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In the Minority on Majority Voting

Apple heads the waning number of large companies fighting majority voting for directors.
Sarah Johnson, CFO.com | US
January 27, 2011

At Apple's annual meeting next month, the company's seven directors up for election — including CEO Steve Jobs, who recently took a medical leave of absence — will very likely keep their seats. Six of them have been on the board for at least three years and one board member, Ronald Sugar, former chief executive of Northrop Grumman, was appointed to fill a vacancy this past November. None of the spots is contested.

The company's director elections could be slightly harder to predict next year, however, depending on one of the six ballot decisions to be made at the February 23 annual meeting. An influential institutional investor wants Apple to adopt majority voting for its directors, which would give shareholders more say about who sits in the boardroom.

Just a few years ago, companies were reluctant to adopt such policies. But majority voting in uncontested elections has since grown in popularity at large-cap businesses, thanks to investor pressure and companies' aversion to publicity that could make them appear unfriendly to investors. Shareholders supported majority voting for directors at more than half of the companies that held a vote on the issue last year (see "Majority Rules," below). Nearly 70% of S&P 500 companies now have a majority-voting standard, according to Institutional Shareholder Services.

Indeed, the investor behind the proposal at Apple's meeting, California Public Employees' Retirement System, has been on a quest all year to get more large companies to replace their plurality-voting systems. Calpers's targets so far have been the largest of its portfolio companies; it plans to go after midsize and smaller companies in the near future. Thus far, the giant pension fund has received a commitment to majority voting from 28 of the 58 businesses it has approached on the issue since last spring, including Costco, MasterCard, and UPS. Apple is the most prominent holdout.

Apple claims that if it were to adopt a majority-voting policy, its directorships would be subject to the vagaries of whether or not shareholders show up to vote. The change "could make it significantly more difficult for a director to be elected even when shareholders are satisfied with that director and would prefer that he or she be elected," the company said in its proxy statement filed earlier this month. (Reaching a quorum has become a concern for companies after a new exchange rule passed last year prohibited brokers from voting in director elections without their clients' direction. It's mostly an issue for companies with a large number of retail investors.)

Moreover, Apple is concerned about its ability to quickly fill an empty seat if a director does not receive a majority of shareholder votes (a rare occurrence). Under the laws of California, where Apple is incorporated, a director must step down within 90 days of a negative vote. In contrast, the board of a Delaware-incorporated company can reject a director's resignation, in effect overriding the shareholder vote.

Investor groups have been pushing for more input on board seats, and majority voting is one area where they've made progress since the latter half of the past decade. "It basically enables shareholders to have a say on who the directors are and to reject a board or board member who they believe is not thinking in the interest of the shareholders," explains Peter Clapman, chairman of Governance for Owners USA, a corporate-governance advisory firm.

Companies that don't have majority voting use a plurality system, in which a director can be reelected even if only a few shareholders give the director approval, since voters do not have the choice to vote "against" a candidate. But with majority voting, shareholders do have that choice, and to be elected, each nominee must get more votes in favor of his or her election than against it. "Essentially an election is meaningless unless you can vote no as well as yes," says Anne Simpson, senior portfolio manager at Calpers.

Calpers and others also want proxy access, or the ability to actually nominate directors, but that issue has been on hold pending a court case between the U.S. Chamber of Commerce and the Securities and Exchange Commission. For majority voting, Simpson says Calpers tries to reach a compromise with companies before making a shareholder proposal. Voluntary adoption of majority voting "is a smart thing to do," observes Clapman. "It takes the issue off the table and lets other companies argue with their shareholders over it."

Smaller businesses that have been able to ignore the issue so far will soon have to pay attention, as investors continue to go down the list of portfolio companies that don't offer majority voting. "There has been a tendency for smaller companies to whistle by the graveyard rather than face [the issue]," says Scott Stanton, chairman of Morrison Foerster's corporate practice group. "So far shareholders haven't asked them to do it."

Majority voting


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