Skip to main content

Does the director election system matter? Evidence from majority voting

Abstract

We examine the effect of a change in the director election system—the switch from a plurality voting standard to a more stringent standard known as majority voting (MV). Using a regression discontinuity design, we document abnormal returns of 1.43–1.60 % around annual meeting dates where shareholder proposals to adopt MV are voted upon, suggesting that shareholders perceive the adoption of MV as value-enhancing. We document an increase in boards’ responsiveness to shareholders at MV firms. In particular, relative to a propensity score-matched control sample, firms adopting MV exhibit an increase in the rate of implementation of shareholder proposals supported by a majority vote and in the responsiveness to votes withheld from directors up for election. We do not find a relation between votes withheld and subsequent director turnover, regardless of the election standard. Overall, it appears that, rather than a channel to remove specific directors, director elections are viewed by shareholders as a means to obtain specific governance changes and that, in this respect, their ability to obtain such changes is stronger under a MV standard.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2
Fig. 3

Notes

  1. Rule 14a-8 of the Securities Exchange Act of 1934 permits shareholders to submit nonbinding proposals requesting that certain corporate matters be put to a vote at the company’s next annual meeting. To be eligible to submit a proposal, a shareholder must be a beneficial owner of at least 1 % or $2,000 in market value of securities entitled to vote, have owned these securities for at least 1 year, and continue to own them through the date of the meeting.

  2. A provision calling for mandatory adoption of MV by all US publicly traded firms was included in the Senate version of the financial reform bill but eventually dropped in the final version of the Dodd-Frank Act passed in 2010.

  3. In 2003 the SEC proposed a proxy access rule, that would have given shareholders (under certain conditions) the ability to put their nominees on the proxy ballot along with the board’s nominees—with the aim to increase board accountability to shareholders. The proposal was dropped amid strong opposition from the business community. The activists’ campaign for an MV election standard was partly a response to this event. The SEC eventually adopted a new proxy access rule in 2010, which however has been successfully litigated in court by the Business Roundtable and the U.S. Chamber of Commerce. See Kahan and Rock (2011) and Fisch (2012) for a history of proxy access.

  4. This setting also alleviates the concern that any documented effect associated with the adoption of MV may be the result of factors leading to the adoption of MV rather than the adoption of MV per se. If the adoption of MV was simply a manifestation of greater responsiveness to shareholders, then we would expect MV firms to adopt or negotiate away the shareholder proposal when submitted, before the vote. Shareholder proposals voted upon at the annual meeting were and continue to be opposed by the board. Hence an increase in the implementation rate of these proposals (relative to a proper control sample, as discussed in Sect. 3.1.1) is unlikely to simply reflect the governance orientation of the firm and more likely to capture the causal effect of the adoption of MV.

  5. Sjostrom and Kim (2007) and Cai et al. (2013) perform event studies around the announcement of the adoption of MV and the proxy filing (annual meeting) date where shareholder proposals are submitted (voted upon) and find no significant stock price reactions, concluding that the trend toward the adoption of MV is little more than “smoke and mirrors” (Sjostrom and Kim 2007). However, as noted by Gillan and Starks (2007), event studies focused on these dates are plagued by a number of problems (e.g., contaminated events), which our regression discontinuity design mitigates.

  6. Sjostrom and Kim (2007) find insignificant returns around the announcement of adoption of MV for a sample of 116 firms between September 2004 and October 2006, regardless of the form of MV. Cai et al. (2013) find insignificant returns for a larger sample of 481 adopters between 2004 and 2007. Cai et al. (2013) also report positive three-day mean (median) abnormal returns of 0.46 % (0.23 %) around the proxy filing date for firms targeted by a shareholder proposal to adopt MV, while they report insignificant returns around the annual meeting date where the proposal is voted upon.

  7. A growing number of studies rely on RDD in a variety of contexts to address endogeneity concerns that arise in observational data. Imbens and Lemieux (2008) review some of the practical and theoretical issues in implementing RDD. Lee and Lemieux (2010) provide an introduction and user guide to RDD.

  8. To validate this assumption of the RDD approach, Cuñat et al. (2012) show that firms targeted by proposals that pass by a small margin do not differ from firms targeted by proposals that fail by a small margin along a number of dimensions (performance, growth, governance characteristics, etc.). In Sect. 2.2, we perform a similar validity test.

  9. We estimate t statistics based on robust standard errors. Our results are qualitatively similar if we cluster standard errors by meeting date.

