Finance:Shareholder apathy

Shareholder apathy is a phenomenon whereby investors remain uninvolved in the corporate governance process. This behavior is most common among retail investors, who generally own small amounts of equity in public companies. As opposed to institutional investors in the United States (who vote 82% of their shares), individual investors only vote 29% of their shares. Low levels of participation in the shareholder voting process are the most common symptom of shareholder apathy.

Background

The American model of corporate governance places shareholders as the ultimate owners of the corporation. Shareholders have the right to elect the board of directors and vote on other important issues, such as mergers and acquisitions. The board of directors has a fiduciary duty to act in the best interest of the shareholders, serving as a conduit between a company's owners and its managers.

In 1999, Mark Latham had predicted that rational shareholder apathy would dissipate as a result of the internet. Latham argued that shareholders would exercise more influence due to their increased accessibility to information.

Lisa M. Fairfax, law professor at the University of Pennsylvania, argues that "rational apathy" view of shareholders is waning. Fairfax notes that shareholders have become increasingly active, voting against management preferences and demanding more engagement from leaders.

Causes

Recent surveys indicate that retail shareholders do not vote their shares for a variety of reasons, including:

• Perceptions about the impact of their votes
• Not having enough time to vote or conduct the necessary research to be informed
• A lack of interest in voting
• Ignorance about voting methods or shareholder voting altogether

Regulation and technology

Technical and legal barriers, including rules for proxy voting and the availability of online voting platforms, can have a direct impact on shareholder participation in company matters. Internet voting has become increasingly popular within the context of corporate voting. In the absence of an online platform, investors may only be able to vote through less convenient methods, such as:

• Voting in person
• Voting by mail
• Voting by telephone

Resources

While institutional shareholders may afford to hire dedicated service providers or teams to handle shareholder voting for their shares, individual investors generally lack such resources. Firms such as proxy advisers may specialize in corporate voting matters, by offering third-party analysis regarding voting proposals and company profiles. For instance, these firms may advise institutional investors with regards to ESG matters that may arise during the investment or corporate voting processes.

Passive investing

The fact that many retail investors have passive, diversified portfolios also inhibits individuals from participating in corporate governance. Passive investing is a strategy where an investor allocates capital to all the components of an investment index, such as the S&P 500. Rather than identify favorable investments through fundamental research or technical analysis, passive investors simply track the performance of an index or benchmark, often by utilizing investment vehicles such as ETFs or mutual funds.

Diversification

Furthermore, diversification can reduce portfolio concentration, resulting in smaller individual positions to spread out risk. These factors may reduce shareholder awareness and familiarity regarding their portfolio companies, leading to lower engagement.

Poor investor relations

Companies which do not actively engage with their investor base may also have lower levels of participation. Firms which provide detailed materials through a variety of channels are more likely to foster an informed community of shareholders, who may be more inclined to engage in corporate governance.

Dual-class shares

Additional factors specific to individual companies, such as dual-class voting structures, can disenfranchise certain shareholders by diluting their voting power. These structures may be present at controlled companies, where minority shareholders are powerless to gain control by definition. As a result, those investors may become disengaged with the voting process.

Effects

Low engagement from shareholders can harm corporate governance, leading to lower valuations and inefficient utilization of company resources. In extreme cases where investor participation is severely low in company meetings, quorum may not be reached and voting matters may have to be postponed for future resolution.

In moderate cases, reduced involvement from shareholders can allow directors and executives to extract personal benefits from the corporation, particularly through compensation plans and related-party transactions. These developments can detract from the notion of shareholder democracy, where a corporation is run as a semi-democratic institution. Similar to the political context, declining voter participation can jeopardize public confidence in the governance system.