Majority vs. Plurality for Board Elections

Our Best Practices view:

Our view: plurality standard for any uncontested board election is a bad practice.  Except for cases of cumulative voting, plurality should apply only to the contested seats (where there is more than one candidate per seat).  We generally support resolutions seeking to implement or strengthen the majority standard.

A majority standard for election requires that in order to be elected, at least 50% of the votes cast are for this candidate.  (In board elections, withhold is equivalent to a vote against).  Plurality means that the winner receives more votes than his opponent does.  However, because 99% of US listed companies do not allow shareholders to nominate directors using the company’s proxy, most directed run uncontested. In the absence of an opponent, plurality means that even if there is just one vote for the candidate, he or she is elected.  CALPERS Principles (see par 6.2) require the majority standard in uncontested elections, but allow plurality in contested elections.  OECD Principles do not address this issue, but because they envision only fully contested elections.

Some companies, under shareholder pressure, have moved from plurality to majority standard for uncontested elections.  However, this does not solve the problem entirely solved because in most companies plurality continues to exist if there is only one external candidate. 

Take an example where there are at least two candidates for one seat.  Candidate one gets 49% of the vote, candidate two gets 30% and the remaining 21% cast votes for a third candidate or withhold votes from both.  Under such layout, it should be reasonable for candidate one to win.

However, the reality is that:

1. There are usually fewer alternate candidates than the full board size. 
2. The board usually can freely expand the board size.

Here is a different example: the board of company X has 16 incumbents.  Under the proposed {proxy access rule,} shareholders nominate four new candidates.  This is now a contested election, so plurality applies.  Suppose all shareholder nominees and half of the incumbent candidates get majority vote.  However, the remaining incumbents get 5% each.  If uncontested, the 5% incumbents would have to resign.  However, because the election is technically a contested election, the board can just expand to 20 members and keep the 5% candidates.  Even if the board does not expand to 20 members, only four of eight board members with 5% vote would have to resign.

A much better practice is to fix the number of board members before the election and to identify the specific seats subject to contest.