Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’?

In a forthcoming Journal of Financial Economics article co-written with Diane Del Guercio and Laura Seery, entitled Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’?, we examine whether the external pressure of a ‘just vote no’ campaign is sufficient to motivate directors to act in shareholders’ interests. ‘Just vote no’ campaigns are organized attempts by activists to convince their fellow shareholders via letters, press releases, and Internet communications, to withhold their vote from one or more directors in an effort to communicate a message of shareholder dissatisfaction to the board.

Our study utilizes a comprehensive sample of 112 publicly announced ‘just vote no’ campaigns during the period 1990 to 2003. We find that ‘just vote no’ campaigns have several characteristics in common with shareholder proposals in addition to their non-binding nature. Specifically, the typical campaign targets a large, poorly performing firm, and is sponsored by a public pension fund. Although other proponent types sponsor campaigns, we only observe institutional investor proponents, and not the small individual shareholders who commonly sponsor shareholder proposals. Proponents typically have broad campaign goals, commonly expressing overall dissatisfaction with firm performance and/or with management and board decisions on firm strategy. Some campaigns, however, are narrowly focused on corporate governance issues, such as removing an insider from the compensation committee. Campaign proponents are typically able to garner vote support from their fellow shareholders.

In contrast to the shareholder proposal literature, we find consistent evidence across a broad set of measures suggesting that on average campaigns are effective in spurring boards to act. The typical campaign target has significant post-campaign operating performance improvements. Moreover, we find a forced CEO turnover rate of 25% in target firms in the one year following a campaign, a rate more than three times higher than the 7.5% rate for a control sample matched on sales and performance, and over 12 times the annual 2% rate in the general population of firms. We find this result to be robust to controlling for a variety of firm performance and governance control variables, as well as for concurrent events, such as changes in the board of directors or external pressure from block-holders. Further analysis reveals that the improvements in operating performance are primarily driven by the campaigns motivated by firm performance and strategy reasons, and not by the campaigns focused on general corporate governance practices. In fact, within these campaigns motivated by firm performance and strategy reasons, we find that boards take a variety of value-enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value enhancing, post-campaign operating performance improvements are economically and statistically significantly higher in these sub-samples of target firms. Overall, our evidence suggests that activists can be successful at disciplining managers and directors despite the non-binding nature of withholding votes.

The full paper is available for download here.