As the 2017 proxy season approaches, now is the ideal time for bank to begin preparations.  As in past proxy seasons, one issue that may turn out to be a significant focus of shareholders and companies alike is the voting standard for director elections.  This is no more evident than in the corporate governance regimes of small and mid-sized banks.  As reported in the American Banker in May, shareholders at some small and mid-sized banks have renewed a push for banks to adopt majority voting, rather than plurality voting, in director elections.

Plurality voting in director elections is the default rule under most states’ corporate laws, including the Delaware General Corporation Law.  Under plurality voting systems, the directors with the most votes are elected, even if a director receives less than a majority of the votes cast.  Thus, is it possible that in an uncontested election, a director candidate could be elected with as little as a single affirmative vote.  The benefit of plurality voting is that someone always wins; there cannot be a “failed” election.  But, shareholders cannot vote against a director candidate, which limits their role in the director selection process.  This means that if a shareholder wants to prevent the election of a company’s nominee, the shareholder must nominate its own director(s) and stage a costly proxy solicitation in hopes of soliciting more votes than the company’s nominee.

Companies generally have the option, however, of adopting a higher voting standard, which some shareholders believe could help improve director accountability.  Historically, U.S. public companies of all sizes, including banks, have used plurality voting to elect directors.  Over the last decade or so, shareholders have successfully pushed most large public companies, including banks, to adopt either majority voting or “plurality plus” voting standards.  While the vast majority of companies in the S&P 500 use the majority vote standard for uncontested director elections, thousands of U.S. companies still use the plurality vote standard.  Key influential shareholder groups, including the Council of Institutional Investors and Institutional Shareholder Services (“ISS”) favor either majority or plurality plus voting in uncontested director elections.

In a majority voting system, uncontested director nominees must receive more “for” votes than “against” votes to be elected, and thus a shareholder can stage a “vote no” campaign to attempt to deprive the company’s nominees of the required majority vote without nominating its own directors and soliciting proxies.  As a result, many majority voting systems default to “plurality plus” voting in a contested election to prevent a failed election in which, despite multiple nominees, no nominee receives the necessary vote to be elected.  Under a plurality plus system, if a director nominee is elected but fails to secure a majority vote, the director must offer his or her resignation, and the board has varying degrees of discretion on whether it may decline to accept such resignation.

According to the most recent ISS 2106 Board Practices Study, close to 90% of S&P 500 companies (and 40 of 43 S&P 500 financial services companies) have adopted either majority or plurality plus voting.  However, only about 60% of midcap and 30% of small cap companies have adopted either majority or plurality plus voting.  This distinction between large and midcap/small cap companies is even more pronounced at financial institutions, with less than 20% of Russell 3000 financial services companies (excluding S&P 500 companies) having adopted a majority or plurality plus voting, according to ISS.

Last proxy season, a handful of banks received either significant shareholder pressure or formal shareholder proposals to adopt majority or plurality plus voting.  This push in the financial services industry is consistent with the broader market trend, as during the 2016 proxy season small and mid-cap companies adopted majority vote standards for board elections at a faster pace than S&P 500 companies.

This trend is likely to continue into the 2017 proxy season.  For example, in August 2016, the Council of Institutional Investors launched a broader campaign to encourage all companies in the Russell 3000 to adopt majority voting, including those companies that have previously adopted plurality plus voting.