Election of the board of directors
Generally, directors are nominated by the board for election at the annual shareholders’ meeting (AGM). Companies listed on the NYSE normally must have a nominating/governance committee, composed entirely of independent directors, that identifies individuals qualified to become board members and recommends their nomination to the board. The Nasdaq has similar requirements, but does not require a formal committee.
Activist shareholders may also submit their own director nominees to a shareholder vote in what is referred to as a proxy contest. Currently, shareholders are allowed to conduct a proxy contest under SEC rules and can recommend to other shareholders one or more director candidates. However, shareholders find this process cumbersome and costly as they must provide proxy materials to other shareholders at their own cost. There has been much debate in recent years as to the circumstances, if any, under which shareholders should be able to nominate directors using the company’s proxy materials (commonly referred to as "proxy access"). After a proposed SEC rule that would have allowed shareholders to have proxy access for all companies was struck down by a federal court, the SEC's rule permitting shareholders on a company-by-company basis to propose proxy access became effective.
Legal framework for election of directors
In 2009, Delaware enacted important changes to its General Corporation Law (effective on 1 August 2009) to permit companies to adopt bye-law amendments that:
Allow proxy access.
Fix a record date for voting rights that is different from the record date for notice of meetings. Permit reimbursement of proxy contest expenses.
Frequency of election to the Board of Directors
Term limits for directors are relatively uncommon, although Delaware’s General Corporation Law allows a corporation’s certificate of incorporation or bye-laws to prescribe various qualifications for directors, including the term of appointment. While 72 of the Top 100 US Companies discuss the topic of term limits for directors in their proxy statements, only five have adopted mandatory term limits (2012 S&S Corporate Governance Survey).
Nature of the ballot on the Board of Directors
Directors are elected by shareholders at the AGM. State corporate laws generally provide that directors are elected by a plurality vote, in which a director nominee who receives the highest number of votes cast for an open director’s seat is elected to that position. Under the plurality voting standard, the only votes that count are votes that are cast for a director; withhold votes have no effect. However, there has been a significant movement toward adoption of a majority voting standard for election of directors in the past several years. Under most majority voting standards, directors must be approved by more than 50% of the votes cast.
Pressure from shareholders on voting standards in director elections has resulted in a dramatic increase in the number of companies adopting a majority vote standard. 91 of the Top 100 US Companies now require directors to be elected by a majority of the votes cast, up from 11 companies in 2006 (2012 S&S Corporate Governance Survey). Of those 91 Top 100 US Companies, 81 require incumbent directors to submit their resignation from the board following their failure to receive a majority of the votes cast in favour of their election. Of the remaining nine Top 100 US Companies that continue to elect directors by a plurality of the votes cast, seven have adopted a policy that nominees receiving more votes withheld than votes for their election must submit or tender their resignation from the board.