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The power of shareholder votes: Evidence from uncontested director elections
Accepted Manuscript
The Power of Shareholder Votes: Evidence from Uncontested Director Elections Reena Aggarwal , Sandeep Dahiya , Nagpurnanand R. Prabhala PII: DOI: Reference:
S0304-405X(18)30334-9 https://doi.org/10.1016/j.jfineco.2018.12.002 FINEC 3007
To appear in:
Journal of Financial Economics
Received date: Revised date: Accepted date:
4 November 2016 11 July 2017 20 July 2017
Please cite this article as: Reena Aggarwal , Sandeep Dahiya , Nagpurnanand R. Prabhala , The Power of Shareholder Votes: Evidence from Uncontested Director Elections, Journal of Financial Economics (2018), doi: https://doi.org/10.1016/j.jfineco.2018.12.002
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The Power of Shareholder Votes: Evidence from Uncontested Director Elections* Reena Aggarwal McDonough School of Business, Georgetown University 37th and O St NW, Washington DC 20057 [email protected]
[email protected]
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Sandeep Dahiya McDonough School of Business, Georgetown University 37th and O St NW, Washington DC 20057 Nagpurnanand R. Prabhala Robert H. Smith School of Business, University of Maryland, College Park MD 20742
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[email protected]
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Abstract: This paper asks whether dissent votes in uncontested director elections have consequences for directors. We show that contrary to popular belief based on prior studies, shareholder votes have power and result in negative consequences for directors. Directors facing dissent are more likely to depart boards, especially if they are not lead directors or chairs of important committees. Directors facing dissent who do not leave are moved to less prominent positions on boards. Finally, we find evidence that directors facing dissent face reduced opportunities in the market for directors. We also find that the effects of dissent votes go beyond those of proxy advisor recommendations.
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JEL Classification: G3, G32, G34, K22, L51 Keywords: director elections, director reputation, shareholder voting, proxy advisor
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*Corresponding author: Reena Aggarwal, McDonough School of Business, Georgetown University, Washington, D.C. 20057. Tel. (202) 687-3784, [email protected]. Prabhala was on leave to CAFRAL, Reserve Bank of India, Mumbai when part of this work was done. We thank the editor (Bill Schwert), an anonymous reviewer, Jie Cai, Fabrizio Ferri, Ron Masulis, Ralph Walkling, David Yermack, seminar participants at Georgetown University, the Indian School of Business, and FTSE’s World Investment Forum 2016. Aggarwal gratefully acknowledges support from the Robert Emmett McDonough Professorship endowment. Aggarwal and Dahiya thank the Georgetown Center for Financial Markets and Policy for support. 1
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1.
Introduction
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At least at H.P., all the directors got a majority of the votes cast, and even then, two resigned and a third gave up his post as chairman. But at Cablevision Systems, the New York cable and media company controlled by the Dolan family, three directors lost shareholder elections twice in the last three years — in 2010 and 2012 — and received only tepid support in 2011. Nonetheless, the three remain on the board. “As fiduciaries, we can’t sit by and let the board make a mockery of our fundamental right to elect directors,” said New York City’s comptroller, John Liu, who oversees the city’s pension funds, which own more than 532,000 Cablevision shares. “Share owners need accountable directors who will ensure the company isn’t being run for the benefit of insiders at our expense.” -New York Times, April 12, 2013
Almost all director elections in the United States are uncontested, and therefore most
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elections tend to be routine events in which nominees are elected with overwhelming majorities. However, even in uncontested elections, shareholders are sometimes dissatisfied with directors. To express dissent in these elections, shareholders can withhold votes for the relevant directors in the elections held at shareholder meetings. Do these expressions of dissent have consequences
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for directors?
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Anecdotal evidence, such as that in the introductory quote, suggests that voting in uncontested director elections has little effect. Policymakers and the media often highlight
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related issues. For instance, “zombie directors” and “unelected directors” are individuals who continue to serve as directors despite lacking shareholder support.1 In a recent speech, Chairman
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White of the Securities and Exchange Commission asks whether companies should be mandated to disclose why they choose to retain directors for whom the majority of votes are withheld, even
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in uncontested elections.2 Some academic literature on governance also takes a skeptical view of
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See, for instance, Minow, N., 2012. Zombie Directors Should Exit Boardrooms. Bloomberg Businessweek. Available at https://www.bloomberg.com/view/articles/2012-07-18/zombie-directors-should-exit-u-s-boardroomsnell-minow; McDonnell, I., 2013. Calpers to Awaken Zombie Boards. Financial Times. Available at https://www.ft.com/content/8632b21e-9f75-11e2-b4b6-00144feabdc0. 2 White, Mary J., 2015. “Building Meaningful Communication and Engagement with Shareholders.” Speech. Society of Corporate Secretaries and Governance Professionals, Securities and Exchange Commission. Available at https://www.sec.gov/news/speech/building-meaningful-communication-and-engagement-with-shareholde.html.
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the effectiveness of voting in director elections (Cai, Garner, and Walkling, 2009), leading legal scholars such as Bebchuk (2003) and Kahan and Rock (2011) to argue that the director election process is perhaps broken. Are votes in uncontested elections actually so ineffective? We examine this issue using a large dataset on director elections that includes a recent time period
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during which shareholders displayed greater engagement in governance.
Director elections are important events because shareholders govern corporations through the boards of directors, and elections are the primary events through which shareholders can make changes in boards. Thus, the effectiveness of elections is a significant policy issue. If
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director elections are inconsequential sideshows, other mechanisms are perhaps necessary for shareholders to exert control over board composition. Such mechanisms could, for instance, include moving from a plurality to a majority voting system. Alternatively, governance
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mechanisms could change so that shareholders can nominate directors directly through new proxy access rules. Given the perception about the ineffectiveness of current director election
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systems, institutional investors, governance activists, and the Securities and Exchange Commission have all pushed for such changes.3 However, firm managers often oppose sweeping
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changes to the director election system because of their significant potential for disruption and
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abuse by shareholders with small stakes.4 Evidence of the effectiveness of the current process for director elections can help inform this policy debate.
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In uncontested elections, directors are elected unopposed. Should votes in such elections matter? Dissent in director elections reflects the negative sentiment by a firm’s owners about the relevant directors. Ignoring shareholder votes can result in negative consequences for both firms 3
For example, see Council of Institutional Investors' 2014 letter to the SEC. Available at http://www.cii.org/files/issues_and_advocacy/correspondence/2014/07_08_14_CII_letter_to_SEC.pdf. 4 From page 85 of Coca Cola’s 2015 proxy statement in response to a proposal by Harrington Investments. See https://www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2015/03/2015-proxystatement.pdf.
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and directors.5 For instance, the board and firm can receive negative press coverage. Ignoring dissent also imposes costs on senior management who must spend time understanding the reasons for dissent and make a case for retaining directors facing dissent. Perhaps even greater pressure is felt by the directors who receive expressions of dissent. These directors have career
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concerns as they can hold managerial positions or directorships in other firms or aspire to such positions. Directors facing dissent can become less desirable candidates for other positions. Reputation is an important disciplining device in the director market (Grundfest, 1993; Fama and Jensen, 1983; Herman, 1981; Masulis and Mobbs, 2011, 2014). Thus, from both a firm’s
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viewpoint and that of the directors, dissenting votes, even if cast in uncontested elections, are unlikely to be disregarded. Whether dissent matters in practice is the question we examine empirically.
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We examine director elections held between 2003 and 2014. We exclude proxy contests, which are special events that aim to remove an entire slate of directors (Fos and Tsoutsura, 2014)
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to focus exclusively on uncontested elections. Votes are then simply advisory indications by shareholders to firms. Our sample comprises over 34,000 election events in companies that
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involve votes for close to 194,000 director positions. Our unit of observation is a firm director
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election event. The proxy voting ballot for director elections typically lists three voting choices for each nominated director: for, against and abstain. We measure shareolder dissent as the
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number of shares in which the votes are against or abstain as a proportion of total shares voted. We study multiple outcomes including director turnover, spillover effects on the future number of directorships held at other firms, and, for directors who stay on despite dissent, the reassignment of responsibilities away from influential positions on boards. We also estimate 5
There is the broader issue if shareholder votes matter in settings other than director elections. Li, Lu and Wu (2018) provide evidence that managers of acquiring firm in M&A transaction actively avoid shareholder voting when agency problems are higher.
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models that control for unobserved heterogeneity at the level of the firm in a given year, which lets us isolate the variation in votes across directors within a specific election. We also control for recommendations of proxy advisors. We find that directors at a board who face greater dissent votes are more likely to leave
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the board before the next fiscal year-end. That is, director turnover is more likely when more shareholders withhold votes for a director; 1.84% of directors who receive less than majority dissent depart within a year of the election, which increases by four times to 7.14% when there is majority dissent. In a multivariate specification that holds all variables at their sample averages,
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increasing the votes withheld from the sample mean of 5.86% by 10% to 15.86% results in a 24% increase in the predicted director turnover probability.6 The effect is more pronounced at firms that do not have classified boards with staggered elections of directors. The finding is
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robust to including the recommendation of proxy advisors. Thus, the results indicate that what matters is the incremental judgment of institutional investors and shareholders, rather than a
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passive adherence to proxy advisor’s recommendations. We also investigate outcomes for directors who receive low shareholder support in
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elections but continue to hold on to their board seats. We find that these directors are likely to
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face reassignment of responsibilities away from the high profile committees. For instance, in June 2014 three directors in Nabors Industries faced dissent. Two directors were then moved off
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the compensation committee. We identify three prominent committees on boards: audit, compensation, and nominating committee. The rate of departure from these key committees for directors not receiving majority dissent is 7.11%, which almost doubles to 13.54% when there is majority dissent.
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The standard deviation of %Withheld is 8.71%.
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We next examine whether greater dissent at one firm is associated with a reduction in directorships at other firms. We find that this is the case. This result is consistent with the disciplining role of the external market for directors. The result suggests an outcome in which firms are reluctant to use the services of a director who attracts hostility from shareholders at
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another firm, and in which directors facing dissent are less likely to seek new board positions. We find heterogeneity in voting effects across directors. We identify directors in leadership positions and find that these directors are more likely to receive significantly greater shareholder disapproval and negative Institutional Shareholder Services (ISS) recommendations.
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However, the average departure rate for these directors is significantly lower compared to directors who are not in leadership positions. While dissent is generally likely to be followed by director turnover, this effect is less pronounced for influential directors. Thus, we find that
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boards value continuity in directors who hold key responsibilities. Alternatively, these directors can hold more power in boards relative to directors not in leadership positions.
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We then turn to endogeneity issues. As Roberts and Whited (2011) point out, three sources of endogeneity in corporate finance are reverse causality, measurement error, and
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unobserved heterogeneity. The first two are not relevant in our context, but the third unobserved
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heterogeneity could matter. We control for unobservables that vary across firms, those that vary across years, and also unobservables unique to a firm and year, by including withheld votes
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relative to firm-level withheld votes. What remains after addressing this variation is the portion unique to a director in a particular firm in the election under consideration, helping us pin down the effects of the vote specific to the director. Gormley and Matsa (2014) point out that saturating specifications with a full suite of interactive fixed effects can control for time and cross-sectionally varying unobservables. The
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interactive fixed effects approach can be summarized as follows. Our dataset has many directors standing for election each year from the same firm. The common component across all directors reflects the shareholder dissatisfaction with the entire firm in the particular election year. Filtering out this component removes the firm wide dissatisfaction and isolates the portion
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specific to a director in an election event. Alternatively, we specify and estimate a model in which the independent variables are both the firm-level dissent and the difference between a director’s vote relative to all other directors in the same firm, year, and election event. The latter variable reflects each director’s vote judged relative to votes received by other directors at the
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same firm in the same year. We obtain similar results under both approaches. We find that director votes matter even after controlling for unobservables.
The rest of the paper is organized as follows. Section 2 gives background about the
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director election process and reviews related work. Section 3 describes the data. Section 4 discusses the empirical results and the robustness results. Section 5 concludes. Background on director elections
2.1.
The director election process
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2.
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In the United States, most director elections are uncontested. A company’s bylaws outline
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the guidelines for electing directors, and there are two main ways for electing directors. A plurality vote system implies that to win the election, an individual needs to get more votes than
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any other candidate. Our sample consists of uncontested elections; therefore, receiving even one vote is enough to guarantee election of an individual if the firm has a plurality vote system. In contrast for firms with a majority vote system, an individual must receive majority of the votes cast; however, the voting outcome is still not binding as discussed in the paper.
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The perception that the plurality system is ineffective has led institutional investors to push firms to adopt majority voting.7 However, even a majority voting system may only have limited impact. Directors who do not receive majority votes tender their resignations, but boards are not necessarily obliged to accept the resignations. Thus, even after a switch to majority
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voting systems, votes remain nonbinding expressions of dissent. Our study can be viewed as examining whether such expressions of dissent have effects in the sense of being related to organizational outcomes at the firm and personal outcomes for directors.
Another regulatory push to make elections more meaningful is by altering the process by
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which directors are nominated for elections. After the Dodd-Frank Act was signed into law on July 21, 2010, one of the earliest moves by the SEC was to suggest revised proxy access rules. On August 25, 2010, the SEC suggested that firms should be open to receiving director
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nominations from shareholders. Such proxy access gives shareholders more voice in nominating candidates for directors. However, these rules have faced strong opposition from US businesses.
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Two organizations (the US Chamber of Commerce and the Business Roundtable) challenged the rule in court. Several institutional investors, such as TIAA and CalPERS, supported the rule. In
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July 2011, the court ruled against proxy access and the SEC decided not to pursue the proposal.
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However, proxy access proposals have continued to be filed at several firms in recent years. Companies resist these changes through many tactics, including outright opposition and
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proposing new hurdles for investors to qualify for proxy access.8
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For example, see http://www.cii.org/MajorityVotingForDirectors. For example, in 2012, Norges Bank Investment Management, a company that manages investment of Norway’s
pension fund, filed binding proxy access proposals at several firms, including Wells Fargo, Western Union, Staples, and CME Group.
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The perceived ineffectiveness of director election votes has also led to changes in the handling of broker votes that allowed brokers to caste uninstructed shares. Rule 452 of the New York Stock Exchange allows brokers to cast votes on behalf of their shareholders that hold the shares in “street name” in “routine” proposals if the client did not provide voting instructions.
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Uncontested director elections were considered routine proposals. As shown by Bethel and Gillan (2002), broker votes are typically cast in favor of management. In 2010, the SEC adopted new rules barring brokers from voting uninstructed shares in uncontested board elections. The rules on how brokers can vote uninstructed shares continue to be held under scrutiny by
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legislators. For example, the Dodd-Frank Act prohibits broker votes for compensation proposals. Since 2012, major US exchanges prohibit uninstructed broker votes without the client’s consent for proposals related to declassification of boards, majority voting to elect directors, eliminating
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the supermajority voting requirement, providing for the use of consents, providing rights to call a special meeting, and certain antitakeover provisions.9 Related corporate governance literature
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2.2.
Cai, Garner, and Walkling (2009) study a sample of director elections between 2003 and
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2005. They find that votes are related to the recommendations of a proxy advisory firm, ISS. In
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light of their results, we include ISS’s recommendation as a control variable to assess the incremental effects of votes. An appendix in their paper examines turnover and does not find
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that votes are significant. Ertimur, Ferri, and Oesch (2016) report similar evidence for a smaller sample of S&P 500 firms between 2003 and 2010.
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See NYSE memo 12-4 dated January 25, 2012, on modifications to Rule 452 to incorporate the new instructions on
casting broker votes.
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It is reasonable to ask why our study finds that votes in director elections explains turnover. Our study features a larger and more recent sample than used in prior studies. Shareholder engagement in governance is changing over this period. For example, Fos, Li, and Tsoutsoura (2016) finds that the number of proxy fights in 2002 – 2012 have more than tripled
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compared to 1980 – 1990, and almost doubled compared to 1991 – 2001. Shareholders have also become more engaged in this period and are less likely to follow ISS’s negative recommendations on contentious proposals (Aggarwal, Erel, and Starks, 2016). We also expand the scope of prior work by studying the changes in outside directorships after dissent and the
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internal reorganization of board responsibilities for directors facing dissent that do not depart. Our results are related to, and support, the analysis of Fos and Tsoutsoura (2014), who analyze proxy contests that replace entire slates of directors with an alternate set proposed by
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aggrieved shareholders. Fos and Tsoutsoura report that these contests impose significant costs on directors through turnover and loss of outside directorships after proxy contests. Our evidence is
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complementary to theirs. We analyze the large universe of uncontested elections in which votes are only advisory, while Fos and Tsoutsura study proxy contests in which voting picks one slate
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of directors over another. Our evidence suggests that even in routine uncontested elections that
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are typical of most annual meetings of US firms, dissent has multiple consequences. We find that there is director turnover, changes in the external directorships, as well internal restructurings of
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responsibilities after dissent. Iliev et al. (2015) study non-US firms. They report that more dissent votes cast by US mutual funds are associated with director departures in the next year. However, unlike the US, votes cast are mandatory and not advisory in most countries. Related work focuses on voting after specific triggering events. Early instances of such work include Pound (1988), who shows that there are pro-management biases in the voting
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process. DeAngelo and DeAngelo (1989) and Mulherin and Poulsen (1998) show that proxy contests are likely to be followed by firm restructuring. More recent studies are after the wave of financial frauds detected in the post dot-com era. Brochet and Srinivasan (2014) show that shareholders tend to sue directors and vote against them when firms are involved in financial
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fraud. The role of directors has also come under scrutiny after the options backdating scandal (Heron and Lie 2007; Bizjak, Lemmon, and Whitby, 2009; Bebchuk, Grinstein, and Peyer, 2010) because backdating likely reflects insufficient board of director oversight. For instance, Bereskin and Smith (2014) find that directors associated with option backdating lose more outside
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directorships, and Ertimur, Ferri, and Maber (2012) find more votes are withheld for these directors.
The work on nonplurality voting systems in US firms is relatively nascent. This is not
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surprising. Most US firms continue to follow plurality, rather than majority voting. Ertimur, Ferri, and Oesch (2015) identify 398 firms that moved from plurality to majority voting between
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2003 and 2010. They report that firms who switch become more responsive to agenda items brought forth by shareholders. Thus, agenda setting is influential when firms switch to majority
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voting. Our work is also related to the literature on the influence of proxy advisory firms on
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voting by institutional investors (Bethel and Gillan, 2002). More recently, Iliev and Lowry (2015) report that mutual funds vary greatly in their reliance on proxy advisory firm
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recommendations. Malenko and Malenko (2016) discuss a theoretical model of proxy advising. In their model, proxy advising firms is beneficial only when they have sufficiently precise information. Our findings suggest that voting decisions are related to, but go beyond, proxy firm advisories.
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While our focus is on director elections, related work examines voting in different contexts. Early work in this area includes Thomas and Cotter (2007) and Renneboog and Szilagyi (2011).
The literature finds that shareholder proposals are more likely to be
implemented by management if there is majority backing for the proposals. The role played by
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the types of institutional owners is less developed. Cai, Garner, and Walking (2009) report that ownership by index funds or quasi-indexers (see Bushee, 2001 for definitions) exhibits the same pro-management bias as the broker votes studied in Bethel and Gillan (2002). Appel, Gormley, and Keim (2016) show that passive investors are not necessarily passive owners and engage in
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active oversight of the firms they invest in. Borochin and Yang (2016) identify how institutional investor types and their underlying portfolio turnover and holdings concentration affect corporate governance. Fos, Li and Tsoutsoura (2017) provide evidence that director elections play a
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significant role in CEO turnover-performance sensitivity.
Our work is also related to the emerging literature on nonbinding shareholder votes. A
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key issue in this literature is whether such nonbinding votes have real effects compared to binding proposals. Buchanan et al. (2012) compare the nonbinding system in the US to the UK
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system in which proposals are more onerous on sponsors but carry greater force because they are
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binding. They find that shareholder proposals in the UK are more likely to target director elections than in the US where the emphasis of proxy rules is more on shareholder protection and
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less on empowerment. Levit and Malenko (2011) present a theoretical analysis of advisory proposals. They show that nonbinding votes do not tend to be effective unless an activist is involved in order to discipline managers. Director election votes in uncontested elections are advisory, so our study can be viewed as empirical evidence on the role played by advisory votes. 3.
Data and sample selection
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3.1.
