NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does Confidential Proxy Voting Matter?

"The adoption of confidential voting procedures had no significant impact on subsequent voting outcomes."

Confidential voting in corporate proxies is a principal recommendation of activist institutional investors, such as TIAA-CREF, and is the first principle listed among the "core corporate governance policies" of the Council of Institutional Investors. The rationale behind these recommendations is that shareholders with conflicts of interest will not feel constrained to vote with management if it cannot be determined how they voted. Confidential voting also should limit re-solicitation efforts that occur when it becomes apparent that votes are not going in favor of management. Proponents of this view believe that those most vulnerable to re-solicitation efforts are shareholder entities, such as financial services firms, that have a conflict of interest.

In Does Confidential Proxy Voting Matter? (NBER Working Paper No. 9126), author Roberta Romano examines the impact of the adoption of confidential voting on 130 corporations from 1986-98. She finds that the adoption of confidential voting procedures had no significant impact on subsequent voting outcomes. Support for shareholder proposals did not increase and support for management proposals did not decrease after adoption of the confidential voting procedure. Specifically, financial institutions, whose votes could be construed as being constrained because of conflicts of interest, do not change their level of support for management proposals once confidential voting is enacted.

Romano also finds that stock value is not changed by adoption of these procedures. This may explain why so many firms voluntarily adopt confidential voting procedures; it apparently does not matter in terms of voting outcomes or stock performance, results that are similar to research conducted on three other categories of activist investor proposals, namely defensive tactics, board independence, and executive compensation. Romano concludes that investor initiatives aimed at confidential voting are not a fruitful allocation of investors' resources.

-- Les Picker


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