Majority Rules!

Do you own shares in a company that behaves like a banana republic, with a high-powered clique in command and a voting process that means next to nothing? The methods by which many companies elect their board members wouldn't be amiss in a shady Third World dictatorship. But one important change to corporate bylaws could make such dubious dealings history.

Majority voting simply requires that a director must receive the majority of shareholder votes to get elected. For years, many companies have insisted instead on a mind-bendingly unreasonable and unfair alternative: plurality voting, where a director can be elected with a single vote.

Plurality voting is a problem that desperately needs fixing. Personally, I don't want to be head of any club where I can vote for myself, win no other votes, and still win. That behavior wouldn't even pass muster on an elementary-school playground.

Signs of progress
Happily, in recent years, more and more companies have voluntarily adopted majority voting. I asked corporate governance experts at The Corporate Library how the trend has progressed, and they were kind enough to share the following data, culled from Russell 1000 companies.

Year

Number of Companies Adopting Majority Voting

Percentage

2007

185

18.4%

2008

327

32.7%

2009

394

40.9%

2010

480

49.6%

Source: The Corporate Library, June 2010.

Though The Corporate Library has found that some of the previous years' data may have been understated by about 5%, you can still clearly see an increasing trend over time.

Heated debates rage on
Despite this progress, many companies continue to oppose such common-sense changes in their corporate governance policies.

Activist shareholder John Chevedden recently proposed majority voting at Devon Energy (NYSE: DVN  ) . Though a whopping 72% of shareholders had supported Chevedden's proposal, the company initially failed to publish the voting results, and later acknowledged that it had disregarded the vote because of an old SEC rule that required shareholder proposals to be "seconded." After Devon shareholders made their displeasure known, Devon dropped its objection to the proposal and disclosed the vote results.

Granted, critics come up with lots of reasons why majority voting might hinder public companies' boards. I recently saw one argument that such policies would increase "politicization" of boards, making many individuals reluctant to serve. In an interview with Business Ethics magazine, Standford professor Joseph Grundfest also opined that majority voting in uncontested director elections "will generate strategies whereby shareholders drive structural change by personalizing corporate disputes and targeting individual directors."

Maybe so, but that argument doesn't quite hold water with me. I doubt most shareholders will rock the boat too hard unless they see signs of serious trouble at their companies. Even with the potential pitfalls, it's hard to dispute that our long-held status quo -- where complacent boards of directors, impervious to shareholder ousting, let investors down time and time again -- needs to change.

If you can't take the heat, you need a change of heart
Thankfully, more investor groups are holding companies' feet to the fire on majority voting. The California Public Employees' Retirement System (better known as CalPERS, a major shareholder activist) announced that it planned to pressure 58 of the top companies in its portfolio to adopt the majority vote standard this year.

Shareholders at Graco (NYSE: GGG  ) , one of the companies it targeted, supported the proposal for a majority vote standard, with 63% in favor. CalPERS is also targeting major companies like Apple (Nasdaq: AAPL  ) , Coca-Cola (NYSE: KO  ) , Comcast (Nasdaq: CMCSA  ) , Google (Nasdaq: GOOG  ) , and MasterCard (NYSE: MA  ) .

Meanwhile, the financial reform legislation currently working its way through Congress includes elements that corporate governance fans have endorsed for years, such as non-binding advisory votes on compensation (aka "say on pay"), proxy access, and, yes, majority voting.

At long last, plenty of people are saying "no more" to the continuation of abusive, nonsensical policies. Is it a crying shame that some corporate managements and boards might have to be forced to adopt majority voting and other shareholder-friendly policies? I vote "yes."

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.

Coca-Cola has been recommended by Motley Fool Inside Value and Motley Fool Income Investor. Google is a Motley Fool Rule Breakers pick. Apple is a Motley Fool Stock Advisor choice. The Fool owns shares of Coca-Cola and Devon Energy. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (22)

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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 June 17, 2010, at 9:39 AM, TMFLomax wrote:

    Just saw this breaking news in my email, after negotiations last night it appears that they might drop the majority voting provision from the bill:

    http://blog.riskmetrics.com/gov/2010/06/senate-seeks-to-drop...

  • Report this Comment On June 18, 2010, at 10:47 AM, twdonner wrote:

    heres a thought.....do your own due diligence and make sure good management is there before you invest. Invest for the long haul like an owner, not a trader

  • Report this Comment On June 18, 2010, at 11:41 AM, corpgov wrote:

    Congress has apparently removed a requirement for majority voting that had been included in the major financial reform bill.

  • Report this Comment On June 18, 2010, at 12:11 PM, TMFLomax wrote:

    twdonner,

    I do agree that investors should seek out companies with good management and it's something I talk about frequently. However, shareholders should be able to make some noise when management policies are abusive.

    corpgov, that prospect is something we are aware of here and some of us are not too happy about. Two of my colleagues have an article coming out later today that addresses this possible development, and thank you for bringing it up.

    Best,

    Alyce

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