Director elections We obtain voting outcomes for proposals listed on proxy statements from the ISS Voting
Analytics database for firms included in the Russell 3000 Index. Our sample includes all director election proposals from January 2003 to December 2014. We exclude financials and utilities. We
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also exclude directors identified as executives at the time of the elections to focus on supervisory or outside directors. These exclusions do not materially affect the results. We examine uncontested elections in which director slates are sponsored by management. In our sample (and in the US more broadly), it is relatively infrequent for alternate slates to be proposed by
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shareholders (Fos and Tsoutsoura, 2014). Our unit of analysis is a unique firm director election event. We construct our sample such that only those directors who face an election in a particular year are included in the analysis for that year. We extract the name of each director who stands
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for election from the ballot item description field in the voting database. The proxy voting ballot in uncontested elections typically lists three voting choices for
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each director nominee: for, against and abstain. For all shareholders who voted, we know the total number of shares voted for, against, and abstain. Shareholders who do not vote are not
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included in our analysis. %Withheld is estimated for each director at a firm and is defined as
(Voted against+Voted abstain) . (Voted for+Voted against+Voted abstain)
(1)
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%Withheld
Following Cai, Garner, and Walkling (2009), a key control variable is the
recommendation that the proxy advisory firm ISS issues for the director nominees in an election. A dummy variable, ISS Against, takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. We also include a range of controls. Appendix A
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describes these firm- and director-level variables and lists the source of the data. The remaining part of Section 3 discusses the important variable specifications and where relevant, the data sources, in greater detail. 3.2.
Dependent variables
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We analyze the relation between director election votes and subsequent director-level outcomes, viz. directorships held at the voting company, the number of other board seats held by a director, and a director’s membership in significant board committees. Explanatory variables includes votes, firm attributes, and the characteristics of individual directors facing elections. We
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construct the data by merging multiple databases with manual interventions as necessary. We describe the key steps below.
The BoardEx database is our primary source for board data such as number of
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directorships and committee assignment as well as individual director-specific attributes such as director age. BoardEx provides extensive data on the service history and biographical data for
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individuals who serve as directors of large US corporations. The coverage begins in 1999 but is narrow until 2003, when it starts to include smaller firms outside the S&P 1500 population. This
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is an important reason for choosing 2003 as the start of our sample period. We merge BoardEx
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with the ISS Voting Analytics database, which has data on director elections. This matching process requires a one-to-one match of individual directors in the two databases. While many
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matches can be handled through machine-based text matching algorithms, manual interventions are necessary both to check matches and resolve ambiguities that arise.10
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For example, Anheuser-Busch Companies has two directors with exactly the same text, “August A. Busch”, in the dataset. We keep track of suffixes to ensure that these are two distinct individuals, namely, August A. Busch III and August A. Busch IV. In other instances, we track the middle names to account for different individuals with the same first and last name. For example Pilgrim Pride Inc. has two directors listed as Lonnie Pilgrim that is resolved by keeping track of the middle initial for the father Lonnie “Bo” Pilgrim and the son Lonnie “Ken” Pilgrim.
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Our measure of director outcome is director turnover, denoted hereafter as Director_TO. We use the BoardEx-identified start and end dates of a particular individual’s tenure as director at a specific firm. Consider, for instance, the case of Zale Corporation At its annual meeting held on December 7, 2009 (for the fiscal year ending in July 2009), the company had a slate of seven
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directors up for reelection. To measure director turnover in the period following the shareholder voting at the annual meeting, we examine Zale’s board composition at the end of the fiscal year during which the meeting took place, i.e., July 2010. We find that two of the seven directors who were up for reelection were no longer on the board. We thus assign the Director_TO variable a
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value equal to one for these two directors and a value equal to zero for the other directors.11 We believe that our turnover measure is conservative as a measure of election-induced changes because our data covers a relatively short horizon of less than one year after voting.
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Consider the example of Zale Corporation described in the previous paragraph. Here, we are effectively looking for a turnover in a relatively short period of eight months (December 2009 to
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July 2010). In some instances, it is possible that the low support from shareholders has effects over longer periods. For instance, while two of the directors of Zale Corporation departed before
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the end of the fiscal year, the other five Zale directors up for reelection who were still on the
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board had also received a high level of %Withheld. Two out of these remaining five directors resigned in September 2010 (two months after the fiscal year-end), and an additional director
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resigned in February 2011 (seven months after the fiscal year-end). Our turnover measure is conservative in the sense that it does not capture these later turnovers, which are likely to reflect the July 2010 dissent but could also have other contaminating effects that are more likely during a longer time horizon.
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Two directors faced a substantial 19.53% and 19.57% of votes withheld, respectively. Their resignation was announced in the May 6, 2010, 8-K filing, i.e., two months before the fiscal year-end in July 2010.
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We also consider an alternative econometric specification in which the total dissenting vote against a director is decomposed into a firm-level component and a component specific to the director facing the election. The first component is the average withheld at the firm level, or Firm%Withheld, which is the mean of %Withheld across all directors on the slate at an election
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event. The second director-specific component, Excess%Withheld, is the %Withheld for the director minus the firm-level average, Firm%Withheld. The variable Excess%Withheld thus filters out the aggregate firm-level dissatisfaction and thereby controls for other issues that can lead to dissent at the level of the firm and year. Following Gormley and Matsa (2014), we also
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estimate an econometric model that controls for such unobservables using interactive fixed effects at the election-year level. The fixed effects specification absorbs and thus sheds no light on the firm-level drivers of dissent such as past performance, returns, or the aggregate dissent at
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the firm. The results are similar to the model using Excess%Withheld.
We also analyze the total number of other directorships held by an individual director.
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We use this measure to examine whether dissent at one firm has spillover effects on other positions held by the director. This measure, Change in outside directorships is the sum of all
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directorships at the beginning of year t+2 minus the same sum at the beginning of year t, where t
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is the year of the election. To ensure that we do not double count a loss of directorship for the firm in which the individual director is facing an election, we exclude such departures when we
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estimate the variable Change in outside directorships. Our third outcome variable is committee turnover. The variable is a metric of the internal
consequences of elections. It reflects the reassignment of responsibilities for directors who remain on a board after an election. We take the view that the important board committees are the compensation, nominating, and audit committees. The compensation committee has acquired
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an especially high profile given the increased focus and debate on top management pay (see Frydman and Jenter, 2010 or Murphy, 2013 for reviews). The audit committee has gained importance since the 2002 Sarbanes-Oxley Act, which increased the scope, expertise, and the authority of the audit committee. Finally, the nominating committee is important because it
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influences the composition of the board through the director nomination process. Exchanges and regulators have responded to concerns about the director selection process by requiring nominating committees to be composed of only independent directors (Shivdasani and Yermack, 1999). As a result, nominating committees are important in determining board structure.
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We identify committee turnover from successive annual reports. A committee turnover occurs if a member at the time of election is no longer on the committee in the year following reelection. We focus, of course, on turnover from committees conditional on the member’s
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staying on the board. Thus, a committee turnover variable equals one if the director who is up for election remains on the board at the end of the year but is no longer a member of that
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particular committee in the year after the election. The variable aims to capture the loss of status for a director who does not leave a board. Firm characteristics
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3.3.
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We control for several firm-specific characteristics. These characteristics are constructed by merging the ISS Voting Analytics and BoardEx with Center for Research in Securities Prices
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(CRSP) and Compustat databases. We require that firms have nonmissing accounting data and stock returns data for the fiscal year-end preceding the election date. Most of our control variables are commonly used in empirical corporate finance studies. Size is the natural logarithm of the book value of total assets for the most recent fiscal year preceding the director election. Excess ret is a stock return performance measure. It equals the stock return in the fiscal year
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prior to the election date minus the return of a characteristics-matched portfolio based on style quintiles from Daniel et al. (1997), hereafter DGTW. Adj. ROA is an accounting-based performance measure. It is calculated as the earnings before interest, taxes, depreciation and amortization (EBITDA) to assets ratio minus the median ratio for firms in the same two-digit
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Standard Industrial Classification (SIC) industry. The control variable DualClass equals one if the firm has more than one class of voting stock. These data come from Gompers, Ishii, and Metrick (2010). In staggered or classified boards, only a subset of directors stand for elections each year (Cremers, Litov, and Sepe, 2016). We impute whether a board is staggered from the
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number of directors on the slate relative to the total number of board members.
We include other firm-level characteristics of interest. InstOwnship is the fraction of outstanding shares held by institutional owners as reported in the Schedule 13F filings. In
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addition, we also focus on different types of institutional investors that hold shares of a firm immediately prior to the annual meeting of the firm in which some or all of its directors face a
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reelection. For each firm-meeting date observation, we obtain institutional investor holdings for
(13F) Database.
Director characteristics
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3.4.
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the most recent quarter before the meeting date from the Thomson-Reuters Institutional Holdings
The primary unit of analysis in our paper is a director facing an election at a firm in a
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given fiscal year. To control for heterogeneity across individual directors, we include a number of director-specific characteristics. These include age, tenure, gender, and the educational qualifications of each director. All director-related characteristics are obtained from BoardEx. In some specifications, we control for unobserved director heterogeneity by including director fixed effects. While this approach has the advantage of not requiring us to specify the form of director
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heterogeneity, it does not shed light on the drivers of heterogeneity and, perhaps more importantly, requires a sample of firms in which a specific individual holds multiple directorships. In this approach, we would lose observations involving individuals who only hold a single directorship. Thus, it is not our preferred specification. However, we emphasize that the
4.
Results
4.1.
Withholding of votes
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results are robust to either approach.
Our final sample consists of 83,496 director election events. Table 1 reports data on
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shareholder voting by fiscal year to illustrate the time series variation in dissent. We have between 4,570 and 8,015 director election events per year. The average percentage of votes withheld in the full sample is 5.86% and varies between a low of 4.66% in 2014 and a high of
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8.18% in 2009 just after the financial crisis. Shareholder concerns related to the financial crisis are reflected in the 2009 proxy season because the 2008 proxy season was mostly complete by
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September 2008, when the crisis had fully set in. The displeasure with directors in the aftermath of the financial crisis continues in 2010, when the 6.88% dissent rate significantly exceeds the
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overall sample average of 5.86% and the levels prior to 2008.
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We also report the data on instances of majority dissent. There are 350 instances of such dissent, representing about 0.5% of the full sample. These instances also peak after the 2008
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crisis. For instance, in 2009 we see majority dissent in 69 cases, or 5% of elections, and in 2010, we see 85 instances of majority dissent, or 6% of all cases. These numbers are similar to those reported in February 2015 by the Committee on Capital Markets Regulation.12
12
See http://capmktsreg.org/reports/committee-releases-updated-data-recommendations-unelected-directors/.
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Following Cai, Garner, and Walkling (2009), proxy advisory recommendations can influence how shareholders vote. Thus, we also report data on the influence of recommendations by proxy advisors. We show the percentage of director nominees opposed by ISS each year. In our sample, Table 1 shows that ISS opposes between 6.72% and 17.30% of nominees up for
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election each year. The overall level of the opposition trends downward over our sample period. For instance, the opposition by ISS reaches a low of 6.72% of all director election events in 2014. The decline in opposition is preceded by a peak in ISS opposition in the 2009 and 2010 proxy seasons.
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The influence of the proxy advisory firm’s recommendations on voting is indicated by the numbers presented in Table 1. Over the whole sample period, if ISS does not oppose a director nominee, the average votes withheld equal 3.91%. For directors opposed by ISS, the
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average percentage of votes withheld is much higher at 22.42%. The difference is economically meaningful and also statistically significant, as shown in the t-values reported in the last column
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of Table 1. How much shareholder votes and proxy firm advice matter is an empirical question that we address.
Other descriptive statistics
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4.2.
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Panel A of Table 2 provides firm and director descriptive statistics for the 83,496 election events in our sample. The mean and median board size per election event equal 9.17 and 9.00,
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respectively, and 26.62% of the election events are for directors from staggered boards. However, the median election event does not feature a staggered board. Not surprisingly, the firms in our sample are primarily held by institutions. The mean and median holdings of institutional investors equal 72.83% and 77.15%, respectively. Thus, votes by institutions and the voting behavior of institutional investors are important governance issues for our sample firms.
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Panel B of Table 2 reports director characteristics. The mean and median age of the directors standing in the election events in our sample are 61 and 62 years, respectively, and the mean and median duration of service at election time equal 7.6 years and 5.7 years, respectively. Directors with longer tenures have considerable experience, expertise, and firm-specific capital
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that are often helpful to the boards they serve on. On the other hand, there is also an argument for director “freshness.” This notion is partly based on the belief that, after several years of service on a board, a director is perhaps co-opted and no longer independent, as discussed by Coles, Daniel, and Naveen (2015). In addition, firms could benefit from fresh insights brought in
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by new directors.
In our sample, an individual director holds a mean (median) of 1.98 (2.0) directorships. Fama and Jensen (1983), and, more recently, Masulis and Mobbs (2011, 2014) point out that the
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external director market is an important source of incentives for directors. The incidence of multiple directorships underlines the importance of this source of incentives in our sample. We
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include various demographic attributes of individual directors as controls. Panel B in Table 1 provides descriptive statistics of these characteristics.
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Panel C in Table 1 gives the correlation coefficients for several variables. The correlation
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between ISS Against and %Withheld is 0.65, which is statistically significant, consistent with Cai, Garner, and Walkling (2009). Panel C in Table 1 further shows that there is significant
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negative correlation between Firm%Withheld and the two measures of prior period performance—Excess ret and Adj. ROA. Thus, dissent is more pronounced at firms with weaker performance. The dissenting vote, %Withheld, has a positive and significant correlation with director age and tenure and for members of
compensation and nominating committees,
suggesting directors with more prominent positions are more likely to be targeted by dissenting
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shareholders. Members of the audit committee are, however, associated with fewer dissent votes. Perhaps given the specificity of the role and the statutory responsibilities of auditors, dissent against audit committee members is more focused on issues related to an audit.13 Dissent is more correlated with directors having law degrees and male directors and appears less likely to be
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correlated with directors holding Master of Business Administration (MBA) degrees. The table suggests the necessary controls in the multivariate specifications that we discuss next. 4.3.
Voting and director turnover
The main empirical question we address in our paper is whether shareholder discontent
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with a director, as reflected in votes, has consequences for that director. While we turn to formal regression specifications later, it is useful to consider simple univariate statistics for which we focus on instances of majority dissent. Table 3 provides the basic results. The average turnover
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rate for directors who receive less than 50% of dissent votes is 1.84% but is 7.14% for directors receiving majority dissent votes. The turnover rate for directors receiving 50% or more dissent
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votes and who do not serve on compensation, nominating or audit committees, is even higher at 12.50%. The results partly reflect a baseline effect in which directors who do not serve on
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important committees tend to depart more, as reflected in the high turnover rates for such
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directors of 2.95%, even at low levels of dissent (Chidambaran, Liu, and Prabhala, 2016). However, when there is majority dissent, the departure rates increase by four times.
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We now turn to multivariate specifications that include votes and other controls for firm and director characteristics. Our baseline specification is a logit model ( Director _ TO)i , j ,t 1 (%Withheld )i , j ,t Fj ,t Di ,t i .
13
(2)
Brochet and Srinivasan (2014) find audit committee members are more likely to be named in lawsuits relating to accounting irregularities.
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The dependent variable, Director_TO, takes a value of one if a director i at firm j who faces an election at time t is no longer on the board for fiscal year t+1, and zero otherwise. The main independent variable of interest is %Withheld, which is estimated for each director facing reelection (Eq. 1). The parameter of interest in Eq. (2) is the coefficient λ. The control variables
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include firm characteristics denoted by vector F, and director-specific characteristics denoted by vector D. We estimate but do not report results of a linear probability model, as it gives similar results. While the marginal results are easier to visualize and compare in the linear probability model, we report the estimates of a logit specification given that our dependent variable
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Director_TO is binary.
Table 4 reports the logit results. Firm-level controls are Size, two measures of performance, namely excess stock market returns (Excess ret), industry-adjusted operating
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performance (Adj ROA), and institutional ownership (InstOwnship). Director-specific controls are age of the director (Age), number of years served on the board (Tenure), membership on a
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significant committee (CommMember), and number of other board positions (#Dirships). We define the variable CommMember as follows. CommMember is a dummy variable that equals
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one if a director serves on a significant committee, which is one the following three committees:
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audit, compensation, and nominating (governance) committees. We start by examining the relation between firm-level characteristics and director
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turnover. Director turnover is more likely when the firm has poor prior-year performance. Both accounting performance and stock market performance are significant in explaining turnover. In addition, there is less turnover at larger firms (proxied by total assets). Aggregate institutional ownership is not significant. Model (2) of Table 4 includes dissenting vote against a director and several director-level controls. We find that there is a positive and significant relation between
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dissent, i.e., votes withheld for a director and subsequent director turnover in the next year. We briefly discuss some coefficients for the control variables in model (2). Older directors are less likely to depart boards. However, the length of a director’s tenure is not associated with turnover. The number of directorships held by a director is not significant. An interesting variable is the
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responsibility assigned to a director as reflected by membership of significant committees. Directors holding such positions are less likely to depart in the year after an election.
Model (3) in Table 4 adds a key control variable of interest, the proxy advisor recommendation, ISS Against. The coefficient of ISS Against is positive and statistically
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significant at the 1% level. The result indicates that if ISS issues a recommendation opposing a management-sponsored director nominee, it is more likely that the director will leave the firm in the next year. Model (4) includes both proxy advisor recommendation and dissent. The
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coefficient of %Withheld continues to be significant, but ISS Against is no longer significant. We
advisor recommendations.
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conclude that the significance of votes withheld is not simply due to correlation with proxy
In models (1) to (4) in Table 4, we find that firm-level stock and accounting performance
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is negatively related to director turnover. However, stock- and accounting-based performance
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measures may not capture the entire spectrum of firm performance used by investors in determining votes. We address this point by including aggregate firm-level dissent as an
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additional explanatory variable, Firm%Withheld. This variable also captures other forms of heterogeneity at the firm level that determine dissent. For instance, there could be an idiosyncratic variation in how a firm’s shareholders vote in a particular year due to unobservable compositional effects of a firm’s shareholder base. Alternatively, there could be time varying unobservables, for example, product defects or recalls, litigation, or environmental challenges.
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Such events could influence votes but may not be fully captured by the summary performance metrics included in models (1) to (4). We define the firm-level shareholder dissatisfaction measure, Firm%Withheld, as the average of individual fraction withheld for all directors up for election at a firm in a given year.
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Thus, Firm%Withheld is the average dissent across the entire slate of directors up for election in a given year. Model (5) of Table 4 shows that the coefficient of this firm-level measure of discontent is positive and significant beyond the stock and accounting performance variables. We thus include the firm-level dissent in subsequent specifications.
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The last column of Table 4 takes one step toward addressing unobservables. We estimate a model that includes the variable Excess%Withheld, which is estimated by subtracting the average fraction of withheld votes for all directors at a firm for the year from each individual As discussed earlier in Section 3.2, this is a powerful control for
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director’s %Withheld.
unobservables. Model (6) reports the results. The coefficient of Excess%Withheld is positive and
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significant, even after controlling for both Firm%Withheld and the proxy advisor’s recommendation. Directors who receive higher dissent relative to other directors in the same
PT
election are more likely to depart from the board in the next year. Thus, director-specific dissent
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matters.
Table 5 provides additional tests to address the issue of unobserved heterogeneity. The
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unit of our analysis is an election event t for a director i at a firm j. In model (1) of Table 5, we include interactive firm-year fixed effects that control for all unobserved heterogeneity at the firm in the particular election. This fixed effect controls for firm-level unobservables, including both the time-invariant and the dynamic components that vary from year to year. What remains then is variation within a particular firm across directors in the specific election. This approach is
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roughly equivalent to the model with Excess%Withheld but differences all other explanatory variables relative to firm-year averages. The results are reported in model (1) of Table 5. Because the specification absorbs all variation within a firm and an election, firm-level characteristics drop out. The coefficient for the fraction withheld remains significant at the 1%
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level.
Specification (2) in Table 5 reports estimates that control for director level unobservables. This model allows us to examine the effect of votes withheld for the same director across different firm elections. This sample, however, requires us to narrow the sample
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to the universe of directors with multiple appointments. The coefficient for %Withheld is positive and significant. In model (3), we estimate a similar specification including both Excess%Withheld and Firm%Withheld. The coefficient for both variables is significant. This
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result indicates that directors are more likely to depart if they receive more dissent votes than other directors at that firm and also from firms in which there is more overall dissent.
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Table 6 reports the results of other robustness tests. Here, we focus on heterogeneity across firms. In Panel A, we divide the sample into firms with or without classified boards. In
PT
firms with classified boards, director elections are staggered. In such elections, there is less
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pressure on a director receiving low shareholder approval, as the next election for the director occurs three years later. It is less likely that boards would react to negative votes for a director
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only up for election three years down the line, or that such directors would choose to leave. Thus, if the earlier results reflect the pressures from voting on directors and firms, we expect voting effects to be more pronounced for boards that are not classified. Panel A of Table 6 corroborates this hypothesis. The coefficient for dissent is statistically significant and greater in unclassified boards whose directors face elections every year.
