Home > Trends in Corporate Governance, Voting Rights > How are board directors elected? The US/Canada and Spain cases.

How are board directors elected? The US/Canada and Spain cases.

According to the Council of Institutional Investors, (CII), at most US companies, (it is also the case in Canada, although there is a trend to change that), directors are elected by a plurality of votes cast; under this procedure, the candidate that receives the most “for” votes, is elected as a director. This might seem acceptable, but what does this entail? First, a director may be elected by a minority of votes cast, which might put into question the adequacy of the candidate for the job, but this is common to the majority system; second, what happens in an uncontested election? In that case, the election turns into a “for or withhold” choice, so that the “withheld votes” could win if that bipolarity was respected; but, if not, a single “for” vote could be enough for a candidate to be elected. This is the case in Canada and the US, except where companies have adopted an alternative procedure. Majority systems require a candidate to obtain more “for” than “withhold” votes to be elected or reelected, and in many companies, those directors not reaching that target need to offer their resignation, (even if the Board does not accept it, which leads to what recent literature calls “zombie directors”).

The CII and many Corporate Governance activist advocate for majority systems, in order for directors to be accountable; in other words, they argue shareholders need to hold the power to elect directors and to dismiss them if their job is judged not to be satisfactory, so that boards and directors do not entrench and feel actual pressure to generate the firm`s best possible performance.

The case in Spain is as follows: the competency to designate directors is assigned to the General Assembly, which can also cease them. Designations starts generating their effects since the day the designated person accepts the responsibility. This decision must be registered by the company within ten days. A substitute may also be named, so that when a director ceases, it can be immediately replaced by the new one, for the time that left until the end of the tenure, in case it was established for a fixed period.

Tenure: directors can be designated for indefinite periods in Limited Partnerships, (SL companies, which are private and generally small), provided the bylaws don`t establish a fixed tenure period. In the case of Anonymous Partnerships, (SA companies, which include all public ones), the mandate is limited to six years, it needs to be equal for all directors, and may be named repeated times for this pre-established periods.

Composition and voting systems: it is composed of at least three members, and in SL companies a maximum of twelve; otherwise, the minimum and maximum is to be established in the company bylaws. In that case, the General Assembly determines the number of members. In SA companies, shareholders representing a certain percentage of the voting power have the right to designate a number of directors equal to the result of dividing the percentage by the percentage required to designate one director, (that is 100 divided by the number of directors as determined by the bylaws or the General Assembly). That is called the Proportionality System. Those shares shall not vote in the designation of the rest of directors, if they chose to designate “their” directors. Therefore the rest of directors will be elected by the usual decision-making rules in the General Assembly, normally a Majority system. Directors could be voted jointly or individually. In quoted companies, all of them SA companies, an election can be made by a majority of the present votes, not a majority of the voting power, provided the bylaws don`t require wider or strengthened majorities.


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