02 December 2006

Corporate Board Election Facts

David Milstead, writing for the Rocky Mountain News, hits the nail on the head in his article discussing how elections for the directors of a publicly held corporation work, the single biggest flaw in American corporate governance.

In the United States, "a public company is any company with 300 or more shareholders as defined in the US 1933 Securities Act that elects to become a reporting company. Under the US 1934 Act, any company with 500 or more public shareholders or a company with some public shareholders and assets of $5 million dollars must become a reporting company."

The boards of these companies are effectively self-perpetuating in the absence of a takeover bid, where the purchaser secured 50% or nearly 50% of the outstanding stock of the company to secure control of it.

Each year, when a company conducts its election, the board nominates a slate of candidates. There's one person for every open seat - no more, no less.

Shareholders typically get two choices: "for" and "withhold," as in withholding a vote from the director. In most elections, no matter how many shareholders vote to "withhold," the directors will have at least one "for" vote and will get re-elected automatically. . . .

Robert McCormick, the vice president of proxy research and operations at advisory service Glass Lewis & Co., says that 0.12 percent of directors up for election in 2005 failed to get a majority. That was down from 0.18 percent in 2004.

Colorado directors were even more successful this year, with none of the 505 up for re-election failing to get a majority, according to a Rocky Mountain News analysis.

The News reviewed the most recent voting results for 98 of the 111 Colorado-headquartered public companies it tracks. Some energy partnerships, closed-end funds and newly public companies didn't have to conduct a director vote.

Only 13 director nominees had more than 20 percent of votes withheld, meaning they failed to get 80 percent of the vote. Another 22 had between 10 percent and 20 percent, meaning they fell short of 90 percent.

In all, 423, or 84 percent, had fewer than 5 percent of their votes withheld, meaning they got 95 percent or more of the votes cast. . . .

The recommendations of proxy-advisory services such as Institutional Shareholder Services, known as ISS, and Glass Lewis played a large role in the "withhold" vote for Colorado's least-popular directors. Every member of the list had a negative recommendation from one or both of the two advisers.

ISS and Lewis typically base their recommendations on general corporate governance issues, like a failure to have a sufficient role for independent directors, or a decision to have a board of directors with less than five members, or not putting an auditor choice to a vote, or inappropriate poison pills.

In Colorado, the director who received the least support, Richard P. Beck at Advanced Energy Industries, had about 34% of the vote for him withheld. The company took no action as a result. Five more directors at New Frontier Media, facing a takeover bid from a hedge fund which owns 15% of the stock, had 27% to 27.7% of the vote withheld. The company took no action. No action was taken at four other publicly held companies in Colorado where six other directors had between 20.1 and 27.4 percent of the shareholder vote withheld, largely based on recommendations from ISS or Lewis or both.

The only Colorado company to materially respond to withheld directors votes was Vail Resorts, where John J. Hannan had 23% of the vote withheld in his bid to be a director. His lack of independence was faulted, as was his absence from more than 25% of director's meetings. He kept corporate support, but improved his attendance and the board added two new independent directors.

Bottom line: Shareholder action helped secure corporate change in just one of 505 director's races in Colorado corporations. Board of director's elections are meaningless.

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