Pfizer To Directors With Majority Withhold Votes: Resign

Last week, $52.5 billion Pfizer announced that directors who receive a majority of withhold votes must submit their resignation to the board. The board will in turn consider the resignations and make recommendations.

The pharmaceutical giant has amended its corporate governance principles to reflect the new director election policy.

McKinnell

According to Pfizer Chairman and CEO Hank McKinnell, the change was prompted by pressure from investors. "Today's decision is another example of our long-standing commitment to responding to the concerns of our shareholders," he said in announcing the change.

As the Securities and Exchange Commission's proxy access proposal has been stalled amid corporate resistance and staff changeover, the issue of majority voting is being discussed with greater frequency among institutional investors and shareholder advocates. That's partially because director withhold vote campaigns have received increasing support at several public companies. In May, over 60 percent of the shares of common stock outstanding at Career Education were voted in favor of withholding authority to elect the three director nominees. In addition, several companies—including Citigroup, Lowes and Dillards—have left the door open to consideration of majority vote policies.

According to Institutional Shareholder Services, majority elections have become "one of the most significant corporate governance issues this year," with shareholders at more than 60 companies voting on the issue.

"In recent years, the issue of majority voting for directors to the boards of public companies has emerged as a critical corporate governance issue that our board has addressed with today's decision," noted McKinnell at Pfizer. Indeed, earlier this year 38 percent of shareholders voting supported a resolution at Caterpillar’s annual meeting calling for directors to be elected by majority vote, and 48 percent of those voting at Gannett’s annual meeting supported a similar measure. Another resolution at Citigroup received 41 percent approval.

Model Changes?

Veasey

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 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," Veasey said at the time.

The day before the Pfizer announcement last week, the ABA committee—which is coincidentally co-chaired by Pfizer Vice President and Corporate Secretary Peggy Foran—released a "discussion paper" that analyzed possible changes to the Model Act. The paper, which weighs in at 32 pages, is intended to elicit comments from interested parties; the ABA committee will then decide whether to recommend any amendment to the Model Act. Specifically, the paper notes that the committee "is evaluating whether an amendment to the Model Act would be an appropriate response to the concerns of those seeking to give greater effect, in a non-contested director election, to votes cast against or withheld from one or more directors."

At the same time, the committee noted that was aware of the importance of any board’s ability to fill its vacancies, and to have the flexibility to deal with problems that could occur in the event of a failed election under

an altered default voting system. "Any proposal to amend the Model Act should avoid the consequences of a voting standard that would create uncertainty in the functioning of the election process or undermine the efficacy of the shareholder franchise."

According to the report, the committee is examining various alternative voting scenarios and their consequences. These alternatives include:

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."

Proponents of majority voting argue that the reform would change the current "symbolic" process—in which shareholders can withhold their votes but cannot vote against directors—to a more democratic and meaningful election; directors would be accountable to shareholders and could their board seats, as is the case under Pfizer's amended policies. Critics counter that majority voting would open a Pandora's box of unanswered questions and unintended consequences, ranging from reducing the candidate pool of prospective board members to destabilizing corporate boards.

COMMENTS

According to the Committee On Corporate Laws Discussion Paper On Voting By Shareholders For The Election Of Directors, the committee "seeks the input of knowledgeable and experienced persons about the optimal course of action to assure a clear, understandable and workable voting system."

Send comments to:

E. Norman Veasey

Chairman

Committee on Corporate Laws

1201 N. Market Street

Suite 1402

Wilmington, Delaware 19801

Comments and suggestions should be submitted by August 15, 2005.

Certain institutional investors have been particularly vocal regarding their support of majority voting. One of the more active sponsor of majority voting proposals, the United Brotherhood of Carpenters and Joiners of America, recently formed a working group to study issues relating to implementation of a majority voting standard. And—according to an update published by the law firm of Gibson, Dunn & Crutcher—the Council of Institutional Investors recently sent a letter to the heads of approximately 1,500 U.S. companies asking that their charters and bylaws provide that directors be elected by a majority of the votes cast.

So far, though, the ABA committee has refrained from weighing in on the issue. According to its discussion paper, the committee has "reached no conclusions on these issues, and we continue to approach the matter objectively."

The complete paper is available in the box above, right, and instructions for commenting on the paper are at left. Compliance Week will continue to update subscribers on related developments.

Portions of this article were excerpted with permission from

"Lawyers' Group Issues Majority Elections Paper," by

Ted Allen and Thaddeus Kopinski, as published in Institutional Shareholder Services' "The Friday Report,"

June 24, 2005. © 2005 Institutional Shareholder Services. Reprinted with permission.