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We next analyze firms that have majority voting systems for director elections. We use an approach similar to that for classified boards. %Withheld is significantly higher for firms with plurality voting relative to firms that adopt majority voting. We estimate the impact of voter dissatisfaction separately for subsamples of firms with plurality voting and majority voting
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systems. Panel B of Table 6 reports the results. Dissent matters both for plurality as well as majority voting firms. However, the coefficient for dissent is almost twice as large for the majority voting subsample. In the Panel C specification, we divide firms into those with and without dual class shares. In the case of firms that have dual class shares, votes can be less
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informative, as inside shareholders have greater control over the firm. Shareholder discontent remains a significant predictor of director turnover at firms with and without a dual class structure.
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Finally, many firms have mandatory retirement ages for their directors. We analyze director turnover separately for directors below 65 years of age and those 65 years or older at the
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time of the reelection. This approach is a filter for turnovers due to age-based retirement rules. The results are reported in Panel D of Table 6. We find that the coefficient for Excess%Withheld
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is positive and significant at the 1% level for the below-65 directors. The dissent coefficient
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remains positive but is about one-third smaller and has weaker significance at the 10% level for 65 and older directors. Thus, younger directors are more likely to leave a board in response to
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dissent. 4.4.
Change in outside directorships We next address the question of whether dissent with a director at a firm is associated
with an increase or decrease in other (outside) directorships held by the individual being voted on. A well-established literature going back to Fama and Jensen (1983) suggests that outside
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directorships are an important channel for aligning shareholder and director incentives. If shareholders use dissent at a firm even in uncontested elections with no direct consequence at the voting firm to signal dissatisfaction with a director, the directors in question are likely to become less attractive to boards at other firms. Thus, dissenting votes for a director at a firm potentially
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affect the number of directorships held by the director at other firms.
We test this proposition by estimating models in which the dependent variable is the Change in outside directorships. This variable is the net change in the number of outside directorships held by the director, positive or negative, over the next two years after an election.
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We exclude any changes in the directorships in the focal firm with an election event, as this change is already accounted for in the dependent variable Director_TO in Tables 4 to 6. Table 7 presents regression results in which the Change in outside directorships is the
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dependent variable. The coefficient for %Withheld is negative and significant. As before, proxy advisory firm recommendations matter in models that do not control for dissent. However,
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dissent remains significant even after we control for proxy advisor recommendations. Thus, shareholder dissent is related not only to director turnover at the firm in which the opposition
PT
occurs but also the net directorships held at other firms. The results are similar using director-
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specific measure, Excess%Withheld, as the measure of dissent and the average dissent at the firm level, Firm%Withheld. Even when both variables are included in the specification, they are both
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significant as seen in model (5) in Table 7. Some control variables included in Table 7 are of interest. We find that directors at large
firms are likely to gain more directorships. Masulis and Mobbs (2013) argue that directors spend more time on prestigious directorships. Our results suggest that there are rewards for doing so. Directors already serving on several boards are less likely to increase directorships. Older
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directors and directors with long tenures are less likely to increase future directorships, and directors with law and business qualifications appear more likely to gain future directorships. We find that male directors are less likely to gain new directorships, consistent with pressures to
4.5.
What about directors who stay on despite dissent?
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increase the representation of women on boards (Adams, 2016).
We turn to the outcomes for directors who continue to remain on the board despite facing dissent in shareholder elections. Our sample comprises directors who remain on boards after elections until the end of the fiscal year following an election. For this group of “surviving”
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directors, we examine whether there is a change in roles within the board. We focus on whether a director receiving significant dissenting votes is assigned away from the membership of key board committees.
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We create three indicator variables Comp_TO, Nom_TO, and Audit_TO to capture departure from the compensation, nomination, and audit committees, respectively. These
ED
variables take the value equal to zero if an individual director stays on the committee following the reelection and one if the director departs the committee following the election (but continues
PT
to stay on as a board member). Committee names are not standardized across companies or
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sometimes within the same company across years. We use extensive manual intervention to standardize committee names to ensure their comparability across years. For example,
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Abercrombie & Fitch Co. states in its May 2009 proxy that it has four standing committees: compensation, executive, audit, and nominating committee. In the proxy filed in the following year in May 2010, the company states that it has five standing committees, adding a new social responsibility committee to the previous four committees. Consider an executive listed as a member of the compensation and nominating committees in 2009 who is reassigned in 2010
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away from these committees but who gains a position on the corporate social responsibility committee. Because the executive continues on the board but is no longer a member of the compensation and nomination committees, we set Comp_TO and Nom_TO equal one in this case.
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Table 8 compares committee reassignment outcomes for staying directors, i.e., conditional on continuing in the same board, who receive majority dissent relative to those who do not. The probability of departure from any one of the committees is 7.11% for directors receiving less than 50% dissent, and it increases to 13.54% if dissent exceeds 50%. The
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difference between the two is statistically significant at the one percent level. We observe similar relations for individual membership in the compensation and nominating committees, but, as noted earlier, weaker results for the audit committee.
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Table 9 reports estimates of multivariate specifications. The dependent variable is committee turnover, or reassignment away from one of the compensation, nominating, or
ED
auditing committees. The explanatory variables of interest are %Withheld, Excess%Withheld, and Firm%Withheld. The control variables are as before. Some directors serve on more than one
PT
committee. Controlling for the number of committee memberships is important because directors
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on multiple committees are less likely to assume further committee responsibilities in the future. Thus, we include a dummy variable MultipleComm that takes that value of one for directors who
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serve on more than one committee. Models (1) and (2) of Table 9 report results for audit committee turnover with %Withheld and Excess%Withheld, respectively. Models (3)–(4) and (5)–(6) report similar estimates for the directors who serve on the compensation and nominating committees, respectively. We find that the coefficients for both %Withheld and Excess%Withheld are significant. The results suggest that even if directors who are opposed by
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shareholders do not leave, they are more likely to experience some degradation of their status within the board, as they are more likely to be removed from important committees.14 Among the control variables, three variables appear to be prominent. Multiple committee membership is significant throughout. Poor accounting performance is consistently likely to lead
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to reassignment away from both compensation and nominating committees. Age has a negative coefficient, so older directors are less likely to depart their committee positions. In summary, the results suggest that shareholder votes have consequences for the internal organization of boards.
responsibilities of directors within boards. 4.6.
Directors in leadership roles
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Shareholder voice, as expressed through nonbinding dissent, is related to the functional
Directors in roles, such as the chair of the board, lead director, or chair of an important
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committee, are board leaders who help shape board functioning in the areas of their responsibility. These individuals are logical targets for unhappy shareholders. However, a
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director appointed to a leadership role likely provides unique services to the firm so the firm is more likely to ignore the low shareholder support for such directors. Dissent should thus have
PT
less force for higher profile directors in leadership positions.
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There is considerable variation in how boards report board positions. We search the board role field of the BoardEx database and create a dummy variable Board_chair that equals one if
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BoardEx describes the role as chair of the board or presiding director. Thus, our Board_chair
14
We also examine dissent for new directors at firms. The average dissent for all directors who depart is 6.82%
versus 5.39% for directors who stay on and 3.82% for new directors. This is additional evidence that dissent appears to be targeted at specific directors.
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variable identifies nonexecutive directors that are chair of the board.15 We also identify lead directors if the board role field in BoardEx contained the text string “lead” without any qualifiers such as deputy, interim, acting, or emeritus. Directors who meet this description are classified as Lead_directors. We also search for leadership roles within significant board committees by
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searching for chairman, co-chairman, president, or chairwoman text strings in the committee role name field of BoardEx.
Table 10 provides the turnover outcomes for directors in leadership positions relative to directors not in such leadership roles. With the exception of the chair of audit committee,
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directors in the leadership position get significantly higher dissent votes than those not in leadership roles. The fraction of votes withheld is higher for the nonexecutive chair, lead independent director, chair of the compensation committee, and chair of the nomination
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committee. The notable exception to the directors in leadership positions is the case of the audit committee chair role. Directors listed as audit committee chair are significantly less likely to
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receive dissenting votes. These directors have statutorily endowed roles as watchdogs. They are likely held culpable in cases of financial irregularities but do not seem to be targeted for more
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normal performance-related concerns.
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We next examine the association between the likelihood of departing from the board within a year of election. We find that even though directors in leadership roles receive
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significantly greater shareholder disapproval and negative ISS recommendations, the average departure rate for these directors is significantly lower compared to directors who are not in 15
BoardEx uses more than a dozen different titles such as independent chairman, presiding independent chairman,
joint chairman, presiding independent director etc. We are careful to exclude roles that appear transitory or somewhat junior. For example, all roles with qualifiers, such as interim, deputy, emeritus, acting, etc. are not classified as board leadership roles.
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leadership positions. For example, on average, 1.21% of directors listed as the lead director depart in the year following the election. In contrast, 1.89% of the directors that are not listed as lead directors depart within a year of the election. We expand on this theme in Table 11, which reports results from estimating a
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multivariate logit regression with director turnover as the dependent variable. We estimate this regression for several subgroups. In each case, we compare the effect of votes on directors who are not identified as being in a leadership position in the year of the election relative to directors identified as leaders. We find that voting is insignificant in explaining departures of directors in
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leadership positions. The coefficient for votes is not significant for board chair, lead directors, and chairs of compensation, nominating, and audit committees, but it is significant for directors without leadership roles. A specification that combines the roles and compares directors with or
6.
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without a major leadership position gives essentially similar results.16 Conclusion
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An important and sometimes contentious debate is whether shareholder voting is an effective mechanism to bring about changes in corporate governance and firm policy. Voting in
PT
director elections is one way for shareholders to express their displeasure with firm policy.
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However, director elections in the US tend to be uncontested events, raising questions about the usefulness of votes in these elections as a means of exerting pressure on directors. Do votes in
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these routine elections matter? We find that, contrary to popular belief and results found in prior
16
Using excess votes withheld gives similar result. In unreported results, we examine differences based on the
nature of a firm’s institutional shareholders, as represented by the institutional investor horizon (Bushee, 2001). The results do not appear to vary by these ownership patterns.
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studies, dissent votes in uncontested director elections have power and result in negative consequences for directors. We examine the consequences of shareholder votes in 83,496 director election events held between 2003 and 2014. We find that directors receiving more dissent experience negative
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future outcomes. Dissent is associated with increased director turnover. The results are robust according to a range of specifications and models with granular controls for unobserved heterogeneity. There is some heterogeneity in these results. Our results are stronger for firms that have nonclassified boards in which directors must stand for election every year. Directors in
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leadership positions tend to be recipients of more dissent but are less likely to depart. We also find that elections have consequences even when directors do not leave boards at which they face dissent. Such directors are likely to lose leadership positions and membership in key committees
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that shape how boards function.
Our results on voting are also relevant to the broader issue of assessing director
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performance and turnover-performance sensitivity. Yermack (2004) presents evidence on this issue. Variables such as the size, profits, or the reputation of the firm are reasonable choices for
PT
the firm’s performance. These measures aggregate the output of the entire board and the top
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management. However, firm-level performance measures do not indicate an individual director’s performance. In our view, votes in director elections can fill this gap. Votes are cast for
AC
individual directors and can thus be interpreted as director-specific judgments by shareholders. Their empirical usefulness, however, depends on whether there is sufficient variation in voting within a firm in an election year across directors and also whether intra-election variation explains director outcomes. We find that this is the case. Voting varies across directors even
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within a firm for a specific annual meeting, and it is precisely this variation that explains post election outcomes. We also find that dissent in uncontested elections has pass-through effects at other firms. Directors with high dissent votes at one firm are likely to have fewer outside board seats at other
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firms, even within a relatively conservatively specified short period after elections. Both the votes received by a director relative to other directors at the same firm as well as the overall level of dissent across all directors matter. Thus, dissent by shareholders negatively impacts director reputation. This finding contributes to the literature on the labor market for external directors and
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is consistent with the viewpoint that this market is important for directors and is thus a source of discipline (Fama and Jensen, 1983; Masulis and Mobbs, 2011, 2014). Votes in director elections serve as an informational channel that helps inform the director market and contributes toward
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the functioning of the reputation channel. While proxy advisory services and their recommendations are important, our results hold even after controlling for ISS’s
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recommendations. Dissent votes carry additional information. Thus, we conclude that even though votes in uncontested director elections are advisory and nonbinding, these indications of
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CE
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dissatisfaction with directors do matter and have consequences for directors.
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Appendix A A.1. Firm characteristics Size: Natural logarithm of book value of assets for the most recent fiscal year prior to the director election [Source: Compustat]
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Excess ret: A stock’s return minus its matching 125 characteristics-based portfolios based on Daniel et al., 1997 (DGTW), annualized.
Adj. ROA: A firm’s ratio of EBITDA to total assets, winsorized at 1% and 99%, and it is used to compute mean EBIDTA/assets. For any firm, the excess performance = EBITDA to assets minus average for corresponding to the firm’s native SIC. BoardSize: This equals the number of directors on the board at the start of fiscal year immediately preceding the director elections. [Source: BoardEx]
AN US
Staggered: This is a dummy variable that equals one if a firm has a classified board, i.e., only a fraction of the board members are up for election each year. We impute it by comparing the number of directors up for election in a year (i.e., Slate) to the reported BoardSize. Financial: If the firm is listed with SIC code between 6000 and 6999, Financial takes the value of one, and zero otherwise. [Source: Compustat]
M
Utility: If the firm is listed with the primary SIC code between 4800 and 4999, Utility takes the value of one, and zero otherwise. [Source: Compustat]
ED
DualClass: Dummy variable that equals one if the firm is listed as having more than one class of stock, and zero otherwise. [Source: Andrew Metrick’s website: http://faculty.som.yale.edu/andrewmetrick/data.html]
PT
InstOwnership: This is fraction of total ownership held by institutional investors. [Source: ThomsonReuters Institutional Holdings (13F) Database] A.2. Director characteristics
CE
Age: Age in years at the time a particular director is up for election. We impute Age by subtracting the year of birth of the director from the year of the election. [Source: BoardEx]
AC
Tenure: Length of time served on the current board in years. [Source: BoardEx] CompComm: Equals one if the director is a member of the compensation committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] NomComm: Equals one if the director is a member of the nomination committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] AuditComm: Equals one if the director is a member of the audit committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx]
37
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MultipleComm: Equals one if the director is a member of two or more of the audit, compensation, and nominating committees for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] #Dirships: Equals the total number directorships held by the individual director at the start of the year in which the election meeting takes place. [Source: BoardEx] Male: Equal one if the director is male, and zero otherwise. [Source: BoardEx]
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MBA: Takes the value one if the director is reported in BoardEx as having an MBA degree. [Source: BoardEx] Law: Equals one if the director is listed as having a Juris Doctor (JD) degree. [Source: BoardEx]
AN US
IvyPlus: Is a dummy variable that takes the value one when the director up for election attended a high quality undergraduate institution, which is the Ivy League definition proposed by Zawel (2005). [Source: BoardEx] A.3. Election related
%Withheld: Proxy voting ballots list three voting choices for each director up for election: for, against and abstain. %Withheld is based on shared voted and is defined as: (Voted against+Voted abstain)/(Voted for+Voted against+Voted abstain). [Source: ISS Voting Analytics]
M
ISS Against: Equals one if ISS recommends withhold, against, or no for a director, and zero otherwise. [Source: ISS Voting Analytics] Firm%Withheld: Average %Withheld for all directors at an election event. [Source: ISS Voting Analytics]
ED
Excess%Withheld: %Withheld for a director at an election minus Firm%Withheld for the election event. [Source: ISS Voting Analytics]
PT
Director_TO: Equals one if the director who faces an election in fiscal year t departs before fiscal year t+1, and zero otherwise. [Source: BoardEx]
CE
Change in outside directorships: The two-year net change in the number of outside directorships held by a director up for election, not counting any changes in the directorship at the focal firm with an election event. [Source: BoardEx]
AC
Committee_TO: Equals zero if a director up for election and currently on a committee stays on the board and the committee until the next election and one if the director stays on the board but is no longer a member of the committee after the election. We define Committee_TO separately for audit, compensation, and nominating committees. [Source: BoardEx]
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References Adams, R., 2016. Women on boards: superheroes of tomorrow? Unpublished working paper. University of New South Wales.
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Aggarwal, R., Erel, I., Starks, L., 2016. Influence of public opinion on investor voting and proxy advisors. Georgetown McDonough School of Business unpublished working paper. Appel, I., Gormley, T., Keim, D., 2016. Passive owners, not passive investors. Journal of Financial Economics 121, 111–141. Bebchuk, L., 2003. The case for shareholder access to the ballot. Business Lawyer 59, 43–66.
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Bizjak, J., Lemmon, M., and Whitby, R., 2009. Option backdating and board interlocks. Review of Financial Studies 22, 4821-4847.
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PT
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Bushee, B., 2001. Do institutional investors prefer near-term earnings over long-run value? Contemporary Accounting Research 18, 207–246. Cai, J., Garner, J., Walkling, R., 2009. Electing directors. Journal of Finance 64, 2389–2421. Chidambaran, N., Liu, Y., Prabhala, N., 2016. Heterogeneity in director turnover. Unpublished working paper. Fordham University. Coles, J., Daniel, N., Naveen, L., 2014. Co-opted boards. Review of Financial Studies 27, 1751– 1796.
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Yermack, D., 2004. Remuneration, retention, and reputation: Incentives for outside directors. Journal of Finance 59, 2281–2308. M.,
2005.
Untangling
the
Ivy
League
College
Prowler,
Pittsburgh..
AC
CE
PT
ED
M
AN US
CR IP T
Zawel,
42
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Table 1 Descriptive Statistics
(3)
(4)
(5)
(6)
(7)
(8)
# directors with >50 % votes withheld
% ISS rec against
% of votes withheld when ISS for
% of votes withheld when ISS against
1
14.73%
3.45%
17.76%
(9) t-test for difference between columns (7) and (8) –59.47***
Year
# of firms
# director nominees
Average % of votes withheld
2003
699
4,570
5.55%
2004
1,002
5,975
5.83%
8
2005
1,125
6,021
5.60%
12
12.77%
3.99%
18.02%
–58.61***
11.33%
3.74%
20.23%
–68.97***
2006
1,263
6,553
4.95%
2007
1,002
6,564
5.72%
4
8.74%
3.54%
19.62%
–67.07***
28
9.93%
3.73%
23.90%
–78.48***
2008
1,039
6,755
5.71%
2009
1,165
7,657
8.18%
21
9.03%
4.02%
22.79%
–71.1***
69
17.30%
4.56%
25.51%
–90.27***
2010
1,218
7,967
2011
1,153
7,638
6.88%
85
13.78%
3.74%
26.54%
–93.42***
5.74%
38
7.61%
4.18%
24.74%
–70.17***
2012
1,190
8,015
2013
1,182
8,003
5.84%
36
8.11%
4.44%
21.79%
–59.75***
5.27%
25
8.11%
3.90%
20.84%
–63.8***
2014
1,124
7,778
4.66%
23
6.72%
3.44%
21.64%
–65.54***
Total
13,162
5.86%
350
10.51%
3.91%
22.42%
–246.94***
ED
PT
CE 83,496
M
(2)
AC
(1)
AN US
The table reports descriptive statistics for uncontested director elections of nonexecutive directors in shareholder meetings held between January 2003 and December 2014. The data comprise firms with election data and proxy recommendations in the ISS Voting Analytics database, excluding financials and utilities that have matching data in BoardEx and CRSP-Compustat. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
43
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Table 2 Firm and director characteristics
CR IP T
The table reports descriptive statistics for uncontested elections of nonexecutive directors in shareholder meetings held between January 2003 and December 2014. We include management-sponsored independent director nominees as reported in the ISS Voting Analytics dataset. This data was matched with individual director characteristics from BoardEx and merged with CRSP/Compustat to obtain firmlevel characteristics for the year immediately preceding the year in which the board meeting was held. We exclude financials (SIC codes 6000–6999) and utilities (SIC codes 4800–4999). Also excluded are directors who were serving as executives at the time of the election. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. All other variables are described in Appendix A. Panels A and B provide descriptive statistics for the main variables used in the study. In Panel C, we report pairwise correlations across variables, where * indicates significance at the 5% level.
