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JANUARY 31, 2005
A Simple Way To Make Boards Behave Requiring directors to win a majority of votes would give shareholders more say Eighteen months ago, the Securities & Exchange Commission embarked on a plan to give shareholders the right to nominate their own director candidates. The aim was to make it easier to oust bad directors and make boards more responsive. But after intense opposition from business groups, the once-revolutionary reform has bogged down at the SEC. And even if it survives, the proposal has been transformed into a convoluted process that's unlikely to accomplish its goal. The bottom line: Showing a bad director the door would take at least 18 months, if it happens at all. Says Joanne T. Medero, general counsel for Barclays Global Investors (BCS ): "We think the proposal really needed more thought." There's a far better way, and it's gaining credence in corporate-governance circles: requiring directors to win a majority of votes. It's simpler and faster, allowing shareholders to remove bad directors at each annual meeting. It keeps control over nominations in directors' hands, preventing special interests from hijacking the process. In coming months, investors at as many as 100 companies -- including Merrill Lynch (MER ), Gannett (GCI ), and Motorola (MOT ) -- will vote on nonbinding shareholder resolutions urging those companies to adopt majority voting. It's an idea that deserves serious consideration. Says Ann Yerger, executive director of the Council of Institutional Investors: "It would make boards think even harder about their duties and responsibilities." Currently most U.S. companies only require directors to win a plurality, which means that uncontested board nominees nearly always keep their seats even when most shareholders want them out. To cite one recent example: Four directors at Federated Department Stores (FD ) continue to serve, despite winning support from only 39% to 43% of investors at the annual meeting last May. With limited incentive to address shareholder concerns, many boards routinely ignore shareholder resolutions even when they win. The proposal the SEC is considering isn't much better. Shareholders would get to nominate director candidates -- but only after a massive vote against a sitting director, and only if the company fails to address investors' concerns. The plan has been stalled at the SEC because Chairman William H. Donaldson has been unable to craft a compromise that will win the backing of a majority of his fellow commissioners. They're sympathetic to the concerns raised by many in Corporate America that the rule would hand control of the nominating process to special interests, such as labor, whose agenda could run counter to a company's interests. With majority voting, that wouldn't be a problem. Directors would continue to control board nominations, but candidates would be required to win a majority of votes cast. If they don't, the board, under one version, would be required to put up a new nominee subject to investor approval. Another option would permit boards to decide the fate of rejected directors; alternatively, boards that allow them to stay on would be subject to onerous disclosure requirements. Susan Ellen Wolf, chairwoman-elect of the Society of Corporate Secretaries & Governance Professionals, called that version "a brilliant compromise." Still, many companies remain skeptical. At Bristol-Myers Squibb Co. (BMY ), a majority vote resolution won 7.4% of votes cast early last year, and it has been submitted again for the annual meeting in May by the United Brotherhood of Carpenters and Joiners of America, a major advocate of majority voting. The board is urging shareholders to reject the proposal. Bristol calls it "unworkable," saying vacancies created by majority voting would cause instability and that qualified people would be deterred from serving. Those fears may be overstated. In reality, only directors deemed to have been particularly bad stewards would likely be ousted. The main benefit of bringing majority vote to the boardroom would be its value as a deterrent. The future of individual directors could hang in the balance in every decision they make -- a recipe for accountability if ever there was one.  By Louis Lavelle Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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