A review of Aggarwal, R., S. Dahiya, and N. R. Prabhala, 2019, “The Power of Shareholder Votes: Evidence from Uncontested Director Elections,” Journal of Financial Economics 133, 134-153.
I. Research question and its importance
Drawing on corporate governance literature, this article seeks to explain multiple firm- and director-level outcomes with shareholder dissent votes. The authors examine the proposition in the empirical context of US where shareholder vote is advisory, namely, director elections that are uncontested. They distinguish from others by utilizing a larger and more recent sample from ISS Voting Analytics to assess the independent variable. BoardEx, another database, was sourced for dependent variables: (1) director turnover by the end of next fiscal year, (2) change in outside directorship two years after the election, and (3) committee membership turnover based on the next immediate annual report for “survivor” directors. This unique choice of data sources makes this article relevant and informative to the core question of governance studies, especially when the effectiveness of director election has been largely debated in the US.
II. Method and finding
Data was collected for Russel 3000 Index firms from 2003 to 2014 from the sources mentioned above. The authors exclude directors identified as executives at the time of election. They also control for several firm characteristics. Logit multivariate model was used for the main specification, while fixed effect was employed for robustness checks. Ultimately, they found support for the three hypotheses. First, directors with dissent vote are more likely to leave the board before the end of the next fiscal year. This relation is stronger in nonclassified boards. Moreover, the “survivor” directors are more likely to lose their leaderships and important committee memberships. Second, the voting is director-specific, pointing to the fact that shareholders express their discontent toward specific board members based on the information available. Lastly, there exists a spill over effect as directors who were voted more “against” or “abstain” in an election are more likely to lose outside directorships subsequent to the election. In brief, these findings point to a negative consequence for director and hence support the functioning of uncontested director election.
III. Future research
This work, albeit employing a novel data source, remains largely descriptive. Its R2 all too small indicating omitted variables in the specifications. More importantly, it hasn’t answered yet the core question of this literature whether shareholder dissent vote leads to firm- or director-level outcomes. In other words, causality was missing. Future work may employ the data source with sophistication, such as considering dissent vote as a shock where a director is treated if the vote of “Against” is higher than “Agree” votes. An operational example article focuses on CSR proposals that pass or fail by a small margin of votes might be a good reference for future work.