Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections

Abstract

Many argue that uncontested director elections are meaningless because director nominees are almost surely elected. We assess whether the outcomes of uncontested director elections still serve as an informative poll of investor perceptions regarding board performance. We find that higher (lower) vote approval is associated with lower (higher) stock price reactions to subsequent announcements of management turnovers, even after controlling for other performance metrics. We also provide evidence that vote outcomes are associated with future actions in a manner consistent with lower vote approval reflecting poorly performing boards. Specifically, we find that firms with poorly perceived boards are more likely to experience forced CEO turnovers, greater board member turnover, and lower CEO compensation in subsequent years. In addition, lower approval is associated with both a decrease in the number of acquisitions and an increase in the number of divestitures in the following year, and better-received acquisitions and divestitures.

Keywords: performance measurement, corporate governance, corporate democracy, director elections, voting

JEL Classification: G34, M40