Shareholders 1, Board Bozos 0

Imagine if the votes of every American who didn't show up on Election Day went to the incumbent party. That's how out-of-whack our shareholder democracy is today.

At the Fool, we've long encouraged shareholders to get out and vote each proxy season. As part-owner of a business, it's in your interest to keep an eye on the Board of Directors, and vote against the members if you suspect them of negligence in their fiduciary duties. There are also crummy compensation plans to oppose, such as the one floated by offshore engineering outfit Acergy (Nasdaq: ACGY  ) last year.

Unfortunately, the reality is that more investors probably vote for their favorite American Idol than file a proxy. The problem goes beyond feeling like your vote doesn't matter in the grand scheme of things. Often, it literally doesn't matter, because most board slates run uncontested. Even in the tiny minority of contested elections, the odds are always stacked against challengers -- thanks to a certain Rule 452.

In 1937, the New York Stock Exchange adopted this rule, allowing brokers to vote on routine matters on behalf of their clients. Over the decades, the definition of "routine" has been altered many times, but until now, the election of directors has fallen under that rubric.

No longer. After years of study and debate, and a 3-2 decision at the SEC last week, NYSE members will not be allowed to vote for corporate directors without instructions from their clients beginning Jan. 1, 2010.

This is a big deal, my Foolish friends.

I can't imagine how many value-torching decisions have coasted through with the patina of shareholder approval provided by broker voting. Ditto for incumbent Board bozos. Bank of America (NYSE: BAC  ) is a disaster, and dissident shareholders just barely squeaked out a victory in the separation of CEO and chairman roles at the end of April.

Without the broker votes, major corporations such as Intel (Nasdaq: INTC  ) , Home Depot (NYSE: HD  ) , and PepsiCo (NYSE: PEP  ) are suddenly facing a majority vote standard with some teeth. Now, if only mutual funds would be prevented from carelessly voting their clients' shares, things could get really interesting.

I suggest you ignore the protests about unfairly empowering short-term-oriented activist hedge funds. The same bugbear has justified all sorts of devious devices, from staggered boards to poison pills. I much prefer keeping the incumbents on their toes. Ring this one up as a victory for shareholders big and small. And don't forget to vote!

Home Depot and Intel are Motley Fool Inside Value recommendations. PepsiCo is a Motley Fool Income Investor pick. See if any of our newsletters win your vote with a free 30-day trial.

Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his CAPS profile or follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


Read/Post Comments (18) | Recommend This Article (84)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2009, at 5:01 PM, htownjester wrote:

    I have to agree this is huge. Having followed FRN, SNS and read much on the MDP service I have come to the conclusion that 1) boards are not being held accountable, and 2) mutual fund managers are not being held accountable. Some is apathy, but much is arcane rules setup by the SEC that render our shareholder value subservient to Wall St machines and a growing management class that acts in its own interests with complicit boards.

    Let's get our shareholder value back!!

  • Report this Comment On July 08, 2009, at 5:53 PM, lakeaffected wrote:

    I also agree that this is huge! I cast a vote in every proxy that I receive, albeit a negative vote. I figure that voting "as recommended by the Board of Directors" is a waste of time, so I ALWAYS vote against their nominations and recommendations. Still probably a waste of time, but what if EVERY individual shareholder did this?

  • Report this Comment On July 08, 2009, at 6:10 PM, thisislabor wrote:

    wait we won one? i don't get it, explain again how this makes my vote more important. sorry, i'm just naive on how the process works.

  • Report this Comment On July 08, 2009, at 6:22 PM, Rogerd430 wrote:

    Now all we have to do is to get rid of the procedures under which the Board gets to nominate candidates for the Board. Sounds confusing and crazy, huh? But that's how it works...

    There should be some means other than this insanity to get qualified candidates who don't spout the party line, or is some sort of a retired politician that can "grease the skids of government" for the company's executives.

    I don't mean "get the government involved", that would change the insantity into an "ordinary" and possible incurable everyday event.

