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Columnist
Public companies may soon have difficulty resisting the call of investors to end plurality voting for directors. By Doug Raymond Recent corporate scandals have renewed demands that directors be more directly responsive to stockholders. Under the banner of “accountability,” institutional stockholders and others have presented companies with an increasing number of stockholder proposals seeking to require majority approval of directors, rejecting the plurality vote standard that applies to most corporations. While “majority rule” and stockholder empowerment are attractive concepts, directors should think carefully before adopting these measures, which may have the effect of shifting power from the board of directors to organized groups of shareholders who are not constrained by the directors’ fiduciary duties. Under majority approval, directors must be approved by more than 50% of the votes cast (or in some versions by 50% of the total potential votes, whether or not actually voted). Under this system, if no candidate receives more than 50% of the vote, no one is elected and a second election must be held. By contrast, under plurality approval, the candidate receiving the most votes becomes director, even if she did not receive a majority of the votes. As a result, under a plurality system a slate of directors will be re-elected no matter how little support they receive -- so long as the election is not contested, or, if contested, so long as they garner more votes than the contenders. The Default Rule Under most state corporation laws, including Delaware’s, the plurality standard is the default rule for directors’ election. Although these corporate laws generally permit shareholders to adopt majority approval as the standard, historically few public companies have done so. Critics have pointed out that, under plurality voting, the incumbents almost always win re-election, particularly as they control the proxy mechanism. Since a proxy campaign is expensive and time-consuming, stockholders rarely run opposition candidates. According to the critics, this system is contrary to ideals of corporate democracy, dilutes director accountability, and contributes to the sort of clubby atmosphere that impedes exercising effective oversight. Proponents of majority voting also note that majority voting for directors is the standard in many countries outside of the United States, including the United Kingdom, France, and Germany. Advocates of the majority approval standard have recommended outright changes to the corporate laws to require a majority vote to elect directors. They also are seeking to persuade corporations to amend their bylaws to adopt the majority standard. Some have proposed that a director’s election would fail unless he received at least some baseline of support, even if less than a majority (such as one-third), or that directors who do not receive that threshold of support be limited to a shortened term or subject to removal by the board. Many companies have already adopted provisions of this nature. Notably, Walt Disney Co. recently amended its bylaws to provide that any director who receives a “withhold” vote representing a majority of the votes cast for his or her election be required to submit a letter of resignation to the board’s governance and nominating committee, which in turn must consider recommending to the full board whether to accept the resignation. Automatic Data Processing Inc. adopted a provision that board members will be elected by a majority in uncontested elections, but still by a plurality in contested elections. Need to Exercise Caution Although greater stockholder democracy may sound attractive, boards should exercise caution before changing the method of electing directors. For all its limitations, the plurality voting system has a long history in the United States as an effective way to ensure decisive elections for directors, without the need for holdover directors or expensive and time-consuming run-off elections. Reform proposals have sometimes, but not always, addressed the consequences of holdover directors or the consequences of no director receiving sufficient votes for re-election. Also, pending regulatory and legislative reforms may affect the election process in ways not yet apparent. At the time of this writing, the New York Stock Exchange is considering changes to the proxy process to eliminate broker discretionary voting. If these proposals are adopted, it could become significantly more difficult for many companies to solicit proxies from their stockholders, and, in any event, proxy solicitation costs would likely increase. While the NYSE is considering these reforms, there have also been moves by the American Bar Association and the Delaware Bar Association to consider recommending legislative reforms to state corporate laws concerning plurality voting. Any of these possible changes would alter the landscape for board elections. A Power Shift One of the chief concerns with a majority voting standard for directors is its potential to shift the balance of power from the board to special interest voting blocks. Boards adopting majority voting might as a consequence empower vocal minority stockholders on a range of issues that many believe are best decided by the board of directors. Some investors act as “one-issue voters” on topics ranging from disarming poison pills and other defensive measures, to investment policies, workplace conditions, and global warming. Directors faced with the prospect -- or threat -- of significant “withhold” votes that might jeopardize their re-election understandably could feel pressured to accede to the demand, even if they did not consider it to be in the best interests of the corporation. Although criticisms of plurality voting will continue, directors should resist the rush to adopt majority voting provisions. However, such restraint may not be easy, and some investor groups have already threatened to wage public campaigns to withhold votes from directors who do not support the change. While majority approval may one day become the standard for directors’ elections, it has the potential to significantly change the balance of authority of the directors and the stockholders, especially on the issues that have been actively contested in the area of stockholder non-binding proxy statement proposals. For this reason, it is particularly important to proceed with caution. |
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| Doug
Raymond is a partner in the law firm Drinker Biddle & Reath LLP and
heads its Corporate and Securities Group (http://www.drinkerbiddle.com).
He is a regular columnist for Directors & Boards,
writing the “Legal Brief” column in each edition. He can be contacted
at douglas.raymond@dbr.com.
Patrick Lord, an associate with the firm, assisted in the preparation
of this column, a version of which originally appeared in the Fourth
Quarter 2005 issue. Copyright © 2005 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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