The Myth of Majority Vote Provisions

Last week, when Commissioner Paredes voted against submitting an access proposal for comment, he gave as one of the reasons the raft of majority vote provisions that have been put in place by a majority of the largest companies.  Likewise, in opposing The Shareholder Bill of Rights, the memorandum issued by Wachtell Lipton pointed to the same development. 

In fact, the development is anything but.  Their widespread adoption reflects an attempt by management to head off a majority vote movement and ensure that majority voting is as weak as possible. 

What is the evidence to date?

First, they rarely work in practice.  According to RiskMetrics, only 32 directors at 17 companies in the Russell 3000 index did not receive a majority.  Assuming each company has on average 8 directors, that means that 1/10th of a percent of directors did not receive a majority.

Second, the board retains the right to refuse to accept the resignations and often does.  I haven't seen stats on the issue but anecdotal evidence suggests that it happens often.  This is particularly true since directors are most likely to lose either because they were too supportive of management (perhaps with respect to executive compensation) or because of the company's performance (which is a criticism also of the job done by the CEO).  In other words, these are the very types of directors that the CEO will want to keep in office.

In the article on the three directors of Pulte who did not receive a majority, the CEO more or less made a public case for justifying the board's refusal to accept their letter of resignation.  As the WSJ reported:

• But Pulte chief executive Richard Dugas said in an interview that he thinks the withheld votes were driven primarily by the board's voting structure. "We strongly refute that this had to do with performance of the company," he said. He added that the company was one of the few builders with positive share performance in 2008.

We have other examples, some of which are winding their way through the courts.  Suffice it to say, as we will describe, the Delaware courts are likely to make it very difficulty for shareholders to examine the reasons why boards decline to approve director resignations.

Third, for all of the crowing about widespread adoption, the trend is largely limited to the large companies where efforts to defeat a director are the most expensive and the least likely to succeed.  According to Directorship:

• However, while this dramatic shift at large U.S. companies has garnered much attention, the straight plurality voting standard is still very common among the smaller companies included in the Russell 1000 and 3000 indices. Over half (54.5 percent) of the companies in the Russell 1000, and nearly three-quarters (74.9 percent) of the companies in the Russell 3000, still use a straight plurality voting standard for director elections.

Finally, implementation by management allows some companies to include majority vote provisions in their corporate governance policies, something that can be easily changed by the board and probably not changed by shareholders. 

This type of "majority" voting is better than the reigning system of plurality voting.  It gives a withheld vote by shareholders more meaning (in a plurality system the withheld vote has no meaning).  But in the end, even directors not receiving a majority of the votes (a difficult proposition) will likely remain on the board.  Why?  Because the decision about whether to accept the letter of resignation becomes a matter of the board's fiduciary obligation. 

But as anyone following this area knows, with board capture and the lack of true independence, fiduciary obligations are often exercised in the best interests of management rather than shareholders.  In other words, letters of resignation will not be accepted when the CEO doesn't want them accepted.  It is, after all, the Delaware model.