Is it time for a majority voting standard? Public companies may soon have difficulty resisting the call of investors to end plurality voting for directors.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

RECENT corporate scandals have renewed demands that directors be more directly responsive to stockholders. Under the banner of "accountability," institutional stockholders and others have presented companies with an increasing number of stockholder proposals seeking to require majority approval of directors, rejecting the plurality vote standard that applies to most corporations.

While "majority rule" and stockholder empowerment are attractive concepts, directors should think carefully before adopting these measures.

Under majority approval, directors must be approved by more than 50% of the votes cast (or in some versions by 50% of the total potential votes, whether or not actually voted). Under this system, if no candidate receives more than 50% of the vote, no one is elected and a second election must be held. By contrast, under plurality approval, the candidate receiving the most votes becomes director, even if she did not receive a majority of the votes.

As a result, under a plurality system a slate of directors will be re-elected no matter how little support they receive--so long as the election is not contested, or, if contested, so long as they garner more votes than the contenders.

Under most state corporation laws, including Delaware's, the plurality standard is the default rule for directors' election. Although these laws generally permit shareholders to adopt majority approval as the standard, historically few public companies have done so.

Critics have pointed out that, under plurality voting, the incumbents almost always win re-election, particularly as they control the proxy mechanism. Since a proxy campaign is expensive and time-consuming, stockholders rarely run opposition candidates. According to the critics, this system is contrary to ideals of corporate democracy, dilutes director accountability, and contributes to the sort of clubby atmosphere that impedes exercising effective oversight. Proponents of majority voting also note that majority voting for directors is the standard in many countries outside of the U.S.

Although greater stockholder democracy may sound attractive, boards should exercise caution before changing the method of electing directors. For all its limitations, the plurality voting system has a long history in the U.S. as an effective way to ensure decisive elections for directors, without the need for holdover directors or expensive and time-consuming run-off elections.

Also, pending regulatory and...