The voice of minority shareholders: Online voting and corporate social responsibility

Abstract

In 2014, the Shenzhen Stock Exchange introduced “Rules for the Implementation of Online Voting” to standardize the implementation of online voting for its listed companies. Using this event as an exogenous shock, we design a difference-in-differences model to show that minority shareholders’ participation in online voting improves firms’ corporate social responsibility performance. We reveal that this improvement is achieved through minority shareholders’ positive influence on firms’ internal control and transparency and is more pronounced for private firms and firms with lower levels of profitability and less external monitoring. Accordingly, since the standardization of online voting, minority shareholders have played an important role in corporate governance and have a positive influence on firms’ sustainable development.

Introduction

Minority shareholders are defined as shareholders who neither are part of the firm’s board or supervision or management team nor hold more than 5 % of the firm’s shares individually or collectively. Due to information asymmetry, severe agency conflicts exist between controlling and minority shareholders (Shleifer and Vishny, 1997). In particular, controlling shareholders can use their power to transfer firm resources for their personal benefit through channels such as related party transactions at the expense of minority shareholders (Johnson, 2000; Bushman et al., 2004; Jiang et al., 2010). To more effectively protect minority shareholders and encourage their participation in shareholder meetings through online voting, in 2014 the Shenzhen Stock Exchange introduced “Rules for the Implementation of Online Voting” (hereafter referred as the Rules). Taking advantage of this incident, this paper examines whether and how the participation of minority shareholders in online voting affects corporate social responsibility (CSR).

Compared to controlling shareholders, minority shareholders have limited access to a firm’s internal information, weaker voting power due to lower levels of share ownership, and higher costs of attending on-site general shareholder meetings (Claessens et al., 2002). Therefore, small shareholders are inclined to vote with their feet¹ or free-ride,² rather than to vote by hands³ (Grossman and Hart, 1980; Bharath et al., 2013). To resolve this problem, many countries have passed legislation that allows shareholders other methods of communication to vote, such as through the Internet. The online voting systems aim to realize minority shareholders’ self-protection by reducing their costs to participate in shareholder meetings and thus raise their enthusiasm in influencing the firm’s governance and decision making. The literature documents that the protection of minority shareholders is beneficial to firm value and profitability (La Porta, 2002; Berkman et al., 2010) and helps firms to (i) vote down refinancing projects that can potentially destroy firm value and (ii) improve the quality of corporate governance (Bebchuk, 2005).

Following the establishment and development of stakeholder theory, CSR has been widely discussed and studied in the academic literature. CSR refers to firms’ fulfillment of social responsibility to stakeholders while maximizing shareholder profits (Clarkson, 1995; McWilliams and Siegel, 2001), and it is considered one of the most prominent factors influencing firm value (Mackey et al., 2007). Studies show that CSR helps firms to accumulate firm reputation (Rhou et al., 2016) and plays a vital role in firms’ sustainable development (Shaukat et al., 2016).

In addition, firms’ CSR performance is influenced by external factors (Kim et al., 2018). For example, Barako et al. (2006) document that foreign ownership is positively associated with listed firms’ CSR disclosure, because foreign shareholders desire better firm transparency (Haniffa and Cooke, 2002). Similarly, since institutional shareholders put a higher value on firms’ long-term goals and development (Oh et al., 2011), their ownership is positively related with CSR performance (Cox et al., 2004). On the contrary, management shareholdings are negatively associated with firms’ CSR performance and disclosure (except for export-oriented firms), due to conflicts of interests (Khan et al., 2013), with large shareholders apparently placing less emphasis on CSR (Ducassy and Montandrau, 2015). However, little attention has been paid to the relation between minority shareholder protection and firms’ CSR performance from the prospective of stakeholder relations. Therefore, this paper aims to contribute to the literature by investigating the role of minority shareholders in corporate governance and their influence on firms’ decision making and sustainable development.

In particular, we examine the relation between minority shareholders’ online voting in shareholder meetings and listed firms’ CSR performance. As one of the main participants in China’s capital markets, minority shareholders’ participation in firm decision making could enhance the monitoring over management and controlling shareholders (Chen et al., 2013; Hamdani and Yafeh, 2013). Additionally, when exercising their online voting rights, minority shareholders are expected to try their best to acquire firm-related information, which could improve the quality of firm information disclosure and mitigate the information asymmetry between the firm’s controlling shareholders and other investors. Therefore, we expect minority shareholders’ online voting to have a positive influence on firms’ CSR performance through its improvement effect on firms’ internal control quality and transparency.

