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Majority Voting in Director Elections
Majority voting for the election of directors has been transformed from a fringe concept to the prevailing election standard among large public companies in the brief span of three years, as demonstrated by the November 2007 edition of the Study of Majority Voting in Director Elections (available at http://www.ngelaw.com/). Statistics and examples drawn from the Study underscore that majority voting has become a relatively mature, as well as widespread, movement:
- Sixty-six percent of the companies in the S&P 500, and over 57% of the companies in the Fortune 500 have adopted a form of majority voting, notwithstanding robust merger and acquisition activity in the first half of 2007, which resulted in many companies with majority vote provisions being taken private. By way of contrast, when the Study was initially published in February 2006, only 16% of the companies in the S&P 500 were known to have adopted a form of majority voting;
- Majority voting is not found at large cap companies alone. Consistent with other governance trends that have trickled down to the broader market, such as declassifying boards, majority voting has been adopted by mid-cap, small cap and some micro-cap companies.
- Majority voting provisions are appearing in a variety of contexts:
- Such provisions are being included in the governance documents of companies being spun-off. Exam- ples include Discover Financial Services LLC, Kraft Foods Inc., Teradata Corporation and, as contemplated by the registration statement filed in September 2007, Philip Morris International Inc.;
- Companies being taken public, such as Care Investment Trust, Concho Resources Inc., CVR Energy, Inc., SandRidge Energy, Inc., VMware, Inc. and, as contemplated by the registration statement filed in September 2007, RiskMetrics Group, Inc. (the acquiror of Institutional Shareholder Services (collectively, 'ISS')), have provided for majority voting.
- When it emerged from bankruptcy protection in 2007, Delta Air Lines, Inc. had a majority vote bylaw;
- States have been responding to the majority vote movement through legislation that enables boards and/or stockholders to provide for forms of majority voting and/or permit contingent, irrevocable director resignations from nominees who fail to receive a majority vote. States that have addressed majority voting include California, Delaware, Nevada, North Dakota, Ohio, Utah, Virginia and Washington. States that permit such contingent, irrevocable resignations include Delaware, Maine, Texas, Utah, Virginia and Washington, and legislation to permit such resignations was introduced in Oklahoma; and
- Average support levels for majority vote stockholder proposals have risen from 12% in 2004 to in excess of 50% in 2007, according to ISS.
Notwithstanding concern over the manner in which majority voting might be used by hedge funds, unions and other activists, in 2007 only one director received a majority against vote at a company with majority voting. Mae Jemison, an incumbent director at Gen-Probe, Incorporated, received a majority against vote based upon her failure to attend at least 75% of board meetings. After consulting with ISS, the board declined to accept her resignation, with the understanding that the attendance issue would be addressed. Ms. Jemison subsequently stepped down. Additionally, companies including Alaska Air Group, Inc., General Motors Corporation, Motorola, Inc. and Tandy Brands Accessories, Inc. weathered actual or threatened proxy contests in 2007 with majority voting provisions that provided for plurality voting to apply in the event of a contested election. Dissatisfied stockholders also targeted specific directors at companies with majority voting, including certain directors at CVS Caremark Corporation, International Paper Company, Verizon Communications Inc. and Yahoo! Inc. None of the targeted directors received a majority against/withhold vote. Nonetheless, the relevant directors and boards appear to have examined the voting results closely, with certain targeted directors at CVS Caremark Corporation and the CEO at Yahoo! Inc. subsequently resigning.
The Activist Origins of Majority Voting
Majority voting emerged as a potential alternative for activists demanding greater director accountability following the failure of the Securities and Exchange Commission's 2003 proxy access initiative. That proposal would have provided access to management's proxy statement to large, long-term holders under specified circumstances. Activists turned to state law and began a campaign to change the director election standard from a plurality, under which being slated as a director nominee guarantees election if the election is not contested, to a majority vote. Ironically, the push for proxy access is continuing as the 2008 proxy season approaches, and the two movements are not mutually exclusive.
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