Volume 86, Number 6

December 2011

The Politics of Shareholder Voting

Lee Harris

Economic theory that suggests underperforming boards of directors should be fearful of an ouster vote by shareholders underappreciates the complexity of shareholder voting decisions. Skill at enhancing firm value has less to do with whether directors win votes and stay at the helm of public companies than previous commentators have presumed. Instead, like incumbent politicians, managers of some of the largest U.S. firms tend to stay in charge of firms because they understand—and take advantage o —the political dynamics of corporate voting. This Article presents a competing theory of shareholder voting decisions, one that suggests that shareholder voting in corporate elections is not dissimilar from citizen voting in political elections. Next, the Article presents the evidence. Using a hand-collected dataset from recent board elections, the Article compares the explanatory power of a standard economic variable (long-term stock price returns) and a political variable (money budgeted for campaigning) on election outcomes. Based on the data, directors’ ability to enhance firm value (as measured by stock price returns) is not significantly related to whether they win reelection. Rather, the likelihood of being returned to office appears to be a function of typical election politics—how much was spent by challengers to persuade shareholder voters. These findings have at least two implications. First, the theory that shareholder voting may be politicized helps point the way to how the SEC ought to craft reforms—and, just as important, how not to craft them. Recent SEC reform efforts have the laudable goals of creating new conduits for shareholders to participate in firm affairs, increasing shareholder-nominated candidate success, and disciplining incumbent managers.

The results of this study suggest that these reforms will not achieve the stated goals. Even with these reforms, the board continues to have an important political advantage, which likely translates into real votes. As the research here shows, the outcome of elections depends on persuasion and, not simply, as the SEC contends, on shareholders’ director nominees being presented alongside those of management. Second, the evidence and theory about shareholder voting presented here has significant implications for understanding mergers and acquisitions, particularly hostile acquisitions. The theory is that acquirers have steep incentives to target firms with poor performance. In most cases, however, such acquisitions depend on winning a vote from shareholders. Thus, if there is any disciplinary effect created by the prospect of takeovers, it depends crucially on understanding what motivates shareholder voting behavior. If voting shareholders respond to political motivations, not economic ones, then the performance of target board members might not be as relevant as takeover theorists had previously surmised.