evidence from institutional investors and proxy voting in korea

CORPORATE GOVERNANCE AND FIRM PERFORMANCE: EVIDENCE

FROM INSTITUTIONAL INVESTORS AND PROXY VOTING IN KOREA

SANGLAE LEE

Department of Business Administration, Chonbuk National University

Jeonju 561-756, South Korea

[email protected]

Received March 2014; Accepted July 2014

Abstract

This paper investigates the role of institutional investors as corporate monitors by

analyzing the relationship between proxy voting decisions and firm performance in Korea. We

find that institutional investors support more proposals when firm performance is strong. They

are more likely to support the proposals when ownership of the blockholder and foreign

investors are high. It suggests that institutional investors monitor firms through active voting on

the proposals relating to performance. On the contrary, National Pension Serviceʼ affirmative

voting decisions is negatively related to firm performance. Furthermore, we also find that

institutional investorsʼ voting is significantly related to the long-term performance and impact

the pass of proposal and they more carefully monitor financially distressed firm.

Keywords: proxy voting, firm performance, corporate governance, institutional investors,

National Pension Service

JEL Classification Codes: G23, G30, G32

I. Introduction

Institutional arrangements have been established in order to improve the corporate

governance ever since the financial crisis in Korea. For example, the audit committee and

outside director system have strengthened the firmʼs internal supervision. In addition, domestic

institutional investors substantially have begun to exercise their voting rights beyond a friendly

passive ownership, following the revision of the Korea Securities Investment Trust Business

Act in 1998.

According to the Korea Exchange, the ownership of institutional investors has risen

steadily since 2000; it was increased by 20% in 2007. On the other hand, they voted on 2,502

proposals at the annual general meeting in 2011, which has been increased by 41.25%

compared to 1, 463 proposals in 2006. However, a few studies have examined the effect of

institutional investorsʼ voting on operating performance. Therefore, it is interesting to see

whether domestic institutional investors fulfill the role as monitors through the exercise of

voting rights in the field of corporate governance. This paper investigates how institutional

Hitotsubashi Journal of Economics 56 (2015), pp.35-53. Ⓒ Hitotsubashi University

investors vote and analyze the relationship between voting decisions and firm performance in

Korea.

In general, it will be easy for institutional investors, compared to individual investors, to

monitor management because they have large shares and more information. They can also save

money through the form of centralized decision-making. Hence, monitoring of institutional

investors engenders the following benefits. First, it increases the transparency of corporate

management through disclosing accurate information to investors. Second, it facilitates the

establishment of an effective corporate governance system. Third, it improves the efficiency of a

professional management system by objectively evaluating management ability and firm

performance. Despite these benefits, however, all of the previous empirical studies of

institutional investors did not report improvement in firm performance1.

Institutional investors can monitor management in the two ways. One is to sell the shares

of under-performance firms. Admati and Pfleiderer (2009) verify that share block sales bring

positive change in a firmʼs strategy. Although it has an advantage of being less expensive

compared to other methods, a larger shareholder may face greater liquidity constraints. The

other is voting at the general meeting of shareholders or privately negotiating with the manager.

It will be beneficial for investors who have difficulty exiting the market by selling shares to

improve management efficiency. Shleifer and Vishny (1986) suggest that block shareholders

have an incentive to attain the information and monitor the manager, because they can take

more benefits compared to the minority shareholders through monitoring. Moreover, institu-

tional investors who have a fiduciary duty will be considered to closely monitor the

management.

Mutual funds had sold their shares in the market, according to the Wall Street Rule until

the 1970s; however, by increasing the number of shares, they have begun to have an effect on

management as a shareholder rather than simple sales since the 1980s in the U.S. In particular,

the U.S. Securities and Exchange Commission (SEC) required mutual funds to disclose how

they voted on the proxy proposals presented at the shareholder meetings starting in July 2003.

McCahery et al. (2009) report that institutional investors are willing to engage in shareholder

activism and corporate governance is important to the investment decisions.

Existing domestic studies regarding the monitoring effect of outside investors have mainly

focused on foreign investors. Baek et al. (2004) find that firms with larger equity ownership by

foreign investors experience a smaller reduction in their share value during Korean financial

crisis. Kim et al. (2010) show that ownership of foreigner is negatively associated with firmsʼ

ownership concentration but it is positively related to firmsʼ efforts for better corporate

governance. Moreover, Jeon and Ryoo (2013) provide evidence that foreign investors affect theboard structure by pushing for an increase in board independence. However, because these

studies analyze the relationship between institutional investorsʼ ownership and firm value, it is

difficult to know whether institutional investorsʼ activity improve firm value or if they simply

select the high performance firm with more information2.

Institutional investors can enhance firm value by actively exercising voting rights,

HITOTSUBASHI JOURNAL OF ECONOMICS [June36

1 Agrawal and Knoeber (1996) find that corporate governance does not have a significant correlation with

institutional investors.2 Bae et al. (2011) suggest that the superior performance of foreigners is attributed to their ability to discern stocks

with good versus bad prospects in Korean stock market.

identifying the undervalued firm or getting an objective profit through monitoring management

as blockholders. This paper investigates how domestic institutional investors vote and verifies

the relationship between voting decisions and firm characteristics, especially firm performance.

This analysis is expected to offer more clear evidence on the monitoring role of institutional

investors in Korea.

The remainder of the paper is organized as follows. In Section II, we discuss the related

literature. In Section III, we describe the research design and methods. In Section IV, we offerinstitutional investorsʼ voting patterns and show the empirical results. In Section V, we examine

National Pension Serviceʼ voting decision. In Section VI, we explore further empirical issues.

We conclude in Section VII.

II. Related Literature

One of the characteristics of public corporation is the separation of ownership and control.

The owners (shareholders) cannot directly know what the managers do. Managers obviously

have more information than the investors. Moreover, managers have an incentive to get private

benefit, although it depreciates the shareholdersʼ value. The board of directors, as an internal

mechanism, is constituted to monitor the managers, and as an external mechanism, to establish

the laws, regulations and market discipline. However, the boards of directors in the modern

corporation sometimes fail to represent the shareholders. The more dispersed are the small

shareholders, the higher is the monitoring cost, like a free-rider problem. This problem would

be mitigated by institutional investors who have an incentive to monitor management.

