Electronic Proxy Statement Dissemination and Shareholder Monitoring

This study examines the effects of electronic dissemination of proxy statements on the monitoring of company management by retail investors, as well as strategic decisions by management regarding how proxy statements are disseminated. Retail investors are an economically important group, and regulators have sought to increase their participation in corporate governance decisions. One way that investors monitor management is by participating in shareholder voting. Yet, retail participation in shareholder elections is generally low. I estimate average participation of 46% from 2011 to 2016.

The value of investor participation in shareholder meetings is a long-standing question touching on the fundamental trade-offs of principal-agent relationships. Shareholder meetings allow investors to direct and monitor management. However, investors, particularly retail investors, who include some of the least sophisticated investors, may be less knowledgeable than management regarding the best ways of optimizing firm value. Nonetheless, regulators have highlighted the importance of retail participation, a major right of shareholders, which they have a duty to protect. The SEC describes the proxy process as a “vital means by which shareholders and company leadership communicate with one another” and wants to create rules that would increase informed participation to empower shareholders (Commissioner Luis A. Aguilar, February 19, 2015). Legal scholars argue that retail participation is fundamental to the legitimacy of the capital markets and beneficial to aggregate welfare (Solomon, 2017). Not only is the value of retail participation unknown, but the factors that drive it are largely unexplored. Whether the proxy dissemination method is a factor in retail participation is an important question among regulators. In most developed countries, the government regulates the dissemination of documents related to shareholder meetings, but regulators do not have clear measurements of the costs and benefits of electronic dissemination.

To study the effects of electronic dissemination of proxy statements on retail participation, I take advantage of two regulatory shocks: the passage of e-proxy regulation in the U.S. and the passage of Notice and Access in Canada. Before the e-proxy regulation, companies were required to disseminate proxy documents through postal mail. With e-proxy, the SEC required companies to choose between two proxy statement distribution systems, the full access system and the notice and access system. Full access requires the company to both post proxy materials on its website and mail physical copies of the proxy documents to shareholders. Notice and access allows the company to only distribute proxy materials via a link to its website. Implementation of the regulatory change was staggered, based on company size. The effective date for large accelerated filers was January 1, 2008, whereas for companies with public floats below $700 million, it was January 1, 2009.

I use two approaches to examine the effects of e-proxy regulation, with a focus on non-routine votes. Brokers can vote for non-participating beneficial investors during routine votes, but not non-routine votes, which is reflected in observed participation. First, I analyze the change in participation for adopting firms where within-firm routine versus non-routine votes are the main variation. Second, I estimate only examining non-routine votes where participation decreases after dissemination changes. In the United States, firms are not required to disclose their method of dissemination, and so I use firm filings to infer the dissemination method. I find that e-proxy led to approximately a 1% to 2.2% decrease in total shareholder participation. On average, 13.5% of shares are not voted in my sample, due to the lack of retail participation. Therefore, the decrease represents a 7% to 17% decrease in retail participation.

I examine if any change occurs in voting outcomes with particular focus on the percentage of votes in agreement with management for routine votes. Brokers may have agency conflicts, leading them to almost always voting for management recommendations. Concerns about these agency costs were one of the reasons that Dodd-Frank restricted the types of votes that could be classified as routine. I find that as companies switch dissemination methods and monitoring power transfers to brokers, the percentage of the vote that agrees with management’s recommendation increases. After U.S. broker-reform (Dodd-Frank and NYSE Rule 452) or, in Canada, which has no broker voting, the percentage of the votes that agrees with management decreases with adoption of e-proxy. Activist investors had been the loudest group pushing for broker non-vote reform. My findings suggest a hierarchy of friendliness to management, where brokers are the friendliest, followed by retail investors, and then passive institutions.

Additionally, this study provides evidence that management strategically invests in dissemination. Although the primary reason for using electronic dissemination is to save money for the firm, when a strategic or close vote takes place, management becomes more sensitive to participation of retail investors and increases spending on dissemination of proxy materials by using the more expensive physical dissemination. This shows that management is aware of how dissemination methods can affect the level of monitoring. Participation might be important to management if the company is close to quorum requirements, or if it believes retail investors might be more in agreement with management than institutional investors. I study this post-broker vote reform, when e-proxy is associated with a decrease in votes in agreement with management, and I show that management’s voluntary use of electronic dissemination is negatively associated with special contests and votes that fail.

I also study implementation of Canada’s similar notice and access regulation in February 2013 using proprietary data from the Canadian Securities Administration. The Canadian regulation created requirements for notice dissemination very similar to requirements in the United States, where Canada’s differences increase the data quality and identifies the mechanism unambiguously as the change in information dissemination. The Canadian setting highlights a selection effect that works against finding a decrease in votes in agreement with management. When I do not control for firm characteristics, there is a positive correlation between voting outcome and use of notice and access, driven by registered investors. However, when I look within a firm and try to control for the controversy of the vote, the relation between voting outcomes and use of notice and access becomes negative. Use of notice and access for the entire investor base is associated with a 1.1% decrease in votes in agreement with management’s recommendation. The votes for which a 1.1% change in the vote would be economically significant are disproportionally likely to be important votes. This is consistent with the firm dissemination switching I observe. The Canadian setting confirms that the rate of notice and access use for special elections is lower than the rate for annual meetings and that firms switch dissemination methods for important elections. Lastly, I find a decrease in voter participation in the Canadian setting. I estimate the effect of notice and access for beneficial investors to be a participation decrease of around 12%, and for the entire investor base to be a participation decrease of around 14%.

This study shows that larger firms have higher participation on average, and previous smaller firm sample restrictions led to underestimated non-participation. This is the first paper to estimate individual investor participation. It quantifies non-monetary consequences when companies stop sending proxy statements in the postal mail and instead rely on the internet, as over 31% of U.S. and 19% of Canadian companies now do annually.

The complete paper is available for download here.