What’s wrong with majority voting? You know what I mean, people take a vote on something and whichever position or candidate gets the most votes wins. Even if it’s the slimmest of margins; something along the lines of 50.1% vs. 49.9% — the folks who fall into the 50.1 category win.
The country, states, and local governments all operate this way. Most local community organizations also follow this rule of thumb. Even families often use majority voting — in my home, whenever my wife and son choose to watch a movie that’s different than my preference, guess which movie we watch?
So, returning to my original question, what’s wrong with majority voting.
If there’s nothing wrong with it, how come so much of Corporate America doesn’t bother with it?
Because boards of directors are like little closed clubs, and the last thing they want to do is share any kind of effective governing power with their shareholders. By shareholders I’m referring to the employees and investors who own stock and might have minds of their own — minds in disagreement with the directors and senior corporate managers (who are often shareholders as well).
Boards nominate a slate of directors for each annual meeting, and the way many corporations are set up, it requires only one vote “for” a director to elect him or her to the board. (I could explain how this has come to pass, but you and I would both get hurt when we fell asleep from boredom and hit our heads on our desks. Trust me on this, it only takes one vote.)
For years, activist investors such as the large pension funds like CalPERS and TIAA-CREF have advocated for majority vote, which would require that a candidate for a board needs to receive a majority of votes cast to be elected (or re-elected) to a board. It’s important to note that the key thing is votes cast — like American citizens in national elections, a huge number of shareholders never exercise their franchise in corporate votes.
But it’s been a long, hard slog. About five years ago, Pfizer instituted a form of majority voting — a first for a major corporation. Intel followed within months with a more robust form of majority voting. (I know, you’re wondering how there can be different ways of majority voting — isn’t 50.1% a majority no matter what? In the continued pursuit of your safety, I’m not going to explain this either, just believe me, there are, in fact, different forms of majority voting.)
According to RiskMetrics Group, Corporate America is gradually buying into majority-vote bylaws — mostly due to pressure from folks like CalPERS and the United Brotherhood of Carpenters and Joiners.According to RiskMetrics, which advises investors on governance issues, 59% of S&P 500 corporations had adopted majority-vote standards as of 2009, up from 52% in 2008. Only 31% of RiskMetrics’ S&P 1500 measure of 1500 large and mid-sized U.S. corporations had done so in 2009, up from 27% in 2008.
Take a second look at those numbers: among the very largest corporations, a majority of them have only had majority voting since 2008, which means the majority vote was only in effect for 2009. And if you look at the larger group (the S&P 1500) not even a third has majority voting.
The slog continues. Boards of directors tend to believe they know more about running their companies than their investors do. They don’t want to be pushed into things due to a populist fervor. If they have large union pension funds investing in the company, they don’t want to be pushed around by organized labor.
And when you look at the recent track record it’s hard to argue with the directors. All those fine investment firms like AIG, Bear Sterns, Citigroup, Lehman Brothers, and Merrill Lynch that weathered the financial storms of the last few years so well. This is a Wizard of Oz moment: Ignore the man behind the curtain. Ignore the fire sales of Bear and Merrill. Ignore the bankruptcy of Lehman. And the gigantic bailouts of AIG and Citigroup. Trust the boards.
Or look at Chrysler and GM, whose boards led them to bankruptcy. (To be fair, GM seems to be well on the road to recovery. Chrysler, not so much.)
With track records like this it’s no wonder that boards are reluctant to grant any form of majority voting. The shareholders might just throw the bums out.