Majority voting and board diversity trends

As recently highlighted in the Harvard Law School Forum on Corporate Governance and Financial Regulation, a report (the Report) by Institutional Shareholder Services (ISS) found that majority voting practices and annual board elections, along with increases in board diversity, are the new norm.

The Report examined the public filings of Standard & Poor’s U.S. “Super 1,500” companies (S&P 1500)  comprised of the S&P 500, MidCap 400 and SmallCap 600 indices from the period of July 1, 2014 through June 30, 2015.

Majority Voting and Annual Elections

Majority voting is now the clear market standard amongst S&P 500 companies, with over 88 per cent of companies in the index having adopted this practice. While larger companies had initially led the way in adopting these “accountability enhancements”, the Report notes that SmallCap 600 and MidCap 400 companies are now adopting majority voting standards at a faster pace than their S&P counterparts had in 2015.

Annual elections have also increased in prevalence, with over 60 per cent of S&P 1500 companies holding annual elections.  The largest jump occurred last year with a rise from 60 to 64 per cent. Over 80% of S&P 500 companies now hold annual elections (and only 84 boards continue to hold staggered elections).

Board Diversity

As discussed in one of our earlier posts, diversity has been a top priority for boards. Advocates for board diversity contend that different backgrounds and perspectives will enhance a board’s effectiveness and will ultimately lead to an increase in diversity throughout the corporate hierarchy.

ISS’ Report indicates that there has been a market-wide increase in board diversity over the past five years. Ninety-eight per cent of S&P 500 boards have at least one female member while 79 per cent have at least one minority board member. While the Report notes that companies with larger market caps have higher levels of gender and ethnic diversity, 90 per cent of MidCap boards and 78 per cent of SmallCap boards have at least one female or minority director, and the numbers suggest that these numbers will continue on an upward trend.

Board accountability and composition continue to inhabit the public corporate governance dialogue. Companies would be prudent to turn their attention to, if they have not already done so, incorporating what ISS calls “the new normal”.

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The author would like to thank Shreya Tekriwal, summer student, for her assistance in preparing this legal update.

Updates to ISS proxy voting guidelines

Institutional Shareholder Services (ISS) is one of the leading proxy advisory firms that makes voting recommendations on public companies’ proxy resolutions. In Canada, ISS’ recommendations on transactions and governance issues can have a significant impact on many shareholders’ opinions, and particularly the opinions of institutional shareholders.

ISS publishes its proxy voting guidelines which explain the policies underlying its recommendations. For 2016, ISS updated certain items in guideline. The updates, as described below, are good indicators of investors’ views toward current issues in the corporate governance landscape.

Director Overboarding

In response to information about the average workload for directors (over 300 hours a year, on average), ISS has revised its overboarding policy to lower the number of boards a director should sit on.  For directors who:

  • are not CEOs, the number of board has been lowered from 6 boards to 4; and
  • do hold CEO roles, the number has been lowered from 2 other boards to 1.

ISS did not make negative recommendations based on this revised “overboarding” definition in the 2016 proxy year. However, for meetings held after February 1, 2017, this policy update will result in a “withhold” recommendation if the director (i) is overboarded and (ii) attends fewer than 75% of its board or committee meetings.

Externally Managed Issuers

ISS has updated its voting recommendation policy for externally-managed issuers (EMIs), being issuers that have management services provided by external management companies.

Where an EMI provides insufficient disclosure about management services agreements and how management is compensated, ISS will make case-by-case voting recommendations for say-on-pay resolutions and director nominations. Where an EMI does not propose a say-on-pay resolution, the updated policy allows ISS to evaluate other factors, including: the size and scope of the management services agreement; executive compensation in relation to similar issuers; related-party transactions and independence; and historical compensation concerns for the issuer.

In Canada, this policy update will likely affect ISS’ recommendations on the election of individual directors of EMIs.

Management and Director Equity Plans 

ISS has also updated its regime for evaluating equity plans. Whereas ISS’ former system was based on a series of standalone pass/fail tests, the new evaluation system uses an Equity Plan Scorecard (Scorecard) with a holistic approach to evaluating equity plans. The Scorecard considers equity plans’ strengths and weaknesses based on plan cost, plan features and historic grant practices. The Scorecard takes into account considerations such as: the viability of risk-mitigating measures; the strength of vesting provisions; and the use of performance-based equity.

Further information on this Scorecard is available here.

Issuers should be mindful of the updates to ISS’ guidelines and the ways such updates might affect the ISS’ voting recommendations on meeting proposals in 2017.

