Rational Apathy: The Curse of Shareholder Empowerment in Uncontested Board Elections

Abstract

In contrast to popular belief, this paper shows that there does not exist an unambiguous positive relationship between an unbiased shareholder’s voting power and the quality of corporate governance. I utilize a 2010 NYSE policy change that increased shareholders’ voting power in uncontested board elections, and, to establish the causality, I take advantage of the exogenous election cycles for director elections. I find that an increase in individual shareholder’s voting power will worsen some measures of corporate governance (CEO’s pay-performance sensitivity and probability of removing poison pills). I show that this is due to shareholders’ decreased participation in both the sponsorship of governance proposals and active voting in annual meetings. I argue that the negative relationship between shareholders’ voting power and their participation is due to a free-rider problem in the collective action.

Keywords: Director Elections, Proxy Voting, NYSE 452, Board of Directors

JEL Classification: G34, G38, G40