Strategic Proxy Voting

Despite its importance, voting in the elections of corporate boards of directors remains relatively unexplored in the empirical literature. We construct a comprehensive dataset of 3,204,890 mutual fund votes in director elections that took place between July 2003 and June 2005. We find substantial systematic heterogeneity in fund voting patterns: some mutual funds are management friendly, and others are less so. We construct and estimate a model of voting in which mutual funds impose externalities on each other: the cost of opposing management decreases when other funds oppose it as well. We exploit fund heterogeneity to overcome the endogeneity problem induced by unobserved firm quality. We estimate all parameters in the voting model and show that strategic interaction between funds is economically and statistically significant. We then construct counterfactuals to compute the equilibrium distribution of votes under alternative specifications of strategic externalities. We use the counterfactuals to show that implementing confidential voting in board of director elections has potentially large consequences on the equilibrium number of funds withholding their votes from directors.