Old Republic International Corp.'s annual meeting shows how challenging it is for asset owners to hold boards of directors accountable to shareholders.
At the company's May 27 annual meeting, shareholders rejected by a vote of 60% of the shares cast the re-election of John M. Dixon as a director. Nevertheless, Mr. Dixon won election because ORI uses the plurality standard for election. With plurality voting, the nominee who receives the most “for” votes for a board seat wins, which means a nominee running unopposed wins elections regardless of how small the vote in his or her favor is.
The California Public Employees' Retirement System and other shareholders that did not support Mr. Dixon deserve credit for marshaling a majority to oppose his re-election. It's rare for a nominee for director not to receive a majority of votes in favor. So far this year, as of June 3, according to ISS QuickScore data, only one nominee of 4,302 nominees of the S&P 500 companies received less than a majority vote. In 2015, 12 nominees out of 4,896 received less than a majority vote.
Among Russell 3000 companies, so far this year 26 nominees out of 15,107 received less than a majority vote, the ISS data show. Last year, it was 51 out of 18,650.
On top of the plurality standard, ORI has a classified board, meaning directors are elected to staggered terms, making it impossible for shareholders to hold the entire board accountable in any year. In the case of Mr. Dixon, the shareholders who voted the majority of shares opposed to him not only have to see him remain on the board this year, but they are stuck with him as director until his term expires in 2019.
Asset owners and other institutional shareholders must seek to engage the board in discussion and demand it remove Mr. Dixon from the board, or that he resign. Institutional shareholders also must insist the board be made up of directors who represent most shareholders, rather than directors like Mr. Dixon who serve at the pleasure of a plurality voting standard put into place to weaken shareholders' ability to elect representative directors.
ORI's proxy statement states that the governance and nominating committee “would investigate” reasons for a significant withhold vote for any director and make recommendations to the board “as are appropriate in the circumstances.” William Dasso, ORI counsel, said in an interview the next board meeting is in August, although he couldn't say whether the committee would examine the vote or make any recommendation to the board. Mr. Dasso pointed out there is no provision for removing a director properly elected under the plurality standard.
This situation of having a director rejected by a majority of shares yet remaining on the board might not have occurred had ORI implemented a shareholder proposal filed last year at the company by CalPERS, calling for the company to adopt a majority-vote standard in uncontested elections for directors. It was approved by 78.5% of shares voted.
CalPERS put more pressure on the company this year, not only by withholding its votes from Mr. Dixon, but also by filing a proposal calling for proxy access, enabling shareholders to nominate directors using corporate proxy material. That proposal was approved by 74.4% of the shares voted. Mr. Dasso couldn't say whether the board will implement it. But the board has a track record of ignoring shareholder votes.
Asset owners must pressure the board for Mr. Dixon's resignation or removal, as well as adoption of the two proposals approved by the majority of shareholders last year and this year as a way to begin making the board accountable to shareholders.
If the company resists the proposals, it will be clear it is being run for the benefit of the insiders — directors and officers own a combined 2.3% of the stock — not for the majority of shareholders. n
