How Votes are Counted: More Important Than Who Votes at Plum Creek

Newground Social Investment won a first-of-its-kind vote at Plum Creek Timber, the nation’s largest private landholder. Their resolution, which got an 18% FOR vote asked the company to change its vote-counting practices. Plum Creek agreed to revise its vote-counting formula to remove Broker Non-Votes. The resolved portion of their resolution read as follows:

RESOLVED: The shareholders of Plum Creek Timber Company, Inc. (the “Company” or “Plum Creek”) hereby ask the Board of Directors to take the steps necessary to amend the Company’s governing documents to provide that all matters presented to shareholders for decision shall be decided by a majority of the shares voted FOR and AGAINST the item (or, as with director elections, shares voted for and withheld from voting for a given nominee). This policy shall apply to all matters unless shareholders have expressly approved the use of a higher threshold for specific types of items.

As the Soviet leader Stalin reportedly said: “I do not care who is allowed to vote, so long as I am the one who gets to count the votes.” While Plum Creek is no Joe Stalin, Stalin’s statement certainly highlights the importance of how votes are counted. The formula mandated by the SEC for determining resubmission eligibility is:

FOR / FOR + AGAINST

For decades Plum Creek counted votes this way:

FOR / FOR + AGAINST + ABSTAIN + BROKER NON-VOTES

Broker Non-Votes are all those shares held at brokerage firms for which the broker has not received any vote instructions from the shareowner. In many if not most instances where retail shareowners hold the majority of shares, Broker Non-Votes could represent the largest absolute number of shares in the equation. Until recently, if no voting instructions had been received by the broker by the 10th day preceding the stockholder meeting, brokers were permitted to exercise discretionary voting authority with respect to those “uninstructed shares” on matters considered “routine.” Several years ago that practice ended for shareowner proposals. This year it ended for uncontested director elections. Shareowner proposals and uncontested elections are considered important, not “routine” matters.

The rule change was intended to promote “better corporate governance and transparency of the election process.” After all, why should votes NOT cast be counted as cast in favor of the position of management and the current board? Although not allowing brokers to vote in place of shareowners who failed to vote, the Plum Creek formula in effect counted every one of these un-voted shares as having been cast in favor of management.

Though typically a much smaller category, Abstentions are also counted as having been voted in favor of management – though this is when the abstaining voter (who has marked, voted, and returned their ballot) has decided twice NOT to side with management.

As Larry Dohrs, Vice President of Newground Social Investment, puts it:

Counting abstentions in favor of management misrepresents voter intent.  This is because when a shareholder votes ABSTAIN they have already — on at least two occasions — chosen not to side with or to follow management’s recommendation.

Let’s step through the voting process. When logging on to vote, shareowners first see a prominent button to “Vote with the Board’s Recommendations” on all issues. (I discussed this and other issues that tip the voting scales in favor of entrenched management and boards in my post, Jim Crow “Protections” for Retail Shareowners, 4/19/2010.)

First, an abstaining shareholder declines that offer to vote with the Board, and moves instead to consider each matter independently.

Next, alongside every shareholder-sponsored proposal, the abstaining voter finds the Board’s unanimous recommendation to vote AGAINST the resolution.

The abstaining voter again decides to not follow management’s clear recommendation, and instead chooses the ABSTAIN box.

By including them in the denominator, Plum Creek lays claim to these abstaining votes, when in point-of-fact the abstaining voter has clearly not been swayed by nor agrees with management’s position on the matter — and has twice demonstrated this by how they voted their proxy.

Adds Herbert: “Plum Creek, counting abstentions as it does, directly thwarts the abstaining voter’s intent.”

Since the 1930s when Lewis Gilbert won the right for shareowners to present issues to a vote by their fellow shareowners, concerned investors have seen the positive effects that derive from shareowners having a fair opportunity to present new ideas and perspectives to management via the shareholder resolution process.

Plum Creek’s vote-counting procedures have for decades effectively de-railed this SEC-sanctioned process.  Though in response to this shareholder resolution the company offered a new vote-counting formula that removes Broker Non-Votes, it continues to count Abstentions in favor of management – which falls short of the SEC standard. Their new counting formula is: FOR / FOR + AGAINST + ABSTAIN 

Notes Herbert: “This new formula, while much better, is still not entirely fair – it is only less unfair than before.” While we congratulate Bruce Herbert, Larry Dohrs and others who worked on this effort at Newground, we hope they will come back with the same resolution next year and every year until Plum Creek takes its thumb off the voting scale. There is no reason for corporate elections to be counted unfairly. This is the United States of America. Votes should be counted as they are cast, not as an entrenched board or managements wishes they were cast.