In the paper, Does the Director Election System Matter? Evidence from Majority Voting, which was recently made publicly available on SSRN, my co-authors (Yonca Ertimur from the University of Colorado at Boulder and David Oesch from the University of St. Gallen) and I examine the effect of a switch from a plurality voting standard to a majority voting (MV) director election system. Under plurality voting (until recently the default standard at many companies) the candidate with the most votes “for” is elected. In uncontested elections, the plurality voting standard implies that one vote “for” is sufficient for a nominee to be elected. Under a MV standard, a director is not elected unless the majority of votes are cast in her favor, even in uncontested elections.

We begin our empirical investigation of the economic consequences of the adoption of MV by analyzing whether shareholders perceive MV to be value-increasing. We do this through an event study around the annual meeting dates where shareholders vote on the adoption of MV. We employ a research design know as a regression discontinuity design, which exploits the fact that companies where MV proposals pass by a small margin are presumably very similar to companies where MV proposals fail by a small margin. Our analysis documents an abnormal return of between 1.43% and 1.60% around the passing of close-call MV shareholder proposals, suggesting that shareholders perceive the adoption of MV to be value-increasing.

The second part of our study examines the effect of MV on boards’ responsiveness to concerns voiced by shareholders. We first analyze boards’ inclination to implement or not implement non-binding shareholder proposals that win a majority of the votes cast at the annual meeting (majority-vote proposals). This setting is particularly useful for our purpose as it offers a divergence in preferences between boards (who opposed the proposal when presented and now need to decide whether to follow the shareholders’ vote) and shareholders. Our results document a statistically and economically significant increase in the rate of implementation of majority-vote shareholder proposals for firms adopting a MV standard relative to a sample of similar control firms.  We next examine boards’ response to another voting outcome, a high percentage of votes withheld from directors up for election. We use the change in the percentage of votes withheld from one year to the next as a measure of responsiveness to director election votes. We show that MV firms exhibit a greater decrease in the percentage of votes withheld the year after a high amount of votes withheld (defined as 20% or more votes withheld from at least one director) relative to a sample of control firms. Both findings are consistent with the notion that the adoption of MV results in increased boards’ responsiveness to shareholder pressure.

Finally, we investigate the effect of MV on director turnover. We find no relation between votes withheld and individual director turnover, regardless of the director election standard. In other words, even in the rare situations where directors fail to win a majority vote, turnover remains infrequent and is not driven by the voting outcome, regardless of the election standard. In these cases, we find that, rather than the removal of the director, the main effect of an adverse shareholder vote is to push boards to address the concerns behind the vote. That is, rather than a channel to remove specific directors, director elections are viewed by shareholders as a means to obtain specific governance changes and, in this respect, their ability to obtain such changes is stronger under a MV standard.

Summarizing, the findings in our paper provide evidence that the adoption of MV is value-enhancing and that one source of this increase in firm value may be the greater responsiveness of boards to shareholder concerns under a MV standard.

The full paper is available here.