Carleton et al. (1998) empirically analyze the monitoring performance of the Teachers

Insurance Annuity Association‒College Retirement Equities Fund (TIAA-CREF). They verify

that TIAA-CREF is able to reach agreements with targeted firms more than 95 percent of the

time. Helwege et al. (2012) find that exit is unlikely to be a dominant force in management

discipline going forward, whereas institutional activism will likely continue to play an

important role. Thus, activists pursue strategies designed to bring about change of under-

performing firms. However, Smith (1996) reports that shareholder wealth increases for firms

that adopt or settle the proposal of the California Government Employees Pension (CalPERs),

but decreases for firms that resist. Wahal (1996) investigates the public pension fund activity

and documents and states that governance-related proxy proposal is not a significant long-term

performance.

On the other hand, Burns et al. (2010) find that misreporting is associated with institutions

which are generally less likely to engage in costly monitoring, but in which the effect dissipateswhen concentration among those institutions is sufficiently high to increase monitoring. Hadani

et al. (2011) indicate that the number of shareholder proposals received by firms is positively

related to subsequent earnings management; however, monitoring by the largest institutional

owners is negatively related to earnings management.

In addition, the SEC began requiring a disclosure of fund voting decisions beginning in

2004. The new mandatory has generated many studies to verify mutual fund voting behavior.

Ng et al. (2009) investigate whether mutual fundsʼ voting is related to prior firm performance.

They find that mutual funds support management (shareholder) proposals less (more) when

prior firm performance has been weak, describe that mutual funds attempt to monitor firm

CORPORATE GOVERNANCE AND FIRM PERFORMANCE:2015] 37

management and also show some accountability to their investors. Davis and Kim (2007) find

no evidence that client ties and mutual fundsʼ ownership are related. Morgan et al. (2011)

examine voting decisions made by mutual funds and find that mutual funds vote more

affirmatively for potentially wealth-increasing proposals and fundsʼ voting approval rates for

these beneficial resolutions, which are significantly higher than those of other investors.

The prior literature shows relatively weak corporate governance in Korea. Joh (2003)

examines whether a firmʼs ownership structure affected its performance before the 1997 Korean

financial crisis. He argues that weak corporate governance systems allowed poorly managed

firms to stay in the market and resulted in inefficiency of resource allocation despite low firm

profitability for many years. Baek et al. (2004) find that domestic firms with concentrated

ownership by controlling family shareholders experienced a larger drop in the value of their

equity during the crisis. They also demonstrate that institutional investors serve as trading

partners, although they hold a large proportion of voting rights. However, Solomon et al. (2002)

research the role of Korean institutional investors after crisis and show that institutional

investorsʼ power increasing and they are taking on an active role in corporate governance

reform. Kim et al. (2010) argue that foreign investors allocate a disproportionately higher share

of their funds to the firms with better corporate governance. And domestic investors care less

about corporate governance than their foreign counterparts. Jeon et al. (2011) find that foreign

investors lead firms to pay more dividends, but domestic institutions do not have any significant

effect on payout policy. They suggest that foreign investors are likely to monitor management

faithfully, due to their application of more established global standards and practices emanating

from their revealed preference of a longer-term investment philosophy.

We regard that foreign investors positively influence firm performance by monitoring

management, but the role of institutional investors as monitors is unclear in Korea.

Furthermore, there are few studies on domestic institutional investorsʼ proxy voting with the

recent growing interest.

III. Study Design

This paper examines how domestic institutional investors and the National Pension Service

(NPS) vote and empirically analyze whether their voting is related to firm characteristics3.

Institutional investors as block shareholders, unlike the minor shareholders, will be equipped

with monitoring capabilities. Further, institutional investors voting decisions may significantly

affect the management. The logistic regression model is set as follows to verify the role of

institutional investors as monitors.


3 There is no direct regulatory forcing to disclose the institutional investorsʼ voting in Korea. Institutional investors

have actively participated in the managementʼs decision and voted to protect the interests of customers, following the

revision of Securities Investment Trust Business Act in 1998. However, it is beneficial for minor institutional investors

to sell their shares instead of undertaking costly monitoring. Then, the Capital Market and Financial Investment

Business Act rules the standards that shareholders more than 5% or 10 billion have to disclose how they vote using the

voting guidelines at the annual and special meetings in February 2009. Thus, this paper examines institutional investors

voting decisions after 2009.

Yi, t=αi, t+Returnit1+Log(size)it1 +BMit1+Leverageit1+Ownerit1

+Foreignerit1+Investorit1+Stcok Listingit1+εit1 (1)

The dependent variable Y equals one if the institutional investors votes in favor of a

proposal and zero otherwise. The fewer affirmative votes for a given proposal related to

managementʼs assessment such as director election and limit executive awards, signal that

institutional investors have been dissatisfied with firm performance. This may press manage-

ment to improve firm value. Hence, the relation between institutional investorsʼ approval rate

and firm performance will be positive. Ng et al. (2009) describe that proxy voting accounting

for firm performance implies the investorʼ monitoring effort. Stock returns (Return) is a proxy

variable representing firm performance. It is the market adjusted buy-and-hold abnormal returns

for the previous year.

Other firm characteristics variables are included in order to control the influence on voting

outcomes. Firm size is measured by the log of the total assets. It will be beneficial for

institutional investors to sell shares if they are difficult to get management information;

however, the smaller firm size, institutional investors may get more private information through

negotiations with the management. We expect that the firm size is negatively related to

affirmative voting decision. BM is the ratio of book value to market value of common equity.

Leverage is the total leverage divided by the total assets. Ownership (Owner) is a proxy

variable for controlling shareholders, which is measured by the percentage shares held by the

largest shareholder and related parties4. Foreign ownership (Foreign) is measured by the

percentage shares held by registered foreigners and foreign institutions. As the ownership of the

controlling shareholders becomes higher, the influence of institutional investors is bound to be

relatively less. Ownership will be positively related to institutional investorsʼ approval rate.

