Does Majority Voting Improve Board Accountability?

Edward B. Rock is the Saul A. Fox Distinguished Professor of Business Law at University of Pennsylvania Law School. This post is based on a paper, Does Majority Voting Improve Board Accountability?, authored by Professor Rock, Stephen J. Choi, Murray and Kathleen Bring Professor of Law at the New York University School of Law, Jill E. Fisch, Perry Golkin Professor of Law at the University of Pennsylvania Law School, and Marcel Kahan, George T. Lowy Professor of Law at the New York University School of Law.

Directors have traditionally been elected by a plurality of the votes cast (the Plurality Voting Rule or PVR). This means that the candidates who receive the most votes are elected, even if a candidate does not receive a majority of the votes cast. Indeed, in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a Majority Voting Rule (MVR), under which a candidate must receive a majority of the votes cast to be elected. This, proponents say, will make directors more accountable to shareholders.

Over the past decade, the shift to majority voting has been one of the most popular and successful governance reforms. As recently as 2005, only nine of the S&P 100 companies used majority voting in director elections. As of January 2014, almost 90% of S&P 500 companies have adopted some form of majority voting.

Yet critics are skeptical as to whether majority voting improves board accountability. Tellingly, directors of companies with majority voting rarely fail to receive majority approval—even more rarely than directors of companies with plurality voting. A striking finding in our article is that under plurality voting, the likelihood that a director fails to receive a majority “for” vote is 20 times higher than under majority voting (0.6% versus 0.03%). Of over 24,000 director nominees at S&P 1500 companies who were subject to the majority voting rule in elections between 2007 and 2013, only eight failed to receive a majority of “for” votes. Even when a director fails to receive a majority, that director may not actually leave the board. Rather, the director stays on until he or she resigns, is removed or a successor is elected. In fact, of the eight directors at majority voting firms who failed to receive a majority, only three actually left the board following the election. This poses a puzzle: why do firms switch to majority voting, and what effect does the switch have, if any, on director behavior?

At first blush, it may appear that majority voting could generate substantial indirect effects and that the reason directors fare better under majority voting is because they are more responsive to shareholders (the “deterrence/accountability” hypothesis). Thus, for example, as we detail in the article, directors subject to a majority voting are more likely to attend board meetings regularly and less likely to receive a withhold recommendation from ISS than directors subject to plurality voting.

There are, however, alternative explanations for these differences. For example, causality may run in the other direction: companies that are more responsive to shareholders may be more likely to adopt majority voting, and majority voting may have no effect on director actions (the “selection” hypothesis). Or companies subject to majority voting may lobby ISS more heavily to avert a withhold recommendation (the “electioneering” hypothesis). Finally, shareholders may posit that a “no-vote” under MVR will have more of an effect than under PVR and pull their punches (the “shareholder restraint” hypothesis).

We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for all four hypotheses. However, our results suggest that the reasons for and effects of adopting majority voting may differ between early and later adopters of majority voting. We find that early adopters of majority voting were more shareholder-responsive than other firms even before they adopted majority voting. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in their subsequent responsiveness to shareholders. By contrast, for late adopters, we find stronger evidence that majority voting changed the actions of adopting firms.

Differences between early and late adopters have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Advocates of majority voting, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive, the “easy targets.” They then may have used the widespread adoption of majority voting to create pressure on the non-adopting firms.

As far as we know, this is the first time that differences between early and late adopters of governance reforms has been examined empirically. Our results show that empirical studies of the effects of governance changes need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms. In particular, future research on the effect of other governance reforms such as proxy access, bylaws enabling shareholders to request a special meeting, and the separation of chair and CEO, should examine whether these effects differ for early and late adopters.

The full paper is available for download here.

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