Shareholder voting in China: The role of large shareholders and institutional investors

• DOI: http://doi.org/10.1111/corg.12303
• Author: Shunlin Song,Xin Xu,Yang Yi
• Published date: 01 January 2020
• Date: 01 January 2020

ORIGINAL ARTICLE

Shareholder voting in China: The role of large shareholders and

institutional investors

Shunlin Song

1

|Xin Xu

2

|Yang Yi

3

1

School of Accountancy, Central University of

Finance and Economics, Beijing, China

2

School of Accounting, Zhongnan University

of Economics and Law, Wuhan, Hubei, China

3

School of Accounting, Southwestern

University of Finance and Economics,

Chengdu, Sichuan, China

Correspondence

Shunlin Song, School of Accountancy, Central

University of Finance and Economics, No. 39

South College Road, Haidian District, Beijing

100081, China.

Email: songsl@cufe.edu.com

Funding information

Chinese National Natural Science Foundation,

Grant/Award Numbers: 71702151, 71872183

and 71502183

Abstract

Research Question/Issue: Shareholders of nearly every company are given the

right to vote, yet relatively little is known about the determinants of their voting

behavior. Unique data in China render the votes of large shareholders observable,

providing a rare opportunity to study the determinants of shareholder voting.

Research Findings/Insights: We find that (a) large shareholders are significantly

less likely to vote against reform proposals than small shareholders and (b) institu-

tional investors—especially mutual funds (the largest institutional investors in China)

—are significantly less likely to vote against proposals than individual investors.

Theoretical/Academic Implications: We provide strong evidence for insider inter-

vention in the voting process. Our study also adds to the understanding of voting

behavior of large shareholders and institutional investors along with their governance

roles in countries with weak legal protection for investors.

Practitioner/Policy Implications: To improve the governance role of shareholder

voting in countries with weak investor protection, it is necessary to strengthen the

level of disclosure and supervision of shareholder voting decisions.

KEYWORDS

Corporate governance, institutional investors, shareholder activism, shareholder voting,

intervention

1|INTRODUCTION

Shareholder voting is a fundamental right granted to most share-

holders to influence management decisions and is an effective mech-

anism for exercising governance (Brickley, Lease, & Smith, 1988;

Denes, Karpoff, & McWilliams, 2017; Iliev, Lins, Miller, & Roth,

2015; Yermack, 2010). On one hand, shareholder voting is important

for managers to implement shareholder proposals that can enhance

firm value (e.g., Cuñat, Gine, & Guadalupe, 2012; Hermanson, Rama,

& Ye, 2019). In addition, shareholder voting plays an important role

in monitoring management proposals, including electing directors

(Aggarwal, Dahiya, & Prabhala, 2019; Cai, Garner, & Walkling, 2009),

making acquisitions (Becht, Polo, & Rossi, 2016 Li, Liu, & Wu, 2018),

deciding equity issuances (Holderness, 2018), and determining execu-

tive pay (Stathopoulos & Voulgaris, 2016a, 2016b).

Overall, prior studies have provided evidence to support the view

of the effectiveness of shareholder voting. An essential prerequisite

to support this view is that corporate voting is a fair process that is

not systematically biased in favor of management (Bach & Metzger,

2019). However, in developed countries, managers often intervene

in the voting process and jawbone shareholders into supporting them

(Pound, 1988). Listokin (2008) found that in votes for management‐

sponsored proposals, management was much more likely to win by a

small margin than lose by a small margin. Bach and Metzger (2019)

reported that management was much more likely to win by a small

margin in shareholder‐sponsored proposals as well. One action

Received: 13 April 2018 Revised: 30 July 2019 Accepted: 1 August 2019

DOI: 10.1111/corg.12303

Corp Govern Int Rev. 2020;28:69–87. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg

69

management can take to win votes is to ask connected shareholders

to vote for the proposals (Calluzzo & Kedia, 2019; Davis & Kim,

2007). These results suggest that management in U.S. firms can take

actions to win if they strongly want to win. Shleifer & Vishny (1997)

asserted that in countries with weak investor protections,

1

share-

holder voting rights have been violated more flagrantly. Therefore,

management in these countries may take many actions to affect

shareholders' voting decisions. However, despite these concerns,

there is almost no empirical evidence to support the claim that corpo-

rate voting is biased in favor of management.

In our study, we examine the voting decisions of large shareholders

and institutional investors

2

in approving nontradable shareholders'

(NTS'; i.e., controlling shareholders') proposals during China's recent

split share structure reform (SSSR). Under the SSSR, NTS offer com-

pensation shares (and sometimes other commitments) to tradable

shareholders (TS) to obtain liquidity rights; therefore, the conflict of

interest between NTS and TS is obvious.

