In Public Companies, If You Don't Vote it Still Counts

by Odysseas Papadimitriou on June 4, 2009

Vote does not countThe thing about corporate democracy, as it has been allowed to flourish, is that it isn’t very much like a “real democracy”.  Basically, in a “real democracy” that you and I would recognize, people either vote for or against something.  If there are more votes for yes then yes wins the day, otherwise, no.  What we don’t think about as much is the number of people who don’t really vote yes or no, but who don’t vote at all.  In a “real democracy”, these people don’t really count.

On the other hand, in a corporate democracy when it comes to counting the votes from shareholders in publicly traded companies, those votes that aren’t cast, still count.   Officially, the votes not voted are given over to the brokers.  The brokers in charge of these votes are likely to defer their position to the suggestions made by the board of directors.  Thus, whatever the directors put up to a vote, they can be assured of having it go their way because they are supported by a silent majority.

For example, a coalition of labor unions recently opposed the re-election of the Bank of America CEO Ken Lewis. Under the existing rules and based on trends established during the prior two years, Mr. Lewis will only need 29% of shareholders to be in favor of his re-election, and he will be able to get a 51% majority given that 22% of shareholders will not cast a vote and therefore their vote will be counted as being in favor of Mr. Lewis re-election.

I think it’s natural during this economic crisis to wonder how it all went so wrong.  First, weren’t the shareholders aware that the companies they were investing in were run badly, and second, how did these boards manage to run their companies into the ground when a lot of these bad decisions required the support of the shareholders through a vote?  However, if the voting system itself is just a farce to empower whatever decision the board of directors wants to make, then we should not wonder why certain board of directors have acted in ways that do not represent the shareholder wishes

Luckily, recently, the SEC has decided to change the voting structure to the democratic system that you and I would best recognize as a “real democracy”.  This revision will take effect at the end of the year and will greatly support those investors who want to have some say in their company and who have otherwise had the power of their vote diminished by non-voters.

Finally, according to the Wall Street Journal, several companies, including General Electric Co. (GE), Pfizer Inc. (PFE), J.P. Morgan Chase & Co. (JPM) and Exxon Mobil Corp. (XOM), recently wrote letters to the SEC urging the agency to hold off on making the change. I guess the CEOs of these companies are really worried about the fact that their job security is now dependent on a 51% shareholder vote – not 29%, as was the case with Mr. Lewis.

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