Common Sense: Sham Shareholder Democracy

It turns out there are many stronger cases — 41.

That’s the number of publicly traded companies where directors actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained in their posts.

At least at H.P., all the directors got a majority of the votes cast, and even then, two resigned and a third gave up his post as chairman. But at Cablevision Systems Inc., the New York cable and media company controlled by the Dolan family, three directors lost shareholder elections twice in the last three years — in 2010 and 2012 — and received only tepid support in 2011. Nonetheless, the three remain on the board.

“As fiduciaries, we can’t sit by and let the board make a mockery of our fundamental right to elect directors,” said New York City’s comptroller, John Liu, who oversees the city’s pension funds, which own more than 532,000 Cablevision shares. “Shareowners need accountable directors who will ensure the company isn’t being run for the benefit of insiders at our expense.”

Mr. Liu sent the company a letter earlier this month urging it not to nominate the three again and threatening a proxy fight. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. Mr. Liu warned that he’d oppose their election and that “my office will also encourage other shareholders to join us.”

Mr. Liu didn’t get a response, but a Cablevision spokesman told me this week, without being specific, that Mr. Liu’s letter was “woefully misinformed, inaccurate and political.” In proxy materials released by Cablevision this week, all three directors — Thomas V. Reifenheiser, John R. Ryan and Vincent S. Tese — were renominated for new terms.

Even directors who resign after losing votes don’t necessarily leave. Two directors of Chesapeake Energy in Oklahoma, V. Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, the former chief executive of Union Pacific, were opposed by more than 70 percent of the shareholders in 2012. Chesapeake requires directors receiving less than majority support to tender their resignations, which they did. The company said it would “review the resignations in due course.” (After a shareholder outcry, Mr. Davidson left a month after the vote, but and Mr. Hargis only left last month.)

At Iris International, a medical diagnostics company based in Chatsworth, Calif., shareholders rejected all nine directors in May 2011. In keeping with the company’s policy, they submitted their resignations. And then they voted not to accept them. The nine stayed on the board. (The company was acquired in late 2012 by the Danaher Corporation.)

A list of companies retaining directors who were rejected by shareholders in 2012 — so-called zombie directors — was compiled by the Council of Institutional Investors, which represents pension funds, endowments and other large investors. The list includes not just smaller, family-controlled companies, where disdain for shareholder views may be more ingrained, but also Loral Space Communications, Mentor Graphics, Boston Beer Company, and Vornado Realty Trust.

“It’s appalling,” Nell Minow, a co-founder of GMI Ratings, which rates companies based on risk to shareholders, including corporate governance issues, told me this week. “It’s the No. 1 issue in corporate governance.” She noted that the reason such a thing is possible is that many companies operate under a “plurality” voting system, in which directors run unopposed and just one vote is enough to be elected. And even companies that require a majority vote may decline to accept a director’s resignation.

Article source: http://www.nytimes.com/2013/04/13/business/sham-shareholder-democracy.html?partner=rss&emc=rss