0.26 0.40 0.09 0.16 0.27 0.26 0.31 0.57 Electronic copy available at: https://ssrn.com/abstract=3785420 TABLE 9 Negotiating proposals Columns 1-3 are taken from Part D of the questionnaire, where the question was how often are the following statements true in describing your decision-making process regarding voting in shareholders meetings? The possible answers are ranked on a scale of 1-7, where 1 means “almost never true (less than 10% of the votes)”, 4 means “occasionally true (40-60%), and 7 stands for “almost always true (more than 90% of the votes)”. Column 4 is taken from Part C of the questionnaire, where the questions asked, “how likely you are to consider the following factor in your voting decision?”. Answers are ranked on a scale of 1: “extremely unlikely to 7: “extremely likely”. The asterisk symbols *, ** and *** stand for significance at the 10, 5, and 1 percent levels, respectively. T values are in parentheses. The fact that I was Discuss expected Try to negotiate the Discuss the either active in the vote with proposal with proposal with negotiations or absent management management other institutional from them will affect (1) (2) investors my vote. (3) (4) N % N % N % N % Not true (answers 1-3) 8 28% 6 21% 15 50% 4 12% Neutral (answer=4) 3 10% 12 41% 9 30% 11 33% True (answers 5-7) 18 62% 11 38% 6 20% 18 55% Total N 29 29 30 33 mean 4.34 4.21 3.2 4.58 H0: mean score=4 (t=1.22) (t=0.80) **(t=-2.69) **(t=2.64) H0: mean score<4 ***(<4) *** Electronic copy available at: https://ssrn.com/abstract=3785420 FIGURE 1. Proportion of votes against the proposal, according to peer voting information This figure shows the proportion of participants who voted against the proposal. The three left columns indicate participants from Study 3, who had a personal interest in the proposed nomination, while the three right columns indicate participants from studies 1 and 2. Blue bars stand for the disenfranchised participants who had no power to affect the outcome, while the red bars represent for those with pivotal power to do so. The asterisk symbol ** in each couple of bars indicates significance of the difference in the proportions (T-Test) at the 5 percent level. Std. errors are in parentheses. With self-interest Without self-interest 92.1% 92.1% (0.04) **(0.05) 79.0% 79.6% 72.4% **(0.06) (0.06 100.0% **(0.07) 90.0% 92.9% 57.3% **(0.07) 80.0% 83.7% 84.2% 70.0% 62.5% 60.0% 61.1% 50.0% 40.0% 37.0% 30.0% 20.0% 10.0% 0.0% No In favor Against No In favor Against information information No power Pivotal power Electronic copy available at: https://ssrn.com/abstract=3785420 FIGURE 2. Distribution of survey participants’ answers by voting power This figure presents the comparison (Z-Test) of the distribution of answers to the questions regarding voting patterns. Blue bars stand for the disenfranchised participants who had no power to affect the outcome, while the red bars represent for those with pivotal power to do so. The asterisk symbols *, ** and *** in each chart stand for significance of the difference between the two distributions at the 10, 5, and 1 percent levels, respectively. Mean difference (first no.) and std. error (second no.) are in parentheses. Electronic copy available at: https://ssrn.com/abstract=3785420 Author information Efrat Dressler and Yevgeny Mugerman have contributed equally to this article. Affiliations 1. School of Business Administration, The Hebrew University of Jerusalem, ISRAEL. E-mail: Efrat.Dressler@mail.huji.ac.il Efrat Dressler 2. School of Business Administration, Bar-Ilan University, ISRAEL. E-mail: Yevgeny.Mugerman@biu.ac.il Yevgeny Mugerman Corresponding author Correspondence to Yevgeny Mugerman. Ethics declarations 1.1.1 Conflict of interest The authors declare that they have no conflicts of interest. 1.1.2 Ethical Approval All procedures performed in studies involving human participants were in accordance with the ethical standards of the institutional and/or national research committee and with the 1964 Helsinki declaration and its later amendments or comparable ethical standards. 1.1.3 Informed Consent Informed consent was obtained from all individual participants included in the study. Additional information Electronic copy available at: https://ssrn.com/abstract=3785420 Research Instrument Appendix A: M-Turk questionnaire We are asking you to participate in a research study. This form will give you some information about the study. Please read the form carefully and feel free to ask any questions that you may have. Project Description In this study, you will be asked to participate in a hypothetic situation that ends with your vote. The estimated time to complete this study is approximately 5 minutes. The research is being conducted with the goal of publication in academic journals and presentation at academic conferences. Risks and Benefits Your participation in this study does not involve any physical risk or emotional risk to you beyond the risks of daily life. You have the right to withdraw your consent or discontinue participation at any time for any reason. Your decision to withdraw will not involve any penalty or loss of benefits to which you are entitled. The potential benefit of the study is a better scientific understanding of people’s voting behavior. Compensation You will receive 25 cents for your participation. Confidentiality To secure the confidentiality of your responses, your M-Turk worker ID will be kept in a separate dataset from the dataset which will include your responses. A limited number of research team members will have access to the data. All data will be kept in a password protected computer that is kept secure. Your privacy will be maintained in all published and written data resulting from this study. All data collected will be analyzed in aggregate form. Your name or other identifying information will not be used in our reports or published papers. Contacts If you have any