This is a summary of "The Power of Shareholder Votes: Evidence from Uncontested Director Elections," by Reena Aggarwal, Sandeep Dahiya, and Nagpurnanand R. Prabhala, published in the Journal of Financial Economics.
The authors demonstrate that dissent votes by shareholders in uncontested elections have an impact on directors’ continuity and position on that firm’s board as well as on their external directorships.
What Is the Investment Issue?
At times, the interests of firm management can clash with those of shareholders. Voting in a director election is one way shareholders express their approval or disapproval of firm policy and of the role of particular directors.
The authors empirically explore whether dissent votes by shareholders in uncontested director elections have consequences for these directors, even though the directors still get elected. This research is based on data collected from US-based companies and may not be applicable to other regions. In the United States, directors are usually proposed by management for elections, and most director elections are uncontested. Whether shareholder voting is effective in that case is debatable because the votes are advisory and nonbinding.
How Did the Authors Conduct This Research?
The authors collect the base data for their research as follows:
- Voting outcomes are extracted from proposals for director election for firms included in the Russell 3000 Index from the ISS Voting Analytics database for the period January 2003–December 2014, excluding the financial sector and utilities. Executive directors are excluded. Only uncontested elections are considered where directors are proposed by the management. Each director’s voting outcome is tracked for each firm, and %Withheld is estimated from the three ballot choices of “for,” “against,” and “abstain.”
- Board-level data are derived from the BoardEx database for the same period and include the number of external board seats, significant board committee assignments, and director-specific attributes, such as director tenure, age, gender, and educational qualification.
- Firm-specific characteristics are obtained from the CRSP and Compustat databases for firms that have non-missing accounting data and stock returns data for the fiscal year-end preceding the election date. Control variables include size, stock return measures, adjusted return on assets, and proportion of institutional ownership.
The resultant data include 83,496 director-election events held between 2003 and 2014. The authors evaluate three aspects of their combined dataset: (1) relationship between each director’s election votes and subsequent outcome (i.e., director turnover), (2) number of external board seats held by the director, and (3) that director’s membership in such significant board committees as audit, board nomination, and compensation. One limitation of the data is that information is tracked for up to one year, or until the next election, so any impact beyond the one-year horizon is not captured. This limitation implies that the results are conservative.
Director outcome is refined for firm-level dissatisfaction by decomposing the dissenting vote against the director into firm-specific and director-specific components. Firm%Withheld is calculated as the mean of %Withheld across all directors proposed by the management. Then Excess%Withheld is calculated as the difference between Director%Withheld and Firm%Withheld, which filters out the dissatisfaction against the firm from the director’s outcome. Committee turnover is obtained by examining successive annual reports for reelected directors.
What Are the Findings and Implications for Investors and Investment Professionals?
The authors conclude that “dissent votes in uncontested director elections have power and result in negative consequences for directors.” This finding includes votes received by a director relative to other directors at the same firm and the overall level of dissent across all directors. The authors find that dissent voting for a director results in a greater probability of turnover of that director within that year in that same firm. Directors in leadership positions tend to receive more dissent because of their visibility but are less likely to depart. However, such directors are more likely to lose leadership positions or membership in key board committees. The authors also note variation in voting patterns for individual directors on the board, which reflects that while overall dissatisfaction with firm performance may shape voting behavior, voters also scrutinize the individual director’s performance. Furthermore, dissent in uncontested elections affects director elections at other firms as well, which implies that the market for directors is quite vigilant.
According to these results, director performance at firms is monitored by shareholders, and dissent voting, even in uncontested elections, affects the director’s reputation. This finding has consequences for the continuity of a director’s board seat and the importance of her position on the board, as well as in external directorship positions. Therefore, investors should exercise their right to vote in a judicious manner.