Dissenting Directors

Abstract

Expressions of dissent by corporate directors are a valuable, indeed vital, attribute of good corporate governance. Vocal opposition by a director, for example, might help correct a good-faith mistake or, in more serious and extreme circumstances, warn the market of possible abuse and other risks for investors. If acquiescence and conformism are negative, however, dissent is not necessarily a sign of independence, and can be disruptive and ill-motivated. Notwithstanding the potential importance of director dissent, the subject has been largely neglected in the academic literature, also due to the scarcity of empirical or anecdotal evidence. As a result, we know virtually nothing about why, when, and with what consequences directors dissent from their fellow board members.

We examine empirically dissent of directors - expressed either voting against a resolution of the board, or resigning from the board - using handpicked data from the Italian market. Differently from the few other works on this issue, we also consider dissent expressed by non-independent directors. The Italian system offers a particularly interesting case in light of the prevailing ownership structures and of the legal rules governing the composition of the board. The paper is organized as follows. After an overview of the existing literature on directors' dissent, we discuss the legal framework of dissent under Italian law, clarifying the relevance and effects of split votes on the board, and resignation of board members. We then present our dataset and discuss some methodological issues we encountered. In our empirical analysis, we address four questions: (a) What are the topics directors more often dissent on? (b) What are the characteristics of dissenting directors in terms of age, gender, education, compensation, who appointed them, but also organization of the board (e.g. if the positions of President and CEO are separated); (c) In what types of corporations is dissent more common, with respect in particular to economic performance; (d) What are the consequences of dissent in terms of cumulative abnormal returns and volatility of the shares. Based on the results of the analysis, we offer some conclusions and raise some policy questions.

Keywords: corporate governance, board of directors, independent directors, dissent, resignation

JEL Classification: K22