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Key takeaways from the 2016 proxy season in the US

The EY Centre for Board Matters (EYC) recently published its annual report setting out key takeaways from 2016’s proxy season in the United States. Canadian issuers should take note of the developments in the US as trends south of the border will impact the proxy landscape in Canada.

Investor Communications

One of the takeaways from the 2016 proxy season was that proxy circulars have developed into a tool for communication to investors. For more companies, this annual disclosure is being used to engage investors by communicating companies’ goals and guiding principles.

Further, over the last few years, proxy disclosure has become more reader-friendly, incorporating tools such covering letters to shareholders, executive summaries, information in tabular form and enhanced formatting and graphics.

Environmental Considerations

Environmental and social concerns were a leading theme in shareholder proposal submissions in 2016.  EYC reports that support for proposals on climate risk jumped from 7% in 2011 to 28% in 2016.

Successful environmental shareholder proposals have included a proposal for a company to issue a sustainability report with greenhouse gas emissions reduction goals and a proposal for a company to report on methane emissions. Environmental shareholder proposals this year also dealt with topics such as political spending and lobbying and labour and human rights practices.

Proxy Access

In a previous post, we discussed the trends in the US, and, to a lesser degree, in Canada, toward proxy access and the use of proxy access by-laws.  The EYC report confirms that this topic continues to be a live issue for companies in 2016.

Proxy access allows shareholders to influence who governs a company by giving certain shareholders the right to nominate candidates to the board of directors.  According to the report, a third of S&P 500 companies have adopted proxy access provisions over the last two years. This year almost 200 companies received proxy access shareholder proposals in advance of their annual meetings. Sixty per cent of such companies adopted proxy access by-laws prior to their shareholders’ meetings.

Typically proxy access by-laws allow a shareholder (or a group of up to 20 shareholders) to make director nominations if it holds 3% of the outstanding shares of an issuer for at least 3 years. Such shareholders may nominate up to 20-25% of a board.

Key Lessons

EYC’s takeaways from the 2016 proxy season may be valuable to issuers as they plan for their 2017 shareholder meetings.  These takeaways, particularly the concerns expressed in shareholder proposals, may also help inform boards and management with respect to the strategic direction for their companies in the coming months.

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Litigation Flashpoints

Proxy contests spill over into court for many reasons, but there are certain flashpoints of which both activists and issuers should be mindful.  For activists, these are pitfalls to avoid, while for issuers they may represent opportunities to push back on sharp tactics and maintain a level playing field in the struggle for shareholders’ votes.

Some common reasons for which parties may find themselves before a judge include:

  • Securities disclosure requirements: Securities laws require disclosure of positions at specific thresholds, and these requirements can vary from one jurisdiction to the next. An activist wants to focus on its message for shareholders, not be dragged into the distraction of defending itself from allegations it is offside securities laws.  From an issuer’s perspective, these statutory filings may be the first evidence that an activist wants to make a move on the company.
  • Inadvertently acting in concert: Seeking support from fellow shareholders is integral to an activist campaign, but in doing so would-be dissidents should be careful to avoid communications or agreements that could result in them being considered by a securities regulator to be acting in concert, which could cause the activist to accidentally pass disclosure or even takeover bid thresholds.
  • Don’t get carried away: Securities laws prohibit false or misleading statements, and the defamation suit has a prominent place in the special situations litigator’s toolkit. For both activists and issuers, the solution is a simple one: speak with the facts, and avoid making up new ones.
  • Be careful with social media: Just because an appeal to shareholders is made in a tweet doesn’t mean there aren’t applicable securities laws. Be mindful of, for example, shareholder solicitations made on social media which could trigger regulatory filing requirements.
  • The bylaws set the rules: Issuers are increasingly adding disclosure requirements and other rules to control the parameters for of the proxy playing field long before an activist investor emerges onto the scene. Activists need to do their research and, if an activist wants to challenge a provision in the issuer’s bylaws, the activist should be prepared to go to court.
  • Standstill agreements: Parties who agree to a standstill should choose their language carefully, or else an issuer could find itself confronted by an activist challenger much sooner than they believed they had bargained for. Conversely, an activist that believes it is outside a standstill could have its campaign stopped in its tracks if a court disagrees with its interpretation of the contract.
  • It’s not over until it’s over: Winning a campaign is not necessarily the end of the threat of litigation for the activist. Where there is a sale of the company closely following a successful campaign, the activist can face a claim, which could come in the form of a class action, alleging that the newly elected directors breached their duties to the issuer.

