With the number of shareholder proposals related to environmental and social issues on the rise, boards and management have a greater need to understand the factors that influence how investors vote on those proposals. A new study by Leting Liu, Ph.D. student at the Rotman School of Management; Aida Wahid, Associate Professor of Accounting at Rotman and Johnston Centre Research Fellow; and Xijiang Su, Assistant Professor of Accounting at Schulich School of Business finds that how these arguments are framed matters, as proposals that lean more heavily on financial arguments receive higher support than those relying on non-financial arguments.
If shareholder proposals receive significant investor support, they influence board decision making. Findings from a new working paper examining voter support for shareholder proposals on environmental and social (E&S) issues, by Leting Liu, a Ph.D. student at Rotman School of Management, Aida Wahid, Associate Professor of Accounting at Rotman, and Xijiang Su, Assistant Professor of Accounting at Schulich School of Business, reveal that investor support depends on how a proposal’s argument is framed — as much as the specific ask.
Their study, titled “Value or Values: The Effect of Environmental and Social Proposal Framing on Voting Outcomes,” examined whether the framing of arguments to support E&S shareholder proposals and board responses to those proposals affects subsequent investor voting. The results clearly show that, yes, framing matters.
Specifically, Liu, Wahid and Su found that “value” trumps “values.” In other words, proposals that rely more heavily on financial arguments receive higher shareholder voting support than those that rely on non-financial arguments.
“That’s not to say that these proposals will necessarily pass,” says Liu, who was interviewed along with Professor Wahid for this Research Spotlight, “but the percentage of the shareholder voting base that votes in favour tends to be higher than for proposals that lean on more values-oriented arguments.”
This result has obvious implications for proposal writers seeking voting support. But it is also strategically instructive for boards and management in guiding how they opt to respond to specific proposals when they’re received. “Understanding that the way a proposal is framed may impact how other investors view it, directors and management can tell prior to a vote if a proposal is more likely to convince other investors and plan their response accordingly,” says Wahid.
Investor motivations under scrutiny
The study builds on existing literature examining how institutional investor voting support varies between environmental, social and governance proposals. It also responds to a growing push within the field to tease out the differences in voting patterns within each of those categories, with the goal of better understanding “how investors motivated by value differ from investors motivated by values,” as stated by Laura Starks, Professor of Finance at the University of Texas at Austin, in her 2023 presidential address to the American Finance Association.
Current political trends also make the research timely, the authors write, as it comes at a time “when there is a clear ideological divide in attitudes towards value and values between political groups in the United States.”
To conduct the study, Liu, Wahid and Su obtained all E&S shareholder proposals issued for six proxy seasons (2016 through 2021, obtained from Institutional Shareholder Services Voting Analytics). Removing a handful that didn’t receive “against” recommendations from management as well as those with missing textual data and control variables left 843 unique proposals for analysis. The three then used a pre-trained, natural language processing model to classify the proposals and responses by the degree to which each appealed to financial (value-driven) or non-financial (values-driven) interests. Proposals were scored on a continuous scale, with stronger “values” framing scoring closer to 0 and stronger “value” framing closer to 1.
Framing’s influence highlighted
The top-line result, as noted: proposals mainly framed using financial arguments were associated with greater support relative to those framed more with non-financial arguments. (Specifically, a one standard deviation increase in value framing was associated with a more than 1% increase in the level of support.) However, additional cross-sectional tests revealed some varying details:
- Different framing only led to different levels of support at firms with above-median ESG performance records;
- Financially oriented arguments in proposals received greater support in Republican states while ideological framing of proposals and board recommendations had no significant impact on voting in Democrat-led states;
- The effect of financial arguments drawing more voter support was much more pronounced when the proposals were backed by institutional investors rather than individuals, and when the proposals call for substantive changes to company practices rather than mere changes in how current practices are reported;
- Actively managed ESG funds were more likely to support values-oriented proposals than either passive index ESG funds or non-ESG funds.
Liu finds all of these outcomes instructive. For example, while ESG funds as a class are associated with values-based ideologies, when actively managed ESG funds respond to proposals differently it suggests that having someone reading these proposals heightens the framing’s influence. Likewise, given the recent rise of Republican-led anti-ESG backlash, “it follows that areas associated with those ideologies also tend to be where we find strong support for financially oriented arguments.”
Wahid acknowledges that while there’s some intuitive sense to these outcomes, the overall extent to which conceptual framing and ideologies influence voting behaviour is still somewhat surprising. “In accounting and finance, a lot of people will say that investors are very rational and they understand everything. So really, framing shouldn’t matter. But what we’ve found is that it does.”
This article was originally published on the Johnston Centre for Corporate Governance Innovation’s website on Nov. 21, 2024. Photo courtesy of the Johnston Centre.