Are Uncontested Director Elections Meaningless?
New study suggests there's merit in current regulations for such elections, now being examined by the SEC.
ANN ARBOR, Mich. — As shareholders of publicly traded companies look ahead to corporate board elections this spring, new research suggests that a lack of enthusiasm for slated directors can affect stock prices and lead to management turnovers.
The study, which appears in the latest issue of the Journal of Accounting and Economics, also suggests that there's merit in current regulations for uncontested director elections, which are now being examined by the Securities and Exchange Commission (SEC).
The majority of publicly traded companies approve corporate directors through uncontested elections. Combined with the widespread use of plurality rules, this system ensures that director nominees always prevail.
"Many argue that uncontested director elections are meaningless because directors up for election almost surely prevail. We provide evidence, however, that vote tallies still play a meaningful role by reflecting investor perceptions of board performance," conclude Hal White of the Ross School of Business and colleagues Brian Miller of Indiana University's Kelley School of Business, Paul Fischer of Penn State University's Smeal College of Business and Jeffrey Gramlich of the University of Southern Maine.
The researchers, all of whom are professors of accounting, followed firms in the Standard & Poor's 500 list over a five-year period. They chose the larger firms because they expected that shareholders would be watching them more closely. Companies that did not provide ample voter information were excluded along with those that had concerted "vote no" efforts by shareholder activists or proxy contests.
The study found that board of director elections can actually serve as meaningful polls of investor perceptions of board performance, and boards appear to respond to these polls. It shows that shareholders may not have to resort to replacing directors in order to influence their actions.
Among other findings:
--Chief executive officers of companies where the board was approved by a lower margin were two-and-a-half times more likely to be pushed out of their jobs than at those approved by a larger margin. At firms with the lowest approval levels, 5.1 percent of CEOs were forced out.
--The replacement CEOs at low-approval companies were more likely to come from outside the company. Firms where the board was approved by a low margin were five times more likely to replace the CEO with an outsider than firms with higher margins.
--The stock market reacts most negatively when CEOs leave firms where directors were approved by a high majority. Conversely, when CEOs depart a firm with directors who were elected with a low majority, the market responds positively.
--In regard to CEO compensation, chief executives at companies where there has been a lower vote receive less compensation in the future than their counterparts at firms where directors have a stronger vote of confidence. Management also becomes more conservative with regard to mergers and acquisitions, as well.
Overall, the findings are applicable to recent proposals calling for majority voting in director elections.
"Our evidence suggests that while uncontested votes reflect investor perceptions of board performance, such proposals will have little effect unless they significantly alter voting behavior," the professors wrote. "An approval measure of 80 percent falls into the lowest quintile of our approval measures, indicating low relative approval, but the tally still far exceeds the 50 percent-plus majority hurdle."
The SEC currently is accepting comment on its proposed proxy access rules, which would change the way boards of directors are elected at public companies. Rather than limit board candidates to a slate of directors chosen by a panel subcommittee, the reforms could give shareholders the right to place their own board candidates up for election.
While the paper does not directly address the proposed reforms, it does demonstrate that shareholders already have a major voice under the current system that can affect needed changes, the researchers said.
—George Vlahakis, Indiana University
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