October 4, 2005
Voluntary Adoption of Majority Voting
The voluntary adoption by publicly-held companies like Walt Disney Co. and Pfizer Inc. of majority voting standards for the election of directors has been heralded as a “breakthrough” in corporate governance. In reality, I think it is nothing more than a public relations maneuver.
As explained in Dale’s earlier post, under the prevailing plurality system, a director can win while only receiving a single affirmative vote. With a majority voting standard, a candidate is not elected unless he or she receives a majority of votes cast. Or a company could set the standard even higher and require a majority of shares outstanding.
Although trumpeted in the press as having done so, neither Disney nor Pfizer has adopted a majority voting standard. What they have done is amended their corporate governance guidelines to provide that any director who receives "withhold" votes representing a majority of the votes cast for the director's election is required to submit his or her resignation to the nominating committee which would then advise the full board whether it thinks the resignation should be accepted. The director would still be elected even if only one vote was cast in the director’s favor (assuming a quorum at the meeting), and the board could choose not to accept the resignation. If the board did accept the resignation, the board would be entitled to simply appoint whomever it chooses to fill the vacancy.
Office Depot waters things down even more. Under its so-called majority voting standard,
a director is only required to tender his or her resignation if a majority of
outstanding shares withholds votes or votes against the director (presumably,
Office Depot’s ballot will include an “against” box).
Obviously, these so-called majority voting standards are farces. They do not even give shareholders a veto power over a director as some have characterized them since the board is not obligated to accept the resignation. It really amounts to nothing more than a shareholder recommendation to the board that a certain director be ousted. I do not see how this is any different from the prevailing system where someone like CalPERS launches a withhold vote campaign against a director. Yes, the board does not have the legal power to oust the director even if a supermajority of outstanding shares withholds votes. But do you honestly think a director who does not have the confidence of the shareholders and is therefore asked to resign by the rest of the board would refuse to resign?
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