There has been much discussion over the last few years about companies adopting a majority voting standard for director elections. And, there has been great progress in this area among large U.S. companies. Some observers have commented that this proactive adoption of majority voting should serve as a signal that no additional shareholder rights or mechanisms are necessary to provide greater board accountability. However, a recent study conducted by The Corporate Library finds that the proliferation of majority voting is limited to large companies, meaning, according to The Corporate Library, that calls to reform director elections should not be so easily dismissed.
Background
One of the fundamental rights shareholders have under state corporate law is the power to elect corporate directors. Influential former Delaware chancellor William Allen wrote in Blasius v. Atlas Corp. that “[t]he shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests.” Shareholders have complained, however, that director elections do not impose meaningful accountability because board slates are chosen by the incumbent board and contested elections are exceedingly rare.
Under the corporate law of all U.S. states, the default voting threshold for director election—the one that applies unless the company provides otherwise—is a plurality. A plurality standard means that the director who receives the most votes is elected.
A company can alter its voting threshold by including a different threshold in the bylaws or, less commonly, the charter. The Corporate Library considers a company to have a “majority” voting standard for director elections if the company’s governing documents provide that directors must receive support from holders of a majority of shares voted in order to be considered legally elected.
Some companies retain a plurality standard for election but adopt a corporate governance policy requiring that a director who does not receive majority support must submit his or her resignation. Such companies are described by The Corporate Library as having a “plurality plus resignation policy.” The board has discretion to amend or repeal a corporate governance policy at any time, without shareholder concurrence.
Findings
A recent analysis of director election standards in place at U.S. companies yields a striking finding about the current state of the movement toward change in U.S. director election voting standards. Much of the discussion regarding the move away from plurality voting for directors seems to indicate that the majority voting standard is becoming the norm among U.S. companies. While this may be true for the largest companies, smaller companies are not following their lead.
Nearly half (49.5 percent) of the companies in the S&P 500 have made the switch to majority voting for director elections and another 18.4 percent have adopted the plurality-plus-resignation approach. Less than one-third (32.1 percent) of the S&P 500 companies now use the once-ubiquitous straight plurality standard (plurality without a director resignation policy). This reflects a dramatic change since last year, when more than half of the S&P 500 companies still had a plurality voting standard for director elections.
However, while this dramatic shift at large U.S. companies has garnered much attention, the straight plurality voting standard is still very common among the smaller companies included in the Russell 1000 and 3000 indices. Over half (54.5 percent) of the companies in the Russell 1000, and nearly three-quarters (74.9 percent) of the companies in the Russell 3000, still use a straight plurality voting standard for director elections.
As shown in the charts above, there is a long way to go before the straight plurality standard for director elections is no longer the norm among smaller U.S. companies. Several factors likely explain why such companies have not yet made the change to a majority voting standard:
First, the smaller companies tend to garner less attention from institutional shareholders, activists, and the media. Many of the companies that were among the first to modify their director election standards did so with much fanfare, attracting attention for being on the cutting edge of best practices in corporate governance. For example, when Pfizer first announced its groundbreaking change to a plurality-plus-resignation policy in 2005, much attention was paid to the announcement and the approach became known as the “Pfizer-style” standard for director elections. Because they are not in the spotlight, smaller companies in the U.S. might not enjoy the same kind of public relations boost from making the same changes to their governance practices.
In a similar vein, smaller companies tend to receive fewer shareholder proposals, which are the primary mechanism for pressuring companies to make changes to their director election standard. Although some companies might proactively adopt majority voting without a shareholder proposal (or a credible threat of one), others would likely wait to see if the issue is raised via a proposal before seriously considering a change. (A smaller company that analyzes the data on shareholder proposals might rationally conclude that the likelihood of facing a proposal on majority voting is rather low.)
Another explanation for the differing patterns in director election standards may lie in the ownership structure of companies of different sizes. The Corporate Library has found that companies with smaller market capitalization are much more likely to have concentrated ownership than companies with larger market capitalization. Companies with concentrated ownership are more likely to have controlling shareholders, such as families who own large blocks of shares, and are therefore less likely to be under pressure from their shareholders to adopt best practices.
Conclusion
Whatever the reason for the disparity between large and small capitalization companies’ adoption of majority voting, the fact that many U.S. companies still use a straight plurality standard should be considered when arguments are made that further change to director election procedures is unnecessary. While much progress has been made in this area, shareholders do not have a meaningful role in director elections at a large number of publicly-owned companies in the U.S.