More Angry Investors Say, Throw the Boards Out

Disgruntled shareholders have been taking a tougher and more vocal stand against company directors in 2009 over issues ranging from frothy executive pay packages to company stock performance, according to a new study. And experts believe this trend could fuel efforts by Congress and the Securities and Exchange Commission (SEC) to bring in changes to corporate-governance rules.

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The report, released this week by proxy-advisory firm Proxy Governance Inc., shows a spike in the number of shareholders casting votes against the election of a company director — even when the director was uncontested. The study found that about 10% of directors who were up for election in the first eight months of 2009 saw at least 20% of the shares either voted against them or withheld. That's up from 5.5% of directors in 2008. The percentage of directors seeing at least 40% of the shares voted against them more than doubled to 2.1% from 1% during the same period. (See the top 10 financial-crisis buzzwords.)

"The financial crisis has no doubt played a role in this jump," says Scott Fenn, senior managing director for policy at Proxy Governance. "There's a greater willingness on the part of big institutions to hold boards accountable and to vote against directors when they perceive a problem at companies."

Plummeting stock prices and anger over lofty compensation packages drove the trend. "When stocks start to go down and you see executives getting very big paychecks, that's when people get angry," says Dean Baker, co-director of the Center for Economic and Policy Research, a Washington think tank.

"They've seen some really high compensation packages and wonder if it really takes $50 million a year to motivate someone," says Ken Suelthaus, vice chairman who handles M&A activity and corporate law at Polsinelli Shughart.

Indeed, about 60% of the directors facing the biggest opposition from voting shareholders were those who sat on compensation committees, Fenn noted. (Read "Why the Stock Market Looks Bullish for Autumn.")

Fenn expects this trend to continue in 2010 when a new rule, approved by the NYSE and the SEC, goes into effect and no longer allows brokers to vote shares if they haven't received specific instructions from the shareholder on how to vote those shares. In the past, Fenn says, brokers were allowed to use their own discretion to vote shares and "typically voted management's slate" of directors.

"At many companies, these uninstructed broker votes may have constituted 10% or 20% of the vote, and with those votes no longer going in favor of management's candidates, it's going to naturally push up the percentages of opposition votes," Fenn says.

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