These were the first three annual meetings of 2006 where the issue of majority voting in board elections came to a vote; it was also the first time that majority vote proposals were on the ballot at these companies. Most significantly, the votes were the first test ever of whether investors are satisfied with the director resignation policies adopted by Pfizer and more than 80 other firms or would prefer that companies go further and adopt bylaws establishing a full majority standard, as Intel, Dell, and a dozen other firms have done.

Analog Devices, Ciena, and Hewlett-Packard, which opposed the proposal by the Carpenters' pension fund, all amended their corporate governance guidelines late last year to provide a director resignation policy while maintaining a plurality standard. H-P unsuccessfully tried to persuade the Securities and Exchange Commission to allow the company to omit the Carpenters' proposal, arguing that it had substantially implemented the resolution by adopting a resignation policy.

The three companies' policies call on director nominees who receive a majority of "withhold" votes to tender their resignation. Such votes are rare at U.S. companies; last year, just 14 out of more than 35,000 director nominees received a majority withhold vote. While the United Kingdom, Australia, and other nations have majority elections, most U.S. companies still have plurality voting. At those firms, management nominees are ensured of winning a board seat in uncontested elections, regardless of how many investors withhold their support. The Carpenters and other proponents argue that a full majority default standard is the only way to ensure that shareholders have a meaningful vote in uncontested elections.

With just three votes so far, it's too early to tell whether director resignation policies will suppress investor support for a full majority standard. Majority vote proposals will be on the ballot this season at two dozen other firms that have adopted resignation policies, including Morgan Stanley (April 4) and Novell (April 6). This issue may fare better later this season as more investors focus on it. Last year, a majority vote proposal did not receive majority support until the seventh meeting where it was on the ballot.

The most recent U.S. companies to adopt a resignation policy include General Dynamics, 3M, and Berkshire Hathaway. Of the almost 80 companies that have adopted director resignation policies, only two--Time Warner and Toro--have put these policies in their bylaws, as is being recommended in the latest proposal by the American Bar Association's Committee on Corporate Laws.

ABA Group Calls for Use of Bylaws
On March 13, the ABA committee released a series of proposed amendments to the Model Business Corporation Act to allow companies to adopt bylaws to provide for a modified plurality standard and more enforceable director resignation policies. The Model Act is used by most U.S. states to craft their corporate laws.

The ABA's proposed changes are consistent with a preliminary report issued in January by the lawyers' group, which disappointed the Carpenters and other investors by declining to support a majority default standard. In that preliminary report, the committee endorsed director resignation policies and other voluntary initiatives and pledged to work out language that would make these policies enforceable. Pfizer's corporate secretary, Margaret M. Foran, along with A. Gilchrist Sparks III of the Delaware law firm of Morris, Nichols, Arsht & Tunnell, co-chaired the task force that wrote the report.

In its latest report, the ABA committee seeks to address investor concerns about the enforceability of resignation policies by calling for the use of bylaw amendments, rather than corporate governance guidelines. Some investors have argued that adopting a resignation policy through a governance guideline is not sufficient, because those guidelines can be changed at any time by the board without shareholder approval.

These investors have cited the example of News Corp. to illustrate their concern. In 2004, the company stated that it would seek investor approval for future poison pills as it sought shareholder permission to reincorporate from Australia to Delaware. The company later adopted a pill and then extended it by another two years in August 2005 without seeking shareholder approval. Twelve U.S., Australian, and European institutional investors then sued the board. The company argued that it had the right to change governance policies without shareholder approval, but a Delaware court refused to dismiss the case in December. A trial in the case is set for April 28.

Meanwhile, state lawmakers in California are considering legislation to establish a default majority standard for uncontested director elections. On March 13, CalPERS, the country's largest public pension fund, publicly endorsed the bill introduced by Senator Richard Alarcon. If passed, the legislation would affect 23 public companies incorporated in the state. (For details, see the Feb. 10, 2006, issue of Governance Weekly.)

Holdover Directors
The ABA proposes to change the Model Act to allow either the board or shareholders to unilaterally adopt a director resignation policy for uncontested elections through a bylaw amendment (but only at companies that do not have cumulative voting).

The proposal also includes stronger language to force off nominees who receive majority opposition. The ABA calls on nominees who receive more votes cast against than for their election to serve an abbreviated term of either 90 days or until the date a replacement is selected, whichever comes first.

The Model Act now allows companies to opt out of the default plurality standard only by amending the articles of incorporation; this has to be done at the initiative of the board of directors and endorsed by shareholders. More than 30 states have adopted the plurality default provisions of the Model Act. In contrast, current corporation law in Delaware, where more than half of all public companies in the U.S. are incorporated, allows shareholders to opt out of the default standard by amending the bylaws. If the company's voting rules are in the certificate of incorporation, the change has to be made by the board of directors. Delaware is not a Model Act jurisdiction.

The current Model Act (as well as Delaware law) contains a provision known as the "holdover rule," which says that an incumbent director may stay in office until a successor is chosen and qualified. The report notes that the rule is prescriptive and does not expressly give the corporation the authority to change its provisions.

The ABA proposes to amend the Model Act to expressly allow changes in the articles of incorporation, initiated by the board and endorsed by shareholders to either eliminate the holdover rule altogether or adopt variations of it. "Such a change will permit corporations to strike an appropriate balance between the risks associated with failed elections and the goal of attaining greater director accountability," the report notes.

Investors Express Disappointment
Keith L. Johnson, who represents a group of 17 institutional investors from the Netherlands, the U.K., Australia, and the U.S. that have lobbied the ABA to support a majority default standard, expressed disappointment over the committee's proposals.

"Given the growing support that majority vote standard resolutions have received, the ABA committee's recommendation would create an inefficient process that forces companies and shareholders to deal with thousands of shareholder resolutions that will be eventually adopted," Johnson, a lawyer with the firm of Reinhart Boerner Van Deuren, told Governance Weekly. "However, it does challenge institutional investors to get their act together and seek self-help, which may be a good thing."

The proposal by the ABA committee is being published in late April in The Business Lawyer. Public comments can be sent until May 30 to E. Norman Veasey, Committee Chair, Weil Gotshal & Manges, 767 Fifth Ave., New York, N.Y. 10153, or by e-mail to e.normanveasey@weil.com. The document can be downloaded from the ABA Web site here.

Proposed amendments to the Model Act must be reviewed three times by the ABA committee before they are adopted. State legislatures then will decide whether to change their laws to reflect the Model Act amendments.

"We are a long way from that end in this matter," E. Norman Veasey, the former Delaware chief justice who heads the committee, told Governance Weekly.