The Association of U S West Retirees



Directors find elections tough to lose
'Stalinesque' rules slammed by shareholder activists
By David Milstead
Rocky Mountain News
Saturday, December 2, 2006

Pity the poor politicians last month who lost when the votes were counted.  They should run in an election where everyone wins -- the race for seats on corporate boards.  Not a single director was turned out this year when shareholders voted at Colorado's largest public companies.  Out of 505 director candidates, just 13 failed to get 80 percent of the vote.  Nearly 85 percent of the directors running got 95 percent of the vote or more.  The worst performer got nearly two-thirds of the vote.

Even as directors' jobs are getting tougher in a new era of scrutiny, it remains nearly impossible to get voted out of the job.  That overwhelming success at corporate Colorado's ballot box highlights how director elections differ from political contests -- and why shareholder activists are trying to change the rules.

"At most companies, elections are virtually Stalinesque," said Amy Borrus, deputy director of the Council of Institutional Investors.  "These are not very democratic elections, by any means."

During the boom 1990s, the era of the celebrity CEO, directors often were seen as rubber stamps for the executives' wishes.  With the implosion of Enron and subsequent scandals, however, the workload of a director, and the potential liability, has greatly increased.  More boards are standing up to CEOs.  At the same time, director pay has increased so that the part-time job can now pay hundreds of thousands of dollars, including stock incentives, at America's biggest companies.

"The day when (the board) was the CEO's buddies, and they did a round of golf and a country club dinner before signing off on things, is over," said Bill Holstein, editor in chief of Directorship, a monthly newsletter for corporate board members.

William Buchholz joined his first public-company board at Centennial-based Penford Corp. in 2003.  As an audit committee member, he says meetings are longer and more frequent.  "It's gotten tougher.  Directors are more in the spotlight for their diligence.  It takes more time than it used to."

One thing that hasn't changed much is how directors are chosen.  Each year, when a company conducts its election, the board nominates a slate of candidates.  There's one person for every open seat -- no more, no less.

Shareholders typically get two choices:  "for" and "withhold," as in withholding a vote from the director.  In most elections, no matter how many shareholders vote to "withhold," the directors will have at least one "for" vote and will get re-elected automatically.

Activist shareholders, however, are seeking to change that.

The issue is coming to a head thanks to a lawsuit between the American Federation of State, County and Municipal Employees, or AFSCME, and the Securities and Exchange Commission.  AFSCME submitted a proposal calling for greater ability to nominate directors at insurer American International Group, but the company, with the SEC's blessing, left it off its proxy statement.

After losing the case at the appellate level, the SEC now is trying to craft a position on the matter.  But more and more companies are changing their own policies to maintain the ability to nominate their own directors, while actually listening to shareholders' views.

San Francisco-based Wells Fargo said Tuesday it's adopting a majority-vote standard:  Director nominees are elected to the board if the votes cast for them exceed votes withheld.  A director who receives less than a majority is expected to resign.  But the Wells Fargo board will still have the power to decide whether to accept the resignation.

Such an out may not even be necessary.  Robert McCormick, the vice president of proxy research and operations at advisory service Glass Lewis & Co., says that 0.12 percent of directors up for election in 2005 failed to get a majority.  That was down from 0.18 percent in 2004.

Colorado directors were even more successful this year, with none of the 505 up for re-election failing to get a majority, according to a Rocky Mountain News analysis.

The News reviewed the most recent voting results for 98 of the 111 Colorado-headquartered public companies it tracks.  Some energy partnerships, closed-end funds and newly public companies didn't have to conduct a director vote.

Only 13 director nominees had more than 20 percent of votes withheld, meaning they failed to get 80 percent of the vote.  Another 22 had between 10 percent and 20 percent, meaning they fell short of 90 percent.

In all, 423, or 84 percent, had fewer than 5 percent of their votes withheld, meaning they got 95 percent or more of the votes cast.