For all of these, the best and most important precaution that an activist or issuer can take is to hire counsel experienced in proxy disputes and securities laws.  Indeed, lawsuits are infrequent precisely because it is uncommon for activists to launch proxy contests without hiring external consultants to help them navigate the legal waters, and issuers are well-advised to take the benefit of similar expertise.

Unintentionally landing in court is expensive, distracting, and usually unpleasant.  It should never happen by surprise.

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Should companies expect an increase in short-selling activism in Canada?

Success breeds imitation. The persistence of that cliché is good evidence of its accuracy.  Its implications, however, may be a warning call with respect to shareholder activism in Canada.

The woes of Valeant Pharmaceuticals International Inc. (“Valeant”) and its share price have been well documented in the media. Following a report by Citron Research, who held a short position in Valeant, alleging improper revenue recognition, Valeant’s shares fell precipitously: on the day prior to the report, October 20, 2015, Valeant’s shares closed at $190.85 (CDN) on the TSX.  On October 22, 2015, Valeant’s shares closed at $144.05.  By now, Valeant’s shares have declined to under $40, albeit not solely on the basis of Citron’s allegations.

It is not my intention to recite in depth the news surrounding Valeant. Its plight does, however, highlight an important form of activism that should not be overlooked: short-selling activism.

In broad strokes, the practice of short-selling activism involves an activist taking a short position on a company, while publically identifying reasons why the share price is overvalued – often (but not always) through explosive allegations of fraud or criminality. The practice is not particularly new, with well documented cases of public shorts in North America in 2011 and 2012, but the Valeant case represents one of the largest, most notorious, and most consequential public short in Canada in recent memory.  It is a fair assumption that this notoriety may lead to an uptick in short-selling activism, and it is an issue that boards should be prepared to address.

Traditional shareholder activism generally seeks to increase a corporation’s share price, at least in the short term. Short-selling activists, in contrast, only profit when a company’s share price declines.    The dissimilar incentives as between shareholder activism generally and short-selling activism means that responding to this unique form of activism, or being prepared in advanced to respond to it, presents unique challenges.

We have outlined strategies for responding to shareholder activism in the past, and our Special Situation Team, in collaboration with The Boston Consulting Group and RBC Capital Markets, has released a white paper addressing defensive strategies to shareholder activism.  Many of these strategies, including engagement with long-term shareholders, good governance, and proactive board involvement in value creation, remain relevant and important to defending against virtually all forms of activism.  Engagement with the activist, however, which may be beneficial in responding to traditional activism, has little to recommend itself in the context of short-selling activist, as it is effectively a zero-sum situation: there can only be one winner when one party seeks value creation and the other value destruction.  Consequently, a board should be prepared to adopt a significantly more aggressive strategy in dealing with a short-selling activist, and should expect the activist to respond in kind.

Policy activists get tough on climate change

As we previously predicted in a 2014 article, The Rise of Policy Activists?, policy activism in Canada is gaining speed. In this year’s upcoming proxy season, a hot topic for policy activists is the potential transition to a global low-carbon economy.

Canada is currently working towards a national climate change plan and one of the tools being considered is a national carbon tax. If implemented, energy companies would be required to pay a national tax on greenhouse gas emissions.

One of Suncor’s shareholders, NEI Investments, filed a shareholder proposal last month demanding that Suncor address its long-term survival plans. In particular, it demands that Suncor “provide ongoing reporting on how it is assessing, and ensuring, long-term corporate resilience in a future low-carbon economy.”

NEI Investments’ proposal will be put to a shareholder vote at Suncor’s annual general meeting on April 28, 2016. While shareholder proposals are technically non-binding even if they receive a majority of votes, this proposal has Suncor’s support and Suncor has even recommended that shareholders vote in favour of the proposal.

NEI Investments explains its position in a report entitled The End of the World as We Know It: Transitioning to a Low-Carbon Energy System. It states: “We believe the energy transition is already underway and change is now inevitable. As a result, investors face both risks and opportunities, but more importantly, we believe investors have a responsibility to actively drive this transition.”

South of the border, shareholders of Exxon – the world’s largest publicly traded oil company – recently brought a similar proposal requiring Exxon to account annually for the risks of climate change legislation. Exxon objected, arguing that the proposal was vague and that Exxon already published carbon-related information for shareholders on its website. The US Securities and Exchange Commission, however, found that Exxon’s public disclosures do not appear to “compare favorably with the guidelines of the proposal” and ordered the shareholder resolution to be put to a vote at Exxon’s annual meeting this May.

