The Power of Shareholder Votes: Evidence from Director Elections

Our paper titled “The Power of Shareholder Votes: Evidence from Director Elections” aims to answer the question: Do shareholder votes matter in uncontested director elections? In principle, shareholders who own a firm should be free to pick the board members who represent them. However, in the U.S., for the most part, shareholder votes for director elections are non-binding, leading scholars to describe shareholder votes as “sham democracy”. Plenty of anecdotal evidence supports this view. For instance, in Cablevision Systems, shareholders repeatedly cast majority votes against re-electing three directors. The directors remained on the board.

Is the Cablevision election an isolated instance? Or does the pattern of ignoring shareholder votes dominate the U.S. landscape in director elections? This is the central question we address. Our main finding is that even though votes in director elections are non-binding, they matter. Low shareholder support for a director has negative consequences for the director both within the firm and in the market for directors.

Our sample comprises over 50,000 individual director election events over 8 years from 2003 to 2010, for firms included in the Russell 3000 index. Our measure of shareholder dissent is the fraction of total votes that were cast against (or withheld) for an individual seeking election for the board. We report three key results.

We find that directors are significantly more likely to depart from boards if they face dissent. Dissent votes in excess of 30% have major consequences. Remarkably, these results hold even though we measure director departures within a short interval of 12 months from election date. This is our first indicator that shareholder voice matters.

Our second test examines the market for external directors. We find that directors facing dissent in one firm face a decline in their outside directorships at other firms. Thus, dissent votes at one firm affects her ability to retain and attract additional directorships.

A third result focuses on directors who continue to serve. Within this group we examine directors for whom a greater fraction of shareholder votes are withheld. By definition, these directors continue to stay on the board but is there an internal consequence for them? We find that such directors are less likely to retain leadership roles, as proxied by service on three important board committees, viz., the compensation, nomination and audit committees.

We find other results. First, our findings are robust to controls for proxy advisory firm recommendations. We do not find this surprising: many large institutional investors take into account research generated by proxy advisors, but conduct their own analysis too. Second, we examine voting in firms where investors can more credibly threaten exit. Dissent matters more in these firms. Finally, we look at dissent within a firm, or a director’s votes relative to those for other directors serving at the same firm. This effectively separates out dissent with a specific director from dissent with the entire firm or the entire slate, and from aspects of voting strategies at the firm level not observable to us. Our results strengthen. Dissent for a director relative to dissent for others serving in the same firm is more powerful in explaining director outcomes.

What is the bottom line? Our main conclusion is that shareholder votes have significant power, and result in several consequences for directors. The results have relevance to both directors and institutional investors. To directors, we suggest taking shareholder concerns seriously as their votes can affect status within boards and also external directorship opportunities. For shareholders, the evidence suggests that their votes matter, and therefore it is worth taking voting seriously.

The preceding post comes to us from Reena Aggarwal, the Robert E. McDonough Professor of Business Administration and Professor of Finance at Georgetown University and Director, Georgetown Center for Financial Markets and Policy, Sandeep Dahiya, Associate Professor at the McDonough School of Business and Nagpurnanand Prabhala, Head of Research at CAFRAL, Reserve Bank of India on leave from University of Maryland, College Park. The post is based on their recent paper, which is entitled “The Power of Shareholder Votes: Evidence from Director Elections” and available here.