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Evidence from Uncontested Director Elections University of Pennsylvania ScholarlyCommons Accounting Papers Wharton Faculty Research 12-2009 Investor Perceptions of Board Performance: Evidence From Uncontested Director Elections Paul E. Fischer University of Pennsylvania Jeffery D. Gramlich Brian P. Miller Hal D. White Follow this and additional works at: https://repository.upenn.edu/accounting_papers Part of the Accounting Commons Recommended Citation Fischer, P. E., Gramlich, J. D., Miller, B. P., & White, H. D. (2009). Investor Perceptions of Board Performance: Evidence From Uncontested Director Elections. Journal of Accounting and Economics, 48 (2-3), 172-189. http://dx.doi.org/10.1016/j.jacceco.2009.09.002 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/accounting_papers/127 For more information, please contact [email protected]. Investor Perceptions of Board Performance: Evidence From Uncontested Director Elections Abstract This paper provides evidence that uncontested director elections provide informative polls of investor perceptions regarding board performance. We find that higher (lower) otev approval is associated with lower (higher) stock price reactions to subsequent announcements of management turnovers. In addition, firms with low vote approval are more likely to experience CEO turnover, greater board turnover, lower CEO compensation, fewer and better-received acquisitions, and more and better-received divestitures in the future. These findings hold after controlling for other variables reflecting or determining investor perceptions, suggesting that elections not only inform as a summary statistic, but incrementally inform as well. Keywords performance measurement, corporate governance, corporate democracy, director elections Disciplines Accounting This journal article is available at ScholarlyCommons: https://repository.upenn.edu/accounting_papers/127 Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections Paul E. Fischer The Smeal College of Business, The Pennsylvania State University E-mail: [email protected] Phone: (814) 863-3569 Jeffrey D. Gramlich University of Southern Maine School of Business and Copenhagen Business School E-mail: [email protected] Phone: (207) 228-8232 Brian P. Miller Kelley School of Business, Indiana University E-mail: [email protected] Phone: (812) 855-2606 Hal D. White Ross School of Business, University of Michigan E-mail: [email protected] Phone: (734) 647-1966 This version: August 2009 We would like to thank Jim Bennett, Scott Bronson, Marcus Caylor, Fabrizio Ferri, David Haushalter, Karen Hennes, Henock Louis, Michelle Lowry, Ric Marshall, Robert Monks, Karl Muller, Monica Neamtiu, Robert Parrino (referee), Richard Sias, Bert Smoluk, Ross Watts (editor), Jerry Zimmerman, and workshop participants at the University of Michigan, the University of Southern Maine, and the 2007 AAA Annual Meeting for helpful comments and suggestions. We thank Diane Del Guercio, Laura Wallis, and Tracie Woidtke for data on vote-no campaigns and Stuart Gillan, Jay Hartzell, and Robert Parrino for data on CEO compensation contracts. The authors gratefully acknowledge Chris Hennes for assisting with data extraction, Mike Kusuma and Joel Miller for assistance with data collection, and Andy Leone and The Corporate Library for providing data. This paper was previously titled “Uncontested Director Election Results and Board Performance.” Electronic copy available at: http://ssrn.com/abstract=928843 Investor Perceptions of Board Performance: Evidence from Uncontested Director Elections Abstract This paper provides evidence that uncontested director elections provide informative polls 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. In addition, firms with low vote approval are more likely to experience CEO turnover, greater board turnover, lower CEO compensation, fewer and better received acquisitions, and more and better received divestitures in the future. These findings hold after controlling for other variables reflecting or determining investor perceptions, suggesting that elections not only inform as a summary statistic, but incrementally inform as well. Electronic copy available at: http://ssrn.com/abstract=928843 1. Introduction Every year the vast majority of publicly traded firms’ shareholders vote to approve members of the board of directors in uncontested elections (i.e., elections not involving proxy fights or vote-no campaigns). The lack of contested elections, coupled with the widespread use of plurality voting rules, implies director nominees almost always prevail. Consequently, commentators claim that director elections are meaningless charades of shareholder democracy (Morgenson, 2006; Monks and Minow, 2004).1 We conjecture, however, that uncontested elections serve as meaningful polls reflecting investor perceptions of board performance. The objective of this study is to empirically test this conjecture. We construct approval measures using director vote tallies for a sample of S&P 500 firms from 2000-2004, and find evidence consistent with these measures reflecting investor perceptions of board performance. In particular, we examine the relation between the approval measures and the stock price response to a change in the most focal member of the board, the CEO. We find that higher (lower) approval is associated with lower (higher) stock price reactions to subsequent announcements of management turnovers. We also show that the approval measures predict uncertain future events expected to be associated with board performance. Specifically, we find that firms with low board approval are associated with a higher likelihood of CEO turnover, greater board turnover, lower CEO compensation, fewer and better received acquisitions, and more and better received divestitures subsequent to the vote. We also assess whether the approval measures are incrementally informative to traditional metrics of board performance, such as stock returns and return on assets. We conjecture that a vote tally, which in principle pertains solely to board performance, is less likely to be contaminated by sources of noise inherent to equity market and financial metrics, such as commodity price movements and other economic shocks that are independent of management 1 Under plurality voting rules, the director nominee who receives the greatest number of affirmative votes is elected to fill an open board seat (i.e., a majority vote is not required). Consequently, when a slate of nominees put forward by the board runs unopposed, each nominee can be elected with a single affirmative vote. 1 decisions. Consistent with our conjecture, the information content in the vote approval measures is largely unaffected by the inclusion of controls for traditional metrics of board performance. Hence, the vote approval metrics are uniquely meaningful measures of board performance. This study contributes to the existing literature by showing that uncontested votes reflect investor perceptions of board performance, despite a number of reasons suggesting otherwise. First, shareholders do not always vote diligently, either because the outcome is preordained or because their vote has an immaterial impact on the outcome (Downs, 1957). For example, shareholders owning “street name” shares (i.e., shares held by a broker) often do not provide the broker with voting instructions, which permits the broker to vote the shares.2 Also, some investors are alleged to follow the “Wall Street rule,” whereby they vote in favor of the slate proposed by the board, and only vote against the board by selling their shares (Lowenstein, 1988; Parrino, Sias, and Starks, 2002). Second, even if some shareholders do vote diligently, the votes they cast could be too few in number for their perceptions to be detectible. Finally, because only shareholders of record can vote, the votes of shareholders who do vote diligently do not necessarily reflect broader investor perceptions (Fischer, 2007). Our findings suggest uncontested votes do reflect investor perceptions in spite of these countervailing forces. The results of our analyses should also be useful to researchers, regulators, and governance commentators. For instance, our approval measure can be used to complement existing governance measures, such as the Gompers, Ishii, and Metrick (2003) index, which focus primarily on governance structures (e.g., existence of classified board or board size) as opposed to the performance of the individuals operating within those structures. Further, the findings inform regulators and governance commentators debating recent calls to strengthen shareholder democracy (see Bebchuk, 2007), such as proposals to require majority voting requirements. 2 Broker votes are allowed only for routine matters, which includes uncontested director elections. Typically, broker votes are cast in favor of the proposed slate. A primary rationale for allowing broker votes is that they help ensure that a quorum is reached, which is necessary for the vote to transpire. See Bethel and Gillan (2002). 2 The rest of the paper is organized as follows. In the next section, we discuss related literature. Section 3 provides information related to the sample and descriptive statistics. Our primary results are reported in sections 4 and 5. Section 6 describes the results of the supplementary tests, and concluding comments are provided in section
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