The WSJ reported on the "reelection" of one of the directors to the board of directors at Sirius XM Radio. As the artcile described: "Sirius XM Radio Inc. held seven meetings for its 13-person board during 2011. Leon Black, a well-known private-equity player, attended none of them." The response by shareholders was direct and unequivocal. In a Form 8-K Sirius disclosed that Black received 512,411,779 votes in favor and 955,186,887 votes against. In other words, by any reasonable standard, he was overwhelminingly defeated for election to the board.
But reasonableness does not, for the most part, apply to the system for electing directors. In something that would have intrigued Lewis Carroll and befuddled Alice in Wonderland, shareholders of public companis for the most part cannot defeat candidates for the board, no matter how many shares are voted against these directors.
This is the case because most states (including Delaware) rely on the plurality system for electing directors. Under this system, directors who receive the most votes win. When the number of candidates and number of vacancies are the same, the nominees presented by management always win. In effect, the "no" votes cast against directors are irrelevant. So Sirius had eight openings on the board and eight nominees. All of them won, including the one director who did not receive a majority of the votes cast.
Some companies have put in place "majority vote" provisions. These generally provide that directors who do not receive a majority of the votes cast must submit a letter of resignation. As we have discussed on this Blog, however, majority vote provisions provide no meaningful authority to shareholders.
To the extent a candidate does not receive a majority of the votes cast, removal authority is not with shareholders but in the hands of the remaining directors. In effect, therefore, a majority vote provision merely transfers to directors the power to decide on board membership. Moreover, in a number of notable circumstances, the board has declined to accept the resignations of directors who did not receive majority support of shareholders. For examples, go here.
Had a majority vote provision at Sirius been in place, the outcome would likely have been no different. The board presumably knew about the poor attendance record when they renominated him. Having decided this was not a disqualification for board membership, the remaining directors also presumably would have declined to accept a letter of resignation on that basis.
Should anything be done about this? Shareholders can only ensure the defeat of management nominated directors if they nominate their own candidates. Doing so, however, is an expensive proposition. Shareholder access was designed to make this easier by by requiring the company to include shareholder nominees in its proxy statement. In certain, likely rare, circumstances, shareholders would have been in a position to opt for a non-management candidate.
When would that occur? Perhaps in the case of management nominating a director with a weak attendance record. By striking the rule down in Business Roundtable, therefore, the DC Circuit effectively took away from shareholders a check on management. The board can renominate directors with poor attendance records without having to worry that the decision would be second guessed at the ballot box.
We will have some more thoughts on this approach to governance in the next few posts.