Unhappiness runs deep when shareholders withhold votes: study

WASHINGTON (Reuters) - Shareholders who choose to “withhold” their vote for a corporate board member are more dissatisfied than it may initially seem, according to a study released Wednesday by two corporate governance organizations.

The study, conducted by GMI Ratings and commissioned by the Investor Responsibility Research Center Institute (IRRCi), concluded that a higher-than-average level of withheld votes in a board election shows that shareholders may not only be dissatisfied about the nomination of an individual director but with the board as a whole.

But even when a majority of shareholders withheld their votes for a nominee, it was rare for the member to be directly removed, the study found.

“It is a mistake to dismiss majority-withhold votes,” study author Kimberly Gladman of GMI Ratings said in a release. “These votes often are a means for shareholders to express key concerns about board oversight, and public companies should take them seriously.”

The IRRCi is a non-profit corporate-responsibility group, based in New York, and GMI Ratings is a corporate-governance information company.

The study looked at 175 cases in which a majority of shareholders opposed director nominees between July 1, 2009 and June 30, 2012. The companies were among the 3,000 largest in the United States, but smaller companies in that group accounted for 80 percent of the cases of majority-shareholder vote withholding.

Major reasons for withholding votes included: the company’s adoption of a poison-pill anti-takeover strategy without shareholder approval, “related-party” transactions by corporate insiders, concern over executive compensation and general dissatisfaction with the company.

The average level of withheld votes in a director’s election is 5 percent; companies should be concerned when the level in an election exceeds 10 percent, said Gladman, who is GMI Ratings’s director of research. She encouraged boards to engage in more dialogue with their shareholders.

“I’m hopeful that companies will start to see that and start to pay attention to any levels that are above the average level,” Gladman said. “If I was a corporate secretary I would be asking: why is that happening?”

The study found that shareholders who withheld their votes for an individual nominee often -- 18 percent of the time -- showed signs of broader dissatisfaction, for example by withholding votes in proxy contests or for management plans.

Most large companies have adopted majority-voting standards, which require that a director receive a majority of the shares voting at the meeting in order to be re-elected, the study found. But smaller companies often had a “plurality” voting system where withheld votes cannot stop a candidate from getting re-elected.

Director nominees were directly removed in just 5 percent of the cases in which a majority of votes for a nominee were withheld, the study said.

“We have a system in which the vast majority of directors who receive withhold votes fail to achieve a majority and still they exercise power over our investments. It is capitalism without accountability,” said IRRCi Executive Director Jon Lukomnik.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete here provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

Editing by Randall Mikkelsen and Richard Pullin