Despite this overwhelming support, many Colorado directors felt at least some sting from shareholders paying more attention than ever to good corporate governance.

The recommendations of proxy-advisory services such as Institutional Shareholder Services, known as ISS, and Glass Lewis played a large role in the "withhold" vote for Colorado's least-popular directors.  Every member of the list had a negative recommendation from one or both of the two advisers.

"People tend to think a 'no' vote is significant at the 20 percent level," said Patrick McGurn, an executive vice president at ISS.  "It indicates so many shareholders voted against your election, it's hard to avoid the message that was sent."

At Fort Collins-based Advanced Energy Industries, former Chief Financial Officer Richard P. Beck had 34 percent of votes withheld, the highest percentage for any Colorado director.

Both ISS and Glass Lewis recommended a "withhold" vote for Beck.

The firms considered him an "affiliated" board member because of his past employment.  They noted he was sitting on both the audit committee and the board's nominating committee where, the research firms believe, all directors should be truly independent.

Larry Firestone, the company's current chief financial officer, said Beck retired in May 2002.  "Previously, the cooling-off period for an insider to be independent was three years, and it appears they're now looking for a five-year period.  He's certainly a financial expert, he sits on other boards and other audit committees.  We believe his expertise outweighs (this)."

At Boulder-based New Frontier Media, five directors exceeded 20 percent of the vote withheld, with only new director Marc Greenberg escaping.  ISS recommended the votes be withheld because the returning directors had failed to revoke the company's "poison pill," a device that reduces the chance of a hostile takeover.

ISS particularly objected because New Frontier's pill, also known euphemistically as a shareholders' rights plan, can only be removed by the company's current directors, so even if shareholders voted them out in a takeover attempt, the pill remains.

New Frontier declined to comment.

Unlike other companies with a poison pill, New Frontier actually faces a potential hostile takeover.

New York-based hedge fund Steel Partners, which often takes a critical approach to the companies it invests in, owns 15 percent of New Frontier.  The fund's Warren Lichtenstein approached the company last August about acquiring it.

At Boulder-based Dynamic Materials, both CEO Yvon Pierre Cariou and director Bernard Hueber had 27.3 percent of votes withheld after ISS said they should be held responsible for failing to establish a majority-independent board.

Spokesman Geoff High said Dynamic Materials erroneously referred to Hueber in the proxy as the company's former CEO, so the board had more independence than ISS believed.  When Dynamic Materials did a roadshow for a stock offering last year, "everybody seemed very excited that Yvon was going to be on the board.  It shows people just vote the way ISS tells them to."

ISS' McGurn and Glass Lewis' McCormick say their firms' reports are just one tool that shareholders use, often coupled with their own research.

Still, they play a major role.  At Denver's Janus Capital, the proxy-voting guidelines list seven reasons why the company's fund managers may vote against a director.  They mirror many of the proxy advisers' governance concerns, and three specifically cite ISS.

As the proxy-advisory services step up their "withhold" recommendations for governance issues, the shareholders are following suit.

"The amount of attention focused on corporate governance has increased dramatically," Glass Lewis' McCormick said.  "There's a growing realization it matters, and some of the best ways to address corporate governance, which leads to better performance ultimately, is (voting for) the board of directors.  Even if it's just a symbolic vote, it sends a strong message to the board that it's a concern."

At a glance

  What's a director?  Corporate directors have a duty to represent the shareholders' interests and set the overall direction of the company, including hiring management and overseeing their pay.

  How do they get elected?  Each year, when a company conducts a director election, its board nominates a slate of candidates.  There's one person for every open seat -- no more, no less.  Shareholders typically get two choices: "for" and "withhold," as in withholding a vote from the director.  In most elections, no matter how many shareholders vote to "withhold," the directors will have at least one "for" vote and will get re-elected automatically.

Board of directors scorecard


Richard P. Beck

Advanced Energy Industries  /  34 percent


Beck is the former chief financial officer, which mean while he may technically be independent, he's an "affiliated outsider."  Glass Lewis and ISS object to an affiliated outsider chairing the corporate governance/nominating committee and serving on the audit committee.  Glass Lewis also notes independent directors do not make up at least two-thirds of the board.


