Re-Jin Guo

Activism and the Shift to Annual Director Election

We examine a comprehensive sample of firms that dismantle their staggered board in favor of annual director elections. We focus on the period following the passage of the Sarbanes-Oxley act of late 2002 and we find 465 instances between 2003 and 2010. Investor reaction to these decisions is muted but nonetheless significantly positive at the 5% level. We find that the type shareholder activism is of considerable importance in determining the form of this self-imposed governance reform: when the change is pushed by aggressive hedge fund activists the board is more likely to embrace annual elections immediately and the markets react very favorably to the change, but if the change is pushed by non-binding shareholder proposals, the response is to drag out the change as much as possible and the markets are commensurately unimpressed. Moreover, our sample firms are substantially more likely to be taken over in the ensuing two years when the shift to annual director elections is pushed by activist hedge funds.