While most directors at U.S. companies continue to receive overwhelming support each year, there was a significant increase in the number of board members who failed to win majority support in uncontested elections during the 2009 proxy season.
So far this year, 93 directors at 50 U.S. companies have received majority dissent, almost three times the 32 board members at 17 firms who failed to earn majority support in all of 2008, according to RiskMetrics Group data as of Sept. 23, which includes vote results on 12,052 directors at Russell 3,000 and S&P 500 firms. Among S&P 500 index firms, 12 directors at six companies received majority opposition this year, up from five directors at two firms in 2008, according to RiskMetrics data.
Despite this surge in majority withhold votes, it does not appear that any of the 93 directors have stepped down as a result of investor dissent. None were legally required to do so; as of the end of August, all 50 firms had plurality voting standards for director elections, according to RiskMetrics data. Two companies had resignation policies that were triggered, but the boards decided to retain the directors who failed to earn majority support.
During the 2009 season, there also were more votes cast against board members generally. The average dissent level against U.S. directors climbed to 7.2 percent, up from 5.1 percent in 2008 and 4.9 percent in 2007, according to RiskMetrics data. Among S&P 500 firms, directors at 93 companies had at least 10 percent dissent, up from 82 in 2008, 64 in 2007, and 57 in 2006.
While investors may have different reasons for opposing directors, it appears that shareholder objections to tax gross-up payments and other compensation practices played a greater role in driving up withhold votes across the S&P 500 index this year. Pay concerns contributed to more than 10 percent opposition against directors at 50 firms this year, up from 24 in 2008, 18 in 2007, and six in 2006. This upward trend suggests that more investors are acting on the additional compensation information that they have been getting since new disclosure rules took effect before the 2007 proxy season.
Compensation committee members at Assurant and Southwestern Energy received majority withhold votes this year, apparently because of the companies' arrangements to reimburse executives for their taxes. Pay panel members also faced more than 30 percent dissent this year at Anadarko Petroleum, Lorillard, Apartment Investment & Management, Equifax, Fidelity National Information Services, Legg Mason, Omnicom Group, Peabody Energy, Pepco Holdings, Sandisk, Textron, and XTO Energy. Tax gross-ups were a contributing factor at Sandisk and Equifax, and helped fuel more than 20 percent opposition at AT&T, Agilent Technologies, AK Steel, CIT Group, and Eli Lilly.
At Nvidia, a board member received 41.9 percent dissent, and two fellow directors had more than 34 percent opposition, after the company undertook a stock-option exchange program without seeking shareholder consent. Likewise, Google's option exchange without investor consent contributed to an 11 percent vote against two directors, a notable display of dissent at a firm where officers and directors have a 70.6 percent voting stake.
Another important factor that contributed to high withhold votes at S&P 500 firms was the failure to implement a majority-supported shareholder resolution.
Four FirstEnergy directors received more than 50 percent opposition at the company's annual meeting in May after failing to implement three majority-backed shareholder proposals. Seven other directors at the Ohio-based utility firm received more than 48 percent dissent. The significant display of investor dissent follows FirstEnergy's failure to adopt a trio of proposals seeking to eliminate the company's supermajority voting provisions, reduce the threshold for calling special meetings, and adopt a majority vote standard for director elections. All three resolutions won more than 67 percent support in 2008. In a quarterly filing, FirstEnergy said the board would "further review" the three proposals.
At Pulte Homes, three directors received majority opposition after the board failed to put a "poison pill" takeover defense to an investor vote and act on a majority-supported declassification proposal. The company's director resignation policy was triggered, but the board decided to retain the three board members. Labor investors have called on Pulte to reconsider that decision. Since its annual meeting, the company has said it would put its pill to a vote next year and would recommend declassification after completing a merger with Centex. One of the three Pulte directors has since left the board as a result of the merger, which was approved in August.
At Southwest Airlines, an outside director who is affiliated with management and sits on the board's nominating committee received a 53.7 percent withhold vote after the company did not implement a proposal seeking majority voting in board elections that earned 68 percent support in 2008. Ignored shareholder proposals also contributed to more than 40 percent opposition at Boston Properties, Vornado Realty, and Stanley Works.
At Cameron International, two directors received more than 47 percent dissent after the company failed to respond to a majority withhold vote in 2008 that apparently was inspired by a 10-year extension of the company's poison pill without investor approval. Four Convergys board members had more than 40 percent opposition after the board extended a pill without seeking shareholder approval. Likewise, three directors at Abercrombie & Fitch received more than 42 percent after the company renewed its pill without shareholder consent.
There were other reasons that contributed to high withhold votes. An outside director at Massey Energy who sits on more than six boards received 58 percent opposition. Affiliated outsider directors who serve on key board committees (compensation, audit, or governance/nominating) received more than 40 percent withhold votes at Consol Energy, Pepco, and Vornado.
Outside the S&P 500 index, directors at 44 smaller Russell 3,000 companies also received majority withhold votes this year. For at least 10 of the companies, the majority opposition followed a failure to seek shareholder approval for a poison pill. Affiliated outsiders serving on key board committees contributed to investor dissent at more than a half-dozen firms. At vitamin maker NBTY, a compensation committee member had majority opposition that apparently was a result of the company's tax gross-up arrangements. At Advanced Analogic, the dissent appeared to stem from an option-exchange program that was not submitted for investor approval.
At discount retailer Dollar Tree, a director received majority opposition after the company failed to implement a declassification proposal that earned 67 percent support from the company's outstanding shares in 2008. Dollar Tree has a director resignation policy that was triggered. On Sept. 3, the company reported that the resignation had not been accepted, and that the board would recommend that shareholders approve an article amendment in 2010 to declassify the board.