One of the purported advantages of blogging is it allows a blogger to float a “trial balloon†relating to traditional scholarship he/she has in the works. Readers then comment on the balloon which leads to an improved piece. So here’s my trial balloon: I’ve been working on a piece about majority voting for the election of directors. As you may know, the “majority vote movement†was launched in 2004 in the wake of the death of the SEC’s shareholder nomination proposal. The movement continues to gain momentum, and to date has been surprisingly successful. As of October 2006, more than 250 public companies, including at least 36% of S&P 500 companies and 31% of Fortune 500 companies, had implemented some form of majority voting (see Study of Majority Voting in Director Elections by Claudia H. Allen).
What I’ve been considering is whether majority voting as implemented by these 250 companies is little more than smoke and mirrors.
Here’s why. Most of the 250 companies have adopted one of two basic forms of majority voting—plurality plus (a/k/a modified plurality or the Pfizer model) or what I call majority plus (a/k/a true majority voting or the Intel model) (I don’t use the term true majority voting because I reserve that term for a system that would actually give shareholders the power to veto a director nominee, which, as discussed below, majority plus does not). The breakdown is about 72% plurality plus and 24% majority plus.
The plurality plus approach does not establish a true majority voting standard. The voting standard remains at the statutory plurality default which means that in an uncontested election a director nominee who receives more “withheld†votes than “for†votes is still elected, even if he receives only a single “for†vote. The approach does, however, add a resignation requirement. Specifically, a nominee who fails to receive a majority of “for†votes is required to promptly tender his or her resignation.
In contrast to the plurality plus approach, the majority plus approach does establish a true majority voting standard (through a charter or bylaw amendment). If a director nominee does not receive the requisite majority vote, he is not elected. Note, however, that an incumbent director up for reelection in an uncontested election whom does not receive the requisite majority vote will nonetheless remain as a director as a result of the statutory holdover rule (the rule that says an incumbent director remains in office until her successor is elected and qualified). To address this issue, the majority plus approach also includes a resignation requirement. Specifically, an incumbent director who fails to receive the requisite majority vote is required to tender his or her resignation.
Here’s the smoke and mirrors part. Under every plurality plus and majority plus system I’ve seen, discretion is left to the board to determine whether or not to accept a resignation. This means that the board can choose to retain an incumbent director even if the director “lost†by a landslide. Many have noted that “practical pressure†will keep a board from doing so. Regardless, if they accept the resignation, the existing board, not the shareholders, choose the person to fill the vacancy. At the end of the day, under the traditional plurality standard and the new majority standards, all directors are ultimately selected by the existing board regardless of how shareholders voted. Majority voting, as implemented in practice, simply does not give shareholders veto power over a director.
Note that in theory under a majority plus system shareholders would have veto power over a non-incumbent director. This is because under such a system if a non-incumbent does not receive the requisite vote he will not be elected and since he is not already a director the holdover rule will have no impact. In reality, however, a company can easily ensure that its slate is composed entirely of incumbent directors. It merely needs to have a resigning director step down in advance of the annual meeting. The board could then exercise its statutory power to fill the vacancy with the new nominee prior to the election, thereby giving her incumbent status.
I’m not aware of anyone countering the above points, but I expect they would argue that majority voting ramps up the “practical pressure†on the board to follow the will of the shareholders. I’m skeptical of a ramp up claim because plenty of practical pressure can and has been applied under the traditional plurality system through “withhold authority†campaigns (see Disney and Federated).
The cynic in me thinks that the majority vote movement has been so successful because it’s a no-brainer for public corporations. A corporation gives up little, if anything, in implementing it and can then put out a press release touting this latest example of their “long-standing commitment to responding to the concerns of our shareholders†(see here) and/or get activist shareholders off its back.
