The majority vote movement rolling across Corporate America hit a few bumps last week as Hewlett-Packard and two other corporations rejected the idea at annual meetings, but governance watchdogs say the reform will continue to spread this proxy season.
HP’s non-binding resolution to impose a majority vote requirement for election to its board of directors fetched only 43 percent support last week. A similar measure at Analog Devices received 38 percent support, and yet another at Ciena Corp. won only 31 percent.
Dozens of other companies this winter have already adopted some sort of majority vote rule—typically requiring a director to offer his resignation if a majority of votes go against him—before shareholders force the question. The issue is rapidly shaping up to be the dominant topic in the 2006 proxy season.
Ferlauto
Despite last week’s setbacks, governance activists are enthusiastic that momentum is on their side. “These are substantial votes,” says Richard Ferlauto, director of pension and benefit policy at the American Federation of State County and Municipal Employees. “This is still a strong embrace by shareholders.”
Ferlauto argues that last week’s votes were among the first majority vote resolutions for the current annual meeting season, and characterizes them as a strong showing out of the box that will improve over coming months. He also notes that in 2005, 62 similar resolutions were filed and received an average of 44 percent support from shareholders; only 16 such measures won majority support.
In recent weeks, numerous companies voluntarily agreed to change their bylaws to implement a majority vote standard for uncontested elections, including Safeway, Altera and Alaska Air. Safeway, for example, explained that in a contested election, the plurality vote standard will remain in place. In addition, its bylaws were amended to incorporate the director resignation policy contained in Safeway’s corporate governance guidelines. Under this policy, an incumbent director who does not receive a majority of votes tender his resignation, which the board must accept or reject within 90 days.
This model—known as “the Intel model” since Intel Corp. unveiled it two months ago—is now followed by a little more than two dozen companies, says Claudia Allen, partner of the law firm Neal Gerber Eisenberg and chair of the firm’s corporate governance practice. Allen's firm recently completed a study on majority voting that reported—among other findings—that there has been a "marked uptick" in the number of majority vote bylaws adopted since change at Intel.
And that number could wind up soaring by the end of proxy season: Institutional Shareholder Services estimates that more than 140 majority vote proposals have been filed, mostly by unions, for the 2006 proxy season.
Allen
“A lot of the companies are negotiating with the unions to not put them to a shareholder vote,” Allen explains, and may well agree to implement the policy just to avoid a messy annual meeting.
Even companies that defeated shareholder proposals are open-minded about the future. Analog Devices, for example, mulled adopting the majority vote standard when management first received the proposal, company spokeswoman Maria Tagliaferro. Ultimately executives were dissuaded from the idea by company lawyers who warned of unintended consequences if Analog found itself with too few independent board members.
Even so, Analog may change its position in the future. “It’s a changing issue,” Tagliaferro says. “At the annual meeting, the chairman said he is keeping an eye on this. If the trend is in that direction, we will go that way.”
Going National
Benny Hernandez, corporate governance adviser to the Sheet Metal Workers’ National Pension Fund, believes that companies located outside Delaware would amend their by-laws without seeking shareholder approval if they were permitted to in their states. “So they are waiting to see the reaction from their shareholders” when they vote on majority vote resolutions, Hernandez adds.
A number of companies facing majority vote resolutions have already enacted director resignation policies, also called “modified plurality” policies, and based on a model adopted by Pfizer Corp. last year. Where the Intel model requires a director to win 51 percent of the vote outright, the Pfizer model only requires that 51 percent not be voted “withheld” against a director, but he could still win with, say, 45 percent.
EXCERPT
Policies vs. Bylaws
The excerpt below is from the Executive Summary of the Neal, Gerber & Eisenberg study on majority voting in director elections, updated March 14, 2006:
The study indicates that a clear majority of companies that have taken definitive action have adopted policies rather than bylaws. Of 116 companies listed in the study, 90 (78%) adopted policies ... 21 (18%) adopted bylaws [two of which were "plurality-plus" bylaws], and five (4%) adopted both a policy and bylaw. An additional three companies listed in the survey have publicly announced an intention to adopt some form of majority voting. Examined from a different perspective, of the 116 companies, 92 (79%) retained a plurality election standard, but added a discretionary policy addressing the status of nominees who receive a majority withheld vote, while 24 (21%) adopted a true majority election standard...
Source
Neal, Gerber & Eisenberg, "Study Of Majority Voting In Director Elections" (March 14, 2006)
HP, Analog Devices and Ciena all adopted the Pfizer model this year, hoping to prevent the majority vote resolutions by arguing that they have “substantially implemented” a majority vote rule already. “When Pfizer first came out with its resignation policy, they thought it was good enough and the majority vote issue would go away,” notes Hernandez.
Meanwhile, pressure could start to build on the legislative front. In California, State Sen. Richard Alarcon has sponsored a bill that would require candidates in uncontested elections receive more than 50 percent support from voting shareholders. (The bill would not affect contested elections, where the candidate needs only the most votes to win, not a majority.)
ISS estimates that 23 companies in the Russell 1000 and eight in the S&P 500 might be affected, including Pacific Gas & Electric, Broadcom, Apple Computer and Pixar. The bill has been heavily backed by the state’s largest pension funds, including the mightily influential CalPERS public-employee union.
“In uncontested elections, there were several cases in the 2004 proxy season where uncontested directors received significantly less than 50 percent of the shares voting, yet remained on a company’s board,” Robert Feckner, CalPERS Board President, said in a recent statement. “This legislation will hold directors accountable for their performance and help elect the best person for the job.”
The bill, introduced Jan. 26, is very similar to the Intel model. CalPERS notes that under a proposed amendment to the bill, an incumbent director who fails to win approval of a majority would be required to resign within 90 days of the election. The legislation would require the company’s board to respect the election results by declaring the office vacant rather than ignoring the results and reappointing the same candidate.
The bill was assigned to the Banking, Finance and Insurance Committee in the California Assembly, and the first hearing is scheduled for early April. “It’s early in the process,” says Rodger Dillon, principal consultant to Alarcon.
If it passes, the bill would take effect in the 2007 proxy season at the earliest. Noting how fast the majority vote issue has been moving of late, Allen says: “I see things playing out in other forums before California gets to act.”
And Ed Durkin, spokesman for the United Brotherhood of Carpenters, insists that “we have turned the corner. Companies will adopt it without resolutions.”
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