Risk & Compliance

Majority Rules?

Should winning or keeping a seat on the board require a majority of votes? Despite three defeats for that proposal last week, majority voting resol...
Marie LeoneMarch 24, 2006

Corporate executives and investors got a glimpse of how one of the hottest issues of the 2006 proxy season may play out following the defeat of three majority voting resolutions last week. The trio of resolutions to change the way board elections are held were submitted by shareholders of Analog Devices Inc., Hewlett-Packard Corp., and Ciena Corp. All three received more than 30 percent of the vote — a respectable showing, experts say, but not enough to carry any of the proposals to victory.

The Analog Devices resolution won 31 percent of the vote, while Hewlett Packard and Ciena received 45 and 44 percent of their shareholders’ votes respectively. The average support for a majority voting resolution in 2005 was 44 percent, significantly up from the 12 percent average in 2004, according to proxy advisory firm Institutional Shareholder Services (ISS).

The three resolutions were the first majority voting proposals to come to a vote in 2006. But it’s too early to tell how the rest of the season will shape up, says Patrick McGurn, executive vice president and special counsel at ISS, who estimates that 130 more proxy resolutions on majority voting are in still in play.

A majority voting standard, as the term suggests, means that board directors must garner a majority of votes cast by shareholders in order to win or retain their seats. This method of conducting board elections contrasts with the plurality method, which is still the standard used by most U.S. public companies. Under the plurality model, directors who receive the most “for” votes are elected; there is no “against” option, and votes that are actively “withheld” or simply not cast are disregarded in the tally.

Despite the early defeats, the majority voting proxy campaign “has been one of the most successful” efforts in memory, asserts McGurn. He calls the growth in the number of resolutions “extraordinary,” noting that over the past 12 months, more than 150 resolutions have surfaced, compared to the mere 17 that were on the table in the prior 12 months.

Not all shareholder proposals are taken to a vote. Some resolutions are withdrawn by shareholders before they reach annual meetings because companies voluntarily adopt majority voting standards to avoid public votes, says Claudia Allen, a partner with Chicago-based law firm Neal Gerber and Eisenberg LLP, and chair of its corporate-governance practice. Recently, proposals at Dell, Gannett Co., Motorola, Pepco Holdings, and Federal Realty Investment Trust, were withdrawn after those companies voluntarily adopted majority voting.

Whether resolutions make it to the annual meeting or not, investors are being heard. In a March update of a Neal Gerber study authored by Allen, the attorney estimates that since 2003 — when the issue was first placed on proxy ballots — 116 companies were pressured by shareholders to adopt majority voting standards. That includes 29 companies that took action since February, including Allstate, Berkshire Hathaway, and Dominion Resources. The study also notes that 79 of the 116 companies listed in the study are members of the Fortune 500, including AIG, Chevron Texaco, General Electric, Intel, and Pfizer.

“The vote to watch,” contends McGurn, will be at the Novell Inc. annual meeting on April 6. The software company’s shareholders will be the first owners in 2006 to cast ballots on a majority voting resolution without having any type of alternative election structure already in place. The Novell vote will give the “first clean read” of how much support a majority voting resolution can garner “without being affected by the prior adoption of an alternative standard, like the [so-called] ‘plurality-plus’ mechanism.”

First adopted by Pfizer, as well as the three companies that held the elections last week, the plurality-plus structure layers a director’s resignation provision over the plurality voting scheme. Essentially it’s a step toward majority voting, but stops short of immediately ousting directors who don’t receive majority support. Under plurality-plus, if a director nominee doesn’t receive majority approval from stockholders, the nominee is required to tender his resignation. However, the director remains on the board for 90 days, or until a replacement is elected.

Some shareholders think keeping a weakened director on the board defeats the purpose of majority voting rules. Others simply would like to see current toothless policies become binding corporate bylaws. Currently, Intel Corp.’s model is considered the governance “gold standard,” says McGurn, who explains that the chipmaker’s rule is a binding corporate bylaw that includes a stringent director resignation policy. He expects the Intel model to be the benchmark for shareholder activism going forward.

McGurn also predicts that by the end of proxy season, this year’s crop of majority voting proposals will, on average, muster the same support level as last year — around 45 percent. But until he see what the Novell and other pivotal votes reveal, he’s not counting out a second surge in adoption as companies move into the third quarter.