Commentary: How Shareholder Votes Are Legally Rigged

By Louis Lavelle

Most shareholders would have given up a long time ago, but not Evelyn Y. Davis. Every year since 1985, the corporate gadfly from Washington, D.C., has asked Bristol-Myers Squibb Co. (BMY ) shareholders to approve a proposal that would force the company to eliminate staggered board elections and elect its entire board of directors annually. Designed to increase accountability, the proposal has passed by a majority of votes cast at the annual meeting for six consecutive years, garnering 69% on May 7. Yet nothing has changed. "It's ridiculous how they ignore the wishes of stockholders," says Davis. "You just keep trying and hope that some day they'll see the light."

Don't count on it, Evelyn. Every year, dozens of U.S. companies engage in a great corporate rite of spring: ignoring shareholder resolutions that won a majority of votes cast. Despite "winning" the election, shareholders end up losing because many companies require a supermajority vote. Most states, including Delaware, require only a simple majority of votes cast to change bylaws, but some companies set the bar well above that, at a near impossible 80% of shares outstanding. Indeed, while Davis won the majority of votes cast, she only captured 46% of Bristol's outstanding shares. Says company spokesman Robert F. Laverty: "We have to be responsive to what shareholders say. We have to look at this very, very carefully."

With management accountability a front-page issue, it's time to lower the hurdle. A supermajority of 60% of shares voted is more like it. And if resolutions fall short, management should consider compromise action to address investor concerns. It's time to make it easier for shareholders to have a hand in how their companies are governed.

At one time they did. In the early 1990s, it was not uncommon for two-thirds of shareholder resolutions garnering a simple majority of shares voted to trigger company action, according to the Investor Responsibility Research Center. Today, more resolutions are winning, but far fewer--just 17%--are prodding companies into action. Says Alan P. Cleveland, special counsel to the New Hampshire Retirement System: "Is it arrogant? Sure it is. It shows a disregard of the company's shareholders."

Many companies have a different view. They say that without the higher hurdle, a company could, in a low-turnout year, find itself bowing to the dictates of a small minority of shareholders. Electronic Data Systems Corp. spokesman Jeff Baum says the supermajority rule is in fact pro-stockholder: "It enables us to act in the shareholders' best interest."

Other companies argue that the tough voting rules are fair, since both shareholders and management are held to the same standards when it comes to making changes to the bylaws. In fact, though, when management wants a change, it is only too happy to do away with supermajorities. That's because not all resolutions involve bylaw changes. Consider stock options. When management is seeking shareholder approval for new executive option grants, which dilute the value of existing shares, most companies require only a majority of shares voted at the annual meeting. Such rules make it easy for shareholders to enrich managers but difficult for shareholders to rein them in.

Not all companies are so insensitive. At Cendant Corp. (CD ) and Home Depot Inc. (HD ), shareholders have floated proposals that did not garner supermajorities, prompting management to put them to a vote at the annual meetings--this time as management proposals. Cendant Vice-Chairman James E. Buckman says: "It gives it the best opportunity for passage that it can have."

Companies with high hurdles for shareholder resolutions could learn a thing or two from Cendant and Home Depot. Shareholders deserve a say in how their company is governed--and right now they have no such thing.

Department Editor Lavelle covers management.

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