Beginning in 1999, the United Brotherhood of Carpenters Pension Funds (“Carpenter Funds”) and pension funds associated with the International Brotherhood of Electrical Workers, the Sheet Metal Workers International Union, the Laborers International Union of North America, and the United Association of Plumbers and Pipefitters (collectively “Trades Funds”) began a multi-year dialogue with leading corporations on a series of governance reforms proposed by the Funds. The discussions focused on a set of governance reforms submitted in the form of shareholder proposals to approximately forty corporations.
The goal of the reforms was to create a governance environment that encouraged board and management pursuit of long-term corporate value growth, while providing shareholders appropriate management accountability measures. The Funds’ proposals reflected the view that governance systems need board and management accountability mechanisms that rely less on the workings of the corporate control market and more on active monitoring by patient owners. A Shareholder – Management Dialogue on Governance Issues & Long-Term Corporate Value.
The corporate engagement effort culminated in the Carpenter Funds’ recognition that corporate director elections were symbolic and ineffectual in ensuring director accountability to the goal of long-term value creation. To invigorate director elections, the Carpenter Funds in 2003 began a shareholder activism initiative to establish majority voting in these elections. The initiative was rooted in the belief that director elections are the foundation of an effective system of corporate governance that focuses the leadership of corporations on the goal of sustained corporate value growth. The goal of the majority vote campaign was simple: transform corporate director elections into meaningful board and management accountability events.
At the time of the Carpenter Funds’ first submission of majority vote proposals in 2003, plurality voting in the election of directors was the default rule under Section 216(3) of the Delaware General Corporation Law (“DGCL”) and Section 7.28 (a) of the Revised Model Business Corporation Act (“Model Act”). Corporate director elections were universally conducted under a plurality vote standard as nearly all companies defaulted to the plurality standard or placed the plurality vote standard in their bylaws or articles.
As the market for corporate controlled heated up in the 1980’s, state corporate law amendments established the plurality vote default standard, as the existing majority vote standard was not seen as compatible with contested director elections that were a component of the developing takeover market. Whether intended or not, the establishment of a plurality vote default standard as the prevailing standard in all director elections rendered the voting rights of shareholders virtually meaningless in the vast majority of director elections that were uncontested (elections in which there is the same number of board nominees as and there are open board seats). The application of a plurality vote standard in uncontested director elections means that the election of unopposed management candidates is assured with as little as a single vote.
The goal of the Carpenter and Trades Funds’ majority vote campaign was to establish corporate elections as meaningful governance processes in which shareholders have the right to elect or un-elect their legal representatives. The use of a majority vote standard in uncontested elections would require an uncontested director nominee standing for election to receive a majority of the “votes cast” in order to be elected, if he or she is a first-time nominee, or re-elected, if the nominee is an incumbent director. Alternative majority vote standards, such as a “majority of shares present and eligible to vote at the annual meeting” or a majority of “outstanding shares” are possible, but the “majority of votes cast” version is what has been adopted by virtually all majority vote companies.
Should an incumbent director fail to be re-elected under a majority vote standard, he or she would continue to serve on the board as a “holdover” director under state corporate law. Current provisions of the DGCL (Section 141(b)), and the Model Act (Section 8.05(e)), require that each director shall hold office until such director’s successor is elected and qualified or until such director’s earlier resignation or removal. the “holdover rule” necessitated a post-election process to address the status of incumbent directors that are not re-elected, but continue as “holdover” directors. To address “holdover“ director issue, majority vote companies with few exceptions have adopted director resignation policies that obligate company directors to submit irrevocable resignation letters that are triggered by a director nominee’s failure to be re-elected. The typical director resignation policy sets the timeline and review criteria used by elected directors to review and decide whether to accept or reject a tendered resignation. Virtually every majority vote company has established a post-election resignation requirement in a corporate governance policy or a bylaw.
Outlined below is a chronology of key events in the successful private-ordering advocacy campaign to establish majority voting spearheaded by the Carpenter Funds. The chronology documents the various stages of a campaign that has transformed the vote standard in US corporate elections.
Summer 2003: The majority vote issue is defined and the text of a non-binding majority vote shareholder proposal language is prepared by the Carpenter Funds. The initial majority vote proposals contain various majority vote standards, including a majority of votes cast, a majority of shares present and eligible, and a majority of outstanding shares. As the majority vote proposals were being prepared, the U.S. Securities and Exchange Commission issues a report entitled “Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors,” Division of Corporation Finance, U.S. Securities and Exchange Commission (July 15, 2003). In the Staff Report, the Staff recommends that the Commission consider revising its rules to provide for a limited proxy access right for shareholder-nominated director nominees.
Fall & Winter 2003: The campaign begins modestly with the Carpenter Funds’ submission of the first majority vote proposals to 12 companies. The U.S. Securities and Exchange Commission issues a proposed rulemaking (Release Nos. 34-48626; IC-26206; File No S7-19-03) on October 14, 2003, entitled “Security Holder Director Nominations” proposing a shareholder proxy access right with a 5% ownership requirement and a two-year minimum holding period.
