Why Do Shareholder Votes Matter ? 1

We show that majority-supported shareholder proposals create value not necessarily because their content has intrinsic value, but because they increase pressure on the board of directors. We document that shareholder organizations (CII), proxy advisory firms (ISS), and management often disagree about voting results because they apply different majority requirements in 60% of the cases. This allows us to identify each of those key players’ reactions to what they consider an approved proposal. As soon as CII considers a proposal has passed, there is higher pressure on noncomplying boards, as votes against directors and inefficient CEO turnovers increase very sharply. This is overall well-perceived by investors as stock prices also go up. Sanctions taken by ISS remain mild against otherwise well-perceived directors and do not cause inefficient CEO turnovers, but they do not improve firm value either. Interestingly, those effects of passage according to CII and ISS arise only when a proposal is not eventually implemented. 1 Stockholm School of Economics & Swedish House of Finance, Drottninggatan 98, Stockholm, Sweden. E-mail: laurent.bach@hhs.se; daniel.metzger@hhs.se. We thank Marco Becht, Vicente Cuñat, Daniel Ferreira, Ernst Maug, Per Strömberg, Paolo Volpin, as well as seminar participants at HEC Paris, FU Amsterdam, Nova/Catolica Lisbon, WHU Vallendar, IFN Stockholm, Frankfurt U, Stockholm U, 2012 Gerzensee Evening Sessions, AFFI-EUROFIDAI 2013 conference, 15th Workshop on Corporate Governance in Oslo, and at the Swedish House of Finance for very helpful comments. This paper was initially circulated with the title “The Dark Side of Shareholder Activism: Evidence From CEO Turnovers”.