At the very core of the “capitalist” model is the notion that limited liability companies will facilitate the productive marriage of capital, talent and ideas without the risk of personally bankrupting the providers of capital. In 17th century England, the providers of capital were most often the directors of the company. As owners and directors, they helped with strategy and examined results.

Over the centuries, this “owner-director” model evolved to a more arms-length model, where the directors were most likely not owners, and the managers were most likely not owners either.

Today, with vast institutional ownership of public companies, there is a huge chasm separating ownership from management. The intermediary group is the board of directors and academics have created the phrase “agency challenge” to try to capture the problems inherent in such a model. In the worst cases, managers operate in their own interests and the shareholders take a licking. Recent scandals illuminate the agency challenge.

One way to try to shift the balance of power back to the owners is to have the owners more involved in the selection of directors — the people who are supposed to represent the shareholders’ interests. The Securities & Exchange Commission was looking at reforming the way directors are nominated, but a much more elegant and simple solution would be to allow shareholders a “real” vote for those who are nominated to represent them.

Shareholders of most companies don’t actually elect their directors today.

Take a look at a proxy form for the election of directors. You will see that you are offered a choice between voting “For” a director or “Withholding” your vote.

You most likely would expect to choose between voting “For” or “Against” a director. In fact, in the United Kingdom, Australia, Germany and France, shareholders actually do vote “For” or “Against” each director. Failure to receive a majority of votes cast results in a director not being elected. This voting system is called the “majority” system.

In Canada and the United States, a single “For” vote ensures the election of a director.
This voting system is called the “plurality” system.

As the election of directors is one of a shareholder’s most fundamental rights, it is essential to ensure that voting counts. For this reason the Canadian Coalition for Good
Governance (www.ccgg.ca) will be actively encouraging corporate boards to adopt majority voting by either by-law or operating practice.

Some North American companies have already moved to majority voting. In Canada, for example, Nortel Networks Corp. has adopted such a practice. Nortel’s proxy statement indicates to shareholders that a “Withhold” vote will be counted as a vote “Against” and that a two-thirds majority of votes must be “For” a director in order for that director to be elected. This is a simple and effective solution.

In the United States, U.S. Bancorp, Best Buy Co., Lockheed Martin Corp. and, most recently, Pfizer Inc. have moved to majority voting. Indeed, the pressure is mounting for a more comprehensive reform as the giant Institutional Shareholder Services has published a comprehensive evaluation of majority voting titled “From the Symbolic to the Democratic” . It can be found at www.issproxy.com. There is also a draft discussion paper from the American Bar Association.

A move to majority voting could be made in Canada by amending securities legislation.
That is not only onerous, as there are as many securities laws as there are provinces, but practically troublesome. The details of the by-law would have to address the situation where a key director, perhaps the chairman of the board, doesn’t receive the requisite votes. It would not be acceptable for his/her position on the board to be terminated immediately.

And it is often predicted that if there were an electoral risk, many good candidates would not stand for election.

The impact of any such change to majority voting would be an increase in consultation between institutional shareholders and chairs of boards. This is how it works in the U.K.
There, it would be a foolish chair who would propose a controversial new director without first testing the opinions of significant shareholders. Large U.K. shareholders are not interested in becoming members of the nominating committees of companies where they have significant shareholdings. But, they are interested in being consulted about new directors.

@page_break@So, stay tuned as shareholders pressure the companies in which you own stock to give you, the owner, a real vote in the election of directors. IE

David Beatty is a professor of strategic management at the University of Toronto’s Rotman School of Management. He is managing director of the Canadian Coalition for Good Governance and a director of several public and private companies.