In an important and intriguing Article, Professors Stephen Choi, Jill Fisch, Marcel Kahan, and Edward Rock examine the replacement of the traditional plurality voting rule (PVR) in board director elections with majority voting (MV) terms.1 The Article makes significant contributions to the study of MV implementation and effects and, more generally, to the study of governance changes that are driven by shareholder proposals. To begin with, the Article finds that MV is associated with a significant reduction in the likelihood of “withhold” votes in annual director elections.2 Second, importantly, the Article finds evidence for a causal effect of MV on the rate of withhold votes.3 The Article’s most interesting and important finding, however, concerns differences in causes and effects of MV adoption between early and late adopters. The Article finds that early adopters, which adopted MV by 2009, were more shareholder responsive—having shareholder-friendly governance and a lower likelihood of receiving an International Shareholder Services (ISS) recommendation to withhold votes in directors’ elections—even prior to MV implementation.4 Accordingly, for these adopters, MV did not matter much, if at all.5
Late adopters, on the other hand, were statistically different from nonadopters only in that they were less likely to exhibit abnormally high returns in the year prior to MV adoption, an indication that they adopted MV under pressure.6 For these late adopters, there is evidence that MV resulted in improved board accountability7 and a significant decline in the likelihood of directors garnering less than 70 percent of the votes.8
The importance of the differences between early and late adopters cannot be overstated. Assumptions have been routinely made as to how firms self-select into governance terms, but little has been done to test them empirically. The aforementioned self-selection effect, which the authors are the first to report, not only has important implications for empirical interpretation and policy, but also suggests that a rigorous examination of firms’ self-selection should be a part of every study that examines governance changes.
This Response explores whether management resistance to MV, in the years prior to MV eventual implementation, could have caused an omitted-variable bias in testing MV effects on votes withheld—in that management resistance could have both delayed late adopters’ MV adoption, and frustrated shareholders, who, in turn, withheld votes from management. In other words, this Response argues that a shift in late adopters’ resistance to MV, could be the very reason for the reported decline in withhold votes rates following MV implementation.
Part I of this Response argues that management resistance to MV proposals could have been a significant source of delay for MV implementation. While the Article identifies late adopters as resisting firms, it attributes their delay in adoption to shareholders’ targeting choices.9 Yet this Part demonstrates that by resisting informal shareholder requests, attempting to exclude shareholder proposals, relying on strict counting rules, and refusing to implement a shareholder proposal that passed, managers could have delayed, and have delayed MV implementation.
Part II argues that management resistance to MV, not only delayed MV implementation, but also could have caused high withhold vote rates in the years prior to MV implementation, thus causing an omitted-variable bias in testing MV effects on votes withheld. To the authors’ credit, they attempt to address the concern that variations in firms’ resistance to MV are driving the results. Yet, as this Part argues, the methods they employ to that end primarily address management resistance as a source for nonadoption, and less so the case in which a firm resisted for several years, and then eventually succumbed. For example, by using firm-fixed effects, the Article compares the withhold rates at the same firm pre-MV and post-MV. Yet, since a fixed effects model addresses only time-invariant selection effects, it does not address firms’ temporary resistance to MV. Similarly, the Matched Sample Model and the model that includes only firms that implemented MV do not solve the potential omitted-variable bias caused by changes over time in firms’ responsiveness to MV. Finally, excluding data from the two years subsequent to adoption of a shareholder resolution, as the Article does, does not address other potential triggers of punishment, such as exclusion of shareholder proposals by managers, supermajority requirements, or negative counts of abstentions.10 Thus, further unbundling of the process by investigating variations in managers’ resistance is needed in order to get to the bottom of the source of differences between early and late adopters, and in order to arrive at the correct interpretation with respect to the effect of MV on withhold votes.
Unbundling the reasons for delay in MV adoption is also relevant for policy implications. For example, a recent study has found that managers were more likely to attempt to exclude proxy access proposals in firms that investors believed would have benefited most from proxy access implementation.11 In examining the trade-offs between private ordering and mandatory corporate law, policymakers should consider self-selection patterns, the types of firms that adopted a governance change, and the factors that contributed to their adoption.
- 1. See generally Stephen J. Choi, et al, Does Majority Voting Improve Board Accountability?, 83 U Chi L Rev 1119 (2016).
- 2. Id at 1122, 1129–31 (“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.”). See also Yonca Ertimur, Fabrizio Ferri, and David Oesch, Does the Director Election System Matter? Evidence from Majority Voting, 20 Reven Acctg Stud 1, 27–32 (2015).
- 3. Choi, et al, 63 U Chi L Rev at 1123 (cited in note 1) (explaining that Part II of the Article is dedicated to detailing four hypotheses, while Part III is dedicated to testing and analyzing the results of the data in the context of the hypotheses).
- 4. Id at 1139–47.
- 5. For early adopters, the Article finds evidence for a decline in withhold votes only for those votes in which withhold votes were 40–50 percent of the total. Id at 1153. The Article finds little evidence that MV affected early adopters’ responsiveness to shareholders. Id at 1119 (“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.”).
- 6. Id at 1146:
For late adopters, by contrast, the variables that were significant [for early adopters] . . . —the prior record of ISS “withhold” recommendations and the presence of a poison pill—are now insignificant. By contrast, the variable that may reflect reduced outside pressure to adopt majority voting or the ability to resist such pressure—positive abnormal returns—is significant, which is consistent with lower pressure or a higher ability to resist pressure making the adoption of majority voting less likely.
- 7. Id at 1123–24 (cited in note 1) (“[W]e find the adoption of majority voting by late adopters led to more shareholder-friendly governance.”).
- 8. Id at 1157 (“Overall, these results provide strong support for the proposition that the adoption of an MVR by late adopters reduced the likelihood of getting a ‘withhold’ vote of 30 percent or above.”).
- 9. Id at 1147–48 (“A plausible interpretation of these results is that shareholder activists first pushed for the adoption of an MVR at firms where an MVR may have been largely costless (or at least low-cost) because these firms were already responsive to shareholders.”).
- 10. See id at 1150. In addition, punishment for nonimplementation may linger for more than two years. See Part II.
- 11. See Tara Bhandari, Peter Iliev, and Jonathan Kalodimos, Governance Changes through Shareholder Initiatives: The Case of Proxy Access *22 (SEC Working Paper, Jan 17, 2017), archived at http://perma.cc/C8XH-CD24 (“Interestingly, we find that firms that chose to challenge the proposal in this relatively extreme way are exactly the firms that were expected to benefit more from mandatory proxy access or more from being targeted with a shareholder proposal for proxy access.”).