Mutual Fund Board Connections and Proxy Voting (Summary)

Funds consult Institutional Shareholder Services (ISS) for advice on voting decisions. Previous research has shown that ISS voting influences management support, and reduced support results in lower management compensation and governance changes. Negative ISS recommendations also result in less support for management proposals. ISS recommendations are not always aligned with shareholder interests. Because mutual funds often use a “one-size-fits-all” approach to issues, management has a tendency to approach funds and supply information. A connected director can provide a contact source between funds and firms, stimulating information flow. The authors assess whether the presence of a connected director affects voting decisions and use databases to determine which relations exist between voting behaviors and which connections exist between funds and firms.

Since 2003, the SEC has required disclosure on proxy voting. The authors are thus able to collect data from the ISS Voting Analytics database, which provides proxy voting information for the 2004–15 period. The dataset contains information on the topic voted on, management, and the ISS recommendation. No data are available on the number of shares the funds hold. To link executives’ firms with funds, the authors use the ExecuComp database, and to link directors’ firms with funds, the authors use Form N-CSR. Directors’ biographical data are used to understand whether the directors’ support of management is based on informed voting or on conflicts of interest. The dataset, which consists of 42 executives and 226 directors, incorporates information from N-CSR, S&P Capital IQ, the Bloomberg Executive Profile, and the biography/team data pages of company sites.

To assess the impact of connectivity, the authors introduce a dummy variable of “connected” when a fund has a director or executive connection. The authors apply ordinary least squares and include fixed effects and clustering of standard errors.

The results show that connected funds vote more independently of ISS than those without connections, implying that they are better informed. Furthermore, connected directors and executives provide more support for conflict proposals, and a peer effect appears to exist, given that other voters come to the same conclusion.

The authors also test the effects of terminating the connection, finding that voting is negatively affected after disconnecting and that managerial support is reduced.

Because mutual funds own 24% of the US equity market, they are influential in the proxy voting process. Hence, more and more financial professionals might be influenced by these developments. Directors and executives can be connected to multiple funds (“busy” directors). Most proposals relate to direction-election, routine-business, and compensation proposals. The authors show that ISS influences other institutions because the other institutions follow the ISS vote.

The authors show that full-time and busy directors are more likely to support management during times of crisis and conflict. Connected voting is probably not due to conflicts of interest because support for management is not higher when the ISS recommendation is positive. Also, looking at the change in stock market prices, information advantages appear to be more relevant than conflicts of interest.

The authors also check which funds are most likely to be approached for connections, concluding that high firm ownership funds and longer investment horizons are more attractive. Finally, proximity increases connections.

As the popularity of index investments and investing in ESG (environmental, social, and corporate governance) funds grows, proxy voting will become more relevant. This research is an effective and condensed introduction to the variables influencing fund voting.