Can online annual general meetings increase shareholders’ participation in corporate governance?

• Date: 01 December 2020
• DOI: http://doi.org/10.1111/fima.12301
• Author: Huasheng Gao,Jun Huang,Tianshu Zhang
• Published date: 01 December 2020

DOI: 10.1111/fima.12301

ORIGINAL ARTICLE

Can online annual general meetings increase

shareholders’ participation in corporate

governance?

Huasheng Gao1Jun Huang2Tianshu Zhang3

1Fanhai International School of Finance, Fudan

University, Shanghai, China

2School of Accountancy, Shanghai University of

Finance and Economics, Shanghai, China

3Accounting School, Shanghai University of

International Business and Economics, Shanghai,

China

Correspondence

HuashengGao, Fanhai International School of

Finance,Fudan University, Shanghai, China.

Email:huashenggao@fudan.edu.cn

Fundinginformation

ShanghaiPujiang Program, Grant/Award Num-

ber:18PJC007; Program for Professor of Special

Appointment(Eastern Scholar) at Shanghai

Institutionsof Higher Learning, Grant/Award

Number:TP2018001; National Natural Science

Foundationof China, Grant/AwardNumbers:

71973029,71632006; MOE Project for Key

ResearchInstitutes of Humanities and Social

Sciencein Universities, Grant/Award Number:

16JJD790037;Higher Education Discipline Inno-

vationProject, Grant/Award Number: B18033;

ShanghaiPhilosophy and Social Science Founda-

tion,Grant/Award Number: 2017BGL009; Dawn

Programof the Shanghai Education Commission

Abstract

We find that annual shareholder meetings conducted online can

significantly increase the participation of shareholders, especially

minority shareholders. This finding is more evident when the cost

of physically attending the annual meeting is higher and when the

firm’s ownership is more dispersed. We further document significant

positive stock returns when firms initiate annual online meetings.

We also find that such online meetings help improve corporate

governance. Overall, we provide evidence that online shareholder

meetings provide shareholders a cost-effective way to participate in

governance issue s.

KEYWORDS

online annual generalmeetings, shareholder participation, corporate

governance

1INTRODUCTION

Annual general meetings (AGMs) often serve as an opportunity for shareholders to receive updates on company

developments, ask management and directors questions, consider corporate proposals, and review the company’s

performance. It is generally believedthat shareholder participation is a vital component of a successful annual meeting

and overall governance (Easterbrook & Fischel, 1983; Pound, 1991). However, shareholder participation in annual

c

2019 Financial Management Association International

Financial Management. 2020;49:1029–1050. wileyonlinelibrary.com/journal/fima 1029

1030 GAO ETAL.

meetings is extremely low among public firms because of a diffused ownership structure and the inconvenience of

physically attending meetings. For example,in the United States, 70% of shares held by minority shareholders are not

voted on in annual meetings.1In China, more than 90% of shares held by minority shareholders are not voted on in

annual meetings.

The number of debates regarding the practice of online AGMs has surged over the past decade; regardless, more

firms are using online AGMsthan ever before. One view suggests that online AGMs make annual meetings more acces-

sible, transparent, and efficient to meet the corporate governance needs of shareholders. In contrast to traditional

AGMs,which typically require shareholders to attend meetings on-site, online AGMs allow shareholders to attend and

voteremotely, via an Internet platform. Thus, when the cost of physically attending an AGM is high, an online AGM may

facilitate shareholder participation.

Critics of online AGMs assert that such meetings are of limited value, because (a) online participation is a poor

substitute for “looking management in the eye”; (b) large shareholders will most likely attend the meeting anyway,

whereas minority shareholders may still lack incentive to participate because of their small stake in the firm; and (c)

even if minority investorsactively participate in online meetings, too much intervention by (unsophisticated) minority

investors maybe value destroying (Jensen, 1993; Lipton & Rosenblum, 1991).

In this article, we examine whether online AGMs2canincrease shareholder participation in annual meetings based

on data from China, as Chinese public firms have been conducting online AGMs as early as 2005 (and in 2017, all Chi-

nese public firms had adopted online AGMs3). The relatively rich history and widespread adoption of online AGMs in

China allow us to better examine the effects of online AGMson shareholder participation in annual meetings.

Wefind that shareholder participation, especially minority investor participation, increases significantly after a firm

adopts online AGMs. Specifically,firms with online AGMs see a 35% higher rate of ownership participation by minor-

ity investors than firms without online AGMs. The number of minority investors participating in AGMs in the former

group is five times as large as in the latter group. This effect is more pronounced when the cost of physically attending

AGMs is higher,suggesting that the cost of physically attending the meeting is an essential factor leading to low partic-

ipation by shareholders who would otherwise like to attend. Furthermore,the impact of online AGMs on shareholder

participation in AGMs is greater for firms with dispersed ownership, because minority shareholders are more likelyto

be influential when large stakeholders do not dominate firms.

Our main results may be subject to an omitted variable problem. For example, a firm’s culture of shareholder

democracy and a firm’s information barriers to communicate with its shareholders may be unobservable variables

that are correlated with both online AGM voting and shareholder participation in AGMs. Such a problem could bias

our results. We address this endogeneity concern byexploiting a quasi-natural experiment that examines the Shanghai

and Shenzhenstock exchanges’2014 policy requiring firms to adopt online AGMs. Based on a difference-in-differences

approach, we show that such a policy change leads to a significant increase in shareholder participation in AGMs. This

result suggests that our implication is unchanged after accounting for possible endogeneity.

We also examine the valuation effects of online AGMs. Online AGMs likely increase shareholder value because

active shareholder participation in AGMs (a) facilitates the communication between managers and shareholders and

(b) increases the function of corporate governance.Moreover, considering that the financial cost of convening a phys-

ical meeting with a large number of shareholders can be nontrivial, online AGMs provide an inexpensive and geo-

graphicallyunlimited means for more shareholders to participate in such meetings. However, shareholders—especially

minority shareholders—usually lack specific information about the firm, and their opinions may differ from those of

managers with better information (Porter, 1992). Managers facing frequent shareholder interventions might be less

1SeeBroadridge and PwC’s 2013 Proxy Voting Trends(June 4, 2013), availableat: http://www.broadridge.com/news-events/press-releases/Broadridge-and-

PwC-Announce-New-Data-on-2013-Proxy-Voting-Trends.html.

2Throughoutthis article, online AGMs refer to the AGMs in which shareholders can attend meetings and cast a vote online (not just a webstream).

3In2009, Intel became the first U.S. company to enable all its shareholders to attend, ask questions, and cast their votes live on the web in its AGM. Since then,

morecompanies have followed suit, although the total number of firms using online AGMs is still very small in the United States (Joann S. Lublin, 2011, “Online

AnnualMeetings Begin to Click,” Wall Street Journal [November 14], https://www.wsj.com/articles/SB10001424052970203537304577032313764922458).