When Shareholder Democracy Is Sham Democracy
By James Stewart
Two weeks ago, I argued that it was hard to imagine a more compelling case for ousting directors than the one posed by Hewlett-Packard.
It turns out there are many stronger cases — 41.
That’s the number of publicly traded companies where directors actually lost their elections last year, meaning that more than 50 percent of the shareholders withheld their votes of approval. Yet despite these resounding votes of no confidence, they remained in their posts.
At least at H.P., all the directors got a majority of the votes cast, and even then, two resigned and a third gave up his post as chairman. But at Cablevision Systems, the New York cable and media company controlled by the Dolan family, three directors lost shareholder elections twice in the last three years — in 2010 and 2012 — and received only tepid support in 2011. Nonetheless, the three remain on the board.
“As fiduciaries, we can’t sit by and let the board make a mockery of our fundamental right to elect directors,” said New York City’s comptroller, John Liu, who oversees the city’s pension funds, which own more than 532,000 Cablevision shares. “Share owners need accountable directors who will ensure the company isn’t being run for the benefit of insiders at our expense.”
Mr. Liu sent the company a letter earlier this month urging it not to nominate the three again and threatening a proxy fight. “The fact that all three directors remain on the board suggests that one of the few rights” afforded shareholders is “illusory,” he wrote. Mr. Liu warned that he’d oppose their election and that “my office will also encourage other shareholders to join us.”
Mr. Liu didn’t get a response, but a Cablevision spokesman told me this week, without being specific, that Mr. Liu’s letter was “woefully misinformed, inaccurate and political.” In proxy materials released by Cablevision this week, all three directors — Thomas V. Reifenheiser, John R. Ryan and Vincent S. Tese — were renominated for new terms.
Even directors who resign after losing votes don’t necessarily leave. Two directors of Chesapeake Energy in Oklahoma, V. Burns Hargis, president of Oklahoma State University, and Richard K. Davidson, the former chief executive of Union Pacific, were opposed by more than 70 percent of the shareholders in 2012. Chesapeake requires directors receiving less than majority support to tender their resignations, which they did. The company said it would “review the resignations in due course.”
It later said that the board declined to accept Mr. Hargis’s resignation, a decision made with the “input” of the activist shareholder Carl Icahn and another large shareholder who had voted against Mr. Hargis. (Mr. Davidson left a month after the vote, but Mr. Hargis left only last month.)
At Iris International, a medical diagnostics company based in Chatsworth, Calif., shareholders rejected all nine directors in May 2011. In keeping with the company’s policy, they submitted their resignations. And then they voted not to accept them. The nine stayed on the board. (The company was acquired in late 2012 by the Danaher Corporation.)
A list of companies retaining directors who were rejected by shareholders in 2012 — so-called zombie directors — was compiled by the Council of Institutional Investors, which represents pension funds, endowments and other large investors. The list includes not just smaller, family-controlled companies, where disdain for shareholder views may be more ingrained, but also Loral Space and Communications, Mentor Graphics, Boston Beer Company and Vornado Realty Trust.
“It’s appalling,” Nell Minow, a co-founder of GMI Ratings, which rates companies based on risk to shareholders, including corporate governance issues, told me this week. “It’s the No. 1 issue in corporate governance.” She noted that the reason such a thing was possible was that many companies operate under a “plurality” voting system, in which directors run unopposed and just one vote is enough to be elected. And even companies that require a majority vote may decline to accept a director’s resignation.
That an electoral system unworthy of Soviet-era sham democracies is flourishing today in corporate America is largely thanks to the management- and director-friendly policies of Delaware, where more than half of United States companies are incorporated and where the corporate franchise tax contributes disproportionately to the state’s revenue. State law controls board governance, and Delaware has long tolerated plurality voting. The Delaware Supreme Court has also affirmed the power of boards to reject the resignations of directors who fail to gain a majority of votes.
“We’ve had lengthy correspondence suggesting they change this,” Amy Borrus, deputy director of the Council of Institutional Investors, told me. ”We’ve even provided the wording to make it easier. Nothing happens.”
