Practice Pointers | About Us

Chapter 31 Voting Issues





§ 31.01 Introduction

§ 31.02 Confidential Voting

§ 31.03 Cumulative Voting

§ 31.04 Proposals Asking the Company to Hire a Proxy Advisory Firm

§ 31.05 Voting Issues Proposals — Most Common Grounds for Exclusion

Chapter 31 Voting Issues

§ 31.01 Introduction

Because it is the major avenue for shareholders to effect change and express their opinions on corporate governance and behavior, shareholder voting rights are considered critical by investors. For example, TIAA-CREF's Policy Statement on Corporate Governance states, "The proxy vote is thus the key mechanism by which shareholders play a role in the governance of the corporation."[fn1] Accordingly, shareholders have submitted a variety of proposals addressing voting rights and the proxy voting process. The most popular of these proposals — dealing with confidential voting, cumulative voting and the hiring of a proxy voting service — are discussed in this chapter.

[fn1] TIAA-CREF, Policy Statement on Corporate Governance (undated and unpaginated) (available at www.tiaa-cref.org/libra/governance) (hereinafter, "TIAACREF Policy Statement").

Back to TOC

§ 31.02 Confidential Voting

The vast majority of shareholders vote not by attending meetings, but by executing a proxy card indicating the desired votes and returning that card to company management to act as the shareholder's proxy. If the shareholder is a record holder, the proxy card is returned directly to the company; if the shareholder holds in "street name" — that is, in the name of a bank or broker, a voting instruction form is returned to that company's agent (usually Automatic Data Processing), which tallies the votes and reports the results to the company.

In either case, the company can generally determine how a shareholder voted, especially if the shareholder holds a large number of shares and the company employs the services of a proxy solicitor to assist in identifying shareholders. To avoid a chilling effect, shareholders have submitted proposals asking companies to adopt a policy of confidential voting, so that the company does not have access to information about shareholder voting except under limited circumstances.

Back to TOC

§ 31.02[A] Corporate Governance Guidelines

CalPERS Corporate Governance Core Principles state, "Proxies should be kept confidential from the company, except at the express request of shareowners."[fn2]

The Council of Institutional Investors' Corporate Governance Policies recommend, "Confidentiality should be automatic and permanent and apply to all ballot items."[fn3]

TIAA-CREF's Policy Statement on Corporate Governance states, "The board should adopt confidential voting for the election of directors and all other matters voted on by shareholders."[fn4]

[fn2] California Public Employees' Retirement System, Corporate Governance Core Principles and Guidelines D7 (1998) (hereinafter "CalPERS Guidelines").

[fn3] Council of Institutional Investors, Corporate Governance Policies, Core Policy 1 (undated) (available at www.cii.org) (hereinafter, "CII Policies").

[fn4] TIAA-CREF Policy Statement on Corporate Governance dated Mar. 2000 (available at www.tiaa-cref.org).

Back to TOC

§ 31.02[B] Typical Proposal

BE IT RESOLVED: That the stockholders of UnitedHealth ("Company"), recommend that our Board of Directors take the steps necessary to adopt and implement a policy of Confidential Voting at all meetings of its stockholders, which includes the following provisions:

  1. That the voting of all proxies, consents and authorizations be secret, and that no such document shall be available for examination nor shall the vote or identity of any shareholder be disclosed except to the extent necessary to meet the legal requirements, if any, of the Corporation's state of incorporation; and

  2. That the receipt, certification, and tabulation of such votes shall be performed by independent election inspectors.[fn5]

[fn5] Definitive Proxy Statement of UnitedHealth Group Inc. filed on Apr. 6, 2001.

Back to TOC

§ 31.02[C] The Debate Over Confidential Voting

Supporters of confidential voting argue that shareholders that have a relationship with a company — as an employee, supplier or partner — or wish to establish a relationship by, for example, managing the company's pension plan assets, are inhibited from voting against management because they fear retaliation. To the extent that votes against management would maximize shareholder value, the lack of a confidential voting policy harms corporate performance. Proponents also argue that confidential voting would "invigorate the corporate governance process" and induce shareholders to "be more active in the proposing of corporate policy resolutions and alternate board candidates."[fn6]

Companies urge that confidential voting would "deny shareholders a direct and effective means of communicating their concerns to the company."[fn7] They also claim that the current system affords confidentiality to street name holders, whose names cannot be disclosed by their banks or brokers without their consent. Finally, companies argue that in the event of a proxy contest, confidential voting could put the company at a disadvantage since dissidents would not be bound by the policy.[fn8]

The only study on the effect of confidential voting found no difference in voting outcomes on shareholder and management proposals or in the stock performance between companies with confidential voting and those without it.[fn9]

[fn6] See, e.g., Definitive Proxy Statement of Constellation Energy Group filed on Mar. 8, 2001.

[fn7] Definitive Proxy Statement of Union Pacific Corp. filed on Mar. 8, 2001.

[fn8] Definitive Proxy Statement of Huffy Corporation filed on Mar. 7, 2001.

[fn9] Roberta Romano, "Less is More: Making Institutional Investor Activism a Valuable Mechanism of Corporate Governance," 18 Yale J. on Reg. 174 (2001) (describing unpublished study).

