Companies may be moving to provide shareholders with a greater voice, but the trend still seems to have a way to go. A study of 175 instances since 2009 when corporate directors garnered a majority of withhold votes from shareholders shows just 5% of the directors ended up leaving the board.
"Director elections are the fundamental accountability mechanism in our form of capitalism," says Jon Lukomnik, executive director at the Investor Responsibility Research Center Institute (IRRC), which commissioned the study. "Yet it is an open secret that most directors can be elected with one vote. There is largely a plurality voting system. Moreover, even when directors fail to receive a majority of votes, they still serve."
Elections of board members at U.S. companies traditionally operated on a plurality standard: as long as the director got the greatest number of votes, he or she was elected, even if withhold votes outweighed the votes cast in favor of the director. In recent years, activist shareholders have pressed companies to adopt a majority voting standard under which directors who do not win a majority of the votes cast are expected to tender their resignation. A third approach is plurality plus resignation, in which a director who does not win a majority is expected to tender his or her resignation, although the board is not required to accept it.
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The study, which was conducted by GMI Ratings, shows that the type of voting standard a company uses has an effect on what happens when a director gets a majority of withhold votes. While only 5% of directors who win a majority of withhold votes step down, at companies with a plurality plus resignation standard, 8% step down, and at companies with a majority voting standard, half step down.
The study also suggests that such withhold votes in director elections reflect substantial investor concerns about a company. In the elections studied, 50% of withhold votes reflected issues specific to the company. Seventy-five percent of withhold votes stem from six reasons, four of which have to do with governance best practices: poison pill adoption without shareholder approval, the director's attendance, related party transactions, or service on a high number of boards.
Even when investors express dissatisfaction by withholding votes in a director election, companies generally did not make governance changes, says Kimberly Gladman, director of research and risk analytics at GMI.
"In most cases, there were not any changes, Gladman says, but notes compensation as an area where companies were more responsive. "In cases where directors on the compensation committee received withhold votes, some companies made changes."
Gladman notes that the amount of disclosure that companies provide about director elections is higher at companies with plurality plus resignation or majority vote standards. "While 87% provided no disclosure at all, all of the companies with plurality plus resignation or majority standards did so," she says. "And a few plurality standard companies provided disclosure."
The campaign to get companies to put a majority vote standard in place has had the biggest impact at large companies. Lukomnik estimates that 80% of S&P 500 companies have adopted a majority voting standard, vs. just 15% of the companies in the S&P SmallCap index.
But the push for majority voting is likely to filter down to those smaller companies. Anne Sheehan, director of corporate governance at the California State Teachers' Retirement System (Calstrs) told top1000funds.com last week that Calstrs will be pushing small companies to adopt majority voting standards.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
