Plurality and Majority Voting - Who Really Cares?

June 19th, 2012
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Contributed by: Michael R. Levin, The Activist Investor
Very experienced activist investors, especially governance aficionados at pension funds and similar asset managers, know this subject all too well. What follows is for everyone else.

While most aspects of corporate director elections annoy shareholders, none does so more than the voting standard for winning election to the BoD. More than one observer has likened BoD elections to those in the Soviet Union: no competing candidates, in which the winners obtained 98% of the vote.

As the Council of Institutional Investors (an association of pension and similar funds) notes at their website:

In an uncontested election, a single vote “for” a candidate theoretically would be enough for him/her to win a board seat.

This situation bugs some shareholders to no end, and the solution they’ve pushed, majority voting, has taken hold. Most large companies have adopted it, and in 2012, at the annual meetings of another 40 or so companies, shareholders have asked us investors to approve that standard.

Yet, the problem lies in the mechanics of plurality voting. And, the solution that investors have advocated, the majority vote standard, has proved to be largely ineffective.

Plurality voting
Think back to your high school civics classes. Recall that plurality voting means that in an election, the person with the highest number of votes wins. For decades, BoD elections (as well as many others, civic and otherwise) have operated this way.

So, with two or more candidates running, the one with the most votes wins. No problem.

What about when a single candidate runs for a given spot? Or, when there are the same number of candidates as openings? As in most uncontested corporate elections? Then, the person with the “most” votes, even just one vote, wins.

That a complacent, incompetent, or absent director could win election with as little as a single vote drives some folks nuts. These shareholders urged a different, more stringent standard for winning election.

Thence majority voting
Rather than winning with the most votes, shareholders pushed corporations to require uncontested candidates to win some minimum number of votes. It seemed right that he or she should receive support from a majority of the shares voting. And so it was.

(A plurality standard still applies in almost all contested director elections.)

Majority voting for BoD elections became a priority for governance-oriented investors. After only a few years’ effort, these shareholders got what they wanted. Today, ISS reports that 43% of the S&P 1500, and 80% of the S&P 500, have some form of majority vote standard for director elections.

Careful what you wish for
This standard leads to a tricky situation, though. What happens if a candidate fails to win that majority? Things get very complicated:

❖ Would the BoD seat remain open until the next election?
❖ Would the company hold another election right away?
❖ Would the BoD fill the vacancy the way it might fill a mid-term vacancy, by appointing someone?

So many questions. In general, companies with majority voting also have a baroque process in which the less-than-majority-vote director must tender a resignation. The BoD can then decide what to do next - accept it, reject it, think about it some more.

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