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Peer pressure can be tough. Just ask Motorola, Inc. At the end of 2005 Motorola was ready to adopt a new policy that it hoped would put a troublesome shareholder issue to rest. Like many U.S. companies, the Schaumberg, Illinois — based business was under pressure to make its director elections more democratic. Shareholder activists argued that, instead of being elected by a mere plurality of proxy votes, the company’s 12 board members should win their jobs with an actual majority. If they didn’t get enough votes, they wouldn’t get a seat on the board. But Motorola resisted. Instead, the telecom equipment maker decided to adopt a middle-of-the-road policy first popularized by Pfizer Inc earlier that year. At the time, Pfizer’s move was viewed as a progressive step toward giving shareholders more say over board elections, but without making the radical changes espoused by some activist groups. The Pfizer policy keeps the plurality standard in place: The board nominee with the most votes is elected — even if that candidate runs unopposed and gets only one vote. However, under the Pfizer policy, any board member who doesn’t receive a majority of votes has to offer to resign. Then in January 2006 Santa Clara, California’s Intel Corporation raised the bar a few notches. Days before Motorola’s board was set to vote on its new policy, the microchip manufacturer took the more dramatic step of amending its bylaws to require that directors be elected by a majority vote. Computer maker Dell Inc. soon followed. Intel’s move “meant there was a clear model out there from other respected companies, major technology companies,” says Motorola senior corporate counsel Jeffrey Brown. The Pfizer option was no longer the gold standard of corporate governance. Suddenly Motorola’s choice wasn’t so simple after all. Majority voting is the biggest issue of proxy season 2006. This year more than 140 businesses faced shareholder proposals seeking to change their method of electing board members. And at least 179 companies have responded to this movement by taking various steps, most within the past year, to empower shareholders in board elections, according to research conducted by Claudia Allen, a partner at Chicago’s Neal, Gerber & Eisenberg. The shareholder activists seeking the change, led by the pension funds of the building trades unions, believe that the majority vote standard will increase board members’ accountability. Under the plurality standard, they argue, shareholders don’t have a direct impact on board elections. While shareholders can signal their disapproval of a candidate with a “withhold” vote for that person, such a move is purely symbolic, since a nominee can win with just one vote. Proponents of majority voting argue that it offers shareholders real clout in choosing directors, including the ability to give unpopular candidates a definitive thumbs down. But those opposing majority voting worry that it will destabilize companies, permitting parties with short-term interests in a corporation to sway its board composition. They also fear that unexpected changes in board makeup could run the company afoul of state law, federal regulations, exchange listing standards, or company employment contracts [see "Model Behavior," page 75]. Both sides agree, though, that majority voting represents a change in corporate power dynamics. “It’s the most fundamental reform,” says Allen. She points out that, since the board hires and fires a business’s chief executive and chief financial officer, the majority voting question is ultimately “about who runs the company.” Despite the growing momentum of the majority vote movement, corporate America remains split on how to respond. Some businesses, like Pfizer, have taken a step toward majority voting by adopting policies that require directors to offer to resign if they don’t get a majority of votes — although some critics charge that these policies aren’t binding enough. Other businesses, such as Intel and Dell, have gone further and officially changed their bylaws to support majority voting. The vast majority of U.S. corporations have made no change at all — even though there has been little public opposition to majority voting, perhaps because companies are unwilling to risk speaking out against a change that is largely touted as a move toward good corporate governance. The issue has divided not only American businesses, but their outside counselors as well. Last November corporate guru Martin Lipton of New York’s Wachtell, Lipton, Rosen & Katz and two of his partners issued a white paper saying that it was clear that majority voting would become “universal.” They recommended that companies proactively adopt a policy in order “to put the issue to bed and [keep] the adversarial proxy proposals process from continuing.” But Cravath, Swaine & Moore partner James Woolery says corporations shouldn’t give up any ground. He sees majority voting as leaving companies vulnerable to pressure from hedge funds or others only interested in the short-term performance of the company’s stock. Majority voting could allow such investors to stack the board in their favor. “There’s a real herd mentality on these types of provisions, and this is the flavor-of-the-month issue,” says Woolery. He points out that mechanisms already exist to allow unhappy shareholders to nominate board members: “What we’re saying is, ‘Look, if a dissident shareholder wants to launch a proxy fight, fine.’ That’s what they should do.” But early results from the 2006 proxy season show that investors often disagree. Midway through the season, at least 20 majority voting proposals had passed, most of them at companies that had not adopted a policy. At two of those companies, Novell, Inc., and Sprint Nextel Corporation, more than 60 percent of voting shareholders supported such proposals. At companies that followed Pfizer’s example and adopted a policy — but did not change bylaws — shareholder activists still weren’t happy. While majority voting proposals at such companies generally haven’t hit the 50 percent approval mark, they still have received strong levels of support, often more than 30 percent of votes cast. Hewlett-Packard Company and Honeywell International Inc. are among the businesses that adopted Pfizer-type policies. Yet this spring almost half of their voting shareholders said yes to a proposal to change the company’s bylaws to require majority voting — a huge percentage for two companies that thought they had already addressed the issue. While a staple of corporate governance until the 1980s, the majority vote movement got a second wind in recent years after the scandals at Enron Corp., WorldCom, Inc., and other troubled companies. In October 2003 the Securities and Exchange Commission proposed letting large shareholders nominate director candidates using company proxy materials. The proposal included several complicated requirements for nominating directors to ensure that only corporations with serious problems would be targeted, such as companies where shareholders had already withheld 35 percent of the vote for a director. Nevertheless, many companies and organizations, such as the Business Roundtable, a group of prominent CEOs, objected to the SEC proposal, fearing that it would open the door to abuse by special interests and create havoc at companies. The U.S. Chamber of Commerce threatened to sue the SEC if the proposal was adopted. Investor groups also objected to the SEC proposal. They felt that the threshold for triggering the shareholder nominating process was too high. Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters & Joiners of America, whose pension fund has $38 billion invested in U.S. and Canadian companies, says his fund thought that the SEC proposal was too narrow, and that it would only allow shareholders to go after the bad directors. As the SEC proposal languished — it was never ultimately instituted — the carpenters union looked back at the majority voting standard that had once been in place at many U.S. companies. Plurality voting, introduced in the 1980s, was designed to prevent failed elections when more than one candidate ran for a single spot on the board. Today, though, most board candidates, picked by management, run uncontested. Proxy fights are expensive, and therefore rare. Shareholders looking to effect change have limited options. Primarily, they can organize a “withhold” campaign — asking other shareholders to withhold their votes for a board candidate — which ultimately has no legal authority under the plurality standard. The plurality system is embedded in state laws that govern corporation law, including those of Delaware, where half of the S&P 500 companies are incorporated. The American Bar Association’s Model Business Corporation Act, which is used by most states to form their laws, also establishes plurality voting as the default standard. Majority voting is not untested, though. It is currently the standard in Europe, and a handful of large U.S. companies, including Best Buy Co., Inc.; U.S. Bancorp; and Lockheed Martin Corporation have employed majority voting for years, even weathering no-vote campaigns against directors. Lockheed Martin has had majority voting since it was created from a merger in 1995, a legacy from its premerger parents. “[Majority voting has] served the corporation well, and we believe it will continue to,” says a Lockheed spokesman. In 1996 Missouri amended its corporation laws to require majority voting. At Ameren Corporation, which is incorporated in Missouri, spokesperson Susan Gallagher says of majority voting, “It has not been an issue. All the directors have historically been elected by majority vote for almost a decade now. We really haven’t had any concerns about the bylaw or majority voting in general.” After studying the issue, the carpenters union decided to support a majority vote standard. “We thought it made sense for enhancing accountability, yet not making the elections disruptive events,” Durkin explains. “It’s designed to make every director and every board better by establishing a meaningful threshold for election.” As a test run, in 2004 the pension fund submitted majority voting proposals to 12 companies, including Chevron Corporation, SuperValu Inc., Devon Energy Corporation, and UnumProvident Corp. The union funds weren’t looking to punish bad companies, says Durkin; instead, the funds selected a variety of companies from those in which they were invested. They received an average of 12 percent of shareholder votes, a surprising level of support for a first-time proposal on a new issue. The next year, 2005, the carpenters union and other building trade union funds filed 89 nonbinding majority vote proposals, which garnered 44 percent of the shareholder vote on average. The union’s proposals won majority support from shareholders at 16 companies. Of those, Office Depot, Inc., responded by passing a Pfizer-style policy in August 2005; Freeport-McMoRan Copper & Gold Inc. and UnumProvident changed their bylaws to adopt majority voting earlier this year. Pfizer Inc. was not among the companies targeted with a shareholder proposal. But late in 2004 the company decided to take a look at the majority voting issue, says Margaret Foran, vice president — corporate governance and secretary at Pfizer. The New York — based pharmaceutical company has taken the lead on many corporate governance issues, including making fuller disclosure of management perks and director pay and eliminating classified boards and poison pills. “We saw there was a tremendous frustration from shareholders [in general],” says Foran. “So we wanted to be responsive.” A majority voting standard seemed like a no-brainer in some ways, Foran says: “If one of our [13] directors didn’t get a majority of votes, something’s wrong. Of course we’d want to investigate.” But Foran says that as she and governance committee members discussed the issue, they were concerned that Delaware law limited Pfizer’s ability to change the plurality system. In June 2005 Pfizer thought that it had found a solution. The board adopted a policy under which the company maintains the plurality standard but requires an offer of resignation from any director nominee who receives a greater number of votes “withheld” than votes “for.” The corporate governance committee then considers the resignation offer and makes a recommendation to the board