Opening the door to shareholder proposals: are you ready to respond to the 'voice' of your shareowners.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

THIS YEAR, shareholders, especially of large companies, have enjoyed unprecedented influence in corporate governance. Traditionally, and almost reflexively, shareholder proxy proposals have been viewed with suspicion and hostility by management. Unwelcome or not, shareholders' days of futilely banging at management's doors seem to be over. Whether the topic is executive compensation, majority voting for directors, or antitakeover measures, the influence of shareholders on corporate policymaking is definitely on the rise.

Boards should consider the impact of this increasing influence and whether to fling open the doors. However, it's pretty clear that boards can no longer ignore the voices of activist shareholders.

The principal cause of shareholders' increased voice in governance is growing shareholder activism on a broad range of issues, animated by institutional shareholders' animosity towards the corporate scandals of recent years. This activism has been spearheaded by the building trade unions and supported by Institutional Shareholder Services (ISS), who have provided focus, organization, and structure to shareholder frustration.

Management's new responsiveness can be traced to two principal factors. First, ISS--whose recommendations are widely followed--recommends withhold votes in director elections for any nominees that have: (1) ignored a shareholder proposal that was approved by a majority of the votes cast for two consecutive years; or (2) ignored a shareholder proposal approved by a majority of the shares outstanding. As ISS puts it, "Boards are responsible for ensuring that the voices of the owners of the firm are heard. If the majority of shareholders have indicated they desire a particular governance change, the board should support the proposal in question."

The second factor is the majority vote movement, which has virtually swept through public companies, particularly the larger ones. Roughly half of the larger public companies have now adopted some version of majority voting, up from less than 20 percent just two years ago. The logical appeal of majority voting is difficult to ignore: Why should a director be elected if she has more withheld votes cast against her than votes to elect her? (Others can speculate on whether this movement received a boost from reactions to the 2000 Presidential election.)

Regulators too have jumped on the bandwagon. The NYSE now proposes to eliminate broker discretionary voting in director...