3

All else remaining equal,

NTS prefer to pay lower compensation, whereas TS prefer to receive

higher compensation. In addition, SSSR requires separate approval

from NTS and TS; as such, TS have substantial power to reject low‐

compensation proposals. Whereas prior studies have only related the

ownership of different types of investors to voting outcomes (e.g.,

Brickley et al., 1988; Brickley, Lease, & Smith, 1994), our unique

dataset enables us to directly observe voting decisions by different

types of large shareholders. Per the SSSR, firms are required to dis-

close detailed information about shareholder attendance and voting

results, including the identities and votes of the top 10 attending

investors. Therefore, our data enable us to compare voting decisions

across shareholder groups, including large versus small investors, insti-

tutional versus individual investors, and across types of institutional

investors.

We develop an insider intervention hypothesis to explain how

investor size and investor type affect voting behavior and outcomes.

Under the insider intervention hypothesis, insiders (managers or

NTS) will take several measures to intervene in the voting process

and jawbone large shareholders and institutional investors into

supporting them. We provide three specific arguments—pressure sen-

sitivity, collusion, and communication cost—to explain how insiders'

intervention affects shareholders' voting decisions. According to the

pressure sensitivity argument, institutional investors who are more

sensitive to the pressure from insiders or the government are more

likely to vote for management proposals. According to the collusion

argument, insiders will collude with fewer large shareholders to secure

two‐thirds favorable votes in the case of SSSR because it incurs lower

collusion costs. And according to the communication argument,

insiders communicate more with larger shareholders to support them

because it is cheaper to communicate with several larger shareholders.

To test our hypotheses, we use detailed voting data from the SSSR

to compare voting decisions between shareholder groups. Our main

results are as follows: (a) Large shareholders are significantly less likely

to vote against compensation proposals than small shareholders; and

(b) institutional investors, especially mutual funds (the largest institu-

tional investors in China), are significantly less likely to vote against

proposals than individual investors. These results hold after controlling

for compensation level and other firm‐specific characteristics. Our

findings also hold when using shareholder‐level data and controlling

for firm fixed effects, which can alleviate endogeneity concerns

around missing variables for firm characteristics. Our evidence is con-

sistent with the insider intervention hypothesis—that managers inter-

vene in the voting process and influence voting decisions of large

shareholders and institutional investors.

However, the above results may also be driven by two alternative

explanations: The first is that large shareholders and institutional

investors prefer exerting a monitoring role before voting; the second

is that large shareholders and institutional investors are more sophisti-

cated investors and are more likely to make sensible voting decisions

than small individual investors. We provide additional evidence to rule

out these two explanations. We find that large shareholders and insti-

tutional investors are negatively related to final compensation and not

related to compensation changes in the negotiation stage, suggesting

that they do not play monitoring roles in the compensation‐setting

stage. We also find that large shareholders and institutional investors

are less likely to vote against compensation proposals even when

the compensation is unfavorable to TS, inconsistent with the alterna-

tive explanation that they are more sensible. Large shareholders and

institutional investors are also less likely to vote against proposals in

samples with a low historic stock performance, inconsistent with the

explanation that individual investors are more likely to vote against

proposals because they demand compensation for their historic losses.

Next, we provide preliminary evidence for our three arguments,

although we realize it is difficult to separate them. Evidence consistent

with the pressure sensitivity argument includes the following: (a) in

firms with favorable compensation (i.e., those less likely to involve col-

lusion), large institutional investors remain less likely to vote against

proposals than large individual investors (assuming large individuals

and institutions face similar communication costs); and (b) funds inves-

tors are less likely to vote against proposals than other, more indepen-

dent institutional investors. Findings consistent with the collusion

argument are as follows: (a) within the top 10 individuals attending

shareholders, the top 5 individual investors are less likely to vote

against proposals than the top 6 to 10 investors (assuming individuals

are not sensitive to political pressure and the top 10 investors face

similar communication costs); and (b) large institutional investors are

significantly less likely to vote against proposals and are significantly

positively associated with information leakage before public

announcement of the SSSR. Evidence consistent with the communica-

tion argument is that in firms with no institutional investors (i.e., those

less likely to suffer from pressure) and with favorable compensation

(i.e., those less likely to involve collusion), large investors remain less

likely to vote against proposals than small investors. Nevertheless,

these results should be interpreted with caution because such evi-

dence is indirect.

Our paper contributes to the literature in several ways. First, we

extend the strand of literature on shareholder voting. Whereas prior

studies have shown that shareholder voting is important in both man-

agement proposals and shareholder proposals (e.g., Aggarwal et al.,

SONG ET AL.

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