In Public Companies, If You Don't Vote, It Still Counts

The thing about corporate democracy, as it has been allowed to flourish, is that it isn’t very much like a "real democracy". Basically, in a "real democracy" that you and I would recognize, people either vote for or against something. If there are more votes for yes then yes wins the day, otherwise, no. What we don’t think about as much is the number of people who don’t really vote yes or no, but who don’t vote at all. In a "real democracy", these people don’t really count.

On the other hand, in a corporate democracy when it comes to counting the votes from shareholders in publicly traded companies, those votes that aren’t cast, still count. Officially, the votes not voted are given over to the brokers. The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors. Thus, whatever the directors put up to a vote, they can be assured of having it go their way because they are supported by a silent majority.

For example, a coalition of labor unions recently opposed the re-election of the Bank of America (BAC) CEO Ken Lewis. Under the existing rules and based on trends established during the prior two years, Mr. Lewis will only need 29% of shareholders to be in favor of his re-election, and he will be able to get a 51% majority given that 22% of shareholders will not cast a vote and therefore their vote will be counted as being in favor of Mr. Lewis re-election.

I think it’s natural during this economic crisis to wonder how it all went so wrong. First, weren’t the shareholders aware that the companies they were investing in were run badly, and second, how did these boards manage to run their companies into the ground when a lot of these bad decisions required the support of the shareholders through a vote? However, if the voting system itself is just a farce to empower whatever decision the board of directors wants to make, then we should not wonder why certain board of directors have acted in ways that do not represent the shareholder wishes.

Luckily, recently, the SEC has decided to change the voting structure to the democratic system that you and I would best recognize as a "real democracy". This revision will take effect at the end of the year and will greatly support those investors who want to have some say in their company and who have otherwise had the power of their vote diminished by non-voters.

Finally, according to the Wall Street Journal, several companies, including General Electric Co. (GE), Pfizer Inc. (PFE), J.P. Morgan Chase & Co. (JPM) and Exxon Mobil Corp. (XOM), recently wrote letters to the SEC urging the agency to hold off on making the change. I guess the CEOs of these companies are really worried about the fact that their job security is now dependent on a 51% shareholder vote - not 29%, as was the case with Mr. Lewis.

Comments

[stefaith]

Even with the proposed changes corporate democracy is a farce.

I would like to always have a choice of directors to vote for, like I do in real elections. If there are, say 10 board memebers there should be a minimum of 20 applicants, and then I could vote for the board member that seemed most friendly to shareholders' interests.

I also think that the compensation package for the CEO should, by law, have to be approved by a majority of shareholders, excluding those shares owned or controlled by the CEO.

2009 Jun 05 05:48 AM

[TinyTim]

"The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors"

Unless these broker "unvotes" are eliminated, nothing has changed.
Good concept though and sorely needed.

2009 Jun 05 10:28 AM

[jackooo]

I have said for years that the voting is a joke.
My 1,000 sh. mean zip. It is the mutual funds that control millions of voting shares that have the say. They could care less because the American public is stupid. The public has no interest in voting. Lazy, fat and couch bound. That's how we got into this mess. The public pays these mutual funds commissions EVERY year whether the stocks move up or down or stay the same. They never think of moving the funds out until a catastrophe hits so the funds could care less about management at companies.

2009 Jun 05 12:47 PM

[Odysseas Papadimitriou]

I think you will all enjoy this article:
www.walletblog.com/200.../

More specifically, I am suggesting to remove term limits from Board seats, to limit the Board size to 8 members, and to allow anyone (or any group) with 12.5% of the stock full access to 1 Board seat (i.e. appoint anyone they want and fire them immediately if they do not do their jobs) in order to ensure full representation of the shareholders desires.

2009 Jun 05 04:59 PM