Previous studies show that the relationship between foreign investorsʼ ownership and firm value

is significantly positive (Kim et al., 2010; Jeon and Ryoo, 2013). This paper is also expected to

find a positive relationship between foreign investorsʼ ownership and institutional investorsʼ

approval rate. Institutional investor ownership (Investor) is percent of the firmʼs stock owned by

institutional investor. It will be more beneficial for larger ownership to undertake monitoring in

enhancing the governance mechanism, instead of sell their shares in the market, since their gain

from monitoring is likely to exceed the cost. Stock listing is a dummy variable, which takes the

value one if the stock listed on the Korea Stock Exchange and zero otherwise from 2008

through 2011. Exchange-listed firms disclose more transparent information to satisfy the

demanding conditions and therefore these firms are expected to receive more support.

IV. Empirical Analysis

The sample in this paper includes all manufacturing companies with a December fiscal

year and listed on the Korea Stock Exchange (KSE) and Korea Securities Dealers Automated

Quotation (KOSDAQ) during the period 2009 to 2011. We hand-collect proposal and

institutional investorsʼ voting data from KRX KIND (kind.krx.co.kr) and National Pension


4 Baek et al. (2004) report that controlling shareholders hold low ownership but maintain a high level of control

through the pyramid ownership structure in the Korean market.

Service (www.nps.or.kr). Financial data, stock price and ownership of shareholders are

collected from the KIS-Value.

1. Characteristics of Sample Firms and Institutional Investorsʼ Voting Decisions

Shareholders are required to disclose their voting until 5 days before the general meeting

in Korea. Institutional investors vote on 3342 proposals at 724 annual and special meetings for

692 firms between 2009 and 2011.

Table 1 describes the statistics of the sample firms. Stock return has a diverse range, and

the average of stock return is 1.97%. The average of firm size is 23,643 billion won, and the

average ratio of book to market value is 0.83 lower than one. Leverage is 39.14% on average.

The average of controlling shareholdersʼ ownership and foreign investorsʼ ownership is 34.52%

and 11.90%, respectively. The control power of foreigners seems to be limited, because the

percentage shares of foreigners is relatively small compared to that of the controlling

shareholders. The average of institutional investorsʼ ownership is 5.98%.

Table 2 presents the distribution of proposals and voting outcomes by institutional

investors. Institutional investors make 17,274 voting decisions and voted affirmatively 98.32%.

Among the various proposals, approve of merger/division (84.88%) is the smallest, following

the others (96.27%) and auditor elections (92.92%). Institutional investors vote against 171

proposals in which 100 proposals (60%) include auditor elections, director elections and audit

committee elections and 16 proposals are approve of merger/division. The result suggests that

institutional investors vote more carefully on the merger/division proposals, which directly

affect the short-time performance, although they seem to favorably vote on the management.

2. Institutional Investor Voting and Firm Characteristics

This subsection examines whether voting decisions of institutional investors are related to


107,179

1.97 1.55

Size (10 billion)

-18.93 25.97

Mean Median Minimum

Leverage (%)

BM

Investor (%)

Owner (%)

Maximum

Foreign (%)

34.52 33.78 5.08 75.86

39.14 39.59 0.16 96.79

0.84 0.82 0.10 2.73

2,364 354 16

This table presents the descriptive statistics of firm characteristics. The sample firm consists of a total of

692 manufacturing firms in the period 2009 to 2011. Return is the market adjusted buy-and-hold abnormal

returns for the previous year. Firm size is measured by the log of the total assets. BM is the ratio of book

value to market value of common equity. Leverage is the total leverage divided by the total assets.

Ownership (Owner) is a proxy for controlling shareholders, which is measured by the percentage shares

held by the largest shareholder and related parties. Foreign Ownership (Foreign) is measured by the

percentage shares held by registered foreigners and foreign institutions. Institutional investor ownership

(Investor) is percent of the firmʼs stock owned by institutional investor.

5.98 4.20 0.00 43.26

11.90 7.35 0.00 87.06

TABLE 1. DESCRIPTIVE STATISTICS

Return (%)

prior firm performance. If the relationship between institutional investorsʼ approval and firm

performance is positive, it can be concluded that institutional investors support the proposals

when firm performance has been strong. Table 3 reports the logistic regression results. The

dependent variable is whether the institutional investors vote affirmatively for proposals.

Shleifer and Vishny (1986) prove in theory, that the large shareholders have greater incentives

to be active monitors. Ashraf and Jayaraman (2007) find that firm performance is positively

related to affirmative fund voting decisions. It shows that the relation between institutional

investorsʼ approval and firm performance is positive in the full sample regression, although it is

not significant.


15

30

Withheld

Alteration of memorandum

Limit auditors awards

Expense stock option

Grant stock option

Executive severance policy

Approve of merger/division

Election of audit committee

Election of directors

Total

Election of auditors

The others

Limit directors awards

Abstain Total % affirmative votesAgainst

116

0

0

0

0

0

2

32

1

Proposal

7

29

1,510 98.94%

15

1 3,405 97.86%

This table presents institutional investors voting for shareholder meetings occurring from 2009 to 2011.

Institutional investors made 17,274 voting decisions for 692 firms. The other proposals include dismissal

outside directors, asset transactions, statement of retained earnings, etc.

0 2,522 98.85%

1 3,711 98.76%

For

100%

14

0 1,211 99.59%

1 3,694 98.70%

1 706 92.92%

TABLE 2. INSTITUTIONAL INVESTOR VOTING

3,665

0

43

0 86 84.88%

0 188 98.94%

0 104 98.08%

2,493

0

Approve of financial statements

86

656 48

1,494 9

4 17,274 98.32%

3,332

0 51 86.27%

102 2

86 0

1,206 3

3,646 15

16,983 171

44 7

73 13

186 2

This table presents the logistic regression results. The dependent variable equals one if the institutional

investors votes in favor of a proposal and zero otherwise. The sample includes 17,274 voting decisions for

692 firms by institutional investor between 2009 and 2011. Independent variables are defined in Section

III. Adjusted pseudo R-squared is adjusted Nagelkerkeʼ R-squared. ***, ** and * indicate statistical

significance at the 1%, 5% 10% levels, respectively.