While the specifics of Canada’s climate policy remain to be seen, it is clear that a climate change plan is on the agenda for Canada and other countries around the world. Policy activism will continue to rise as investors become increasingly conscious of the risks of climate change.

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Making Your Vote Count: New Developments on Proxy Voting in Canada

The majority of shareholders in Canada hold their shares through a broker or other intermediary which in turn holds their shares with the Canadian Depository for Securities Limited (CDS). Most voting at shareholder meetings therefore occurs within a layered, complex and opaque proxy system. This leads to uncertainty as to whether all of the votes of the true beneficial shareholders are properly tabulated. The Canadian Securities Administrators (CSA) have announced proposed changes to the process of vote counting and reconciliation, which will hopefully result in a more accurate, reliable and accountable voting system.

The CSA has proposed new protocols for the parties responsible for vote collection and tabulation.  These parties include CDS, intermediaries such as brokers, Broadridge Investor Communication Solutions Canada (the main proxy voting agent for intermediaries) and transfer agents who act as vote tabulators at shareholder meetings.  The new protocols delineate clear roles for each of these participants at each stage of the process and outline the operational processes that each should implement to ensure their roles and responsibilities are fulfilled.

The protocols include:

  • moving towards a paperless proxy voting system; and
  • developing end-to-end vote confirmation capability that would allow beneficial shareholders to receive confirmation that their voting instructions have been received by their broker or other intermediary and submitted as proxy votes, and that these proxy votes have been received and accepted by the transfer agent as tabulator.

In addition, the CSA intends to establish a committee to promote better communication, information sharing and problem solving among the participants responsible for vote collection and tabulation.

Although the CSA did not identify any vote reconciliation issues unique to proxy contests, the proposals, if implemented, will provide greater certainty and transparency for all parties involved in proxy contests and hopefully will provide beneficial shareholders with greater comfort that their votes were, in fact, properly received and counted.

The deadline to comment on the proposed protocols is July 15, 2016.  The CSA intends to publish the final protocols by the end of 2016, in time for the 2017 proxy season.  The protocols will likely be implemented on a voluntary basis initially.

A copy of the CSA amendments can be accessed here.

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The State of Proxy Access Reforms

With the rise of shareholder activism led by what some refer to as “constructivists”, “reluctavists” or “suggestivists” (and, yet others, those who commit “extortion”), shareholders have become increasingly distrustful of leaving matters of corporate governance to management and boards. One tool that investors can rely on is exercising rights pursuant to a proxy access by-law, or, in Canada, the statutory rights of certain shareholders.

Proxy access is about enabling shareholders to influence who governs a company, and by extension, how the company proceeds with its affairs. It expands the activist shareholder’s quiver of offensive tactics by giving shareholders the right to nominate candidates to the board of directors and, in the United States, have information about those candidates included in the management’s proxy statement at the expense of the company. In Canada, the current rules do not provide the right to include shareholder nominees on the same form of proxy used by the company, so shareholders resort to preparing costly dissident proxy circulars that provide an overview of the nominees, as well as the overall thesis behind the shareholder’s actions.

In essence, proxy access preempts the need for an expensive, drawn-out, and often all-consuming proxy battle. All shareholders are given control of the board nomination process through their vote at the annual meeting, and can directly select the most qualified or best-positioned candidate to replace unproductive or misaligned directors.

USA

In August 2010, the Securities and Exchange Commission (SEC) adopted changes under Exchange Act Rule 14a-11 to the federal proxy rules in order to “facilitate the rights of shareholders to nominate directors … as a matter of fairness and accountability”. The changes, which are now colloquially referred to as the ‘3/3/25 Rule’, gave shareholders who: (i) owned at least 3% (whether held individually or as an aggregate of a group) of the total voting power of the company’s securities that are entitled to be voted on the election of directors at the annual meeting, (ii) for at least 3 years, (iii) could nominate up to 25% of the company’s directors. In July 2011, the United States Court of Appeals for the District of Columbia Circuit vacated the rule, stating that the SEC “acted arbitrarily and capriciously” and” inconsistently and opportunistically framed the costs and benefits of the rule”. The SEC, in response, permitted companies to adopt proxy access bylaws of their own accord.

