Skip to main content

Trust and Shareholder Voting

Theory as well as empirical studies suggest that voting at annual general shareholder meetings (AGMs) creates value. Indeed, voting gives shareholders a final say on major company decisions, such as appointments to the board of directors and the approval of takeover offers. It also enables shareholders to show their support the current management or to disagree with the latter. It is then somewhat surprising that, on average, voter turnout at AGMs is only about 60%. Still, the average voter turnout varies across the world with a minimum of 41% for New Zealand and a maximum of 100% for Cyprus. Moreover, the average approval rates for management-initiated proposals vary between 84% and 100%.

In a study with Peter Limbach and Simon Lesmeister, we propose the level of trust in others that prevails in a country has an effect on shareholder voting and explains differences in voting patterns across countries. The economics literature (see e.g. Zak and Knack 2001) finds that trust increases economic performance, as measured by GDP per capita growth. The argument is as follows: In high-trust countries economic agents do not have to expend as much time on monitoring each other. Hence, they have more time for productive tasks. Therefore, countries with high trust levels should have better economic performance. By examining whether trust affects the level of shareholder monitoring of management, as proxied by voter turnout at AGMs and support of management-initiated proposals, we perform a more direct test of this argument.

Trust has been shown to vary quite substantially across countries with only 3% of Filipinos trusting others while as 74% of Norwegians agree that others can be trusted. By studying the voting outcomes at ordinary and extraordinary AGMs of companies from more than 40 countries, we find empirical support of our main hypothesis: Shareholders in countries with high trust spend less time on monitoring the management of their companies.

In detail, we find that for high-trust countries voter turnout at AGMs is significantly lower while the approval rate for management-initiated proposals is significantly higher. We also find evidence that the lower levels of shareholder voting or monitoring in high-trust countries are not exploited by the firms’ managers. Although low voter turnout and high approval rates for management proposals have been shown to decrease future stock performance, this negative effect is neutralised in high-trust countries. Hence, in high-trust countries it might be optimal for shareholders to trust management and reduce monitoring.

This post was originally published on the webpages of the European Corporate Governance Institute.

The internet appendix for the paper entitled "Trust and Shareholder Voting" is available from here.

Popular posts from this blog

DMGT Plc - Not your typical UK Plc

I haven't posted any of these corporate governance case studies for a while. As the updated version of my corporate governance textbook is about to be published on 11 March 2018, I thought it was a good time to investigate the corporate governance of another interesting company. The company I have chosen is the Daily Mail and General Trust Plc (DMGT Plc), a UK company. This is a media company which owns a.o. the tabloid The Daily Mail and the free newspaper Metro. It also has a holding in Euromoney Institutional Plc and Zoopla.

I chose DMGT Plc as it is not your run-of-the-mill UK stock-market listed Plc. The typical example of a UK exchange-listed corporation would be a Plc with dispersed ownership and weak control (see Section 3.3 of my textbook International Corporate Governanceor its updated version Corporate Governance. A Global Perspective). This is what I call combination A in my textbook (see below figure).

It what follows, I shall be using the 2017 annual report of DMGT P…

Dos and Don'ts of Approaching a Potential PhD Supervisor

Similar to most academics, I get lots of unsolicited emails from potential PhD students asking me whether I would be willing to supervise them. Hence, I thought I should put together the Dos and Don'ts of doing this. DosDon'tsEmail only potential supervisors in your area of research.Email everybody in the department or school. Start your email with "Dear Sir or Madam".Specify a topic that is of interest to you. Be as specific as possible. Ideally, you should attach a detailed research proposal to your email.State that you want to do a PhD in an area as large and vague as e.g. finance. Write that, since the age of 5, it has been your dream to do a PhD. (I didn't know what a PhD was at that age!) This is not a great start.The choice of the university is an important consideration. So is identifying a suitable supervisor. Do your research by consulting staff profiles. Choose a supervisor who is research active in your field of interest.Email a potential supervisor …

Corporate Governance. A Global Perspective.

The second edition of the highly acclaimed textbook "International Corporate Governance" is scheduled to be published by Cengage on 11 March 2018. The new edition will follow the style and approach of the first edition, but its title will change to "Corporate Governance. A Global Perspective". The book can already be pre-ordered from Blackwells.

A new chapter on boards of directors has been added to the book. There has been extensive updating of the material throughout the book, reflecting advances in research on and practice in corporate governance (full details can be found here). The table of contents (subject to change) of version two is as follows:

Part I – Introduction to Corporate Governance
Defining corporate governance and key theoretical modelsCorporate control across the worldControl versus ownership rightsPart II – Macro Corporate Governance
Taxonomies of corporate governance systemsCorporate governance, types of financial systems and economic growthCorpor…