  10. The estimation period for the Fama and French (1996) and Carhart (1997) factors ends 15 trading days before the event date; the length of the estimation period is 200 trading days, and we require at least 15 days with returns for a firm to be included in the sample.

  11. Throughout the analyses, we use a polynomial of order five on either side of the threshold. As Cellini, Ferreira, and Rothstein (2010) discuss, assuming that the conditional expectation of the unobservable determinants of the dependent variable (in our case, abnormal returns) given the realized vote share is continuous, one can approximate it by a polynomial of order g and the approximation will become arbitrarily accurate as g → ∞. As in Cuñat et al. (2012), the results are robust to using lower and higher order polynomials.

  12. To further check the validity of this assumption, in untabulated analysis, we estimate Eq. (2) after including the same set of firm characteristics in Table 1 as covariates. Our results are qualitatively similar to those reported in Table 2.

  13. Imbens and Kalyanaraman (2012) derive the asymptotically optimal bandwidth under squared error loss taking into account the special features of the RD setting and provide a fully data dependent method for choosing the bandwidth that is asymptotically optimal. We rely on the rdob.ado routine provided by Guido Imbens to estimate the nonparametric local linear regression for the optimal bandwidth.

  14. Note that in Models (3) and (4), we cannot estimate a coefficient on Other Pass, because in those subsamples we do not have any case of Other proposals that passed.

  15. Previous studies show that proposals that receive high voting support (but are not adopted) are resubmitted in the future and that the probability of implementation increases with the number of majority-votes in favor of the proposals (Ertimur et al. 2010).

  16. This would explain the significant variation in voting outcomes for MV proposals: for example, 3.2 % of the MV proposals in our sample received less than 25 % support, and 8.3 % received more than 75 % support. This variation is common to many other types of shareholder proposals (e.g., proposals to declassify the board).

  17. Between 2005 and 2010 voting support for the 334 proposals to declassify the board ranged between 16.8 % and 98.9 % with mean (median) voting support of 67 % (64.5 %).

  18. A comparison of firms targeted by MV proposals (whether or not with a close vote) to other S&P 1,500 firms in terms of size, performance, institutional ownership, entrenchment index, and Tobin’s Q reveals that the only significant difference is that firms targeted by MV proposals are larger, consistent with prior evidence that activists tend to submit proposals at larger, more visible firms (Gillan and Starks 2000, Ertimur et al. 2010).

  19. We focus our analysis on shareholder proposals that receive a majority of the votes cast at the annual meeting, because, as mentioned in Sect. 2, board responsiveness to shareholder proposals that fail to receive the majority of the votes cast is low (Ertimur et al. 2010, Ertimur et al. 2011, Cuñat et al. 2012).

  20. The proxy statement includes a section where the board presents its arguments against the shareholder proposal and recommends shareholders to vote against it.

  21. A number of studies show a strong association between ISS recommendations and voting outcomes (e.g., Cai et al. 2009; Ertimur, Ferri, and Maber 2012). For a review, see Ferri (2012).

  22. More precisely, ISS recommends withholding votes from the entire board of directors (except new nominees, who are considered on a case-by-case basis) if (i) the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year, or (ii) if the board failed to act on a shareholder proposal that received the support of a majority of shares cast in the last year and one of the two previous years. Starting in the 2013 proxy season, ISS will tighten the policy and recommend withholding votes if the board fails to act on a shareholder proposal that received the support of a majority of shares cast in the previous year.

  23. There is also a conceptual drawback to using RDD in this analysis. Since only a subset of firms that adopt MV do so in response to a shareholder proposal to adopt MV, we would be estimating the impact of MV on firms’ subsequent actions only for a potentially biased subset of MV adopters, making it difficult to generalize our findings to the broader population of MV adopters.

  24. The report, prepared by Claudia H. Allen at Neal, Gerber & Eisenberg LLP, provides a list of firms that adopted an MV standard between September 2004 (the first case of adoption) and November 2007, with the adoption date and details about the specifics of the MV provision. The initial report was released in February 2006 and subsequently updated a number of times up to November 2007. The report also lists 107 firms that had MV in place prior to the push toward an MV standard (i.e., prior to 2004). We exclude these 107 firms from the analysis. Sjostrom and Kim (2007) and Cai et al. (2013) also use the Allen Report as a source to identify MV adopters.

  25. In robustness tests, we (i) match each MV firm to three firms in the same year with the closest propensity score (resulting in 413 control firms), (ii) limit the propensity-matched sample to firms that received shareholder proposals to adopt MV, and thus likely considered its adoption. The results presented in Sects. 3 and 4 are robust to using these alternative control samples.

