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Romano’s “Institutional Investors and Proxy Voting”

I’m at the the Federal Reserve Bank of Atlanta’s 2008 Financial Markets Conference, where Yale law professor Roberta Romano is presenting her paper Institutional Investors and Proxy Voting: The Impact of the 2003 Mutual Fund Voting Disclosure Regulation. Very statistical. Regressions and all that.

She’s studying rules that “require mutual funds to disclose the policies and procedures they use to vote proxies relating to portfolio securities. The new rules will also require mutual funds to file with the SEC and make available to shareholders the specific proxy votes they cast. The new rules are intended to provide greater transparency for shareholders with respect to an important function performed by mutual funds given their significant presence in the equities markets.”

Her finding that post-rule change, when mutual fund voting on proxies became more transparent, the likelihood that mutual funds would vote in favor of equity executive compensation plans where outside directors owned a lot of stock in the company, A positive correlation between favorable votes and outside director stockownership makes sense if you believe (as I mostly do) Charles Elson‘s argument that outside director stock ownership has a significant positive incentive effect that encourages directors to be more effective monitors. But why would increased transparency make the correlation stronger? Curious.

It’s also interesting that mutual fund disclosure did not have the effect in voting that proponents expected. It suggests a certain degree of caution is necessary when assessing claims that increased transparency will have certain effects.

The discussant is Timothy Weithers who is Associate Director of the Graduate Program in Financial Mathematics at the University of Chicago.

Offers a great quote from Lawrence Summers:

Not so long ago, we were all Keynesians. (“I am a Keynesian,” Richard Nixon famously said in 1971.) Equally, any honest Democrat will admit that we are now all Friedmanites.

Weithers poses the interesting question of “where’s the regulatory capture?” In other words, what interest group benefited from the 2003 rule change? Hard to see one.

Did the rules increase transparency of voting to firms? If so, would firms that manage 401(k) plans have greater incentive to vote in favor of executive equity compensation plans?