TABLE 3. INSTITUTIONAL INVESTOR VOTING AND FIRM CHARACTERISTICS

0.015

6.445

Return(%)

0.000 ***

Owner (%)

Coefficients P-value

Investor (%)

Foreign (%)

# observations

Stock Listing

Adjusted pseudo R2

0.018

0.626 0.003 **

Leverage (%)

-0.031 0.017 **

***

0.025 0.000 ***

0.002

2.684 0.124

0.000-0.156Log (firm size)

0.479-0.124BM

***

17,274

0.000

0.105

***

Intercept

On the other hand, Morgan et al. (2011) indicate that the voting outcomes depend on the

characteristics of the proposal. In addition, the commercial law requires that stockholders shall

not exercise their voting rights for those stocks exceeding 3% in the appointment or dismissal

of a member of the audit committee. Hence, we examine again the institutional investorsʼ

voting decisions as the characteristics of proposal in the next subsection.

Firm size is negatively and significantly related to affirmative voting decisions. It consists

of expectations. Gordon and Pound (1993) also find that voting results on shareholder-

sponsored proposals are positively associated with firm size. B-to-M ratio is negatively related

to affirmative voting, but the coefficient of leverage is significantly positive.

Look at the relationship between ownership structures; the ownership of controlling

shareholders is positively associated with institutional investorsʼ approval. As insider equity

ownership increases, the interest of managers will closely align with the interests of

shareholders (Jensen and Meckling, 1976). Then, institutional investors should respond

affirmatively to the proposals. In contrast, if the largest shareholder, who owns a substantial

fraction of the firm shares, colludes with a manager, she is willing to pursue private benefits at

the expense of shareholder wealth (Morck et al., 1988), and the response of institutional

investors will be changed. This result is consistent with the former. The coefficient of foreign

ownership is significant and positive. It supports the existing studies which foreign ownership

has a significant effect on firm value and foreign investor monitor management (Kim et al.,

2010; Jeon and Ryoo, 2013; Jeon et al., 2011). Institutional investors with higher ownership

holdings in the firm are more likely to vote against proposals. This implies that institutional

investors undertake a complementary monitoring role. The coefficient of stock listing is positive

and significant, suggesting that listed firms are more likely to get support.

The overall results provide some evidence that institutional investors carefully monitor

firm performance. In subsequent subsections, we provide more tests to verify whether the

voting-performance link persists.

3. Institutional Investors Voting for Types of Proposals

This subsection investigates whether the voting patterns of institutional investors are

affected by the proposal types, because the voting outcomes depend on the characteristics of the

proposal, as mentioned above. Table 4 shows the logistic regression results for each proposal5.

The coefficient of Return is positive and statistically significant for auditor elections and

alteration of the memorandum. The proposals, such as auditor elections, alteration of the

memorandum, and approve of merger/ division, are applied more strict standards for passing6.

So, institutional investors may actively vote against these proposals to penalize management

when firm performance is poor. It suggests that institutional investors affirmatively vote when

firm performance has been strong. The board of directors is expected to monitor the

management instead of the shareholders who cannot closely observe the managersʼ behavior and

therefore it is responsible for internal governance. The lower institutional investorsʼ support


5 The proposal of expense stock option is excluded, since institutional investors do not vote against.6 Under the Korea Commercial Code, especially, any shareholder who holds more than 3/100 of the total outstanding

shares, exclusive of non-voting shares, canʼt exercise his vote in respect of the shares in excess of the above limit, in

the election of auditors.


Foreign

Investor

Stock

Listing

Alterationofmem

orandum

Adj.

Pseudo

R2

#obs.

Lim

itdirec

tors

awards

Lim

itau

ditors

awards

Grantstock

option

Electionofau

dit

committee

Electionofdirec

tors

Theothers

Electionofau

ditors

Exec

utiveseveran

cepolicy

Approveofmerger/division

0.019b

(0.046)

0.028b

(0.044)

0.031a

(0.002)

-0.031

(0.274)

-1.867c

(0.089)

0.122

3711

Intercep

tReturn

Size

BM

Lev

erag

eOwner

-0.203

(0.295)

0.681

(0.296)

0.005

(0.652)

0.029b

(0.050)

0.058b

(0.022)

-0.019

(0.792)

1.150c

(0.083)

This

table

presents

thelogisticregressionresu

ltsfortypes

ofproposals.Thedep

enden

tvariable

equalsoneif

theinstitutional

investors

votesin

favorofaproposalan

dze

rootherwise.

Thesample

includes

17,274

voting

dec

isionsfor692firm

sby

institutional

investorbetwee

n2009

and

2011.Indep

enden

tvariablesaredefi

ned

inSec

tionIII.

P-valueis

reported

inparen

theses.Adjusted

pseudoR-squared

isad

justed

Nag

elkerkeʼ

R-

squared

.a,

ban

dcindicatestatistica

lsignifica

nce

atthe1%,5%

10%

levels,

resp

ectively.

0.121

2522

6.920b

(0.021)

-2.893

(0.569)

-0.112

(0.252)

0.459

(0.378)

1.483a

(0.000)

0.996

(0.763)

-0.102

(0.272)

-0.268

(0.473)

0.005

(0.472)

0.012

(0.215)

0.011

(0.244)

-0.016

(0.737)

1.483a

(0.000)

0.076

3405

TABLE4.

