When Shareholder Democracy Is Sham Democracy
By JAMES B. STEWART
Two weeks ago, I argued that it was hard to imagine a more compelling case for ousting directors than the one posed by Hewlett-Packard.
It turns out there are many stronger cases — 41.
That’s the number of publicly traded companies where directors actually
lost their elections last year, meaning that more than 50 percent of the
shareholders withheld their votes of approval. Yet despite these
resounding votes of no confidence, they remained in their posts.
At least at H.P., all the directors got a majority of the votes cast,
and even then, two resigned and a third gave up his post as chairman.
But at Cablevision Systems,
the New York cable and media company controlled by the Dolan family,
three directors lost shareholder elections twice in the last three years
— in 2010 and 2012 — and received only tepid support in 2011.
Nonetheless, the three remain on the board.
“As fiduciaries, we can’t sit by and let the board make a mockery of our
fundamental right to elect directors,” said New York City’s
comptroller, John Liu, who oversees the city’s pension funds, which own
more than 532,000 Cablevision shares. “Share owners need accountable
directors who will ensure the company isn’t being run for the benefit of
insiders at our expense.”
Mr. Liu sent the company a letter earlier this month urging it not to
nominate the three again and threatening a proxy fight. “The fact that
all three directors remain on the board suggests that one of the few
rights” afforded shareholders is “illusory,” he wrote. Mr. Liu warned
that he’d oppose their election and that “my office will also encourage
other shareholders to join us.”
Mr. Liu didn’t get a response, but a Cablevision spokesman told me this
week, without being specific, that Mr. Liu’s letter was “woefully
misinformed, inaccurate and political.” In proxy materials released by
Cablevision this week, all three directors — Thomas V. Reifenheiser,
John R. Ryan and Vincent S. Tese — were renominated for new terms.
Even directors who resign after losing votes don’t necessarily leave.
Two directors of Chesapeake Energy in Oklahoma, V. Burns Hargis,
president of Oklahoma State University, and Richard K. Davidson, the
former chief executive of Union Pacific, were opposed by more than 70 percent
of the shareholders in 2012. Chesapeake requires directors receiving
less than majority support to tender their resignations, which they did.
The company said it would “review the resignations in due course.”
It later said that the board declined to accept Mr. Hargis’s
resignation, a decision made with the
“input” of the activist
shareholder Carl Icahn and another large shareholder who had voted
against Mr. Hargis. (Mr. Davidson left a month after the vote, but Mr.
Hargis left only last month.)
At Iris International, a medical diagnostics company based in
Chatsworth, Calif., shareholders rejected all nine directors in May
2011. In keeping with the company’s policy, they submitted their
resignations. And then they voted not to accept them. The nine stayed on
the board. (The company was acquired in late 2012 by the Danaher
Corporation.)
A list of companies retaining directors who were rejected by
shareholders in 2012 — so-called zombie directors — was compiled by the
Council of Institutional Investors, which represents pension funds,
endowments and other large investors. The list includes not just
smaller, family-controlled companies, where disdain for shareholder
views may be more ingrained, but also Loral Space and Communications,
Mentor Graphics, Boston Beer Company and Vornado Realty Trust.
“It’s appalling,” Nell Minow, a co-founder of GMI Ratings, which rates
companies based on risk to shareholders, including corporate governance
issues, told me this week. “It’s the No. 1 issue in corporate
governance.” She noted that the reason such a thing was possible was
that many companies operate under a “plurality” voting system, in which
directors run unopposed and just one vote is enough to be elected. And
even companies that require a majority vote may decline to accept a
director’s resignation.
That an electoral system unworthy of Soviet-era sham democracies is
flourishing today in corporate America is largely thanks to the
management- and director-friendly policies of Delaware, where more than
half of United States companies are incorporated and where the corporate
franchise tax contributes disproportionately to the state’s revenue.
State law controls board governance, and Delaware has long tolerated
plurality voting. The Delaware Supreme Court has also affirmed the power
of boards to reject the resignations of directors who fail to gain a
majority of votes.
“We’ve had lengthy correspondence suggesting they change this,” Amy
Borrus, deputy director of the Council of Institutional Investors, told
me. ”We’ve even provided the wording to make it easier. Nothing
happens.”
Ms. Minow agreed. “Delaware is a race to the bottom,” she said. “There’s
no benefit to doing anything friendly to shareholders.“ The only state,
she said, that bars plurality voting is North Dakota — and it’s no
coincidence that no major company is incorporated there.
A spokesman for the Delaware secretary of state’s office, which oversees
the division of corporations, didn’t have any comment.
Defenders of plurality voting have typically argued that majority voting
or elections that would be binding might be destabilizing or disrupt
continuity. But “that’s simply to say that democracy is destabilizing,”
Ms. Minow said. “Continuity is exactly what shareholders voting against
directors do not want. That’s why they’re withholding their votes.”
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