  26. Due to data availability, some of the subsequent tests use a subset of the MV and propensity-matched non-MV firms. We continue to find that MV and non-MV firms are generally very similar in those cases.

  27. In untabulated tests, we find that board responsiveness to shareholders does not differ with the version of MV adopted (“majority plus” vs. “plurality plus”). This is consistent with the conjecture that in practice the two versions of MV are similar in that whether a director that fails to receive majority support from shareholders remains on the board is ultimately a board decision under both majority plus and plurality plus (Sjostrom and Kim 2007).

  28. In untabulated tests, we find that the percentage of firms with a classified board is similar in the MV and non-MV samples both before and after the adoption of MV (and increase over time in both groups); hence the existence of classified boards is unlikely to affect our inferences.

  29. Univariate analysis (not tabulated) shows that Lag Max Votes Withheld is not significantly different across MV and non-MV firms in the pre- and post-adoption periods. Also, the pre-post difference is not significant for either group of firms. The difference-in-differences, while statistically significant, is economically very small (1.5 %).

  30. In our sample, there are only nine cases where a director fails to receive the majority of the votes in favor: seven cases in plurality voting firms and two in MV firms. In only one case (a MV firm), the director is no longer on the board the year after a majority of the votes is withheld from her.

  31. The sample size is also too small for a meaningful time-series comparison. We find only six cases of directors failing to receive a majority vote in plurality firms that would eventually adopt MV (i.e., pre-adoption MV firm). None of them experiences director turnover the subsequent year.

References

  • Adams, R. B., & Ferreira, D. (2008). Do directors perform for pay? Journal of Accounting and Economics, 46, 154–171.

    Article  Google Scholar 

  • Agrawal, A. (2012). Corporate governance objectives of labor union shareholders. Review of Financial Studies, 25, 187–226.

    Article  Google Scholar 

  • Allen, C. H. (2007). Study of majority voting in director elections. Neal, Gerber & Eisenberger LLP. http://www.ngelaw.com/files/upload/majoritystudy111207.pdf.

  • Armstrong, C., Gow, I. D., & Larcker, D. F. (2013). The efficacy of shareholder voting: Evidence from equity compensation plans. Journal of Accounting Research, 51, 909–950.

    Article  Google Scholar 

  • Bainbridge, S. (2005). The case for limited shareholder voting rights. UCLA Law Review, 53, 601–636.

    Google Scholar 

  • Bebchuk, L. A. (2003). The case for shareholder access to the ballot. The Business Lawyer, 59, 43–66.

    Google Scholar 

  • Bebchuk, L. A. (2007). The myth of the shareholder franchise. Virginia Law Review, 93, 675–732.

    Google Scholar 

  • Bebchuk, L. A., & Cohen, A. (2005). The costs of entrenched boards. Journal of Financial Economics, 78, 409–433.

    Article  Google Scholar 

  • Bebchuk, L. A., Cohen, A., & Ferrell, A. (2009). What matters in corporate governance? Review of Financial Studies, 22, 783–827.

    Article  Google Scholar 

  • Bebchuk, L. A., Cohen, A. & Wang, C. Y. (2011). Staggered boards and wealth of shareholders: Evidence from two natural experiments. Working paper.

  • Becker, B., Bergstresser, D. B., & Subramanian, G. (2013). Does shareholder proxy access improve firm value? evidence from the Business Roundtable’s Challenge. Journal of Law and Economics, 56, 127–160.

    Article  Google Scholar 

  • Brickley, J. A., Lease, R. C., & Smith, C. W. (1988). Ownership structure and voting on antitakeover amendments. Journal of Financial Economics, 20, 267–291.

    Article  Google Scholar 

  • Cai, J., Garner, J., & Walkling, R. A. (2009). Electing directors. Journal of Finance, 64, 2389–2421.

    Article  Google Scholar 

  • Cai, J., Garner, J., & Walkling, R. A. (2013). Paper tiger? An empirical analysis of majority voting. Journal of Corporate Finance, 21, 119–135.

    Article  Google Scholar 

  • Cai, J., & Walkling, R. A. (2011). Shareholders’ Say on pay: Does it create value? Journal of Financial and Quantitative Analysis, 46, 299–339.

    Article  Google Scholar 

  • Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance, 52, 57–82.

    Article  Google Scholar 

  • Cellini, S. R., Ferreira, F., & Rothstein, J. (2010). The value of school facility investments: Evidence from a dynamic regression discontinuity design. Quarterly Journal of Economics, 125, 215–261.

