Withhold Vote Gets Rare Majority At Career Education

The Securities and Exchange Commission may be dragging its feet on its proxy access proposals, but that hasn’t stopped shareholder activists from taking matters into their own hands. This proxy season, they have proposed scores of non-binding resolutions calling for companies to require directors be approved by a majority of voting shareholders in order to serve on a board.

For the past couple of years, activists have also mounted campaigns urging shareholders to withhold their votes from nominees they oppose in order to pressure companies to remove those directors from corporate board slates.

Although these initiatives have been receiving increasingly strong support, they still rarely attract majority support. This is why it was so significant that at the recent annual meeting of Career Education, the company reported that approximately 62 percent of the shares of common stock outstanding were voted in favor of withholding authority to elect the three director nominees—Dennis Chookaszian, Robert Dowdell and chief financial officer Patrick Pesch.

Savino

“This is an exceptionally rare circumstance,” asserts Angelo Savino, partner at Mound Cotton Wollan & Greengrass.

Adds Greg Taxin, chief executive officer of Glass Lewis & Co.: “Shareholders delivered a pretty historic rebuke of the board and its practices.”

In fact, Steve Bostic, the dissident shareholder who led the “vote no” campaign, estimates that more than 80 percent of shareholders who actually voted withheld their votes from the three directors.

Seven Companies

Historically speaking, it is extremely rare for withhold votes to garner more than 50 percent of votes. In fact, according to Patrick McGurn of Institutional Shareholder Service, during 2004 withhold votes reached a majority in just 12 director elections at seven companies—AvalonBay Communities, ExpressJet Holding, Federated Department Stores, Group 1 Automotive, Kilroy Realty, Maximus, and Pediatrix Medical Group.

And that’s despite the fact that the tactic enjoyed a high profile during the 2004 proxy season, as CalPERS withheld votes from the directors at about 90 percent of its holdings, mostly because it opposed any audit committee member who allowed the outside auditor to provide non-audit services. The most high profile incident last year was the 45 percent withhold vote against Walt Disney Chief Executive Officer Michael Eisner.

Career Education, which runs for-profit colleges, has had its share of recent troubles. It has seen its stock halve to around $35 in the past year amid a formal inquiry by the Securities and Exchange Commission and an investigation by the Justice Department.

In early April, the company said it was informed by the SEC's Division of Corporation Finance that the regulator completed its review and “does not at this time, have further comments.” The company, however, added that it is still subject to an investigation by the SEC's Division of Enforcement. Then in May, the company announced that an independent investigation found wrongful conduct by individual employees of the company, but specifically found that the wrongful activity was not directed or orchestrated by the company's senior management. Career Education has also been the target of private lawsuits.

Though the company has said it has undertaken a number of steps to improve its internal controls in both the finance and compliance areas—including the further development and expansion of its compliance infrastructure—dissident shareholder Bostic still pushed for the withhold vote; his efforts received support from ISS, Glass, Lewis, and Proxy Governance Inc.

In addition to pushing for the withhold vote, Bostic—who owns more than 1 million shares after selling his company to Career Education in 2001—also sponsored three shareholder resolutions that each received majority support: to declassify the board, rescind its shareholder rights plan, and allow stockholders holding roughly one-third of its common stock to call a special meeting of stockholders.

Transparent Posturing?

Despite the votes, Career Education declared victory. In its press release, it announced that “stockholders re-elected” the three directors, which was factually correct given the company’s plurality method of tabulating director votes. “It appears the company is treating them [the withhold votes] as abstentions rather than votes against,” says Savino.

At the annual meeting, Career Education also announced that it would add two directors to its current total of seven.

The company also said after the meeting that its board had directed the nominating and corporate governance committee to conduct an evaluation and provide the board with recommendations by Aug. 31, 2005. "As we have been developing a world class compliance organization over the past year, our goal is to be a corporate governance leader," John Larson, Career Education's chairman and chief executive officer, said in a statement announcing the official results of the meeting.

Block

Janice Block, the company’s senior vice president and general counsel, acknowledges in an interview that, "Shareholders want to see stronger governance measures." Block asserts that the company has been speaking daily "if not hourly" with shareholders, and stresses the company is actively seeking to fill those two new director positions and is "actively reevaluating every governance feature."

Block also adds, "We welcome Bostic's suggestions."

Bostic, however, is unimpressed. “It’s all posturing, but very transparent,” he says in an interview. Bostic says he is mailing a survey to the 100 largest shareholders, asking them to rate the company on 25 criteria, including such key operating factors as its effectiveness of recruiting students, graduation rates, and the ability of its graduates to find jobs.

Then, on July 1, he plans to hand the company a list of five nominees for directors and call for a special shareholder meeting so he could put up the slate.

Career Education's Block, however, stresses, "Only the board of directors can call a special meeting. It's one measure we are evaluating."

Blood In The Water

However the Career Education situation plays out, governance experts believe it could have an impact on future director battles. In addition, high-profile battles like this one also attract attention to a company's low stock price, which could make the company an acquisition target.

In fact, ISS’ McGurn thinks Career Education’s stock collapse and the current controversy surrounding the company could open the door for a potential hostile acquirer. “There is blood in the water,” he explains. “If this doesn’t put the company in play for someone looking to pick up assets, I don’t know what does.”

Bostic, however, says it’s would not be that easy for a raider to successfully take over Career Education.

For one thing, the company still has its poison pill. In addition, if there is a change of control, the company must be reaccredited by key educational groups, such as the Southern Association of Colleges and Schools. According to Bostic, this isn’t exactly a trivial consideration, and any potential acquirer risks not receiving the backing from these groups. “That’s the ultimate poison pill,” he asserts.

In any case, many other dissidents and companies as well will be watching closely how this battle plays out. Adds ISS’ McGurn: “This is a shot across the bow to medium and small market companies that this issue is not just for large companies.”