Who's Afraid of Shareholder Democracy



Who's Afraid of Shareholder Democracy?

By _GRETCHEN MORGENSON_

()

 

INVESTORS may think they live in the United States of America, but when it  

comes to electing corporate directors - shareholders' intended watchdogs in the

 boardrooms - they are definitely back in the U.S.S.R. Even sadder to say,

some  of the nation's biggest mutual funds are helping to keep them there.  

Every year, shareholders are asked to elect directors of the companies they  

own. But investors can vote only for a director or withhold votes. For anyone  

who opposes a candidate, the election is an exercise in futility.

The Securities and Exchange Commission under William H. Donaldson put forward

 a proposal that would have brought power to shareholders in the election of  

directors. But that proposal died with his recent departure.  

Pension fund activists have kept the issue alive, however, by forcing some  

companies to include in their proxy materials proposals that would require  

directors standing for election to stay on only if a majority of votes are  

"yes." But this democratic idea is often swatted  down by mutual fund managers who

side with corporations. Perhaps  they reason that shareholders should not

worry their pretty little heads about  who represents them on the board.  

Shareholders of the _Altera Corporation_

(

ompanyprofile.asp&symb=ALTR) , a semiconductor maker in San Jose,  Calif.,

were asked to vote this year on such a proposal. The Fidelity Magellan fund

voted against it, as did the Vanguard 500  Index fund.  

Both the Vanguard fund and the  Fidelity Overseas fund also voted  against

such a proposal earlier this year at Freeport-McMoRan Copper and Gold,  and

Putnam funds did so at _Advanced Micro Devices_

(

-companyprofile.asp&symb=AMD)  and _Raytheon_

(

tml-companyprofile.asp&symb=RTN) .  

These proposals, by the way, were supported by the Council of Institutional  

Investors and, in spite of the mutual funds'  rejection, won majority support

from shareholders. As is the  case with most proposals, they were not binding,

so the companies did not have  to comply.  

"I think the current system is broken and, frankly, weird," said Daniel J.  

Steininger, president of Catholic Knights, a financial services company in  

Milwaukee whose mutual funds vote in favor of such proposals. "The shareholders  

are the owners of the corporation; shouldn't we be empowered to elect our  

directors?"

Indeed. And because money managers have a fiduciary duty to represent the  

interests of investors whose money they oversee, it is hard to see how they can  

square that duty with a vote against giving shareholders the power they

deserve  in elections.  

Listen to Glenn Booraem, a principal at Vanguard Funds, try.  

"Generally, we did vote against those types of proposals from the general  

perspective that we were concerned with some of the practical applications about

 the standards that were proposed," Mr. Booraem said. "Such as how the

majority  standard would work from a corporate law perspective if a full board

wasn't  elected, if there weren't sufficient directors that got a majority vote to  

enable the board to continue to operate."

But Ed Durkin, director of corporate affairs at the United Brotherhood of  

Carpenters and Joiners of America, said it didn't have to be complicated. "This  

issue is amazingly simple, but it's been made amazingly complex," said Mr.  

Durkin, whose union pension fund has led the majority-vote charge. "If a  

director doesn't get elected, under Delaware law they continue to hold over  until

their successor is elected and qualified. We don't have to prescribe  

everything that has to happen after the election. These boards would have to  come up

with policies and practices to deal with that situation. It's a very  

manageable, very straightforward reform."  

A FIDELITY spokesman said its proxy voting guidelines did not address  

director elections, but that the company was looking at the issue. In the  meantime,

Fidelity votes these matters case by case.

John Hill, chairman of Putnam Funds, said executive compensation and dilutive

 stock awards have been the focus of Putnam's proxy voting. Majority votes

for  directors are on its agenda now. "My board has got to vet it, but I think

there  will be sentiment to support majority voting going forward," he said.

On Oct. 12, shareholders at _Paychex Inc._

(

-companyprofile.asp&symb=PAYX)  will express their views on this important  

issue. A proposal from the American Federation of State, County and Municipal  

Employees Pension Plan would require Paychex directors to receive majority  

support. If the proposal passes, it will be binding.  

Last year, 36 percent of shares voted withheld support for a Paychex  

director. The company's board - no surprise - recommends shareholders reject the  

pension plan's proposal. Echoing Mr. Booraem's view, the board said in the proxy  

that the proposal would have "unintended and undesirable consequences." For  

example, a board vacancy would be filled temporarily by directors, not  

shareholders, it said.  

Hmm. We put a man on the moon, but we  can't manage the consequences of

shareholder democracy. There's  something goofy about that.

As of June, Vanguard held a 2.2 percent stake in Paychex shares for its  

customers, while Fidelity had a 1.6 percent holding. Putnam's stake was about  0.6

percent. It will be interesting (or depressing) to see how they vote their  

clients' shares.  

Stockholders today are truly disenfranchised on many governance issues. But  

majority voting is one that they can do something about.  

"When it comes up for a vote at companies, investors should support the  

change," said Jay W. Eisenhofer, a lawyer at Grant & Eisenhofer in  Wilmington,

Del., who represents the Council of Institutional Investors on the  issue.

"Investors need to organize around the principle that the law should be  changed.

Right now, the Delaware State Bar Association is considering the issue.  In the

absence of hearing from investors, I would expect that the only things  they

are going to hear are from the leaders of the corporate community who don't  

think that the law should be changed."

David C. McBride, a partner at Young Conaway Stargatt & Taylor LLP in  

Wilmington, is the point man on the issue in Delaware. As chairman of the  executive

council of the corporate law section of the Delaware State Bar  Association,

he leads the group that recommends and drafts amendments to the  state laws

relating to corporations.

A committee of the association was formed a week ago to study director  

elections, Mr. McBride said. The earliest that anything might be done about the  

issue would be next April or May, he said.  

INVESTORS should register their views with him. And shareholders who own  

mutual funds that vote against these proposals should also let those companies  

know if they are displeased with their stances.  

Anthony M. Maramarco, a portfolio manager at Babson Capital Management in  

Boston, says shareholders realize that they can achieve long-term value at a  

company only through the board. And because directors are the overseers of  

company management, it is not surprising that the spotlight is now shining on  how

directors are elected.

Some 36 companies have changed bylaws to require majority votes for  

directors. These include _Abbott Laboratories_

(

anyprofile.asp&symb=ABT) , _Best Buy_

(

anyprofile.asp&symb=BBY) , Lockheed Martin and KB Homes.  

But at most companies, shareholder democracy  remains an oxymoron. Investors

have the tools to change that. Let's see if they  do.

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