Corporate Governance

Shareholder Access and the Charade of Majority Voting Provisions

By J. Robert Brown

In arguing against shareholder access, commentators and pundits often point to majority vote provisions.  These are given as an example that private ordering really works.  It is used to suggest that access should be left to private ordering rather than a mandatory rule issued by the Commission.

Put aside that the possibility of access has always existed and, small anamolous exceptions aside, there has been no private ordering on the part of public companies.  But somehow the use of majority voting provisions suggests otherwise.

As we have noted on this Blog and in a letter to the SEC, that is simply not true.  There is serious doubt as to whether there is ever meaningful private ordering in the corporate context given the inherent advantages held by management.  See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.  More specifically, in the context of majority vote provisions, they are common only among the largest companies.  Moreover, the common models merely require directors to submit letters of resignation that can be and have been rejected. 

Yet still the argument is made.  Well, the death knell should be the data put out by Riskmetrics.  It seems that the instances of a director failing to obtain a majority are up, 93 board members in 50 companies so far in 2009.  The number of these directors removed from the board?  "0".  That right, zero.  All of the companies have plurality vote requirements (in other words, they've rejected majority voting bylaws completely).  In two of the companies, the directors offered to resign but the letters weren't accepted.  The data shows that only one director who did not receive a majority lost his seat last year because of the requirements of California law.

Things will heat up with the end of brokers voting uninstructed shares in board elections.  More directors will likely not receive a majority.  But in the world of shareholder rights, it does not mean that more directors will lose their seat on the board.

Only competition for the board seats will do that.  Shareholder access is a step in that direction.

Full post as published by The Race to the Bottom on September 28, 2009 (boomark / email).