Shareholders Fight For Directors To Be Elected By Majority

Ed Durkin, a union official, is on a mission.

He says that board members at U.S. corporations who are seeking re-election should be required to win more than 50% of the vote to retain their seats.

His group's campaign is just one of the many shareholder initiatives that will be debated across the land this spring as public companies prepare for annual meeting season.

Durkin has got his work cut out for him.

Since the 1930s, directors have managed to stay on their boards with barely any shareholder support. Technically, a director can even vote for himself and that's enough to get re-elected.

So Durkin, who works for the United Brotherhood of Carpenters and Joiners, is using the annual proxy season that is under way to take a company-by-company approach to change the status quo.

Of 61 so-called "majority vote" proposals that Durkin has submitted at U.S. corporations for 2010, 35 have been withdrawn after he reached settlements with the companies.

"With a majority-vote standard, companies will be more attentive to investors," Durkin said.

This year, about 25 of Durkin's proposals are expected to come up for a vote, and among the targeted companies are Occidental Petroleum Corp. (OXY), Vornado Realty Trust (VNO) and Equity Residential Properties Trust (EQR).

The proposals submitted by Durkin and other similarly minded labor-backed investor groups would require directors to win more than 50% of the votes of participating investors in uncontested elections. A director who falls short would have to offer to resign, but their board could keep them aboard.

Even though such votes are nonbinding, majority-vote bylaws are expected to have a major impact on the nation's evolving standards of corporate governance.

That's because these provisions can empower institutional investors planning "just vote no" campaigns in 2010 to pressure corporations--including many big banks at the center of the financial crisis--to dump directors. Companies that have majority-vote bylaws in place, the thinking goes, will have a harder time explaining why they didn't listen to their shareholders when they vote "no."

"We're thinking long and hard about identifying failed directors in 2010," said Michael Garland, a director at Change to Win Investment Group, a labor-backed advisor to union funds.

Last year, roughly 100 directors at companies that don't have majority-vote bylaws didn't lose their jobs even though more than 50% of voting shares opposed their renomination.

Durkin says his proposals at Vornado and Equity Residential are likely to achieve strong shareholder support, in large part, because a majority last year backed majority-vote proposals at those corporations, and the companies have yet to implement the nonbinding resolutions.

However, most large and midsized corporations typically will adopt the measure after receiving significant pressure to do so by investors. A Vornado spokeswoman acknowledged that the company didn't set up a majority-vote bylaw even though a majority of participating investors voted in 2009 for just such an action.

Equity Residential officials didn't return calls seeking comment.

Corporations are gradually buying into majority-vote bylaws--mostly as a result of pressure from shareholders. According to RiskMetrics Group, which advises investors on governance issues, 59% of S&P 500 corporations had adopted majority-vote standards as of 2009, up from 52% in 2008.

Only 31% of RiskMetrics' S&P 1500 measure of 1500 large and midsized U.S. corporations had done so in 2009, up from 27% in 2008.

At the same time, the number of majority-vote shareholder proposals peaked in 2009, with 104 measures filed at companies, up from 86 in 2008, with strong support (in 2009 the proposals received an average of 58% support, while in 2008, 51% of investors backed the measures). As of March 15, only 23 have been filed so far, for 2010 Riskmetrics reports.

"The prevalence of majority-vote standards is much less at smaller companies, but that will change once it becomes a standard among S&P 500 firms," said Carol Bowie, director of the governance institute at RiskMetrics. She added that the number of proposals for 2010 may be misleading because, in many cases, corporations have agreed to set up majority-vote bylaws after investors privately pressed corporate executives to install them.

"There was increased engagement behind the scenes," Bowie said.

An Issue On Capitol Hill

Currently, shareholders can only target companies on a case-by-case basis to adopt majority-vote bylaws. However, a sweeping banking-reform bill under consideration in the Senate would require all U.S. corporations to adopt majority-vote standards.

Bowie says that relatively few shareholder proposals for the standard have surfaced this year, in part because many of its advocates have spent much of their time lately pressing for it on Capitol Hill.

There are other major factors affecting behind-the-scene decision-making at corporations under pressure from investors to install majority-vote policies in 2010. In January, a Securities and Exchange Commission rule went into effect prohibiting brokers from casting director-election votes on behalf of investors who don't vote themselves. This will make a big difference in many "just vote no" campaigns, especially at companies that have set up majority-vote bylaws.

Most retail investors don't vote in director elections. It's common for brokerages that hold these shares for investors to vote the uninstructed stake known as "broker-non-votes" for the management-backed director slate.

These undirected votes are often compared to ballot stuffing. Eliminating them can have a major impact on "just vote no" campaigns to oust CEOs from boards, because the removal of these uninstructed votes can shed light on the true extent of a shareholder group's vote of no-confidence in a particular management-backed director.

In a letter to the board at Bank of America Corp. (BAC) last April, a group of unions argued that a significant chunk of votes cast at the bank's shareholders meeting were "broker non-votes," based on previous year trends.

A "just vote no campaign" engineered at the bank last year by labor-backed Change to Win Investment Group to remove then-Chief Executive Ken Lewis and two other directors from the board took on greater significance because the bank had previously adopted the majority-vote rule. Even though the campaign failed to garner a majority vote opposing any of the three candidates, the effort helped hasten Lewis' departure at the end of the year.

Shareholders cast 41% of their votes against Lewis and 49% against O. Temple Sloan, another director, based on their calculation of what the vote would have been had the uninstructed broker votes been removed, according to an estimate by Change to Win. (Sloan also stepped down).

Change to Win's Garland says the group hasn't decided whether it will launch a "just vote no" campaign against Bank of America in 2010.

However, he points out that it's early and investment groups still have plenty of time to act in advance of elections at controversial financial institutions and other companies.

One candidate for a "just vote no" campaign could be Pulte Homes Inc. (PHM), a Michigan-based homebuilder that has a majority-vote policy.

A majority of participating investors voted to oust three of Pulte's directors at the company's 2009 annual meeting. However, the group decided not to accept the resignations tendered by these directors, opting instead to take steps to resolve two governance issues that were central to the dissident investor campaign.

Later in 2009, Pulte completed a merger with Centex Corp. and two of the three directors opposed by the investor group remain on its newly reconstituted board, according to Pulte spokeswoman Caryn Kelbba. She added that those two directors aren't up for re-election this year.

Garland wouldn't go so far as to say CtW will launch a "just vote no" campaign against Pulte-Centex at its annual meeting, scheduled for May. However, he added, "there will likely be shareholder attention at Pulte. This will be a high-profile vote this year."