Inching toward reform at Costco …

ballot boxes

It’s a bizarre fact of American business that directors can stay on corporate boards for years after shareholders have resoundingly rejected them in an annual vote. (As we footnoted here, just look at Cablevision)

So we were at first happy to see that Costco (COST), the giant warehouse-store chain, had modified its bylaws to require directors to tender their resignation if they lose a vote. Here’s how Costco put it in the 8-K it filed yesterday:

The bylaws as amended provide that if in an uncontested election for directors a nominee receives a greater number of —withhold votes than votes —for the nominee shall offer his or her resignation. A committee of independent directors whose election is not at issue will determine and publicly report the action to be taken with respect to the resignation offer.

(Costco in many ways is just playing catch-up — a study in 2007 found that a majority of S&P 500 companies already had similar provisions in place.)

But then we took another look at that second sentence. Sure enough, in the revised text of the bylaws themselves (and section 3.6 in particular), we found the escape clause: Should a director have to tender his or her resignation, a special committee of independent directors gets to pick from a number of options that

“can include: (i) accepting the offer of resignation; (ii) maintaining the director but addressing what the Qualified Independent Directors believe to be the underlying cause of the withhold votes; (iii) resolving that the director will not be re-nominated in the future for election; or (iv) rejecting the offer of resignation.”

In other words, that rejected director could still stick around, a la Cablevision, if his buddies on the board want him to.

We could be persuaded that boards need a little flexibility in handing the timing of a resignation, to give them time to recruit a replacement, for example. But can you imagine the ruckus if Congress were able to re-seat incumbents who are voted out, simply by “addressing what [they] believe to be the underlying cause” of the loss? The Whigs would still be running things up on Capitol Hill.

So kudos to Costco for taking a step in the right direction. But shareholders are still a long way from being able to give board members the boot, should they so desire.

Image source: Keith Bacongco via Flickr


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