questions or concerns about this study or rights as a participant in this research, you may contact *** Subject rights Participation in this study is voluntary, and you are free to leave the study at any time without penalty. Do you agree to participate? o Yes (1) o No (2) Electronic copy available at: https://ssrn.com/abstract=3785420 Series A: Power and peer conditions, no self-interest: Imagine you are a shareholder in a big corporation (you own some of its stocks). The company is about to elect a new CEO (a senior manager). The Chairman of the Board suggests the appointment of a candidate whom you do not know, apart from some outstanding CV details that were mentioned. The salary suggested for the new CEO is four times larger than the salary of the former CEO. You are troubled by this increase in salary and suspect that the Chairman (who has initiated the proposal) has some other connections with this candidate but you are unsure. In order to make the appointment, the corporation must get the approval of its 9 shareholders. All shareholders must vote, either for or against this proposal. Note that all the votes, including your own, will be disclosed to the public. A1. Control condition, not pivotal: The voting is now taking place. Each shareholder votes by raising his/her hand. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) A2. Power condition full power to affect the results: The voting is now taking place. Each shareholder votes by raising his/her hand. Since you own more stocks in the company than the other shareholders, your vote is pivotal and will Electronic copy available at: https://ssrn.com/abstract=3785420 determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) A3. Peer effect (in favor) condition, no power to affect the results: The voting is now taking place. Each shareholder votes by raising his/her hand. You see that the eight other shareholders have voted in favor of the appointment. Thus the appointment is going to be approved regardless of your vote. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) A4. Peer effect (in favor) condition, full power to affect the results: The voting is now taking place. Each shareholder votes by raising his/her hand. You see that the eight other shareholders have voted in favor of the appointment. Since you own more stocks in the company than the other shareholders, your vote is pivotal and will determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) A5. Peer effect (against) condition, no power to affect the results: Electronic copy available at: https://ssrn.com/abstract=3785420 The voting is now taking place. Each shareholder votes by raising his/her hand. You see that the eight other shareholders have voted against the appointment. Thus the appointment is going to be denied regardless of your vote. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) A6. Peer effect (against) condition, full power to affect the results: The voting is now taking place. Each shareholder votes by raising his/her hand. You see that the eight other shareholders have voted against the appointment. Since you own more stocks in the company than the other shareholders, your vote is pivotal and will determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. How would you vote? o I would vote in favor of the appointment (1) o I would vote against the appointment (2) Why did you vote the way you did? (One sentence is fine) ________________________________________________________________ ________________________________________________________________ Series B repeated all six groups of series A, but with self-interest, expressed in the following sentence: You know that the proposed CEO intends to hire your good friend, whom you care deeply about, as a personal assistant. Part c: verifying questions Electronic copy available at: https://ssrn.com/abstract=3785420 C1. What is the vote about? o Changing the company’s product line (1) o Giving a pay raise for longtime employees (2) o Hiring and paying a higher salary to a new CEO (3) C2. How many shareholders are participating the vote (including yourself)? o 1 (1) o 9 (2) o 12 (3) o I do not remember (4) Part D: general questions Sex o Female (1) o Male (2) Age (in years) ________________________________________________________________ Electronic copy available at: https://ssrn.com/abstract=3785420 Years of education (please enter a number) ________________________________________________________________ General Comments on this section (optional) ________________________________________________________________ Electronic copy available at: https://ssrn.com/abstract=3785420 Appendix B: The survey questionnaire (translated from Hebrew) Consent We are a team of researchers from the *** University, we study the voting patterns presented by institutional investors in a concentrated ownership environment. We would be happy to have your response on this survey. The survey is aiming to reach employees in institutional investors who manage investors’ funds, analysts, investment committee members, participants in shareholders meeting, and board of directors’ members in an institutional investor. If you choose to participate in this study you will be asked to answer several questions regarding your voting behavior in shareholder’s meeting on various issues and situations, as an institutional investor. These tasks will take approximately 10-12 minutes in total. Participation is voluntary. You may skip a question or withdraw from the study at any time. Only a click on the “submit” button will cause your answers to be kept. The dataset that will be gathered in this survey will remain confidential and anonymous. No identifiable information will be stored with the data set. The answers you will provide in this survey will be used for research purposes only. After the conclusion of this survey, you and your institution will have an option to receive a report that will