Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re:  S7-10-03 Possible Changes to Proxy Rules

Dear Mr. Katz:

In response to your request for public views with regard to possible changes in proxy rules I am submitting a working paper version of an academic research paper "The Impact of the Institutional and Regulatory Environment on Shareholder Voting."  The paper, coauthored with Jennifer E. Bethel of Babson College, appeared in final form in Financial Management, (Volume 31, issue 4, (2002) pages 29-54) (

The paper is pertinent to your request in that it explores the balance of power between managers and shareholders in the proxy process, as delineated by firms' institutional and regulatory environment. We find evidence in our sample suggesting that the institutional and regulatory environment may confer a vote-getting advantage to managers.  On average, routine management proposals have higher voting turnout and receive more votes cast favorable to management than do nonroutine proposals.  The passage of as many as 73 routine proposals in 1998 may have been swung because they were classified as routine, rather than nonroutine, proposals.

This evidence is important, because it suggests that certain features of the institutional and regulatory environment can alter voting results, perhaps even causing shareholders' voted preferences to be overridden.  Specifically, brokers' ability to vote uninstructed shares can dislocate voting and cash-flow rights.  We also find, not surprisingly, that firm ownership structure affects voting results.  The percentage of votes cast favorable to management is increased by the presence of investors with large blocks of shares and insider holdings and is reduced by institutional investor holdings.  Moreover, voting recommendations from Institutional Shareholder Services that are unfavorable to management are associated with fewer votes cast in favor of management, even after we control for dilution (for stock option plan proposals) and other factors that capture institutions' voting guidelines.

Another implication of the paper is that managers are likely to have incentives to alter the control rights of shares by changing their firms' institutional and regulatory environment.  For example, the NASD recently filed a proposal that would codify its brokers' right to vote beneficial owners' uninstructed shares on routine matters. Given the results in this study, we might expect that such a rule, if it changed brokers' behavior, would reduce the control rights of existing investors' shares and therefore would be supported by Nasdaq-listed firms (See SEC Release No. 34-42238, File No. SR-ASD-99-63, Notice of Filing of Proposed Rule Change and Amendment No. 1 thereto by NASD to Allow NASD Members to Give Proxies in the Absence of Written Instructions from Beneficial Owners, 12/22/99). 

Shareholders are also likely to have incentives to alter the control rights of shares through direct contact with firms and by lobbying to change regulatory policy.  For example, shareholders have incentives to preclude managers from counting broker votes and abstentions in determining voting outcomes by submitting and passing shareholder proposals to that effect. More recently, shareholders have applauded proposals by both the NYSE and NASD to change brokers' ability to vote on equity compensation proposals.   Shareholders might also want to endorse regulatory and institutional changes that enhance the control rights of shares and open up the nominations process.  To the extent that shareholders are successful in lobbying for regulatory change, they are likely able to enhance the control rights of shares.

Stuart L. Gillan
Director of Research
Weinberg Center for Corporate Governance
University of Delaware.

Contact Details:

Stuart L. Gillan
Department of Finance
Lerner College of Business and Economics
University of Delaware
306 Purnell Hall
Newark, DE 19716