In the 2011 proxy season, shareholders won major victories in the ongoing battle to improve the way corporations elect their boards. Where boardroom banana-republic rules once left investors burned, successful shareholder campaigns are now helping good corporate governance flourish.
Signs of change
Companies' progress toward fixing their own dubious practices led the California State Teachers' Retirement System, a pension fund and major shareholder activist, to withdraw 21 of the 26 majority vote proxy proposals it filed this year. Many of these big wins saw corporations switch to the majority voting standard.
Majority voting simply requires that a director receive a majority of shareholder votes to get elected. For years, many corporations favored the unreasonable and unfair alternative of plurality voting, in which a director only needed to get more votes than any other candidate, even if the majority of shareholders voted against him or her.
CalSTRS reported that investors rallied around majority voting at several companies, including Clean Harbors (NYSE: CLH) (62.6%), Masimo (Nasdaq: MASI) (70%), and NetLogic Microsystems (Nasdaq: NETL) (72%).
In another impressive victory, Wilshire Bancorp included a related management proposal in addition to its support for CalSTRS' proposal. Both passed with flying colors, stacking up 85% of the votes.
Other shareholder activists have achieved similar wins this year. A proposal in favor of majority voting at Prudential Financial (NYSE: PRU) received more than 98% of shareholders' votes. Furthermore, 73.6% of Apple (Nasdaq: AAPL) shareholders voted in favor of adopting the standard.
Pockets of apathy
Despite the positive progress for this shareholder-friendly measure, there's still plenty of work to do. CalSTRS pointed out that while only 20% of S&P 500 companies cling to the unfair, unfriendly plurality voting standard, more than two-thirds of the small- to mid-sized companies in the Russell 2000 still use it.
Despite proxy season victories, majority voting proposals didn't fly with every company's shareholders. I checked Proxy Monitor's database, which tracks shareholder resolutions and vote results, and found a few examples of companies where majority voting standard proposals only garnered minority approval.
At Caterpillar (NYSE: CAT), 35.5% voted for such a change. Less than 10% voted in favor of simple majority voting at Google (Nasdaq: GOOG). In cases like these, investors should hope for better luck next year.
Dysfunctional boards are not a competitive advantage
What the heck was wrong with the board? When corporate disaster strikes, that’s one of the first questions investors ask. In theory, a board of directors is supposed advocate for shareholders. Unfortunately, that theory frequently doesn’t match up with reality, paving a way for weak or even failed businesses, and dwindling shareholder returns.
Policies like plurality voting help lame, stagnant boards stay in business. Directors with little fear of losing their jobs have little incentive to actually do those jobs.
Thankfully, activists who consistently work toward better corporate governance policies can celebrate victories this year. Hopefully, by this time next year, more corporations will realize that establishing shareholder-friendly policies makes them far more worthy of investors' dollars.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.
