October 3, 2005
The Legal Quagmire That Is Shareholder Voting
John Bogle has an editorial in today's WSJ on the "Individual Stockholder, RIP." He makes the point that only 30 percent of today's shareholders are individual shareholders. The rest of the 70 per cent are institutional intermediaries -- mutual funds and pension plans. The institutional intermediaries are passive; that is, they vote with incumbent management. The picture is worse than he paints. (I have discussed the matter in my post: SEC Controls on Shareholder Voting: An archaic, cumbersome system.) The 30 percent "individual shareholdings" that he notes are largely held in street name by brokerage firms. The brokerage firms vote much of the stock by defaul, when the beneficial owners, the individuals, do not return the vote solicitation materials.
His editorial supplements the wonderful piece by Gretchen Morgenson in Sunday's New York Times. Ms. Morgenson is a national treasure; she is my favorite business commentator in the media, period. In any event, she chronicles the failure of shareholder resolutions that would have directors win their elections by a majority vote. At present, directors can win election in most publicly-traded firms with a single affirmative vote (as long as a quorum of voters is represented, usually only one-third of the outstanding voters) even though all the other voters have "withheld" their votes. There is no option to vote "no." In theory, a firm with 1,000 outstanding voting shares could have 333 shares represented at a meeting (in person or in proxy) and a director could win a seat with a vote of 1 "for" and 332 "withheld." In practice, we have seen examples of, in the terms of our example, votes of 300 "for" and 200 "withheld" with the rest of the shareholders (500) not voting. The shareholder resolutions would stop such nonsense. The reslutions recommend firms put in buylaws that require an absolute majority, in our example 500 "for" votes, for a valid election.
Yet, many of our largest institutional investors (Fidelity Magellan, Vanguard 500 Index Fund) voted against the proposals. Why? Their public reasons are makeshift. (What happens if no-one gets elected???? Answer -- the old board member holds over until the vacancy is filled by shareholders or, in some cases, by the remaining board members.) The real reason they voted against the resolutions? They knew that managers are vehemently opposed and the institutional investors did not have the spine to stand up to them. Appropriate shareholder control in United States corporations will not be adequate until the institutional investors do not pull stunts like this.
I some cases the shareholder proposals passed by a majority shareholder vote, over the no votes of the institutional investors (!). The firms, however, do not have to comply (the proposals are "recommendations from the shareholders"). Some firms adopted the proposal's recommendation to amend their bylaws and some did not. I hope the market will punish those who do not, but there is significant noise in stock price and it will be hard to see it if the market does.
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