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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