Tuesday, October 13, 2015 - 4:10pm to 5:45pm
Location: 
Solarium (room FA2) Falconer Hall - 84 Queen's Park

LAW & ECONOMICS WORKSHOP SERIES 

presents 

Stephen Choi
New York University School of Law

Does Majority Voting Improve Board Accountability?

Tuesday, October 13, 2015
4:10 - 6:00
Solarium (room FA2) - Falconer Hall
84 Queen's Park 

Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a majority voting rule in which a candidate must receive a majority of the votes cast to be elected. Over the past decade, they have been successful, and the shift to majority voting has been one of the most popular and successful governance reforms.  Yet critics are skeptical as to whether majority voting improves board accountability.  Tellingly, directors of companies with majority voting rarely fail to receive majority approval – even more rarely than directors of companies with plurality voting. Even when such directors fail to receive majority approval, they are unlikely to be forced to leave the board. This poses a puzzle: why do firms switch to majority voting and what effect does the switch have, if any, on director behavior?  We empirically examine the adoption and impact of a majority voting rule using a sample of uncontested director elections from 2007 to 2013. We test and find partial support for four hypotheses that could explain why directors of majority voting firms so rarely fail to receive majority support: selection; deterrence/accountability; electioneering by firms; and restraint by shareholders.  Our most dramatic finding is a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder‐responsiveness goingforward. By contrast, later adopters, as a group, seem to have adopted majority voting only semi‐voluntarily. Among this group, majority voting seems to have led to more shareholder-responsive behavior.  These differences between early and late adopters have important implications for understanding the spread of corporate governance reforms and evaluating their effects on firms. Reform advocates, rather than targeting the firms that, by their measures, are most in need of reform, instead seem to have targeted the firms that are already most responsive. They then seem to use the widespread adoption of majority voting to create pressure on the nonadopting firms. Empirical studies of the effects of governance changes thus need to be sensitive to the possibility that early adopters and late adopters of reforms differ from each other and that the reforms may have different effects on these two groups of firms.

Stephen Choi joined the NYU faculty in 2005. He taught as an assistant professor at the University of Chicago Law School from 1996 to 1998. From 1998 to 2005, Choi taught at the UC Berkeley Law School where he was the Roger J. Traynor Professor of Law. While in law school, Choi served as a legal methods instructor and supervising editor of the Harvard Law Review. He graduated first in his class from Harvard Law School in 1994 and received his Ph.D. in economics in 1997. Choi has been a recipient of the Fay Diploma, Sears Prize and Irving Oberman Memorial Award. He also held John M. Olin, Jacob K. Javits and Fulbright Fellowships. Following graduation, Choi worked as an associate at McKinsey & Company in New York. His research interests focus on the theoretical and empirical analysis of corporations and capital markets. He has published in the Yale Law Journal, Stanford Law Review, University of Chicago Law Review, Michigan Law Review, Southern California Law Review, Duke Law Journal, University of Pennsylvania Law Review and Virginia Law Review, among others, and has presented papers at numerous conferences and symposia. 

 

For more workshop information, please contact Nadia Gulezko at n.gulezko@utoronto.ca.