In November 2014, the New York City Comptroller submitted 75 proxy access proposals through the 2015 Boardroom Accountability Project at companies targeted because of corporate governance deficiencies with respect to environmental liabilities, executive compensation and board diversity. To date, well over 100 U.S. companies have adopted proxy access bylaws (up from 6 in November 2014, and including household names such as Apple Inc., Coca-Cola Co., General Electric and McDonald’s Corp.), with the issue gaining momentum as we head into the 2016 proxy season, for which the Comptroller has already submitted more than 70 proxy access proposals. Overall, roughly 10% of S&P 500 companies have adopted proxy access by-laws.

Canada

Proxy access bylaws have not, as of yet, been an important consideration for most Canadian companies, largely due to the fact that under existing corporate laws, shareholders owning 5% (or shareholders representing 5% of shares in the aggregate) can nominate directors under a statutory mechanism (in Ontario, Business Corporations Act, RSO 1990, c B.16 s 99; federally, Canada Business Corporations Act, RSC 1985, c C-44, s 137). In Canada, director nominees are most often selected by an independent committee of the board of directors, which is responsible for identifying and nominating candidates. Extending the proxy access right in Canada is important due to the fact that most shareholders vote on the directors nominated by that committee prior to the meeting with a proxy form, making nominations at the annual meeting useless. In addition, in order to rely on the statutory mechanism, the nominating shareholder must limit the content of the nomination in the directors’ circular to 500 words, which must be submitted many months prior to the meeting date; activist shareholders do not frequently rely on the company’s proxy circular, for fear of too heavily relying on it as the only voice promoting the shareholder’s nominees. Over and above that, separate rules contained in advance notice bylaws adopted by a company are now widespread, requiring shareholders to submit detailed and compliant nomination proposals well in advance of the meeting.

Approaches

There are generally two approaches that can be taken by companies trying to determine how to proceed. A company can take a “wait and see” approach and not act until a shareholder makes a proposal for the adoption of proxy access bylaws. Under this scenario, the proposing shareholder will be able to control the dialogue and suggest terms that may not be as preferable to the interests of the company if the company had led with its own version of the bylaw. Although most companies have adopted the ‘3/3’ elements of the 3/3/25 Rule, many have reduced the percentage of directors that can be nominated and placed limits on the number of shareholders acting together in order to form a 3% aggregate.

Under the second approach, the company can propose its own form of the bylaw, preemptively adjusting it to reflect its own appetite for shareholder participation in the nomination process.

The two major proxy advisory organizations have, so far, indicated different approaches on how they will evaluate proxy access bylaw amendments. Institutional Shareholder Services (ISS) has stated that it will generally recommend a vote in favour of proxy access proposals that abide by the 3% for 3 years standard, with a 25% limit on the number of directors nominated by the shareholder. On the other hand, Glass, Lewis & Co. has stated that it will review proposals on a case-by-case basis, and will not make broad recommendations.

In the United States, the Council of Institutional Investors, a nonprofit association of pension and benefit funds representing over $3 trillion USD assets under management, has been vocal about its position on proxy access, which it considers a “crucial mechanism”. Similarly, the Canadian Coalition for Good Governance (CCGG), a coalition of investors who together manage $3 trillion CAD in assets on behalf of funds and institutional investors, has come out with full-force support of proxy access reforms, suggesting even broader rights to shareholders. The most notable reform suggested by CCGG would be to eliminate the holding period, so that any shareholder meeting the requisite percentage would be able to nominate directors; this, as CCGG suggests, would eliminate the “two classes of shareholders” created by a holding condition.

Finally, as pointed out by another commentator, the issue of proxy access may well be one that is merely symbolic, with little material effect on activist endeavours. The type of shareholder that typically attempts to reconstruct a board of directors—most often, an activist hedge fund—does not often maintain long-term positions in a company. And as a comparison of13D filings (in the United States) and early warning reports (in Canada) to the occurrence of activist campaigns reveals, this type of rich and nimble investor becomes active in a stock for the very purpose of surfacing shareholder value through corporate reforms. This essentially means that proxy access and proposal rights may, ultimately, have little to no impact, and may divert investment dollars into companies that have not yet adopted these reforms. It remains to be seen whether proxy access will remain in the spotlight in the 2016 proxy season.

 

Corporate governance at top of mind for investors

A recent article from IR Magazine, “Governance crucial factor for nine in ten Canadian investors” (the Article), highlights just how much emphasis Canadian investors place on good corporate governance. Canadian companies would be smart to take heed and ensure their corporate governance is in line with accepted good practices. The Article reports that, of the members of the Canadian buy side interviewed as part of the “IR Magazine Investor Perception Study – Canada 2016”, 86% cite corporate governance as being a crucial factor when making investment decisions.