    Article  Google Scholar 

  • Cohen, A. & Wang, C.Y. (2013). How do staggered boards affect shareholder value? Evidence from a natural experiment. Journal of Financial Economics (forthcoming).

  • Cohn, J. B., Gillan, S. L. & Hartzell, J. C. (2011). On the optimality of shareholder control: Evidence from the Dodd-Frank Financial Reform Act. Working paper.

  • Cremers, M. & Ferrell, A. (2013). Thirty years of shareholder rights and firm valuation. Journal of Finance (forthcoming).

  • Cremers, M., & Nair, V. (2005). Governance mechanisms and equity prices. Journal of Finance, 60, 2859–2894.

    Article  Google Scholar 

  • Cuñat, V., Gine, M., & Guadalupe, M. (2012). The vote is cast: The effect of corporate governance on shareholder value. Journal of Finance, 67, 1943–1977.

    Article  Google Scholar 

  • Davis, G. F., & Kim, E. H. (2007). Business ties and proxy voting by mutual funds. Journal of Financial Economics, 85, 552–570.

    Article  Google Scholar 

  • Del Guercio, D., Seery, L., & Woidtke, T. (2008). Do boards pay attention when institutional investors “Just Vote No”? Journal of Financial Economics, 90, 84–103.

    Article  Google Scholar 

  • Ertimur, Y., Ferri, F., & Maber, D. (2012). Reputation penalties for poor monitoring of executive pay: Evidence from option backdating. Journal of Financial Economics, 104, 118–144.

    Article  Google Scholar 

  • Ertimur, Y., Ferri, F., & Muslu, V. (2011). Shareholder activism and CEO pay. Review of Financial Studies, 24, 535–592.

    Article  Google Scholar 

  • Ertimur, Y., Ferri, F., & Stubben, S. (2010). Board of directors’ responsiveness to shareholders: Evidence from shareholder proposals. Journal of Corporate Finance, 16, 53–72.

    Article  Google Scholar 

  • Faleye, O. (2007). Classified boards, firm value, and managerial entrenchment. Journal of Financial Economics, 83, 501–529.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (1996). Multifactor explanations of asset pricing anomalies. Journal of Finance, 51, 55–84.

    Article  Google Scholar 

  • Ferri, F. (2012). Low-cost shareholder activism: A review of the evidence. In C. A. Hill & B. H. McDonnell (Eds.), Research handbook on the economics of corporate law. Cheltenham: Edward Elgar Publishing.

    Google Scholar 

  • Ferri, F., & Maber, D. (2013). Say on pay votes and CEO compensation: Evidence from the UK. Review of Finance, 17, 527–563.

    Article  Google Scholar 

  • Ferri, F., & Sandino, T. (2009). The impact of shareholder activism on financial reporting and compensation: The case of employee stock options expensing. The Accounting Review, 84, 433–466.

    Article  Google Scholar 

  • Fisch, J. E. (2012). The destructive ambiguity of proxy access. Emory Law Journal, 61, 435–500.

    Google Scholar 

  • Fischer, P., Gramlich, J., Miller, B., & White, H. (2009). Investor perceptions of board performance: Evidence from uncontested director elections. Journal of Accounting and Economics, 48, 172–189.

    Article  Google Scholar 

  • Georgeson (2005–2010). 2005–2010 Annual corporate governance reviews. http://www.georgeson.com.

  • Gillan, S., & Starks, L. (2000). Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of Financial Economics, 57, 275–305.

    Article  Google Scholar 

  • Gillan, S., & Starks, L. (2007). The evolution of shareholder activism in the United States. Journal of Applied Corporate Finance, 19, 55–73.

    Article  Google Scholar 

  • Gompers, P., Ishii, J., & Metrick, A. (2003). Corporate governance and equity prices. Quarterly Journal of Economics, 118, 107–155.

    Article  Google Scholar 

  • Grundfest, J. (1993). Just vote-no: A minimalist strategy for dealing with barbarians inside the gates. Stanford Law Review, 45, 857–937.

    Article  Google Scholar 

  • Gul, F. A., Srinidhi, B., & Ng, A. C. (2011). Does board gender diversity improve the informativeness of stock prices? Journal of Accounting and Economics, 51, 314–338.

    Article  Google Scholar 

  • Huber, P. J. (1967). The behavior of maximum likelihood estimates under nonstandard conditions. Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability, 1, 221–223.

    Google Scholar 

  • Imbens, G., & Kalyanaraman, K. (2012). Optimal bandwidth choice for the regression discontinuity estimator. Review of Economic Studies, 79, 933–959.

