Changing Voting Standards Start to Threaten Corporate Directors

Study finds corporate governance and company-specific issues drive withhold votes

A high level of withhold votes for corporate board nominees is a material indicator of investor concern with a specific company, according to a study released Thursday by the Investor Responsibility Research Center Institute.

Although only 5% of corporate directors who receive majority withhold votes are removed from boards, about 50% are unseated at companies with majority voting standards, the study found.

The study sample also indicated that half of withhold votes are ascribable to corporate-specific issues, and more than three-quarters of withhold votes can be ascribed to six main factors.

Four of these issues—poison pill adoption without shareholder approval, failed attendance, related party transactions and serving on too many boards—are considered violations of governance best practices.

The other two issues are concerns about company-specific compensation and discontent over board oversight of a company’s affairs. The remaining quarter of withhold votes are situational, with widely varying specifics.

“Although directors who fail to receive majority votes still overwhelmingly serve on corporate boards, the seeds of change are taking root,” Jon Lukomnik, IRRCi’s executive director, said in a statement.

“This study suggests that withhold votes signal a larger pattern of shareholder dissatisfaction with a company,” Lukomnik said. “Withhold votes are not just the product of ‘check the box’ voting by investors upset with a technical violation of standard governance practices."

Indeed, it would be a mistake to dismiss majority withhold votes because they are rare, Kimberly Gladman, the study’s lead author, said in the statement. “These votes often are a means for shareholders to express key concerns about board oversight, and public companies should take them seriously.”

Other key findings:

  • Eighteen percent of majority withhold votes occurred at companies where there was evidence of shareholder dissatisfaction not only with the director in question but with the board or company as a whole.
  • More than 80% of majority withhold votes took place at Russell 2000 smaller-cap companies, which made up two-thirds of the study sample.
  • Ninety-one percent of majority withhold votes occurred at companies without majority election standards—in part reflecting that smaller U.S. companies are less likely than their larger-cap peers to have adopted either majority or plurality plus resignation election standards.
  • Eighty-seven percent of companies that received majority withhold votes did not disclose their boards’ processes for responding to them, whereas all companies with majority or plurality plus resignation election standards made some disclosure about their response to the votes.
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