Now that the SEC may have dealt a near fatal blow to proxy access, shareholder advocates have moved on to what many deem the new front in the bid to obtain more say in what goes on in the boardroom—majority voting.
In an overlooked ruling last week, the SEC said Citigroup cannot omit from its proxy a shareholder resolution calling for directors to be approved by a majority of shareholders who are voting.
Currently, a director only needs to receive one vote to be approved. The only way to register displeasure with a board member is for shareholders to withhold their votes, a rather benign exercise that wasn’t very successful last year despite high-profile campaigns against top executives at Walt Disney and Safeway by pension fund giant CalPERS. The SEC’s Citigroup ruling was first reported by the Investor Responsibility Research Center.
The Citigroup vote is not the first instance of a majority voting proposal, however, the resolutions are growing in frequency. In 2004, for example, there were 14 majority vote proposals, 12 of which were voted upon and two withdrawn, according to Subodh Mishra of the IRRC. However, the proposals did not exactly fire up investors; the measures were supported, on average, by 11.8 percent of shareholders who voted. The highest approval rate—17.8 percent—came at Albertson’s annual meeting and the lowest—7.4 percent—at Bristol-Myers Squibb’s annual meeting.
This year, however, these resolutions are more popular. IRRC has tracked 81 shareholder proposals for the current proxy season asking companies to elect directors by majority vote. One of the proposals has been withdrawn, and 10, including Citigroup’s, have been forwarded to the SEC for "No Action" relief, according to IRRC.
Proxy Access Alternative
McGurn
A number of experts believe the environment is much different this year, and that the issue of majority votes will gain a lot more attention. That’s because the measures are considered the next best thing to proxy access. “It’s being viewed that way,” confirms Patrick McGurn, executive vice president of Institutional Shareholder Services.
“It’s an alternative to proxy access,” agrees Elliott Schwartz, director of research for the Council of Institutional Investors.
Eisenhofer
Others, however, disagree. Speaking on a recent ISS Webcast, Jay Eisenhofer, principal and founding partner of Grant Eisenhofer, said majority votes “should really be looked at as a complement to shareholder access, and not, as some opponents of shareholder access are now urging, as a replacement for shareholder access.”
Opponents argue that it is disruptive to boards in general and to key committees if they lose a critical member.
Grundfest
Majority voting has many well-respected supporters, however. For example, last year Joseph Grundfest, a Stanford law professor and former SEC Commissioner, proposed majority voting as an alternative to proxy access. In a letter fired off to the SEC, he wrote that requiring majority voting "would create a strong incentive for corporate nominating committees to confer and consult with shareholders about the identity of nominees. The result will, we believe, be a less confrontational mechanism that constructively engages shareholders in the process of nominating and electing directors."
Grundfest also asserted that this practice would be "the only perspective that has material support in both the corporate and shareholder communities."
Ira Millstein, senior partner at Weil, Gotshal & Manges, also recommended majority voting at the SEC’s roundtable discussion in March 2004. In fact, he wants to make it a listing requirement for the major exchanges.
Revisiting The Issue
Oddly, ISS actually opposed these measures last year, mainly because it preferred to campaign on behalf of proxy access. In its analysis, ISS said: (1) the plurality voting threshold is the accepted standard for the election of directors of publicly traded companies, (2) approval of this item could disrupt board operations and the company's financial performance in the event certain or all of the director nominees do not receive majority support and do not get elected, (3) requiring a majority vote of the outstanding shares in effect provides for a supermajority of votes cast, which would adversely affect shareholders' ability to elect directors in a contested election, and (4) the proposed provision may diminish the likelihood of a successful open access campaign by providing for an increased vote requirement in the election of directors.
However, this year it may change its policy. McGurn confirms that later this week ISS will officially announce how it plans to vote on this issue during the upcoming annual meetings. And, even though he would not tip off ISS’ new policy, he said, “This year we are revisiting it in light of ballot access.”
Asked why ISS opposed majority voting, McGurn explained, “Ballot access is less intrusive. But, now that it is dead, it is more of a moot point.”
Citigroup’s failed attempt to keep the majority voting resolution off its proxy is significant because it is the SEC’s first No Action ruling since it allowed Halliburton to keep a proxy access-like resolution out of its proxy. So, governance experts think it is significant that the regulator is clearly distinguishing between the two issues.
According to IRRC’s Mishra, the Commission did not agree with the company’s request to exclude the proposal under rules 14a-8(i)(3), which prohibits materially false or misleading statements in proxies; 14a-8(i)(8), which relates to an election for membership on the company’s board; and 14a-8(1)(10), which allows for omission if the company has substantially implemented the proposal.
Task Force
Meanwhile, earlier this month a task force of the American Bar Association’s Committee on Corporate Laws, led by former Delaware Chief Justice and current Weil Gotshal & Manges partner E. Norman Veasey, will examine the possibility of updating Model Business Corporation Act relating to voting for directors. According to Veasey, a majority of the states follow the "Model Act" to a significant extent, and task force will examine the consequences of any change.
Veasey
"The result of the plurality process for electing directors theoretically means that a candidate for director in an uncontested election may be elected by far less than a majority of those voting," said Veasey in a statement dated Feb. 28. "The Task Force is carefully studying the question of whether or not to recommend any change from the plurality system to a majority system or some other system."
The task force—which is co-chaired by Pfizer vice president and corporate secretary Peggy Foran, and Morris, Nichols, Arsht & Tunnell senior partner A. Gilchrist Sparks—is expected to report to the full committee at the ABA’s spring meeting in Nashville. But according to an IRRC report that cited task-force member and Pillsbury Winthrop partner Michael Halloran, changes to the Model Act should not be expected in the short-term.
Even so, the IRRC said the ABA’s efforts are receiving strong backing from the London-based
International Corporate Governance Network, which back in December helped support the proxy access debate.
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