INSTIT

UTIO

NALIN

VESTOR

VOTIN

GFOR

EACH

PROPOSAL

6.453

(0.175)

8.462c

(0.094)

13.027

(0.998)

-7.688

(0.337)

0.240

(0.436)

0.820

(0.334)

0.015

(0.426)

0.012

(0.620)

0.069c

(0.067)

-0.068a

(0.002)

-8.334

(0.998)

0.203

1510

Approveoffinan

cial

statem

ents

0.415

(0.575)

0.164

3694

11.218a

(0.001)

9.331b

(0.029)

-0.408b

(0.004)

-0.146

(0.723)

0.020b

(0.040)

0.021c

(0.063)

0.020

(0.256)

-0.022

(0.571)

1.171b

(0.014)

0.149

706

0.006

(0.835)

0.032

(0.578)

-0.093

(0.439)

-0.583

(0.665)

0.084

1211

6.751b

(0.018)

0.777

(0.875)

-0.163c

(0.090)

0.333

(0.532)

0.009

(0.311)

0.044a

(0.002)

0.043a

(0.000)

-0.023

(0.527)

22.860

(0.988)

-13.189

(1.000)

-2.732

(0.996)

3.369

(0.985)

2.276

(0.999)

7.833

(0.997)

-45.065

(1.000)

0.985

104

-1.064

(0.934)

2.041

(0.859)

-0.186

(0.710)

0.464

(0.676)

0.035

(0.249)

-7.176

(0.773)

2.927

(0.879)

0.292

(0.786)

1.867

(0.677)

0.022

(0.702)

0.043

(0.555)

0.069

(0.613)

0.629

(0.487)

0.129

(0.953)

0.273

188

-58.174

(0.998)

56.084

(1.000)

0.867

51

2.038

(0.881)

0.512

(0.977)

-0.150

(0.791)

-1.398

(0.332)

8.941c

(0.082)

0.034

(0.352)

-0.087

(0.168)

0.478

(0.166)

2.439

(0.133)

0.529

86

160.547

(0.996)

-45.971

(1.000)

-79.735

(1.000)

-9.597

(0.999)

-0.366

(0.994)

-0.565

(0.973)

-4.399

(0.998)

3.001

(0.401)

105.790

(1.000)

level could imply that they were dissatisfied with the role of the board of directors. The

coefficient of Return is positive but not significant for director elections.

Firm size is negatively related to affirmative voting, but the coefficient of BM is

insignificant. We find that higher leverage is generally associated with more favorable votes. It

is consistent with the results of Table 3.

Larger ownership is associated with higher affirmative voting. It is contrast with the result

of Gordon and Pound (1993) that proposals more votes when the insider ownership is low.

Foreign investor is positive. It suggests that the role of institutional investors consist that of

foreign investors. The coefficient of investor and stock listing varies with types of proposals.

In summary, it is concluded that institutional investors fulfill their monitoring effort by

aggressively voting on proposals related to firm performance.

V. The National Pension Service Voting

1. Determinants of the National Pension Service voting

The National Pension Service (NPS) also has large shares and can influence management7.

NPSʼ voting decision has received a lot of attention these days, because NPS is gradually

expanding equity investment. However, the characteristics of NPS are somewhat different fromthose of institutional investors. For example, NPS might pursue activism strategies aimed at

boosting the performance of the stock market overall8. Therefore, it would be interesting to

examine how NPS votes and whether exercise of voting rights is influenced on the firmsʼ

characteristics.

Table 5 describes the NPS voting outcomes. NPS makes 2,338 voting decisions and votes

affirmatively on 91.57% of all proposals. At a glance, NPS seems to be aggressively voting

compared to institutional investors. Among the various proposals, NPS supports auditor

elections with an average of 69.93% of affirmative votes, following grant stock option (76.92%)

and alteration of memorandum (83.56%). NPS votes against 197 proposals in which 97

proposals (50%) include director elections and auditor elections. The main reasons for

opposition to the director elections or auditor elections are lack of attendance and management

independence. In conclusion, NPS voting patterns are similar to institutional investors for

director elections and auditor elections; however, the opposition rate of alteration of

memorandum is relatively high.

2. Further Empirical Results on NPS Voting

This subsection examines NPS voting related to firm characteristics and proposals types.

Table 6 reports the logistic regression results9. The dependent variable equals one if NPS votes


7 The National Pension Service has emerged as the third largest international public fund, surpassing KRW 420

trillion as of the end of 2013. The portion of public equity investment in domestic stock markets recorded 6.4% as of

2013.8 Monks (1997) suggests that public pension fund is susceptible to political pressure and invest in accordance with

the political nature rather than return on investment.9 The proposals of expense stock option and approve merger/division are excluded, since NPS do not vote against.

are in favor of a proposal and zero otherwise.

We find a significant negative relation between firm performance and voting approval in

the full sample regression. Furthermore, the coefficient of Return is -0.464 and ‒0.349, and is

significant for auditor elections and limit directors awards, respectively. It means that with one

unit of stock returns down in the previous year, the NPS approval rate increase 0.705 times and

0.629 times. This result is contrast to that of institutional investors, however, consistent with

American studies. Romano (1993) documents that public pension funds are subject to pressures

to take actions which are politically popular, but harm the fundsʼ investment performance.

Wahal (1996) finds that pension funds have no significant effect on firm performance. Firm size

is positive and statistically significant. It suggests that larger firms receive higher support. This

result is contrary to my expectation. Other control valuables show differently for type of

proposals.

In summary, these results suggest that NPS voting patterns are different from institutional

investors, and voting outcomes do not influence firm performance.

VI. Further Analysis on Institutional Investors’ Voting

In this section, to shed more light on the above finding, we investigate the relationship

between institutional investorsʼ voting and long-term performance and whether institutional

investorsʼ voting influences proposal passage. We also examine how institutional investors vote

in financially distressed firm.

1. Institutional Investorsʼ Voting and Long-term Performance

Investor uses the proxy voting to trigger desirable changes may more concern long-term

performance. In this subsection, we investigate institutional investorsʼ voting in relation to long-


Total % affirmative votes

Alteration of memorandum

Elect directors

Elect audit committee

Elect auditors

Limit directors awards

Limit auditors awards

Executive severance policy

Grant stock option

Total

Approve of merger/division

Expense stock option

The others

478 9 0 0 487 98.15%

For AgainstProposal Neutral Abstain

54 0 0 413 86.92%

This table presents the National Pension Service (NPS) voting for shareholder meeting occurring from

2009 to 2011. NPS made 2, 568 voting decisions on 309 firms. The other proposals include dismissal

outside directors, asset transactions, statement of retained earnings, etc.