AC
CE
PT
ED
Size Excess ret Ind Adj. ROA BoardSize Staggered Institutional Ownership Panel B: Director characteristics 83,432 Age 83,457 Tenure 83,496 CompComm 83,496 NomComm 83,496 AuditComm 82,262 #Directorships 82,277 Male 76,969 MBA 76,969 Law 76,969 IvyPlus 82,804 %Withheld 83,496 ISS Against
Mean 7.28 4.22% 2.65% 9.17 26.62% 72.83%
Std Dev 1.79 66.36% 14.21% 2.28 44.20% 20.74%
Median 7.13 –2.18% 1.60% 9.00 0.00% 77.15%
61.01 7.59 0.51 0.43 0.52 1.98 0.88 0.37 0.10 0.15 5.86% 10.51%
8.76 6.97 0.50 0.50 0.50 1.33 0.33 0.48 0.30 0.36 8.71% 30.67%
62.00 5.70 1.00 0.00 1.00 2.00 1.00 0.00 0.00 0.00 2.59% 0.00%
M
N 83,496 83,496 83,496 83,496 83,496 78,281
AN US
Panel A: Firm characteristics
44
Table 2 (continued) Panel C: Pairwise correlations—firm and director characteristics Firm Size Excess ret Adj. ROA BoardSize Characteristics 1.000 Size –0.0629* 1.000 Excess ret 0.1914* 0.0307* 1.000 Adj. ROA 0.6378* –0.0485* 0.0755* 1.000 BoardSize –0.0992* –0.0083* –0.0264* -0.006 Staggered 0.1975* –0.0383* 0.1600* 0.006 InstOwnship 0.0846* –0.0349* –0.0453* –0.0901* Firm%Withheld
AC
1.000 0.1090* –0.1353* –0.0080* 0.0279* 0.000 –0.0137* –0.0130* 0.0701* 0.0112*
1.000 –0.0486* –0.004 0.0123* –0.0171* 0.0341* –0.001 0.0428* –0.0159*
Firm%Withheld
AN US
1.000 0.0151* 0.0490* –0.0642* –0.0640* 0.0714* –0.0441* 0.0519* 0.0408* 0.0940* 0.0549*
Nom Comm
InstOwnship
1.000 0.0268* 0.0936*
Audit Comm
1.000 0.0263*
#Director -ships
1.0000
Male
MBA
Law
IvyPlus
%Withheld
1.000 0.0302* 0.0015 0.0243* 0.0433* 0.0403*
1.000 –0.1698* 0.0900* –0.0188* –0.0319*
1.000 0.0772* 0.0224* 0.0378*
1.000 0.001 0.0115*
1.000 0.6512*
M
1.000 0.3923* 0.0500* 0.0823* 0.0182* 0.0547* 0.1564* –0.1267* 0.0016 –0.0684* 0.0344* –0.0257*
Comp Comm
ED
Tenure
PT
Age
CE
Director Characteristics Age Tenure CompComm NomComm AuditComm #Directorships Male MBA Law IvyPlus %Withheld ISS Against
Staggered
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ACCEPTED MANUSCRIPT
1.000 –0.0086* 0.0162* 0.0768* –0.0442* –0.0459* –0.0451* –0.0941*
45
1.000 –0.0102* 0.0639* –0.002 0.0220* 0.0215* –0.001
ACCEPTED MANUSCRIPT
Table 3 Majority dissent and director turnover
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Table 3 reports statistics on one-year departure rates for outside directors up for election. We follow these directors and check if they are still on the board at the start of the next fiscal year, i.e., whether they survive beyond the fiscal year in which the election was held. We create a dummy variable Director_TO, which equals one if the director departs, and equals zero if otherwise. Each row in the table below reports the fraction of directors who were no longer on the board by the start of the year following the year in which they sought reelection. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Voting outcome
Majority dissent 7.14% 6.00% 6.70% 4.07% 12.50%
AN US
from board (All) from board (Member CompComm) from board (Member NomComm) from board (Member AuditComm) from board (Not a Comm member)
AC
CE
PT
ED
M
Departed Departed Departed Departed Departed
Less than majority dissent 1.84% 1.71% 1.65% 1.46% 2.95%
46
t-test for significance of difference –7.31*** –4.65*** –5.46*** –2.84*** –3.18***
ACCEPTED MANUSCRIPT
Table 4 Director turnover and voting outcomes
(1)
(2)
(3)
2.245*** (6.70)
%Withheld
Adj. ROA InstOwnship Age
#Dirships
AC
Male
CE
CommMember
PT
Tenure
MBA Law
IvyPlus Intercept Observations Pseudo R2
–3.403*** (–8.36) 78035 0.013
0.566*** (5.97) –0.064** (–2.39) –0.238** (–2.29) –0.427* (–1.75) –0.071 (–0.34) –0.035*** (–8.44) –0.001 (–0.10) –0.455*** (–5.77) 0.000 (0.00) 0.072 (0.80) 0.079 (1.29) –0.183* (–1.79) 0.184** (2.36) –1.339*** (–2.70) 70658 0.032
M
Excess ret
–0.059** (–2.17) –0.227** (–2.20) –0.386 (–1.58) –0.266 (–1.23) –0.036*** (–8.77) –0.001 (–0.23) –0.499*** (–6.43) –0.000 (–0.01) 0.069 (0.76) 0.086 (1.39) –0.167 (–1.64) 0.196** (2.51) –1.281*** (–2.61) 70103 0.034
ED
–0.094*** (–3.79) –0.219** (–2.27) –0.464* (–1.90) –0.270 (–1.33)
Size
AN US
ISS Against
(4)
(5)
(6)
1.734*** (2.96)
Excess%Withheld Firm%Withheld
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The table reports logit estimates in which the dependent variable is whether an outside director up for election in a year departs the board in the next year, the dummy variable Director_TO equals one if the director departs, and zero otherwise. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no, and zero otherwise. All variables are described in Appendix A. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
47
0.223 (1.34) –0.059** (–2.16) –0.227** (–2.20) –0.398 (–1.62) –0.211 (–0.97) –0.036*** (–8.60) –0.001 (–0.25) –0.481*** (–6.07) –0.001 (–0.03) 0.063 (0.70) 0.088 (1.43) –0.171* (–1.67) 0.194** (2.49) –1.316*** (–2.69) 70103 0.034
1.658*** (3.05)
–0.066** (–2.42) –0.236** (–2.27) –0.387 (–1.59) –0.228 (–1.06) –0.037*** (–8.80) 0.001 (0.26) –0.497*** (–6.41) 0.007 (0.32) 0.086 (0.95) 0.077 (1.24) –0.157 (–1.55) 0.194** (2.48) –1.187** (–2.42) 70155 0.030
2.921*** (4.53) 0.928 (1.26) 0.195 (1.20) –0.061** (–2.24) –0.236** (–2.26) –0.403* (–1.65) –0.213 (–0.98) –0.035*** (–8.53) –0.002 (–0.41) –0.486*** (–6.13) –0.005 (–0.20) 0.060 (0.67) 0.089 (1.45) –0.179* (–1.75) 0.193** (2.48) –1.312*** (–2.64) 70103 0.035
ACCEPTED MANUSCRIPT
Table 5 Director turnover and voting outcomes: robustness to unobserved heterogeneity
%Withheld
(1) Firm election FE
(2) Director FE
2.585***
2.555***
(3.72)
(4.38)
–0.310 (–1.64) –0.267*** (–5.16) –0.214** (–2.16) –0.790** (–2.11) 0.443 (1.48) 0.138*** (6.78) 0.140*** (8.60) 0.072 (0.45) 0.317*** (5.43) Dropped Dropped
Dropped
Dropped
Dropped
Dropped
Dropped
5661 0.100
5661 0.100
AN US
Firm%Withheld
Size
0.216 (1.18) Dropped
Excess ret
Dropped
Adj. ROA
Dropped
Tenure
ED
PT
Age
M
ISS Against
CE
CommMember #Dirships
AC
Male MBA Law
IvyPlus Observations Pseudo R2
Dropped
–0.025*** (–5.31) 0.011 (1.56) –0.519*** (–5.19) –0.020 (–0.68) 0.068 (0.59) 0.092 (1.16) –0.099 (–0.77) 0.342*** (3.36) 4937 0.041
48
(3) Director FE
2.569*** (3.28) 2.541*** (3.31) –0.310 (–1.64) –0.267*** (–5.16) –0.214** (–2.16) –0.790** (–2.11) 0.443 (1.48) 0.138*** (6.78) 0.140*** (8.60) 0.071 (0.45) 0.317*** (5.43) Dropped
Excess%Withheld
InstOwnship
CR IP T
The table reports conditional logit estimates in which the dependent variable is the dummy variable Director_TO, which equals one if the director departs in the next year, and zero if otherwise. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no, and zero otherwise. Model (1) reports the model with firm–election fixed effects, while models (2) and (3) incorporate director fixed effects. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
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Table 6 Director turnover and voting outcomes: heterogeneity
CR IP T
The table reports estimates of the baseline logit specification used for Table 4 for subsets of the full sample. The dependent variable is whether an outside director up for election in a year departs from the board in the next year. Panel A reports the results for subsamples of firms that have a classified (staggered) board or not. Panel B reports the results of subsamples of firms that have a plurality versus majority voting systems. Panel C reports the results for subsamples of firm with and without dual class shares. Panel D reports estimates for directors who are less than 65 years old as of the election date and those 65 or older. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. The models include all variables in Table 4 but for brevity, we do not report their coefficients. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Coefficient for Excess%Withheld Panel A: Classified boards versus non-classified boards
Nonclassified boards Panel B: Plurality versus majority Plurality
M
Majority
1.472
1.10
3.204***
4.63
AN US
Classified boards
t-statistics
2.380***
3.31
4.528***
3.36
3.922***
3.85
3.542***
3.88
3.355***
4.52
Dual class shares
PT
Non-dual class shares
ED
Panel C: Dual class shares versus non-dual class shares
Panel D: Director age<65 versus director age >=65
CE
Director <65 years age
2.111*
AC
Director>=65 years age
49
1.89
ACCEPTED MANUSCRIPT
Table 7 Changes in outside directorships and voting outcome
(1) –0.177*** (–3.82)
%Withheld
(2)
(3) –0.199*** (–3.20)
AN US
Excess%Withheld Firm%Withheld
Adj. ROA InstOwnship Age Tenure CommMember
Male MBA
AC
Law
CE
#Dirships
IvyPlus
Intercept
Observations Pseudo R2
ED
Excess ret
0.026*** (6.65) –0.005 (–1.16) 0.002 (0.06) 0.030 (1.50) –0.005*** (–8.56) –0.005*** (–8.00) 0.060*** (5.54) –0.179*** (–6.97) –0.054*** (–4.84) 0.038*** (4.96) 0.042*** (3.69) –0.046*** (–4.49) 0.229*** (3.18) 63490 0.110
PT
Size
–0.029** (–2.23) 0.027*** (6.78) –0.005 (–1.00) 0.006 (0.20) 0.023 (1.15) –0.005*** (–8.54) –0.005*** (–8.38) 0.058*** (5.38) –0.179*** (–7.03) –0.054*** (–4.92) 0.037*** (4.86) 0.043*** (3.82) –0.047*** (–4.54) 0.226*** (3.13) 64047 0.110
M
ISS Against
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The table reports estimates of a regression in which the dependent variable is Change in outside directorships, which is the difference between all the directorships at the end of the year and directorships at the start of the year excluding the focal firm at which the director is up for election. %Withheld is the total votes cast against a particular director divided by the sum of all votes cast in the prior year. Firm %Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against equals one if ISS recommends withhold, against, or no, and zero otherwise. All variables are described in Appendix A. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
50
0.010 (0.53) 0.026*** (6.66) –0.005 (–1.17) 0.001 (0.05) 0.031 (1.55) –0.005*** (–8.57) –0.005*** (–8.01) 0.061*** (5.61) –0.179*** (–6.97) –0.054*** (–4.86) 0.038*** (4.98) 0.042*** (3.68) –0.046*** (–4.50) 0.227*** (3.16) 63490 0.110
(4)
–0.150*** (–2.89) 0.027*** (6.76) –0.005 (–1.09) 0.003 (0.10) 0.028 (1.44) –0.005*** (–8.54) –0.005*** (–8.53) 0.060*** (5.51) –0.179*** (–6.98) –0.055*** (–4.93) 0.038*** (4.99) 0.041*** (3.62) –0.047*** (–4.53) 0.229*** (3.16) 63542 0.110
(5)
–0.262*** (–2.72) –0.166** (–2.55) 0.011 (0.64) 0.027*** (6.75) –0.005 (–1.14) 0.002 (0.06) 0.031 (1.55) –0.005*** (–8.54) –0.005*** (–7.74) 0.061*** (5.65) –0.178*** (–6.94) –0.054*** (–4.86) 0.038*** (4.98) 0.042*** (3.71) –0.046*** (–4.50) 0.224*** (3.12) 63490 0.110
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Table 8 Majority dissent and committee departures for staying directors Table 8 reports committee membership status for outside directors who serve on a committee and are up for election in a year and remain on the board in the year after. Compensation nominating and Audit denote the committees for which we track membership status. Voting outcome
M ED PT CE AC
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t-test for significance of difference –2.33** –7.31*** –1.07 –4.49***
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majority dissent 4.92% 8.62% 3.69% 13.54%
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Departed from compensation committee Departed from nominating committee Departed from audit committee Departed from one of the three committees
Less than majority dissent 2.79% 2.38% 2.72% 7.11%
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Table 9 Committee departures for staying directors
Excess%Withheld Firm%Withheld ISS Against MultipleComm Size
ED
Excess ret ROA
PT
InstOwnship
#Dirships
AC
Male
CE
Age Tenure
0.036 (0.33) 0.914*** (17.42) 0.070*** (4.25) –0.093 (–1.45) –0.395** (–2.09) 0.231* (1.70) –0.008*** (–2.78) –0.007* (–1.78) 0.028* (1.84) 0.079 (1.12) –0.098** (–2.05) 0.040 (0.52) 0.058 (0.89) –4.414*** (–9.15) 69201 0.027
1.356*** (2.73) 0.193 (0.44) 0.013 (0.12) 0.910*** (17.35) 0.068*** (4.15) –0.096 (–1.49) –0.396** (–2.10) 0.226* (1.67) –0.008*** (–2.75) –0.008* (–1.91) 0.026* (1.72) 0.079 (1.12) –0.099** (–2.06) 0.037 (0.48) 0.057 (0.87) –4.372*** (–9.02) 69201 0.027
MBA Law
IvyPlus Intercept Observations Pseudo R2
Comp committee turnover 1.103*** (3.00)
Comp committee turnover
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%Withheld
Audit committee turnover
M
Audit committee turnover 0.604* (1.66)
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Table 9 reports logit estimates. The dependent variable is the committee membership status of an independent director who serves on a given committee, was up for an election, and did not depart from the board in the next year. %Withheld is total votes cast against a particular director divided by the sum of all votes cast in the prior year. Firm %Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm for the year from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. MultipleComm equals one if the director is a member of more than one key committee (audit, compensation, and nominating) in the fiscal year immediately before the year of election, and zero otherwise. All variables are described in Appendix A. Director attributes are included as controls but not reported to conserve space. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
0.154 (1.37) 1.162*** (20.88) 0.070*** (4.07) 0.046*** (4.71) –0.516*** (–2.75) 0.136 (0.96) –0.008** (–2.51) –0.002 (–0.58) –0.000 (–0.02) 0.037 (0.50) –0.008 (–0.18) –0.059 (–0.72) –0.017 (–0.26) –4.359*** (–8.86) 68998 0.038
52
2.725*** (5.90) 0.151 (0.32) 0.107 (0.95) 1.157*** (20.83) 0.067*** (3.87) 0.046*** (4.39) –0.520*** (–2.77) 0.123 (0.87) –0.008** (–2.45) –0.003 (–0.85) –0.006 (–0.31) 0.037 (0.49) –0.009 (–0.19) –0.068 (–0.83) –0.021 (–0.32) –4.269*** (–8.57) 68998 0.039
Nom committee turnover 1.900*** (5.11)
–0.131 (–1.13) 1.452*** (21.06) 0.044** (2.00) –0.011 (–0.19) –0.612*** (–3.20) 0.336** (2.12) –0.015*** (–4.29) 0.004 (0.86) –0.003 (–0.17) 0.253*** (2.97) –0.079 (–1.47) –0.071 (–0.79) –0.072 (–1.00) –4.752*** (–7.16) 69196 0.056
Nom committee turnover 2.880*** (5.17) 1.368*** (3.09) –0.160 (–1.37) 1.449*** (21.03) 0.042* (1.92) –0.014 (–0.23) –0.614*** (–3.21) 0.328** (2.07) –0.015*** (–4.26) 0.003 (0.71) –0.007 (–0.32) 0.253*** (2.97) –0.080 (–1.48) –0.076 (–0.85) –0.075 (–1.04) –4.698*** (–7.11) 69196 0.056
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Table 10 Turnover for directors in leadership positions: univariate results Table 10 reports the percentage of directors of a particular type that depart in the year after being up for election. The t-statistic tests the difference in outcomes between directors who are of a particular type relative to the directors who are not of the given type. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
Board_chair
Fraction departed %Withheld ISS Against
1.86% 5.81% 10.28%
1.96% 6.79% 14.85%
t-test for significance of difference –0.48 –7.19*** –9.51***
Fraction departed %Withheld ISS Against
Non Lead_director 1.89% 5.84% 10.60%
Lead_director 1.21% 6.32% 8.47%
2.93*** –3.18*** 4.02***
Fraction departed %Withheld ISS Against
Non Comp_chair 1.91% 5.73% 10.46%
Comp_chair 1.57% 6.69% 10.89%
2.49** –10.96*** –1.39
Fraction departed %Withheld ISS Against
Non Nom_chair 1.91% 5.73% 10.58%
Nom_chair 1.46% 6.88% 9.97%
3.03*** –11.82*** 1.78*
Non Audit_chair 1.99% 5.94% 11.11%
Audit_chair 1.12% 5.37% 6.94%
6.51*** 6.59*** 13.75***
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M
ED
AC
CE
PT
Fraction departed %Withheld ISS Against
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Non Board_chair
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Table 11 Turnover for directors in leadership positions: multivariate results
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The table reports logit estimates where the dependent variable is whether an outside director departs a board in the year after the director is up for election. We report estimates for different types of directors classified by their board position. Independent variables include %Withheld, which is the percentage of total votes withheld for a director as a fraction of all votes cast. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. All variables are described in Appendix A. Director attributes are included as control but not shown. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroscedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
ISS Against Size Excess ret
(2) Non Board_chair
(3) Lead_director
(4) Non Lead_director
–0.672
1.733***
4.535**
1.489**
(–0.43)
(2.86)
(2.36)
(2.43)
1.107***
0.229
–0.813
0.313*
(2.78)
(1.33)
(–0.89)
0.016
–0.051*
–0.294**
(1.84) –0.046*
(0.15)
(–1.89) –0.256**
(–2.24)
(–1.69)
0.066
–0.230**
0.111
(5) Comp_chair
(6) Non Comp_chair
(7) Nom_chair
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%Withheld
(1) Board_chai r
(8) Non Nom_chair
(9) Audit_chair
(10) Non Audit_chair
0.350
1.743***
1.561
1.593**
1.419
1.609***
(0.29)
(1.12)
(2.52)
(0.76)
(2.78)
0.525
(2.89) 0.263
0.321
0.282
–0.076
0.267
(1.47)
(1.55)
(0.68)
(1.62)
(–0.11)
(1.63)
–0.131**
–0.040
–0.120
–0.049*
0.019
–0.067**
(–2.11)
(–1.41)
(–1.56)
(–1.79)
–0.307
–0.211**
–0.037
–0.246**
(0.25) –0.068
–0.241**
(–2.51)
(–2.33)
(0.13)
(–2.25)
(–1.50)
(–1.97)
(–0.34)
(–2.26)
–0.478**
–1.518
–0.381
–0.133
–0.455*
(–0.19) 0.157
(–2.26)
0.716
–0.462*
–0.203
–0.428*
(0.94)
(–1.96)
(–1.54)
(–1.51)
(–0.23)
(–1.81)
(0.28)
(–1.82)
(–0.28)
(–1.68)
InstOwnship
–1.190
–0.207
1.047
–0.278
–0.238
–0.259
0.169
–0.296
0.565
–0.354
(–1.61)
(–0.93)
(–1.26)
(–0.50)
(–1.13)
(0.32)
(–1.30)
(0.93)
(–1.63)
–0.011 (–0.62) –0.026*
–0.041*** (–9.48) 0.003
(1.01) –0.019 (–0.68)
–0.039*** (–9.16) 0.003
–0.018 (–1.60) 0.004
–0.042*** (–9.24) 0.003
–0.038*** (–2.91) –0.017
–0.038*** (–8.60) 0.004
–0.033** (–2.27) 0.006
–0.037*** (–8.76) 0.002
(–1.65)
(0.43)
(0.16)
(0.51)
(0.23)
(0.43)
(–1.03)
(0.74)
(0.34)
(0.29)
–0.197 (–1.54) –12.433***
0.005 (0.22) –1.443***
–0.116 (–0.65) –11.849***
–0.002 (–0.06) –1.549***
0.045 (0.66) –13.360***
–0.008 (–0.32) –1.370***
–0.066 (–0.73) –0.267
0.001 (0.05) –1.859***
–0.006 (–0.23) –1.329***
(–7.80)
(–3.01)
(–5.78)
(–3.21)
(–14.50)
(–2.76)
(–0.24)
(–2.80)
0.068 (0.85) –15.154*** (–12.63)
Included
Included
Included
Included
Included
Included
Included
Included
Included
Included
3057 0.089
66544 0.033
2205 0.092
67038 0.031
8667
60481 0.034
6811 0.056
62395 0.032
8621 0.033
59824 0.034
Intercept
Director attributes
AC
Observations Pseudo R2
ED
#Dirships
0.006
PT
Tenure
CE
Age
M
(0.83) Adj. ROA
0.039
54
(–2.80)
The Power of Shareholder Votes: Evidence from Uncontested Director Elections Reena Aggarwal , Sandeep Dahiya , Nagpurnanand R. Prabhala PII: DOI: Reference:
S0304-405X(18)30334-9 https://doi.org/10.1016/j.jfineco.2018.12.002 FINEC 3007
To appear in:
Journal of Financial Economics
Received date: Revised date: Accepted date:
4 November 2016 11 July 2017 20 July 2017
Please cite this article as: Reena Aggarwal , Sandeep Dahiya , Nagpurnanand R. Prabhala , The Power of Shareholder Votes: Evidence from Uncontested Director Elections, Journal of Financial Economics (2018), doi: https://doi.org/10.1016/j.jfineco.2018.12.002
This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
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The Power of Shareholder Votes: Evidence from Uncontested Director Elections* Reena Aggarwal McDonough School of Business, Georgetown University 37th and O St NW, Washington DC 20057 [email protected]
[email protected]
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Sandeep Dahiya McDonough School of Business, Georgetown University 37th and O St NW, Washington DC 20057 Nagpurnanand R. Prabhala Robert H. Smith School of Business, University of Maryland, College Park MD 20742
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[email protected]
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Abstract: This paper asks whether dissent votes in uncontested director elections have consequences for directors. We show that contrary to popular belief based on prior studies, shareholder votes have power and result in negative consequences for directors. Directors facing dissent are more likely to depart boards, especially if they are not lead directors or chairs of important committees. Directors facing dissent who do not leave are moved to less prominent positions on boards. Finally, we find evidence that directors facing dissent face reduced opportunities in the market for directors. We also find that the effects of dissent votes go beyond those of proxy advisor recommendations.
