Elsevier

Finance Research Letters

Volume 21, May 2017, Pages 34-39
Finance Research Letters

The elimination of broker voting in director elections

https://doi.org/10.1016/j.frl.2017.02.001Get rights and content

Highlights

  • We study the elimination of broker voting in director elections.

  • The ban provides an experiment to assess the effect (if any) of shareholder empowerment.

  • We find that the elimination did not increase average equity values.

Abstract

In 2009, the Securities and Exchange Commission (SEC) reformed shareholder voting by eliminating uninstructed broker voting in director elections. We use this reform as a quasi-natural experiment to assess the value of shareholder empowerment. Using different control groups and various cross-sectional tests, we find that the reform did not increase average equity values.

Introduction

The right to elect the board of directors is perhaps the most fundamental right of shareholders in a corporation. In 2009, the Securities and Exchange Commission (SEC) banned broker votes for the elections of directors.1 Prior to the reform, registered brokers were allowed to vote at their discretion in director elections if their clients had not given them voting instructions before the annual meeting. Historically, such uninstructed broker votes were almost always cast in favor of management’s nominees and amounted to approximately 11 to 14% of the votes cast (Bethel and Gillan, 2002). The stated goal of the reform was to improve corporate governance by making board elections more competitive.

For research in corporate governance the elimination of broker voting is of great interest because it provides a quasi-natural experiment to estimate the effect (if any) of shareholder empowerment on equity values. On the one hand, the reform may be beneficial for shareholders because it gives them more power to hold boards accountable in elections. On the other hand, both empirical and theoretical research recognizes that shareholder empowerment may be costly. For example, investors may lack relevant information, their intervention might discourage managerial initiative, or they might pursue specific agendas. In a survey article, Yermack (2010) discusses the costs and benefits of shareholder empowerment and conjectures that the elimination of broker voting is a major governance reform that, together with two other reforms (of voting standards and proxy access), will make shareholder voting more effective.

Understanding the costs and benefits of shareholder empowerment is not only important for academics but also for practitioners. Indeed, the reform of broker voting received widespread attention and support by market participants, the business press, and by policy makers. In 2007, the Wall Street Journal (Scannell, 2007) wrote that “investors ... may soon get a boost, as the role of shareholder votes cast by brokers comes under closer scrutiny.” The Council of Institutional Investors declared in 2009 that “this long overdue reform is needed now more than ever” and proxy advisor firms Glass Lewis and ISS were also strongly supporting the rule change.2 In addition, the U.S. House of Representatives exposed the SEC to political pressure.3

We contribute to the literature on corporate governance by estimating the stock market’s response to the elimination of broker voting in director elections. We consider nine important dates in the period between 2003 and 2009 that increased or decreased the probability that the reform would be implemented and run an event study using two different control groups. Our results suggest that the reform did not increase shareholder value. In almost all specifications we fail to find any valuation effect. In the few specifications that yield significant results, abnormal stock returns are negative. Moreover, in a cross-sectional analysis we examine subsets of firms for whom the reform was likely to be most relevant and again find no increase in value for these firms. Overall, our findings suggest that the reform was not effective and did not benefit shareholders.

Our paper is closely related to other recent studies of governance reforms. A contemporaneous working paper by Anderson and Nayar (2013) also examines the elimination of broker voting. They focus on six dates and find that the reform had a value-neutral effect on five of their six event dates, which is consistent with our results.4 Several studies focus on proxy access. Akyol et al. (2012) and Larcker et al. (2011) study the wealth effects of attempts by the SEC to facilitate shareholder proxy access and find a negative effect on shareholder wealth, whereas Becker et al. (2013) and Cohn et al. (2016) conclude that the stock market put a positive value on shareholder proxy access. Our finding that the reform of broker voting had a neutral (or negative) effect is more in line with Akyol et al. (2012) and Larcker et al. (2011), as it points out limitations of recent governance reforms.

Section snippets

Timeline of the change in broker voting regulation

Rule 452 of the New York Stock Exchange allows brokers to vote at their discretion at annual meetings on “routine” proposals if they have not received voting instructions from their clients.5 Uncontested director elections were considered to be a “routine” matter until 2009, when the SEC approved a NYSE proposal that classified

Data and summary statistics

Our sample consists of firms in the S&P 500 index at the end of 2009. We require firms to report their industry classification, firm size and return on assets in Compustat, their stock returns in CRSP, their institutional holdings in the Thomson Reuters 13F filings database, their voting standard for director elections and anti-takeover provisions in ISS (formerly RiskMetrics), and their voting results for director elections in SEC Edgar. This leaves us with a sample of 457 firms.

Table 2

Market response to the reform of broker voting

We study the effect of the elimination of discretionary broker voting in uncontested director elections on shareholder value. Selecting a control group is challenging because Rule 452 is a member rule, meaning that it applies not only to companies listed on the NYSE, but also to companies whose stock is held for customers by member firm broker-dealers. Hence, virtually every listed U.S. firm is affected. Following Zhang (2007) and Akyol et al. (2012), we therefore use as a control group a

Conclusion

We study a reform that received widespread attention by academics and practitioners, namely the elimination of broker voting in director elections. We document that the reform did not increase equity values. The effect is value-neutral and in some specifications even negative. These findings are obtained for two different control groups and are corroborated by various cross-sectional tests.

Many attempts to reform corporate governance presume that shareholder empowerment is beneficial to

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We thank Augustin Landier, Ron Masulis, Albert Menkveld, Oliver Spalt, Per Stromberg, Ralph Walkling, Qiaoqiao Zhu and participants at the 2011 FIRN conference and the 2012 FMA meeting for useful comments. Raff and Verwijmeren thank VU University Amsterdam, where they were faculty members while conducting parts of this research.

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