Majority rules

Director elections are under the microscope this proxy season with a small but influential group of companies testing the majority voting system following pressure from union fund activists. This exercise possibly signals the final demise of the SEC’s highly controversial shareholder access rule, which has been shelved for months, with no timeframe for its passage. 

During a recent speech at the Yale Law School Center for the Study of Corporate Law, SEC commissioner Roel Campos said: ‘I must admit I am becoming a pessimist [about the adoption of the shareholder access rule].’ Patrick McGurn, vice president of Institutional Shareholder Services (ISS), goes further. ‘The SEC shareholder access rule is dead – and has been for some time,’ he declares. 

The majority voting system, which is being tested by a group including ChevronTexaco, Gap, Intel, JPMorgan Chase, Merrill Lynch and Time Warner, involves shareholders receiving ballots on director nominees. Shareholders can then place ‘yes’, ‘no’ or ‘withhold’ votes. In order to win a seat, a director nominee needs to receive a majority of yes votes to get elected or retain his or her position. Under this system, the issue of how withheld votes will be dealt with and what to do about broker votes is still unclear. It’s also uncertain whether the votes will be legally binding. 

Majority voting is supported by several shareholder groups but falls short of the ‘right to nominate’ shareholder director candidates that some investors are seeking. Under the SEC shareholder access proposal, shareholder nominees would be on the proxy alongside management’s slate, provided certain thresholds are met. 

According to McGurn, this is not going to happen, at least not in the near future. ‘Majority voting is more about holding the board accountable than providing nominee choice,’ he explains. Under the new approach, shareholders will not normally be able to put candidates forward but they do have more power to remove directors who have not performed to shareholders’ standards. In the event of it becoming clear that a nominee is not going to pass the vote, most boards will engage in a dialogue with the major shareholders to identify a candidate who would be acceptable. 

In that sense, shareholders will become more enfranchised because they will gain a greater say in board appointments. 

Calpers and ISS support majority voting. ‘We are entirely in favor of the concept of majority shareholder voting and will be incorporating it into our board approval governance guidelines,’ notes Brad Pacheco, Calpers spokesman. ‘Calpers will encourage all companies it is involved with to institute the system.’

Should the system be widely accepted – which seems likely – much of the responsibility will fall on corporate secretaries to facilitate changes. In the event of a majority ‘no’ vote, they will have to meet with shareholders and other involved parties to communicate the situation and find a mutually acceptable solution. This may be more easily said than done but some companies are already starting to evaluate their internal procedures in order to minimize the risk of a shareholder revolt come proxy time.