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JEL Classification: G3, G32, G34, K22, L51 Keywords: director elections, director reputation, shareholder voting, proxy advisor
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*Corresponding author: Reena Aggarwal, McDonough School of Business, Georgetown University, Washington, D.C. 20057. Tel. (202) 687-3784, [email protected]. Prabhala was on leave to CAFRAL, Reserve Bank of India, Mumbai when part of this work was done. We thank the editor (Bill Schwert), an anonymous reviewer, Jie Cai, Fabrizio Ferri, Ron Masulis, Ralph Walkling, David Yermack, seminar participants at Georgetown University, the Indian School of Business, and FTSE’s World Investment Forum 2016. Aggarwal gratefully acknowledges support from the Robert Emmett McDonough Professorship endowment. Aggarwal and Dahiya thank the Georgetown Center for Financial Markets and Policy for support. 1
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PT
ED
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1.
Introduction
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At least at H.P., all the directors got a majority of the votes cast, and even then, two resigned and a third gave up his post as chairman. But at Cablevision Systems, the New York cable and media company controlled by the Dolan family, three directors lost shareholder elections twice in the last three years — in 2010 and 2012 — and received only tepid support in 2011. Nonetheless, the three remain on the board. “As fiduciaries, we can’t sit by and let the board make a mockery of our fundamental right to elect directors,” said New York City’s comptroller, John Liu, who oversees the city’s pension funds, which own more than 532,000 Cablevision shares. “Share owners need accountable directors who will ensure the company isn’t being run for the benefit of insiders at our expense.” -New York Times, April 12, 2013
Almost all director elections in the United States are uncontested, and therefore most
AN US
elections tend to be routine events in which nominees are elected with overwhelming majorities. However, even in uncontested elections, shareholders are sometimes dissatisfied with directors. To express dissent in these elections, shareholders can withhold votes for the relevant directors in the elections held at shareholder meetings. Do these expressions of dissent have consequences
M
for directors?
ED
Anecdotal evidence, such as that in the introductory quote, suggests that voting in uncontested director elections has little effect. Policymakers and the media often highlight
PT
related issues. For instance, “zombie directors” and “unelected directors” are individuals who continue to serve as directors despite lacking shareholder support.1 In a recent speech, Chairman
CE
White of the Securities and Exchange Commission asks whether companies should be mandated to disclose why they choose to retain directors for whom the majority of votes are withheld, even
AC
in uncontested elections.2 Some academic literature on governance also takes a skeptical view of
1
See, for instance, Minow, N., 2012. Zombie Directors Should Exit Boardrooms. Bloomberg Businessweek. Available at https://www.bloomberg.com/view/articles/2012-07-18/zombie-directors-should-exit-u-s-boardroomsnell-minow; McDonnell, I., 2013. Calpers to Awaken Zombie Boards. Financial Times. Available at https://www.ft.com/content/8632b21e-9f75-11e2-b4b6-00144feabdc0. 2 White, Mary J., 2015. “Building Meaningful Communication and Engagement with Shareholders.” Speech. Society of Corporate Secretaries and Governance Professionals, Securities and Exchange Commission. Available at https://www.sec.gov/news/speech/building-meaningful-communication-and-engagement-with-shareholde.html.
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the effectiveness of voting in director elections (Cai, Garner, and Walkling, 2009), leading legal scholars such as Bebchuk (2003) and Kahan and Rock (2011) to argue that the director election process is perhaps broken. Are votes in uncontested elections actually so ineffective? We examine this issue using a large dataset on director elections that includes a recent time period
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during which shareholders displayed greater engagement in governance.
Director elections are important events because shareholders govern corporations through the boards of directors, and elections are the primary events through which shareholders can make changes in boards. Thus, the effectiveness of elections is a significant policy issue. If
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director elections are inconsequential sideshows, other mechanisms are perhaps necessary for shareholders to exert control over board composition. Such mechanisms could, for instance, include moving from a plurality to a majority voting system. Alternatively, governance
M
mechanisms could change so that shareholders can nominate directors directly through new proxy access rules. Given the perception about the ineffectiveness of current director election
ED
systems, institutional investors, governance activists, and the Securities and Exchange Commission have all pushed for such changes.3 However, firm managers often oppose sweeping
PT
changes to the director election system because of their significant potential for disruption and
CE
abuse by shareholders with small stakes.4 Evidence of the effectiveness of the current process for director elections can help inform this policy debate.
AC
In uncontested elections, directors are elected unopposed. Should votes in such elections matter? Dissent in director elections reflects the negative sentiment by a firm’s owners about the relevant directors. Ignoring shareholder votes can result in negative consequences for both firms 3
For example, see Council of Institutional Investors' 2014 letter to the SEC. Available at http://www.cii.org/files/issues_and_advocacy/correspondence/2014/07_08_14_CII_letter_to_SEC.pdf. 4 From page 85 of Coca Cola’s 2015 proxy statement in response to a proposal by Harrington Investments. See https://www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2015/03/2015-proxystatement.pdf.
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and directors.5 For instance, the board and firm can receive negative press coverage. Ignoring dissent also imposes costs on senior management who must spend time understanding the reasons for dissent and make a case for retaining directors facing dissent. Perhaps even greater pressure is felt by the directors who receive expressions of dissent. These directors have career
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concerns as they can hold managerial positions or directorships in other firms or aspire to such positions. Directors facing dissent can become less desirable candidates for other positions. Reputation is an important disciplining device in the director market (Grundfest, 1993; Fama and Jensen, 1983; Herman, 1981; Masulis and Mobbs, 2011, 2014). Thus, from both a firm’s
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viewpoint and that of the directors, dissenting votes, even if cast in uncontested elections, are unlikely to be disregarded. Whether dissent matters in practice is the question we examine empirically.
M
We examine director elections held between 2003 and 2014. We exclude proxy contests, which are special events that aim to remove an entire slate of directors (Fos and Tsoutsura, 2014)
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to focus exclusively on uncontested elections. Votes are then simply advisory indications by shareholders to firms. Our sample comprises over 34,000 election events in companies that
PT
involve votes for close to 194,000 director positions. Our unit of observation is a firm director
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election event. The proxy voting ballot for director elections typically lists three voting choices for each nominated director: for, against and abstain. We measure shareolder dissent as the
AC
number of shares in which the votes are against or abstain as a proportion of total shares voted. We study multiple outcomes including director turnover, spillover effects on the future number of directorships held at other firms, and, for directors who stay on despite dissent, the reassignment of responsibilities away from influential positions on boards. We also estimate 5
There is the broader issue if shareholder votes matter in settings other than director elections. Li, Lu and Wu (2018) provide evidence that managers of acquiring firm in M&A transaction actively avoid shareholder voting when agency problems are higher.
5
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models that control for unobserved heterogeneity at the level of the firm in a given year, which lets us isolate the variation in votes across directors within a specific election. We also control for recommendations of proxy advisors. We find that directors at a board who face greater dissent votes are more likely to leave
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the board before the next fiscal year-end. That is, director turnover is more likely when more shareholders withhold votes for a director; 1.84% of directors who receive less than majority dissent depart within a year of the election, which increases by four times to 7.14% when there is majority dissent. In a multivariate specification that holds all variables at their sample averages,
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increasing the votes withheld from the sample mean of 5.86% by 10% to 15.86% results in a 24% increase in the predicted director turnover probability.6 The effect is more pronounced at firms that do not have classified boards with staggered elections of directors. The finding is
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robust to including the recommendation of proxy advisors. Thus, the results indicate that what matters is the incremental judgment of institutional investors and shareholders, rather than a
ED
passive adherence to proxy advisor’s recommendations. We also investigate outcomes for directors who receive low shareholder support in
PT
elections but continue to hold on to their board seats. We find that these directors are likely to
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face reassignment of responsibilities away from the high profile committees. For instance, in June 2014 three directors in Nabors Industries faced dissent. Two directors were then moved off
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the compensation committee. We identify three prominent committees on boards: audit, compensation, and nominating committee. The rate of departure from these key committees for directors not receiving majority dissent is 7.11%, which almost doubles to 13.54% when there is majority dissent.
6
The standard deviation of %Withheld is 8.71%.
6
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We next examine whether greater dissent at one firm is associated with a reduction in directorships at other firms. We find that this is the case. This result is consistent with the disciplining role of the external market for directors. The result suggests an outcome in which firms are reluctant to use the services of a director who attracts hostility from shareholders at
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another firm, and in which directors facing dissent are less likely to seek new board positions. We find heterogeneity in voting effects across directors. We identify directors in leadership positions and find that these directors are more likely to receive significantly greater shareholder disapproval and negative Institutional Shareholder Services (ISS) recommendations.
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However, the average departure rate for these directors is significantly lower compared to directors who are not in leadership positions. While dissent is generally likely to be followed by director turnover, this effect is less pronounced for influential directors. Thus, we find that
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boards value continuity in directors who hold key responsibilities. Alternatively, these directors can hold more power in boards relative to directors not in leadership positions.
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We then turn to endogeneity issues. As Roberts and Whited (2011) point out, three sources of endogeneity in corporate finance are reverse causality, measurement error, and
PT
unobserved heterogeneity. The first two are not relevant in our context, but the third unobserved
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heterogeneity could matter. We control for unobservables that vary across firms, those that vary across years, and also unobservables unique to a firm and year, by including withheld votes
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relative to firm-level withheld votes. What remains after addressing this variation is the portion unique to a director in a particular firm in the election under consideration, helping us pin down the effects of the vote specific to the director. Gormley and Matsa (2014) point out that saturating specifications with a full suite of interactive fixed effects can control for time and cross-sectionally varying unobservables. The
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interactive fixed effects approach can be summarized as follows. Our dataset has many directors standing for election each year from the same firm. The common component across all directors reflects the shareholder dissatisfaction with the entire firm in the particular election year. Filtering out this component removes the firm wide dissatisfaction and isolates the portion
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specific to a director in an election event. Alternatively, we specify and estimate a model in which the independent variables are both the firm-level dissent and the difference between a director’s vote relative to all other directors in the same firm, year, and election event. The latter variable reflects each director’s vote judged relative to votes received by other directors at the
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same firm in the same year. We obtain similar results under both approaches. We find that director votes matter even after controlling for unobservables.
The rest of the paper is organized as follows. Section 2 gives background about the
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director election process and reviews related work. Section 3 describes the data. Section 4 discusses the empirical results and the robustness results. Section 5 concludes. Background on director elections
2.1.
The director election process
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2.
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In the United States, most director elections are uncontested. A company’s bylaws outline
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the guidelines for electing directors, and there are two main ways for electing directors. A plurality vote system implies that to win the election, an individual needs to get more votes than
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any other candidate. Our sample consists of uncontested elections; therefore, receiving even one vote is enough to guarantee election of an individual if the firm has a plurality vote system. In contrast for firms with a majority vote system, an individual must receive majority of the votes cast; however, the voting outcome is still not binding as discussed in the paper.
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The perception that the plurality system is ineffective has led institutional investors to push firms to adopt majority voting.7 However, even a majority voting system may only have limited impact. Directors who do not receive majority votes tender their resignations, but boards are not necessarily obliged to accept the resignations. Thus, even after a switch to majority
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voting systems, votes remain nonbinding expressions of dissent. Our study can be viewed as examining whether such expressions of dissent have effects in the sense of being related to organizational outcomes at the firm and personal outcomes for directors.
Another regulatory push to make elections more meaningful is by altering the process by
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which directors are nominated for elections. After the Dodd-Frank Act was signed into law on July 21, 2010, one of the earliest moves by the SEC was to suggest revised proxy access rules. On August 25, 2010, the SEC suggested that firms should be open to receiving director
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nominations from shareholders. Such proxy access gives shareholders more voice in nominating candidates for directors. However, these rules have faced strong opposition from US businesses.
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Two organizations (the US Chamber of Commerce and the Business Roundtable) challenged the rule in court. Several institutional investors, such as TIAA and CalPERS, supported the rule. In
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July 2011, the court ruled against proxy access and the SEC decided not to pursue the proposal.
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However, proxy access proposals have continued to be filed at several firms in recent years. Companies resist these changes through many tactics, including outright opposition and
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proposing new hurdles for investors to qualify for proxy access.8
7 8
For example, see http://www.cii.org/MajorityVotingForDirectors. For example, in 2012, Norges Bank Investment Management, a company that manages investment of Norway’s
pension fund, filed binding proxy access proposals at several firms, including Wells Fargo, Western Union, Staples, and CME Group.
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The perceived ineffectiveness of director election votes has also led to changes in the handling of broker votes that allowed brokers to caste uninstructed shares. Rule 452 of the New York Stock Exchange allows brokers to cast votes on behalf of their shareholders that hold the shares in “street name” in “routine” proposals if the client did not provide voting instructions.
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Uncontested director elections were considered routine proposals. As shown by Bethel and Gillan (2002), broker votes are typically cast in favor of management. In 2010, the SEC adopted new rules barring brokers from voting uninstructed shares in uncontested board elections. The rules on how brokers can vote uninstructed shares continue to be held under scrutiny by
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legislators. For example, the Dodd-Frank Act prohibits broker votes for compensation proposals. Since 2012, major US exchanges prohibit uninstructed broker votes without the client’s consent for proposals related to declassification of boards, majority voting to elect directors, eliminating
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the supermajority voting requirement, providing for the use of consents, providing rights to call a special meeting, and certain antitakeover provisions.9 Related corporate governance literature
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2.2.
Cai, Garner, and Walkling (2009) study a sample of director elections between 2003 and
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2005. They find that votes are related to the recommendations of a proxy advisory firm, ISS. In
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light of their results, we include ISS’s recommendation as a control variable to assess the incremental effects of votes. An appendix in their paper examines turnover and does not find
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that votes are significant. Ertimur, Ferri, and Oesch (2016) report similar evidence for a smaller sample of S&P 500 firms between 2003 and 2010.
9
See NYSE memo 12-4 dated January 25, 2012, on modifications to Rule 452 to incorporate the new instructions on
casting broker votes.
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It is reasonable to ask why our study finds that votes in director elections explains turnover. Our study features a larger and more recent sample than used in prior studies. Shareholder engagement in governance is changing over this period. For example, Fos, Li, and Tsoutsoura (2016) finds that the number of proxy fights in 2002 – 2012 have more than tripled
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compared to 1980 – 1990, and almost doubled compared to 1991 – 2001. Shareholders have also become more engaged in this period and are less likely to follow ISS’s negative recommendations on contentious proposals (Aggarwal, Erel, and Starks, 2016). We also expand the scope of prior work by studying the changes in outside directorships after dissent and the
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internal reorganization of board responsibilities for directors facing dissent that do not depart. Our results are related to, and support, the analysis of Fos and Tsoutsoura (2014), who analyze proxy contests that replace entire slates of directors with an alternate set proposed by
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aggrieved shareholders. Fos and Tsoutsoura report that these contests impose significant costs on directors through turnover and loss of outside directorships after proxy contests. Our evidence is
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complementary to theirs. We analyze the large universe of uncontested elections in which votes are only advisory, while Fos and Tsoutsura study proxy contests in which voting picks one slate
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of directors over another. Our evidence suggests that even in routine uncontested elections that
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are typical of most annual meetings of US firms, dissent has multiple consequences. We find that there is director turnover, changes in the external directorships, as well internal restructurings of
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responsibilities after dissent. Iliev et al. (2015) study non-US firms. They report that more dissent votes cast by US mutual funds are associated with director departures in the next year. However, unlike the US, votes cast are mandatory and not advisory in most countries. Related work focuses on voting after specific triggering events. Early instances of such work include Pound (1988), who shows that there are pro-management biases in the voting
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process. DeAngelo and DeAngelo (1989) and Mulherin and Poulsen (1998) show that proxy contests are likely to be followed by firm restructuring. More recent studies are after the wave of financial frauds detected in the post dot-com era. Brochet and Srinivasan (2014) show that shareholders tend to sue directors and vote against them when firms are involved in financial
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fraud. The role of directors has also come under scrutiny after the options backdating scandal (Heron and Lie 2007; Bizjak, Lemmon, and Whitby, 2009; Bebchuk, Grinstein, and Peyer, 2010) because backdating likely reflects insufficient board of director oversight. For instance, Bereskin and Smith (2014) find that directors associated with option backdating lose more outside
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directorships, and Ertimur, Ferri, and Maber (2012) find more votes are withheld for these directors.
The work on nonplurality voting systems in US firms is relatively nascent. This is not
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surprising. Most US firms continue to follow plurality, rather than majority voting. Ertimur, Ferri, and Oesch (2015) identify 398 firms that moved from plurality to majority voting between
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2003 and 2010. They report that firms who switch become more responsive to agenda items brought forth by shareholders. Thus, agenda setting is influential when firms switch to majority
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voting. Our work is also related to the literature on the influence of proxy advisory firms on
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voting by institutional investors (Bethel and Gillan, 2002). More recently, Iliev and Lowry (2015) report that mutual funds vary greatly in their reliance on proxy advisory firm
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recommendations. Malenko and Malenko (2016) discuss a theoretical model of proxy advising. In their model, proxy advising firms is beneficial only when they have sufficiently precise information. Our findings suggest that voting decisions are related to, but go beyond, proxy firm advisories.
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While our focus is on director elections, related work examines voting in different contexts. Early work in this area includes Thomas and Cotter (2007) and Renneboog and Szilagyi (2011).
The literature finds that shareholder proposals are more likely to be
implemented by management if there is majority backing for the proposals. The role played by
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the types of institutional owners is less developed. Cai, Garner, and Walking (2009) report that ownership by index funds or quasi-indexers (see Bushee, 2001 for definitions) exhibits the same pro-management bias as the broker votes studied in Bethel and Gillan (2002). Appel, Gormley, and Keim (2016) show that passive investors are not necessarily passive owners and engage in
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active oversight of the firms they invest in. Borochin and Yang (2016) identify how institutional investor types and their underlying portfolio turnover and holdings concentration affect corporate governance. Fos, Li and Tsoutsoura (2017) provide evidence that director elections play a
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significant role in CEO turnover-performance sensitivity.
Our work is also related to the emerging literature on nonbinding shareholder votes. A
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key issue in this literature is whether such nonbinding votes have real effects compared to binding proposals. Buchanan et al. (2012) compare the nonbinding system in the US to the UK
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system in which proposals are more onerous on sponsors but carry greater force because they are
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binding. They find that shareholder proposals in the UK are more likely to target director elections than in the US where the emphasis of proxy rules is more on shareholder protection and
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less on empowerment. Levit and Malenko (2011) present a theoretical analysis of advisory proposals. They show that nonbinding votes do not tend to be effective unless an activist is involved in order to discipline managers. Director election votes in uncontested elections are advisory, so our study can be viewed as empirical evidence on the role played by advisory votes. 3.
Data and sample selection
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3.1.
