All bark, no bite

In August, the American Bar Association (ABA) closed its comment period on majority voting that began in June when a task force of the ABA’s committee on corporate laws issued a discussion paper outlining possible changes to the Model Business Corporations Act. The committee, chaired by former Delaware chief justice Norman Veasey, is at the beginning of a lengthy process before any decision will be made on whether or not to take any action on changing the Model Act from the plurality system to a majority or some other system. 

The act is followed, either fully or in part, by a majority of US states. Delaware, home to most US corporations, is not a Model Act state, but it follows developments closely, as do the courts. Like the Model Act, Delaware employs a plurality vote standard in the absence of a specific provision in a firm’s bylaws or certificate of incorporation. 

The committee is careful to state that it sees problems with some of the options listed, and that it has reached no conclusions thus far. 

The ABA paper attempts to avoid creating uncertainty in the event of a failed election and discusses four alternatives: Those alternatives include retaining the current plurality vote default rule; changing to a majority vote default rule; adopting a default plurality rule requiring a director to secure at least a minimum plurality vote; leaving the plurality vote rule in place but authorizing against votes where a director achieves a plurality vote but gets more ‘against’ than ‘for’. Consequences could include shortening the director’s term, unless the board acted within specified time frame to confirm the director’s election, or giving the board the authority to remove that director. 

Voluntary standards emerge

The day before the discussion paper was released, Pfizer, whose corporate secretary Peggy Foran co-chairs the ABA committee, announced the adoption of a new director election policy. The new policy requires directors receiving a majority of withhold votes to tender their resignation to the board, which will then consider the situation before recommending whether or not to accept the resignation. 

Office Depot chairman and CEO Steve Odland recently announced the company’s adoption of a similar majority vote standard. In its press release, Office Depot states that its action ‘is in the mainstream of corporate governance,’ and according to investor relations officer Ray Tharpe, shareholders’ reactions have been very positive. 

According to Council of Institutional Investors (CII) spokeswoman Alyssa Ellsworth, CII’s concern with voluntary standards is that they are, well, voluntary. CII posted its comment letter to the committee on CII’s web site. To date, CII has received eighty responses to its letter-writing campaign asking companies whether they would consider adopting a majority vote standard. Of these, twenty-four say they have already adopted a voluntary standard. Examining the language provided by these companies, CII sees no real processes or abilities to meaningfully implement such a standard. 

Ed Durkin, director of corporate affairs with the United Brotherhood of Carpenters and Joiners, had a similar experience in his work with the Majority Vote Work Group, which comprises representatives from his union and three other unions. ‘Many of the companies we speak with have majority voting, but haven’t put the plumbing in place,’ says Durkin. 

A need for clear legal consequences

Topics discussed by the group include how boards can create fair policies to deal with legal and practical implementation problems such as how to handle holdover director situations and doubts under Delaware law as to whether adoption of a voluntary standard is allowed. Durkin hopes ‘these issues will be addressed by each firm, with each board afforded the latitude to put in implementation standards appropriate to their situation in the event of a failed election.’ 

Like Ellsworth, Durkin doesn’t think Pfizer-type voluntary plans are intended as the end of the process, and doesn’t expect that they will diminish the momentum building for majority voting. Ellsworth and Durkin also expect that majority voting with legal consequences would end the vote inflation that has occurred as director elections have become primarily symbolic. Instead, they believe that under a legal, consequential voting system, voting fiduciaries will weigh their power with a new sense of purpose and clarity, casting practical rather than symbolic votes. 

In its comment letter, the Majority Vote Work Group supports continuing a plurality vote system in contested situations. ‘Shareholders have a choice and appropriate disclosures are made from both parties in contested situations,’ writes the group. ‘Our vision is not to create contested elections. We don’t agree with the SEC proposals – we believe a firm’s nominating committee is best positioned to make nominations. Increasingly, boards are working to get outside input on submissions and vetting of names. We want to take the committee’s work and have a meaningful vote on it. If a director is rejected or fails to get reelected, we want to know the thinking of the board when the candidate gets kicked back. We don’t want to enhance investor’s abilities to participate in elections.’ 

Ellsworth agrees with Goodman that US corporations are not democracies, but claims the phrase ‘shareholder democracy’ only implies employing more democratic standards in terms of listening to shareholders. She comments that many non-US jurisdictions employ majority voting in their elections of directors and are shocked at the US model. Goodman is heartened by the voluntary adoption of majority voting standards by many US firms, and points out that many of those non-US countries adopt a comply-or-explain methodology on broader corporate governance initiatives, saying ‘this is a more complicated issue than is often appreciated.’ 

‘Our advocacy of the majority vote issue is based on our commitment to advance the retirement and employment interests of our members,’ says Durkin. ‘As a significant owner of US corporations, we have the right and the responsibility to participate prudently in setting governance standards designed to enhance and sustain long-term corporate value. We believe an enforceable majority vote standard will provide shareholders with a meaningful role in elections, enhance the work of nominating committees, improve board performance, and produce thoughtful and deliberative investor voting.’