Majority Voting for Director Elections

Shareholder Proposals

Generally vote FOR precatory and binding resolutions requesting that the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.

Companies are strongly encouraged to also adopt a post-election policy (also know as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.

Discussion

Majority voting in board elections gained momentum in the 2006 proxy season with more than 180 companies adopting new election policies or bylaws.

The average level of support for majority vote shareholder proposals increased to 48.5 percent at approximately 94 companies holding shareholder meetings in 2006, compared with 44 percent support at the more than 55 company meetings that had a majority vote shareholder proposal in 2005.

The majority voting election standard (in uncontested elections), coupled with a post-election “director resignation policy” (also known as the “Intel” standard) has emerged as the current state of the art: shareholders have a clear, legally significant vote, and the board retains the ability to address the situation of “holdover” directors to accommodate both shareholder concerns and the need for stability and continuity of the board.

By adopting both majority voting and a director resignation policy, it is unnecessary to substitute one for the other; the two can co-exist as shown by companies adopting the Intel model. Majority voting, by itself, does not address the holdover situation if a director fails to get majority support. On the other hand, plurality voting coupled with a director resignation policy lacks teeth: the incumbent director still determines whether to tender his or her resignation. However, if majority voting creates holdover directors, the fate of the director is in the hands of the board.

Given the strong level of shareholder support for majority-vote shareholder proposals, ISS generally supports both binding and non-binding resolutions requesting that the board change the company's bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with state law where the company is incorporated. Moreover, binding resolutions need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.

Director Election Vote Standards

ISS outlines the vote standard for directors (e.g., plurality or majority standard), and the presence or absence of a director resignation policy. However, ISS continues to provide vote recommendations on director elections based on consistent application of voting policies. ISS does not overlay different director election policies for companies with different vote standards.

This approach reflects the preference of many institutional shareholders who have called for a consistent policy, and disclosure of voting standards in order to make their own determination as to how to vote.

Contested Elections

When there are more nominees than board seats, the use of a majority-voting standard can act as a takeover defense (e.g., although the dissident nominees may have received more shares cast, as long as the combination of withhold/against votes and the votes for the management nominees keep the dissident nominees under 50 percent, the management nominees will win, due to the holdover rules). This is clearly contrary to the expressed will of the shareholders.

If the company has a majority vote standard, but no carve-out for plurality voting in the situation where there are more nominees than seats, ISS includes cautionary language that, in the future, ISS may recommend a withhold vote from all board members at companies that do not provide for such a carve-out. ISS will not do so if such a carve-out would not be permissible under the jurisdictional laws governing the company.

Cautionary language rather than withhold recommendations will be applied at this time, as companies may need to explore their options under their jurisdictional laws and/or put forth charter amendment proposals on their ballots. Starting in 2008, however, ISS will likely recommend withhold votes for the entire board at companies that would be permitted to have a carve-out for plurality voting under their jurisdictional laws but have chosen not to do so.