When the California Public Employees Retirement System recently singled out six companies for its latest annual “Focus List” of businesses with poor corporate governance performance, five shared at least one fault: requiring a super-majority of votes to change bylaws or charters.
Brocade Communications, for example, requires a two-thirds majority for shareholders to amend its bylaws; Cardinal Health and Mellon Financial insist on three-fourths, while OfficeMax and Sovereign Bancorp as much as four-fifths for some changes.
CalPERS, always a heavyweight in discussions to bolster shareholder rights, now wants to bring super-majorities into the spotlight. It has already filed resolutions to end such requirements at Brocade and Mellon.
“The super-majority subject is in our top half-dozen or so targeted corporate governance issues during the current proxy season,” CalPERS spokesman Clark McKinley says. Faced with voting requirements of 75 or 80 percent, pension funds and other shareholder activists often find changing bylaws and charters virtually impossible, he says.
“Companies erect this barrier to defend against takeovers, but the downside is it’s difficult to muster the required number of ‘for’ votes to get changes through,” McKinely says. “The result is that corporate boards and management aren’t as responsive or accountable as they should be to shareholders—the owners of the company.”
Of the five companies on CalPERS’ Focus List for super-majority voting, only Mellon offered any comment on the critical attention. In a statement, the company said it was disappointed to be included on the list, adding that “Mellon senior executives and an independent member of Mellon’s board have been engaged in a constructive, responsive dialogue with CalPERS for the past several months regarding the matters they raised.”
While Mellon did not specifically address the super-majority issue, the company also stated that in its 2006 proxy, it communicated its commitment to reviewing all corporate governance matters that relate to institutional takeover efforts, and that it has already indicated management’s intention to introduce a proposal to declassify Mellon’s board.
The other four companies declined to comment for Compliance Week. (The sixth company on CalPERS’ list, Clear Channel Communications, was not faulted for super-majority requirements.)
Institutional Shareholder Services estimates that about 40 percent of the roughly 2,000 of the most widely traded U.S. companies require super-majorities to change the charter or bylaws, although it admits it does not have the exact numbers. ISS also estimates that about 15 percent of the group also require super-majority voting to approve a merger.
ISS’ official policy is to vote against proposals to require a super-majority shareholder vote, and vote for proposals to lower super-majority vote requirements. Most portfolio managers oppose super-majority provisions as well. For example, T. Rowe Price notes on its Web site that it “generally opposes anti-takeover measures and other proposals designed to limit the ability of shareholders to act on possible transactions,” and cites super-majority voting as one.
Fighting The Power
Many different types of super-majority policies exist. Some require an outsized vote only to amend charters, some to change by-laws; others are required to approve mergers or various corporate transactions. Companies might also have more than one super-majority policy.
McGurn
Changing one super-majority policy is relatively easy, says Patrick McGurn, executive vice president of ISS. But, he adds, “if there are eight spread over the charter and bylaws, you will need amendments.” Ann Yerger, executive director of the Council of Institutional Investors, agrees: “They are not easy to get rid of.”
Still, the number of shareholder resolutions calling for the elimination of super-majority voting has increased for the past few years, many of them receiving majority support. In 2003, ISS tracked 10 such resolutions, where nine went to a shareholder vote and received average support of 60.5 percent. In 2005, 24 resolutions were filed, with 15 going to a vote and receiving average support of 63 percent.
So far this year, ISS has counted 40 proposals to amend super-majority vote requirements, with 25 of them either going to a vote already or likely to be voted on later this spring.
Which companies have already seen a super-majority showdown? A shareholder proposal at IBM passed with 61.6 percent of the vote. Another at Lockheed Martin passed with 57 percent, while a shareholder proposal at Goodyear Tire & Rubber sailed through at 73 percent. On the other hand, a shareholder vote on super-majority requirements flopped at AT&T’s annual meeting with only 27.8 percent support.
Meanwhile, Pfizer shareholders approved a management proposal to amend the drug giant’s charter to eliminate super-majority vote requirements, and UnitedHealth—embroiled in a scandal over back-dating of stock options—has said it will recommend doing so at its 2007 annual meeting.
Most shareholder proposals calling for the elimination of super-majority voting have been sponsored by individuals such as John Chevedden, an activists who has filed the resolutions at Southwest Airlines, Citigroup, Lockheed and elsewhere, or by CalPERS. Absent so far are large trade unions, which have aggressively pushed for elimination of poison pills and staggered boards, as well as for adoption of majority voting for election of directors.
Brandon Rees, research analyst for the AFL-CIO Office of Investment, will only say that “we obviously support” efforts to end super-majority requirements. Likewise, Yerger concedes that while CII supports abolition of super-majority requirements, “they have not been a hot point” among CII members so far.
Chevedden
Even Chevedden himself, when asked whether this issue is as important as eliminating poison pills and staggered boards, admits, “I doubt it,” adding, “the pill is probably one of the most important ones. Staggered boards are high up there too.”
McGurn agrees. “It’s a non-controversial policy,” he says. “The consensus is against it. It generally does well. It’s just not a controversial issue. It’s the low hanging fruit of corporate governance.”
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