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Key5 Electing board members is still the shareholder's job

Shareholders elect directors, CEOs don’t. The power of shareholders is wielded at the annual meetings where elections for directors are held. Under the Model Business Corporation Act, if, for any reason, the annual meeting has not been held in 15 months, shareholders can demand such a meeting.

Every shareholder who owns voting shares in a corporation has the right to cast votes for director candidates listed on the proxy, which includes timely notice of the annual meeting along with information and materials required under state and federal law.

The proxy must be sent to each shareholder. The information in the proxy includes:

• Names and brief background information for director nominees
• Issues management wants shareholders to act on, (e.g., changes in articles of incorporation or any major transactions such as mergers)
• Any shareholder proposals (see Key 22) for shareholder vote
• Required statutory information on the compensation of the top five officers as well as financial performance information so that shareholders can compare salaries of officers with results.
• The shareholders are given this information before casting their vote or they can sign the proxy form included in the proxy materials and designate another to vote for them.

The era when shareholders signed away their proxies by endorsing their divedend checks is long gone. Shareholders have full information before they vote. Under the 1934 Securities Exchange Act (Section 14), the proxy materials must be approved by the Securities and Exchange Commission (SEC) before they are sent to shareholders. If the materials are not sent out prior to the vote at the meeting, the SEC can set aside the action taken at the meeting. Regulation of proxy solicitation is not limited to corporate management; shareholders seeking a vote on any issue must also garner the SEC’s approval prior to proxy solicitation.

The actual voting process is usually one share = one vote. Some companies provide for cumulative voting in their articles of incorporation. Under cumulative voting, if a shareholder owns, say, 100 shares and there are 9 directors to be elected, the shareholder gets 900 votes. The idea behind cumulative voting is to give minority shareholders a greater chance to make their voices heard by concentrating their votes on a single candidate or a small number of candidates.

Voting one’s shares need not be a completely independent process and shareholders can wield power through organizing their votes. Some shareholders create a voting trust, transferring their shares to a trust. A trustee votes their shares according to the terms of the trust agreement. The shareholders in the trust no longer hold their shares but the trust certificate entitles them to all the rights of a shareholder, including dividends---except the right to vote. A copy of the voting trust must be filed with the secretary of the corporation or with the officer responsible for the notices, proxies and votes at the annual meeting.

Pooling agreements are also used by shareholders. A pooling agreement is simply a contract to vote a certain way, such as casting all your votes as a shareholder for a particular candidate for the board. A pooling agreement is a contract, but the problem is enforcing it. If a shareholder disregards the terms of his pooling agreement, his vote still counts as cast and there is no reversing the corporate action once taken. In situations where the pooled votes would not have made a difference in outcome, it is nearly impossible to establish damages for breach of pooling contract.

At the annual meeting, the secretary of the corporation is generally responsible for the determination the a quorum of shareholders is present in person or by proxy. The secretary also tabulates the votes along with election inspectors appointed prior to the annual meeting. There are generally at least two election inspectors---one representing shareholders. This process is designed to insure that shareholders always have access to the ballot box as a remedy to keep the board of directors in line.