Director elections We obtain voting outcomes for proposals listed on proxy statements from the ISS Voting
Analytics database for firms included in the Russell 3000 Index. Our sample includes all director election proposals from January 2003 to December 2014. We exclude financials and utilities. We
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also exclude directors identified as executives at the time of the elections to focus on supervisory or outside directors. These exclusions do not materially affect the results. We examine uncontested elections in which director slates are sponsored by management. In our sample (and in the US more broadly), it is relatively infrequent for alternate slates to be proposed by
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shareholders (Fos and Tsoutsoura, 2014). Our unit of analysis is a unique firm director election event. We construct our sample such that only those directors who face an election in a particular year are included in the analysis for that year. We extract the name of each director who stands
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for election from the ballot item description field in the voting database. The proxy voting ballot in uncontested elections typically lists three voting choices for
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each director nominee: for, against and abstain. For all shareholders who voted, we know the total number of shares voted for, against, and abstain. Shareholders who do not vote are not
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included in our analysis. %Withheld is estimated for each director at a firm and is defined as
(Voted against+Voted abstain) . (Voted for+Voted against+Voted abstain)
(1)
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%Withheld
Following Cai, Garner, and Walkling (2009), a key control variable is the
recommendation that the proxy advisory firm ISS issues for the director nominees in an election. A dummy variable, ISS Against, takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. We also include a range of controls. Appendix A
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describes these firm- and director-level variables and lists the source of the data. The remaining part of Section 3 discusses the important variable specifications and where relevant, the data sources, in greater detail. 3.2.
Dependent variables
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We analyze the relation between director election votes and subsequent director-level outcomes, viz. directorships held at the voting company, the number of other board seats held by a director, and a director’s membership in significant board committees. Explanatory variables includes votes, firm attributes, and the characteristics of individual directors facing elections. We
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construct the data by merging multiple databases with manual interventions as necessary. We describe the key steps below.
The BoardEx database is our primary source for board data such as number of
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directorships and committee assignment as well as individual director-specific attributes such as director age. BoardEx provides extensive data on the service history and biographical data for
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individuals who serve as directors of large US corporations. The coverage begins in 1999 but is narrow until 2003, when it starts to include smaller firms outside the S&P 1500 population. This
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is an important reason for choosing 2003 as the start of our sample period. We merge BoardEx
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with the ISS Voting Analytics database, which has data on director elections. This matching process requires a one-to-one match of individual directors in the two databases. While many
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matches can be handled through machine-based text matching algorithms, manual interventions are necessary both to check matches and resolve ambiguities that arise.10
10
For example, Anheuser-Busch Companies has two directors with exactly the same text, “August A. Busch”, in the dataset. We keep track of suffixes to ensure that these are two distinct individuals, namely, August A. Busch III and August A. Busch IV. In other instances, we track the middle names to account for different individuals with the same first and last name. For example Pilgrim Pride Inc. has two directors listed as Lonnie Pilgrim that is resolved by keeping track of the middle initial for the father Lonnie “Bo” Pilgrim and the son Lonnie “Ken” Pilgrim.
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Our measure of director outcome is director turnover, denoted hereafter as Director_TO. We use the BoardEx-identified start and end dates of a particular individual’s tenure as director at a specific firm. Consider, for instance, the case of Zale Corporation At its annual meeting held on December 7, 2009 (for the fiscal year ending in July 2009), the company had a slate of seven
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directors up for reelection. To measure director turnover in the period following the shareholder voting at the annual meeting, we examine Zale’s board composition at the end of the fiscal year during which the meeting took place, i.e., July 2010. We find that two of the seven directors who were up for reelection were no longer on the board. We thus assign the Director_TO variable a
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value equal to one for these two directors and a value equal to zero for the other directors.11 We believe that our turnover measure is conservative as a measure of election-induced changes because our data covers a relatively short horizon of less than one year after voting.
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Consider the example of Zale Corporation described in the previous paragraph. Here, we are effectively looking for a turnover in a relatively short period of eight months (December 2009 to
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July 2010). In some instances, it is possible that the low support from shareholders has effects over longer periods. For instance, while two of the directors of Zale Corporation departed before
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the end of the fiscal year, the other five Zale directors up for reelection who were still on the
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board had also received a high level of %Withheld. Two out of these remaining five directors resigned in September 2010 (two months after the fiscal year-end), and an additional director
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resigned in February 2011 (seven months after the fiscal year-end). Our turnover measure is conservative in the sense that it does not capture these later turnovers, which are likely to reflect the July 2010 dissent but could also have other contaminating effects that are more likely during a longer time horizon.
11
Two directors faced a substantial 19.53% and 19.57% of votes withheld, respectively. Their resignation was announced in the May 6, 2010, 8-K filing, i.e., two months before the fiscal year-end in July 2010.
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We also consider an alternative econometric specification in which the total dissenting vote against a director is decomposed into a firm-level component and a component specific to the director facing the election. The first component is the average withheld at the firm level, or Firm%Withheld, which is the mean of %Withheld across all directors on the slate at an election
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event. The second director-specific component, Excess%Withheld, is the %Withheld for the director minus the firm-level average, Firm%Withheld. The variable Excess%Withheld thus filters out the aggregate firm-level dissatisfaction and thereby controls for other issues that can lead to dissent at the level of the firm and year. Following Gormley and Matsa (2014), we also
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estimate an econometric model that controls for such unobservables using interactive fixed effects at the election-year level. The fixed effects specification absorbs and thus sheds no light on the firm-level drivers of dissent such as past performance, returns, or the aggregate dissent at
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the firm. The results are similar to the model using Excess%Withheld.
We also analyze the total number of other directorships held by an individual director.
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We use this measure to examine whether dissent at one firm has spillover effects on other positions held by the director. This measure, Change in outside directorships is the sum of all
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directorships at the beginning of year t+2 minus the same sum at the beginning of year t, where t
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is the year of the election. To ensure that we do not double count a loss of directorship for the firm in which the individual director is facing an election, we exclude such departures when we
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estimate the variable Change in outside directorships. Our third outcome variable is committee turnover. The variable is a metric of the internal
consequences of elections. It reflects the reassignment of responsibilities for directors who remain on a board after an election. We take the view that the important board committees are the compensation, nominating, and audit committees. The compensation committee has acquired
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an especially high profile given the increased focus and debate on top management pay (see Frydman and Jenter, 2010 or Murphy, 2013 for reviews). The audit committee has gained importance since the 2002 Sarbanes-Oxley Act, which increased the scope, expertise, and the authority of the audit committee. Finally, the nominating committee is important because it
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influences the composition of the board through the director nomination process. Exchanges and regulators have responded to concerns about the director selection process by requiring nominating committees to be composed of only independent directors (Shivdasani and Yermack, 1999). As a result, nominating committees are important in determining board structure.
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We identify committee turnover from successive annual reports. A committee turnover occurs if a member at the time of election is no longer on the committee in the year following reelection. We focus, of course, on turnover from committees conditional on the member’s
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staying on the board. Thus, a committee turnover variable equals one if the director who is up for election remains on the board at the end of the year but is no longer a member of that
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particular committee in the year after the election. The variable aims to capture the loss of status for a director who does not leave a board. Firm characteristics
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3.3.
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We control for several firm-specific characteristics. These characteristics are constructed by merging the ISS Voting Analytics and BoardEx with Center for Research in Securities Prices
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(CRSP) and Compustat databases. We require that firms have nonmissing accounting data and stock returns data for the fiscal year-end preceding the election date. Most of our control variables are commonly used in empirical corporate finance studies. Size is the natural logarithm of the book value of total assets for the most recent fiscal year preceding the director election. Excess ret is a stock return performance measure. It equals the stock return in the fiscal year
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prior to the election date minus the return of a characteristics-matched portfolio based on style quintiles from Daniel et al. (1997), hereafter DGTW. Adj. ROA is an accounting-based performance measure. It is calculated as the earnings before interest, taxes, depreciation and amortization (EBITDA) to assets ratio minus the median ratio for firms in the same two-digit
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Standard Industrial Classification (SIC) industry. The control variable DualClass equals one if the firm has more than one class of voting stock. These data come from Gompers, Ishii, and Metrick (2010). In staggered or classified boards, only a subset of directors stand for elections each year (Cremers, Litov, and Sepe, 2016). We impute whether a board is staggered from the
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number of directors on the slate relative to the total number of board members.
We include other firm-level characteristics of interest. InstOwnship is the fraction of outstanding shares held by institutional owners as reported in the Schedule 13F filings. In
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addition, we also focus on different types of institutional investors that hold shares of a firm immediately prior to the annual meeting of the firm in which some or all of its directors face a
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reelection. For each firm-meeting date observation, we obtain institutional investor holdings for
(13F) Database.
Director characteristics
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3.4.
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the most recent quarter before the meeting date from the Thomson-Reuters Institutional Holdings
The primary unit of analysis in our paper is a director facing an election at a firm in a
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given fiscal year. To control for heterogeneity across individual directors, we include a number of director-specific characteristics. These include age, tenure, gender, and the educational qualifications of each director. All director-related characteristics are obtained from BoardEx. In some specifications, we control for unobserved director heterogeneity by including director fixed effects. While this approach has the advantage of not requiring us to specify the form of director
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heterogeneity, it does not shed light on the drivers of heterogeneity and, perhaps more importantly, requires a sample of firms in which a specific individual holds multiple directorships. In this approach, we would lose observations involving individuals who only hold a single directorship. Thus, it is not our preferred specification. However, we emphasize that the
4.
Results
4.1.
Withholding of votes
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results are robust to either approach.
Our final sample consists of 83,496 director election events. Table 1 reports data on
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shareholder voting by fiscal year to illustrate the time series variation in dissent. We have between 4,570 and 8,015 director election events per year. The average percentage of votes withheld in the full sample is 5.86% and varies between a low of 4.66% in 2014 and a high of
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8.18% in 2009 just after the financial crisis. Shareholder concerns related to the financial crisis are reflected in the 2009 proxy season because the 2008 proxy season was mostly complete by
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September 2008, when the crisis had fully set in. The displeasure with directors in the aftermath of the financial crisis continues in 2010, when the 6.88% dissent rate significantly exceeds the
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overall sample average of 5.86% and the levels prior to 2008.
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We also report the data on instances of majority dissent. There are 350 instances of such dissent, representing about 0.5% of the full sample. These instances also peak after the 2008
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crisis. For instance, in 2009 we see majority dissent in 69 cases, or 5% of elections, and in 2010, we see 85 instances of majority dissent, or 6% of all cases. These numbers are similar to those reported in February 2015 by the Committee on Capital Markets Regulation.12
12
See http://capmktsreg.org/reports/committee-releases-updated-data-recommendations-unelected-directors/.
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Following Cai, Garner, and Walkling (2009), proxy advisory recommendations can influence how shareholders vote. Thus, we also report data on the influence of recommendations by proxy advisors. We show the percentage of director nominees opposed by ISS each year. In our sample, Table 1 shows that ISS opposes between 6.72% and 17.30% of nominees up for
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election each year. The overall level of the opposition trends downward over our sample period. For instance, the opposition by ISS reaches a low of 6.72% of all director election events in 2014. The decline in opposition is preceded by a peak in ISS opposition in the 2009 and 2010 proxy seasons.
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The influence of the proxy advisory firm’s recommendations on voting is indicated by the numbers presented in Table 1. Over the whole sample period, if ISS does not oppose a director nominee, the average votes withheld equal 3.91%. For directors opposed by ISS, the
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average percentage of votes withheld is much higher at 22.42%. The difference is economically meaningful and also statistically significant, as shown in the t-values reported in the last column
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of Table 1. How much shareholder votes and proxy firm advice matter is an empirical question that we address.
Other descriptive statistics
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4.2.
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Panel A of Table 2 provides firm and director descriptive statistics for the 83,496 election events in our sample. The mean and median board size per election event equal 9.17 and 9.00,
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respectively, and 26.62% of the election events are for directors from staggered boards. However, the median election event does not feature a staggered board. Not surprisingly, the firms in our sample are primarily held by institutions. The mean and median holdings of institutional investors equal 72.83% and 77.15%, respectively. Thus, votes by institutions and the voting behavior of institutional investors are important governance issues for our sample firms.
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Panel B of Table 2 reports director characteristics. The mean and median age of the directors standing in the election events in our sample are 61 and 62 years, respectively, and the mean and median duration of service at election time equal 7.6 years and 5.7 years, respectively. Directors with longer tenures have considerable experience, expertise, and firm-specific capital
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that are often helpful to the boards they serve on. On the other hand, there is also an argument for director “freshness.” This notion is partly based on the belief that, after several years of service on a board, a director is perhaps co-opted and no longer independent, as discussed by Coles, Daniel, and Naveen (2015). In addition, firms could benefit from fresh insights brought in
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by new directors.
In our sample, an individual director holds a mean (median) of 1.98 (2.0) directorships. Fama and Jensen (1983), and, more recently, Masulis and Mobbs (2011, 2014) point out that the
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external director market is an important source of incentives for directors. The incidence of multiple directorships underlines the importance of this source of incentives in our sample. We
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include various demographic attributes of individual directors as controls. Panel B in Table 1 provides descriptive statistics of these characteristics.
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Panel C in Table 1 gives the correlation coefficients for several variables. The correlation
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between ISS Against and %Withheld is 0.65, which is statistically significant, consistent with Cai, Garner, and Walkling (2009). Panel C in Table 1 further shows that there is significant
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negative correlation between Firm%Withheld and the two measures of prior period performance—Excess ret and Adj. ROA. Thus, dissent is more pronounced at firms with weaker performance. The dissenting vote, %Withheld, has a positive and significant correlation with director age and tenure and for members of
compensation and nominating committees,
suggesting directors with more prominent positions are more likely to be targeted by dissenting
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shareholders. Members of the audit committee are, however, associated with fewer dissent votes. Perhaps given the specificity of the role and the statutory responsibilities of auditors, dissent against audit committee members is more focused on issues related to an audit.13 Dissent is more correlated with directors having law degrees and male directors and appears less likely to be
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correlated with directors holding Master of Business Administration (MBA) degrees. The table suggests the necessary controls in the multivariate specifications that we discuss next. 4.3.
Voting and director turnover
The main empirical question we address in our paper is whether shareholder discontent
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with a director, as reflected in votes, has consequences for that director. While we turn to formal regression specifications later, it is useful to consider simple univariate statistics for which we focus on instances of majority dissent. Table 3 provides the basic results. The average turnover
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rate for directors who receive less than 50% of dissent votes is 1.84% but is 7.14% for directors receiving majority dissent votes. The turnover rate for directors receiving 50% or more dissent
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votes and who do not serve on compensation, nominating or audit committees, is even higher at 12.50%. The results partly reflect a baseline effect in which directors who do not serve on
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important committees tend to depart more, as reflected in the high turnover rates for such
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directors of 2.95%, even at low levels of dissent (Chidambaran, Liu, and Prabhala, 2016). However, when there is majority dissent, the departure rates increase by four times.
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We now turn to multivariate specifications that include votes and other controls for firm and director characteristics. Our baseline specification is a logit model ( Director _ TO)i , j ,t 1 (%Withheld )i , j ,t Fj ,t Di ,t i .
13
(2)
Brochet and Srinivasan (2014) find audit committee members are more likely to be named in lawsuits relating to accounting irregularities.
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The dependent variable, Director_TO, takes a value of one if a director i at firm j who faces an election at time t is no longer on the board for fiscal year t+1, and zero otherwise. The main independent variable of interest is %Withheld, which is estimated for each director facing reelection (Eq. 1). The parameter of interest in Eq. (2) is the coefficient λ. The control variables
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include firm characteristics denoted by vector F, and director-specific characteristics denoted by vector D. We estimate but do not report results of a linear probability model, as it gives similar results. While the marginal results are easier to visualize and compare in the linear probability model, we report the estimates of a logit specification given that our dependent variable
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Director_TO is binary.
Table 4 reports the logit results. Firm-level controls are Size, two measures of performance, namely excess stock market returns (Excess ret), industry-adjusted operating
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performance (Adj ROA), and institutional ownership (InstOwnship). Director-specific controls are age of the director (Age), number of years served on the board (Tenure), membership on a
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significant committee (CommMember), and number of other board positions (#Dirships). We define the variable CommMember as follows. CommMember is a dummy variable that equals
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one if a director serves on a significant committee, which is one the following three committees:
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audit, compensation, and nominating (governance) committees. We start by examining the relation between firm-level characteristics and director
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turnover. Director turnover is more likely when the firm has poor prior-year performance. Both accounting performance and stock market performance are significant in explaining turnover. In addition, there is less turnover at larger firms (proxied by total assets). Aggregate institutional ownership is not significant. Model (2) of Table 4 includes dissenting vote against a director and several director-level controls. We find that there is a positive and significant relation between
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dissent, i.e., votes withheld for a director and subsequent director turnover in the next year. We briefly discuss some coefficients for the control variables in model (2). Older directors are less likely to depart boards. However, the length of a director’s tenure is not associated with turnover. The number of directorships held by a director is not significant. An interesting variable is the
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responsibility assigned to a director as reflected by membership of significant committees. Directors holding such positions are less likely to depart in the year after an election.
Model (3) in Table 4 adds a key control variable of interest, the proxy advisor recommendation, ISS Against. The coefficient of ISS Against is positive and statistically
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significant at the 1% level. The result indicates that if ISS issues a recommendation opposing a management-sponsored director nominee, it is more likely that the director will leave the firm in the next year. Model (4) includes both proxy advisor recommendation and dissent. The
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coefficient of %Withheld continues to be significant, but ISS Against is no longer significant. We
advisor recommendations.
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conclude that the significance of votes withheld is not simply due to correlation with proxy
In models (1) to (4) in Table 4, we find that firm-level stock and accounting performance
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is negatively related to director turnover. However, stock- and accounting-based performance
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measures may not capture the entire spectrum of firm performance used by investors in determining votes. We address this point by including aggregate firm-level dissent as an
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additional explanatory variable, Firm%Withheld. This variable also captures other forms of heterogeneity at the firm level that determine dissent. For instance, there could be an idiosyncratic variation in how a firm’s shareholders vote in a particular year due to unobservable compositional effects of a firm’s shareholder base. Alternatively, there could be time varying unobservables, for example, product defects or recalls, litigation, or environmental challenges.
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Such events could influence votes but may not be fully captured by the summary performance metrics included in models (1) to (4). We define the firm-level shareholder dissatisfaction measure, Firm%Withheld, as the average of individual fraction withheld for all directors up for election at a firm in a given year.
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Thus, Firm%Withheld is the average dissent across the entire slate of directors up for election in a given year. Model (5) of Table 4 shows that the coefficient of this firm-level measure of discontent is positive and significant beyond the stock and accounting performance variables. We thus include the firm-level dissent in subsequent specifications.
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The last column of Table 4 takes one step toward addressing unobservables. We estimate a model that includes the variable Excess%Withheld, which is estimated by subtracting the average fraction of withheld votes for all directors at a firm for the year from each individual As discussed earlier in Section 3.2, this is a powerful control for
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director’s %Withheld.
unobservables. Model (6) reports the results. The coefficient of Excess%Withheld is positive and
ED
significant, even after controlling for both Firm%Withheld and the proxy advisor’s recommendation. Directors who receive higher dissent relative to other directors in the same
PT
election are more likely to depart from the board in the next year. Thus, director-specific dissent
CE
matters.
Table 5 provides additional tests to address the issue of unobserved heterogeneity. The
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unit of our analysis is an election event t for a director i at a firm j. In model (1) of Table 5, we include interactive firm-year fixed effects that control for all unobserved heterogeneity at the firm in the particular election. This fixed effect controls for firm-level unobservables, including both the time-invariant and the dynamic components that vary from year to year. What remains then is variation within a particular firm across directors in the specific election. This approach is
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roughly equivalent to the model with Excess%Withheld but differences all other explanatory variables relative to firm-year averages. The results are reported in model (1) of Table 5. Because the specification absorbs all variation within a firm and an election, firm-level characteristics drop out. The coefficient for the fraction withheld remains significant at the 1%
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level.
Specification (2) in Table 5 reports estimates that control for director level unobservables. This model allows us to examine the effect of votes withheld for the same director across different firm elections. This sample, however, requires us to narrow the sample
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to the universe of directors with multiple appointments. The coefficient for %Withheld is positive and significant. In model (3), we estimate a similar specification including both Excess%Withheld and Firm%Withheld. The coefficient for both variables is significant. This
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result indicates that directors are more likely to depart if they receive more dissent votes than other directors at that firm and also from firms in which there is more overall dissent.
ED
Table 6 reports the results of other robustness tests. Here, we focus on heterogeneity across firms. In Panel A, we divide the sample into firms with or without classified boards. In
PT
firms with classified boards, director elections are staggered. In such elections, there is less
CE
pressure on a director receiving low shareholder approval, as the next election for the director occurs three years later. It is less likely that boards would react to negative votes for a director
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only up for election three years down the line, or that such directors would choose to leave. Thus, if the earlier results reflect the pressures from voting on directors and firms, we expect voting effects to be more pronounced for boards that are not classified. Panel A of Table 6 corroborates this hypothesis. The coefficient for dissent is statistically significant and greater in unclassified boards whose directors face elections every year.
