Negative votes have con uences: when shareholders register dissatisfaction with a director, that director's life on the board is likely to change.

• Author: Aggarwal, Reena

IS SHAREHOLDER VOTING on the election of board members effective, or is it, to quote New York Times reporter James Stewart, "an electoral system unworthy of Soviet-era sham democracies"? Asked another way, do dissenting votes by shareholders have any consequences for directors nominated for elections?

A casual reader of the financial press can draw either conclusion. High profile resignations from companies such as Hewlett-Packard and Chesapeake Energy suggest that shareholder dissent eventually leads to targeted directors departing from the board. However, there continue to be many cases where boards overlook the lack of shareholder support for individual directors.

In a study I conducted (with Sandeep Dahiya and N. Prabhala), "The Power of Shareholder Votes: Evidence from Director Elections," we provide comprehensive empirical evidence on the consequences of shareholder votes in director elections.

This issue revisits the core principal of how widely dispersed shareholders of a public corporation can (if at all) exercise their ownership rights. The board of directors is supposed to play a critical role in how a widely held, public shareholder-owned company is managed and have a fiduciary responsibility to protect the interest of shareholders. If directors who have lost support of their constituents continue in their director roles, it would imply little or no value of shareholder voice. On the other hand, if shareholder votes actually carry consequences, the classic model of shareholders exerting control via the board of directors will have validity.

Our findings confirm that majority dissent is rare. However, significant variation in the votes received by directors illustrates that voting patterns do reflect expressions of dissent.

Most director elections are fairly routine, with management-sponsored director nominees receiving almost unanimous support. However, some shareholders voice their concerns about the firm and/or a director by withholding votes from the director. During our study period, 2003-2010, the average percentage of votes withheld varies from a low of 4.78% in 2006 to a high of 7.89% in 2009, an increase of more than 65%. Shareholder dissatisfaction related to the financial crisis was particularly evident in 2009, with 557 directors receiving more than 30% withheld votes. A total of 218 directors received majority dissent, 50% or more, with 136 of these occurring in 2009 and 2010. On average, we find that ISS opposes...