Democracy or Disruption: an Empirical Analysis of Majority Elections
41 Pages Posted: 17 Mar 2006
Date Written: January 2006
In the most recent proxy season, the majority election of board members has emerged as a major corporate governance initiative. Proponents suggest that majority elections are more democratic than the current plurality voting system, allowing greater shareholder power. Opponents believe that the costs of failed elections as well as other unfavorable outcomes outweigh the benefits of the process. In addition, recent academic evidence on the level of voting for directors suggests that almost all directors currently receive a majority of votes anyway. We examine the impact of financial and other governance characteristics on the probability that a firm receives a majority election proposal and on the probability of adoption. We also examine the abnormal return surrounding proposals and adoptions. Our evidence suggests that poorly performing firms with high outside board representation are more likely to receive and adopt majority proposals. Firms with poor performance and fewer shareholder rights are more likely to adopt the proposals. Firms announcing proposals earn significantly positive abnormal returns. Although firms adopting majority voting on average earn insignificant return, the returns are significantly higher in firms more insulated from takeover. Our results suggest that shareholders value majority voting, particularly in situations where the benefits are likely to be high.
JEL Classification: G34, G18
Suggested Citation: Suggested Citation