A large number of shareholders seem to think nominated directors should receive a majority of votes cast rather than a plurality in order to serve on the company’s board, and companies like Citigroup, Lowe's and Dillard's seem to be leaving the door open to consideration of a majority vote policy.
Two weeks ago, 38 percent of shareholders voting supported a resolution at Caterpillar’s annual meeting calling for directors to be elected by majority vote, while 48 percent of those voting at Gannett’s gathering supported a similar measure. And last week, a Citigroup resolution—which the world’s largest bank unsuccessfully tried to omit from its proxy—received 41 percent approval.
While none of the non-binding resolutions received majority support, experts note the votes came awfully close. “It is certainly a shot in the arm,” asserts Subodh Mishra, editor of the Investor Responsibility Research Center’s weekly newsletter, Corporate Governance Highlights.
Altogether, 84 similar resolutions were submitted so far this proxy season—most of them by the United Brotherhood of Carpenters and Joiners of America—and at least 15 were withdrawn, according to the IRRC. During last year's proxy season, just 12 similar proposals came to a vote, according to the IRRC. The biggest support came from shareholders of supermarket chain Albertson's, where 17.8 percent voted for the measure.
Warming Up
Most U.S. corporations currently use the plurality model, whereby shareholders can vote "for" a director, or they can withhold their votes. They cannot vote “no.” Proponents of majority voting assert that the plurality model should be scrapped since a nominee can be elected with just one affirmative vote, even if a substantial majority of votes cast are 'withheld' from that nominee.
Majority voting was advocated by Joseph Grundfest, a Stanford law professor and former SEC commissioner, an alternative recommendation to the SEC’s proxy access proposal at last year’s SEC roundtable.
SEC Commissioner Harvey Goldschmid, a major advocate of proxy access, seems somewhat lukewarm to majority voting, however, calling it “a veto device.” He adds, “It doesn’t give shareholders an opportunity to get someone good on the board. I’m skeptical.”
Even so, he is encouraged by the strong results thus far from the majority vote resolutions. “On a whole, it is a good thing that it is happening,” he adds. [Editor’s note: Next Tuesday, May 3, Compliance Week will publish an exclusive, in-depth interview with Goldschmid].
In fact, a growing number of players who were initially opposed to majority voting are now warming up to the concept and seem willing to consider implementing the rule under certain circumstances.
For example, the Council of Institutional Investors recently trotted out a new policy that states, "when permissible under state law, companies' charters and by-laws should provide that directors are to be elected by a majority of the votes cast. If state law requires plurality voting (or prohibits majority voting) for directors, boards should adopt policies asking that directors tender their resignations if the number of votes withheld from the candidate exceeds the votes for the candidate, and providing that such directors will not be re-nominated after expiration of their current term in the event they fail to tender such resignation."
The California Public Employees' Retirement System said it would "seek to implement majority vote policies at individual companies through company bylaw and charter amendments; pursue changes to state laws to implement majority (voting) where feasible; and amend the CalPERS Corporate Governance Core Principles and Guidelines to advocate majority votes for corporate directors."
"Majority vote will give shareowners the power to hold directors accountable for their actions and their performance, and elect the best person for the job," said Rob Feckner, president of the CalPERS board.
Even the Business Roundtable, a staunch opponent of proxy access, is willing to consider supporting a majority vote policy. In a statement submitted to Compliance Week, it said, “Business Roundtable is working with the American Bar Association Committee to study this issue and its ramifications. While ensuring that shareholders are able to communicate their positions to directors is vitally important, we also must ensure that this does not become a vehicle for special interests to usurp the board election process.”
Clearing Up Ambiguities
Indeed, Lowe's and Dillard's recently agreed to take steps toward scrapping their current plurality voting system if supporters of related resolutions drop the measures for this year’s annual meeting, according to the IRRC, pointing out that Lowes said its governance committee had "begun a review of the appropriate process" to transition to majority voting and that shareholders would be given the opportunity to make the changes happen at next year's meeting.
Citigroup also left the door open to considering a majority vote policy, when Shannon Bell, deputy director, public affairs for Citigroup, said in a statement, “Citigroup is committed to participating in the working group to find an approach to electing directors that reflects the goals of the proposal and is workable under applicable law.”
According to Institutional Shareholder Services, the working group also includes Baxter International, Chevron Texaco, Cinergy, Constellation Energy Group, Dow Chemical, El Paso Corp., Gap Inc., Intel, JPMorganChase, Merrill Lynch, Time Warner, and Wyeth.
Four unions are also involved in the group, including United Brotherhood of Carpenters and Joiners, Laborers' International Union of North America, Sheet Metal Workers International Association and United Association of Plumbers & Pipe-fitters.
One of the goals among those who are conditionally supportive of majority voting is to clear up some ambiguities that currently exist if a company does adopt a majority vote rule. For example, in its annual report, Citigroup pointed out that in a contested election, including an election where a shareholder nominee was being voted upon, plurality voting would dictate that whoever received the most votes would win the contested seat. However, if majority voting were the standard, even if the shareholder nominee received more votes than a board candidate, if neither candidate received a majority vote, the board candidate would remain in office in accordance with Delaware law.
“Given these provisions of Delaware law, there is uncertainty as to how the proposal might ultimately work in practical terms,” Citigroup adds. “As a result, stockholders are at a disadvantage when deciding how to vote on the proposal. The intended goal, providing for majority voting in elections for directors and its anticipated effect, removing directors that stockholders, by a majority, vote against, may never come to fruition.”
Gannett asserted in its proxy statement opposing the measure that majority voting would not improve the company’s corporate governance and in fact could disrupt the operation and function of the board. “The higher voting threshold could make it more difficult for shareholders to elect a full Board and result in a high number of vacancies since the proposal does not address what would occur if a candidate fails to receive the requisite majority vote,” it adds, voicing a widespread practical concern about how this policy would work.
The media company points out that under Delaware corporate law and the company’s articles of incorporation and bylaws, the remaining directors may elect a director to fill a vacancy on the board. The higher voting threshold may also result in an incumbent director, who does not have the majority of votes, remaining in office until a successor is elected and qualified under the majority voting threshold. “Any of these possibilities is less favorable than the current standard of plurality voting,” it adds.
Delaware corporate law provides that, unless otherwise provided in a company’s organizing documents, directors “shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors,” Gannett points out. “In this respect, Delaware corporate law is consistent with the Model Business Corporation Act and the corporation law in over 40 other states which provide for the plurality director election standard.”
Indeed, even Citigroup points out in its proxy, “given the constructs of this proposal and the current state of Delaware law, this proposal cannot achieve the intended goal of ensuring that directors are elected by a majority vote.”
This situation could change, though. Earlier this year, 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, began examining the possibility of updating the Model Business Corporation Act relating to voting for directors. Veasey says the task force will examine the consequences of any change.
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—met in early April, but nothing much happened, according to the IRRC’s Mishra. The next meeting is scheduled for sometime in June. “They will probably provide some comments and maybe recommendations to the full committee,” Mishra adds.
But, he warns that this could take some time to play out. “If there is change, it will not be before next proxy season,” Mishra predicts. “From a legal perspective, this is critical.”
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