Does Cumulative Voting Compliment Majority Voting?
Submitted by: Rajeev Kumar, Director of U.S. Research, and Robert Kellogg, Managing Director, Taft-Hartley Advisory Services
An interesting post ran last week on Broc Romanek's Corporate Counsel Blog. If one agrees, as mentioned in the piece, that cumulative voting helps protect shareholder rights--which ISS policy does--then majority vote standard and cumulative voting compliment each other. Without majority vote standard, cumulative voting in an uncontested election has no teeth because then a director could still be elected if he/she receives one single vote.
As for cases of contested elections, it is a non-issue because plurality voting standard would remain the election standard maintaining the status quo. Having majority vote standard in an uncontested situation would actually serve as a takeover defense. Therefore, in evaluating shareholder proposals requesting majority vote standard, ISS looks for such carve-out for contested elections in the language of the resolution.
Regarding ISS' policy on cumulative voting with respect to majority vote standard, we would not support a cumulative voting shareholder proposal if the company has majority vote standard in place. This is not because the two are incompatible, as many companies have been arguing. Rather, the rationale behind this policy is to provide an incentive mechanism (the carrot) for companies to move toward a majority voting standard for electing its directors.
It is true that cumulative voting can be viewed as a vehicle to allow special interest shareholders to make their voice heard in that, in theory, it makes it easier for a minority holder to get at least one director elected. However, many would say this isn't necessarily a negative byproduct. ISS' current policy is willing to "trade off" a cumulative voting provision if the company is willing to adopt a majority vote standard.
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Comments
I think ISS has got the trade off all wrong. Cumulative voting is a much more valuable accountability and oversight measure to exercise on recalctrant boards than majority voting. We all know a withhold vote in a plurality system is entirely symbolic. Yes, majority voting gives some teeth to a withhold vote campaign. However, it only gives shareowners rejection power of a board's nominee. That board then gets to replace the original bad nominee with another nominee OF THE VERY SAME BOARD'S choosing .
Majority voting is simply a veto action rather than the affirmative placement action that easier shareholder access (via cumulative voting or one day direct shareholder nomination on company proxies) provides.
Board's that are bad enough to warrant a majority withhold vote are the very same companies that want to keep shareholder nominees out of the board room at all costs, often using the red herring label of representing "special" interests, (which I am disappointed to see ISS continue to swallow hook line and sinker). ISS ought always favor cumulative voting and it never should be thought of as mutually exclusive with having majority voting. Majority voting limited to instances of uncontested elections can exist while cumulative voting remains in place for contested contests allowing less expensive election of minority short slates.
Posted by: Andrew Shapiro, President, Lawndale Capital Management, LLC | July 31, 2006 7:50 PM
Shapiro is correct, ISS shouldn't be trading cumulative voting (which actually empowers shareholders to select directors) for majority voting (which simply provides more meaningful withhold campaigns).
I've attended several meetings this year, such as the excellent Directors Forum in January (see http://www.directorsforum.org/2006). The vast majority of those attending that gathering and others believe that majority voting requirements would become the standard, replacing cumulative voting within the next several years. No carrot needed.
Don't move shareholder rights backwards!
ISS should be highlighting the small number of cases where shareholders have proposed replacement directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request.
Even if shareholder nominees aren't accepted when this rule is invoked, every such action helps build the future case for equal or open access.
Posted by: James McRitchie | August 2, 2006 5:01 PM