When Voting Doesn’t Matter: A Dark Tale
It’s springtime but all is not well – it’s election time around here. Those officials who are in charge have decided that they know best and have selected 9 candidates for the politburo. These fellows have served in their posts for many years and earn large incomes for their devotion to the Chairman. But they have done a terrible job. The economy is in disarray, people are losing their jobs, the ones at the top are cleaning up but the rest of the people are losing their shirts. But that doesn’t matter, they know what’s good for you.
You have received your ballot and it’s time to vote. The only problem is that the Big One’s candidates are the only ones on the ballot. In the past, nobody voted for these guys because, in the end, it didn’t matter. Regardless of how many votes they received, they always won.
This time around, somebody decided that they wanted to run against one of the politburo members. You laugh to yourself because, in the end, it won’t matter. This renegade can’t win. Unlike the politburo members, she can’t match the resources of her opponents. After all, they have all of the money in the world; they are funded by the Big One. But the renegade has to pay to mail out hundreds of thousands of ballots even though the Big One has already sent out the “official” ballot. Even if everybody voted for her, it still wouldn’t matter because the politburo gets to count all of the voters who didn’t bother to vote in their favor. That’s the law. Their campaign slogan: “Stay at Home and Vote for Us”
Sound like a banana republic or some Stalinist regime. Think again.
Welcome to Corporate America.
Unlike a democracy, corporate director elections are rigged to ensure that the candidates selected by the company win. This is practically guaranteed by many rules established by the states and federal government.
Qualification for Company-Sponsored Directors: A Pulse
When looking at the corporate election process, erase any quaint notions about democracy or fairness. A director standing for election doesn’t require a majority of the voting electorate to approve his position. Why is this you ask?
Aside from the fact that directors almost always run unopposed, the legal system in place since the dawn of corporate legal system in America establishes arcane processes for ensuring the stability of the business organization in exchange for political expediency. For instance, a plurality of votes is sufficient to elect a director. If that’s not enough, one of the most unusual devices for ensuring the status quo is the broker non-vote.
Broker Non-Votes
The term “broker non-votes” refers to shares held by stockbrokers on behalf of their clients. When a client fails to return his or her proxy card., these votes have not been “voted” at all but are used by companies to obtain a quorum and prevent unnecessary proxy solicitation costs should not enough shareholders cast their votes. But here is the kicker. These non-votes can actually be used in support of routine matters.
What is a routine matter?
You guessed it. Director elections.
According to the rules for these matters, the uncontested election of directors is considered routine. The consequence is that even if you vote against a director, which you are entitled to do even in an uncontested election, that director will always win.
Proxy Access
Still, corporations leave nothing to chance so they have yet a few more tricks up their sleeves, just in case.
Let’s say that you are an angry shareholder. The company you own shares of stock in is doing badly. The CEO receives millions in compensation while the value of the company stock plummets. Management incompetence is rampant. (Sound familiar?) You decide to run for the board of directors.
So here is how the game is played:
Currently the only way investors can run their own candidates is to lead an expensive proxy contest. Budget for $250,000 if you think you want to try this yourself. Even if you get this far, the deck is stacked against you.
- Management has full access to company coffers to run its own candidates and oppose shareholder initiatives and candidates.
- The cost of running a proxy contest is considerable, and management can increase the cost by commencing expensive litigation, running expensive print ads and initiating multiple mailings.
- Shareholder resolutions are limited to 500 words, but management’s opposing statements have no limit.
Unless you have oodles of shares in this company and lots of additional cash to throw at this risky gambit, the whole process becomes a giant waste of money. Unless you are Carl Icahn taking a run at Yahoo Inc., which he did last summer, forget it. To his credit, Mr. Icahn has shown particular leadership on this issue and has been howling like a banshee about the sorry state of board management of corporate affairs.
While in recent years a fairer system has been proposed, in the end the Securities & Exchange Commission shot down this nascent reform. This simple notion of fairness – called “proxy access” – remains an important reform that would create effective mechanisms for holding executives and directors accountable.
So where does this leave shareholders and, for that matter, everybody else who is concerned about corporate incompetence?
In a recent post on the IcahnReport.com, Nell Minow, a highly respected governance expert, set out a number of recommendations for the Obama Administration that would dramatically shift the lopsided balance of power between corporate management and shareholders. On the subject of proxy reform, Minow argues that “[o]ne way to remind directors that they represent shareholders is to make it possible for shareholders to remove those who overpay executives and fail to manage risk.”
How this dark tale ends is anyone’s guess. What is certain is that investor tolerance for the 19th century approach to governing global corporations will be and must be transformed. Otherwise, this story will not have a happy ending for anybody.
Recent Comments