Finance
Giving Power to the People
Virtually all director elections in the U.S. are uncontested and a single “for” vote is enough to elect a director. Do votes in these routine elections even matter? Yes, according to new research.
Sep 28, 2017

Giving Power to the People

Sep 28, 2017
Finance
As Featured In 
Journal of Financial Economics

'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.

About the Author(s)

PrabhalaNagapurnanand

Dr. Prabhala's primary research interest is in the area of empirical corporate finance.  Within this field, he has written on several topics including self-selection, event studies, payout policy, executive compensation, financial fraud, mergers and acquisitions, venture capital, and IPOs. His more recent research focuses on using spatial methods to understand product market and mutual fund competition, on financial intermediation including monetary transmission, bank runs, creditor rights, banking for the unbanked, and bank financing of small firms, and on robo-advising for individual investors. Dr. Prabhala has previously taught at Yale School of Management, Indian School of Business, NUS Singapore, and has been research head at CAFRAL, Reserve Bank of India. 

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