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Commentary: Alternative Models of Voting for Institutional Shareholders

A recent commentary posted on the Harvard Law School Forum on Corporate Governance and Financial Regulation discusses the current model of voting by institutional shareholders and possible alternatives to this model.  The author believes that institutional shareholders currently vote in a formulaic manner that doesn't take into account the particular circumstances of each portfolio company.  He states that although this model is cost effective to institutional shareholders, it does not necessarily result in good corporate governance or create shareholder value.  As an alternative, he discusses three voting paradigms that could replace the current model:

(1)    The first alternative would be to reduce the number and frequency of shareholder votes.  The author acknowledged that this would require a radical change to current notions of corporate governance, such as eliminating annual elections of directors and other policies intended to increase accountability to shareholders.

(2)    The second proposed alternative would be to force institutional shareholders to evaluate votes on a case-by-case basis with the involvement of investment decision making personnel. The author believes that this alternative would be costly and therefore new regulations or a stricter application of fiduciary standards would be needed to implement it.

(3)    The third alternative rejects the commonly held belief that institutional shareholders have a duty to vote all portfolio shares on all matters.  Instead, the author proposes that institutional shareholders make an initial cost-benefit analysis of whether more value would be created by voting than not voting.  Costs to be considered would include the shareholders' costs in making a vote determination and the costs imposed on portfolio companies in dealing with corporate governance activism. Under this paradigm, the only time an institutional shareholder would need to determine how to vote is when they have already determined that voting is economically preferable to not voting.  The author suggests that in situations where the institutional shareholder decides it is not cost-effective to vote, that the institutional shareholder vote with management.