From apathy to activism: Shareholder dissent on director's pay proposals and board effectiveness

Using a hand-collected dataset of shareholder voting on 10,805 director compensation proposals at the shareholder meetings of Chinese listed firms from 2010 to 2019, we provide novel empirical evidence on board reaction to shareholder dissent. We find that boards of directors facing shareholder dissent significantly improve their monitoring and advising effectiveness. Specifically, they reduce the likelihood of financial restatements, improve CEO performance-turnover sensitivity and improve corporate investment efficiency. Our findings are robust to propensity score matching, instrumental variable estimation and the exogenous shock of mandatory online voting. Moreover, independent directors facing dissent are more likely to vote against board proposals and to reduce their absences from board meetings. The mechanism analysis shows that shareholder dissent operates through the reputation concern and market signal channels. This effect is more prominent for non-SOEs, for firms with more high-profile directors and for firms with less powerful CEOs. Besides, shareholder voting dissent induced improved board effectiveness leads to better firm performance. Overall, our findings highlight the role of shareholder voting in emerging markets with concentrated ownership and weak investor protection.