Meet the most unpopular corporate directors in Canada - the six men and women who make up the board of Linamar Corp. They may be lovely people, for all I know. The shareholders of the Guelph, Ont.-based auto parts maker have a decidedly negative view of their efficacy, however, as they withheld a majority of their votes this year for the entire board, a rarity in Canadian corporate elections.
Remarkably, it's the second time this has happened at Linamar. The directors failed to get a majority in 2007, as well. Even more remarkably, the board soldiers on, intact, apparently unfazed by the shareholder opprobrium.
Politicians, at least, know when they're not wanted. Every election, some get thrown out. But corporate elections are a different animal. Shareholders typically don't get a choice of candidates; they get a preapproved Politburo-style slate for an up or down vote. And the vote isn't as direct as "yes" or "no." Instead, it's the much more polite "for" and "withhold."
The shareholders of Linamar withheld in a mighty way, considering founder/chairman Frank Hasenfratz and his daughter, CEO Linda Hasenfratz, own nearly 30 per cent of the company. Assuming they and the other four directors voted for themselves, 87.5 per cent of the remaining voting shareholders refused to mark "for" in favour of the board.
What's the problem? Part of it may be the company's stock price. Over five-plus years starting at the end of 2004, Linamar has cumulatively trailed the TSX composite index at the end of every year. Only now, with a 43-per-cent year-to-date return, is Linamar poised to catch up.
Yet the stock price can't wholly explain the shareholder vote, as Linamar beat the TSX in three of the five years and has made a huge comeback from the depths of 2008, when the car makers seemed poised to drag their suppliers down with them.
Instead, the disenchantment of shareholders may reflect irritation at a seemingly ossified board and a voting practice many consider archaic even by corporate-election standards. Unlike many companies, Linamar doesn't conduct voting on individual directors; it instead asks approval for the entire board. A shareholder who wants to withhold his or her vote from a specific director can only vote against everyone.
In response to my questions - actually, before I even had a chance to ask any questions - Linda Hasenfratz provided a written statement. She said "after much deliberation," the board has indeed decided to recommend individual director voting to its shareholders. The recommendation will appear in a proposal on the 2011 proxy for later implementation, which means there's at least one more chance to vote for or withhold votes from the entire board.
"This conclusion was drawn based on shareholder feedback and benchmarking work … looking at leading companies in Canada in terms of corporate governance," she wrote. "At Linamar we prioritize equally our customers, our employees and our shareholders and are concerned to ensure we always achieve a good balance of satisfaction for each. This is a great example of listening to the concerns of our shareholders and implementing a change that is meaningful to them."
So kudos for Linamar from the governance types? Not quite. Laura O'Neill of the Shareholder Association for Research and Education, calls it "much deliberation of the blindingly obvious."
"I am incredulous that the slate election of directors was really seen to be a benefit to customers and/or employees, or indeed anyone but the incumbent directors," she said, adding that putting it to a vote in 2011 "delays actual change for another year."
Indeed, it's not as if this year's Linamar vote came out of nowhere. The vote was worse in 2007, with nearly 60 per cent of the votes cast withheld (93 per cent of the non-director vote). In 2008 and 2009, the withheld vote was a healthy 18 per cent and 20 per cent, respectively. (Not all shares are voted; in the past five years, anywhere from roughly 25 per cent to 35 per cent of Linamar shareholders failed to return their ballots.) Linamar's directors should have considered the possibility they wouldn't get a majority in 2010. And they should have considered resigning if they lost.
A number of companies adopting a majority-vote rule require their directors to tender their resignations if they fail to get a 50 per cent "for" vote. Critics suggest companies go further and promise their shareholders the resignation will be accepted, rather than rejected. But the response to that has been it's not necessary, because a board member will be too publicly shamed to continue if they can't get a majority.
No such sense of shame seems to exist on the Linamar board.
Special to The Globe and Mail
David Milstead