According to this SocialFunds.com article, the hot issue with activist shareholders for the upcoming proxy season is majority voting for the election of directors. ISS estimates that shareholder proposals for the adoption of majority voting will be submitted to over 100 companies (up from 79 last year). These proposals generally call for a bylaw amendment changing the standard for election of directors from the default of plurality established by state corporate law to majority. The beef with the prevailing plurality standard is that a director can win while only receiving a single affirmative vote. With a majority voting standard, a candidate is not elected unless he or she receives a majority of votes cast.
As noted in the article and as Iâ€™ve blogged about before (here), a number of public companies have taken a pre-emptive strike approach and voluntarily adopted so-called majority voting standards in an effort to stave off the activists. I say â€œso-calledâ€? because they havenâ€™t really adopted a majority voting standard. What they have done is amended their corporate governance guidelines to provide that any director who receives “withhold” votes representing a majority of the votes cast for the director’s election is required to submit his or her resignation to the nominating committee which would then advise the full board whether it thinks the resignation should be accepted. The director would still be elected even if only one vote was cast in the directorâ€™s favor (assuming a quorum at the meeting), and the board could choose not to accept the resignation. If the board did accept the resignation, the board would be entitled to simply appoint whomever it chooses to fill the vacancy. Hence, modified plurality system is a much more accurate label.
Hewlett-Packard is one of the companies that has gone with a pre-emptive strike approach. The strike, however, has failed. The United Brotherhood of Carpenters Pension Fund submitted to HP the following resolution for inclusion on the HP proxy pursuant to Rule 14a-8:
Resolved: That the shareholders of Hewlett-Packard Company (“Company”) hereby request that the Board of Directors initiate the appropriate process to amend the Company’s governance documents (certificate of incorporation or bylaws) to provide that director nominees shall be elected by the affirmative vote of the majority of votes cast at an annual meeting of shareholders.
As is typical, HP wrote to the SEC arguing that it does not have to include the Fund’s proposal in its proxy. HP based the argument on Rule 14a-8(i)(10) which permits a company to exclude a shareholder proposal if the company has substantially implemented the proposal. HP claims that the modified plurality system it put in place in November constitutes a substantial implementation of the Fund’s proposal. The SEC disagrees. The Fund’s proposal will be on the HP proxy. Whether it gets the requisite shareholder votes or not remains to be seen.
Update: In a comment below, Geoff asks “Do we have (by which I mean, should I have seen but missed while reading blogs) data on the outcomes of last yearâ€™s 79 proposals?” According to this CFO.com article, of the 79, 55 went to a vote and 13 passed. I believe most of the 55 (including the 13 that passed) were phrased as non-binding proposals instead of binding bylaw amendments which appears to be the norm this season.
A Wachtel, Lipton memo quoted in the SocialFunds article states:
In light of the hardening of the position of shareholder activists and the now-unstoppable momentum toward majority voting for directors, it is advisable for companies to consider carefully whether their individual circumstances indicate a persuasive reason to resist the trend . . . . It appears clear that, given the high level of shareholder support, the strong commitment of influential institutional shareholders and institutional shareholder advisory services, and the lack of powerful opposition, majority voting will become universal. (emphasis added).