Activist Shareholders Push for Majority Rule In Selecting Directors
Washington Post Staff Writer
Friday, April 14, 2006; Page D01
For decades, the selection process for corporate boards of directors has had more in common with a Soviet-style system than with an American-style election.
Most public companies nominated only as many candidates as there were open slots, and there was virtually no way to block an anointed candidate. Though shareholders could withhold votes in protest, as long as the candidate got a plurality of the votes cast --- even if by a single vote --- he or she was elected.
But now, the winds of change are blowing.
Led by several activist unions, shareholders at dozens of companies are pushing rule changes that would allow them to vote for or against each director and require that directors receive a majority of the votes cast.
The United Brotherhood of Carpenters and Joiners of America and its allies have taken advantage of Securities and Exchange Commission rules that allow shareholders who hold at least $2,000 in stock for a year to submit governance proposals to push more than 140 companies to adopt majority voting. Most of the proposals would not automatically force out losing directors -- under most state laws, "holdover" directors who fail to win reelection may continue serving until their replacements are named.
The goal is to make directors more directly accountable to shareholders, rather than corporate management. Shareholder activists say they hope more accountability will help protect against excessive executive compensation and corporate fraud.
"When every director knows they have a hurdle -- they have to get a majority of the votes cast -- it will help focus the directors," said Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners. "It may not lead to dozens and dozens of directors being thrown out, but we think it will improve the operation of all boards."
Some local companies -- including Gannett Co. and Pepco Holdings Inc. -- have adopted the suggestion this year without putting it to a shareholder vote. Rockville-based Federal Realty Investment Trust's management adopted majority vote this winter after a 2005 shareholder vote fell short of the margin required for approval.
District-based Marriot International Inc. fought a majority-vote proposal from the Sheet Metal Workers National Pension Fund last year, and it was defeated by a 61 to 39 percent vote. But the hotel chain has changed its tune and is now recommending that shareholders vote in favor of the identical majority-vote standard at its April 28 annual meeting.
"The clear trend in corporate governance is toward greater and greater adoption of the majority vote standard for uncontested elections," the company said on its proxy ballot. "The majority vote standard provides for enhanced director accountability to the shareholders and avoids potentially undemocratic results."
The Washington Post Co. has a majority-vote policy and has not changed it in recent years, said spokeswoman Rima Calderon. However, the Class A shares, which are held by a small number of investors including the Graham family, elect 70 percent of the directors, while the publicly traded Class B shares elect 30 percent.
But other local companies have fought the carpenters' proposals. In December, Capital One Inc.'s board adopted a halfway measure -- if more shareholders voted to "withhold" than voted for a sitting director, he or she would have to offer to resign. The board would then decide what to do next.
The company is now recommending that shareholders vote against the carpenters' proposal at its April 27 annual meeting in Tysons Corner, saying in its proxy that majority voting would require the "significant, costly and possibly premature step of" changing its certificate of incorporation.
Ciena Corp. of Linthicum followed a similar strategy and said in its proxy that it was concerned about the "ambiguity and uncertainty" that might follow if a director failed to gain election. The networking firm's shareholders voted down the proposal 69 percent to 31 percent in mid-March.
Some companies have opposed majority-vote standards if they do not make an exception for contested elections because they might end up short a board member.
Still, the idea of majority voting appears to be taking hold very quickly. The carpenters and their allies first floated the proposal in 2004, when it appeared on 12 proxy statements and garnered an average of 12 percent of shares cast. The issue came up at 80 companies last year and made it onto shareholder ballots at 62 of them, said Patrick McGurn, executive vice president of Institutional Shareholder Services, which analyzes proxy issues for large investors. Overall, the 2005 proposals drew 42 percent positive votes on average, and 17 of the proposals passed outright.
McGurn said he expects that the proposals could do even better this year, given the number of companies that have already agreed to adopt majority voting .
About 26 percent of the companies that make up the Standard & Poor's 500-stock index require directors to get a majority of the votes cast, according to a study by Claudia Allen, who chairs the corporate governance practice group at the Chicago law firm Neal, Gerber & Eisenberg LLP. The unions "have had unexpected traction," Allen said. "What they are saying makes sense to people on a visceral level. Most boards have not been very accountable, and from the point of view of some shareholders, that's not good."
The plurality system isn't all that old. Until the 1970s and 1980s, most companies required directors to be elected by a majority vote. But concern grew that chaos might result if a majority of a company's directors were not reelected, so state laws began allowing a plurality standard and also included the holdover rule that allows a director who fails to obtain the required vote to continue serving at the pleasure of the rest of the board.
Now the pendulum is swinging back. But corporate governance experts say it's not at all clear whether a majority-vote standard will have much impact -- most directors receive upwards of 95 percent of the vote in uncontested elections. "It's a feel-good thing," said Joe Goodwin, a corporate governance consultant who specializes in director recruiting. "It's a nice PR move on the part of boards and a way for the unions to go to their constituents and say we can put this one in the 'W' column for us."
But advocates say the majority-vote standard could matter more if the SEC follows through on Chairman Christopher Cox's proposal for more disclosure of corporate perks and salaries. "Ultimately, our power to restrain executive pay is through votes against compensation committees and chairmen of comp committees, and now the votes have teeth," said Richard Ferlauto, director of pension and benefits policy for the American Federation of State, County Municipal Employees. "It's not the Holy Grail of shareholder nomination of directors, but it's a good first step."
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