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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.

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