Vote Reform

Ever since George W. Bush won Florida by one vote cast by a Supreme Court judge, many have come to believe that reforms are needed to ensure election winners reflect the wishes of the voters. The Wall Street Journal ran a series of three articles entitled "America's Dysfunctional Voting System" which compared the US voting system with those in other countries and highlighted the need for reforms. Yet, there was little or no mention of corporate elections.

Shareholder rights activist Mark Latham offers a commentary that begins to link the two systems on the Corporate Monitoring Project website. As he indicates, the vote splitting solution for the political system is relatively simple, either:

Runoff: Have the voters go to the polls a second time, with only the top two first round vote getters on the ballot; or
Instant Runoff: Voters only go to the polls once, but rank the candidates in order of preference. Then a computer calculates the results of a runoff vote automatically, dropping out candidates with the fewest first choice votes and retabulating each ballot for the top ranked candidate still in contention; or
Condorcet's Method: Similar to the one above, except that the computer calculates the results of every possible two-way election contest. Usually, there will be one candidate that would beat every other candidate, so thatÕs the winner. (If thereÕs a three-way tie where A beats B, B beats C, and C beats A, then the winner can be chosen using the ranked pairs method above.) Latham thinks Condorcet's method is best.

Any of these options are better than the current plurality system. Under any of them, Al Gore probably would have won the presidential election. Of course, it's also possible George Bush wouldn't have lost to Bill Clinton in 1992 (remember Ross Perot?) under one of those counting systems.

Corporate elections won't be so easy to reform. For years, shareholders and their supporters (such as the Council of Institutional Investors have opposed rules adopted by the New York Stock Exchange, American Stock Exchange and proposed by the National Association of Securities Dealers which allow member brokers to cast votes on many issues without instructions from beneficial shareowners. Patrick McGurn, Director of Corporate Programs at Institutional Shareholders Services, writes that "issuers continue to prod the exchanges to retain this loophole because winning has become more important than the integrity of the markets."

In a recent article in Investor Relations Business, McGurn points out that decisions regarding whether ballot issues are "uncontested" or "routine" are made behind closed doors by exchange staffers and are virtually immune to investor challenge. Brokers aren't required to vote in the best interest of their clients or even take those interests into account. In fact, I have never heard of a broker voting against management on routine issues. In addition, McGurn notes that the Securities and Exchange Commission doesn't require a breakout of broker votes, allowing issuers "to hide the ballot box stuffing." CII points out that since brokers have no obligation to disclose how they voted proxies, shareholders can't monitor their brokers.

Another election problem addressed by McGurn, but few others, is the practice of keeping the polls open beyond the scheduled closure when key management proposals fail to obtain enough votes. He provides several examples, including e.spire Communications' move to increase authorized stock and the Monarch Services vote to move its legal domicile. Fortunately, the courts are beginning to come down on the side of shareholders. McGurn cites the Delaware Chancery Court decision reversing the announced vote results of a contested election at Carver Bancorp, handing two seats over to dissident nominees.

I'm delighted to see McGurn, Latham and CII continue to raise these issues but where is the financial press? Why isn't The Wall Street Journal pointing to the need to also fix our broken corporate voting system? There will be hundreds of election reforms bills introduced in state legislatures throughout the US this year; will the exchanges or the SEC offer any reason for shareholders to have more faith in the legitimacy of corporate votes? The Bush administration could help increase its legitimacy by supporting campaign finance and ballot reform in civil elections. Similarly, it could boost investor confidence by eliminating broker voting and reducing abuses such as postponed corporate vote counts.