Far From TrivialAs 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.
Footing the ExpenseUnder 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
|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 OnOf 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.