The Politics of Shareholder Voting

Economic theory that suggests that under-performing boards of directors should be fearful of an ouster vote by shareholders under-appreciates 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 acknowledged. Instead, like an incumbent politician, managers of some of the largest US firms tend to stay in charge of the firm because they understand - and take advantage of - the political dynamics of corporate voting. Thus, this Article presents a competing theory of shareholder voting decisions that suggests that the process of arriving at a voting decision for shareholders in corporate elections is not dissimilar from how citizens vote in political elections. Next, the Article presents the evidence. Using a hand-collected dataset from recent elections for board seats, the Article compares the explanatory power of a standard economic variable (long-term stock price returns) and a political variable (money spent on 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 re-election. Rather, the likelihood of being returned to office appears to be a function of typical election politics - how much was spent by challengers to put on a campaign. These findings have at least two considerable 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 reforms have the laudable goals of creating conduits for shareholders to participate in firm affairs, get shareholder-nominated candidates elected to the board, and discipline incumbent managers. However, the results of this study suggest that these reforms will not achieve the stated goals. Second, the evidence and theory about shareholder voting presented here has significant implications for understanding mergers and acquisitions, particularly hostile acquisitions.