Ms. Minow agreed. “Delaware is a race to the bottom,” she said. “There’s no benefit to doing anything friendly to shareholders.“ The only state, she said, that bars plurality voting is North Dakota — and it’s no coincidence that no major company is incorporated there.
A spokesman for the Delaware secretary of state’s office, which oversees the division of corporations, didn’t have any comment.
Defenders of plurality voting have typically argued that majority voting or elections that would be binding might be destabilizing or disrupt continuity. But “that’s simply to say that democracy is destabilizing,” Ms. Minow said.
“Continuity is exactly what shareholders voting against directors do not want. That’s why they’re withholding their votes.”
Shareholders of Cablevision, which is incorporated in Delaware, have plenty of reason to be disgruntled: over the last two years, while the Standard & Poor’s 500-stock index has rallied to a new high, Cablevision shares have dropped from more than $36 a share to under $15, where they were trading this week. (During that period, Cablevision spun off Madison Square Garden and AMC Networks to shareholders, which the company said would add about $16 to the share price.) Yet Cablevision’s chief executive, James Dolan, earned $16.9 million last year, and his father, Charles, earned $16.6 million as chairman — an unusually high amount for a chairman who is not serving as chief executive.
Both payments were about 50 percent higher than the year before. In addition to their compensation, the two Dolans get a full-time car and driver as well as access to a helicopter and jet for personal use. Institutional Shareholder Services noted there was a “disconnect” at the company between performance and executive pay.
Mr. Tese, Mr. Ryan and Mr. Reifenheiser make up the compensation committee of the board, which approves the Dolans’ compensation.
Mr. Tese, a former chief executive of the New York State Urban Development Corporation and former director of economic development for New York State, was also Bear Stearns’s lead director before its collapse in 2008 and served on its finance and risk committee. “Given the significant lack of oversight provided by Mr. Tese during his tenure at Bear, particularly in the area of risk management, we believe he should not continue to serve on any public company board,” the proxy advisory service Glass, Lewis & Company said last year. Mr. Tese is a member of four boards, including that of Madison Square Garden, which was spun off by Cablevision and is also controlled by the Dolan family.
Mr. Ryan and Mr. Reifenheiser were both members of a special committee that approved an ill-fated proposed buyout of the company by the Dolans in 2007. Independent shareholders blocked the deal on grounds that the Dolans’ offer was self-serving and too low. “Its improvident support by the special committee is among the reasons we have lost confidence in Messrs. Reifenheiser and Ryan,” Mr. Liu wrote in his recent letter to the company.
Last year, Cablevision paid Mr. Tese $233,967, Mr. Ryan $247,508 and Mr. Reifenheiser $220,786 in cash and stock, according to the company’s proxy statement.
Cablevision declined to make any of the directors available for comment, but Charles R. Schueler, a spokesman for the company, said, “These directors have each provided more than a decade of service to the company’s board, and they are widely well regarded for their independent insight, vast experience, as well as their sound counsel.”
Last year, both Institutional Shareholder Services and Glass Lewis recommended that shareholders vote against the three. Mr. Tese received the support of just 45.4 percent of shareholders, which is an abysmal showing by the standards of shareholder democracy. Mr. Reifenheiser and Mr. Ryan each received 46.6 percent. After the vote, the Council of Institutional Investors wrote a letter to Cablevision insisting that the three step down and urging Cablevision to adopt majority voting for director elections. The council didn’t get any response.
“We give Cablevision an F for corporate governance,” Ms. Minow said, “and if there were a lower grade we’d give it to them. The Dolans run Cablevision like a private company, and anyone who thinks they’re interested in shareholders hasn’t been paying attention.”
Cablevision’s Mr. Schueler responded that the directors “were elected because they received the most votes,” adding: “Cablevision has been a family-controlled company since it was founded 40 years ago. Our shareholders have always been aware that Cablevision is a controlled company. The company rules clearly indicate that the director nominees who receive the most votes are elected to the board.”
Even though shareholders nominally own companies, it seems appalling that they can’t even elect a board of their choosing. That’s unlikely to change as long as plurality voting prevails. As Ms. Borrus put it: “Why even bother to have an election? It’s just a rubber stamp for what the board wants.”