Corporate undead, vote losers stay in US boardrooms

Wed Jun 20, 2012 3:11pm EDT

* Investors cool to directors at Cablevision, Vornado

* Only 6 of 48 directors without majorities departed in 2011

* Staying on makes "mockery" of shareholder wishes- critic

By Ross Kerber

BOSTON, June 20 (Reuters) - They lost their votes, but they have not left.

Directors at dozens of companies have taken or kept board seats despite failing to gain majorities in shareholder elections. Examples this proxy season include board members at Vornado Realty Trust and Cablevision Systems Corp .

As at many companies, Vornado and Cablevision bylaws allow board members to stick around even without the endorsement of a majority of voting shareholders.

But some corporate governance experts want directors to quit when they face what amount to votes of no confidence. Otherwise, they fret that the votes undermine shareholder authority.

A company that fails to adopt stricter voting standards "is saying loud and clear that it does not care about its shareholders," Harvard Law School professor Jesse Fried said in an email. "It's not surprising to see directors at many of these firms failing to get majority support," he said.

Some corporate legal experts do not want more pressure on directors to quit, however. They w orry failed elections can destabilize companies.

Last fall an American Bar Association committee declined to adopt a suggestion that would have pushed directors to win majorities. Committee chairman Gilchrist Sparks said companies need the flexibility to keep directors and avoid vacancies, in order to meet exchange listing rules, for example.

"There's a whole series of reasons why you need that safety valve," he said.

The wrangling comes during a broader debate over corporate governance that has developed since the financial crisis, as large shareholders press for more say in how companies are run.

For instance, in new advisory "Say on Pay" votes on executive compensation, shareholders have rejected pay of several high-profile leaders like that of Citigroup Inc Chief Executive Vikram Pandit. Shareholder activists have also won compromises like a deal in March under which Goldman Sachs Group agreed to appoint an independent lead director.

Even tougher company voting rules don't always change the outcome of d irector e lections. Last year, shareholders voted against the entire board of medical equipment supplier Iris International Inc at the urging of proxy advisor ISS.

The nine offered to resign, as required by Iris bylaws. Then they un-did the offers, according to an Iris regulatory filing, voting as a full board to reject the individual resignations.

Such outcomes undercut elections, according to the Council of Institutional Investors in Washington, which represents managers like pension funds and endowments with a combined $3 trillion in assets.

Most large U.S corporations limit who can be nominated to company boards, meaning that elections usually lack an alternative candidate.

Ann Yerger, the investor council's executive director, said corporations ought to take director election r esults m ore seriously. Co rporate leaders of ten tell big shareholders to stop proposing policy questions on proxy ballots and just focus on choosing directors, sh e said.

"What they neglected to say is the vote is meaningless because companies can make a mockery of the results," she said.

TOUGHER RULES

Many companies operate under a "plurality voting" policy in which candidates win by receiving the most votes rather than at least 50 percent.

Plurality voting lowers the bar when incumbents run unopposed. Yerger's group backs plurality voting only for contested elections where there are more candidates than open seats.

Otherwise, it urges directors win a majority of votes cast. Those who cannot meet that test should leave "as soon as practicable," with grace periods only to follow rules like listing requirements, the Council said in a 2010 policy.

Last year, the council counted 48 directors at 35 companies in the Russell 3000 index who did not win majorities in uncontested elections. Of these, only six actually left. So far this year through June 14 it counted 26 companies where directors failed to get majority support.

It counted just one company where a director actually left as a result: exchange operator NYSE Euronext, whose board accepted on April 26 the resignation of Ricardo Salgado.

NYSE Euronext has adopted majority voting. Most other companies cited by the Council have "plurality voting," so directors were not required to leave. Cablevision, where three directors did not get majorities and stayed, is one example.

Cablevision spokeswoman Kelly McAndrew said the three deserved to stay. "Their independent insight, experience and counsel make them valuable assets in serving Cablevision's Board and shareholders," she said.

In Vornado's case, at its annual meeting on May 24, three board members - including Chairman Steven Roth and Chief Executive Michael Fascitelli - got less than 50 percent of votes cast.

Proxy adviser Glass Lewis recommended shareholders withhold their votes from all three in part since the executives did not make changes shareholders had voted for in previous years - like requiring majority backing in uncontested board elections.

Several board members also got less than 50 percent support last year and they, too, remain on the board, the San Francisco proxy adviser said in a note to shareholders. "Glass Lewis remains deeply concerned by the company's decision to repeatedly ignore the will of its shareholders," the firm wrote.

A Vornado representative declined to comment.

Companies can still make amends and regain shareholder support. At Iris the 2011 vote came after proxy adviser ISS criticized directors for adopting a "poison pill" takeover defense. Iris then terminated the plan and its directors easily won re-election on April 27, 2012, filings show.

Iris representatives did not return messages.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.