Recent research on the adoption of majority voting rules provides some insight on how corporate governance reforms are adopted and change company behaviour, and suggests that reforms may have the greatest impact on firms that are late to adopt them.

The push for majority voting, which requires that directors receive a majority (rather than a plurality) of the votes cast in order to be elected, has been highly successful, with over 90% of S&P 500 companies adopting some form of majority voting by January 2014. Majority voting is intended to make boards more accountable to shareholders.  A recent paper by a group of U.S. authors tries to determine if it actually works, and in the process makes an interesting observation about the spread of corporate governance reforms.[1]

The framing observation for this investigation is that, while widely adopted, majority voting rules have caused the removal of very few directors. Of more than 24,000 director nominees subject to majority voting in elections between 2007 and 2013, only 8 failed to achieve a majority of votes cast, and of those, only 3 actually left the board .  These numbers raise the possibility that majority voting may be popular precisely because, while it looks good, it doesn’t actually do much.

However, empirically, majority voting rules are associated with several positive markers – more consistent majority shareholder support for directors, more regular board attendance by directors and fewer “withhold” recommendations from ISS. The researchers attempted to determine if this was a majority voting success story (i.e. these positive effects occur because majority voting pushes directors to be more responsive to their shareholders) or if there was another explanation, such as: companies that are already more responsive to their shareholders are more likely to adopt majority voting; companies with majority voting lobby ISS more heavily to avoid negative recommendations; or shareholders are more reluctant to vote “no” under majority voting because they perceive a no vote to be more impactful than it would be under plurality voting.

Researchers found some support for all four explanations but, interestingly, they found that the timing of the adoption of majority voting made a significant difference. Early adopters were more likely to be firms that were already responsive to their shareholders, and majority voting had little effect on director behaviour for these firms.  Conversely, late adopters were much more likely to have changed their behaviour as a result of adopting majority voting.

These findings suggest that corporate governance reforms are rarely successful in changing the behaviour of perceived problematic actors at the outset. Instead, reforms spread first to more receptive companies that already have good relations with their shareholders, for whom adoption carries little cost and does not demand any change in behaviour.  Adoption by these firms creates an industry norm that increases the pressure on non-adopting firms, who become increasingly isolated as the reforms gain acceptance.

On reflection, this makes sense. Voluntary adoption is a sign that reforms are succeeding, but the reforms have little effect on the firms that readily adopt them voluntarily; rather, it is at the firms that resist adoption and are pressured into it that actual change occurs.

For companies, this is simply another reminder of the importance of keeping up to date on corporate governance issues. A firm that becomes an outlier in the market may be challenged to either explain itself or change its ways, and it could invite activist attention depending on how it handles these questions.

[1] Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel and Rock, Edward B., Does Majority Voting Improve Board Accountability? (November 4, 2015). University of Chicago Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 15-31. Available at SSRN: