The whole idea behind majority voting for the election of directors, to paraphrase ISS, is that it transforms uncontested elections from symbolic to democratic. This is because majority voting in its purest form would give shareholders veto authority over management candidatesâ€”authority not afforded to shareholders under the traditional plurality voting standard.
Critics maintain that giving shareholders this power would be problematic. They argue such power has the potential to destabilize the board because it could result in the sudden removal of directors. This, in turn, could adversely impact a companyâ€™s ability to comply with listing standards or other requirements for retaining independent directors or directors with financial expertise, alter the consequences of having a staggered board, and changecontrol contest dynamics. Further, it could negatively impact the mix of skills and expertise possessed by the board. Critics also argue that majority voting would reduce the pool of qualified candidates willing to serve as directors because of the embarrassing possibility of a candidate failing to receive the requisite majority of votes to be elected even when running unopposed. Finally, they argue that majority voting is simply unnecessary because the traditional â€œwithhold authorityâ€ option provides an adequate avenue for shareholders to express dissatisfaction with the board.
You would think that these objections are falling on deaf ears based on the number of companies that have adopted majority voting in the last few years (see here for statistics). In reality, however, to my knowledge not a single company has enacted a majority voting system that actually gives shareholders veto power over director candidates. So none of the critics’ concerns are actually implicated. While numerous companies have changed their voting standards from plurality to majority, because of the statutory holdover rule, an incumbent director nonetheless remains on the board even if the director fails to garner the requisite majority vote (and a board can ensure that all directors up for election are incumbents by having a resigning director step down and appointing a new director to fill the vacancy prior to the election). For an elaboration of these points, see my paper, Majority Voting for the Election of Directors.
A question Iâ€™ve been contemplating as of late is why the activist shareholders who have been largely responsible for the current majority vote movement appear satisfied with the results given there are ways to give majority voting more teeth. For example, the following bylaw amendment submitted by Professor Bebchuk at General Dynamics last year would actually give shareholders a form of veto power over director candidates: â€œIn no event shall a director stand for election if that director was elected for an immediately preceding term in an uncontested election in which he or she received more â€˜withheldâ€™ votes than â€˜forâ€™ votes.â€ See Beth Young’s comment to this post for more ways.
My working hypothesis is that many activist shareholders are assessed by how successful they are in getting corporations to adopt reforms. If they pushed a real reform like the above bylaw amendment, chances are much greater that it wonâ€™t be adopted, and this wouldnâ€™t be good for the resume. Or is it that they believe that toothless majority voting reflects the appropriate balance of power between a corporationâ€™s board of directors and its shareholders (yeah, right)?
Other possibilities beyond personal incentives and appropriate conservatism:
3) Ignorance: Many of the governance mavens don’t really know what they’re doing, i.e., can’t distinguish between toothless and impactful reforms
4) Laziness: They saw the formula for what got passed originally, and decided to go for the easy dissemination (a variant of the incentive theory, but without overstating the incentives)
5) Conspiracy: Many of the governance mavens are subtly bought off by the corporate powers that be to modulate their pressure.
I personally like the personal incentive theory, but would not underestimate ignorance or laziness. I only mention conspiracy because someone was bound to sooner or later.