244 48 0 0 292 83.56%

143 69.93%

74 8 0 0 82 90.24%

TABLE 5. NATIONAL PENSION SERVICE (NPS) VOTING

359

457 19 0 0 476 96.01%

100 43 0

Approve of financial statements

0

6 0 0 0 6 100%

341 7 0 0 348 97.99%

0 0 31 93.55%

20 6 0 0 26 76.92%

17 94.12%

17 0 0 0 17 100%

29 2

2,141 197 0 0 2,338 91.57%

16 1 0 0


Lev

erag

eOwner

Foreign

App

rove

offina

ncialstatem

ents

Stock

Listing

Adj.

PseudoR

2#obs.

Alterationofmem

orandum

Electionofdirec

tors

Electionof

auditco

mmittee

Grantstock

option

Exec

utiveseveran

cepolicy

Electionofau

ditors

Lim

itdirec

tors

awards

Lim

itAuditors

awards

-0.600

(0.769)

-0.190b

(0.005)

0.280c

(0.092)

-0.022

(0.922)

-0.005

(0.308)

-0.001

(0.815)

-0.004

(0.641)

0.150

(0.458)

0.016

2338

Intercep

tReturn

Size

BM

0.689

(0.100)

0.093

292

15.362

(0.152)

-0.113

(0.729)

-1.137

(0.247)

This

table

presents

theresu

ltsofthelogisticregression

analysisfortypeofproposals.Thedep

enden

tvariable

equalsoneif

NPS

votesarein

favorofaproposalan

dze

rootherwise.

Thesample

includes

2,338votingdec

isionsfor537firm

sbyNPS

betwee

n2009an

d2011.Indep

enden

t

variablesaredefi

ned

insectionIII.

P-valueis

reported

inparen

theses.Adjusted

pseudoR-squared

isad

justed

Nag

elkerkeʼ

R-squared

.a,

ban

dc

indicatestatistica

lsignifica

nce

atthe1%,5%

10%

levels,

resp

ectively.

-1.106

(0.251)

0.022

(0.327)

0.0111

(0.656)

0.039

(0.468)

2.592b

(0.014)

0.123

487

-0.014

(0.974)

0.006

(0.552)

-0.013

(0.223)

-0.002

(0.892)

-0.443

(0.340)

0.025

413

-6.953

(0.138)

-0.013

(0.931)

0.821c

(0.058)

-0.330

(0.510)

-0.024b

(0.023)

TABLE6.

NATIO

NALPENSIO

NSERVIC

EVOTIN

GFOR

TYPE

OFPROPOSALS

0.001

(0.952)

-0.007

(0.738)

4.507

(0.689)

0.435

(0.506)

-0.069

(0.942)

-0.340

(0.792)

-0.010

(0.712)

-0.052

(0.162)

0.025

(0.458)

1.091

(0.449)

0.109

82

5.174

(0.166)

-0.122

(0.534)

Full

sample

-0.217

(0.519)

-0.004

(0.831)

0.014

(0.674)

0.110

(0.861)

0.079

476

2.203

(0.756)

-0.464c

(0.061)

-0.118

(0.859)

0.544

(0.380)

0.000

(0.975)

0.003

(0.814)

0.009

(0.738)

-0.927c

(0.086)

0.095

143

-2.474

(0.878)

-0.299

(0.174)

0.386

(0.797)

1.575

(0.273)

-0.004

(0.876)

0.014

(0.639)

0.039

(0.580)

-0.006

(0.996)

0.144

348

-3.108

(0.661)

-0.349b

(0.043)

0.490

(0.456)

0.674

(0.368)

0.002

(0.919)

-11.062

(0.991)

-22.287

(0.998)

0.985

31

-27.816

(0.349)

-0.329

(0.484)

2.960

(0.288)

-6.214c

(0.054)

-0.009

(0.836)

0.059

(0.524)

0.021

(0.831)

-2.812

(0.270)

0.489

26

-24.145

(0.993)

-11.969

(1.000)

22.991

(0.992)

7.553

(0.999)

3.154

(0.998)

-1.134

(0.997)

term performance. Chen et al. (2007) report that institutional investors with long-term

investments have an incentive to monitor management, because monitoring costs decrease and

benefits increase as the length of time invested. We employ four proxy variables as long-term

performance: (i) stock return, (ii) sales growth rate, (iii) return on assets, and (iv) return on

equity measured over the 3 years prior to the general shareholdersʼ meeting. Stock return is the

average the monthly excess return for the past 3 years. Sales growth rate is calculated as the

prior 3-year average industry-adjusted sales growth rate. ROA(ROE) is defined as the prior 3-

year average industry-adjusted return on assets (equity). Firm size, BM, and leverage are the

prior 3-year average. Other variables are the same as in section III.

Table 7 presents the results from logistic model, in which the dependent variable equals

one if the institutional investors vote for the proposal and zero otherwise. In models 2,

institutional investorsʼ voting is only significantly related to long-term performance, which is

similar to the result of short-term performance. Then, we replicate whether the voting patterns

of institutional investors are affected by the proposal types.

We provide the result in Table 810. In the proposals of directors election and auditors

election, the relation between voting approval and prior 3-year return is positive and significant.

The relation with sales growth rate also positive and significant at the 0.05 level in approve of

financial Statements and limit directors awards, and at the 0.10 level in election of auditors. It


10 We exclude the results of proposals of expense stock option and executive severance policy, and the others, since

percentage of total votes cast against the proposals is very small or nothing.

5.922 5.945

Return (%)

6.302 6.082

Model 1 Model 2 Model 3

ROA

Sales growth rate

# observations

ROE

Model 4

Log (firm size)

-0.003

0.015

0.008

0.001

0.503Stock Listing

0.0980.0970.1020.098Adj. pseudo R2

This table presents the relationship between institutional investorsʼ voting and long-term performance. The

dependent variable equals one if the institutional investors votes in favor of a proposal and zero otherwise.

Stock return is the average the monthly excess return for the past 3 years. Sales growth rate is calculated

as the prior 3-year average industry-adjusted sales growth rate. ROA (ROE) is defined as the prior 3-year

average industry-adjusted return on assets (equity). Firm size (the log of total assets), B-to-M ratio, and

leverage are the prior 3-year average. Other variables are defined in Section Ⅲ . P-value is reported in

parentheses. Adjusted pseudo R-squared is adjusted Nagelkerkeʼ R-squared. ***, ** and * indicate

statistical significance at the 1%, 5% 10% levels, respectively.