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We next analyze firms that have majority voting systems for director elections. We use an approach similar to that for classified boards. %Withheld is significantly higher for firms with plurality voting relative to firms that adopt majority voting. We estimate the impact of voter dissatisfaction separately for subsamples of firms with plurality voting and majority voting
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systems. Panel B of Table 6 reports the results. Dissent matters both for plurality as well as majority voting firms. However, the coefficient for dissent is almost twice as large for the majority voting subsample. In the Panel C specification, we divide firms into those with and without dual class shares. In the case of firms that have dual class shares, votes can be less
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informative, as inside shareholders have greater control over the firm. Shareholder discontent remains a significant predictor of director turnover at firms with and without a dual class structure.
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Finally, many firms have mandatory retirement ages for their directors. We analyze director turnover separately for directors below 65 years of age and those 65 years or older at the
ED
time of the reelection. This approach is a filter for turnovers due to age-based retirement rules. The results are reported in Panel D of Table 6. We find that the coefficient for Excess%Withheld
PT
is positive and significant at the 1% level for the below-65 directors. The dissent coefficient
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remains positive but is about one-third smaller and has weaker significance at the 10% level for 65 and older directors. Thus, younger directors are more likely to leave a board in response to
AC
dissent. 4.4.
Change in outside directorships We next address the question of whether dissent with a director at a firm is associated
with an increase or decrease in other (outside) directorships held by the individual being voted on. A well-established literature going back to Fama and Jensen (1983) suggests that outside
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directorships are an important channel for aligning shareholder and director incentives. If shareholders use dissent at a firm even in uncontested elections with no direct consequence at the voting firm to signal dissatisfaction with a director, the directors in question are likely to become less attractive to boards at other firms. Thus, dissenting votes for a director at a firm potentially
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affect the number of directorships held by the director at other firms.
We test this proposition by estimating models in which the dependent variable is the Change in outside directorships. This variable is the net change in the number of outside directorships held by the director, positive or negative, over the next two years after an election.
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We exclude any changes in the directorships in the focal firm with an election event, as this change is already accounted for in the dependent variable Director_TO in Tables 4 to 6. Table 7 presents regression results in which the Change in outside directorships is the
M
dependent variable. The coefficient for %Withheld is negative and significant. As before, proxy advisory firm recommendations matter in models that do not control for dissent. However,
ED
dissent remains significant even after we control for proxy advisor recommendations. Thus, shareholder dissent is related not only to director turnover at the firm in which the opposition
PT
occurs but also the net directorships held at other firms. The results are similar using director-
CE
specific measure, Excess%Withheld, as the measure of dissent and the average dissent at the firm level, Firm%Withheld. Even when both variables are included in the specification, they are both
AC
significant as seen in model (5) in Table 7. Some control variables included in Table 7 are of interest. We find that directors at large
firms are likely to gain more directorships. Masulis and Mobbs (2013) argue that directors spend more time on prestigious directorships. Our results suggest that there are rewards for doing so. Directors already serving on several boards are less likely to increase directorships. Older
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directors and directors with long tenures are less likely to increase future directorships, and directors with law and business qualifications appear more likely to gain future directorships. We find that male directors are less likely to gain new directorships, consistent with pressures to
4.5.
What about directors who stay on despite dissent?
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increase the representation of women on boards (Adams, 2016).
We turn to the outcomes for directors who continue to remain on the board despite facing dissent in shareholder elections. Our sample comprises directors who remain on boards after elections until the end of the fiscal year following an election. For this group of “surviving”
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directors, we examine whether there is a change in roles within the board. We focus on whether a director receiving significant dissenting votes is assigned away from the membership of key board committees.
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We create three indicator variables Comp_TO, Nom_TO, and Audit_TO to capture departure from the compensation, nomination, and audit committees, respectively. These
ED
variables take the value equal to zero if an individual director stays on the committee following the reelection and one if the director departs the committee following the election (but continues
PT
to stay on as a board member). Committee names are not standardized across companies or
CE
sometimes within the same company across years. We use extensive manual intervention to standardize committee names to ensure their comparability across years. For example,
AC
Abercrombie & Fitch Co. states in its May 2009 proxy that it has four standing committees: compensation, executive, audit, and nominating committee. In the proxy filed in the following year in May 2010, the company states that it has five standing committees, adding a new social responsibility committee to the previous four committees. Consider an executive listed as a member of the compensation and nominating committees in 2009 who is reassigned in 2010
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away from these committees but who gains a position on the corporate social responsibility committee. Because the executive continues on the board but is no longer a member of the compensation and nomination committees, we set Comp_TO and Nom_TO equal one in this case.
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Table 8 compares committee reassignment outcomes for staying directors, i.e., conditional on continuing in the same board, who receive majority dissent relative to those who do not. The probability of departure from any one of the committees is 7.11% for directors receiving less than 50% dissent, and it increases to 13.54% if dissent exceeds 50%. The
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difference between the two is statistically significant at the one percent level. We observe similar relations for individual membership in the compensation and nominating committees, but, as noted earlier, weaker results for the audit committee.
M
Table 9 reports estimates of multivariate specifications. The dependent variable is committee turnover, or reassignment away from one of the compensation, nominating, or
ED
auditing committees. The explanatory variables of interest are %Withheld, Excess%Withheld, and Firm%Withheld. The control variables are as before. Some directors serve on more than one
PT
committee. Controlling for the number of committee memberships is important because directors
CE
on multiple committees are less likely to assume further committee responsibilities in the future. Thus, we include a dummy variable MultipleComm that takes that value of one for directors who
AC
serve on more than one committee. Models (1) and (2) of Table 9 report results for audit committee turnover with %Withheld and Excess%Withheld, respectively. Models (3)–(4) and (5)–(6) report similar estimates for the directors who serve on the compensation and nominating committees, respectively. We find that the coefficients for both %Withheld and Excess%Withheld are significant. The results suggest that even if directors who are opposed by
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shareholders do not leave, they are more likely to experience some degradation of their status within the board, as they are more likely to be removed from important committees.14 Among the control variables, three variables appear to be prominent. Multiple committee membership is significant throughout. Poor accounting performance is consistently likely to lead
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to reassignment away from both compensation and nominating committees. Age has a negative coefficient, so older directors are less likely to depart their committee positions. In summary, the results suggest that shareholder votes have consequences for the internal organization of boards.
responsibilities of directors within boards. 4.6.
Directors in leadership roles
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Shareholder voice, as expressed through nonbinding dissent, is related to the functional
Directors in roles, such as the chair of the board, lead director, or chair of an important
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committee, are board leaders who help shape board functioning in the areas of their responsibility. These individuals are logical targets for unhappy shareholders. However, a
ED
director appointed to a leadership role likely provides unique services to the firm so the firm is more likely to ignore the low shareholder support for such directors. Dissent should thus have
PT
less force for higher profile directors in leadership positions.
CE
There is considerable variation in how boards report board positions. We search the board role field of the BoardEx database and create a dummy variable Board_chair that equals one if
AC
BoardEx describes the role as chair of the board or presiding director. Thus, our Board_chair
14
We also examine dissent for new directors at firms. The average dissent for all directors who depart is 6.82%
versus 5.39% for directors who stay on and 3.82% for new directors. This is additional evidence that dissent appears to be targeted at specific directors.
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variable identifies nonexecutive directors that are chair of the board.15 We also identify lead directors if the board role field in BoardEx contained the text string “lead” without any qualifiers such as deputy, interim, acting, or emeritus. Directors who meet this description are classified as Lead_directors. We also search for leadership roles within significant board committees by
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searching for chairman, co-chairman, president, or chairwoman text strings in the committee role name field of BoardEx.
Table 10 provides the turnover outcomes for directors in leadership positions relative to directors not in such leadership roles. With the exception of the chair of audit committee,
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directors in the leadership position get significantly higher dissent votes than those not in leadership roles. The fraction of votes withheld is higher for the nonexecutive chair, lead independent director, chair of the compensation committee, and chair of the nomination
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committee. The notable exception to the directors in leadership positions is the case of the audit committee chair role. Directors listed as audit committee chair are significantly less likely to
ED
receive dissenting votes. These directors have statutorily endowed roles as watchdogs. They are likely held culpable in cases of financial irregularities but do not seem to be targeted for more
PT
normal performance-related concerns.
CE
We next examine the association between the likelihood of departing from the board within a year of election. We find that even though directors in leadership roles receive
AC
significantly greater shareholder disapproval and negative ISS recommendations, the average departure rate for these directors is significantly lower compared to directors who are not in 15
BoardEx uses more than a dozen different titles such as independent chairman, presiding independent chairman,
joint chairman, presiding independent director etc. We are careful to exclude roles that appear transitory or somewhat junior. For example, all roles with qualifiers, such as interim, deputy, emeritus, acting, etc. are not classified as board leadership roles.
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leadership positions. For example, on average, 1.21% of directors listed as the lead director depart in the year following the election. In contrast, 1.89% of the directors that are not listed as lead directors depart within a year of the election. We expand on this theme in Table 11, which reports results from estimating a
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multivariate logit regression with director turnover as the dependent variable. We estimate this regression for several subgroups. In each case, we compare the effect of votes on directors who are not identified as being in a leadership position in the year of the election relative to directors identified as leaders. We find that voting is insignificant in explaining departures of directors in
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leadership positions. The coefficient for votes is not significant for board chair, lead directors, and chairs of compensation, nominating, and audit committees, but it is significant for directors without leadership roles. A specification that combines the roles and compares directors with or
6.
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without a major leadership position gives essentially similar results.16 Conclusion
ED
An important and sometimes contentious debate is whether shareholder voting is an effective mechanism to bring about changes in corporate governance and firm policy. Voting in
PT
director elections is one way for shareholders to express their displeasure with firm policy.
CE
However, director elections in the US tend to be uncontested events, raising questions about the usefulness of votes in these elections as a means of exerting pressure on directors. Do votes in
AC
these routine elections matter? We find that, contrary to popular belief and results found in prior
16
Using excess votes withheld gives similar result. In unreported results, we examine differences based on the
nature of a firm’s institutional shareholders, as represented by the institutional investor horizon (Bushee, 2001). The results do not appear to vary by these ownership patterns.
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studies, dissent votes in uncontested director elections have power and result in negative consequences for directors. We examine the consequences of shareholder votes in 83,496 director election events held between 2003 and 2014. We find that directors receiving more dissent experience negative
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future outcomes. Dissent is associated with increased director turnover. The results are robust according to a range of specifications and models with granular controls for unobserved heterogeneity. There is some heterogeneity in these results. Our results are stronger for firms that have nonclassified boards in which directors must stand for election every year. Directors in
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leadership positions tend to be recipients of more dissent but are less likely to depart. We also find that elections have consequences even when directors do not leave boards at which they face dissent. Such directors are likely to lose leadership positions and membership in key committees
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that shape how boards function.
Our results on voting are also relevant to the broader issue of assessing director
ED
performance and turnover-performance sensitivity. Yermack (2004) presents evidence on this issue. Variables such as the size, profits, or the reputation of the firm are reasonable choices for
PT
the firm’s performance. These measures aggregate the output of the entire board and the top
CE
management. However, firm-level performance measures do not indicate an individual director’s performance. In our view, votes in director elections can fill this gap. Votes are cast for
AC
individual directors and can thus be interpreted as director-specific judgments by shareholders. Their empirical usefulness, however, depends on whether there is sufficient variation in voting within a firm in an election year across directors and also whether intra-election variation explains director outcomes. We find that this is the case. Voting varies across directors even
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within a firm for a specific annual meeting, and it is precisely this variation that explains post election outcomes. We also find that dissent in uncontested elections has pass-through effects at other firms. Directors with high dissent votes at one firm are likely to have fewer outside board seats at other
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firms, even within a relatively conservatively specified short period after elections. Both the votes received by a director relative to other directors at the same firm as well as the overall level of dissent across all directors matter. Thus, dissent by shareholders negatively impacts director reputation. This finding contributes to the literature on the labor market for external directors and
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is consistent with the viewpoint that this market is important for directors and is thus a source of discipline (Fama and Jensen, 1983; Masulis and Mobbs, 2011, 2014). Votes in director elections serve as an informational channel that helps inform the director market and contributes toward
M
the functioning of the reputation channel. While proxy advisory services and their recommendations are important, our results hold even after controlling for ISS’s
ED
recommendations. Dissent votes carry additional information. Thus, we conclude that even though votes in uncontested director elections are advisory and nonbinding, these indications of
AC
CE
PT
dissatisfaction with directors do matter and have consequences for directors.
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Appendix A A.1. Firm characteristics Size: Natural logarithm of book value of assets for the most recent fiscal year prior to the director election [Source: Compustat]
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Excess ret: A stock’s return minus its matching 125 characteristics-based portfolios based on Daniel et al., 1997 (DGTW), annualized.
Adj. ROA: A firm’s ratio of EBITDA to total assets, winsorized at 1% and 99%, and it is used to compute mean EBIDTA/assets. For any firm, the excess performance = EBITDA to assets minus average for corresponding to the firm’s native SIC. BoardSize: This equals the number of directors on the board at the start of fiscal year immediately preceding the director elections. [Source: BoardEx]
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Staggered: This is a dummy variable that equals one if a firm has a classified board, i.e., only a fraction of the board members are up for election each year. We impute it by comparing the number of directors up for election in a year (i.e., Slate) to the reported BoardSize. Financial: If the firm is listed with SIC code between 6000 and 6999, Financial takes the value of one, and zero otherwise. [Source: Compustat]
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Utility: If the firm is listed with the primary SIC code between 4800 and 4999, Utility takes the value of one, and zero otherwise. [Source: Compustat]
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DualClass: Dummy variable that equals one if the firm is listed as having more than one class of stock, and zero otherwise. [Source: Andrew Metrick’s website: http://faculty.som.yale.edu/andrewmetrick/data.html]
PT
InstOwnership: This is fraction of total ownership held by institutional investors. [Source: ThomsonReuters Institutional Holdings (13F) Database] A.2. Director characteristics
CE
Age: Age in years at the time a particular director is up for election. We impute Age by subtracting the year of birth of the director from the year of the election. [Source: BoardEx]
AC
Tenure: Length of time served on the current board in years. [Source: BoardEx] CompComm: Equals one if the director is a member of the compensation committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] NomComm: Equals one if the director is a member of the nomination committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] AuditComm: Equals one if the director is a member of the audit committee for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx]
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MultipleComm: Equals one if the director is a member of two or more of the audit, compensation, and nominating committees for the fiscal year immediately before the year of election, and zero otherwise. [Source: BoardEx] #Dirships: Equals the total number directorships held by the individual director at the start of the year in which the election meeting takes place. [Source: BoardEx] Male: Equal one if the director is male, and zero otherwise. [Source: BoardEx]
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MBA: Takes the value one if the director is reported in BoardEx as having an MBA degree. [Source: BoardEx] Law: Equals one if the director is listed as having a Juris Doctor (JD) degree. [Source: BoardEx]
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IvyPlus: Is a dummy variable that takes the value one when the director up for election attended a high quality undergraduate institution, which is the Ivy League definition proposed by Zawel (2005). [Source: BoardEx] A.3. Election related
%Withheld: Proxy voting ballots list three voting choices for each director up for election: for, against and abstain. %Withheld is based on shared voted and is defined as: (Voted against+Voted abstain)/(Voted for+Voted against+Voted abstain). [Source: ISS Voting Analytics]
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ISS Against: Equals one if ISS recommends withhold, against, or no for a director, and zero otherwise. [Source: ISS Voting Analytics] Firm%Withheld: Average %Withheld for all directors at an election event. [Source: ISS Voting Analytics]
ED
Excess%Withheld: %Withheld for a director at an election minus Firm%Withheld for the election event. [Source: ISS Voting Analytics]
PT
Director_TO: Equals one if the director who faces an election in fiscal year t departs before fiscal year t+1, and zero otherwise. [Source: BoardEx]
CE
Change in outside directorships: The two-year net change in the number of outside directorships held by a director up for election, not counting any changes in the directorship at the focal firm with an election event. [Source: BoardEx]
AC
Committee_TO: Equals zero if a director up for election and currently on a committee stays on the board and the committee until the next election and one if the director stays on the board but is no longer a member of the committee after the election. We define Committee_TO separately for audit, compensation, and nominating committees. [Source: BoardEx]
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2005.
Untangling
the
Ivy
League
College
Prowler,
Pittsburgh..
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CE
PT
ED
M
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Zawel,
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Table 1 Descriptive Statistics
(3)
(4)
(5)
(6)
(7)
(8)
# directors with >50 % votes withheld
% ISS rec against
% of votes withheld when ISS for
% of votes withheld when ISS against
1
14.73%
3.45%
17.76%
(9) t-test for difference between columns (7) and (8) –59.47***
Year
# of firms
# director nominees
Average % of votes withheld
2003
699
4,570
5.55%
2004
1,002
5,975
5.83%
8
2005
1,125
6,021
5.60%
12
12.77%
3.99%
18.02%
–58.61***
11.33%
3.74%
20.23%
–68.97***
2006
1,263
6,553
4.95%
2007
1,002
6,564
5.72%
4
8.74%
3.54%
19.62%
–67.07***
28
9.93%
3.73%
23.90%
–78.48***
2008
1,039
6,755
5.71%
2009
1,165
7,657
8.18%
21
9.03%
4.02%
22.79%
–71.1***
69
17.30%
4.56%
25.51%
–90.27***
2010
1,218
7,967
2011
1,153
7,638
6.88%
85
13.78%
3.74%
26.54%
–93.42***
5.74%
38
7.61%
4.18%
24.74%
–70.17***
2012
1,190
8,015
2013
1,182
8,003
5.84%
36
8.11%
4.44%
21.79%
–59.75***
5.27%
25
8.11%
3.90%
20.84%
–63.8***
2014
1,124
7,778
4.66%
23
6.72%
3.44%
21.64%
–65.54***
Total
13,162
5.86%
350
10.51%
3.91%
22.42%
–246.94***
ED
PT
CE 83,496
M
(2)
AC
(1)
AN US
The table reports descriptive statistics for uncontested director elections of nonexecutive directors in shareholder meetings held between January 2003 and December 2014. The data comprise firms with election data and proxy recommendations in the ISS Voting Analytics database, excluding financials and utilities that have matching data in BoardEx and CRSP-Compustat. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
43
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Table 2 Firm and director characteristics
CR IP T
The table reports descriptive statistics for uncontested elections of nonexecutive directors in shareholder meetings held between January 2003 and December 2014. We include management-sponsored independent director nominees as reported in the ISS Voting Analytics dataset. This data was matched with individual director characteristics from BoardEx and merged with CRSP/Compustat to obtain firmlevel characteristics for the year immediately preceding the year in which the board meeting was held. We exclude financials (SIC codes 6000–6999) and utilities (SIC codes 4800–4999). Also excluded are directors who were serving as executives at the time of the election. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. All other variables are described in Appendix A. Panels A and B provide descriptive statistics for the main variables used in the study. In Panel C, we report pairwise correlations across variables, where * indicates significance at the 5% level.
