Demanding a Greater Voice, Investors Make Push for Majority Voting

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Bank investors are pushing harder than ever for majority rule at annual meetings.

U.S. companies, including banks, have historically relied on a plurality system to elect directors.

With this standard, directors who receive the most votes are elected, even if he or she lacks a majority.

Most races are uncontested, so directors can keep their seats even if they fail to get a majority of support. That occurred in at least once this year, when four Middleburg Financial directors, including both its chairman and chief executive, were re-elected even though less than half of the Virginia company's shares backed them.

Banc of California in Irvine and Seacoast Banking Corp. of Florida in Stuart also faced criticism this year from investors upset about the companies' use of plurality voting.

At those companies and elsewhere, investors are demanding that more banks switch to a majority system, where directors must get more than half the votes to stay on the board, based on a belief that doing so improves corporate governance. It's an issue that executives and directors, especially those facing complaints about areas such as financial performance, must consider, industry experts said.

"This question goes to a core element of shareholder democracy," said Peter Kimball, an associate director at ISS Corporate Solutions. "Under plurality, you could get one vote and get elected to the board, even if that's the only vote you get and all the others are withheld. That makes the vote essentially toothless."

In many states, including Delaware where a majority of companies are incorporated, the statutory default is a plurality standard, though companies can change their charters to use majority voting.

Shareholders over the past decade have been more vocal about changing the standard across corporate America. Notably, more than 40% of investors withheld support to re-elect Michael Eisner as chairman of Disney in 2004.

"That was a significant vote," said Robert McCormick, chief policy officer at Glass Lewis, another leading proxy advisory firm. "That caused some investors to review this process. It was a bit of a tipping point."

The Dodd-Frank Act also gave more rights to shareholders by, among other things, requiring nonbinding votes on executive compensation at least once every three years. Increased shareholder activism in the financial services sector has given rise to more investor demands for improved corporate governance.

"There has been more of a focus on boards and whether they have the proper core competencies," said Walter Mix, head of the financial services practices at Berkeley Research Group and a former banking commissioner in California. "Plurality elections could allow a board member to be retained without unanimous support and that could lead to a lack of board cohesiveness."

Larger companies have been quicker to adopt majority voting. All but three of the 43 financial services firms listed on the S&P 500 have some form of majority voting, according to ISS Corporate Solutions. Excluding any S&P 500 firms, less than a fifth of the financial institutions in the Russell 3000, which has a larger roster of smaller companies, have switched.

The push is mostly coming from institutional investors, said David Baris, president of the American Association of Bank Directors. His group has fielded questions from directors about plurality voting, though he notes it's rare for a director not to receive broad support. "Institutional investors and their advisers will think that majority voting is very important and generally be in favor of it," Baris said. "But if you ask someone who lives in a small community and is invested in a community bank, they may not care."

The $1.3 billion-asset Middleburg is among the banks facing pressure from a large investor.

David Sokol, a former Warren Buffet protégé who owns about 30% of the company's stock and has been pushing Middleburg to sell itself, took up the issue of plurality voting this year. He withheld support for all 12 director nominees, including Chairman Joseph Boling and Chief Executive Gary Shook.

Virginia is among the states where plurality voting is the default standard, and ISS had also recommended that investors back the company's 2016 agenda, including its board nominees.

Shook, for his part, noted that plurality voting is commonplace at community banks, adding that Middleburg had been working to maintain a dialogue with Sokol.

"I don't see a rush to change" the standard, Shook said in an interview. "I think we need to focus on growing loans, if anything."

Sokol, Middleburg's biggest investor, did not return a call requesting comment.

At Banc of California, shareholders at this year's annual meeting approved a proposal by PL Capital, an activist investor that owns roughly 6% of the $9.6 billion-asset company's stock, to switch to a majority standard.

The measure was nonbinding; efforts to get Banc of California to comment on adopting majority voting were unsuccessful. John Palmer, a principal at PL Capital, did not respond to a request for comment.

Five directors at the $4 billion-asset Seacoast, including the father of Chief Executive Dennis Hudson 3rd, also survived a protest from CapGen Capital Group III, a fund managed by a firm owned by former Comptroller Eugene Ludwig. CapGen, which has been critical of Seacoast's financial performance and corporate governance, withheld support for the company's nominees.

The nominees, which received a recommendation from three proxy advisory firms, still gained a majority of support, though in some instances the results were relatively tight.

John Sullivan, the CapGen fund's managing director, did not respond to requests for comment.

Seacoast uses a modified version of plurality voting that requires a director to immediately submit a resignation if he or she fails to win majority support, a spokeswoman said. Still, it is up to the board's corporate governance committee whether or not to accept the resignation.

"Seacoast's vote structure meets good corporate governance standards and gives shareholders the benefits of majority voting and a meaningful role in uncontested director elections," the spokeswoman said.

Plurality voting has been helpful in past instances of contested elections by ensuring a winner, though industry observers noted that companies with majority voting can address that issue by simply permitting a plurality standard under certain circumstances.

"Publicly owned companies should have a majority voting," Gerald Armstrong, a private investor and shareholder rights advocate, said. "It is the democratic way."

Plurality voting factors into Armstrong's investment decisions, though he said that issue alone will not bar him from buying into a bank's stock.

Reviewing corporate governance policies is a key part of due diligence for Ted Kovaleff, president of Informed Sources Service Group and an investor in more than 80 banks. While he thinks a majority standard is the best practice, he focuses on other areas of corporate governance such as requirements that directors also own stock.

"I think it should be harder, not easier, to choose directors," Kovaleff said. "That way you will get better choices and not the CEO's country club friends."

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