In any self-respecting dictatorship, a head of state who got a "no" vote from 43% of the electorate while running unopposed would be on the next plane to Switzerland with all the cash that could be crammed into a suitcase.

But corporate democracy doesn't work like that.

About 43% of Disney ( DIS) shareholders voted "against" Michael Eisner's re-election to the company's board. Yet he's back on the board and he's still the CEO.

The sop that's thrown to dissenting investors? The board decided to separate the chairman and chief executive roles, giving the new job of nonexecutive chairman to director (and former senator) George Mitchell, who himself received "no" votes from 24% of shareholders. In splitting the two jobs, says Eisner, "we heard our shareholders."

Shareholder rights. What an oxymoron.

If you're not already outraged by the farce at Disney's annual meeting on March 3 in Philadelphia, stew on this: The "success" dissident shareholders had in getting 43% of shareholders to withhold their votes from Eisner could well kill even the limited corporate voting reforms now under consideration at the Securities and Exchange Commission. Corporations were already lobbying hard to kill the almost toothless rule-change proposal; they're now likely to lobby even harder.

Far From Trivial

As the amount of heat that even the proposed rule change demonstrates, this isn't a battle over trivial details. Without meaningful changes in the way corporate elections are run, all the reforms passed so far in an attempt to control executive greed, prevent financial mismanagement and protect investors from financial fraud are likely to fail.

The only way to keep the rascals honest is to give shareholders real power to throw them out. That's exactly what we don't have at the moment.

Why are investors so powerless? We can use the results of the Disney shareholder revolt to explain.

Let's start with this: Almost all nominations for a company's board come from the board's nominating committee. Investors have no say except in unusual cases when an institutional shareholder with a huge stake in the company demands a board seat or else. ("Or else" usually means that the investor will attempt to take over the company.)

Because most directors don't have any interest in nominating anyone to oppose them (and certainly not a strong candidate), the board's slate of candidates usually consists of board members seeking re-election and a few carefully vetted newcomers to fill any empty board seats.

And if a shareholder or group of shareholders wants to propose a candidate for election to the board? Why, there's absolutely nothing to stop the effort -- except gobs and gobs of money.

Footing the Expense

Under current SEC rules, companies don't have to include the names of candidates not nominated by the board in the official proxy materials mailed out at company expense. Nonboard nominees must foot the expense of preparing the materials and mailing them.

That's a considerable expense for anyone who wants to nominate a candidate to the board at a company like Disney. Disney has 2.05 billion shares outstanding. About 35% of those shares are held by individual investors in millions of individual accounts.

Even the institutional ownership, the other 65%, is scattered. The top institutional owner of Disney shares, Barclays Global Investors International, owns just 3.5% of all Disney shares, and the top 15 institutional investors hold just over 28% of shares.

Consequently, most board nominees go unchallenged; the few who are challenged almost never face more than token opposition. Instead of challenging the system, most investors either sell their shares when the board and the CEO get out of control or ignore the issue entirely until it blows up. Even when dissatisfied shareholders come together in a campaign to withhold votes from one or more directors, it's considered a success -- and extremely embarrassing to the targeted director -- to have even 5% of votes withheld.

In that context, the Disney vote is absolutely shocking. Besides the 43% of votes withheld from Eisner and the 24% from Mitchell, other directors received substantial "no" votes.

A Mouse-Sized Mandate
How Disney's directors fared with shareholders
Director Withheld Director Withheld
George Mitchell* 24% Leo O'Donovan 16%
Judith Estrin 23 Robert Iger** 15
John Bryson 22 Gary Wilson 15
Monica Lozano 16 John Chen 14
Robert Matschullat 16 Aylwin Lewis 13
*Now chairman of the board.
**Disney president and chief operating officer.
Source: MSN Money

Holding On

Of course, while they might have been embarrassed by the voting, they held onto their board seats.

How would the new rules proposed by the SEC change this?

They set up two "triggering" events:

  • Holders of 35% or more of shares withhold their votes from one or more board candidates.

  • More than half of all shares vote in favor of a shareholder resolution to allow outside nominees access to the proxy ballot.

If either happens, then the company would have to list outside nominees in the official proxy material for the next annual meeting.

(Reading the second trigger might set you wondering. Why, if a majority of shares vote for something, in this case access to the proxy, does it require a new SEC rule to force the company to comply with the vote? That's because now all such votes on shareholder resolutions are purely advisory. The company is legally free to ignore them no matter how many votes they get. But that's another story.)

These triggers in the SEC proposal only put the opposition candidate on the ballot. There's still the problem of recruiting someone of enough stature to win the vote. The SEC's rule would make that a tough job. Any outside candidate for the board would have to be independent, by the agency's definition, both of the company and of the group supporting the candidate.

I think this rule is nearly toothless: It's another example of the kind of bone that Washington regulators routinely throw to investors outraged by the recent string of financial scandals and CEO frauds.

Changing a Board's Character?

Consider that 35% hurdle. According to the SEC's own records, in the last two years, only about 1% of companies have witnessed withheld votes of 35% or more. Remember that it takes another year before that triggering withheld vote leads to outside nominees on the ballot. There's also a big difference between electing a director or two and changing the character and direction of a board, especially if directors serve staggered terms so that only a fraction of members are elected in any one year.

But the relative modesty of this reform hasn't stopped it from becoming the most controversial proposal in SEC history. The agency received more than 13,000 comments on the new rules by the Dec. 22 cutoff for comment, more than it has ever received on a proposed regulation. And that was before the Disney vote emphasized that dissident shareholders could actually set off the 35% trigger even at a huge established blue-chip company.

Many comments urged the SEC to strengthen this rule so shareholders could actually elect people who represented their interests to the boards of the companies they theoretically own.

But you certainly shouldn't be surprised to hear that much of the corporate world is vehemently opposed to even this change. One of the most common complaints is that the proposed regulations will enable "special interests" to elect directors to corporate boards and then take over those boards. If only. (You can read all the comments at the SEC Web site .)

The next round in this battle is set for Wednesday, when the agency holds what it calls a roundtable on the proposed rules.

Changes to Jubak's Picks

Sell Paychex. I had hoped the March 5 jobs numbers would show signs that a faster pace of hiring might pull Paychex ( PAYX) out of its funk. Well, with nonfarm payrolls climbing just 21,000 in February, the news was depressingly familiar.

With job growth continuing at a puzzlingly slow pace for this point in a recovery and interest rates likely to stay low, I think investors can't count on a strong performance over the next six to eight months from Paychex. The trends I was counting on to lift these shares when I added them to Jubak's Picks last fall just haven't materialized.

With the stock dead money at best, in my opinion, I'm going to take my loss here and look for a better opportunity. I have a 10% loss in these shares since I added them to Jubak's Picks at $36.92 on Oct. 7, 2003. (Full disclosure: I will sell my personal position in Paychex on March 12.)
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Paychex. He does not own short positions in any stock mentioned in this column. Email Jubak at

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