Corporate Governance, the Role of Disclosure and the Myth of Majority Vote Provisions

A director at NYSE Euronext, Ricardo Salgado, failed to obtain a majority of the votes cast. The reason, apparently, was that he failed to attend 75% of the meetings of the Board. 

How do we know about his attendance?  The SEC requires disclosure in the proxy statement of any director that does not meet this standard. See Item 407 of Regulation S-K ("State the total number of meetings of the board of directors (including regularly scheduled and special meetings) which were held during the last full fiscal year. Name each incumbent director who during the last full fiscal year attended fewer than 75 percent of the aggregate of: The total number of meetings of the board of directors (held during the period for which he has been a director); and the total number of meetings held by all committees of the board on which he served (during the periods that he served)."). 

This is one of those interesting requirements that is less about material information and more about altering substantive behavior.  The provision was put in place back in 1978.  See Exchange Act Release No. 15384 (Dec. 6, 1978).  For a discussion of the requirement go here.  The provision was less about informing shareholders and more about encouraging directors to attend board meetings in order to avoid embarassing disclosure.  The SEC has often used this approach under the securities laws.  See Essay: Corporate Governance, the Securities and Exchange Commission, and the Limits of Disclosure

In an era of both majority vote provisions and "just say no," attendance has become a flashpoint with shareholders.  The NYSE Euronext apparently recognized this and provided a spirited defense of Mr. Salgado. As the Company explained in its proxy statement:

Each of our directors attended at least 75% of the total number of meetings of the Board and committees on which the director served that were held while the director was a member, except for Mr. Salgado. Mr. Salgado has been a member of the Board since 2007, and this is the first year that Mr. Salgado did not attend at least 75% of meetings of the Board and the committees on which he served. Mr. Salgado holds a key position as vice-chairman and president of the executive committee of Banco Espirito Santo, Portugal’s largest bank, which in 2011 required him to focus on managing the bank’s navigation of the European debt crisis. He also actively participated in high-level European regulatory and political discussions about how best to resolve the crisis. Mr. Salgado attended a number of joint meetings of the European Commission, the European Central Bank and the International Monetary Fund, as well as meetings of the Bank of Portugal and the Portuguese Banking Association, to implement the new requirements imposed on Portugal and its banking sector. Mr. Salgado’s intensive efforts to address the crisis restricted his ability to attend certain of the significant number of special meetings held in connection with the proposed business combination with Deutsche Börse, which were not part of the regular meeting schedule and were often called with little advance notice. Mr. Salgado participated in major decisions of the Board concerning the proposed business combination, kept apprised of developments regarding the transaction through communications with his fellow directors, and attended all but one of the regularly scheduled meetings of the Board and the committee on which he served.

Nonetheless, shareholders disagreed and declined to give him majority support.  That in turn triggered an obligation to resign.  The NYSE has a bylaw that provides for majority voting.  See Bylaw 2.7 ("each director shall be elected by the vote of the majority of the votes cast with respect to that director’s election at any meeting for the election of directors at which a quorum is present"). 

As is typical of these provisions, the director did not actually lose, but instead was required to submit a letter of resignation.  Id.  ("In the event an incumbent director fails to receive a majority of the votes cast in an election that is not a Contested Election, such director shall tender his or her resignation to the Nominating and Governance Committee of the Board of Directors").  Mr. Salgado submitted the requisite letter.

In the past, resignation letters have not been accepted by the board.  They were rejected at Pulte and Axcelis.  The NYSE Euronext, however, accepted the letter of resignation.  So does this mean that these majority provisions have teeth after all?  It does not.

These majority vote provisions do not give meaningful authority to shareholders.  They merely trigger a resignation that places in the hands of the board the authority to remove an incumbent director, something ordinarily not permitted under state law.  In other words, the resignation enhances the board's authority.  This case shows that when confronted with a letter that does not implicate the behavior of management, boards will at least sometimes accept the resignation.  Where, however, a defeat by shareholders is at least partially a commentary on incumbent management, boards have little incentive to accept the resignation.  Nothing about the NYSE Euronext situation altered that dynamic. 

J Robert Brown Jr.