on whether to accept it. (Pfizer later fine-tuned the policy, giving the board 90 days to act, requiring the board’s action to be made public in a press release, and addressing the status of holdover directors, board members who receive less than a majority of votes but who must serve, under Delaware law, until a new candidate is found.) Initially, Pfizer was lauded for its proactive approach, and its policy was widely imitated throughout 2005. Within a few months after Pfizer’s move, Circuit City Stores, Inc., Aetna Inc., and Pitney Bowes Inc. followed its lead. By February, 69 companies had adopted similar policies, according to Neal, Gerber’s Allen, whose research tracks the companies that have responded to the majority voting movement. But the union pension funds and other shareholder activists objected that it was still Pfizer’s board, not shareholders, who would make the final decision about who was elected or not. In December 2005 the powerful proxy advisory group Institutional Investors Services issued a statement saying it would support only “true” majority voting standard policies — thus calling into question policies like Pfizer’s that maintain the plurality system. Of the criticisms, Foran says, “It’s like saying you have to lose 30 pounds, when you lost 27. It’s pretty damn good.” She adds, “Unfortunately, people who want something want it exactly their way, or they’ll stamp their feet. I think we should be looking for companies that are responsive to this issue, and should be giving people a spectrum or a range of methods, instead of [saying], ‘This one and only this one, or we’ll hold our breath.’ “ Foran insists there’s really no difference between her company’s policy and the extra step of changing the bylaws to institute majority voting. After all, she asserts, in both cases a director who doesn’t have shareholder support will likely not serve. Durkin disagrees. “There’s a significant difference,” he says, “which is not to say you can’t have the same outcome.” He points out that under the plurality standard, even with Pfizer’s resignation policy, a “withhold” vote from shareholders is legally nonbinding. He and others also note that under the plurality standard, the board candidate is elected and must offer to resign. Under a true majority voting standard, a new director would not need to resign from the board because he never would have been elected. Changing a company’s bylaws to require majority voting “sets a bright line,” says Neal, Gerber’s Allen. “A policy which operates after the fact [does] not. It’s all discretionary.” Unlike Pfizer, Intel confronted the issue of majority voting after shareholder activists filed a majority voting proposal. Cary Klafter, Intel’s vice president of legal and governmental affairs, says that the company decided to talk to the activists instead of digging in to fight. “We’ve always had a policy that we try to engage in advance,” says Klafter. “Better to talk, listen, understand, let them understand.” The carpenters union invited Intel and others to form a roundtable group to look at the nuts and bolts of implementing majority voting. Eventually, four unions and 15 corporations participated, including American International Group, Inc.; Chevron; Citigroup Inc.; Gap Inc.; JP MorganChase & Co.; and Time Warner Inc. According to Klafter, the group met several times over the past year and plans to release a report early this summer aimed at helping other companies understand the issues involved in adopting majority voting. The companies in the group have not all taken the same action. Several, such as AIG, Chevron, and the Gap, have adopted a Pfizer-like policy change. But to hear Klafter tell it, Intel’s decision to switch to majority voting was an easy one. “Placing the language into the bylaws seemed to be a relatively straightforward and logical step,” he says. “We talked to outside counsel [at Gibson, Dunn & Crutcher] and asked what are the consequences of this and [whether] it was something we might be unhappy with. We couldn’t find anything with any significance.” Intel chose the stronger, majority voting model, Klafter says, because it “seemed reasonable.” He notes that the company regularly reviews its corporate governance policies each fourth quarter and made several other changes to its bylaws at the same time it adopted the majority voting standard. The bylaws are amendable, he adds, so if the company feels the new voting model isn’t working, it could change the bylaws again. As for the risk of failed elections because a seat goes unfilled, Klafter says that Intel considered addressing the issue in the bylaws, but decided not to. A failed election, Klafter says, is “a sufficiently unlikely state of affairs. If it comes up, we’ll deal with it.” Since Intel adopted a majority vote bylaw in January, there has been a clear uptick in the number of companies adopting bylaw provisions, according to Allen’s data. Of the 39 companies in her survey that have changed their bylaws, 30 did so after Intel’s move. “It’s hard for companies to explain why they can’t if a household name like Intel does,” says Allen. That’s exactly what happened with Motorola. In 2005 the majority voting proposal submitted by the carpenters union garnered 46.4 percent of the shareholder vote, even though management warned that majority voting would increase the cost of elections and deter board candidates. The union had already resubmitted its proposal for the 2006 proxy season when the news broke of Intel’s decision to overhaul its bylaws. Motorola’s Brown says that the company’s board and management decided in the end that the bylaw change was “not a big a deal.” And, like Intel, they knew it was a big deal to the carpenters union. The union, in fact, has pointedly refused to withdraw its majority voting proposals at companies that have only changed their policies, not their bylaws. “Our governance and nominating committee looked at the differences [between the Pfizer and Intel plans], looked at what the shareholder component was interested in and where we thought the vanguard of corporate governance was going,” Brown says. “Where we came out on balance was the Intel model.”

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