summarize the results of the survey, for your benefit. The report will not include data specific for each institutional investor, but the summary statistics and conclusions that can be drawn from the data that was gathered. If you have any questions regarding the study, please contact the research staff: ****** Electronic copy available at: https://ssrn.com/abstract=3785420 Part A: General information on the Institution you work for:titution belongs to the following category:  Insurance company  Investment house  Old Pension Fund  Employees owned fund  Hedge Fund  Mutual Fund  Other. Specify:_________ 1. My institution’s Assets Under Management (AUM) are :  Less than 100 m NIS  Between 100 m and 500 m NIS  Between 500m and 1 bn NIS  Between 1 bn and 50 bn NIS  More than 50 bn NIS 2. My institution’s average holding period for investments in our portfolio is:  long term (5 years or longer)  medium term (between 2 and 5 years)  short term (we sell after 1-2 years) Electronic copy available at: https://ssrn.com/abstract=3785420 3. What is the fraction of assets actively managed in your institution? ___________ 4. In the following questions, please mark the box indicating to what extent do you agree or disagree to the following statement Strongly disagree disagree Tend to disagree neutral Tend to agree agree Strongly agree a. When buying a stock, we care about the company’s environmental policy b. We usually follow a stock index, therefore buy every new stock in the index c. We usually avoid becoming a significant shareholder (who holds more than 5%) in a company d. If we buy foreign stocks, it is always according to some well-known index (for example S&P500) e. The people who make the voting decision in the institution make so for all the funds managed within the institution f. When buying a stock, we consider the company’s impact on the society (for example, its compliance with employees’ rights, good governance etc.) Part B: The following questions are part of a hypothetical scenario. Imagine you are representing your institution in the shareholder meeting and have to vote. “Imagine you are a shareholder in a big corporation (you own some of its stocks). The company is about to elect a new CEO (a senior manager). The Chairman of the Board suggests the appointment of a candidate whom you do not know, apart from some outstanding CV details that were mentioned. The salary suggested for the new CEO is 50% higher than the salary of the former CEO. You are troubled by this increase in salary and suspect that the Chairman (who has initiated the proposal) has some other connections with this candidate but you are unsure. Electronic copy available at: https://ssrn.com/abstract=3785420 In order to make the appointment, the corporation must get the majority of its shareholders.” Control condition, not pivotal: B1. The voting is now taking place. Each shareholder votes by raising his/her hand. How would you vote?  I would surely vote in favor of the appointment.  I would most probably vote in favor of the appointment  I tend to vote in favor of the appointment  Not sure / I don’t know  I tend to vote against the appointment  I would most probably vote against the appointment  I would surely vote against the appointment. Control condition, pivotal: B2. Your vote is pivotal and will determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. The voting is now taking place. Each shareholder votes by raising his/her hand. How would you vote?  I would surely vote in favor of the appointment.  I would most probably vote in favor of the appointment  I tend to vote in favor of the appointment  Not sure / I don’t know Electronic copy available at: https://ssrn.com/abstract=3785420  I tend to vote against the appointment  I would most probably vote against the appointment  I would surely vote against the appointment. Self-interest condition, not pivotal: B3. You know that the proposed CEO intends to hire your good friend, whom you care deeply about, as a personal assistant. The voting is now taking place. Each shareholder votes by raising his/her hand. How would you vote?  I would surely vote in favor of the appointment.  I would most probably vote in favor of the appointment  I tend to vote in favor of the appointment  Not sure / I don’t know  I tend to vote against the appointment  I would most probably vote against the appointment  I would surely vote against the appointment. Self-interest condition, pivotal: B4. You know that the proposed CEO intends to hire your good friend, whom you care deeply about, as a personal assistant. Your vote is pivotal and will determine the outcome. Thus, if you vote against the proposal, it will be rejected, and if you vote for it, it will be approved. The voting is now taking place. Each shareholder votes by raising his/her hand. How would you vote?  I would surely vote in favor of the appointment.  I would most probably vote in favor of the appointment  I tend to vote in favor of the appointment  Not sure / I don’t know Electronic copy available at: https://ssrn.com/abstract=3785420  I tend to vote against the appointment  I would most probably vote against the appointment  I would surely vote against the appointment. B5. Now consider that you are obligated to cast a vote in every proposal of any of the companies in your portfolio. You have a limited time and manpower for the purpose of negotiation. If you had the opportunity to negotiate the management-sponsored proposal before the vote, would you negotiate it? (your pivotality remains the same as in previous question).  