Expressive Shareholder Democracy: A Multilevel Study of Shareholder Dissent in 15 Western European Countries

• Author: Steve Sauerwald,Marc Van Essen,J. (Hans) Van Oosterhout
• DOI: http://doi.org/10.1111/joms.12171
• Published date: 01 June 2016
• Date: 01 June 2016

Expressive Shareholder Democracy: A Multilevel

Study of Shareholder Dissent in 15 Western European

Countries

Steve Sauerwald, J. (Hans) Van Oosterhout

and Marc Van Essen

University of Illinois at Chicago; Erasmus University; University of St. Gallen

ABSTRACT This study develops an expressive understanding of shareholder dissent. In this

view, shareholder dissent is not only about the voting outcomes of proposals put to the vote,

but also expresses an evaluation of the f‌irm’s corporate governance set-up. We hypothesize

that shareholder dissent expresses an agency theoretical evaluation of corporate governance,

but that the degree to which the capitalist system of a country is a coordinated market

economy (CME) leads shareholders to evaluate corporate governance more in team

production terms. We test our theoretical model using multilevel techniques on a sample of

12,513 proposals voted on in 717 f‌irms listed in 15 Western European countries and f‌ind

support for our predictions. Our study not only contributes to a better understanding of the

corporate governance role of shareholder dissent, but also shows that what shareholders

express through dissent differs across national contexts.

Keywords: agency theoretical evaluation, capitalist systems, comparative corporate

governance, shareholder dissent, team production theoretical evaluation

INTRODUCTION

The persistence of corporate governance failures (Coffee, 2005), a growing disappointment

in boards of directors (Ahern and Dittmar, 2012), and mixed empirical evidence on the

effectiveness of corporate governance mechanisms (Dalton et al., 2007) have fuelled a

movement to empower arm’s-length shareholders in the USA (Bebchuk, 2005) and

Europe alike (Enriques and Volpin, 2007). The main objective of this movement is to ena-

ble and encourage shareholders to actively use their voting rights in order to secure their

residual claims on the f‌irm. In an attempt to infuse this movement with public legitimacy,

Address for reprints: Steve Sauerwald, Department of Managerial Studies, University of Illinois at Chicago,

601 S. Morgan Street 2210 UH, Chicago, IL 60607, USA (ssauerw@uic.edu).

V

C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:4 June 2016

doi: 10.1111/joms.12171

its protagonists often appeal to the ideal of ‘shareholder democracy’ as a paradigm of

good corporate governance in public f‌irms (Bebchuk, 2005). Note that the analogy

between shareholder democracy and political democracy is problematic in a normative

sense (e.g., Rodrigues, 2006; van Oosterhout, 2007), even if only because the ‘plutocracy’

in public f‌irms in which large shareholders have more voting rights than small sharehold-

ers is at odds with a foundational principle of political democracy, according to which

each citizen counts as one and none as more than one (Smythe, 2006). In this study, we

will not be concerned with a normative analysis of shareholder democracy. Instead, we will

focus on investigating the practical question whether and how shareholder democracy can

be an effective and useful corporate governance practice.

A core premise of the quest for shareholder democracy involves the assumption that

shareholder voting is a powerful corporate governance practice that allows shareholders

to secure their interests in the f‌irm (Easterbrook and Fischel, 1991). Taking place at reg-

ularly held shareholder meetings (Yermack, 2010), shareholder voting provides ample

opportunities for shareholders to intervene in the f‌irm by voting against the (re-)election

of directors (Hillman et al., 2011) or any other proposal put to the vote and recom-

mended by the board (Bebchuk, 2005). In theory, the right to vote at shareholder meet-

ings is the most powerful control right that shareholders can use to secure their interests

(Mallin and Melis, 2012).

In practice, however, empirical research has documented that shareholder dissent –

def‌ined as shareholder votes cast in opposition to the board’s voting recommendations

on proposals put to the vote (Hillman et al., 2011) – is generally insuff‌icient to keep

board-sponsored proposals from receiving majority support (Cai et al., 2009; Listokin,

2008; Yermack, 2010).

[1]

Even when shareholders sponsor proposals, these typically fail

to be supported by the majority of shareholders (Cziraki et al., 2010). By challenging the

assumption that shareholder dissent is an effective corporate governance mechanism

(Yermack, 2010), these f‌indings question the feasibility of shareholder democracy.

