Dissenting Directors, by ECGI
In october 2016 Piergaetano Marchetti, Gianfranco Siciliano both from Bocconi University, and Marco Ventoruzzo from Bocconi University, Pennsylvania State University and ECGI, published an article (1) where they tried to provide some empirical evidence about the role of a director that either votes against a resolution of the board or resigns. They use data from the Italian market regarding both independent and non-independent directors.
According to the authors, the Italian legal framework is very appropriate for the survey for several reasons:
- List voting favors diverse boards, thus higher levels of debate within the boardroom; list voting allows minorities to nominate directors on their own;
- As the case of controlling shareholders is common, the number of dissenting directors should be scant;
- Information is otherwise abundant.
In Italy there are three types of directors, executives, non-executives and independents. Even if directors are elected by minorities, they all owe fiduciary duties to the corporations and all shareholders. Dissenting (not resigning) may reduce legal liabilities for the director, with several formal requirements, (the minutes should record the dissent and so on).
The authors try to obtain answers to certain questions:
- Who are dissenting directors? Independent directors are more likely to dissent in (i) less controlled firms; (ii) when they are appointed by minorities; (iii) when they receive generous pay; (iv) when the Chairman role is separated from the Ceo role; (v) in general it can be said to be a personality trait.
- On what do they dissent: the more usual topics are (i) internal corporate governance, (ii) information disclosure, (iii) related-party transactions;
- Market consequences of dissent: the authors find that the market reacts positively to resignations as they advance further corporate governance improvements; sometimes a split board affects negatively the stock prices, as observers may consider a decision not so sound, mainly when the dissident was nominated by the minority.
- What`s the kind of firm where dissent appears? The authors find that larger sized and leveraged firms face dissent more frequently; less concentrated firms also attract dissent more often; poor performance firms also suffer from higher dissent events.
- As for non-independent directors and dissent the authors state that the topics are generally the same although the market consequences might be stronger, probably because the markets assigns more insider knowledge to them than to independent directors.
(1) Marchetti, Piergaetano and Siciliano, Gianfranco and Ventoruzzo, Marco, Dissenting Directors (October 2016). European Corporate Governance Institute (ECGI) - Law Working Paper No. 332/2016. Available at SSRN: https://ssrn.com/abstract=2854768 or http://dx.doi.org/10.2139/ssrn.2854768