Spring 2004: The majority vote proposal survives a no-action letter challenge that argued for relief on the grounds that the proposal would force a company to violate state and federal law, and alternatively, that the proposal was impermissibly vague and thus misleading. The SEC Staff rejects both arguments against the proposal. See AT&T Wireless Services, Inc. (Feb. 13, 2004). The 12 Carpenter Fund majority vote proposals receive an average level of support of 12%. Proxy voting services, including Institutional Shareholder Services, Inc. (“ISS”), recommend a vote against the majority vote proposals, taking a position that proxy access is the preferred director election reform.
Fall 2004: Carpenter Funds, joined by other Trades Funds, submit majority vote proposals to 65 companies for the 2005 proxy season. A majority of votes cast standard is selected by the proponents as the preferred majority vote standard. Carpenter Funds submit the first majority vote proposal to a Canadian corporation, Potash Corporation, along with “anti-slate voting” proposals that would allow shareholders to vote on individual board nominees, as slate only voting was a common practice in Canadian corporate elections.
Winter 2004: The Committee on Corporate Laws of the American Bar Association establishes an “ABA Task Force” chaired by retired Delaware Chancery Court Judge E. Norman Veasey to study the majority vote issue. The Council of Institutional Investors (“CII”) sends a letter to 1,500 of the largest corporations urging their support of majority voting.
Spring 2005:
Summer 2005: The ABA Task Force publishes a majority vote Discussion Paper seeking public comment on various majority vote options. The Majority Vote Work Group submits a joint comment on the ABA’s Discussion Paper. Pfizer, Inc. adopts a governance policy that requires a director nominee who receives a majority of “withhold votes” under a plurality standard to tender a resignation letter to the board for consideration. This governance policy, which is later adopted by numerous companies, retains the plurality vote standard and becomes known as a “Pfizer” policy or a “Plurality-Plus” policy.
Fall 2005:
Winter 2005-2006:
Spring 2006: Carpenter and Trades’ majority vote proposals win an average of 48% support, with 30 proposals receiving majority support. Proposals at 31 companies are settled as companies agree to institute a majority vote standard. Majority vote proposals at companies that have adopted “Pfizer” resignation policies receive an average of approximately 42% support.
Summer 2006: Two amendments to the Delaware General Corporation Law (“DGCL”), while not directly establishing a majority vote standard in director elections, facilitate the adoption of the majority vote standard. Under Section 216 of the DGCL, either stockholders or the board of directors of a corporation can unilaterally adopt amendments to the corporation’s bylaws. Section 216 is amended to provide that “[a] bylaw amendment adopted by stockholders which specifies the votes that shall be necessary for the election of directors shall not be further amended or repealed by the board of directors.” Further, DGCL Section 141(b) is amended to facilitate a mechanism for directors to submit resignations that are conditioned upon the occurrence of a future event, including the director’s failure to receive a specified number of votes for election to the board. The amendment also provides that the conditional resignation may be irrevocable when conditioned on the failure of the director to receive a specified percentage of the shares. The DGCL amendments are effective August 1, 2006.
Fall 2006:
Winter 2007: California adopts legislation which permits companies incorporated in California to elect directors by a majority of votes cast and to limit the term of “holdover” directors to 90 days.
Spring 2007:
Summer 2007: Virginia adopts changes to the Virginia Stock Corporation Act, effective July 1, 2007, that permit Virginia corporations to adopt a majority vote bylaw. Washington amends the Washington Business Corporations Act to permit adoption of a majority vote standard through a bylaw amendment that limits the term of a “holdover director” to 90 days or less.
Fall 2007:
Spring 2008:
Fall 2008: Carpenter and Trades Funds submit 92 majority vote proposals for the 2009 proxy season, with Carpenter Funds submitting 67 proposals.
Spring 2009:
Summer 2009: New York Stock Exchange Rule 452 Amended – The US Securities and Exchange Commission approves an amendment to the NYSE Rule 452 and Section 402.08 of the Listed Company Manual (together, “NYSE Rule 452”), which governs discretionary voting by brokers of shares held in street name when beneficial owners have not instructed their brokers as to how such shares should be voted. The amendment makes uncontested director elections non-routine matters under Rule 452. The change means that brokers will no longer be able to vote in favor of management-sponsored board nominees without instructions from the beneficial holders of the shares in question.
Fall 2009: Carpenter and Trades Funds submit 80 majority vote proposals for the 2010 proxy season, with Carpenter Funds submitting 58 proposals.
Spring 2010:
Summer 2010: The US Senate includes a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that would codify the majority vote standard in director elections developed in the market over the course of several years: a majority vote standard in the bylaws or articles combined with a requirement that an unelected nominee tender his or her resignation for board consideration. The conference committee, reconciling the Senate and House versions of the bill, drops the majority vote standard provision from the final version of the legislation.
