More Companies Holding Annual Board Elections, Group Reports

When it comes to one of the oldest corporate takeover defenses around, more and more companies are saying no.

Forty-six companies in the Standard & Poor’s 500-stock index have agreed to re-elect all their directors annually after prompting by shareholders, a corporate governance initiative run out of Harvard Law School said on Wednesday.

The initiative, known as the Shareholder Rights Project, said that the 46 companies agreed to the move after receiving investor proposals this year. The group petitioned 74 companies this year.

Since the Shareholder Rights Project began submitting investor proposals last year, about 91 companies have agreed to forgo the practice.

“Eliminating board declassification on such a broad scale is likely to have a major positive impact on the governance landscape of large publicly traded firms,” Lucian Bebchuk, the Harvard Law professor who runs the initiative, told DealBook.

By putting up directors for election each year, these companies have emoved what are known as “staggered” or “classified” boards, a practice that some corporate governance experts have criticized. Making only a portion of directors up for election every year, the argument goes, means that corporate boards are less accountable to shareholders. The practice is a frequent target of activist investors seeking to gain seats on a board, as well as companies pursuing a hostile takeover.

Professor Bebchuk has been among the most vociferous critics of the practice. He has long focused on research contending that staggered boards ultimately hurt the value that companies create for shareholders.

Such moves have drawn criticism from some corporate law practitioners, notably Martin Lipton, the veteran deal maker who invented the “poison pill” takeover provision. Defenders of staggered board! s say that they insulate companies from investors thinking only of short-term profits, at the expense of generating value longer term.

But Professor Bebchuk disagreed, arguing that becoming more responsive to shareholders is good for companies in the long run.

He has garnered a number of institutional investors who agree, including the Illinois State Board of Investment and the Ohio Public Employees Retirement System, which submitted shareholder proposals on the group’s behalf.