Back to TOC

§ 31.03 Cumulative Voting

In a system of cumulative voting for directors, each shareholder has a number of votes equal to the number of shares held multiplied by the number of directors to be elected. The shareholder could allocate those votes in whatever proportion she prefers; for example, she could cast all of her votes for one candidate or she could divide her votes equally among the candidates. The effect of cumulative voting is to give a minority of shareholders the power to elect a candidate — by disproportionately allocating their votes to that candidate — even though the majority of shareholders did not cast votes in support of the candidate.

Back to TOC

§ 31.03[A] Corporate Governance Guidelines

The Business Roundtable Statement on Corporate Governance states, "Cumulative voting is generally not recommended for large publicly owned corporations because it may lead to the election of directors who represent particular groups of stockholders, which can in turn create factionalism and undermine the effectiveness of the board."[fn10]

California law requires CalPERS to vote in favor of proposals to implement cumulative voting.

[fn10] The Business Roundtable, Statement on Corporate Governance 8 (1997).

Back to TOC

§ 31.03[B] Typical Proposal

RESOLVED: That the stockholders of The Allstate Corporation, assembled at the annual meeting in person and by proxy, hereby request the Board of Directors to take the steps necessary to provide for cumulative voting in the election of directors, which means each stockholder shall be entitled to as many votes as shall equal the number of shares he or she owns multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit.[fn11]

[fn11] Definitive Proxy Statement of Allstate Corp. filed on Mar. 26, 2001.

Back to TOC

§ 31.03[C] The Debate Over Cumulative Voting

Supporters of cumulative voting assert that it will foster greater board independence and board diversity.[fn12] They also claim that it "encourages management to maximize share value by making it easier for a would-be acquirer to gain board representation."[fn13]

Companies urge that cumulative voting would promote factionalism, impairing the cohesiveness of the board and disrupting its functioning. Moreover, companies claim, cumulative voting allows the election of directors who represent "special interests" rather than all shareholders. As one company stated, "The Board of Directors believes that a board composed of factions focused on the special interests of one or more groups will function less effectively than a board whose members are elected by and consider themselves representatives of all stockholders."[fn14]

[fn12] See, e.g., id.

[fn13] Definitive Proxy Statement of General Motors Corp. filed on Apr. 18, 2000.

[fn14] See, e.g., Definitive Proxy Statement of Wells Fargo & Co. filed on Mar. 20, 2001.

Back to TOC

§ 31.04 Proposals Asking the Company to Hire a Proxy Advisory Firm

A new proposal advanced in the 2000 and 2001 proxy seasons that asks companies to engage a proxy voting service — which is normally retained by shareholders — to make recommendations to shareholders on management and shareholder proposals on the proxy statement.

Back to TOC

§ 31.04[A] Corporate Governance Guidelines

This issue is not addressed in any corporate governance guidelines.

Back to TOC

§ 31.04[B] Typical Proposal

Therefore be it resolved: that Equus II Incorporated shareholders request the Board of Directors to hire a proxy advisory firm, chosen by shareholder vote. Shareholders request the Board to enact this resolution in time to hold the vote at the year-20002 shareholder meeting. . . .[fn15]

[fn15] Definitive Proxy Statement of Equus II Inc. filed on Apr. 2, 2001.

Back to TOC

§ 31.04[C] The Debate Over Proposals to Retain a Proxy Voting Service

Supporters of proposals requiring a company to retain a proxy voting service urge that conflicts of interest between managers and shareholders necessitate shareholder access to an "independent professional opinion" regarding proxy voting issues. The proponents further contend that selection by shareholders ensures and reinforces independence.[fn16]

The companies opposing these proposals contend that they would be unable to ensure that the proxy advisor provided high-quality information and well-informed recommendations, since the proposal provides no opportunity for company supervision. Further, companies argue that a large body of information regarding companies and their proxy issues already exists and that implementation of the proposals would add little to that mix. Finally, the adequacy of the board of directors for making recommendations to shareholders is offered as a reason not to implement the proposals.[fn17]

[fn16] See, e.g., Definitive Proxy Statement of Gillette Co. filed on Mar. 15, 2001.

[fn17] See, e.g., Definitive Proxy Statement of KB Home filed on Mar. 8, 2001.

Back to TOC

§ 31.05 Voting Issues Proposals — Most Common Grounds For Exclusion

  • Proposals that would change the voting procedures for the upcoming annual meeting of shareholders may be challenged under Rule 14a-8(i)(8), relating to the election of directors, on the theory that the suggested changes could disqualify management's nominees or otherwise affect the election of directors.

  • A company may attack a confidential voting proposal under the mootness exclusion, Rule 14a-8(i)(10), by arguing that the company has substantially implemented the proposal even though the company's confidential voting policy is less strict than the one proposed in the proposal; for example, a company's policy may permit disclosure of votes during a proxy contest while the shareholder proposal prohibits such disclosure.

  • A proposal asking the company to retain a proxy voting service for shareholders may be excludable under Rule 14a-8(i)(8), relating to the election of directors, to the extent that the proposal or supporting statement discusses the use of such a service to evaluate candidates for election to the board.

    • Back to TOC

    Disclaimer    |