It's puzzling that it took this long for corporate America's owners to rise up against Soviet-style elections, in which shareholders can only withhold their support from incompetent directors, but not oust them. Directors are owners' representatives in the boardroom, after all. They have a fiduciary duty to ensure that companies are run in the best interests of shareholders, not management.
Why shouldn't these directors be subject to the heave-ho if they don't perform? A fine question.
Proposals that would require directors to win more than half of the shareholders' votes to gain a board seat have appeared at 140 companies this year.
At companies including Bank of America, the Borders Group, the EMC Corporation, International Paper, Raytheon and Verizon, more than half of the votes cast supported such proposals. A proposal of this stripe received 56 percent of the vote at Home Depot, a company whose directors didn't have the guts to face their bosses — otherwise known as the stockholders — at the company's annual meeting last month. The Home Depot debacle represented a nadir in board behavior and proper corporate governance.
More than a third of shareholders voting in recent elections favored majority-vote proposals at Analog Devices, Capital One Financial, General Dynamics, Hewlett-Packard, the UnitedHealth Group and Wells Fargo.
Of course, how companies put the majority-vote concept to work is the next concern. Will the policies have teeth?
Some companies — Pfizer, for example — have recently instituted policies requiring directors who receive less than half the votes cast in an election to tender their board resignations immediately. But there are nifty loopholes in this policy at Pfizer and at many other companies: The board, in its infinite wisdom, can reject a resignation and retain an unpopular director.
GARY LUTIN, an investment banker at Lutin & Company , said that shareholder interest in majority voting for directors is a positive. But he warns that the way companies apply the concept may wind up unintentionally entrenching directors.
"I am concerned about the procedural mechanism for majority voting, since it may work against shareholders as an effective takeover defense," he said. "It becomes almost impossible to elect a dissident slate with the kind of majority voting provisions that have been adopted at some companies." Most shareholders already have the ability to remove directors, Mr. Lutin pointed out — but they rarely pursue such a course. Under Delaware law, stockholders can propose the removal of a director in an up-or-down vote at an annual meeting.
One institutional shareholder has proposed such a vote at CA — the embattled software company previously known as Computer Associates — which will hold its annual meeting later this year. LongView Funds, an investment trust that is a unit of Amalgamated Bank, wants shareholders to vote yea or nay on two veteran CA directors: Lewis S. Ranieri, the former vice chairman of Salomon Brothers, and Alfonse M. D'Amato, a former senator from New York. Both men were on the scene during a period of misconduct at the company, LongView said, and CA's shareholders should decide whether they stay.
CA says that both directors have helped turn the company around and that shareholders have benefited from their services. It has asked the Securities and Exchange Commission to keep it off the proxy.
But continuing problems at CA inspire confidence in neither the company's controls nor the board's oversight. The accounting scandal that rocked the company dates back to 2000, but CA said last month that it would delay the filing of its fourth-quarter and full-year financial statements because of accounting problems relating to sales commissions. The turmoil caused Fitch Ratings, a debt-rating agency, to lower its outlook on CA to negative from stable.
The S.E.C. will rule on the CA matter shortly. Given shareholders' justified push for influence in the boardroom, it is hard to believe that the S.E.C. would rule against allowing investors to vote on the proposal.
Even the New York Stock Exchange is recognizing that shareholders must have more say in director elections. A special committee of the exchange's board has recommended abolishing its 70-year-old rule allowing brokerage firms holding stock for clients to vote those shares in director elections if those clients — the true owners — do not give them voting instructions.
If the rule change goes through, only those votes cast by actual owners would be counted in director elections. In other words, brokers would no longer be able to play a pivotal role in rubber-stamping overly cozy corporate board arrangements.
This is significant. Around three-quarters of all shares are held by brokers for their clients, and when investors don't tell them how to vote, these firms follow the recommendations of management or the board. At the typical annual meeting, brokers control an estimated 25 percent of the shareholder vote, according to Governance for Owners, a London-based partnership of financial firms and investors that advises shareholders on their corporate rights.
Imagine the possibilities if brokers were removed from the voting mix. Given the size of broker-voted blocks at Home Depot, it is entirely possible that less than half the shares voted at the company's bizarre annual meeting last month would have backed some of its directors.
Larry W. Sonsini, a partner at Wilson, Sonsini, Goodrich & Rosati in Palo Alto, Calif., and chairman of the New York Stock Exchange committee on proxy rules, said the proposal grew out of shareholders' interest in greater transparency and accountability in the boardroom. "You see a lot of 'withhold vote' campaigns and it becomes very clear to us that this is a major issue about shareholder democracy," he said.
The exchange's directors are considering the proposal and are likely to approve it, as is typical for such recommendations. Companies whose shares trade on the exchange will have time to comment on the proposal before it is sent to the S.E.C. for approval.
"Shareholders' never-ending quest for empowerment in the boardroom is starting to show some glimmer of hope," said Kevin Cameron, president of Glass Lewis & Company, an advisory firm. "After proxy access to the ballot rules was swept under the carpet, shareholders were dour. But now on a series of disparate fronts there is hope."
If the New York Stock Exchange rule goes into effect, it will be more important than ever for shareholders to educate themselves on the performance of their directors and to vote accordingly. Shareholder apathy, justified perhaps when director votes were an exercise in futility, now needs to give way to a new appetite for activism.
Investors must act like owners; if they don't, they can expect more of the same: lax oversight of management and serial scandalrama à la WorldCom and Enron.