What is plurality voting?

Plurality voting is currently the most widely used shareholder voting method at U.S. public companies.

Shareholders can either vote 'For' a director or 'Withhold' their support from a nominee. With plurality

voting, as long as at least one share is voted 'For' the election (or re-election) of a nominee, that individual

will gain (or retain) their position on the board--irrespective of the lack of support from the remaining

shareholders.

Plurality voting appears to be of no great vintage, having become the norm at U.S. corporations during a

period of increased competition for corporate control in the 1980s. Without plurality voting, if more than

one nominee stood for an open director seat on a board and no candidate received a majority of the votes

cast, then, depending on the specific provisions of the corporate charter, the board seat could go unfilled

and result in a failed election.

Why has plurality voting been called into question?

We see two reasons. First, the situation for which plurality voting was designed to cater--namely, more

than one nominee vying to fill a board seat--has been the rare exception rather than the norm. Second,

there are currently more challenges to board authority--from investors concerned about declines in stock

value and general corporate performance, and because of the corporate scandals which led to the

passage of the Sarbanes-Oxley Act in 2002.

While Sarbanes-Oxley was intended to increase the accountability of a corporation's management to the

market, shareholders also began to demand more accountability from the directors they voted onto

boards, particularly regarding their oversight responsibilities over company management.

What led to the current movement for a majority voting standard?

In 2003, the SEC proposed new rules to allow shareholders direct access to a company's proxy

statement, for the purpose of nominating a limited number of director candidates. Although the proposed

rules were supported by many institutional shareholders, it ran into considerable opposition from issuers,

which wanted all shareholder nominees to be first vetted by the board's nominating committee. The

initiative stalled, and that appears to have led to the movement for a majority voting standard, as a way to

make votes that were not cast in support of a board nominee meaningful. Ironically, had the SEC's

initiative been successful, the plurality voting method would in all likelihood have remained unchallenged,

because contested elections are precisely the situation for which plurality voting was designed.

Have companies adopted a single method for majority voting?

Companies making changes have adopted various kinds of majority voting initiatives. A sometimes

overlapping and potentially confusing nomenclature has already been used to describe variations in these

voting initiatives (e.g., 'plurality plus standard', 'modified plurality', 'minimum plurality vote alternative', et

al). One needs to exercise care in each case to see precisely what rights the bylaw amendment or board

policy is giving to shareholders regarding director elections and what effect these changes may have, or

whether they are compatible with other types of voting enhancements, like cumulative voting.

How has majority voting or modified plurality voting thus far been implemented?

Some corporations have made charter or bylaw modifications. Altering these founding documents can be

complex and time consuming, particularly if shareholders have to endorse the changes--and especially if

super-majority voting hurdles have to be surmounted as well (sometimes these hurdles can be as high as

80% of the shares outstanding). To avoid this kind of problem, some companies have adopted board

policies to modify the director election system. Board policies are much easier to enact, but they can be

revoked just as easily, and some shareholder groups have criticized the board's ability to take away what

they have given without input from shareholders.

Is there a single outcome for elections by majority or modified plurality vote in which more votes are cast in opposition to a nominee?

In straightforward majority voting, if total votes cast 'For' a nominee do not exceed those cast 'Against'

said nominee, the nominee does not gain a seat on the board, and his/her election fails. In companies in

which all directors seek election or re-election annually, a company with a very unpopular board could

conceivably find itself with no directors at all. One or more directors failing to gain or retain their seats on

a board raises concerns about the board's continued and effective functioning. Depending on the

particular circumstances of each case, such outcomes could adversely affect the number of independent

directors required for stock exchange listing standards or covenants in the company's debt

instruments--the latter having direct implications for a company's creditors.

To counter these concerns, some companies have introduced modifications to the plurality voting

standard, which provide a means for the board to review and make recommendations where a director

has less votes cast 'For' than 'Withheld' in an uncontested election. In one, the director up for re-election

would have to submit their resignation to the board (or its nominating committee) rather than simply losing

his/her seat immediately (which is the outcome with majority voting). Depending on the specifics of the

company's bylaws or its board policy, the board could decide to retain the director in the best interests of

the corporation, although it is more likely that a search would commence for a replacement. Most boards

can make interim director appointments between annual shareholder meetings once a suitable

replacement has been found.