    Now allwe've got to do is to get some sort of a handle on the outrageous compansation packages being paid to company's executives, like Nardelli, etc.

  • Report this Comment On July 08, 2009, at 6:36 PM, steveelcpo wrote:

    This is BIG! Now, if we could get some accountability in mutual funds and pension funds, and all those other funds that hold million share blocks of stock in major corporations, who appear to be in bed (figuratively, but who really knows??) with the Boards, that would be real progress! I do vote my shares, usually against the board recommendations because my perception is they are just out to protect and perpetuate their own positions, but what difference does a NO vote with a couple hundred shares make when the average CEO owns 100,000 or more shares him/herself. Has anyone ever tried to make mutual funds accountable for how they vote? I tried one time with T.Rowe Price, both by phone and by letter, and never even got a response. BTW, I no longer have mutual fund shares in T.Rowe Price. And I figured if they were going to lose money for me, I could do just as well myself and safe the management fees.

  • Report this Comment On July 08, 2009, at 7:04 PM, Joemit wrote:

    Thisislabor - To answer your question quickly and easily. Each share of common stock has with is one vote.

    You have 5000 shares, you get 5000 votes.

    (Yes I know there are exceptions but I want TIL to get the basics, first.)

    The coversation concerning mutual funds as that if you read the listing of the stocks owned by them, they are often in the Millions of shares,sometimes multiple millions, unless they don't agree with the boards, they will usually vote along. And it takes a lot of 100 lot or 300 lot indiviual owners to combat that.

  • Report this Comment On July 08, 2009, at 7:05 PM, xetn wrote:

    Ok, I am confused. Why would you vote to purchase a particular company, and then vote against their management? Are you seriously saying that you know more about running the company than its managers? If so, why would you buy shares in the first place? And if you really disagree with management decisions after you have made your purchase, the best vote would be to sell the shares. After all, the vote that really counts is the one you cast with your dollars.

    So, please enlighten me.

  • Report this Comment On July 08, 2009, at 8:04 PM, peters46 wrote:

    I seldom vote against individual board members, unless I can track down compensation committee members responsible for floating the outrageous compensation/bonus plans that give away one to five percent of the company each year as options. And now the fed has taken away my vote on the compensation plans by decreeing that each company advance those plans for ADVISORY votes, which the board can ignore. Yes, the companies can still put the plans up for real votes, but why bother? And yes, the junior members of the board (who are the ones chosen for the compensation committee) are strongly influenced (can you say coerced) by the chairman and other board members

  • Report this Comment On July 08, 2009, at 8:37 PM, Guthree wrote:

    What exactly does this mean? If hedge funds and mutual funds still vote their shares, what exactly is no longer being voted? What percent of float on average do these shares comprise?

    I agree it is a good thing -- or so it sounds -- but I'm not sure I understand what is no longer allowed.

    Re: <i>Ok, I am confused. Why would you vote to purchase a particular company, and then vote against their management? Are you seriously saying that you know more about running the company than its managers?</i>

    You think the inherent value of the company is much higher than the stock price, and that the management/board of directors is the problem.

    As for saying I know more about running a company than the management, that's often been the case. For instance, I never would have merged Time Warner with AOL. You gotta realize that the incentive for many executives is to pad their own pockets, and the incentive for many directors often runs along the lines of positioning themselves to get invited to the A-list charity events. (They already have enough money, they want other 'perks'.) One member of the Time Warner board that approved the AOL merger was opera diva Beverly Sills. Yeah. Beverly Sills. And I most definitely know more about AOL and Time Warner than she did.

