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Funds Support Majority Vote on Director Elections

With the receding likelihood of the enactment of the ‘proxy access rule’, certain investor groups’ strategy has been to promote the ‘majority vote’ rule with respect to director elections.

This may be seen as an alternative method of gaining some control over corporate board composition in the US. The rule requires that directors can only be elected to the corporate board if they receive a majority of votes in support of their nomination (as opposed to votes withheld).

Whereas in 2004 only around 12 such proposals were voted on at annual meetings of shareholders of US public companies, this year (2005) there appears to between 50 and 60 such proposals. Most of these have been submitted by labour groups and appear to receive higher levels of support than most of the other categories of shareholder proposals.

The voting records of 45 fund families, as published in their 2005 SEC filings, were analysed. In 2004 only two of the 29 fund families voting on shareholder resolutions addressing one of the 12 majority vote proposals supported the proposal. In 2005 34 of the 41 fund families voting on this issue at one or more of their portfolio companies supported one or more of the 50-60 such proposals.

Pressure for the adoption of this rule has also come from influential groups such as the Council for Institutional Investors (CII), and Institutional Shareholder Services (ISS).

Many companies have responded to this pressure (whether direct or indirect) by implementing the rule. Examples include Pfizer, Circuit City, Abbott Laboratories, Best Buy, Altria, United Technologies, Microsoft, Walt Disney, Prudential Financial, Aetna, Gap, Avnet, Lucent Technologies, Pitney Bowes, Lockheed Martin Office Depot and KB Homes.

It will be interesting to see how shareholders use this opportunity. It seems logical to predict greater levels of ‘withhold’ in future director elections – especially since investment funds are now required to disclose to the world how they vote their proxies, including how they vote on individual board candidates.

The size of the ‘withhold’ vote will become more important and the threat of a large ‘withhold’ vote will pressure boards and individual board members to be more responsive to shareholders’ other concerns.

Additionally, the threat of a large ‘withhold’ vote may pressure boards to be more sensitive to the reputation of potential board recruits before supporting their nominations.

See: Director Map for director election outcomes.

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