Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of shareholder democracy have advocated a shift to a majority voting rule, in which a candidate must receive a majority of the votes cast to be elected. Over the past decade, they have been successful, and the shift to majority voting has been one of the most popular and successful governance reforms.
Yet critics are skeptical as to whether majority voting improves board accountability. Tellingly, directors of companies with majority voting rarely fail to receive majority approval—even more rarely than directors of companies with plurality voting. Even when such directors fail to receive majority approval, they are unlikely to be forced to leave the board. This poses a puzzle: Why do firms switch to majority voting, and what effect, if any, does the switch have on director behavior?
We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for four hypotheses that could explain why directors of majority voting firms so rarely fail to receive majority support: selection, deterrence or accountability, electioneering by firms, and restraint by shareholders.
Our results further suggest that the reasons for and effects of adopting majority voting may differ between early and late adopters. We find that early adopters of majority voting were more shareholder responsive than other firms, even before they adopted majority voting. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in their responsiveness to shareholders going forward. By contrast, for late adopters we find no evidence that they were more shareholder responsive than other firms before they adopted majority voting, but we find strong evidence that they became more responsive after adopting majority voting.
Differences between early and late adopters can have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Rather than targeting the firms that, by their measures, are most in need of reform, reform advocates instead seem to have targeted the firms that were already the most responsive. These advocates may then have used the widespread adoption of majority voting to create pressure on the nonadopting firms to conform. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.
Directors have long been elected by a plurality of the votes cast.1 In uncontested elections, this means that a candidate who receives even a single vote is elected.2 Because most director elections are uncontested,3 proponents of shareholder democracy have long decried the traditional plurality voting rule (PVR).4 Instead, they favor a majority voting rule (MVR) according to which a candidate must receive a majority of the votes cast to be elected.5
Over the last decade, the move from plurality to majority voting for corporate directors has been one of the most popular and successful corporate governance reform efforts.6 As recently as 2005, only nine of the S&P 100 companies used majority voting in director elections.7 The shift since then has been dramatic. As of January 2014, almost 90 percent of S&P 500 companies have adopted some form of majority voting.8
Advocates of majority voting argue that it is a critical tool for maintaining director accountability to shareholders. In the words of the Council for Institutional Investors, “[m]ajority voting ensures that shareowners’ votes count and makes directors more accountable to the shareowners they represent.”9 Accepting this premise, the Toronto Stock Exchange recently amended its company manual to require majority voting for listed companies.10
Yet critics of majority voting are skeptical. One recent article argues that majority voting “is little more than smoke and mirrors.”11 Another characterizes majority voting as a “paper tiger.”12 A striking finding from our data is that under plurality voting, the likelihood that a director fails to receive a majority “for” vote is nineteen times higher than under majority voting (0.622 percent versus 0.033 percent).13 Of over twenty-four thousand director nominees at S&P 1500 companies who were subject to an MVR in elections between 2007 and 2013, only eight failed to receive a majority of “for” votes.14 Even when a director fails to receive a majority, that director might not actually leave the board. Rather, such a director stays on until the director resigns, the director is removed, or a successor is elected.15 In fact, in our sample, of the eight directors at MVR firms who failed to receive a majority, only three actually left the board following the election.16
These findings raise two related issues. First, what accounts for the different voting patterns under PVRs and MVRs? Second, given that the direct effect of majority voting is negligible—a shareholder power to remove directors that is exercised at the rate of one in eight thousand is hardly worth mentioning—does majority voting have more significant indirect effects on board accountability? That is, does the possibility that a nominee may fail to get a majority of “for” votes, and thereby face an increased risk of losing his or her board seat, encourage directors to be more responsive to shareholder interests?
At first blush, it may appear that majority voting could generate substantial indirect effects and that the reason directors fare better under majority voting is because they are more responsive to shareholders. As we detail below,17 directors who are subject to majority voting are more likely to attend board meetings regularly and less likely to receive a “withhold” recommendation from Institutional Shareholder Services, Inc18 (ISS) than directors who are subject to plurality voting.
There are, however, alternative explanations for these differences. For example, causality may run in the other direction: Companies that are more responsive to shareholders may be more likely to adopt majority voting, and majority voting may have no effect on director actions. Or companies subject to majority voting may lobby ISS more heavily to avert a “withhold” recommendation.
In this Article, we empirically examine the different impacts of an MVR using a sample of uncontested director elections from 2007 to 2013. The Article proceeds as follows: In Part I, we offer a brief background on the shift to a majority voting standard among large publicly traded issuers. In Part II, we describe in more detail four hypotheses that could explain the discrepancy between the likelihood that a director candidate will fail to get a majority of “for” votes under the different voting rules. We then proceed to test the hypotheses. In Part III, we describe the data set, the tests we performed, and the results.
While we find some support for all four hypotheses, our most dramatic results indicate differences between early and late adopters with respect to the adoption and effect of majority voting. Specifically, we find strong evidence of selection effects for early adopters; firms that adopted majority voting early had more success in director elections and more shareholder-oriented corporate governance prior to the adoption. In contrast, we find the adoption of majority voting by late adopters led to more shareholder-friendly governance. These findings suggest that investors, perhaps counterintuitively, may have employed a strategy of targeting shareholder-responsive firms first, rather than focusing on those companies most in need of governance reform.
