Sharp Increase in Shareholder Votes Opposing Director Nominees

Recent data compiled by PROXY Governance, Inc. show a significant increase in the percentage of director nominees who received high percentages of shareholder votes cast in opposition in director elections during the 2009 proxy season. Although the vast majority of director nominees continue to be elected with little opposition, for companies with director election results available through August 2009, 9.8 percent of unopposed director nominees had at least 20 percent of shares voted against them or withheld, up from 5.5 percent in 2008. This trend was apparent at other threshold levels as well, with the percentage of directors having at least 40 percent of shares voted in opposition doubling from 1.0 percent in 2008 to 2.1 percent in 2009, and the percentage of directors failing to attain majority support tripling from 0.2 percent in 2008 to 0.6 percent in 2009. (See Table 1)

While declines in stock prices and the financial crisis no doubt played a role in the apparent increase in shareholder discontent with directors during 2009, compensation and corporate governance concerns also appear to have been primary drivers behind the increasing number of shares voted in opposition to directors. Of all director nominees who had more than 20 percent of shares withheld or voted against them in board elections, more than 57 percent served on compensation committees. Governance concerns – ranging from ignoring a majority vote on a shareholder proposal to adopting or renewing a poison pill without shareholder approval – also appear to have played a role in the high opposition votes at many companies.

Despite fewer organized “Vote No” campaigns against directors in 2009 – where a group of shareholders mount a public campaign to oust specific directors – at least 84 directors at 48 companies failed to attain majority support from shareholders through August 2009 at more than 2,400 companies where director voting results were available. Most of these 48 companies still use plurality voting, so the practical impact on most of the directors will be limited. Southwestern Energy Co., Pride International Inc., Cablevision Systems Corp., Pulte Homes Inc., Southwest Airlines Co., Massey Energy Co. and Kansas City Southern were among the larger companies where at least one director failed to achieve a majority vote. A list of the 48 companies where such votes have occurred so far in 2009 is shown in Table 2.

High profile “Vote No” campaigns aimed at unseating directors at financial firms such as Bank of America Corp. and Citigroup Inc. had mixed results – while the directors targeted in such campaigns were re-elected, several targeted directors at Bank of America later resigned, including the bank’s lead director.

The level of opposition to director candidates is likely to increase further next year as a number of existing and proposed regulatory changes related to proxy voting in director elections come into play. Beginning in 2010, under a rule change adopted by the New York Stock Exchange and approved by the Securities and Exchange Commission, discretionary voting by brokers of shares where they have not received voting instructions from shareowners will no longer be allowed in director elections. Because uninstructed broker votes can account for up to 20 percent of the vote at many companies, and are routinely voted with management’s recommendations, the new rule could result in many more directors failing to achieve majority support. For example, out of the universe of more than 2,400 companies, 284 director nominees were elected with less than 60 percent support of the shares cast and 473 nominees were elected with less than 65 percent support of the shares cast. Many of these directors might not have received majority support without the benefit of broker discretionary votes.

In addition to the impact of the rule change on broker discretionary voting, various bills are pending in Congress that would mandate annual elections for all directors and/or a majority voting system for all companies in uncontested elections. Annual elections would put many more directors up to a shareholder vote each year, potentially resulting in a greater total number of directors failing to achieve majority votes. Legislation mandating majority voting, while it might not impact the number of votes in opposition to directors, would certainly change the impact of those votes. Finally, the SEC has proposed a proxy access rule granting large shareholders access to the corporate proxy for purposes of nominating directors which, if implemented, could also have a significant impact on the director election process.