Shareholders Gaining Proxy Power

Companies that have adopted majority-voting policies or bylaws are still in the minority, but that's changing rapidly, mounting evidence suggests.

As public companies increasingly adopt tougher voting standards for board election, corporate executives should expect to see the balance of power tip toward shareholders this proxy season.

Indeed, corporate directors who aren’t sanctioned by investors will likely encounter tougher sledding now that many companies are abandoning the plurality model of board elections. For years, plurality voting almost always ensured that in an uncontested election, nominees slated by the board would win.

That’s changing. One recent sign is the increasing number of majority-voting policies and bylaws being proposed and adopted by corporations, according to a new study by Chicago-based law firm Neal, Gerber & Eisenberg LLP. The study found that 140 such proposals were submitted for 2006, compared with 89 in 2005 and just 12 in 2004.

As a result, more companies will implement majority voting as the year progresses, contends the study’s author, Claudia Allen, a partner with Neal Gerber and chair of its corporate-governance practice. She notes that since last year, 69 companies have adopted a majority-voting policy, 14 have amended their corporate bylaws to make majority voting mandatory, and 4 have done both.

The Neal, Gerber study echoes the findings of a report released late last year by proxy solicitation firm Georgeson Shareholder, which predicted that majority voting would be the major governance issue during the first six months of 2006.

Majority voting, as you would expect, is a standard under which board directors must get a majority of votes cast by shareholders in order to win or retain their seats. Although seemingly self-evident, this method of conducting board elections contrasts with the plurality standard still adhered to by most U.S. public companies.

Under the plurality model, directors who receive the most “for” votes are elected; there is no “against” option, and votes that are actively “withheld” or simply not cast are disregarded in the tally. Thus, in theory, a director nominee could be elected to the board with a single affirmative vote, even though all the other votes were withheld. “In an uncontested election, if you were slated, you were elected,” asserts Allen.

In 2003, the Securities and Exchange Commission proposed to give institutional investors more power to nominated directors. That SEC proposal languished, but in its wake, shareholder activists began pushing through majority-voting policies and bylaw amendments one company at a time.

A turning point may have come last June, when Pfizer Inc. adopted its majority-voting policy. Pfizer is widely regarded as a corporate governance best-practices leader, Allen observes, and since then a total of 73 companies have followed suit. Last October, Pfizer revised its policy to state that, in an uncontested election, any director nominee who receives more “withheld” than “for” votes “shall promptly tender his or her resignation.” This revision, too, has since adopted by other companies in some form.

The Neil Gerber study found that the majority-voting trend has accelerated as the current proxy season approached. During the fourth quarter of 2005, majority-voting policies were adopted by 36 companies, including Capital One, Chevron, Colgate-Palmolive, Eli Lilly, Kroger, and Office Depot. In January and February, 24 more companies jumped on the bandwagon, including Chubb, CSX, Pepco Holdings, and Unisys. Allen also notes that Gannett and Motorola have announced that later this month, they will amend their bylaws and adopt majority voting.

Another key implementation was that of Intel Corp. Of the 17 bylaw amendments noted in the Neil Gerber study, 9 were passed after Intel’s mid-January announcement that it would amend its bylaws to require majority voting. The chipmaker had been one of several companies — others included Time Warner and ChevronTexaco — involved in a majority-vote working group assembled by United Brotherhood of Carpenters and Joiners of America. The overwhelming public support that Intel received from the shareholder-activist trade union, Allen believes, may have spurred other companies to amend their bylaws as well.

That may put another wild card in play, says Allen: What happens when mutual funds, hedge funds, and other institutional investors realize that they’ve gained a greater voice in approving director nominees? Hedge funds, for example, may support directors who focus on short-term results, while mutual funds might throw their support toward candidates who take a longer-term view. Some preliminary answers might be available this summer, suggests Allen, after the current proxy season winds down.

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