Managerial Response to Shareholder Empowerment: Evidence from Majority Voting Legislation Changes

This paper studies managerial reaction to shareholder empowerment that strengthens shareholder voting, a form of direct democracy. We explore this research question by looking at the staggered passage of legislation that makes it more costly to not implement shareholder proposals about the voting rules for electing directors. The new legislation rules that the board cannot unilaterally amend or repeal the shareholder-adopted majority voting bylaw amendments related to director elections. Essentially, the new law empowers shareholders via binding voting that subjects board of directors to stricter voting rules in director elections, a form of indirect democracy.

This regulatory change provides a suitable setting for understanding managerial behavior and the underlying incentives when regulators tilt the balance of corporate governance away from managerial authority and toward shareholder empowerment. Because firms are heterogeneous, the need to moderate managerial authority may differ substantially across them. Changes in governance regulations may be beneficial for some firms but destructive for others. The different management reactions to shareholder empowerment are therefore informative about this heterogeneity and how managers deal with it.

We use a sample of 250 management proposals and 436 shareholder proposals filed from 2005 to 2015 by Russell 3000 firms. First, we find that “fronting behavior” by managers: after enactment of the new laws, the average number of management proposals per treated state grows by 11.3% to 39.2. Meanwhile there is no significant increase in shareholder proposals. At a firm level, when managers initiate a majority voting standard on their own they crowd out further shareholder proposals.

Second, we find that managers become less likely to implement majority voting via a bylaw and more likely to do so via a charter. This implementation route favors managers because amending a charter requires the consent of both the board and shareholders while amending a bylaw only requires the latter’s consent. Managers are also more likely to install a favorable director resignation policy after the enactment of the new laws because such policies enable firms to retain directors who fail to win a majority of votes until a suitable replacement is found, rather than require an immediate resignation. These elements make the implementation of management proposals on majority voting more friendly to managers than that of the shareholder proposals on the same issue.

Finally, we offer insight into the managerial incentives for those firms that select themselves into resisting majority voting or not directly implement it. We find that after the legislative changes, the market reaction turns from neutral to negative. The results show that managers of firms for which the new legislation is likely to impose the greatest cost or the least benefit, tend to show the greatest resistance towards implementing the new standard. The findings indicate that managers do care about shareholder value and that majority voting can be detrimental for some of the firms in the sample.

Overall, this paper presents evidence of managerial fronting when shareholders are empowered. Managers not only pre-empt shareholders in submitting more management proposals but also put forward provisions that are more management friendly than those in the shareholder proposals. We also provide insights into how managers choose to front shareholders and when they decide not to implement shareholder proposals. This second set of results suggest that when shareholder value is likely to suffer more or benefit less from the new legislation is precisely when managers show the greatest resistance to implementation of the majority voting standard. Our results show that shareholders may benefit from the moderation of shareholder proposals by managers if they are informed about their relative benefits to a specific firm.