The Power Of Shareholder Votes: Evidence From Director Elections
Author(s) Reena Aggarwal, Sandeep Dahiya, Nagpurnanand Prabhala


In the U.S., directors usually face elections through plurality systems where shareholders can either vote yes or abstain. Abstentions thus become informal and nonbinding expressions of dissent. We examine whether they have consequences for directors and report affirmative evidence. Directors facing dissent are more likely to depart boards, especially if they are not lead directors or chairs of important committees. Directors facing dissent who do not leave are moved to less prominent positions in boards. These effects are more pronounced in firms with greater ownership by institutional investors who pose exit threats. Finally, we find evidence that directors facing dissent face reduced opportunities in the market for directors, consistent with the Fama and Jensen (1983) view of the disciplining role of the market for directors. We show that contrary to popular belief, shareholder votes have power and result in negative consequences for directors. We also find that the effects of dissent votes go beyond those of proxy advisor recommendations.

Download Paper