Wednesday, June 02, 2010

Senate Bill Contains Key Corporate Governance Provision on Director Majority Voting

. As the House and Senate financial reform bills head to conference, there are some strong corporate governance provisions found only in the Senate bill that could find their way into the conference bill and the signed legislation. One key provision is on majority voting. Most public companies currently elect directors using the plurality standard, by which shareowners may vote for, but not against, a nominee. If shareowners oppose a particular nominee, they may only withhold their votes. As a consequence, a nominee only needs one “for” vote to be elected and unseating a director is virtually impossible. Plurality voting in uncontested situations can result in “rubber stamp” elections. Majority voting is designed to ensure that shareowners’ votes count and make directors more accountable to shareowners.

The Senate bill requires the SEC to adopt rules providing that in an uncontested election a director receiving a majority of the votes cast must be deemed to be elected. (Exchange Act Sec. 14B, as added by the 2010 Act). If a director fails to win a majority of the vote in an uncontested election, the director must tender his or her resignation to the board. Upon accepting the director’s resignation, the board must set a date on which the resignation will take effect in a reasonable period of time and publish such date within a reasonable period of time as established by SEC rule. If the board declines to accept the resignation, the board must disclose the specific reasons why it decided not to accept the resignation and why that decision was in the best interest of the company and its shareholders.

As part of this explanation, the company should discuss the board’s analysis in reaching the conclusion not to accept the tendered resignation. A possible reason for not accepting the resignation may be that the resigning director is the board’s only financial expert. The explanation may be published in a filing made with the SEC. (S. Rep. No. 111-176, p.120).

The Commission must implement this section one year after enactment by adopting rules directing the exchanges to prohibit the listing of any company not in compliance. The SEC is authorized to exempt a company from any or all of these requirements based on the company’s size, its market capitalization, the number of shareholders of record, or any other criteria, as the Commission deems necessary and appropriate in the public interest or for the protection of investors

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