Electing Directors

This post comes from Jie Cai, Jacqueline L. Garner, and Ralph A. Walkling, all of Drexel University.

Shareholder representation by the board of directors is a fundamental component of corporate governance. A great deal of research has focused on the characteristics of corporate boards, yet we know little about uncontested director elections. The subject is particularly important in today’s environment. Congress, stock exchanges, and individual firms have instituted dramatic governance changes. Moreover, shareholders, activist organizations, the New York Stock Exchange (NYSE), and the Securities and Exchange Commission (SEC) have proposed and debated additional changes to the method by which directors are elected. Apart from directors, shareholders do not have representation in the companies they own. If shareholder impact on director elections is weak, so is the link between owners and managers.In our forthcoming Journal of Finance paper, Electing Directors, we examine the determinants as well as the efficacy of uncontested director elections on a large sample of firms in the post-Sarbanes Oxley Act (SOX) era. We test several hypotheses relating performance at both the firm and director levels to the votes directors receive. We also examine whether votes matter to subsequent performance, compensation, or governance.

Our sample consists of 13,384 director elections at 2,488 different shareholder meetings during 2003 to 2005. We find that while director and firm performance as well as corporate governance characteristics affect how shareholders vote, the resulting differences in the level of votes are trivial. In general, the differences in votes are statistically significant but economically minor. At both the firm and director levels, votes exceeding 90% are the norm even for poorly performing firms and directors. There are two exceptions: directors attending less than 75% of board meetings or receiving a negative ISS recommendation receive 14% and 19% fewer votes, respectively. However, even though the variation in director votes is small, we find that fewer votes for compensation committee directors significantly impact subsequent abnormal CEO compensation, and fewer votes for independent directors impact subsequent CEO turnover. Also, the removal of poison pills and classified boards is significantly linked to director votes. Nevertheless, lower levels of votes appear to have little impact on the election of directors themselves or on subsequent firm performance. Directors also do not appear to suffer reputational effects from low votes.

The full paper is available for download here.

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