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Investors demand change to US voting rules

GLOBAL – A group of 14 institutional investors from the UK, Netherlands, Australia and Canada have called for an overhaul of the American voting standard regarding the election of US corporate directors.

They say it is “prone to abuse” and “inconsistent” with democratic values.

In a letter addressed to the American Bar Association (ABA), the organisations – which manage more than $2trn (€1.6trn) – “strongly recommended” that a default rule be accepted which requires a majority shareholder vote to elect a director.

The organisations represented include Dutch giant ABP, the Australian Council of Superannuation Investors (which represents 34 superannuation funds), the UK’s Local Authority Pension Fund Forum (representing 36 funds), the London Pension Funds Authority, RAILPEN Investments and the Universities Superannuation Scheme.

The recommendations follow proposed amendments to the Model Business Corporations Act – encompassing the voting standard – by the ABA’s Committee on Corporate Laws.

The group has also proposed that a director chair should remain vacant if a candidate fails to receive a majority vote. In this event an incumbent would be held over until a replacement had been successfully elected.

“Majority voting is the democratic norm and should be the norm of US corporations too,” said RAILPEN’s special projects officer Frank Curtiss.

The current election system in the US was been labelled “Stalinist” by one observer. Although shareholders can vote for a candidate or abstain from voting no one may vote against a candidate.

“This system encourages cronyism,” added the observer, who did not wish to be identified. “Making any kind of change is therefore very difficult, if not impossible.”

According to the letter addressed to ABA chairman chief justice Norman Veasey, the lack of a default system “effectively undermined the role of shareholders in the governance of US corporations.”

The letter adds: “Shareholders, as the owners of US corporations, are left with no practical ability to select the agents who oversee management of their corporation. This strikes us as an inherently suboptimal system of governance that is prone to abuse.”

This is of great concern to the investor group, which represents some of the largest institutional investors outside US borders. Approximately $185bn (€151bn) worth of assets has been ploughed into US publicly traded stock.

“At a time of growing concern about globalisation and corporate legitimacy, institutionalising a system where directors are not accountable to anyone bar themselves except in the direst of circumstances, is not helpful,” said the signatories.

In 1987 the majority-vote system in the US was abandoned amid claims that it was disruptive.

The group disagrees, and believes the system was overthrown “to protect corporate management from the rising incidence of US shareholder activism at that time.”

According to Universities Superannuation Scheme CIO Peter Moon, “The US system lags behind other countries in corporate democracy. It is critical that US policy makers understand that this has ramifications for how foreign investors view the integrity of the US markets.”

The group says it is backed both by world opinion and by several US firms that have already adopted a majority-vote standard, such as Emerson Electric, ENSCO International, Pfizer and Dillards.

“What a majority vote default does do is encourage better communication between shareholders and directors,” said the group.

“This would strengthen corporate governance in the US and could lessen shareholder reliance on disruptive litigation and use of shareholder resolutions as a vehicle for addressing governance concerns.”

It calls the present system “inconsistent with the values espoused by the US as a democratic nation and leader of the free world, as it effectively renders shareholder votes meaningless in most corporate elections.”

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