April 14, 2006
Shareholder Proposals in 2006
Posted by Gordon Smith

Our guest blogger, Elizabeth Brown, wants to change corporate elections. Shareholders have been working for change, and the big issue in shareholder proposals this year is majority voting for directors. Dale Oesterle has a nice summary of the action over at Business Law Prof Blog, though I am not sold on this analysis:

It is stunning how little is at stake in this controversy.  Last year, out of more than 35,000 director elections, only fourteen—fourteen—nominees for directorships received a majority of “withhold” votes.  We are fighting over the seating of fourteen nominees, who situations were very, very unusual.  Corporate control over who is on the firm’s proxy means that the threat of denying a management nominee a seat on the board is negligible, even infinitesimal. Companies in the United Kingdom and Australia, and several other countries, have operated under majority vote requirements for years without difficulty.

Two problems. First, comparing a world in which majority voting has no consequence with a world in which majority voting matters tells us nothing. As Dale observes elsewhere in his post, some big institutions are supporting this recent push, and I expect to see more battles as majority voting becomes more widespead.

Second, comparing the U.S. under majority voting to the UK and Australia also doesn't work because the institutional investors are different. In the U.S., state pension funds and labor unions drive much of the insitutional investor activity. The biggest institutional investors in Australia are banks, life insurance companies, and mutual funds. Pension funds are big in the U.K., but these are mostly industry funds, which have been much less active than state pension funds and labor unions in the U.S.

Dale also offers two reasons why corporations are concerned about these majority vote proposals:

First, a majority vote procedure enables shareholders to remove a chief executive office (CEO), who is often the board chairman, from the board....

Second, if majority vote proposals succeed, shareholders may follow their successes with elections proposals that have more teeth....  It appears inevitable that classified boards, like plurality vote systems, will go the way of the dinosaur.

Even more troublesome for incumbent managers is the small but growing effort of shareholders to gain access to the company’s proxy for contested elections....

This seems basically right to me. I am curious whether we will see more diversity in board structure and composition as shareholders become more involved. Does one size fit all corporations?

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