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Thursday, July 06, 2006

Interesting Paper on Votes in Director Elections

It's been a while since I highlighted an academic paper, but this one is very interesting. Boards of directors are probably the primary focus of current corporate governance research. There are numerous papers that focus on board composition, board size, the effect of poor corporate performance on board composition, and the effect of board composition on subsequent corporate performance. However, there's been relatively little work done on the director election process. Now there is.

Jay Cai, Jacqueline Garner, and Ralph Walkling (all at Drexel University) just posted a piece to SSRN titled "Electing Directors". Here's the abstract:
The election of directors is arguably the most fundamental aspect of corporate governance, yet little empirical analysis of this issue exists. The objective of this research is to examine the determinants and efficacy of director elections using a large sample of post-SOX elections. Our tests provide strong support for the firm performance, director performance and shareholder rights hypotheses and limited support for the efficacy hypothesis. Specifically, we document that shareholders express their dissatisfaction with governance and with the poor performance of their firms and directors through their votes. However, shareholder votes result in only minor changes to performance and governance of firms and are not associated with reputational effects to directors. These results provide important benchmarks for the current debate about reform of the election and voting process
Read the whole thing here.

They do a very nice job, and have some interesting results. They find that shareholders do change their voting patterns in response to poorer firm performance or perceptions that the directors are not acting in their (shareholders') best interests:
  • Directors at poorer-performing firms receive fewer votes;
  • Directors with poorer attendance records get fewer votes;
  • "Busy" directors (those holding more seats on other boards) receive fewer votes;
  • Independent outside directors receive higher votes, as do those recommended by ISS.
However, it's all relative. The typical director receives in the mid-90% range of the votes, and even in the lowest vote category, directors receive over 92% of the votes.

So, in summary they find that most directors that get put up for election do get the overwhelming majority of the votes, and that while there are variations, they're not that significant in magnitude. However, they do provide some very important benchmarks for future research. Well done.

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