Shareholders vote, but companies count the vote

The birthday of American democracy, coming not long after most U.S. public companies held their annual meetings, is a good time to look at how corporations count the votes when shareholders have proposed any kind of change.

Simply put, what's a majority vote? Half plus one, right? The math might seem indisputable, but it's not.

Companies have declared some shareholder measures defeated based on a voting standard that's open to question, according to the ISS Governance Institute of RiskMetrics Group, which advises big investors.

One example: At Massey Energy, the coal company where an April mine explosion killed 29 workers, a proposal to set corporate goals for reducing greenhouse-gas emissions this past spring got 25.1 million "for" votes and 22.2 million "against" votes. That's 53 percent in favor, an astonishing majority opinion for a company whose profits directly depend on burning fossil fuels.

But Massey measured the "for" vote against a total that included 20.9 million abstentions. So its math says the proposal only got a 36.8 percent favorable vote. Voilà, no majority. Many companies use that same approach.

Why care? Social activists often put forward shareholder proposals demanding changes such as improved recycling or monitoring of overseas contractors for labor abuses. A new wave of such measures, asking for more detailed disclosure of corporate political activity, is now building.

But profit-hungry hedge funds can also use shareholder proposals to dismantle the anti-takeover measures of an undervalued company — those "are very popular with investors across the board," says Carol Bowie, head of the ISS Governance Institute.

And even individual investors, simply concerned with how their company is managed, have raised issues like executive pay through measures on the annual shareholder proxy.

Such measures are only advisory — meaning management can ignore the result — but "there is definitely pressure on companies from shareholder proposals that get majority support," Bowie says.

Until this spring, Plum Creek had an even more onerous standard than Massey Energy.

Along with abstentions, the Seattle timber company had been counting in the total all broker nonvotes — representing shares, held at brokerage houses, whose owners have not returned their own proxies. (The brokerage can vote those shares on ordinary business items but not on shareholder proposals.) In Plum Creek's case, that was typically tens of millions of shares.

So a 2009 "say on pay" proposal at Plum Creek got 56.9 percent of the yes-or-no votes, but "the company announced that the item had been defeated because it had garnered only 31 percent of the total votes actually cast, plus the abstentions, plus the broker nonvotes," wrote Newground Social Investment, a small local money-management firm, raising the issue in its 2010 proxy statement.

Plum Creek gave some ground before the May 4 shareholder meeting. It changed its counting method so broker nonvotes don't figure into calculating whether a proposal won. But it still counts abstentions.

Newground CEO Bruce Herbert says that's better, but still unfair because a company has ample opportunity to persuade its shareholders to vote against a proposal. Counting abstentions often makes a difference of 5 percent or more in the outcome, he says.

"The process is tilted in favor of management," he argues, yet "they still feel the need to lean with their elbow on the scale — it's unbecoming."

Plum Creek spokeswoman Kathy Budinick rejects that argument. If shareholders who participate in the meeting abstain on a measure, "why shouldn't their abstention vote be counted?" she asks.

And, she points out, "whatever the required vote is, it applies to both management-sponsored and shareholder-sponsored items."

The approach Plum Creek has adopted is the default method set forth under Delaware corporate law, Budinick adds.

The Securities and Exchange Commission has a different standard. It requires that any shareholder proposal must be accepted for resubmission the following year if it got 3 percent of the vote — counting only yes and no votes.

"That's a pretty persuasive argument for why companies should do the same," Bowie says.

She says the ISS Governance Institute takes no specific position on how companies should tally the vote.

But it counts only yes and no votes when considering whether a company is being responsive to its shareholders' wishes.

How did Newground's shareholder proposal do at Plum Creek? Under Plum Creek's old approach it would have had less than 13 percent of the vote; under the new approach, it was nearly 18 percent.

That, says Herbert, means they'll be back next year.