As far as we know, this is the first time that this difference has been established empirically. As we discuss in more detail below, this difference, especially if generalizable to the adoption of other corporate governance reforms, has broad implications. In particular, empirical studies of the adoption and effect of governance reform should be sensitive to potential differences between early and late adopters. These differences also suggest that early evaluations of a particular reform may understate the effect of the reform to the extent that the reform has not yet spread to those firms most likely to be affected by its adoption. Our study highlights the importance of considering these differences in future research analyzing other reforms, such as proxy access, bylaws enabling shareholders to request special meetings, and the separation of positions of chair and CEO.
- 1. See, for example, 8 Del Code Ann § 216 (“In the absence of such specification in the certificate of incorporation or bylaws of the corporation . . . [d]irectors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.”); Model Bus Corp Act § 7.28(a) (2011) (“Unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.”). Prior to 1987, Delaware law required the affirmative vote of a majority of the shares present for the election of directors. See 8 Del Code Ann § 216 (1983).
- 2. State law governs the power of shareholders to nominate director candidates. Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand L Rev 1129, 1144 (1993). Our analysis focuses exclusively on uncontested elections.
- 3. See Lee Harris, Missing in Activism: Retail Investor Absence in Corporate Elections, 2010 Colum Bus L Rev 104, 120–21 (reporting that, over the time period from 1999 to 2008, the average number of contested elections at public companies was about thirty-six per year).
- 4. See, for example, Jeff Mahoney, General Counsel of the Council of Institutional Investors, Letter to John Carey, Vice President of Legal for NYSE Regulation, Inc *4 (June 20, 2013), archived at http://perma.cc/X4PT-PKJW (terming the plurality voting process as “antiquated, or as some have described ‘truly bizarre’”).
- 5. Yonca Ertimur, Fabrizio Ferri, and David Oesch, Does the Director Election System Matter? Evidence from Majority Voting, 20 Rev Accounting Stud 1, 2 (2015).
- 6. See Bo Becker and Guhan Subramanian, Improving Director Elections, 3 Harv Bus L Rev 1, 10 (2013) (describing a “rapid proliferation of majority vote requirements among U.S. companies”).
- 7. Marcel Kahan and Edward Rock, Embattled CEOs, 88 Tex L Rev 987, 1011 (2010).
- 8. Marc S. Gerber, US Corporate Governance: Boards of Directors Face Increased Scrutiny, in Thomas H. Kennedy, et al, eds, 2014 Insights *157, 157 (Skadden, Arps, Slate, Meagher & Flom LLP), archived at http://perma.cc/SKC3-HXCE.
- 9. Majority Voting for Directors (Council of Institutional Investors, 2013), archived at http://perma.cc/5MNV-P9JE.
- 10. Toronto Stock Exchange Mandates Majority Voting to Further Enhance Corporate Governance (TMX Group, Feb 13, 2014), archived at http://perma.cc/8XPC-PTUX (announcing the adoption of a “majority voting” requirement that may be satisfied by a policy requiring a director to tender a resignation if the director receives more “withhold” than “for” votes). The Council for Institutional Investors has petitioned the NYSE and NASDAQ to do the same. See Majority Voting for Directors (cited in note 9).
- 11. William K. Sjostrom Jr and Young Sang Kim, Majority Voting for the Election of Directors, 40 Conn L Rev 459, 487, 489 (2007) (conducting an event study and finding “no statistically significant market reaction” to a company’s adoption of majority voting).
- 12. Jay Cai, Jacqueline L. Garner, and Ralph A. Walkling, A Paper Tiger? An Empirical Analysis of Majority Voting, 21 J Corp Fin 119, 120 (2013) (finding that the “adoption of majority voting has little effect on director votes, director turnover, or improvement of firm performance”).
- 13. See Part II.
- 14. See Part III.A.
- 15. Majority voting provisions typically require a director who fails to receive a majority to tender his or her resignation, but the board need not accept that resignation. It is not unusual for a board to refuse to accept the director’s proffered resignation. See Jeff Green, America’s Teflon Corporate Boards (Bloomberg, July 14, 2011), archived at http://perma.cc/GJC3-ZGQ8. The limited effectiveness of the shareholder vote was powerfully illustrated at the May 2011 annual meeting of IRIS International (an issuer not in our sample), at which none of the nine director candidates received a majority of votes in favor. The directors then submitted their resignations, and the board voted not to accept them. Bloomberg has described boards that fail to remove an outvoted director as “Teflon Corporate Boards.” Id.
- 16. A separate study of Russell 3000 majority voting firms also found that directors who failed to receive a majority vote were only sometimes removed. For a more detailed examination of five of these cases, see Becker and Subramanian, 3 Harv Bus L Rev at 13–14 (cited in note 6) (reporting that boards accepted resignations of only two of five such directors and one such acceptance was because of a state mandate). See also Kimberly Gladman, Agnes Grunfeld, and Michelle Lamb, The Election of Corporate Directors: What Happens When Shareowners Withhold a Majority of Votes from Director Nominees? *2 (IRRC Institute, Aug 2012), archived at http://perma.cc/R6AW-B8ZL (reporting that “[o]nly 5% of the majority withhold votes in our study [of 175 director nominees from Russell 3000 firms] led directly to director removal”).
- 17. See Parts III.B.3–4.
- 18. Institutional Shareholder Services is the dominant proxy advisory firm. See Stephen J. Choi, Jill E. Fisch, and Marcel Kahan, Director Elections and the Role of Proxy Advisors, 82 S Cal L Rev 649, 651–52 (2009) (describing the role and influence of ISS and other proxy advisors).