The Activist Investor Blog
The Activist Investor Blog
Plurality and Majority Voting - Who Really Cares?
Very experienced activist investors, especially governance aficionados at pension funds and similar asset managers, know this subject all too well. What follows is for everyone else.
While most aspects of corporate director elections annoy shareholders, none does so more than the voting standard for winning election to the BoD. More than one observer has likened BoD elections to those in the Soviet Union: no competing candidates, in which the winners obtained 98% of the vote.
As the Council of Institutional Investors (an association of pension and similar funds) notes at their website:
In an uncontested election, a single vote “for” a candidate theoretically would be enough for him/her to win a board seat.
This situation bugs some shareholders to no end, and the solution they’ve pushed, majority voting, has taken hold. Most large companies have adopted it, and in 2012, at the annual meetings of another 40 or so companies, shareholders have asked us investors to approve that standard.
Yet, the problem lies in the mechanics of plurality voting. And, the solution that investors have advocated, the majority vote standard, has proved to be largely ineffective.
Plurality voting
Think back to your high school civics classes. Recall that plurality voting means that in an election, the person with the highest number of votes wins. For decades, BoD elections (as well as many others, civic and otherwise) have operated this way.
So, with two or more candidates running, the one with the most votes wins. No problem.
What about when a single candidate runs for a given spot? Or, when there are the same number of candidates as openings? As in most uncontested corporate elections? Then, the person with the “most” votes, even just one vote, wins.
That a complacent, incompetent, or absent director could win election with as little as a single vote drives some folks nuts. These shareholders urged a different, more stringent standard for winning election.
Thence majority voting
Rather than winning with the most votes, shareholders pushed corporations to require uncontested candidates to win some minimum number of votes. It seemed right that he or she should receive support from a majority of the shares voting. And so it was.
(A plurality standard still applies in almost all contested director elections.)
Majority voting for BoD elections became a priority for governance-oriented investors. After only a few years’ effort, these shareholders got what they wanted. Today, ISS reports that 43% of the S&P 1500, and 80% of the S&P 500, have some form of majority vote standard for director elections.
Careful what you wish for
This standard leads to a tricky situation, though. What happens if a candidate fails to win that majority? Things get very complicated:
❖Would the BoD seat remain open until the next election?
❖Would the company hold another election right away?
❖Would the BoD fill the vacancy the way it might fill a mid-term vacancy, by appointing someone?
So many questions. In general, companies with majority voting also have a baroque process in which the less-than-majority-vote director must tender a resignation. The BoD can then decide what to do next - accept it, reject it, think about it some more.
What does a BoD usually do next? Not much. ISS found in 2010 that 108 directors at 60 companies (almost all small and mid-cap) received less than a majority vote. (That’s less than 1% of the thousands of directors elected each year.) The next year, 15 of those directors, at 13 of the companies, did not continue as a director. And, all of the 13 companies had only a plurality vote standard in place. So, a majority vote standard had no impact on the result.
The next year, 2011, ISS looked at director elections, and found a similar result: 45 directors received less than a majority vote (ISS didn’t report the number of companies involved). ISS also noted that at three of the companies involved, the vote triggered resignation policies - and, directors blithely continued on at all three, as BoDs declined to accept the resignations.
Who really cares?
The debate around plurality and majority voting seems to have wasted time and energy. The problem isn’t how many votes it takes to elect or ratify director nominees. Instead, shareholders still cannot nominate and elect their own nominees as easily as management can.
Maybe majority voting was all some shareholders thought they could achieve. More radical reforms, like proxy access, seem like a fantasy now, and probably struck others similarly ten or so years ago, when majority voting efforts took hold.
As reforms go, this one provides some comfort to a few shareholders that investors can change corporate governance. Yet, as reforms go, this one hardly makes a practical difference in how companies really operate.
Monday, June 18, 2012