A year after a campaign at Walt Disney Co. thrust withholding votes from corporate directors into the spotlight, shareholders are renewing their efforts to use the tactic to send a message to what they consider to be poor-performing boards.
Disney shareholders gather again Friday in Minneapolis, though it’s not shaping up to be a repeat of last year’s fireworks, when shareholders withheld 45 percent of the vote from Chief Executive Michael Eisner’s re-election to the board, prompting him to be replaced as chairman.
But some experts predict that such efforts will, if anything, pick up steam this year across the country.
“I think you are definitely going to see a substantial increase in the number of withheld votes,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees.
Despite complaints last year that shareholder activists overreached and withheld votes from too many top-notch directors, they are not shying away from the tactic this year.
“Director elections, in particular organized just-vote-no campaigns against members of corporate boards, appear poised to dominate the annual meeting season in 2005,” Patrick McGurn, a corporate governance expert at the Institutional Shareholder Services proxy voting advisory firm, told clients in a proxy season preview.
“Withhold-vote campaigns came of age in 2004, and they emerged as the dominant tactic for shareholder activists,” he said. “Withhold votes will continue to be a major focus of shareholder activism in 2005.”
Shareholder activists have been stymied on other fronts, particularly in efforts to secure a rule from federal regulators allowing them to put director candidates on the ballot under limited circumstances.
The stalemate on the issue will energize withheld-vote efforts, some experts said.
“If we can’t get it through proxy access, investors may well feel the need to slam directors through withheld votes,” said Tracey Rembert, coordinator of the advocacy and public policy program at the Social Investment Forum, which promotes socially responsible investing.
Then, this week, Securities and Exchange Commission officials also ruled three firms could bar shareholder resolutions on proxy access. “I think that infuriated shareholders even more,” Rembert said.
AFSCME was one of the sponsors of the resolutions. The SEC’s decision, Ferlauto said, puts more emphasis on withheld-vote campaigns.
“If that’s the tool the SEC has given us, that’s the tool shareholder activists are going to use,” he said.
Shareholders withhold votes for a variety of reasons, ranging from poor company performance and ignoring resolutions approved by shareholders to simply bad attendance.
Withheld-vote campaigns are, essentially, symbolic: It generally takes only one vote to re-elect a director, since they almost always run unopposed.
But these campaigns can bring about change. Some companies with high withheld votes, like MBNA Corp., revamped their boards. Others took steps behind the scenes to adopt shareholder resolutions that had received majority votes in previous years.
Withheld-vote campaigns can be controversial. Last year, the California Public Employees’ Retirement System came under criticism when it withheld votes for audit committee members at roughly 2,700 companies because they approved paying independent accountants for non-audit services.
This season, Calpers said it is being more selective.
ISS also was criticized for recommending clients withhold votes from superstar investor Warren Buffett at Coca-Cola Co. because of his firm’s business dealings with Coke.
But withheld votes are not just for the most rabid shareholder activists. Mutual funds withheld votes from scores of directors last year, with the giant Vanguard 500 index fund averaging more than one withheld vote per company.
Despite the publicity surrounding a handful of high withheld votes, like at Disney, McGurn said just 10 nominees at Standard & Poor’s 500 firms saw withhold votes of 40 percent or higher, while nearly 2,500 had 90 percent or more “yes” votes.
Rembert said she expects higher withheld votes overall, but lower profiles, with fewer “big, front-page campaigns.”
“It’s going to be a very interesting season,” she said.
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A who’s who in withheld votes
Here’s a list of selected U.S. directors and the amount of the vote that was withheld from their election last year.
%%
Director Company Withheld vote
Joseph Neubauer Federated Dept. Stores 61.1%
Joseph Pichler Federated Dept. Stores 60.4
James Berick MBNA 47.4
Michael Eisner* Walt Disney 45.2
Benjamin Civiletti MBNA 40.9
Eugene Kahn* May Dept. Stores 33.8
James Kilts May Dept. Stores 33.1
James Kilts* Gillette 26.4
George Mitchell Walt Disney 25.6
Alan Lacy* Sears Roebuck 23.7
%%
* Chief executive; Kahn has since resigned
Source: Securities and Exchange Commission filings
