Who's Afraid of Shareholder Democracy

Who's Afraid of Shareholder Democracy? By _GRETCHEN MORGENSON_ (http://topics.nytimes.com/top/news/business/columns/gretchenmorgenson/?inline=nyt-per)

INVESTORS may think they live in the United States of America, but when it comes to electing corporate directors - shareholders' intended watchdogs in the boardrooms - they are definitely back in the U.S.S.R. Even sadder to say, some of the nation's biggest mutual funds are helping to keep them there. Every year, shareholders are asked to elect directors of the companies they own. But investors can vote only for a director or withhold votes. For anyone who opposes a candidate, the election is an exercise in futility. The Securities and Exchange Commission under William H. Donaldson put forward a proposal that would have brought power to shareholders in the election of directors. But that proposal died with his recent departure. Pension fund activists have kept the issue alive, however, by forcing some companies to include in their proxy materials proposals that would require directors standing for election to stay on only if a majority of votes are "yes." But this democratic idea is often swatted down by mutual fund managers who side with corporations. Perhaps they reason that shareholders should not worry their pretty little heads about who represents them on the board. Shareholders of the _Altera Corporation_ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/html-c ompanyprofile.asp&symb=ALTR) , a semiconductor maker in San Jose, Calif., were asked to vote this year on such a proposal. The Fidelity Magellan fund voted against it, as did the Vanguard 500 Index fund. Both the Vanguard fund and the Fidelity Overseas fund also voted against such a proposal earlier this year at Freeport-McMoRan Copper and Gold, and Putnam funds did so at _Advanced Micro Devices_ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/html -companyprofile.asp&symb=AMD) and _Raytheon_ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/h tml-companyprofile.asp&symb=RTN) . These proposals, by the way, were supported by the Council of Institutional Investors and, in spite of the mutual funds' rejection, won majority support from shareholders. As is the case with most proposals, they were not binding, so the companies did not have to comply. "I think the current system is broken and, frankly, weird," said Daniel J. Steininger, president of Catholic Knights, a financial services company in Milwaukee whose mutual funds vote in favor of such proposals. "The shareholders are the owners of the corporation; shouldn't we be empowered to elect our directors?" Indeed. And because money managers have a fiduciary duty to represent the interests of investors whose money they oversee, it is hard to see how they can square that duty with a vote against giving shareholders the power they deserve in elections. Listen to Glenn Booraem, a principal at Vanguard Funds, try. "Generally, we did vote against those types of proposals from the general perspective that we were concerned with some of the practical applications about the standards that were proposed," Mr. Booraem said. "Such as how the majority standard would work from a corporate law perspective if a full board wasn't elected, if there weren't sufficient directors that got a majority vote to enable the board to continue to operate." But Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters and Joiners of America, said it didn't have to be complicated. "This issue is amazingly simple, but it's been made amazingly complex," said Mr. Durkin, whose union pension fund has led the majority-vote charge. "If a director doesn't get elected, under Delaware law they continue to hold over until their successor is elected and qualified. We don't have to prescribe everything that has to happen after the election. These boards would have to come up with policies and practices to deal with that situation. It's a very manageable, very straightforward reform." A FIDELITY spokesman said its proxy voting guidelines did not address director elections, but that the company was looking at the issue. In the meantime, Fidelity votes these matters case by case. John Hill, chairman of Putnam Funds, said executive compensation and dilutive stock awards have been the focus of Putnam's proxy voting. Majority votes for directors are on its agenda now. "My board has got to vet it, but I think there will be sentiment to support majority voting going forward," he said. On Oct. 12, shareholders at _Paychex Inc._ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/html -companyprofile.asp&symb=PAYX) will express their views on this important issue. A proposal from the American Federation of State, County and Municipal Employees Pension Plan would require Paychex directors to receive majority support. If the proposal passes, it will be binding. Last year, 36 percent of shares voted withheld support for a Paychex director. The company's board - no surprise - recommends shareholders reject the pension plan's proposal. Echoing Mr. Booraem's view, the board said in the proxy that the proposal would have "unintended and undesirable consequences." For example, a board vacancy would be filled temporarily by directors, not shareholders, it said. Hmm. We put a man on the moon, but we can't manage the consequences of shareholder democracy. There's something goofy about that. As of June, Vanguard held a 2.2 percent stake in Paychex shares for its customers, while Fidelity had a 1.6 percent holding. Putnam's stake was about 0.6 percent. It will be interesting (or depressing) to see how they vote their clients' shares. Stockholders today are truly disenfranchised on many governance issues. But majority voting is one that they can do something about. "When it comes up for a vote at companies, investors should support the change," said Jay W. Eisenhofer, a lawyer at Grant & Eisenhofer in Wilmington, Del., who represents the Council of Institutional Investors on the issue. "Investors need to organize around the principle that the law should be changed. Right now, the Delaware State Bar Association is considering the issue. In the absence of hearing from investors, I would expect that the only things they are going to hear are from the leaders of the corporate community who don't think that the law should be changed." David C. McBride, a partner at Young Conaway Stargatt & Taylor LLP in Wilmington, is the point man on the issue in Delaware. As chairman of the executive council of the corporate law section of the Delaware State Bar Association, he leads the group that recommends and drafts amendments to the state laws relating to corporations. A committee of the association was formed a week ago to study director elections, Mr. McBride said. The earliest that anything might be done about the issue would be next April or May, he said. INVESTORS should register their views with him. And shareholders who own mutual funds that vote against these proposals should also let those companies know if they are displeased with their stances. Anthony M. Maramarco, a portfolio manager at Babson Capital Management in Boston, says shareholders realize that they can achieve long-term value at a company only through the board. And because directors are the overseers of company management, it is not surprising that the spotlight is now shining on how directors are elected. Some 36 companies have changed bylaws to require majority votes for directors. These include _Abbott Laboratories_ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/html-comp anyprofile.asp&symb=ABT) , _Best Buy_ (http://select.nytimes.com/redirect/marketwatch/redirect.ctx? MW=http://custom.marketwatch.com/custom/nyt-com/html-comp anyprofile.asp&symb=BBY) , Lockheed Martin and KB Homes. But at most companies, shareholder democracy remains an oxymoron. Investors have the tools to change that. Let's see if they do.