While corporate governance is a broad term, the respondents indicate that a good long-term strategy, succession planning and the separation of chairman and CEO roles are among the most important considerations for investors. The Article also states that where a company does not have appropriate measures in place in respect of these considerations, investors may pass on the company entirely, regardless of how good a potential return on investment is.

In addition to investors’ views on corporate governance broadly, the study also surveyed respondents to consider whether shareholder activism is generally good or bad for long-term shareholder value. The majority of those surveyed believe that shareholder activism is good for a company’s value, while 30% found that it is difficult to determine or varies based on each case and 15% answered that it was unequivocally bad for shareholders.

For those respondents that are of the view that shareholder activism is positive for company value, they point to the fact that activism sends a helpful reminder to management that it is are accountable to shareholders and generally results in positive change. Respondents also indicated that they typically prefer to work with management, rather than against. Of the group that believe activism is simply bad for shareholder value, the most highly cited reason was the potential for short term investments and the kind of problems which can arise as a result of a quick buy and sell.

With proxy season in full swing in Canada, issuers are preparing and releasing management information circulars chock full of corporate governance disclosure. This Article and study highlight the importance of company policies, strategies and independence. Investors are likely to be engaged in a detailed review of this disclosure as it is released through the spring and summer with a view to investment opportunities.

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How corporate governance reforms spread

Recent research on the adoption of majority voting rules provides some insight on how corporate governance reforms are adopted and change company behaviour, and suggests that reforms may have the greatest impact on firms that are late to adopt them.

The push for majority voting, which requires that directors receive a majority (rather than a plurality) of the votes cast in order to be elected, has been highly successful, with over 90% of S&P 500 companies adopting some form of majority voting by January 2014. Majority voting is intended to make boards more accountable to shareholders.  A recent paper by a group of U.S. authors tries to determine if it actually works, and in the process makes an interesting observation about the spread of corporate governance reforms.[1]

The framing observation for this investigation is that, while widely adopted, majority voting rules have caused the removal of very few directors. Of more than 24,000 director nominees subject to majority voting in elections between 2007 and 2013, only 8 failed to achieve a majority of votes cast, and of those, only 3 actually left the board .  These numbers raise the possibility that majority voting may be popular precisely because, while it looks good, it doesn’t actually do much.

However, empirically, majority voting rules are associated with several positive markers – more consistent majority shareholder support for directors, more regular board attendance by directors and fewer “withhold” recommendations from ISS. The researchers attempted to determine if this was a majority voting success story (i.e. these positive effects occur because majority voting pushes directors to be more responsive to their shareholders) or if there was another explanation, such as: companies that are already more responsive to their shareholders are more likely to adopt majority voting; companies with majority voting lobby ISS more heavily to avoid negative recommendations; or shareholders are more reluctant to vote “no” under majority voting because they perceive a no vote to be more impactful than it would be under plurality voting.

Researchers found some support for all four explanations but, interestingly, they found that the timing of the adoption of majority voting made a significant difference. Early adopters were more likely to be firms that were already responsive to their shareholders, and majority voting had little effect on director behaviour for these firms.  Conversely, late adopters were much more likely to have changed their behaviour as a result of adopting majority voting.

These findings suggest that corporate governance reforms are rarely successful in changing the behaviour of perceived problematic actors at the outset. Instead, reforms spread first to more receptive companies that already have good relations with their shareholders, for whom adoption carries little cost and does not demand any change in behaviour.  Adoption by these firms creates an industry norm that increases the pressure on non-adopting firms, who become increasingly isolated as the reforms gain acceptance.

On reflection, this makes sense. Voluntary adoption is a sign that reforms are succeeding, but the reforms have little effect on the firms that readily adopt them voluntarily; rather, it is at the firms that resist adoption and are pressured into it that actual change occurs.

For companies, this is simply another reminder of the importance of keeping up to date on corporate governance issues. A firm that becomes an outlier in the market may be challenged to either explain itself or change its ways, and it could invite activist attention depending on how it handles these questions.

[1] Choi, Stephen J. and Fisch, Jill E. and Kahan, Marcel and Rock, Edward B., Does Majority Voting Improve Board Accountability? (November 4, 2015). University of Chicago Law Review, Forthcoming; U of Penn, Inst for Law & Econ Research Paper No. 15-31. Available at SSRN: http://ssrn.com/abstract=2661560.

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