FEW ISSUES EVOKED MORE interest among governance activists and the companies they targeted this past proxy season than proposals for majority voting in elections of directors. This article assesses where things stand now.
The debate revolves around three current practices:
Election of directors by plurality voting is the default rule under most state corporation statutes. Nominees who receive the most votes "for" election are elected, up to the number of seats being filled. "Withhold" votes may send a message, but they otherwise don't affect outcomes.
Under the "holdover" rule, incumbent directors remain in office until their successors are elected and qualified.
Most elections involve the same number of nominees as directorships to be filled. Thus, incumbent directors usually effectively choose their successors. In uncontested elections, majority voting for directors seems unassailably simple and democratic. If there are more votes "not for" than "for" a nominee, why should that nominee be elected?
When shareholders first began asking this question, some companies responded by adopting corporate governance policies. These policies did not upset the plurality default rule. Instead, they stated that an incumbent director who receives more "withhold" votes than "for" votes would tender his or her resignation. The other directors would consider the tendered resignation, decide within 90 days whether to accept it and publicly announce their decision and rationale.
These policies, however, did not resolve matters. Institutional Shareholder Services indicated it would consider withdrawing recommendations in favor of majority voting proposals by shareholders if a company had adopted a governance policy. But there was no assurance that any particular policy would suffice. The SEC took the position that companies with such policies have not "substantially implemented" majority voting for purposes of excluding a shareholder proposal, citing Rule 14a-8. And because enforcing the policies was problematic under many state statutes, some governance activists remain unsatisfied— although there is evidence that having such a policy helped defeat majority voting shareholder proposals during the 2006 proxy season.
Other companies have gone further, adopting majority voting amendments to their organizational documents. General Electric adopted a bylaw amendment that closely resembled the governance policies that had been adopted. Intel made majority voting the bylaw standard for uncontested elections. Because the problem of the "holdover" rule remained, these bylaws also establish procedures for the tender and consideration of a resignation by any director who does not attain a majority when standing for reelection. But conditional resignations still raised enforceability questions under state corporation statutes.
Changes in Delaware, effective August 1, 2006, retain the plurality standard as the default. But they enable majority voting bylaws by specifying that an irrevocable director resignation can be effective if the director fails to achieve a specified vote and by permitting shareholders to adopt a voting bylaw that directors cannot subsequently amend. These changes give Delaware companies the tools to establish effective majority voting bylaws.
Similarly, changes proposed to the American Bar Association's Model Business Corporation Act, while also retaining the plurality default, would enable companies incorporated in Model Act jurisdictions to implement effective majority voting. (Such legislative changes are not effective in a jurisdiction until approved by the legislature of that state.)
It is by no means clear that all companies must address the majority voting issue immediately, either with a governance policy or bylaw amendment. For one thing, companies with governance policies will not necessarily ward off more restrictive bylaw proposals in the future. Nor are companies with a bylaw that can be amended by directors immune from proposals for a by-law that can be amended only by shareholders. Furthermore, in many companies the shareholder base is largely uninterested in majority voting.
Still, boards that have yet to evaluate this issue should discuss it at an upcoming meeting. To facilitate the evaluation, management should provide an analysis of:
The election process that currently applies, which will depend on the company's charter, bylaws and state of incorporation.
