Shareholders, Majority Voting, and the Continued Need for Access

We are grateful to the research conducted by Claudia H. Allen at Neal, Gerber & Eisenberg on majority voting provisions, The Study of Majority Voting in Director Elections, which was updated most recently on Nov. 12, 2007. 

Majority voting seeks to replace the state law system of plurality voting.  Under plurality voting, a withhold vote for directors ordinarily is meaningless.  With majority voting, a withhold vote amounts to no vote.  Those directors who do not get a majority (usually of votes cast) are typically required to submit a letter of resignation with the board having discretion whether or not to accept the resignation. 

According to the update, 57% of the Fortune 500 have adopted some type of majority voting.  At least eight states (and the Model Business Corporation Act) now expressly permit the implementation of a system of majority voting for directors.  Almost all of the provisions (310 out of 311) require a director to receive a majority of the votes cast rather than outstanding.  Most (92%) carve out and eliminate the majority vote requirement in the case of contested elections.  Once the resignation occurs, most of the proposals provide the board with considerable discretion over whether to accept the resignation.  Beginning with General Electric, a growing number of companies have required acceptance of a letter of resignation "absent a compelling justification." 

A few companies have gone further and simply mandated resignation, at least for new nominees.  According to the bylaws for Exelon Corporation:

• At a meeting for the election of directors, if the number of nominees exceeds the number of directorships to be filled, the directors shall be elected by a plurality of the votes cast. If in an election of directors in which the number of nominees does not exceed the number of directors to be elected, any nominee who is not an incumbent director receives a plurality of the votes cast but does not receive a majority of the votes cast, the resignation of such nominee referred to in Section 4.03 will be automatically accepted. If the nominee is an incumbent director who is standing for re-election and such nominee receives a plurality of the votes cast but does not receive a majority of the votes cast, the committee of the board authorized to nominate candidates for election to the board will make a recommendation to the board on whether to accept the director's resignation or whether other action should be taken. The director not receiving a majority of the votes cast will not participate in the committee's recommendation or the board's decision regarding the tendered resignation. The independent members of the board will consider the committee's recommendation and publicly disclose the board's decision and the basis for that decision within 90 days from the date of the certification of the final election results. If less than two members of the committee are elected at a meeting for the election of directors, the independent members of the board who were elected shall consider and act upon the tendered resignation. For purposes of this paragraph, a majority of the votes cast means that the number of shares voted "for" must exceed the number of shares voted "against" with respect to that director's election.

Majority vote provisions are necessary components of the governance system.  Over the 2008 proxy season, it remains to be seen what portion of the remaining 43% of the Fortune 500 put them in place.  Nonetheless, their value should not be overstated.  Most of them give the board the discretion to reject a letter of resignation, nullifying any no vote by shareholders.  See Study of Majority Voting, at 1 (noting that the board declined to accept the resignation of the only director of a company with a majority vote requirement who did not receive a majority of the shares cast).  Moreover, with most structured as bylaws or policies, they can in most instances be repealed by the board (Delaware allows shareholders to adopt majority vote bylaws that cannot be repealed by the board). 

Finally, and most critically, they do not ensure any shareholder representation on the board.  In the event that a particular director does not receive a majority and the board accepts the resignation, it will be the board that decides who, if anyone, will fill the seat.  In other words, the most shareholders can accomplish is the removal (or non-election) of a particular director.  They cannot use these proposals to ensure that their views receive greater prominence inside the board room.

For that, shareholders need access.