"Majority Vote Lite"; Companies Adopt Modified Policies

It certainly appears that "majority vote mania" is sweeping corporate boardrooms.

For example, the Council of Institutional Investors, which in May fired off a letter to 1,500 companies calling on them to adopt a majority vote requirement for director elections, reports that it has received 130 responses to date, and that so far 24 companies have incorporated this policy into their bylaws.

“We’re very pleased that companies are taking a proactive position on this,” says Ann Yerger, executive director for the CII.

In the past few weeks alone, at least three large companies—Circuit City Stores, Walt Disney and Automatic Data Processing—announced they had adopted variations of majority voting plans.

McCollough

Circuit City announced that its board of directors amended their company's corporate governance guidelines such that

any uncontested director who receives a majority of "withhold" votes must submit his or her resignation to the nominating and governance committee of the board. "Adoption of this policy demonstrates our continued commitment and accountability to shareholders,” said W. Alan McCollough, chairman and chief executive officer of Circuit City Stores, in making the announcement.

Mitchell

On Aug. 18, Disney announced similar changes to its corporate governance guidelines. "Today's action is the latest in a series of steps we have taken to further strengthen Disney's corporate governance practices," said Walt Disney board Chairman George Mitchell at the time of the announcement. "The board remains committed to monitoring evolving best practices and adopting new provisions, as appropriate, to serve the long-term interests of the Company's shareholders."

ADP went a slightly different route. Earlier this month, the company agreed to amend its bylaws, calling for directors to “be elected by the vote of the majority of the shares.” ADP offered no further comment, but its policy appears similar to one that Lockheed Martin has had in place since it merged with Martin Marietta in 1995. “We have not changed anything” since then, says a spokesman for Lockheed, which has required a nominee to receive a majority of the outstanding shares in order to serve as a director. “It has served the company well,” he says. The spokesman also confirmed that no director nominee has ever received less than 50 percent of the votes.

Majority Vote Lite

According to Subodh Mishra, a researcher for the Investor Responsibility Research Center, early adopters of majority voting policies tend to be ones that want to send a message to the markets. “Certainly, I think companies want to be seen by shareholders to be proactive, in the vanguard,” he says. But Mishra also notes that some of the plans put in place fall short of a full majority voting policy, or are not clear on critical details. “Some of these are light,” says Mishra. “They’re not what proponents had in mind but they are more rigorous than plurality [systems].”

McGurn

ADP, for example, does not provide important information about its policy, like what happens if an incumbent receives 49 percent of the vote; while new candidates that fail to receive a majority vote don't serve, it's not clear what would happen to current directors. “If it’s an incumbent, and they fail to get the required vote, they remain on the board as a holdover,” points out Patrick McGurn, executive vice president for Institutional Shareholder Services.

Disney and Circuit City do address this issue, which some governance experts have come to call the “backend.” Those companies kept in place their plurality method of voting for directors. In other words, if the director receives one “yes” vote, the director remains on the board. However, if the director receives a majority of withhold votes, he or she can then be removed.

But this has resulted in a controversial rub, causing skeptics to call the plans “majority vote lite” or “modified plurality policies.” That's because the board still has the opportunity to keep the directors on, even after a 50 percent withhold vote. “Shareholders still have no power to replace the board,” says Richard Ferlauto, director of pension and investment policy of the American Federation of State, County and Municipal Employees.

A Circuit City spokesman said the board looked at all the issues and decided that the resolution passed was “the best way” to implement this strategy. He added that the company’s decision was not in response to any past shareholder resolution calling for a majority voting policy. “There was no pending shareholder resolution and no shareholder submitted a proposal at the June meeting,” he confirms. He also says that no one currently on the board would be impacted by the majority vote policy, noting that all directors recently received nearly 90 percent of the votes cast.

A Disney spokesman pointed to the statement made by Mitchell in the press release, adding “what we adopted is consistent with what Pfizer announced.” Indeed, Pfizer announced a similar policy back in June. However, Pfizer, Disney and Circuit City each stressed in their announcements that they amended their company's corporate governance guidelines, not their bylaws. “A lot of models are patterned on Pfizer’s, which leaves it up to board discretion,” points out Mishra.