Fall 2010:
Spring 2011:
Fall 2011: Carpenter and Trades Funds submit 30 majority vote proposals for the 2012 proxy season, with Carpenter Funds submitting 19 proposals.
Spring 2012:
Summer 2012: During 2012, the Investor Responsibility Research Center Institute, a respected corporate governance research and policy entity, produces a report entitled “The Election of Corporate Directors: What Happened When Shareowners Withhold a Majority of Votes from Director Nominees?” that tracks the vote results in director elections in which directors failed to be elected, or were elected, but received a majority “withhold” vote. The companies tracked in the study are almost exclusively plurality vote standard companies (100 of the 106 companies studied), and only a small percentage of the companies had director resignation policies in place. The study highlights the need for further implementation of the majority vote requirement and elimination of the “withhold” vote used by plurality vote companies in their proxy materials.
Fall 2012: Carpenter Funds submit 34 majority vote proposals for the 2013 proxy season, with the focus on the remaining companies in the S&P 500 Index that have yet to adopt majority voting.
Spring 2013:
Summer 2013: The CII sends a letter to NYSE Euronext requesting that the Exchange adopt a listing standard that would require a company that lists its equity securities on the New York Stock Exchange to adopt a majority vote standard in uncontested elections of directors, with a requirement that incumbent directors who do not receive a majority of votes promptly resign from the board of directors.
Fall 2013: Carpenter Funds submit 27 majority vote proposals for the 2014 proxy season, with the focus on the remaining companies in the S&P 500 Index that have not yet adopted majority voting.
Winter 2014: The Toronto Stock Exchange adopts a rule requiring listed companies to establish majority voting in uncontested director elections and establish a resignation policy requiring unelected directors to tender their resignations for board consideration. (February 13, 2014)
Spring 2014:
The Carpenter Funds’ decade of activism designed to invigorate the corporate election process through the implementation of a majority vote standard in corporate director elections has been very productive. The advocacy efforts have effectively established an important new accountability mechanism in our system of corporate elections. The majority vote standard injects a new level of accountability into every corporate election in which it is used.
Fall 2014: The Carpenter Funds for the first time in over a decade took a different approach to the 2015 proxy season and refrained from submitting majority vote proposals to those remaining S&P 500 Index companies still using a plurality vote standard in uncontested elections. Most of these companies, such as Nucor Inc. and ExxonMobil Corporation, had received previous Carpenter Fund proposals which faced strong board opposition and had failed to receive majority support. The goal was to engage these companies on the topic outside of the context of a submitted shareholder proposal to determine if the companies would be open to moving to the market standard voluntarily. Those engagements were productive with a number of companies, including Nucor Inc. which had received seven previous majority vote proposals. The engagement endeavor was less productive with several companies, including ExxonMobil.
Fall 2015: The Carpenter Funds submitted 15 majority vote proposals for the 2016 proxy season, with the focus on the remaining S&P 500 Index companies that have yet to adopt a majority vote standard.
Spring 2016: The board of directors at seven of the 15 companies that received the majority vote proposals agreed to adopt a majority vote standard. At two of the four companies where the proposals that came to a vote of shareholders, they passed with strong majorities (FirstEnergy – 62.1% For and Netflix, Inc. 87.6% For), while at Cliffs Natural Resources and Monster Beverage, the proposals received less than majority support.
1 – In 1987, the Delaware General Corporation Law was amended to establish a plurality vote standard as the default director election vote standard for corporations incorporated in Delaware. Corporations simply defaulted to the new plurality standard or put the plurality standard in their bylaws.
2 – All board nominees in uncontested elections using a plurality standard are elected and continue to serve regardless of the number of “withhold” votes.
3 – In determining whether a nominee has received a majority of the votes cast in an election, only the “for” and “against” votes cast are considered in the vote calculation.
4 – The director resignation policy was first adopted by Pfizer, Inc. as an alternative to adopting a majority vote standard in uncontested elections. Pfizer combined the resignation policy with its plurality vote standard requiring an incumbent director that received a majority of “withhold votes” to tender his or her resignation for board consideration. The resignation policy was subsequently paired with the majority vote standard to address the status of “holdover” directors.
5 – ISS indicated that in deciding whether or not to vote for the majority vote proposal, it would consider whether a company had a director resignation policy in place with the following features: The policy needs to outline a clear and reasonable timetable for all decision-making regarding the nominee’s status; The policy needs to specify that the process of determining the nominee’s status will be managed by independent directors and must exclude the nominee in question; An outline of a range of remedies that can be considered concerning the nominee needs to be in the policy (for example, acceptance of the resignation, maintaining the director but curing the underlying causes of the withheld votes, etc.), and the final decision on the nominee’s status should be promptly disclosed via an SEC filing.
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