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    The Efficacy of Shareholder Voting in Staggered and...
    research summary posted July 18, 2016 by Jennifer M Mueller-Phillips, tagged 13.0 Governance, 13.05 Board/Audit Committee Oversight, 14.0 Corporate Matters, 14.11 Audit Committee Effectiveness 
    The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections
    Practical Implications:

     This study contributes to the accounting landscape in many different ways. First, the results suggest that, through voting and differentiating between AC and non-AC directors, shareholders can influence the AC’s oversight over financial reporting. Second, the study complements previous research on similar topics by showing that dissatisfaction with AC members is also associated with subsequent turnover of accounting financial experts and that low auditor ratification and AC votes are both associated with a reduction in auditor-provided tax services. Finally, the results show that going forward all studies examining the efficacy of shareholder votes should separately consider staggered and non-staggered boards.


     Gal-Or, R., Hoitash, R., and Hoitash U. 2016. The Efficacy of Shareholder Voting in Staggered and Non-Staggered Boards: The Case of Audit Committee Elections. Auditing: A Journal of Practice and Theory 35 (2): 73-95.

    staggered boards, director elections, audit committee, and proxy advisors
    Purpose of the Study:

    Previous accounting research provides evidence that certain characteristics of audit committees (ACs) are associated with improved effectiveness, finding that features such as size, independence, and member expertise all contribute to the quality and effectiveness of the audit committee. Research on the influence of shareholders on audit committee effectiveness is scarce, so this paper examines whether shareholders voting on audit committee members and the frequency of those elections (staggered versus non-staggered) can influence the effectiveness of the audit committee. Because of the way shareholder votes are cast, the votes in director elections provide an important mechanism to monitor and discipline directors.

                Despite the majority of directors standing for election every year, a significant number of firms have staggered boards, in which only a fraction of members face election every year. Under the staggered board regime, shareholders can typically voice their opinion on any given director only once every three years, making it conceivably possible that directors on staggered boards who do not face election following poor performance will be insulated from the scrutiny of shareholder votes. This could lead to a decrease in accountability, responsiveness, and the overall efficacy of shareholder votes. This paper separates itself from others because prior research has not considered the issue of diminished efficacy of shareholder voting and has not examined whether the effectiveness of shareholder votes is similar across staggered and non-staggered boards. 

    Design/Method/ Approach:

    The authors used cross-sectional time-series data spanning the years 2004 to 2010. The final sample contains over 18,296 director elections taking place in more than 6,786 firm-year observations. The authors also use several measures to test the reaction of ACs to low shareholder approval rates separately for non-staggered and staggered ACs. 

    • The authors find that most AC members serve on non-staggered boards, which typically have higher shareholder votes than staggered boards.
    • The authors find that, consistent with former research, firms with non-staggered boards perform better than those with staggered boards and are more likely to have majority voting rather than plurality voting.
    • The authors find that companies do not necessarily respond to low votes by indiscriminately replacing AC members; instead, they remove and replace financial accounting experts on the AC when shareholders express dissatisfaction with the AC. This appears to only be the case in non-staggered boards; staggered boards do not react to low votes in the same manner.
    • The authors find that low shareholder support is associated with an improvement in the composition and diligence of the AC; however, these associations are prominent only in non-staggered firms.
    • The authors’ findings suggest that dissatisfaction with the AC and the auditor expressed through low votes is associated with a decrease in the tax NAS ratio.
    • The authors’ findings suggest that low shareholder votes in firms with non-staggered boards are associated with changes to the composition and diligence of the AC, changes to the relationship with the auditor and gradual changes to financial reporting quality. 
    Corporate Matters, Governance
    Audit Committee Effectiveness, Board/Audit Committee Oversight