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On Proxy Overload and Biased Ballots


How corporate governance can be undermined when shareholders and their advisors can’t keep up

Microphones in the boardroom

Busyness is a hardwired feature of modern work life. In fact, a busy and overworked lifestyle is not only on the rise but has even become an aspirational status symbol

Shareholders of public companies aren’t immune to the culture of busyness, and, as Paul Calluzzo found in his recent research, the impact of this deluge of work can strike at the heart of how corporations are governed.

“The reality is that when you’re really busy, when there’s a lot on your plate, you’re going to struggle,” says Calluzzo, an associate professor of finance and the Toller Family Fellow of Finance at Smith School of Business. “And I think that these studies show a universal and pervasive effect that can have serious implications.” 

Calluzzo conducted two separate studies with colleagues. One took a deep dive into the hectic proxy season in North America, the infamous six-week period in April and May when more than half of all shareholder meetings occur. It is an intense time when shareholders convene to vote on issues of governance, such as the makeup of the board or the approval of a merger or acquisition. 

Most shareholders delegate their voting duties to a third-party proxy voter, usually Institutional Shareholder Services (ISS), one of the world’s leading proxy advisors. Calluzzo and colleague Simi Kedia (Rutgers University) wanted to see how ISS’s recommendations were impacted by the intensity of proxy season.

To find out, the researchers zeroed in on management proposals data between 2003 and 2018. They teased out two main findings from the data. One, ISS issued fewer negative recommendations during proxy season. On average, ISS issued a negative recommendation for 10 per cent of the proposals from corporate management during proxy season compared with 13.1 per cent during the rest of the year. 

And two, Calluzzo and Kedia found that the ISS recommendations were of lower quality, a conclusion drawn from market reactions. Typically, when ISS makes a recommendation that corporate executives accept, the stock price for that firm rises, which suggests ISS made the right call. But Calluzzo and Kedia found that during proxy season, stock prices rose significantly less than outside of proxy season, suggesting a decrease in the quality of ISS recommendations. 

Names on ballots 

Calluzzo’s other study, examining ballot order effects in the elections of independent directors to corporate boards, illustrated similar downsides to overworked voters. In this study of a large sample of mutual funds, Calluzzo, with colleagues Tanja Artiga González (VU University Amsterdam) and Georg Granic (Erasmus University Rotterdam), found that the average fund held 154 firms at the time of a proxy meeting and cast votes on a whopping 1,724 proposals. 

The researchers wondered whether this high volume of decision-making over a brief period would impact the elections of independent directors. In part, they were inspired by earlier studies on the “choice fatigue” effect. A study in 2011, for instance, found that parole judges in Israel issued fewer favourable rulings to prisoners as hearings wore on, and that this effect wore off after judges returned from food breaks. A study in 2019 showed that the accuracy of financial analysts’ forecasts declined throughout the day.  

Calluzzo and his colleagues hypothesized that the further down prospective directors appeared on a ballot, the less opposition they would get from shareholders. The thinking was that shareholders would make less-informed decisions after having already made many previous decisions on whom to vote for. 

As it turned out, their hypothesis was right. Looking at a sample of alphabetically ordered independent director elections, the researchers found that the first person listed on the ballot received 26 per cent more shareholder opposition compared to directors who appeared beyond the ninth ballot position. They also uncovered evidence that suggested this up-ballot opposition to directors could lead to real and significant changes in firm governance related to managerial compensation, career concerns and executive entrenchment. 

Beyond the boardroom 

What can be done to mitigate these downstream effects on corporate governance? 

To lessen the cognitive load on advisors from the proxy season, Calluzzo recommends firms take a page from Japan’s corporate governance code that encourages companies to spread out their annual meetings. This would help firms carve out enough time to have constructive communications about proposals with investors.

To counter the ballot order effects, the most obvious solution is to randomize the order in which prospective directors appear on the ballot rather than organize ballots alphabetically. For paper ballots, Calluzzo says, firms could change the order of the ballot each year. For electronic voting, each voter could get a different ballot. 

“There could still be choice fatigue, but that bias would be spread out across the directors,” says Calluzzo. 

Really though, any solution must start with a basic awareness of the problem, says Calluzzo. And this can be a really serious problem affecting corporate governance. 

“We’re talking about the main voice of shareholders here and one of the main ways governance is kept in check,” says Calluzzo. “With these voting issues, you can see where it could create nonoptimal governance where, say, a firm tries to get a favoured director elected by putting them way down the ballot. It’s important to be aware of this.”  

It’s also important to be aware that this issue goes beyond corporate governance, he says. 

“It’s easy to say, ‘Oh, what’s the difference if some affluent corporate insider gets more or less importance in a director election?’ But the reality is that corporations control a lot of how the world functions. You can see how this issue could be at play on proposals related to greenhouse gases, for example, or others having societal level impact. This can have big effects on all of our lives.”