This article is part of an ongoing series about the Shareholder Bill of Rights currently in Congress. Together, we can ensure that this bill truly represents our interests as shareholders and individual investors.  

In May, shareholders voted out all three Pulte Homes (NYSE:PHM) directors up for re-election over concerns about the company's corporate governance. Yet none of the three lost their positions as a result of the vote, because other board members simply reappointed them.

Strange as it may seem, not all companies have a "majority" voting structure requiring directors to have a majority of votes cast to stay on the board. Under so-called "plurality" systems, directors can keep their seats so long as they receive one vote.

So far this year, a record 93 board members failed to receive 50% of votes cast by shareholders,The Wall Street Journal reports. What's all the more startling is that not a single board member who lost these elections actually stepped down.

The current situation
Since when did the meaning of "elected" become so complicated, hanging chads aside? In addition to the majority/plurality divide, there's also the question of whether boards should be "staggered" or not.

Some companies -- among them names such as E*Trade (NASDAQ:ETFC), CarMax (NYSE:KMX), and BorgWarner (NYSE:BWA) -- stagger elections such that not all of the board is up for re-election each year. While that approach doesn't entirely lack merit -- see our pros, cons, and comments boxes below -- most folks consider staggered elections a tool that insiders use to keep themselves in the owner's box and you in the cheap seats.

Some boards, including those of Procter & Gamble (NYSE:PG), IBM (NYSE:IBM), and Clorox (NYSE:CLX), instead opt for annual elections for the full slate of their directors. In theory, that puts directors' feet to the fire regularly, which acts in the best interest of shareholders.

What the bill would do
"Each member of the board of directors of the issuer shall be subject to annual election by the shareholders. ... Directors in uncontested elections shall be elected by a majority of votes cast." 

In plain English, that means that you, the shareholder, would get the right to vote on whether you want to keep each member of the board of directors each and every year -- whether that seat is contested or not. In contested elections, whoever gets the most votes wins. In uncontested elections, directors would need at least 50% support to keep their positions.

The pros and cons
Majority-voting rules for uncontested elections seem like a no-brainer. Boards are supposed to represent a company's owners. If a majority of a company's ownership doesn't want a director to represent them, he or she should resign. Corporate Library founder Nell Minow told us that requiring uncontested incumbents to receive a majority of votes cast is absolutely essential to making boards accountable to shareholders. Even John Castellani of Business Roundtable, a vocal opponent of the Shareholder Bill of Rights, told us he supports majority voting, though he noted that most of his member companies have adopted it on their own.

The merits of holding annual elections are less black-and-white. The big pro is that more frequent elections equates to more opportunities for shareholders to affect change. If shareholders aren't happy with a board's performance, those shareholders could organize to kick board members to the curb. Ideally, boards would give more credence to shareholders' goals and concerns knowing that their cushy board seats were on the line each and every year. Indeed, separate studies by Harvard and SEC economists show that staggered boards lead to lower shareholder value.

In terms of cons, look no further than your elected officials. It is no secret that our country has been running on deficits for years, or that we can't afford our projected commitments to programs like Social Security and Medicare. Despite that, making the correct-but-tough choices on these third rails eludes us, probably in large part because your local member of Congress would rather pass the buck on long-term problems than possibly sacrifice his (or her) seat, status, and career.

Board directors with short terms could find themselves in similar positions, possibly incentivized to sacrifice a company's long-run prospects for an extra couple of pennies of quarterly earnings. That's especially true considering the notoriously short time horizons of shareholders -- the average holding period for NYSE-listed stocks is just nine months. Upping the frequency of board elections might actually induce an unhealthy focus on the short term at the expense of long-term results.

Some proposed workarounds for this risk include:

  • Getting rid of staggered boards but giving companies the option to hold elections less frequently (perhaps every one to four years).
  • Giving extra votes to shareholders based on how long they've held the stock.
  • Making it easier for long-term shareholders to nominate directors, as the bill does.
  • Banning the practice of voting with borrowed shares.

How reform will affect you
Should this pass, you'll have an annual vote and voice on the membership of your company's board of directors. Of course, so will other shareholders, who, as a group, may or may not be as long-term-oriented as you, or as the directors we all would have the right to remove.

Shareholders, be heard!
So what do you say, Fools? Should democracy reign supreme? Is requiring majority voting a good idea? Would annual board elections help whip boards into shape, or would they create an unhealthy focus on short-term results?

We want the Shareholder Bill of Rights to come from all of us. So post your comments at the bottom of this article (or any other in this series). Cast your vote in our online polls. Or send us an email at Let’s all tell Wall Street and Washington what rights we shareholders really need.

Once you’re done, remember to check out "It's Time for a Shareholder Revolution" for more on the Shareholder Bill of Rights.