Director Elections May Get New Hurdle

Corporate elections would hardly be mistaken for the hurly burly of professional politics.

Candidates for the boardroom rarely break a sweat. Opposition is highly unusual. Shareholders may vote yes, but they may not vote no. Getting nominated by the company is the ticket to victory.

Such lack of spirited battle has prompted the latest crusade in the quest for corporate democracy: resolutions urging that candidates for the board receive a majority of votes in order to win, instead of a plurality. Under the proposals, blocs of shareholders could thwart the election of directors by refusing to vote for them.

The measures have cropped up at more than 60 annual meetings in this year’s proxy season. And despite wariness of management, they are hitting a strong chord with investors.

“We think this is a straightforward democratic reform,” said Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners of America, sponsor of the resolutions along with other building trades representing $200 billion in pension assets. “This is now an issue that companies are going to have to deal with.”

Last week, shareholders endorsed the concept at semiconductor maker Advanced Micro Devices Inc. with 58% of shares voted in favor and at Marathon Oil Corp. with a 51.7% approval margin. The proposal almost won at newspaper publisher Gannett Co. (48.5%) and paper manufacturer MeadWestvaco Corp. (49.5%).

The resolutions are not binding, and have not fared so strongly everywhere. Still, supporters are delighted with the early returns, with many backers viewing votes of 20% or more in favor as a sign of strength -- particularly when management is asking investors to turn down a measure.

“I’ve never seen any shareholder initiative gain so much support so quickly,” said Nell Minow, editor of Corporate Library, a pro-investor research firm specializing in governance issues. “I think it’s a tremendously significant proposal, and it’s just about unstoppable.”

Indeed, two national retailers -- Lowe’s Cos. and Dillard’s Inc. -- agreed to alter their election policies without shareholder votes after the Carpenters put the measure on the companies’ annual meeting agendas.

A Lowe’s spokesman said the home supply company foresaw no problems in making the shift.

“It will give shareholders the same voice regarding the election of directors as they already have with other matters that come before shareholders for a vote,” said Chris Ahearn, a spokeswoman for the North Carolina-based retailer.

More typical are companies such as Advanced Micro Devices. The Silicon Valley firm asked its shareholders to reject the measure.

In its official proxy materials, the company declared that its director candidates typically won more than 90% of the vote and that its procedures had produced strong and independent boards.

Shareholders were not convinced. At Advanced Micro Devices’ annual meeting last week, the majority-vote resolution garnered almost six out of 10 ballots cast. Executives at the company heard the message loud and clear.

“They take it seriously,” said Eric DeRitis, a spokesman for the chip maker. “Our board of directors will give it careful and thoughtful attention.”

Under typical state laws, unhappy shareholders may protest by withholding their votes from a board candidate, but the action is largely symbolic since they don’t need a majority vote to win.

Cases such as the heated protest campaign against Michael Eisner at Walt Disney Co., which led to his removal as chairman last year, are rare.

As a result, critics deride board elections as empty exercises. But attempts at change have met staunch opposition.

Defenders of the current system maintain that boards are becoming increasingly independent as a result of post-Enron reforms. They also fear that deep-pocketed institutional investors, including pension funds with links to organized labor, could gain too much power if election rules are overhauled.

“Requiring a majority vote would give activists huge leverage by allowing them to threaten to withhold enough votes to defeat a nominee,” corporate lawyer Martin Lipton wrote in a memo to clients in March.

Tita Freeman, a spokeswoman for the Business Roundtable, also voiced concern. “While ensuring that shareholders are able to communicate their positions to directors is very important, we also have to ensure that [the proposal] doesn’t become a vehicle ... to move a special-interest agenda forward.”

A plan being considered by the Securities and Exchange Commission to give large shareholder blocs new leverage in the election of directors sparked a vehement backlash from business lobbies and has been stalled for many months.

Durkin called the company resolutions a “first cousin” to the SEC proposal, which differs in significant ways. The SEC plan, for example, was designed to promote independent candidates for the board if enough major investors are unhappy with management’s choice.

The union plan simply calls for requiring that a board candidate receive a majority of shareholder votes. Although the details of the requirement would need to be worked out, the measures would give shareholders an effective means to block the election of board candidates and not just issue a protest vote that has no effect. Initially, sponsors planned to press the matter at an assortment of about 80 corporations but winnowed the list down when executives at some of those companies -- including Intel Corp., Time Warner Inc., Merrill Lynch & Co., Gap Inc. and ChevronTexaco Corp. -- agreed to study the idea.

“It has an appeal,” said Cary I. Klafter, vice president of legal and government affairs at Intel. “The question is, can we identify the potential unintended consequences” to craft an effective measure.

In fact, arguing against the proposal could pose a public relations problem, said Patrick McGurn, vice president of Institutional Shareholder Services, a proxy advisory firm.

“You essentially have to argue against majority rule, which is a very American and democratic concept,” said McGurn, whose group supports the effort. “Nobody really wants to come out and say majority voting is bad.”

In March, the California Public Employees’ Retirement System called a majority-vote requirement a “new frontier” in corporate governance, and said it would support the goal. Ultimately, sponsors hope that companies will adopt such policies and that state legislatures will enact laws that reinforce majority voting.

“I would expect to see more companies getting on this train,” said Elliot Schwartz, director of research at the Council of Institutional Investors, whose members endorsed the concept last month.

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Majority rules?

Nonbinding resolutions calling for companies to require directors to be elected by majority vote have won strong support at recent annual meetings, although most of the proposals have themselves fallen short of a majority. Here’s a sampling of recent votes based on preliminary tallies.

*--* Shareholder vote in Date Company favor of vote Caterpillar 38.0% 4/13/05 Gannett 48.5% 4/14/05 Citigroup 42.0% 4/19/05 MeadWestvaco 49.5% 4/26/05 Fluor 28.0% 4/27/05 Marathon Oil 51.7% 4/27/05 Advanced Micro Devices 58.0% 4/28/05 Capital One Financial 42.5% 4/28/05 Bristol-Myers Squibb 44.9% 5/3/05 Raytheon 57.0% 5/4/05 Federal Realty Investment Trust 43.0% 5/4/05

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Source: United Brotherhood of Carpenters and Joiners of America