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By Sheryl Nance-Nash
While more companies accept the view that board directors who fail to win a majority of shareholder support should resign, investors can't expect them to be immediately shown the door.
Long delays don't sit well with investor advocates. In cases where board members fail to win a majority vote, "the shareholders have said they don't want them, therefore they have no authority to serve," observes Nell Minow, co-founder of the Corporate Library, a research firm highly critical of standard corporate governance practices.
Even the National Association of Corporate Directors sees the writing on the wall. The NACD, which claims a membership of 10,000 corporate directors, recommends as a best practice that such a member step down unless there are mitigating circumstances.
"Any board decision not to accept the resignation of a director who has failed to receive a majority of the votes cast should be carefully thought out, and the explanation for such decision should be fully disclosed to shareholders," NACD says, in its Key Agreed Principles for the Governance of US Public Companies.
Adds Doreen Kelly Ruyak, a spokesperson for the NACD: "Gone is the time when boards can ignore the concerns of shareholders."
But the pace with which such directors depart is still subject to dispute. Right now, there is no legal requirement that directors resign if they fail to receive a majority of votes cast at annual meetings. In fact, until recently, all a director needs at most firms was to receive one measly "yes" vote." In cases where there is no majority vote policy or standard, activists have advocated shareholders "withhold" votes from directors they opposed in hopes to publicly shame them into receiving a majority of thumbs down, although there is no obligation for those directors to subsequently resign.
And although in recent years a fast-growing number of companies have instituted some form of majority voting requirement, those with resignation provisions are primarily limited to large cap companies. Most companies with majority voting do have resignation policies. Under these, the board, or the nominating or governance committee, typically determines whether to accept the tendered resignation, according to according to Claudia Allen, chair of the corporate governance practice at the law firm of Neal Gerber Eisenberg.
Financial reform legislation may require majority voting for all publicly traded companies, if a provision in a bill passed by the Senate is approved by Congress. Directors who fail to receive a majority of votes cast in an uncontested election would be required to tender their resignation to the board. A director who tenders his or resignation could then remain on the board only if the board unanimously rejects the director's resignation and issues a public statement within 30 days.
Moreover, there is more than one type of "majority voting" clause currently in use. Under a pure "majority" voting rule, a director must receive a clear majority of shareholder votes cast to be considered legally elected. Under a "plurality plus" standard, a director who does not receive a plurality of votes cast offers up a resignation. Companies that opt for some form of majority voting usually pick the latter route, according to Ralph Ward, publisher of the monthly governance letter, Boardroom Insider.
In an uncontested election, said Ruyak, some boards already require a candidate who fails to win a majority of votes cast to tender his or her resignation to the nominating or governance committee. The committee then recommends to the board whether to accept or reject the resignation, depending on the circumstances. The latter part of that process is important, some experts say, simply because exchange listing requirements require a minimum level of independence and expertise.
"Once voted out, a board member should step down as soon as possible, but the company needs to be cognizant of the fact that the exchanges require that there be a certain number of people on the board serving in key roles," points out Richard Rofe, managing director of Arcadia Capital Advisors, a hedge fund management firm.
Allen adds that the board and the individual should evaluate what triggered a no vote. For example, a director may have been the target of a proxy advisory campaign based on something as simple as failure to attend a "best-practices" number of board meetings. Director votes can also be an expression of investor angst over some board action, rather than the specific talents of individual members. Unhappiness over a compensation policy may lead to all members of the compensation committee being voted out at once, explains Ward. The big question is, "Is it a message for the entire board?" asks Allen.
The problem, as shareholders see it, is that directors who fail to receive majority votes are slow to leave. In 2009, the number of the 93 board members at 50 companies who failed to get majorities and then resigned could be counted on one hand.
And in the 2010 proxy season, only 28 directors at 19 small-cap companies so far received less than majority support. Even the groundswell of public anger at Massey Energy, after 28 miners died in a mine it operated, failed to unseat three directors for re-election at the Virginia company.
That has shareholder advocates hoping the federal legislation requiring board resignations in the face of shareholder disapproval will make it into law.
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