The faster reporting of the results of director elections is proving to be very interesting – we no longer have to wait until the summer to watch the drama of majority withhold and against votes unfold. The elimination of broker voting in uncontested elections means that the proportion of "for" votes is likely to be smaller at most companies. And, now that more director elections are subject to a Majority standard or a “Plurality and Resignation Policy”, the likelihood of directors stepping down as a result of these votes is much higher this year than ever before.
One of the first companies to report that holders of a majority of shares have withheld votes from a director is Herley Industries, which had its annual meeting on March 23rd. As required under the new disclosure rules, the company filed an 8-K on March 29th reporting the voting results from the meeting. One of the two directors up for re-election, 77-year-old Rear Adm. Edward K. Walker, Jr. (Ret.), received a very high withhold vote – nearly 66%. Of course, I can’t be sure of all of the reasons behind this lack of shareholder support, but one thing that caught my eye was this statement from the company’s proxy: “Adm. Walker has a consulting arrangement with us for services relating to corporate governance and ethics at an annual fee of $75,000.” While this is a relatively small amount of money, any consulting arrangement between a director and the company is cause for concern because it has the potential to compromise the director’s independence. But, when the consulting is for corporate governance and ethics it makes one wonder . . . isn’t that what directors are supposed to be doing anyway?
What makes this even more interesting is the fact the Herley Industries has a “Plurality and Resignation Policy”. And, unlike other companies in prior years where directors’ resignations have been declined after being considered by boards facing this dilemma – allowing directors who have received a majority withhold vote to continue serving on the board -- this director’s resignation was accepted and he is no longer serving on the board. The company filed an 8-K on April 6th stating the following:
“In accordance with Registrant’s By-Laws, since Rear Admiral Edward K. Walker, Jr. (Ret.) received more “withheld” votes than “for” votes, Admiral Walker submitted a resignation letter to the Board of Directors. The remaining Board of Directors, excluding Admiral Walker, met on March 31, 2010, to determine whether to accept his resignation. In light of the results of the shareholders vote at the Annual Meeting, the Board, following the deliberation process provided for in the By-Laws, determined unanimously to accept Admiral Walker’s resignation and to terminate the consulting arrangement between the Company and Admiral Walker. In making its determination, the Board noted Admiral Walker’s service as a director of the Company since October 1997 and thanked him for his contributions to the Company during his directorship.”
Hopefully, this is the beginning of a trend of boards reacting to majority withhold votes in a more responsive manner than in the past. Purchase Herley's governance risk profile here.
Annalisa Barrett - Senior Research Associate
Unfortunately, the Herley Industries board made an unusual decision in combination with this positive one: the board now has only four directors. This makes it one of only 24 companies in the Russell 3000 which currently has fewer than five directors. Boards this small may pose a risk to shareholders because they do not provide for enough independent directors to staff the board’s key committees and conduct the other work required to fulfill the board’s fiduciary duties.
