By Cydney Posnera
The Wall Street Journal is reporting on a study released yesterday showing that only 5% of directors receiving a majority withhold vote actually heed that advice from shareholders by stepping down. Even when directors actually do tender their resignations following a negative shareholder vote, their resignations are frequently rejected by the board. The research was conducted by governance firm GMI Ratings and commissioned by the Investor Responsibility Research Center, a not-for-profit think tank.
One reason for this result is the prevalence of plurality voting among smaller companies. However, plurality voting standards "have become increasingly rare among large companies…. As recently as 2001, every company in the Standard & Poor's 500-stock index used plurality rules, GMI told [CFO Journal] in June. Now, just 21% use plurality, having switched to rules that require directors to receive a majority of ‘for' votes, and nearly half of those that continue to embrace plurality now require that directors tender their resignations if they fail to win majority support."
According to the article, GMI looked at companies in the Russell 3000-stock index over the period from July 1, 2009, through June 30, 2012. During that time, 175 directors at 98 companies "received a majority of withhold votes. Over 80% of the majority withhold votes occurred outside of the 1,000 largest companies. <br>Only 9 of those directors, or about 5%, stepped down shortly after the annual meetings at which they received the majority of votes withheld, while another seven continued to serve but did not stand for reelection at their companies' next annual meeting."
According to the study, the most common reasons cited for withhold votes were the adoption of shareholder rights plans (27%), poor attendance records (18%) and "general dissatisfaction with broader issues affecting their companies" (18%). The report concluded that companies and boards "should recognize that majority withhold votes are not necessarily the result of ‘check the box' standard governance practices or proxy advisors' recommendations… and may well be part of a pattern of shareholder communication expressing serious concern about a company's direction."