In theory, throwing out current directors and/or electing new candidates through their proxy votes is the most important function of shareowners with respect to corporate governance. That’s how we hold our agents accountable. In practice, shareowners look like powerless wimps, even at companies with majority or plurality plus resignation election standards. At least that is my conclusion after reading the excellent report by Kimberly Gladman, Agnes Grunfeld and Michelle Lamb of GMI Ratings, sponsored by IRRC Institute and its Executive Director, Jon Lukomnik.
The study looked at 175 cases in which a majority of shareholders opposed director nominees between July 1, 2009 and June 30, 2012. The companies were among the 3,000 largest in the United States, but smaller companies in that group accounted for 80 percent of the cases of majority-shareholder vote withholding.
Among their findings:
- Most directors who receive majority withhold votes continue to serve. Only 5% of the majority withhold votes led directly to director removal, with another 7% dropping out of the next election cycle, if I recall correctly.
- Majority or plurality plus resignation election standards increase the probability, but do not guarantee, that “unelected directors” will step down. Only 8% of the directors who received majority withhold votes at companies with plurality plus resignation standards stepped down shortly after the annual meeting, but half of directors at companies with majority standards did so, although that was two out of four — not a large sample.
- Majority withhold votes are not just about “best practices.” Only about half of majority withhold votes in the study period were attributable to generic violations of perceived best practice such as failed attendance, directors serving on too many boards known as “overboarding,” related party transactions, or poison pill adoption without shareholder approval. The remaining votes appear to have been driven mostly by shareholder concern with issues specific to the companies in question. Although I’m not sure why compensation concerns were not viewed in this “best practice” category.
- Majority withhold votes are often part of a larger pattern of shareholder concern. Nearly one-fifth (18%) of majority withhold votes occurred at companies where there was evidence of shareholder dissatisfaction not only with the director in question but with the board or company as a whole.
- Majority withhold votes are more common at smaller-cap companies. Over 80% of majority withhold votes in our sample occurred at Russell 2000 companies, which made up two-thirds of the study sample.
- Most majority withhold votes occur at companies without majority election standards. Ninety-one percent of majority withhold votes in our sample occurred at companies with plurality standards for director voting. This is at least partially a reflection of the fact that smaller US companies are less likely than their larger-cap peers to have adopted either majority or plurality plus resignation election standards.
- Majority or plurality plus resignation election standards improve disclosure about companies’ processes for evaluating and responding to majority withhold votes. Almost nine out of ten (87%) companies receiving majority withhold votes made no disclosure regarding their boards’ processes for responding to them. However, all companies with majority or plurality plus resignation election standards made some disclosure about their response to the votes.
- Companies targeted by withhold votes were no more likely to be under performers going into the annual meeting but were more likely to be in the subsequent year.
- None of the companies with failing votes on directors disclosed any discussions with shareowners. I guess doing so may lead shareowners to think they have some power — can’t have that.
- Companies and boards should recognize that withhold votes are not necessarily the result of “check the box” governance practices and recommendations. Review results carefully whenever a withhold rises above 5% for any director.
- Shareowners should continue to press for the adoption of majority voting requirements. If adopted, there’s a higher chance directors will actually be turned out. If not, at least the company will provide an explanation of their response. While 79% of the S&P 500 have some sort of majority standard, only 34% of mid-caps and 15% of small-caps do, so there is plenty of room for expansion.
From a Reuters article on the report, the following quotes from Kimberly Gladman:
It is a mistake to dismiss majority-withhold votes. These votes often are a means for shareholders to express key concerns about board oversight, and public companies should take them seriously.
I’m hopeful that companies will start to see that and start to pay attention to any levels that are above the average level. If I was a corporate secretary I would be asking: why is that happening?
I certainly concur with the following quote from IRRCi Executive Director Jon Lukomnik.
We have a system in which the vast majority of directors who receive withhold votes fail to achieve a majority and still they exercise power over our investments. It is capitalism without accountability.
While it is important to continue to press majority voting requirements onto mid- and small-caps, even more important would be to press for proxy access. There is nothing like electing a rival candidate. Then the director failing to achieve a majority vote has to step down.