A majority of one: high heat on a front-burner issue.

ITEM: In a Harvard Law School class years ago taught by Louis Loss, the "dean" of securities regulation, a student challenged the basis on which a corporation could exclude a shareholder proposal from its proxy statement. Loss asked him to justify his sweeping contention that, even if made consistent with the proxy rules, exclusion was impermissible. Clearly confused about the fundamental notion of "state action," the student stammered in reply "The First Amendment ... free corporate speech!" Shaking his head, Loss ended the exchange.

Item: In my column "Two Modest Proposals" (Winter 1998), I suggested these changes to the corporate electoral process: (1) proxy statements to contain a short essay from each board candidate explaining why he added value to, and would be a good director for, that particular board, and (2) public companies to hold annual pre-election conference calls at which board candidates would be available for questions from their electorate. A more recent column, "The Albanian Candidate" (Winter 2001), analyzed in more detail how shareholders are disadvantaged by the dearth of information supplied about board candidates.

Item: In spring 2003, there was much hubbub surrounding the SEC's contemplation of major changes in shareholder access to the company proxy statement--that is, giving shareholders the right to make nominations and to have those nominees included in the proxy statement. The commission seemed poised to act even in the face of legitimate, significant criticism regarding several aspects of its proposal. (See "Access Denied!" Summer 2003.) However, although in 2004 the SEC solicited further comments on a proposed rule, it has made no further move toward adoption. Governance gurus consider the proposal to be dead.

Item: Whether it is right and proper to continue to permit directors to be elected on (mere) plurality vote--as opposed to requiring them to garner a majority--is currently a front-burner issue. Both the Council of Institutional Investors and CalPERS have set the burner to high heat. A whole slew of majority voting shareholder proposals were submitted during the 2005 proxy season. Seeing the lay of the land, several companies have agreed either to adopt some version of the idea or, at least, to study it.

The common theme of the above items is this: Elections for directors of U.S. public companies bear little relation to other elections with which we are familiar.

They are not like elections for public office in that (pace the law student), though subject to specific provisions of state (corporation statutes) and federal (the '34 Act) law, they concern private offices in private enterprises. Other big differences are that little information is supplied about the candidates; there is no continuing (or any) press coverage except in high-profile cases; and there are no news conferences or forums through which electors can evaluate the candidates' mettle.

Our directorship elections are also not like other elections in that opposing candidates (where there is a proxy contest) do not appear on the same ballot but on physically distinct ballots.

And they are plainly not like virtually any other election in that a candidate can win by receiving, literally, only one vote--not one vote more than the next highest vote-getter, but one vote, absolutely, literally. Candidate Jones (running, on the company slate, unopposed unless there's a proxy contest) need not receive any minimum number of votes, nor does it matter how many voters "withhold" their votes from Jones, because there is no other candidate able to receive any votes. Jones's total, whatever it is (greater than zero), suffices to elect. This last phenomenon animates those seeking to replace it with a majority vote requirement.

Both the Corporate Law Section of the Delaware State Bar Association and an American Bar Association committee are studying the matter. Alternatives being analyzed by the ABA include: the status quo; moving to majority vote as the "default" procedure; moving to a minimum percentage plurality vote requirement; and creating "consequences" for directors who receive "against" votes (not at present permitted) in excess of "for" votes.

These potential "fixes" are, however, not without their own problems:

a. The "failed election"--if, under a majority vote requirement, either a non-incumbent or an incumbent director does not receive a majority, numerous governance difficulties arise.

b. The encouragement and facilitation of quasi-greenmailers who cynically ride the corporate governance bandwagon.

c. The fact that, even if an incumbent director receives more "againsts" than "fors," he would remain as a (holdover) director until his successor is elected.

d. Assuming an increase in election campaign nastiness if current procedure is altered, the likelihood of a consequent decrease in the directorship pool.

Yet, given the demise of the SEC's shareholder access proposal and the continued afterglow of the successful "withhold" campaign against Michael Eisner, it's hard to believe we won't soon see some move away from the current scheme of "a majority of one."

The author can be contacted at [e-mail].

Hoffer Kaback is president of Gloucester Capital Corp. and has served on several boards.

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