Forget majority rules. In US-style corporate elections, it’s rarely so simple.
Investors can complain as loudly and clearly as they like, but corporate boards are often free to ignore them, with few or no immediate consequences. That’s true whether the protest involves ousting a board member or changing how the company does business.
Most shareholder votes are lopsided things, of course: Directors are re-elected in landslides, management proposals pass handily, and shareholder proposal flop. But shareholders are getting feisty—see the furor at JPMorgan Chase—and with annual meetings in season, we’re once again seeing a handful of votes go against the board—only to be resoundingly ignored by the company.
Here are four ways companies have turned a deaf ear to their shareholders:
- Your vote doesn’t count. Shareholders gave a vigorous thumbs-down to three directors at Impax Laboratories on May 14, giving them each just 39% to 44% of votes cast. The other four directors on the slate didn’t do so well either: None passed 53%. But in disclosing the official results on May 15, the company announced that all seven had been elected to one-year terms. There’s no explanation in the announcement, but a look at the fine print of the proxy filing shows that directors don’t have to win majorities, just a plurality—which means the seven top vote-getters win. And sure enough, there were just seven directors on the ballot. (The company didn’t respond to our request for comment.)
- Your vote counts (even if you didn’t vote). If the shareholders of Occidental Petroleum had their way, they could act by by “written consent,” without the more traditional shareholders’ meeting. Fully 53% of the company’s shares were cast in favor of granting that right to the shareholders. Companies hate this kind of thing as much as activist investors love it, and broad support can hint at simmering shareholder discontent. But Occidental opposed the measure, and got to count 55.4 million unvoted shares as if they were voted against the proposal, thanks to the way the company’s bylaws are written. Voila, a majority-approved measure flips to a narrow defeat, 51% to 49%. (One of Occidental’s directors also lost badly at the ballot-box: storied former chief executive Ray R. Irani. Shareholders cast 477.6 million shares against, him, and just 149.6 million in favor. He submitted his resignation on May 15.) Occidental didn’t respond to our request for comment.
- Try again. In its proxy filing, Hecla Mining, a silver producer with operations on Alaska’s Admiralty Island, asked shareholders to approve the way it pays its executives, in a routine say-on-pay vote. On May 15, shareholders declined to do so, casting 60.4 million shares against Hecla’s pay structure and 56.9 million in favor, or 49.6% to 46.7% counting abstentions. The company’s response? It decided to hold voting open, for that ballot item only, for another month, until June 14, “for the purpose of allowing additional voting by shareholders who have not yet voted, or may wish to change their votes…” A Hecla Mining spokesman said the company hoped that delaying the question would boost a 40% turnout, especially among retail shareholders. “They can tell us what they think, we’ll go from there,” he said. “We’re not running away.”
- Maybe next year. Eventually shareholders can make some headway, as they have with NYSE Euronext. But for two years running, the company decided not to give shareholders what they wanted: the right for big investors to call special stockholder meetings. Similar advisory proposals from shareholders won 73% of shares at the company in 2011 and 59% of shares last year. Both times, the company opposed the measure when it appeared on the ballot, and both times it never got around to doing what the shareholders wanted. Last year, it argued in part that shareholders should vote “no” because the company itself was going to propose something similar this year. In the end, it did, and the measure got 99% of shares voted—only to fail again, because the “yes” votes still didn’t represent the required 80% of shares outstanding (at about 63%.) A NYSE Euronext spokesman declined to comment.
Boards can get away with ignoring their owners for several reasons. Most proposals raised by shareholders are non-binding advisory measures, meaning companies can discount the results by definition. Plus, as in some of the examples above, a majority isn’t always what it seems.
Director elections are more complicated, but securities rules generally give boards broad leeway to handle losses as they see fit. Often, companies have kept defeated directors in place for months or a year (or more); in some cases, boards have simply declined to accept a defeated member’s resignation.
Of course, if companies tick off shareholders too long or too blatantly, activist investors can try to replace the board. But proxy fights are costly and time-consuming, and far from a guaranteed success.