16,084 16,461 16,467 16,461

-0.136 -0.134 -0.154 -0.140

0.017Owner (%)

0.0260.0250.0240.025Foreign (%)

-0.034-0.035-0.034-0.035Investor (%)

0.542

TABLE 7. INSTITUTIONAL INVESTOR VOTING AND LONG-TERM PERFORMANCE

0.6030.630

Coeff-

0.014-0.014-0.0020.008BM

0.0130.0160.0130.013Leverage (%)

0.0150.015

Intercept

0.014

0.157

0.000***0.000***0.000***0.000***

P-valueP-valueP-valueP-value Coeff-Coeff-Coeff-

0.895

0.001***0.000***0.002**0.001***

0.479

0.155

0.029**

0.003**

0.000***0.000***0.000***0.000***

0.002**0.002**0.003**0.001***

0.000***0.000***0.001***0.000***

0.8140.8210.974

0.011**0.005**0.003**0.023**

0.004**0.003**0.005**


Sales

growth

Size

BM

Alteration

ofmem

o-

randum

Lev

erag

eOwner

Foreign

Lim

itdirec

tors

awards

Investor

Stock

Listing

Lim

itau

ditors

awards

Approve

of

merger/

division

Adj.

Pseudo

R2

#obs.

Electionofau

ditors

23.324

(0.993)

-0.015

(0.172)

0.035b

(0.024)

-0.123

(0.247)

-0.233

(0.164)

0.017

(0.128)

0.029b

(0.058)

0.027b

(0.013)

-0.038

(0.161)

-6.809

(0.995)

0.168

3241

Intercep

tReturn

2981

7.388

(0.210)

-0.012

(0.255)

0.028

(0.146)

-0.136

(0.559)

-0.146

(0.395)

This

table

presents

thelogisticregression

resu

ltsfortypes

ofproposals

by

using

long-term

perform

ance

.Thedep

enden

tvariable

equalsoneif

theinstitutional

investors

votesin

favorofaproposalan

dze

rootherwise.

Stock

return

istheav

erag

ethemonthly

exce

ssreturn

forthepast3

yea

rs.Sales

growth

rate

isca

lculatedas

theprior3-yea

rav

erag

eindustry-adjusted

salesgrowth

rate.Firm

size

(thelogoftotalassets),

B-to-M

ratio,an

dleverag

earetheprior3-yea

rav

erag

e.Other

variablesaredefi

ned

inSec

tionⅢ

.P-valueis

reported

inparen

theses.Adjusted

pseudo

R-squared

isad

justed

Nag

elkerkeʼ

R-squared

.a,

ban

dcindicatestatistica

lsignifica

nce

atthe1%,5%

10%

levels,

resp

ectively.

-0.018

(0.340)

0.043b

(0.023)

0.028

(0.352)

-0.157b

(0.055)

0.840

(0.371)

0.156

2134

0.253

1477

3.646

(0.196)

Election

of

audit

committee

0.017c

(0.098)

0.007

(0.427)

-0.082

(0.406)

0.049

(0.721)

0.008

(0.301)

0.011

(0.312)

0.008

(0.383)

-0.010

(0.798)

TABLE8.

INSTIT

UTIO

NALIN

VESTOR

VOTIN

GAND

LONG-T

ERM

PERFORM

ANCE

FOR

EACH

PROPOSAL

1.699a

(0.001)

0.071

1.340a

(0.001)

0.264

557

15.619

(0.998)

0.006

(0.791)

-0.001

(0.953)

0.149

(0.649)

Electionofdirec

tors

-0.340

(0.199)

0.024

(0.284)

0.012

(0.629)

0.066b

(0.053)

-0.061b

(0.002)

Approveoffinan

cial

statem

ents

-7.594

(0.998)

0.047b

(0.007)

0.036b

(0.001)

-0.032

(0.343)

-5.935

(0.995)

0.197

3215

15.415a

(0.000)

0.037b

(0.023)

0.023c

(0.093)

-0.607a

(0.000)

-0.080

(0.664)

0.032b

(0.011)

0.022

(0.113)

0.025

(0.205)

-0.004

(0.934)

0.185

(0.695)

-0.822

(0.235)

0.053

(0.256)

0.056

(0.260)

0.049

(0.436)

-0.111

(0.441)

-2.657

(0.991)

0.183

889

26.209

(0.992)

-0.009

(0.483)

0.047b

(0.004)

-0.243b

(0.032)

-0.279

(0.125)

0.001

(0.981)

19.802

(0.992)

-0.047

(0.244)

0.054

(0.458)

3.332

(0.733)

0.047

(0.556)

0.072

(0.356)

-0.057

(0.876)

0.040

(0.940)

0.006

(0.849)

-0.005

(0.869)

-0.121b

(0.015)

0.259

(0.476)

2.254

(0.145)

0.425

58

indicates that institutional investors are more likely to vote in favor of specific proposals when

long-term performance has been strong. The results suggest that institutional investors consider

not shot-term performance but also long-term performance. However, we find that the

relationship with ROA and ROE are not statistically significant in all proposals, although the

results are not described to save space11.

Hence, our results reflect that institutional investors do not merely support, but penalize

management in opposition to the proposals when firm performance is weak.

2. Institutional Investorsʼ Voting and Proposal Passage

In this subsection, we investigate the likelihood that institutional investorsʼ voting impact

on whether a proposal pass or not. Given a situation in which most proposals are passing, it

may be considered that institutional investors monitor management via voting against a

proposal in Korea. However, the purpose of institutional investors when exercising voting rights

would be that these proposals which potentially destroy the firm value are turned down. Thus,

it is interesting to examine the impact of institutional investorsʼ voting on proposal passage.

Institutional investors, as previously noted, vote on 3342 proposals and support those with

98.32% of their votes. They vote against 171 proposals of which 22 are rejected. It is nothing

more than 0.66% of the total voting. However, institutional investorsvote against 58.9% of non-

passing proposals compared to only 1% of the passing proposals. It shows that opposition of

investors has some connection with passage of proposals.

