New Paper on Majority Voting for the Election of Directors

Bill Sjostrom —  13 February 2007

A draft of my new paper entitled Majority Voting for the Election of Directors is now up on SSRN. I co-authored the piece with Young Kim, a finance professor at Northern Kentucky, so it has an empirical component. Here’s the abstract:

We explore the theory, law, and practice of the shift from a plurality voting standard for the election of directors to a majority voting standard. Although not mandated by law, as of October 2006, more than 250 public companies, including at least 36% of S&P 500 companies and 31% of Fortune 500 companies, had implemented some form of majority voting. The theory behind majority voting is simple: it makes shareholder voting relevant to the outcome of uncontested elections. Specifically, under a majority voting standard, if shareholders holding a majority of shares are dissatisfied with a director, they can express this dissatisfaction by voting against him, he will not receive the requisite majority vote, and therefore will not be elected. Shareholders will, in effect, have veto power over management’s candidates. This, in turn, it is argued, “will enhance director accountability, strengthen the director nomination process, and improve company operations.” We find, however, that the theory does not match the practice. We examined more than 250 majority voting systems implemented by public companies and failed to find a single company with a majority voting system that actually gives shareholders veto power over director candidates. At the end of the day, under each of the majority voting systems we examined, all directors are ultimately selected by the existing board of directors, regardless of how shareholders vote, as is the case under a traditional plurality voting system. Hence, we view majority voting as implemented in practice as little more than smoke and mirrors. In light of this conclusion, we undertook an event study to gauge market reaction to majority voting. Specifically, we examined stock price movements of firms around announcements that they have or will adopt some form of majority voting. Consistent with our “smoke and mirrors” hypothesis, we found no statistically significant market reaction.

You can download the paper here. If you do read it and have comments, please email them to me at sjostromw [at] nku [dot] edu.