At most U.S. public companies, directors are elected by a plurality of votes cast, rather than by a majority of votes cast. Under plurality voting, a director is elected to the board by virtue of having received the most votes. In an uncontested election, a single vote “for” a candidate theoretically would be sufficient for him or her to win a board seat.
The Council considers plurality voting to be fundamentally flawed: It results in “rubber stamp” elections and directors who are less accountable to shareowners because the owners lack a meaningful vote. The Council believes strongly that in uncontested elections, directors should be elected by a majority of votes cast. Majority voting ensures that shareowners’ votes count and makes directors more accountable to the shareowners they were elected to represent (In contested elections, however, plurality voting should be used as it may be impossible for any candidate to secure a majority of votes).
In 2005, the Council launched a letter-writing campaign urging 1,500 of the largest U.S. corporations to consider adopting majority voting in director elections. Support for this reform has grown swiftly. Currently more than half of all companies in the Standard & Poor’s 500 Index have a majority vote standard for uncontested board elections.
Companies that have embraced majority voting for directors generally allow their boards to second-guess shareowners when a majority votes against a director candidate in an uncontested election. They do so through policies that require a director who fails to win majority support to tender his or her resignation, but give the board broad discretion in deciding whether to accept the tendered resignation. Such leeway effectively makes board elections advisory.
That is why the Council, in April 2010, approved an amendment to its majority voting policy to require directors who fail to receive majority support to step down from the board and not be reapppointed. The Council believes that majority voting policy should should reflect the fundamental principle that the will of the shareowners should be respected. This principle underlies the Council’s longstanding policy on shareowner proposals, that boards should take actions recommended in shareowner resolutions that receive a majority of votes cast for and against.
In a troubling trend, directors are losing elections but not their board seats. In 2009, 95 directors at 49 U.S. companies failed to win a majority of votes yet did not relinquish their board seats, according to ISS, a leading proxy advisory firm. All 49 companies used plurality voting, but the trend set a disturbing precedent that boards of majority-vote companies could seize on to reappoint failed directors, ignoring the will of shareowners. So far in 2010, 88 directors in the Russell 3000 index failed to receive a majority of votes cast, according to ISS.