To reconcile our theoretical understanding of the corporate governance role of share-

holder dissent with the available empirical evidence, this study develops an alternative

understanding of the corporate governance role of shareholder dissent. Rather than

understanding shareholder dissent exclusively in instrumental terms in which its effective-

ness depends only on the ability to sway voting outcomes, we draw on the political

science literature to develop an expressive understanding of shareholder dissent (Brennan

and Lomasky, 1993). In this view, shareholder dissent is not only about the voting out-

comes of proposals put to the vote, but also expresses an evaluation of the effectiveness of

the f‌irm’s corporate governance set-up (Hillman et al., 2011), similar to how voting out-

comes in political democracy not only serve to appoint a future government (Downs,

1957), but also express an evaluation of the incumbent one (Brennan and Lomasky,

1993). In this study, we investigate the corporate governance role of this expressive

understanding of shareholder dissent across 15 Western European countries.

We develop our understanding of shareholder dissent as a mechanism of ‘expressive

shareholder democracy’ by investigating two aspects that underlie this view. First, build-

ing on the political science literature on expressive voting in political democracy

(Brennan and Lomasky, 1993), we predict that regardless of what is at stake in a pro-

posal and irrespective of whether the proposal receives majority support, shareholder

521Expressive Shareholder Democracy

V

C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

dissent expresses an evaluation of the basic corporate governance set-up of the f‌irm

(Hillman et al., 2011). Because shareholders are prone to evaluate corporate governance

from a perspective that ref‌lects their interest in the f‌irm as residual claimants (Fama and

Jensen, 1983), we argue that shareholder dissent will express an agency theoretical eval-

uation of corporate governance mechanisms (Hillman et al., 2011).

Second, research has documented that corporate governance mechanisms are not

equally effective across Western Europe (Aguilera and Jackson, 2010; Desender et al.,

2013). Because different capitalist systems (Hall and Soskice, 2001) shape the relations

between the f‌irm and its stakeholders in distinct ways (Blair and Stout, 1999), we argue

that shareholders’ evaluation of corporate governance mechanisms varies across the

capitalist systems of Western Europe (Davis, 2009; Jansson, 2013). Specif‌ically, we argue

that in more liberal market economies (LMEs), such as the UK and Ireland, where mar-

kets play an important role in corporate governance, shareholder dissent is even more

likely to express an agency theoretical evaluation of corporate governance. In LMEs, the

ultimate goal of corporate governance is to reduce the agency costs that result from

the separation of ownership and control (Shleifer and Vishny, 1997). An important

means to achieve this goal in LMEs is to facilitate markets to reduce agency costs in

f‌irms (Aguilera et al., 2015; Edmans, 2009). In more coordinated market economies

(CMEs), such as Germany and France, where coordination with stakeholders through

non-market means is often required, shareholder dissent is more likely to express a team

production theoretical evaluation of corporate governance (Kaufman and Englander,

2005). In CMEs, the ultimate goal of corporate governance is to undergird the ongoing

team production between the f‌irm and its stakeholders by securing f‌irm-specif‌ic invest-

ments and stakeholder relationships (Blair and Stout, 1999).

To test these predictions, we focus our hypotheses development on three corporate

governance mechanisms that are prevalent in both LMEs and CMEs (i.e., relational

blockholders, stakeholder directors, and CEO equity-based pay), but that are known to

serve different corporate governance roles across capitalist systems. Because the contex-

tualization of the corporate governance role of these three governance mechanisms only

comes in at the country level, we f‌irst hypothesize the f‌irm-level effects from an agency

theoretical perspective, as shareholders are eager to protect their residual claims on the

f‌irm. We subsequently hypothesize that the degree to which a country resembles a

CME will lower the extent to which shareholders express an agency theoretical evalua-

tion of corporate governance, because in CMEs corporate governance mechanisms that

support team production between the f‌irm and its stakeholders may be more suitable to

maximize shareholder returns.

We test our hypotheses using a sample of 12,513 proposals voted on in 717 f‌irms

listed in 15 Western European countries for the years 2008 and 2009, and use multilevel

modelling as our analytical approach. We use a Western European sample because

Western Europe is an economically well-developed part of the world hosting a persistent

variety of capitalist systems that may lead shareholders to express different evaluations

of governance mechanisms cross-nationally (Cernat, 2004). It thereby provides a unique

empirical setting to test our predictions.

Our study seeks to make at least three contributions. First, by developing an under-

standing of shareholder dissent as a mechanism of expressive shareholder democracy, we

522 S. Sauerwald et al.

V

C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies