Executive Summary

In theory, the most significant corporate governance check and balance between public company shareowners and the company is the ability to elect corporate directors. In reality, that control mechanism is complicated and often compromised for a host of reasons. Nonetheless, there has been an increased focus on director elections in the past few years. This study examines what happens when shareowners withhold a majority of votes from a director nominee.

The significance of majority withhold votes for corporate directors is the subject of some debate in the governance and business community. It is sometimes argued that majority withhold votes are of little import because they are infrequent, rarely lead to director resignations, and typically come in response not to corporate-specific failings, but to violations of perceived best practice (such as the adoption of a poison pill without shareholder approval). At the same time, however, some academic literature has suggested that high levels of withhold votes may be an indicator of generally negative market perceptions of a company. [1]

This current report contributes to this discussion through an examination of majority withhold votes for 175 director nominees at Russell 3000 companies between July 1, 2009 and June 30, 2012. On the one hand, the study confirms that withhold votes occur at a small percentage of companies, and lead to director resignations in only a small proportion of cases. However, we also find that only about half of majority withhold votes are related to best practice issues, and nearly a fifth co-occur with other serious evidence of shareholder dissatisfaction. Our study also examines corporate disclosures regarding board response to majority withhold votes. We find that companies with majority or plurality plus resignation standards for director elections are more likely to make informative disclosures than those with plurality standards. [2] An analysis of withhold votes in connection to financial performance was inconclusive, but suggests directions for further study of this relationship.

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