Study of Majority Voting in Director Elections

We have recently released the November 2007 edition of the Study of Majority Voting in Director Elections, which demonstrates that majority voting for the election of directors, which has been characterized by its advocates as a tool for increasing director accountability, has become the prevailing election standard among large, public companies. As issuers prepare for the 2008 proxy season, a few statistics and examples drawn from the Study underscore that majority voting has become a relatively mature, as well as widespread, movement.

Majority Voting in the S&P 500 and Fortune 500. 66% of the companies in the S&P 500 and over 57% of the companies in the Fortune 500 have adopted a form of majority voting, notwithstanding robust levels of merger and acquisition activity early in 2007 that resulted in several firms with majority voting going private. By way of contrast, when the Study was initially published in 2006, only 16% of the companies in the S&P 500 had adopted a form of majority voting.

Breaking down those percentages, approximately 19% of the companies in the S&P 500 have adopted a majority vote policy, 25% have adopted a majority vote bylaw or charter provision, and 22% have adopted a majority vote policy and bylaw or charter provision. Overall, approximately 19% of the companies in the S&P 500 have retained a plurality election standard augmented by a majority-vote policy (such as a policy that permits but does not require the board to accept a resignation offered by a nominee who fails to receive a majority vote) while 38% have adopted a true majority election standard. In both the S&P 500, companies which have adopted true-majority vote bylaws or charter amendments outnumber those which have adopted non-binding majority-vote policies by a margin of 2:1.

Binding Provisions Becoming the Standard. Since the Study was first published, the relative percentages of companies adopting policies has continued to decline, while the percentage adopting majority-vote bylaws or charter provisions has steadily increased. Of the 534 companies listed in the Study as having taken definitive action, 42% adopted policies, 30% adopted bylaws or charter provisions, and 28% adopted both a policy and a bylaw or charter provision. The comparable percentages in February 2006 were 79%, 16%, and 5%, respectively, thus emphasizing the shift away from policies and towards binding majority-vote bylaws and charter provisions. And, among these 534 companies, 47% retained a plurality standard with a policy addressing nominees who fail to draw a majority vote, while 53% adopted a true majority-voting standard; the comparable percentages in 2006 were 80% and 20%, respectively. Again, these results highlight that true majority-vote bylaws and charter provisions are increasingly becoming the standard.

Majority Voting Appearing in IPOs and Spin-Offs. The updated Study indicates that majority voting is not found at large companies alone, but has increasingly been adopted by midsize and smaller firms. Majority-voting provisions are appearing in firms being spun off (recent examples include Discover Financial Services, Kraft Foods, and Philip Morris International); companies being taken public (including CVR Energy and RiskMetrics Group, Inc.); and firms emerging from bankruptcy (including Delta Air Lines).

State Legislation. States have been responding to the majority-vote movement through legislation that enables boards or stockholders to provide for forms of majority voting or permit contingent, irrevocable director resignations. States that have addressed majority voting include California, Delaware, Nevada, North Dakota, Ohio, Utah, Virginia, and Washington; Delaware, Maine, Texas, Utah, and Virginia all permit contingent, irrevocable resignations, and legislation authorizing the practice has recently been introduced in Oklahoma.

Industry Breakdown. The Study indicates that manufacturing is the industry sector in which the largest number of companies have adopted a form of majority voting, perhaps in part because of the strong union presence in manufacturing and the involvement of unions in promoting majority voting. Of the companies listed in the Study, 39% are in manufacturing, compared with 34% in February 2006, followed by 24% in finance and insurance.

The Shifting Balance of Power. Majority-voting has not come to the fore alone. Combined with (1) the successful ongoing movements to declassify boards and eliminate other takeover deterrents such as poison pills and supermajority stockholder-approval requirements; (2) the New York Stock Exchange’s proposed elimination of a rule that permitted brokers to vote uninstructed client shares in favor of management’s slate in contested elections; (3) the SEC’s recently-adopted electronic proxy rules which largely allow proxy materials to be distributed via the Internet, enhancing the ability of a dissident to wage a proxy fight; (4) the influence of proxy-advisory firms such as RiskMetrics; and (5) the increased power of stockholder activists, a perfect storm is brewing which is shifting power toward stockholders and leading to increased levels of engagement between boards and stockholders.

A Memorandum summarizing the principal findings from the November edition of the Study is available for download here.