AC
CE
PT
ED
Size Excess ret Ind Adj. ROA BoardSize Staggered Institutional Ownership Panel B: Director characteristics 83,432 Age 83,457 Tenure 83,496 CompComm 83,496 NomComm 83,496 AuditComm 82,262 #Directorships 82,277 Male 76,969 MBA 76,969 Law 76,969 IvyPlus 82,804 %Withheld 83,496 ISS Against
Mean 7.28 4.22% 2.65% 9.17 26.62% 72.83%
Std Dev 1.79 66.36% 14.21% 2.28 44.20% 20.74%
Median 7.13 –2.18% 1.60% 9.00 0.00% 77.15%
61.01 7.59 0.51 0.43 0.52 1.98 0.88 0.37 0.10 0.15 5.86% 10.51%
8.76 6.97 0.50 0.50 0.50 1.33 0.33 0.48 0.30 0.36 8.71% 30.67%
62.00 5.70 1.00 0.00 1.00 2.00 1.00 0.00 0.00 0.00 2.59% 0.00%
M
N 83,496 83,496 83,496 83,496 83,496 78,281
AN US
Panel A: Firm characteristics
44
Table 2 (continued) Panel C: Pairwise correlations—firm and director characteristics Firm Size Excess ret Adj. ROA BoardSize Characteristics 1.000 Size –0.0629* 1.000 Excess ret 0.1914* 0.0307* 1.000 Adj. ROA 0.6378* –0.0485* 0.0755* 1.000 BoardSize –0.0992* –0.0083* –0.0264* -0.006 Staggered 0.1975* –0.0383* 0.1600* 0.006 InstOwnship 0.0846* –0.0349* –0.0453* –0.0901* Firm%Withheld
AC
1.000 0.1090* –0.1353* –0.0080* 0.0279* 0.000 –0.0137* –0.0130* 0.0701* 0.0112*
1.000 –0.0486* –0.004 0.0123* –0.0171* 0.0341* –0.001 0.0428* –0.0159*
Firm%Withheld
AN US
1.000 0.0151* 0.0490* –0.0642* –0.0640* 0.0714* –0.0441* 0.0519* 0.0408* 0.0940* 0.0549*
Nom Comm
InstOwnship
1.000 0.0268* 0.0936*
Audit Comm
1.000 0.0263*
#Director -ships
1.0000
Male
MBA
Law
IvyPlus
%Withheld
1.000 0.0302* 0.0015 0.0243* 0.0433* 0.0403*
1.000 –0.1698* 0.0900* –0.0188* –0.0319*
1.000 0.0772* 0.0224* 0.0378*
1.000 0.001 0.0115*
1.000 0.6512*
M
1.000 0.3923* 0.0500* 0.0823* 0.0182* 0.0547* 0.1564* –0.1267* 0.0016 –0.0684* 0.0344* –0.0257*
Comp Comm
ED
Tenure
PT
Age
CE
Director Characteristics Age Tenure CompComm NomComm AuditComm #Directorships Male MBA Law IvyPlus %Withheld ISS Against
Staggered
CR IP T
ACCEPTED MANUSCRIPT
1.000 –0.0086* 0.0162* 0.0768* –0.0442* –0.0459* –0.0451* –0.0941*
45
1.000 –0.0102* 0.0639* –0.002 0.0220* 0.0215* –0.001
ACCEPTED MANUSCRIPT
Table 3 Majority dissent and director turnover
CR IP T
Table 3 reports statistics on one-year departure rates for outside directors up for election. We follow these directors and check if they are still on the board at the start of the next fiscal year, i.e., whether they survive beyond the fiscal year in which the election was held. We create a dummy variable Director_TO, which equals one if the director departs, and equals zero if otherwise. Each row in the table below reports the fraction of directors who were no longer on the board by the start of the year following the year in which they sought reelection. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Voting outcome
Majority dissent 7.14% 6.00% 6.70% 4.07% 12.50%
AN US
from board (All) from board (Member CompComm) from board (Member NomComm) from board (Member AuditComm) from board (Not a Comm member)
AC
CE
PT
ED
M
Departed Departed Departed Departed Departed
Less than majority dissent 1.84% 1.71% 1.65% 1.46% 2.95%
46
t-test for significance of difference –7.31*** –4.65*** –5.46*** –2.84*** –3.18***
ACCEPTED MANUSCRIPT
Table 4 Director turnover and voting outcomes
(1)
(2)
(3)
2.245*** (6.70)
%Withheld
Adj. ROA InstOwnship Age
#Dirships
AC
Male
CE
CommMember
PT
Tenure
MBA Law
IvyPlus Intercept Observations Pseudo R2
–3.403*** (–8.36) 78035 0.013
0.566*** (5.97) –0.064** (–2.39) –0.238** (–2.29) –0.427* (–1.75) –0.071 (–0.34) –0.035*** (–8.44) –0.001 (–0.10) –0.455*** (–5.77) 0.000 (0.00) 0.072 (0.80) 0.079 (1.29) –0.183* (–1.79) 0.184** (2.36) –1.339*** (–2.70) 70658 0.032
M
Excess ret
–0.059** (–2.17) –0.227** (–2.20) –0.386 (–1.58) –0.266 (–1.23) –0.036*** (–8.77) –0.001 (–0.23) –0.499*** (–6.43) –0.000 (–0.01) 0.069 (0.76) 0.086 (1.39) –0.167 (–1.64) 0.196** (2.51) –1.281*** (–2.61) 70103 0.034
ED
–0.094*** (–3.79) –0.219** (–2.27) –0.464* (–1.90) –0.270 (–1.33)
Size
AN US
ISS Against
(4)
(5)
(6)
1.734*** (2.96)
Excess%Withheld Firm%Withheld
CR IP T
The table reports logit estimates in which the dependent variable is whether an outside director up for election in a year departs the board in the next year, the dummy variable Director_TO equals one if the director departs, and zero otherwise. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no, and zero otherwise. All variables are described in Appendix A. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
47
0.223 (1.34) –0.059** (–2.16) –0.227** (–2.20) –0.398 (–1.62) –0.211 (–0.97) –0.036*** (–8.60) –0.001 (–0.25) –0.481*** (–6.07) –0.001 (–0.03) 0.063 (0.70) 0.088 (1.43) –0.171* (–1.67) 0.194** (2.49) –1.316*** (–2.69) 70103 0.034
1.658*** (3.05)
–0.066** (–2.42) –0.236** (–2.27) –0.387 (–1.59) –0.228 (–1.06) –0.037*** (–8.80) 0.001 (0.26) –0.497*** (–6.41) 0.007 (0.32) 0.086 (0.95) 0.077 (1.24) –0.157 (–1.55) 0.194** (2.48) –1.187** (–2.42) 70155 0.030
2.921*** (4.53) 0.928 (1.26) 0.195 (1.20) –0.061** (–2.24) –0.236** (–2.26) –0.403* (–1.65) –0.213 (–0.98) –0.035*** (–8.53) –0.002 (–0.41) –0.486*** (–6.13) –0.005 (–0.20) 0.060 (0.67) 0.089 (1.45) –0.179* (–1.75) 0.193** (2.48) –1.312*** (–2.64) 70103 0.035
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Table 5 Director turnover and voting outcomes: robustness to unobserved heterogeneity
%Withheld
(1) Firm election FE
(2) Director FE
2.585***
2.555***
(3.72)
(4.38)
–0.310 (–1.64) –0.267*** (–5.16) –0.214** (–2.16) –0.790** (–2.11) 0.443 (1.48) 0.138*** (6.78) 0.140*** (8.60) 0.072 (0.45) 0.317*** (5.43) Dropped Dropped
Dropped
Dropped
Dropped
Dropped
Dropped
5661 0.100
5661 0.100
AN US
Firm%Withheld
Size
0.216 (1.18) Dropped
Excess ret
Dropped
Adj. ROA
Dropped
Tenure
ED
PT
Age
M
ISS Against
CE
CommMember #Dirships
AC
Male MBA Law
IvyPlus Observations Pseudo R2
Dropped
–0.025*** (–5.31) 0.011 (1.56) –0.519*** (–5.19) –0.020 (–0.68) 0.068 (0.59) 0.092 (1.16) –0.099 (–0.77) 0.342*** (3.36) 4937 0.041
48
(3) Director FE
2.569*** (3.28) 2.541*** (3.31) –0.310 (–1.64) –0.267*** (–5.16) –0.214** (–2.16) –0.790** (–2.11) 0.443 (1.48) 0.138*** (6.78) 0.140*** (8.60) 0.071 (0.45) 0.317*** (5.43) Dropped
Excess%Withheld
InstOwnship
CR IP T
The table reports conditional logit estimates in which the dependent variable is the dummy variable Director_TO, which equals one if the director departs in the next year, and zero if otherwise. %Withheld is total votes cast against a particular director divided by the sum of all votes cast. Firm%Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no, and zero otherwise. Model (1) reports the model with firm–election fixed effects, while models (2) and (3) incorporate director fixed effects. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
ACCEPTED MANUSCRIPT
Table 6 Director turnover and voting outcomes: heterogeneity
CR IP T
The table reports estimates of the baseline logit specification used for Table 4 for subsets of the full sample. The dependent variable is whether an outside director up for election in a year departs from the board in the next year. Panel A reports the results for subsamples of firms that have a classified (staggered) board or not. Panel B reports the results of subsamples of firms that have a plurality versus majority voting systems. Panel C reports the results for subsamples of firm with and without dual class shares. Panel D reports estimates for directors who are less than 65 years old as of the election date and those 65 or older. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. The models include all variables in Table 4 but for brevity, we do not report their coefficients. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Coefficient for Excess%Withheld Panel A: Classified boards versus non-classified boards
Nonclassified boards Panel B: Plurality versus majority Plurality
M
Majority
1.472
1.10
3.204***
4.63
AN US
Classified boards
t-statistics
2.380***
3.31
4.528***
3.36
3.922***
3.85
3.542***
3.88
3.355***
4.52
Dual class shares
PT
Non-dual class shares
ED
Panel C: Dual class shares versus non-dual class shares
Panel D: Director age<65 versus director age >=65
CE
Director <65 years age
2.111*
AC
Director>=65 years age
49
1.89
ACCEPTED MANUSCRIPT
Table 7 Changes in outside directorships and voting outcome
(1) –0.177*** (–3.82)
%Withheld
(2)
(3) –0.199*** (–3.20)
AN US
Excess%Withheld Firm%Withheld
Adj. ROA InstOwnship Age Tenure CommMember
Male MBA
AC
Law
CE
#Dirships
IvyPlus
Intercept
Observations Pseudo R2
ED
Excess ret
0.026*** (6.65) –0.005 (–1.16) 0.002 (0.06) 0.030 (1.50) –0.005*** (–8.56) –0.005*** (–8.00) 0.060*** (5.54) –0.179*** (–6.97) –0.054*** (–4.84) 0.038*** (4.96) 0.042*** (3.69) –0.046*** (–4.49) 0.229*** (3.18) 63490 0.110
PT
Size
–0.029** (–2.23) 0.027*** (6.78) –0.005 (–1.00) 0.006 (0.20) 0.023 (1.15) –0.005*** (–8.54) –0.005*** (–8.38) 0.058*** (5.38) –0.179*** (–7.03) –0.054*** (–4.92) 0.037*** (4.86) 0.043*** (3.82) –0.047*** (–4.54) 0.226*** (3.13) 64047 0.110
M
ISS Against
CR IP T
The table reports estimates of a regression in which the dependent variable is Change in outside directorships, which is the difference between all the directorships at the end of the year and directorships at the start of the year excluding the focal firm at which the director is up for election. %Withheld is the total votes cast against a particular director divided by the sum of all votes cast in the prior year. Firm %Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm from each individual director’s %Withheld. ISS Against equals one if ISS recommends withhold, against, or no, and zero otherwise. All variables are described in Appendix A. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
50
0.010 (0.53) 0.026*** (6.66) –0.005 (–1.17) 0.001 (0.05) 0.031 (1.55) –0.005*** (–8.57) –0.005*** (–8.01) 0.061*** (5.61) –0.179*** (–6.97) –0.054*** (–4.86) 0.038*** (4.98) 0.042*** (3.68) –0.046*** (–4.50) 0.227*** (3.16) 63490 0.110
(4)
–0.150*** (–2.89) 0.027*** (6.76) –0.005 (–1.09) 0.003 (0.10) 0.028 (1.44) –0.005*** (–8.54) –0.005*** (–8.53) 0.060*** (5.51) –0.179*** (–6.98) –0.055*** (–4.93) 0.038*** (4.99) 0.041*** (3.62) –0.047*** (–4.53) 0.229*** (3.16) 63542 0.110
(5)
–0.262*** (–2.72) –0.166** (–2.55) 0.011 (0.64) 0.027*** (6.75) –0.005 (–1.14) 0.002 (0.06) 0.031 (1.55) –0.005*** (–8.54) –0.005*** (–7.74) 0.061*** (5.65) –0.178*** (–6.94) –0.054*** (–4.86) 0.038*** (4.98) 0.042*** (3.71) –0.046*** (–4.50) 0.224*** (3.12) 63490 0.110
ACCEPTED MANUSCRIPT
Table 8 Majority dissent and committee departures for staying directors Table 8 reports committee membership status for outside directors who serve on a committee and are up for election in a year and remain on the board in the year after. Compensation nominating and Audit denote the committees for which we track membership status. Voting outcome
M ED PT CE AC
51
t-test for significance of difference –2.33** –7.31*** –1.07 –4.49***
CR IP T
majority dissent 4.92% 8.62% 3.69% 13.54%
AN US
Departed from compensation committee Departed from nominating committee Departed from audit committee Departed from one of the three committees
Less than majority dissent 2.79% 2.38% 2.72% 7.11%
ACCEPTED MANUSCRIPT
Table 9 Committee departures for staying directors
Excess%Withheld Firm%Withheld ISS Against MultipleComm Size
ED
Excess ret ROA
PT
InstOwnship
#Dirships
AC
Male
CE
Age Tenure
0.036 (0.33) 0.914*** (17.42) 0.070*** (4.25) –0.093 (–1.45) –0.395** (–2.09) 0.231* (1.70) –0.008*** (–2.78) –0.007* (–1.78) 0.028* (1.84) 0.079 (1.12) –0.098** (–2.05) 0.040 (0.52) 0.058 (0.89) –4.414*** (–9.15) 69201 0.027
1.356*** (2.73) 0.193 (0.44) 0.013 (0.12) 0.910*** (17.35) 0.068*** (4.15) –0.096 (–1.49) –0.396** (–2.10) 0.226* (1.67) –0.008*** (–2.75) –0.008* (–1.91) 0.026* (1.72) 0.079 (1.12) –0.099** (–2.06) 0.037 (0.48) 0.057 (0.87) –4.372*** (–9.02) 69201 0.027
MBA Law
IvyPlus Intercept Observations Pseudo R2
Comp committee turnover 1.103*** (3.00)
Comp committee turnover
AN US
%Withheld
Audit committee turnover
M
Audit committee turnover 0.604* (1.66)
CR IP T
Table 9 reports logit estimates. The dependent variable is the committee membership status of an independent director who serves on a given committee, was up for an election, and did not depart from the board in the next year. %Withheld is total votes cast against a particular director divided by the sum of all votes cast in the prior year. Firm %Withheld is the average of %Withheld for all directors at a firm that face an election on that particular meeting date. Excess%Withheld is estimated by subtracting the average fraction of withheld votes for all directors at a firm for the year from each individual director’s %Withheld. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. MultipleComm equals one if the director is a member of more than one key committee (audit, compensation, and nominating) in the fiscal year immediately before the year of election, and zero otherwise. All variables are described in Appendix A. Director attributes are included as controls but not reported to conserve space. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroskedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
0.154 (1.37) 1.162*** (20.88) 0.070*** (4.07) 0.046*** (4.71) –0.516*** (–2.75) 0.136 (0.96) –0.008** (–2.51) –0.002 (–0.58) –0.000 (–0.02) 0.037 (0.50) –0.008 (–0.18) –0.059 (–0.72) –0.017 (–0.26) –4.359*** (–8.86) 68998 0.038
52
2.725*** (5.90) 0.151 (0.32) 0.107 (0.95) 1.157*** (20.83) 0.067*** (3.87) 0.046*** (4.39) –0.520*** (–2.77) 0.123 (0.87) –0.008** (–2.45) –0.003 (–0.85) –0.006 (–0.31) 0.037 (0.49) –0.009 (–0.19) –0.068 (–0.83) –0.021 (–0.32) –4.269*** (–8.57) 68998 0.039
Nom committee turnover 1.900*** (5.11)
–0.131 (–1.13) 1.452*** (21.06) 0.044** (2.00) –0.011 (–0.19) –0.612*** (–3.20) 0.336** (2.12) –0.015*** (–4.29) 0.004 (0.86) –0.003 (–0.17) 0.253*** (2.97) –0.079 (–1.47) –0.071 (–0.79) –0.072 (–1.00) –4.752*** (–7.16) 69196 0.056
Nom committee turnover 2.880*** (5.17) 1.368*** (3.09) –0.160 (–1.37) 1.449*** (21.03) 0.042* (1.92) –0.014 (–0.23) –0.614*** (–3.21) 0.328** (2.07) –0.015*** (–4.26) 0.003 (0.71) –0.007 (–0.32) 0.253*** (2.97) –0.080 (–1.48) –0.076 (–0.85) –0.075 (–1.04) –4.698*** (–7.11) 69196 0.056
ACCEPTED MANUSCRIPT
Table 10 Turnover for directors in leadership positions: univariate results Table 10 reports the percentage of directors of a particular type that depart in the year after being up for election. The t-statistic tests the difference in outcomes between directors who are of a particular type relative to the directors who are not of the given type. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
Board_chair
Fraction departed %Withheld ISS Against
1.86% 5.81% 10.28%
1.96% 6.79% 14.85%
t-test for significance of difference –0.48 –7.19*** –9.51***
Fraction departed %Withheld ISS Against
Non Lead_director 1.89% 5.84% 10.60%
Lead_director 1.21% 6.32% 8.47%
2.93*** –3.18*** 4.02***
Fraction departed %Withheld ISS Against
Non Comp_chair 1.91% 5.73% 10.46%
Comp_chair 1.57% 6.69% 10.89%
2.49** –10.96*** –1.39
Fraction departed %Withheld ISS Against
Non Nom_chair 1.91% 5.73% 10.58%
Nom_chair 1.46% 6.88% 9.97%
3.03*** –11.82*** 1.78*
Non Audit_chair 1.99% 5.94% 11.11%
Audit_chair 1.12% 5.37% 6.94%
6.51*** 6.59*** 13.75***
AN US
M
ED
AC
CE
PT
Fraction departed %Withheld ISS Against
CR IP T
Non Board_chair
53
Table 11 Turnover for directors in leadership positions: multivariate results
CR IP T
ACCEPTED MANUSCRIPT
The table reports logit estimates where the dependent variable is whether an outside director departs a board in the year after the director is up for election. We report estimates for different types of directors classified by their board position. Independent variables include %Withheld, which is the percentage of total votes withheld for a director as a fraction of all votes cast. ISS Against takes the value of one if ISS recommends withhold, against, or no for a particular director, and zero otherwise. All variables are described in Appendix A. Director attributes are included as control but not shown. All specifications include industry fixed effects. t-statistics are based on standard errors corrected for heteroscedasticity and clustered at the firm level. ***, **, and * indicate significance at 1%, 5%, and 10%, respectively.
ISS Against Size Excess ret
(2) Non Board_chair
(3) Lead_director
(4) Non Lead_director
–0.672
1.733***
4.535**
1.489**
(–0.43)
(2.86)
(2.36)
(2.43)
1.107***
0.229
–0.813
0.313*
(2.78)
(1.33)
(–0.89)
0.016
–0.051*
–0.294**
(1.84) –0.046*
(0.15)
(–1.89) –0.256**
(–2.24)
(–1.69)
0.066
–0.230**
0.111
(5) Comp_chair
(6) Non Comp_chair
(7) Nom_chair
AN US
%Withheld
(1) Board_chai r
(8) Non Nom_chair
(9) Audit_chair
(10) Non Audit_chair
0.350
1.743***
1.561
1.593**
1.419
1.609***
(0.29)
(1.12)
(2.52)
(0.76)
(2.78)
0.525
(2.89) 0.263
0.321
0.282
–0.076
0.267
(1.47)
(1.55)
(0.68)
(1.62)
(–0.11)
(1.63)
–0.131**
–0.040
–0.120
–0.049*
0.019
–0.067**
(–2.11)
(–1.41)
(–1.56)
(–1.79)
–0.307
–0.211**
–0.037
–0.246**
(0.25) –0.068
–0.241**
(–2.51)
(–2.33)
(0.13)
(–2.25)
(–1.50)
(–1.97)
(–0.34)
(–2.26)
–0.478**
–1.518
–0.381
–0.133
–0.455*
(–0.19) 0.157
(–2.26)
0.716
–0.462*
–0.203
–0.428*
(0.94)
(–1.96)
(–1.54)
(–1.51)
(–0.23)
(–1.81)
(0.28)
(–1.82)
(–0.28)
(–1.68)
InstOwnship
–1.190
–0.207
1.047
–0.278
–0.238
–0.259
0.169
–0.296
0.565
–0.354
(–1.61)
(–0.93)
(–1.26)
(–0.50)
(–1.13)
(0.32)
(–1.30)
(0.93)
(–1.63)
–0.011 (–0.62) –0.026*
–0.041*** (–9.48) 0.003
(1.01) –0.019 (–0.68)
–0.039*** (–9.16) 0.003
–0.018 (–1.60) 0.004
–0.042*** (–9.24) 0.003
–0.038*** (–2.91) –0.017
–0.038*** (–8.60) 0.004
–0.033** (–2.27) 0.006
–0.037*** (–8.76) 0.002
(–1.65)
(0.43)
(0.16)
(0.51)
(0.23)
(0.43)
(–1.03)
(0.74)
(0.34)
(0.29)
–0.197 (–1.54) –12.433***
0.005 (0.22) –1.443***
–0.116 (–0.65) –11.849***
–0.002 (–0.06) –1.549***
0.045 (0.66) –13.360***
–0.008 (–0.32) –1.370***
–0.066 (–0.73) –0.267
0.001 (0.05) –1.859***
–0.006 (–0.23) –1.329***
(–7.80)
(–3.01)
(–5.78)
(–3.21)
(–14.50)
(–2.76)
(–0.24)
(–2.80)
0.068 (0.85) –15.154*** (–12.63)
Included
Included
Included
Included
Included
Included
Included
Included
Included
Included
3057 0.089
66544 0.033
2205 0.092
67038 0.031
8667
60481 0.034
6811 0.056
62395 0.032
8621 0.033
59824 0.034
Intercept
Director attributes
AC
Observations Pseudo R2
ED
#Dirships
0.006
PT
Tenure
CE
Age
M
(0.83) Adj. ROA
0.039
54
(–2.80)