To gain additional insight, we estimate a logistic model in Table 9, in which the dependent

variable whether the proposal passes. Non-approval rate negatively influences the likelihood

that the proposal is passed. It shows that higher against by investor leads to a greater likelihood

of rejection. Proposals related to compensation are more likely to pass. Higher ownership of

foreigner is significantly related to the low likelihood of proposal passage, while other variables

do not significantly impact passage.

Our findings suggest that institutional investorsʼ voting rights has a critical effect on the

passage of proposals.

3. Institutional Investorsʼ Voting in Financially Distressed Firm

Institutional investors would be more actively exercise the voting right when a firm is in

financial distress. For instance, investors at financially distressed firm are will to force change

to improve firm performance. We examine financially distressed firms identified a coverage

ratio less than or equal to one in the previous year as in Bhagat et al. (2005). The coverage

ratio is defined as the sum of income before extraordinary items and interest expense, divided

by interest expense. When a firmʼs coverage ratio is less than or equal to one, the firmʼs income

is less than or equal to its interest expense.

Table 10 presents the results from logistic analysis. As expected, we find that firm


11 Firm performance indicators can be classified into market-based measures (PER and sales growth rate) and

accounting-based measures (ROE and ROA). However, Accounting-based measures are subject to manipulation and can

be described in different methods for each company (Dalton et al, 1998). In addition, Zahra and Pearce (1989) show

that market-based measures have more influence on firm performance than accounting-based measure.


This table presents the impact of institutional investorsʼ voting on proposal passage. The dependent

variable equals one if the proposal passes and zero otherwise. Non-approval rate indicates percentage of

total votes cast against the proposals. Board-related dummy is an indicator variables set to one if the

proposal includes election of directors, audit committee, and auditor. Compensation-related dummy is an

indicator variables set to one if the proposal includes directors awards, auditors awards. Stock return is the

average the monthly excess return for the past 3 years. Sales growth rate is calculated as the prior 3-year

average industry-adjusted sales growth rate. ROA (ROE) is defined as the prior 3-year average industry-

adjusted return on assets (equity). Firm size (the log of total assets), B-to-M ratio, and leverage are the

prior 3-year average. Other variables are defined in Section III. P-value is reported in parentheses.

Adjusted pseudo R-squared is adjusted Nagelkerkeʼ R-squared. ***, ** and * indicate statistical

significance at the 1%, 5% 10% levels, respectively.

TABLE 9. INSTITUTIONAL INVESTOR VOTING AND PROPOSALS PASSAGE

***

2.003

Non-approval rate

0.764


# observations

-0.054 0.000

3342

0.436Adjusted pseudo R2

Intercept

0.5520.010Owner (%)

*0.098-0.034Foreign (%)

0.1390.082Investor (%)

0.8850.106Stock Listing

0.509-0.192Return (%)

0.4650.195Log (firm size)

0.564-0.421BM

0.376-0.014Leverage (%)

0.495-0.364Board-related dummy

**0.0502.126Compensation-related dummy

This table presents the logistic regression results of institutional investor voting in financially distressed

firm. Financially distressed firms is identified as the coverage ratio less than or equal to one in the

previous year. The sample includes 1, 077 voting decisions for 76 firms by institutional investor. The

dependent variable equals one if the institutional investors votes in favor of a proposal and zero otherwise.

Other variables are defined in Section III. Adjusted pseudo R-squared is adjusted Nagelkerkeʼ R-squared.

***, ** and * indicate statistical significance at the 1%, 5% 10% levels, respectively.

TABLE 10. INSTITUTIONAL INVESTOR VOTING IN FINANCIALLY DISTRESSED FIRM

*

-4.971

Return (%)

0.100 *


# observations

3.320 0.089

1,077

0.152Adjusted pseudo R2

Intercept

0.173-1.450Stock Listing

**0.002-0.203Leverage (%)

0.1650.072Owner (%)

**0.039-0.096Foreign (%)

**0.026-0.287Investor (%)

*0.0840.592Log (firm size)

**0.0031.978BM

performance is positively related to affirmative voting decisions, significant at less than the 0.10

level. It indicates that institutional investors more consider firm performance when a firm faces

financial distress. Furthermore, institutional investors with higher ownership holdings in the

firm are more likely to vote against proposals. This implies that institutional investors undertake

a complementary monitoring role. Larger ownership of Institutional and foreign investors is

associated with lower voting. It is consistent with prior studies that outsider ownership has a

positive effect on firm performance.

VII. Conclusion

This study investigates how institutional investors vote and analyze the relationship

between proxy voting decisions and firm performance in order to verify whether institutional

investors monitor management in Korea. The investor with larger ownership holdings in the

firm has a greater incentive to be active monitors. Institutional investors hold substantial stakes

in the firm and are sensitive to firm performance. The monitoring effect of institutional

investors has been actively studied, but existing research mostly focus on the ownership of

institutional investors in Korea. Because voting is a direct behavior influencing management,

this study will offer more clear evidence on the monitoring role of institutional investors. It

examines 17,274 voting decisions for 692 firms from 2009 to 2011. The results are as follows.

Institutional investors, generally, are more likely to vote against the management; however,

they are vote more aggressive on the merger/division-related proposal that directly affects the

short-time performance. Furthermore, the voting decision is related to firm performance for

auditor elections, director elections and audit committee elections. Furthermore, larger

ownership is associated with higher affirmative voting. It suggests that institutional investors

vote friendly with the largest shareholder. Foreign investors are positively related to the

affirmative percentage of institutional investors. At the aggregate, institutional investors fulfill

the monitoring effort by aggressively voting on proposals related to performance.

On the other hand, by investigating the National Pension Service (NPS) voting, the voting

patterns of NPS are similar to institutional investors for director elections and auditor elections.

However, the opposition rate of the alteration of memorandum is relatively high, and voting is

not related to firm performance. It suggests that NPS merely supports management. Although

they seem to be active monitors because the percentage of affirmative voting is lower than that

of institutional investors, it can be concluded that NPS does not attempt to monitor firm

management.

Finally, we find that institutional investorsʼ voting is significantly related to the long-term

performance and impact the pass of proposal and they more actively exercise the voting right

when a firm falls into the financial distress.

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