Office Depot has taken a slightly different route—the company instituted a majority vote policy that is similar to the Pfizer model, however, the trigger point calls for a majority of withhold votes based on the total number of shares outstanding, rather than total shareholder votes cast. This makes it harder for shareholders to push out the incumbent directors. Institutional Shareholder Services points out in a recent report that the company originally opposed the majority election resolution filed by the Sheet Metal Workers' National Pension Fund, but management changed course after the proposal won 52 percent of the votes cast at the annual meeting in May.

COMMENTS

The excerpt below is from the ABA Committee on Corporate Laws Discussion Paper on Voting by Shareholders for the Election of Directors:

The Committee on Corporate Laws (the “Committee”) of the Section of Business

Law of the American Bar Association has undertaken a detailed analysis of possible changes to

the Model Business Corporation Act (the “Model Act”) relating to voting for directors. The

substantive law relating to the election of directors of both public and private corporations is a

matter governed by state corporation law. The Committee’s attention to voting for directors is

limited to the process governing board elections of public corporations.

This Discussion Paper sets forth various issues identified by the Committee

relating to shareholder voting for the election of directors as well as possible changes to the

Model Act that could be considered and the potential consequences of those changes. The

purpose of the Discussion Paper is to elicit from interested persons focused input and suggestions

of alternative courses of action. The Committee intends to consider that input in arriving at a

decision whether to recommend any amendment to the Model Act.

Click Here To Download The ABA Discussion Paper On Director Elections (June 2005)

Much At Stake

Like the resolution at Office Depot, a number of shareholder proposals to switch to a majority standard have received majority support. They include $591 million REIT Mack-Cali (61 percent), Supervalu (54 percent), and Dell, according to ISS. In addition, ISS notes that the United Association of Journeymen & Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada withdrew its proposal for a majority election standard at Devon Energy Corp.'s June 8 meeting after the company agreed to take part in the deliberations on the issue being held by a union-corporate task force led by the United Brotherhood of Carpenters and Joiners.

The AFSCME pension plan, which unsuccessfully tried its best to push the SEC to pass its proposed proxy access rules, has also submitted a number of binding resolutions seeking majority elections. One proposal was filed at Paychex, which had a 35 percent withhold vote against one of its directors last year, according to Ferlauto. AFSCME also filed precatory [non-binding] resolutions at Sysco and Morgan Stanley.

But so far, majority voting proposals have been the result of isolated efforts at specific companies. In fact, the major proxy voting firms like ISS don't even have official policies on how to react to the proposals; for now, says McGurn, ISS treats them on a “one-off basis.” Ultimately, adoption of uniform, widespread majority voting policies would have to come from changes in state legal statutes.

As Compliance Week reported back in February, 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, has been examining the possibility of updating The Model Business Corporation Act relating to voting for directors. The Act, which spells out a default plurality vote standard, now serves as a framework for corporate law in more than 30 states.

In June, the task force released a discussion paper on whether to adopt majority voting in director elections—the discussion paper outlined four options that the committee is considering, and solicited comments through Aug. 15. Experts say there is much at stake here, because states might be more inclined to follow the model that the ABA endorses. As Compliance Week recently reported, the committee is examining various alternative voting scenarios and their consequences, including:

Retain the current plurality vote default rule;

Change to a majority vote default rule;

Adopt a default plurality rule requiring that a director must be elected by at least a “minimum” plurality vote, such as one-third;

Leave the plurality vote default rule in place but specifically authorize “against” votes with consequences where a director achieves a plurality vote but more “against” than “for” votes. According to the report, those consequences could include, for example, "shortening the term of that director, unless the board acted within a specified time frame to confirm the director’s election, or giving the board the authority to remove that director."

However, industry watchers say that it may be a long time before the ABA trots out any specific proposal. James Melican, president of Proxy Governance, explains that if there is a recommendation for change, there are what he calls “three readings,” or stages, that the proposal must go through before the ABA makes its official recommendation. “It’s a fairly lengthy process,” he warns. “It takes a couple of years. It easily could take another year [from now].”