Study Details Tougher Voting Standards for Board Elections

According to a press release, the firm’s ongoing study finds that over 16% of the companies in the S&P 500 have taken one of two forms of action, often influenced by strong stockholder activism: (1) adopting a binding bylaw which requires that corporate director nominees receive the support of a majority of votes cast, rather than a mere plurality, in order to be elected or (2) adopting a non-binding majority vote policy which requires that directors elected by a traditional plurality must offer to resign if they fail to receive the support of a majority of votes cast.

Until recently, virtually all directors of US public companies were elected under a “plurality” vote standard, which makes votes against a candidate meaningless as a practical matter, even if they constitute a majority of the votes cast.   A traditional plurality standard makes it impossible for a nominee slated by a board to lose an uncontested election, prompting many stockholder activists to consider director elections largely symbolic and unresponsive to their increasing demands for change and accountability in the boardroom, the release said.

A majority vote bylaw has greater legal significance than a majority vote policy, as it mandates that a director must receive a majority vote to be elected. Under a majority vote policy, a nominee failing to receive a majority vote would be elected, but would tender his or her resignation to the board for consideration. The board, however, would not be obligated to accept the resignation. Stockholder activists favor bylaws as a stronger and more effective measure to hold directors accountable. Of the 87 companies adopting majority vote provisions, 69 (79%) adopted policies, 14 (16%) adopted bylaws, and four (five percent) adopted both bylaws and policies.

Of the 73 companies adopting policies rather than bylaws, 59 (81%) included a provision that directors in contested elections need obtain only a plurality vote. By contrast, only 10 (56%) of the 18 companies adopting bylaws included a similar provision.

The study suggests that many companies adopted majority vote policies or bylaws in response to stockholder proposals or stockholder litigation.   According to Institutional Shareholder Services, trade unions have submitted at least 66 of approximately 140 majority vote proposals for the 2006 proxy season, a major force behind the majority vote movement. The number of proposals for 2006 reflects a marked increase from the 89 filed in 2005 and the 12 filed in 2004, per Institutional Shareholder Services. The study also highlights that majority vote bylaws or policies are sometimes announced as part of a package of corporate governance reforms.

Almost all of the 87 companies (95%) identified in the study as having adopted a majority vote policy or bylaw employed a “votes cast” rather than a “votes outstanding” standard. A bylaw tied to a majority of outstanding votes could make it extremely difficult to elect a director, while a policy based upon outstanding votes creates a high bar for requiring a director’s resignation.

The complete study, “Survey of Majority Voting in Director Elections,” can be downloaded  here .