  • Report this Comment On July 08, 2009, at 11:59 PM, montyw47 wrote:

    As a FOOL who worked for Merrill Lynch for over 29 years, my loyalty was for naught. The board voted huge packages for the management and interlocking boards protected each other. Finally my shareholder vote with BAC will mean something. Mutual funds should be required to allow their shareholders a say in how the fund votes the shares it owns. Poorly run companies & its officers running the company must be brought to account. This FOOLISHness of retaining talent is just that. The company needs better talent than what is there now. Loosers need better management. Changing management isn't a bad thing. A shake -up at the top is good for the country and companies. Employment contracts of highly compensated EMPLOYEES should be available to shareholders. Disgorgement of excessive compensation should be in the hand of the real owners of public co,its shareholders.Boards are incapable of doing this task. Merrill paid bonus money MONTHS earlier than normal to bypass BAC control and give Stan ONeill et al Hundreds of millions when the company was in severe financial distress. SEC, NASDAQ, SIPC, other federal regulators where are you? In bed with the companies you regulate.

  • Report this Comment On July 09, 2009, at 10:35 AM, JoePublic007 wrote:

    We have free markets in the same way that toilets have water. As soon as anything dirty shows up the Government steps in and flushes the Free Market down the drain. The fact is Congress sets up these rules and through them encourages, in fact creates the Corporate malfeaseance. After all, people are people, and they'll play whatever rules you give them to their best advantage. If the rules are set up so that one group has overwhelming advantage, they're going to use it to win the game. This entire mess has been and continues to be fault of Congress. They are FAILING FAILING FAILING to do the job we hired them for. Exactly what is the process, again, for firing the REAL BOZOS?

    http://AnAmericanFirst.com/?p=743

  • Report this Comment On July 09, 2009, at 1:37 PM, bobbye64 wrote:

    Very tired of your Walmart bashing!!!! Have you shopped there?? There are numerous people who "love" Walmart. B

  • Report this Comment On July 09, 2009, at 4:01 PM, fiscalgeo wrote:

    Great example -> Feb, 2000, Fidelity Aggressive Growth Fund (at the time Morningstar - 5 stars) - fund mgr, Erin Sullivan, bolted to start her own hedge fund. Fidelity put a mgr, Robt Burtleson, with a prior lackluster record in her place and he rode it to a 1-star fund in just under 3 years, losing 90% of the fund's value. He lost money on MSFT more than once during the period. One financial publication labeled him the worst stock picker in the mutual fund industry. As an investor (via 401k), nothing I could do to dissuade Fidelity to get this guy out!

  • Report this Comment On July 10, 2009, at 5:58 PM, novafrontline wrote:

    Good points.

    I noticed that the default selections for a MSSB managed portfolio acct application had them receiving the stockholder info, the trade confirmations, and voting all the proxies. This is for people who would rather not be bothered with this stuff, couldn't understand it anyway, or just don't care.

    I vote all my proxies. If I see a board candidate that is on more than 2 other major corporation boards, I typically withhold my vote. A director on more than 3 major boards can't competently focus on the well-being of my company.

    I will vote against compensation packages and increasing available shares if I see the exec compensations are out of line with the rest of the employees, or the shares are not made available to all the employees. I could care less about making exec comp packages fit a "peer" list.

    I will vote for shareholder proposals if they make sense to me and they are the right thing to do, even if they cost the company some $.

  • Report this Comment On July 11, 2009, at 12:10 PM, tumachar wrote:

    This is great news. I wrote that this is something that is required here at fool.com back in feb.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=139062&t=0...

    I believe there needs to be some way to tell top executives that they cannot just stay on the helm for long/long time, while treating shareholder, employees and other stakeholders as powerless in their hands..

  • Report this Comment On July 13, 2009, at 1:10 PM, turb0kat wrote:

    the comment about mutual funds was somewhat asinine. The whole purpose of a mutual fund is for the fund manager to make voting decisions for their clients.

    As an interesting side-effect of this change, however, mutual fund managers just became a whole lot more powerful...

    -TK

  • Report this Comment On July 13, 2009, at 4:49 PM, TexasChris wrote:

    I have a request of at least the Premium Sevices. Since the Fool can better monitor the activities of individual board members and issues, could they provide a voters guide?

  • Report this Comment On July 13, 2009, at 4:50 PM, TexasChris wrote:

    Or at least set a poll on Caps?

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