We often call out companies and boards for turning a deaf ear to shareholders. We did it just a couple days ago when we footnoted NYSE Euronext (NYX), which is doing its best to avoid doing what most of its shareholders have asked it to do. Now comes the flip side — Quest Diagnostics (DGX) actually seems to want to hear what its shareholders have to say.
This is all the more noteworthy because the issue in question is one that invokes a knee-jerk reaction at plenty of companies: declassification of the board of directors. Quest filed its proxy late yesterday afternoon, and in it was this proposal from the Illinois State Board of Investment:
“RESOLVED, that shareholders of Quest Diagnostics Incorporated urge the Board of Directors to take all necessary steps (other than any steps that must be taken by shareholders) to eliminate the classification of the Board of Directors and to require that all directors elected at or after the annual meeting held in 2013 be elected on an annual basis. Implementation of this proposal should not prevent any director elected prior to the annual meeting held in 2013 from completing the term for which such director was elected.”
Classified boards — where directors serve staggered terms, so no more than a third of them (typically) are up for election in any given year — are supposed to be a nice protection against takeovers (though research suggests the evidence may be dubious), and a great bulwark against any changes in the status quo, however necessary. That’s why activist investors don’t like them, and tend to push for declassification: They can quickly become an aid to complacency and cronyism. Plenty of companies have switched to putting every board seat up for election every year, but plenty of others have resisted (or are going public with staggered boards), sometimes vociferously.
So as we skimmed the proxy to management’s response, we expected the usual message of opposition — after all, if management approved, it would have offered the proposal itself. Instead, there came this:
“OUR BOARD RECOMMENDS THAT YOU CAST YOUR VOTE REGARDING THIS PROPOSAL. The Board is interested in your views regarding the proposal, and is not recommending whether to vote for or against the proposal.
“Our Board is familiar with the discussions regarding classified boards, and understands both sides of the argument. The Board believes that there are valid arguments in favor of, and opposed to, classified boards. The Board believes that our Company’s shareholders have benefitted from having a classified board, but sees this proposal as an opportunity for shareholders to express their views on this subject without being influenced by any recommendation by the Board. Considerations for and against a classified Board are highlighted below.”
Granted, it’s a little bit wishy-washy. The good-governance arguments for annual elections are pretty strong. We have a suspicion there’s disagreement on the board, and they punted. But let’s give them credit for having an opportunity to protect their personal interests, scratch each other’s backs, and stonewall, and they didn’t.
It’s a little sad that it’s praiseworthy when a company simply says it’s interested in what its investors think, but that’s the corporate-governance world we live in these days. So let’s hear it for Quest’s board — and let’s hope they actually act on what shareholders tell them.
Wishy-washy doesn’t cut it when you’re making an investment decision, so arm yourself with hidden insights from corporate filings via footnotedPro, our subscription service for professional investors. Our team scours corporate disclosures to find warning signs and hidden opportunities before the rest of the market notices. We focus on signals that can mitigate risk and help cement an investment case. To see what you’re missing in the filings, or to inquire about a trial subscription, please contact us.