UPDATING DEVELOPMENTS AND TRENDS IN MAJORITY VOTING STANDARDS
By Bradley A. Robinson
May 11, 2011
At the majority of public companies in the U.S., directors are still elected by the plurality voting standard - the directors who receive the most votes in an election win. However, ever since the notorious “Just Say No” Disney shareholder activist campaign in 2004, a “majority voting” policy has been adopted by many U.S. corporations. In fact, 76 percent of companies in the S&P 500 have adopted a majority vote standard in one form or another. However, the “majority voting” standard as adopted by many companies has started to be questioned by some institutional shareholders. Majority voting standards continue to evolve and companies would be well-advised to monitor and anticipate these developments.
The Original Majority Standard: The Director Resignation Policy
The alternative to plurality voting, the majority vote standard, was supported by most shareholder activists. Under this standard, a director would only be considered to have been elected, or re-elected, if that director received a “for” vote from a majority of the votes cast in an uncontested election. Today, however, the majority vote standard actually comes in three major versions. The original majority voting policy, considered by many companies to be a stopgap measure, was designed to appease shareholders without requiring the board to enact any changes. First popularized by Pfizer, companies adopt a policy, usually added to the company’s corporate governance guidelines, that requires a director who does not receive the support of a majority of the votes cast in an election to tender his or her resignation to the board. At this point, the board can decide whether to accept the director’s resignation or not. However, according to ISS, in 2010, while 95 directors at 54 companies in the Russell 3000 index failed to win a majority of the votes cast, nearly all kept their board seats. This really has not come as a surprise to many on either side of the issue and has prompted some in the industry to question the validity of this majority voting standard.
Majority Voting By-Law Changes
The original stop gap majority voting policy added to a company’s corporate governance guidelines is no longer considered ideal and shareholder activists and proxy advisors will generally not support a director resignation policy versus a proposal to amend the articles or bylaws. Activist and advisor objections lead to the second and, currently, the most frequently adopted version of a majority election standard, an amendment to the company’s governing documents. These amendments generally require shareholder approval to both add and remove directors. Otherwise, the text of the majority vote by-law amendment is usually identical to the director resignation policy which, as noted above, requires a director who does not receive majority support to tender his or her resignation to the board, with the board retaining the final word on whether or not that resignation is accepted. There are a number of permutations of the director resignation policy, as coupled with the bylaw amendment, that give the board various amounts of latitude in accepting or rejecting any given resignation. The vast majority of proposals and existing policies already in effect at companies reflect this version of the majority vote standard. The major proxy advisors and shareholder activists currently support this standard.
The “No Reappointment” Standard
The fact that the almost all of the directors that failed to garner a majority of the votes cast kept their board seats has prompted some in the industry to question the validity of these policies. In particular, the well respected shareholder rights group, the Council of Institutional Investors (“CII”), has approved an amendment to its majority voting policy to require directors who fail to receive majority support to step down from the board and not be eligible for reappointment. In support of its new policy, CII states that it “believes that majority voting policy should reflect the fundamental principle that the will of the shareowners should be respected” and that the current standard has become little more than an “advisory vote.” While it still remains to be seen whether this new, more rigid, standard will gain traction, it should be noted that CII members come from a variety of backgrounds, including some of the largest and most influential institutional investors in the world. As such, issuers and advisors would be well advised to track this newly proposed standard through the coming year.
Majority Voting Going Forward
Significant numbers of companies, both in the S&P 500 and among the general body of publicly traded U.S. stocks, will continue to receive shareholder proposals regarding the adoption of majority voting. Majority voting proposals typically receive more than 57 percent shareholder support as well as the support of all major proxy advisory services. Companies with larger institutional shareholder bases who rely on proxy advisory services for their voting direction on director proposals should expect an even larger portion of shares to be voted in favor of majority voting in director elections. They can also expect that, at some point, the advisory nature of majority voting policies will be attacked and be viewed as a substandard approach to the election of directors. Issuers should be prepared for this contingency by evaluating their directors and the standards of the proxy advisory groups.