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Corporate Secretaries Urge ABA Committee Not to Change Director Election Standard

The Society of Corporate Secretaries and Governance Professionals, formerly known as the American Society of Corporate Secretaries, has urged the American Bar Association's Committee on Corporate Laws not to endorse any amendments to the Model Business Corporation Act relating to voting for directors. The Society submitted its views in response to the ABA Committee's June 22, 2005 discussion paper on voting by shareholders for the election of directors. The discussion paper focuses on uncontested elections in public companies. The Committee believes that, given the intense interest in corporate board legitimacy, it should consider and respond to concerns about the plurality voting standard in the Model Act.

The Model Act states that, unless otherwise provided in the articles of incorporation, directors will be elected by a plurality of the eligible votes cast in an election at a meeting where a quorum is present. A plurality vote is the receipt of the most votes for a nominee without regard to the number of votes cast against or votes that are not cast. According to the discussion paper, 35 jurisdictions expressly provide for directors to be elected by plurality vote. Delaware, the state of incorporation of more than half of the publicly traded companies in the U.S., has not adopted the Model Act, but the Delaware General Corporation Law has a plurality standard for the election of directors in the absence of a provision in the certificate of incorporation or the by-laws that specify a different standard.

In its August 15 comment letter, the Society wrote that the Model Act and current state laws provide companies with the flexibility they need if they wish to adopt a majority voting standard. The Society listed a number of companies that have adopted majority voting standards for the election of directors and suggested that the money and energy necessary to amend the Model Act and advocate the legislative changes in the states to revise the standard are not necessary to effect change.

In the Society's view, boards of directors are in the best position to determine the appropriate standard for electing directors at their companies. Boards are well aware of the shareholder resolutions calling for the implementation of majority voting standards, according to the Society. These resolutions gained noticeable support and momentum in the 2005 proxy season, the Society wrote, and boards are seriously considering the standards that are most appropriate for their companies.

Boards generally expect directors to receive a majority vote in uncontested elections. If a director fails to receive a majority of the votes cast, the Society said it is incumbent on the board to analyze the reasons and to take any necessary actions based on the facts and circumstances, regardless of whether the company has a majority or a plurality standard. Boards also must consider their companies' ability to attract and retain qualified board members. The recent regulatory and listing standard changes, coupled with increased litigation, have made director recruitment more difficult, the Society advised. Institutional investors' vote withhold campaigns have also had an impact.

The discussion paper outlines a number of alternatives to the plurality standard, including the change to a majority vote default rule; the adoption of a default plurality rule that requires directors to be elected by at least a minimum plurality vote, such as one-third; or the retention of the plurality vote default rule, but authorize "against" votes in which there are consequences for directors who achieve a plurality vote but have more "against" votes than "for" votes. The consequences could include a shortened term for that director or board authority to remove that director.

The Society believes that certain of the ABA Committee's alternatives are overly complex and may lead to technical problems such as the handling of holdover directors and the impact of failed elections on certain corporate governance agreements. These alternatives must be carefully analyzed before abandoning the flexible and workable plurality standard, according to the Society. The Society also noted that the New York Stock Exchange is currently considering the elimination of the discretionary voting authority of brokers. A change in the director election standard may make it more difficult and more costly if the voting rules are changed. The Society believes that the interested parties need more time to analyze the impact of new disclosure standards and should give boards more time to respond to the increased interest of shareholders in these subjects.

The ABA Committee requested comments by August 15. Before making a final decision, the Committee will publish its proposal and explanatory material in The Business Lawyer. The Committee has no timetable and said it is too early to predict if or when it will publish a report with recommendations for amending the Model Act standard on voting for directors.