Beck retired in May 2002.  ISS used to say if a director worked for a company at any time in the previous three years, the director was "affiliated"and not truly independent.  Beck began to meet that standard in 2005, but that year, ISS lengthened the "affiliated" period to five years. That made Beck "affiliated" again.


Michael Weiner, Alan L. Isaacman, Hiram J. Woo, David Nicholas, Melissa Hubbard

New Frontier Media  /  From 27.7 percent to 27.0 percent each


ISS says the directors have failed to remove a "dead-hand poison pill."  Poison pills, or "shareholder rights plans," are a roadblock to a hostile takeover, which may yield shareholders a better return.  A "dead-hand" poison pill can only be removed by current directors or their designees, so even if shareholders vote for a brand-new slate of directors, the poison pill can't be removed. Glass Lewis opposed Isaacman because his law firm received $146,682 from the company.  It opposed Hubbard because there's no independent chairman, lead or presiding director and Hubbard chairs the governance/nominating committee.


Declined to comment.  Unlike other companies with a poison pill, New Frontier faces a hostile takeover.  New York-based hedge fund SteelPartners, which often takes a critical approach to the companies it invests in, owns 15 percent of New Frontier.  The fund's Warren Lichtenstein approached the company in August about taking it over.


Erwin Haitzmann

Century Casinos  /  27.4 percent


Haitzmann is chairman and co-CEO, so he's not an independent chairman.  Glass Lewis notes there's also no lead or presiding director, no governance/nominating committee, and the board is not two-thirds independent.  ISS' recommendation is based on Haitzmann's failure to establish an independent nominating committee.




Yvon Pierre Cariou, Bernard Hueber

Dynamic Materials  /  27.3 percent each


ISS recommended that shareholders withhold votes from the two for failure to establish a majority independent board.


Hueber was erroneously referred to as a former CEO -- and thus not independent -- in the company proxy.  The company decided not to file a correction because of cost, and ISS won't revise its recommendations unless a company makes an SEC filing, which would be subject to anti-fraud provisions.  Spokesman Geoff Highsays Dynamic Materials is working to add new independent directors who understand the company's industry.


Jerry Tepper, John Labate

Amerivest Properties  /  23.5 percent (Tepper) 23.2 percent (Labate)


Amerivest had a number of unhappy shareholders agitating for its liquidation, which is under way. Glass Lewis recommended withholding votes for Labate, who chaired the nominating/governance and audit committees. The board reduced its size to three, below Glass Lewis' preferred size of five, and the company did not allow shareholders to vote for the ratification of its auditor.




Vail Resorts  /  23 percent


ISS and Glass Lewis note he attended less than 75 percent of meetings.  Glass Lewis said his connection to former shareholder Apollo Management meant he wasn't independent yet still sat on the nomination and governance committee.


"Our company is very supportive and proud of the dedication and independence of each of our outside directors, and our company is committed to the high standards of corporate governance," spokeswoman Kelly Ladyga said.  Since this vote in 2005, Hannan's attendance has improved, and the board has added two new independent directors.


Erich W. Tiepel

Rentech  /  20.1 percent


Tiepel was Glass Lewis' one "withhold"recommendation. Rentech has no independent chairman, lead or presiding director, and the company did not allow shareholders to vote for the ratification of its auditor.  Glass Lewis noted Tiepel is the longest-serving member of nominating/governance and audit committees.


After the departure of two top executives, the company's management and board was intransition at the time of the shareholder vote. "Erich was one of the last remaining directors from 'old Rentech,' " said spokesman Mark Koenig.  "I think some people were trying to make a statement about the old management and didn't want him on the board."

David Milstead is finance editor of the Rocky Mountain News. He can be reached at or 303-954-2648.,2777,DRMN_23908_5185431,00.html