We focus on China’s capital markets for two main reasons. First, different from the decentralized ownership structure that is typically seen in firms in the United States, listed firms in China tend to have greater ownership concentration (Jiang and Kim, 2015) and to adopt a pyramid control structure (Claessens et al., 2002). Given concentrated ownership, controlling shareholders are more likely to expropriate minority shareholders, which leads to severe agency problems (Djankov et al., 2008) and lower corporate governance quality (Crisostomo et al., 2020). Furthermore, individual investors make up a large proportion of China’s stock market and have a significant impact on security pricing and future stock liquidity (Yao et al., 2019; Cheng et al., 2021). Therefore, China’s listed firms provide an important sample for the study of minority shareholder protection. Moreover, the introduction of the Rules by the Shenzhen Stock Exchange in 2014 provides an ideal natural experiment to study the influence of minority shareholder protection on firms’ CSR performance.

Second, China’s weak institutional environment and special microstructure provide a unique environment to examine the influence of minority shareholders’ participation in firm decision making on firms’ CSR performance. On one hand, the government closely controls the economy but conducts insufficient monitoring (Hass et al., 2016). To quickly boost economic performance and profitability, as encouraged by the government, firms in China frequently encounter problems of product quality, resources wastefulness, and pollution, which call for attention and urgent improvements in CSR. On the other hand, China has weak legal and regulatory enforcement and a culture of reporting the good news but concealing the bad, which has significant influence on the reporting of firms’ CSR activities (Piotroski et al., 2015). Such low levels of firm disclosure (Ke et al., 2015) combined with ineffective external auditing (Yuan et al., 2016) provide an ideal institutional background to study the role of minority shareholders in firms’ decision making and CSR progress.

Identifying the publication of the Rules as an exogenous shock, we perform a difference-in-differences (DID) analysis to examine the impact of minority shareholders’ online voting on firms’ CSR activities. Our results show that minority shareholders’ online voting has a significant positive influence on firms’ CSR performance. The result is valid after performing various robustness checks, including parallel trends, placebo, and dosage tests and models with multiple fixed effects. We also find that minority shareholders’ online voting promotes firms’ CSR performance through an improvement in firm internal control and information transparency. Lastly, we examine the heterogeneity of our results and find that the positive influence of minority shareholders’ online voting on firms’ CSR performance is more pronounced for private firms and firms with lower levels of profitability and lower quality of external monitoring.

This paper’s contribution to the literature is at least threefold. First, the literature provides mixed opinions on the effects of minority shareholder participation in firms’ decision making. Some researchers suggest that the participation of minority shareholders in firm decision making alleviates agency problems between controlling shareholders and minority shareholders and improves firm governance and performance (La Porta, 2002; Bebchuk, 2005; Berkman et al., 2010). Others, however, argue that minority shareholders have limited access to information and thus can make misjudged decisions that can potentially reduce firm value (Bainbridge, 2006). In our study, we find that minority shareholders’ participation in online meetings improves listed firms’ CSR performance, providing new evidence of the positive influence of minority shareholders’ participation in corporate governance.

Second, studies state that a firm’s CSR performance is potentially influenced by various factors, including the characteristics of managers (Waldman and Siegel, 2008; Zu and Song, 2009), the firm’s financial situation (Zu and Song, 2009), the firm’s ownership structure (e.g., foreign shareholder, institutional ownership, management shareholding, and ownership concentration; see Cox et al., 2004;Barako et al., 2006; Carmelo, 2009; Khan et al., 2013), and market sentiment (Cheong et al., 2017). However, little evidence is provided regarding the influence of minority shareholders. We expand the literature on CSR by examining the determinants of a firm’s CSR performance from the perspective of minority shareholders’ participation in firm governance.

Third, we contribute to the literature on effective corporate governance by analyzing the role of minority shareholder protection. Our results suggest that firms’ implementation of online voting induces the monitoring effect of minority shareholders on firm management and helps build better firm–stakeholder relations, which provides empirical evidence on the construction of better firm governance. Moreover, our further analyses examine the conditional influence of minority shareholders’ online voting and reveal that this influence substitutes for firms’ external monitoring.

The remainder of this paper is organized as follows. Section 2 introduces the general shareholder meeting online voting system. Section 3 reviews the literature and develops the hypotheses. Section 4 describes the research design. Section 5 presents the empirical results. Finally, Section 6 concludes the paper and provides suggestions to policy makers.