There is a very low probability that I would negotiate the proposal (less than 10%)  I would most probably not negotiate the proposal (10-25%)  There is some probability that I would negotiate the proposal (25-40%)  I might negotiate the proposal (40-60%)  There is a decent probability that I would negotiate the proposal (60-75%)  I would most probably negotiate the proposal (75-90%)  There is a very high probability that I would negotiate the proposal (90-100%) Part C: Using the scale below, mark the box to the right that best describes how likely you are to consider the following factor in your voting decision on issues that require the majority of minority shareholders according to the corporate law: Extremely Moderately Somewhat Not Sure Somewhat Moderately Extremely Unlikely Unlikely Unlikely Likely Likely Likely Less than 10% 10% -25% 25% - 40% 40%-60% 60% - 75% 75% - 90% More than 90% 1. Firm size 2. Accounting profitability measures of the company (for example ROE, ROA, CF, leverage) 3. The quality of the risk management in the company 4. When voting on compensation proposals: Competitors’ CEO compensation level Electronic copy available at: https://ssrn.com/abstract=3785420 5. Local proxy adviser’s recommendation (Entropy or other similar firms) 6. Foreign proxy adviser’s recommendation (ISS) 7. Firms quality of corporate governance 8. My ability to affect the results of the vote 9. The relative weight of the shares in my portfolio 10. My holdings in firm’s bonds 11. Other connections with the management or with the controlling shareholders 12. If there were negotiations before the proposal – the fact that I was an active member in the negotiations, or if I was absent will affect my vote. Part D: Using the scale below, mark the box to the right that best describes how often are the following statements true in describing your decision-making regarding voting in shareholder’s meeting: Almost Never True Usually Not Rarely True Occasionally True Often True Usually True Almost Always True True Less than 10% of 10% -25% 25% - 40% 40%-60% 60% - 75% 75% - 90% More than 90% of votes votes 1. I trust the board of directors, if they approved the transaction, I vote in favor of the proposal. 2. I vote against management-sponsored proposals on compensation issues. 3. I vote against self-dealing transactions with controlling shareholders 4. I vote in favor of management-sponsored proposals – to keep good relations 5. I take into account strategic considerations and not only directly related considerations. For example, the probability that the proposal will be approved regardless of my vote. 6. I purchase the proxy adviser recommendations, and always follow it in a special majority required votes. Electronic copy available at: https://ssrn.com/abstract=3785420 7. I purchase the proxy adviser recommendations, but in most proposals, I do not follow it. 8. If the proxy adviser recommends voting against a proposal, I always follow 9. My institution analyses all proposals by portfolio companies and produces a vote recommendation, which I follow 10. My institution engages companies’ management before votes and announce them about our expected vote. 11. My institution tries to negotiate proposed transactions before the vote, in favor of all minority shareholders 12. If the engagement resulted in dissident opinions with management, we will vote against the proposal. 13. In some cases, I might vote in favor of a bad management-sponsored proposal, because I think it might help me in the future. 14. In some cases, I might vote against a good management-sponsored proposal, if I know it will be approved, for strategic reasons. 15. I discuss the proposals with other institutional shareholders before the vote 16. I vote in a similar way to my peers – they might know something that I don’t know about the transaction 17. I vote the same way (either in favor or against) in the vast majority of the votes’ issues, and only invest in researching a small portion, mainly in one issue 18. Some issues are less important, so I don’t invest time in learning the proposal, and just vote against it. 19. Some issues are less important, so I don’t invest time in learning the proposal and just vote for it. 20. My voting behavior is different when the majority rule is different General Information about the person who answers this questionnaire What is your age? Electronic copy available at: https://ssrn.com/abstract=3785420 ____Under 30 ____30-35 ____35-45 ____45-55 ____55+ What is your gender? ___ Male ___ Female What is your position in the institutional you work for? ____ Portfolio manager ____ Analyst ____ CIO / CFO / CEO ____ board of directors’ member ____Investment committee member ____ other: specify ______ Any other remarks that you might have regarding the voting of institutional investors at shareholder meeting, or regarding this questionnaire ________________________________________________________________________________________________________________ Electronic copy available at: https://ssrn.com/abstract=3785420 (optional) If you specify your email address or the name of the institution you work for, a summarizing report of the survey will be sent to you. __________________________________________________________________________________________________________________ Thank you very much for participating in this survey! Electronic copy available at: https://ssrn.com/abstract=3785420

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ARN Conferences & Meetings SSRN

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Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

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eISSN: ARCH-4059
DOI: 10.2139/ssrn.3785420
Publisher site: See Article on Publisher Site

Abstract

Journal

ARN Conferences & Meetings – SSRN

Published: Sep 2, 2021

Keywords: Voting Power, Shareholder Voting, Business Ethics, Corporate Governance

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Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

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Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

Doing the Right Thing? The Voting Power Effect and Institutional Shareholder Voting

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