Giving Power to the People

'Yes' Vote or Not, Shareholders Sway Board Elections 

Institutional investors, economists and policy makers have been pushing for reforms that strengthen shareholder rights in publicly traded companies. An issue of particular concern is shareholder oversight of boards of directors. Virtually all director elections in the U.S. are uncontested and a single “for” vote is enough to elect a director. Are director elections then simply sideshows? Do votes in these routine elections even matter? Yes, according to new research. Even in the current voting system, shareholders can dissent by withholding their yays. Such dissent has consequences for directors.

Nagpurnanand R. Prabhala, professor of finance at the University of Maryland’s Robert H. Smith School of Business, and researchers at Georgetown’s McDonough School of Business looked at more than 80,000 director elections held between 2003 and 2014. Under the current plurality voting system used by most U.S. firms, shareholders can cast votes in support of directors, but they cannot cast negative votes against directors. The only way shareholders can voice dissent is withholding their votes.

However, despite the limited outlet to express dissatisfaction, the research finds that directors who face dissent from shareholders are more likely to depart boards. And when these unpopular directors do not leave, they are demoted to less prominent positions and removed from important committees. The effects are more pronounced for firms where directors must stand for election every year and for directors who do not have lead positions in boards.

The researchers find another key consequence: When a director garners high levels of dissent votes at one firm, their reputation is affected and they are more likely to be passed over for board seats at other firms.

Read more: The Power of Shareholder Votes: Evidence from Uncontested Director Elections is featured in the Journal of Financial Economics.