The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading not-for-profit research organization for institutional investor interests in corporate governance and proxy voting issues.

Corporate Governance Highlights

Vol. 15, No. 30          July 23, 2004

Proposals for Board Restructuring and Eliminating

Cumulative Voting Become Bedfellows in 2004

COMPANIES SEEK TO ELIMINATE CUMULATIVE VOTING EITHER WAY. This year shareholders at several companies considered management proposals to both eliminate cumulative voting and to repeal their classified boards, while at a couple of others they voted to eliminate cumulative voting as well as implement a classified board structure. Cumulative voting gives minority shareholders more potential influence in board elections¾its effect is increased with a declassified board, since the more directors there are up for election, the greater the number of votes a shareholder may cast for one director.

   This effect led to some interesting proposal combinations this year. At Energy East, management made the implementation of its proposal to declassify the board subject to approval of a separate proposal to eliminate cumulative voting─and, similarly, the cumulative voting proposal would not be effected without shareholder approval of the proposal to declassify the board. The company did not return calls requesting vote tallies for these proposals. The proposal at Harken Energy to repeal the classified board received 91.5 percent of the votes cast, and the one to eliminate cumulative voting also passed, garnering 50.3 percent of the votes cast. United Industrial simply put the two management proposals to a vote, but the company did not respond to IRRC’s request for voting results after its June 10 meeting.

   The situation was somewhat different at Allegheny Energy, where shareholders voted on a management proposal to eliminate cumulative voting and on a shareholder proposal to declassify the board, which was supported by management. Although the proposal to eliminate cumulative voting received 62.7 percent of the votes cast, it did not pass because it failed to receive more than 50 percent of the eligible votes (i.e., outstanding shares). The shareholder proposal to declassify the board did pass with support from 98.2 percent of the votes cast. Similar shareholder proposals requesting the elimination of the company's classified board also received majority support in each of the last three years, including 55.3 percent of the votes cast on the proposal in 2003. The company said in its proxy statement that in light of the level of support for this change, management was recommending a vote for the proposal this year, and that, if approved, the board would take all action required under Maryland law to declassify the board. The board plans to implement the change so that all directors will be elected at the 2005 annual meeting.      In 1999, Allegheny Energy opted into the Maryland law that allows for companies to implement a classified board without shareholder approval. Shareholder approval also is not necessary to opt out of the classified structure, and the company says that it will seek shareholder approval if it determines to opt back into the provision in the future.

   At the other end of the spectrum, Petrohawk Energy (formerly Beta Oil & Gas) and Farmer Brothers, also asked shareholders this year to vote on management proposals to eliminate cumulative voting, but in this case also to adopt a classified board. Both companies also reincorporated to Delaware and initiated stock splits. All the proposals passed, garnering between 61.3 percent and 68.8 percent of votes cast. In December, before the shareholder vote, Petrohawk Energy purchased a controlling interest in Beta Oil & Gas. Petrohawk indicated in the proxy statement that it intended to vote all of its shares in favor of both proposals, thus ensuring their passage. Farmer Bros. has been beset by lawsuits and other criticisms from major shareholders who complain that the founding Farmer family runs the business like a private enterprise for the benefit of insiders. It appears that the two companies are seeking to erect takeover defenses with their proposals.

   The prevalence of cumulative voting dropped significantly over the last decade or so, from 17.7 percent in 1990 to just 8.6 percent as of the end of 2003 among the 2,000 most widely held U.S. corporations. While nearly half of the states once mandated cumulative voting, only six do so now: New corporations in Arizona, Kentucky, Nebraska, North Dakota, South Dakota and West Virginia are required to adopt cumulative voting. Companies incorporated in these states make up less than 1 percent of all companies in IRRC's core research universe, however. Default provisions under most state laws provide for no cumulative voting, unless otherwise provided for in a company’s charter or bylaws.

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