On Jan. 5, 2017, the Council of Institutional Investors (CII) issued FAQs on majority voting for directors. CII advocates the use of consequential majority voting, which removes board discretion if a director does not receive majority approval. CII noted that while almost 90 percent of S&P 500 companies use majority voting, only 29 percent of Russell 2000 companies use majority voting in uncontested elections. Most mid-cap and small-cap companies elect directors by plurality vote.
CII described the following voting methods:
- Strict Plurality Voting: Nominees who receive the most “for” votes are elected until all board seats are filled. CII states this method is the best approach for contested elections and is appropriate for those companies with cumulative voting. However, CII states that plurality voting is not appropriate for uncontested elections with no cumulative voting. In an uncontested election, every nominee is elected upon receiving just one “for” vote, thus effectively serving as a rubber stamp on the board’s nominations.
- “Plurality Plus” Voting: Similar to strict plurality voting, except that a majority-opposed director must tender his resignation. Despite this requirement, the director is still legally elected to serve another term, and the board retains full control in determining whether to accept the director’s resignation. Due to the strong tendency of boards to reject such resignations, CII encourages plurality companies to skip “plurality plus” and adopt consequential majority voting.
- Majority Voting (with board-rejectable resignation): Under majority voting, a nominee in an uncontested election must receive more “for” than “against” votes to be legally elected. However, most companies pair this method with a resignation requirement that preserves the board’s ultimate control in deciding whether a defeated director stays or goes. This is the form of majority voting found at most S&P 500 companies. Thus, CII recognizes that this method poses problems similar to those presented in “Plurality plus” voting. Nonetheless, CII currently accepts this form of majority voting if already in place, and if the board has a good-faith commitment to replace unelected directors within a reasonable period of time.
- Consequential Majority Voting: CII’s preferred voting standard for uncontested elections, this method requires an uncontested nominee to receive more “for” than “against” votes, and requires the director to submit an irrevocable resignation upon appointment to the board. Resignation is triggered automatically if the director does not receive the required vote.
CII notes that any majority standard (whether majority or consequential majority) must be coupled with some form of “holdover” provision to ensure a smooth transition in the event of a director’s defeat. Holdover provisions typically allow 90 days for the transition, and CII believes a window of up to 180 days is reasonable in certain circumstances.