America’s Teflon Corporate Boards

Most directors who fail to receive 50 percent of shareholder votes keep their jobs

Members of the board of medical diagnostics company IRIS International courted trouble earlier this year when they voted to retain a 10-year-old poison pill takeover defense without seeking shareholder approval. They believed they were acting in the company’s best interests, says company spokesman Ron Stabiner. Many shareholders disagreed, and at the company’s annual meeting in May all nine of IRIS International’s directors received less than half of shareholders’ votes to retain their seats. That lack of support among a majority of investors triggered a company policy that required all board members to tender their resignations, which they did. Then things got interesting: The directors voted not to accept their own resignations, Stabiner says, and continued to do their jobs.

When it comes to electing directors, majority rule doesn’t always carry the day. At thousands of public companies the shareholder votes aren’t binding, and even one positive vote is enough to keep a director in his job. In the past three years more than 200 directors at U.S. companies, from Cablevision Systems and shopping network owner HSN to SiriusXM Radio and Taser International, have failed to receive a majority of votes. In all but a few cases the rejected directors stayed, according to data collected by Institutional Shareholder Services, the Council of Institutional Investors, and GovernanceMetrics International. (Cablevision had no comment on its governance. Sirius and Taser didn’t respond to e-mails seeking comment.)

One example is Gregory Blatt, an HSN director who is chief executive officer of Internet company IAC. In 2010, Blatt failed to receive a majority vote to retain his seat. He submitted his resignation, following HSN’s governance policy, but the board refused to accept it. Blatt will cut the number of boards on which he sits to two from three, which should alleviate future opposition, says Felise Glantz Kissell, HSN’s senior vice-president for investor relations and strategy.

Billionaire David Bonderman, founder of private equity firm TPG Capital and a board member at General Motors, likewise failed to receive a majority two years in a row at real estate information provider CoStar Group, a company he helped found. (TPG is not an investor.) Proxy advisers to institutional investors had cited his poor attendance at board meetings. Yet because the company does not require a majority for director votes, the financier was able to keep his seat. Bonderman declined to comment.

One corporate director who responded to shareholders’ votes is Rear Admiral Edward K. Walker Jr. He resigned from the board of military communications maker Herley Industries in March 2010 after receiving just 34 percent support. “I figured that the handwriting was on the wall for me and they probably needed some new blood,” says Walker, 78, who had sat on the board since 1997. “But you don’t want a practice where the board members automatically leave or stay. It’s like … a short-term pendulum swinging into the boardroom.”

Shareholder activists and pension funds want more directors who lose in shareholder votes to depart. The Council of Institutional Investors, an association representing $3 trillion in pension assets, sends letters to directors who don’t get a majority vote, asking them to resign. The Florida State Board of Administration, which manages a $140 billion state pension plan, sent letters to almost 2,200 companies asking them to adopt a policy that would require directors who fail to attract a majority of shareholder votes not to be reelected. So far about 60 of those companies have agreed.

The $155 billion California State Teachers’ Retirement System submitted 26 shareholder proposals asking for majority votes this year and plans 50 next year, says Anne Sheehan, director of corporate governance. Less than 1 percent of directors are rejected each year, so majority votes wouldn’t be disruptive, she says. Although many larger companies in the S&P 500, such as Dell and Wal-Mart Stores, have adopted the majority-vote requirement, thousands of smaller companies—including two-thirds of the Standard & Poor’s 1,500—have not.

“We have always held the fundamental belief that it should be one share, one vote,” says Michael McCauley, senior officer of investment programs and governance for Florida’s public pensions. “A system where you could have one favorable vote, and that’s legally enough to get elected, we don’t feel that’s the best practice.”


    The bottom line: More than 200 corporate directors failed to win votes from a majority of shareholders since 2008. Activists want such directors to resign.

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