Retail Shareholder Participation in Voting – US study

Cliff Weight, ShareSoc Director reviews Retail Shareholder Participation in the Proxy Process: Monitoring, Engagement, and Voting: Working Paper N° 637/2019 November 2019: By Alon Brav, Matthew D. Cain, Jonathon Zytnick

This is a US study on US retail shareholders. Those with a statistical bent and a love of algebra will find the study fascinating and enjoyable. Others may find it less so! However, it does have important conclusions, which I summarise below. I think we can extrapolate that these conclusions probably also apply to the UK Stockmarket and UK retail shareholders.

The study’s results demonstrate that retail shareholders can potentially serve an important role in the monitoring and governance of firms, and one that institutional investors may not perfectly replicate. They conclude that:

1. the common caricature of retail shareholders, as uninformed and apathetic, is wrong; and that
2. retail investors can and do provide meaningful feedback to firms through the voting process.

They study retail shareholder voting using a detailed and nearly universal sample of anonymized retail shareholder voting records over the period 2015-2017. They find that retail shareholders are an influential voting bloc. Consistent with a monitoring role, retail voters are more likely to turn out for the securities in their portfolio that have underperformed, for ballots that include contested proposals, and for firms comprising the largest stakes in their portfolio. Retail shareholders with large stock portfolios and low opportunity costs are most likely to turn out.

In regard to retail voting decisions, they find high sensitivity to recent poor performance, but far lower sensitivity to ISS recommendations than that of large mutual funds. On Say-On-Pay resolutions retail shareholders are 4-times more likely to vote against. They vote 30% against on average compared to just 8% against from institutional investors.

Retail shareholders can be divided into two blocs. The first are highly influential large stakeholders, who turn out at high rates and strongly oppose shareholder proposals. The second are the more populous small stakeholders, who turn out at lower rates and show higher support for shareholder proposals. Retail shareholders are more influential at smaller firms, where they hold a larger proportionate share, their turnout is higher, and their support for management is lower.

Their evidence provides support for the idea that retail shareholders can and do utilise their voting power as a means to monitor firms and communicate with incumbent boards and managements.

Implications for asset managers

The study shows that smaller shareholders are more likely to vote against management than asset/fund Managers. Hence, I conclude that if asset/fund managers sought and listened to the views of beneficial owners of their funds (investment trusts) and individual investors in the funds they manage (OEICS and pension funds), they would vote against management more often. There is a problem of stewardship here. First asset/fund managers are ignoring the preferences of their investors and customers. Second, asset/fund managers do not ask the voting preferences of investors/customers. With the rapid growth of ESG investing, such asset/fund managers will find their approach is no longer tenable.

Next steps

I shall write to the Law Commission, highlighting this important US study, which has parallels in the UK, and its useful commentary on voting problems caused by the way shares are held via chains of intermediaries.

I shall also write to David Stubbs, Head of Stewardship at the FRC making him aware of this important US study, which has parallels in the UK.

You can obtain the paper here