    Article  Google Scholar 

  • Imbens, G., & Lemieux, T. (2008). Regression discontinuity designs: A guide to practice. Journal of Econometrics, 142, 615–635.

    Article  Google Scholar 

  • Ittner, C., & Larcker, D. F. (2001). Assessing empirical research in managerial accounting: A value-based management perspective. Journal of Accounting and Economics, 32, 349–410.

    Article  Google Scholar 

  • Kahan, M., & Rock, E. B. (2011). The insignificance of proxy access. Virginia Law Review, 97, 1347–2011.

    Google Scholar 

  • Larcker, D. F., Ormazabal, G., & Taylor, D. (2011). The market reaction to corporate governance regulation. Journal of Financial Economics, 101, 431–448.

    Article  Google Scholar 

  • Larcker, D. F., Richardson, S. A., & Tuna, I. (2007). Corporate governance, accounting outcomes, and organizational performance. The Accounting Review, 82, 963–1008.

    Article  Google Scholar 

  • Larcker, D. F., So, E. C., & Wang, C. (2013). Boardroom centrality and firm performance. Journal of Accounting and Economics, 55, 225–250.

    Article  Google Scholar 

  • Lee, D., & Lemieux, T. (2010). Regression discontinuity designs in economics. Journal of Economic Literature, 48, 281–355.

    Article  Google Scholar 

  • Levit, D., & Malenko, N. (2011). Nonbinding voting for shareholder proposals. Journal of Finance, 66, 1579–1614.

    Article  Google Scholar 

  • Lipschutz, N. (2010). ‘Proxy access’ era begins; welcome to the unknown. The Wall Street Journal, August 25.

  • Listokin, Y. (2008). Management always wins the close ones. American Law and Economics Review, 10(2), 159–184.

    Article  Google Scholar 

  • Listokin, Y. (2009). Corporate voting vs. market price setting. American Law and Economics Review, 11(2), 608–635.

    Article  Google Scholar 

  • Lublin, J. (2009). Directors lose elections, but not seats. The Wall Street Journal, September 28.

  • Masulis, R. W., Wang, C., & Xie, F. (2012). Globalizing the boardroom—the effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53, 527–554.

    Article  Google Scholar 

  • Matvos, G., & Ostrovsky, M. (2010). Heterogeneity and peer effects in mutual fund proxy voting. Journal of Financial Economics, 98, 90–112.

    Article  Google Scholar 

  • Maug, E., & Rydqvist, K. (2009). Do shareholders vote strategically? Voting behavior, proposal screening, and majority rules. Review of Finance, 13, 47–79.

    Article  Google Scholar 

  • Norris, F. (2004). Corporate democracy and the power to embarrass. The New York Times, March 4.

  • Rogers, W. H. (1993). Regression standard errors in clustered samples. Stata Technical Bulletin, 13, 19–23.

    Google Scholar 

  • Sjostrom, W. K, Jr, & Kim, Y. S. (2007). Majority voting for the election of directors. Connecticut Law Review, 40, 459–510.

    Google Scholar 

  • Thomas, R., & Cotter, J. (2007). Shareholder proposals in the new millennium: Shareholder support, board response and market reaction. Journal of Corporate Finance, 13, 368–391.

    Article  Google Scholar 

  • White, H. (1980). A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroskedasticity. Econometrica, 48, 817–838.

    Article  Google Scholar 

  • Yermack, D. (2004). Remuneration, retention and reputation incentives for outside directors. Journal of Finance, 59, 2281–2308.

    Article  Google Scholar 

Download references

Acknowledgments

We thank Martijn Cremers, Ian Gow, Marcel Kahan, Paul Oyer, Roberta Romano, and participants at the 2011 Annual Corporate Governance Conference at the University of Delaware, the Burton Workshop at Columbia Business School, the 2011 Conference on Empirical Legal Studies, the 2011 Information, Markets & Organizations conference at Harvard Business School, the 2011 NBER Law and Economics Summer Institute, the New York University Corporate Governance Brownbag Series, and workshops at NYU Law School and the University of Arizona for their comments and suggestions.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Fabrizio Ferri.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Ertimur, Y., Ferri, F. & Oesch, D. Does the director election system matter? Evidence from majority voting. Rev Account Stud 20, 1–41 (2015). https://doi.org/10.1007/s11142-014-9284-9

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11142-014-9284-9

Keywords

  • Director elections
  • Majority voting
  • Shareholder activism
  • Director turnover

JEL Classification

  • G30
  • G34
  • M51