The Filibuster and Supermajority Voting: Drinking Coffee with Washington and Jefferson
By Carol Nolan Drake, J.D., Skytop Contributor, February 8, 2021
Carol is the CEO and Founder of Carlow Consulting, LLC, a company she created in January 2017, following a senior position with an institutional investor handling corporate governance and external relations. Before this role, Carol served in leadership positions for three Ohio governors, with appointments to the Cabinet and several boards and commissions, including as a trustee for a public pension fund.
As an attorney, Carol worked in private practice and as an assistant attorney for the city of Columbus. She served five years on the Board of the Council of Institutional Investors (CII). Carol was the co-chair of the ICGN Shareholder Responsibilities Committee (SHREC) under which the Committee revised the Diversity and Share Lending Guidelines.
Carol has published several articles on corporate governance, ESG and diversity, including chapters in The Handbook of Board Governance, Second Edition. She also writes about federal policy and the intersection between effective company reporting and investor expectations. Carol is a frequent speaker on governance, diversity initiatives and investor stewardship. She holds a law degree from the Claude Petit College of Law.
The historic stalling tactic, the U.S. Senate filibuster, is back in the news. With it brings consideration of the supermajority voting approach to governance.
After limited coverage, the filibuster emerged after former President Barack Obama specifically mentioned it last summer during Georgia Congressman John Lewis’ eulogy, said Lindsey McPherson and Clyde McGrady in their July 31, 2020 article published in Roll Call. Even before the election, The Hill’s Jordain Carney reported that, while former Senate Majority Leader Mitch McConnell (R-KY) and current Senate Majority Leader Charles Schumer (D-NY) have expressed their respective opinions on its continuation, both acknowledge that it will remain a topic open for consideration now that Democrats hold the Senate majority.
Georgia and its runoff elections brought two new Democrats to the Senate—a signal to us all that “red” and “blue” designations for states may not be so predictable. Reverend Rafael Warnock and Jon Ossoff were declared the winners, locking the Senate in a 50-50 split (including two Independent Senators) with any voting ties decided by Vice President Kamala Harris.
Now that the elections are over, what does this mean for the sharing of power in Washington- and for companies and their investors?
On January 20th, the commencement of the Biden administration brought forth an aggressive schedule for the rollout of many new and some seismic shifts in policy priorities. The Senate will be a proving ground for President Biden’s commitment to unity and bipartisanship, with hope that leadership in both parties will set an example for the return to civil discourse. On January 16, 2021, former Senate Majority Leader Harry Reid (D-NV) was quoted in the Washington Post, stating, “I believe the filibuster is on its way out. It’s not a question of if; it’s a question of when it’s going to go. Joe Biden has said he will see if he can work something out with McConnell to get legislation done… But if that continues after whatever Biden thinks is a reasonable time, he may need to get rid of the filibuster.”
Even with the call for unity, the filibuster, the historic tool used to frustrate–and sideline–partisan differences seems to be back in play.
Former President Obama and former Senator Harry Reid referred to the filibuster, a procedure in Senate policy that has been employed to delay the passage of a bill or appointment. In the past, it was used to block high level nominations to the federal judiciary and administration’s cabinet appointees. Unlimited in time consumption and tactics, a filibuster can stop the policy making process in its tracks. In fact, the longest recorded filibuster made by a Senator lasted over a lengthy 24 hours. (Documented by the United States Senate Rules & Procedure, Filibuster and Cloture, on the Senate website)
Under Senate Parliamentary Rule 22, a bill must have at least 60 members vote (which is 3/5 of the Senate) to move for cloture before a bill can move forward and limit debate to an additional 30 hours. With a politically and socially divided electorate, the divided Senate will have to decide whether to keep the filibuster and if so, how it might work in the present context. Already two Democratic Senators, West Virginia’s Joe Manchin and Arizona’s Kyrsten Sinema have indicated they are not in favor of ending the filibuster.
The filibuster rule previously applied to Senate approval of all federal judicial and executive nominees; however, that portion of the rule was relaxed under the leadership of then-Democratic Senator Harry Reid. Returning to a simple majority vote in 2013, and labeled the “nuclear option,” the change meant that all lower court and executive branch nominees were not covered under the filibuster rule, according to NPR on April 6, 2017.
Later, under the leadership of Republican Senator Mitch McConnell, the Senate implemented a new “nuclear option” rule. This action allowed the Senate to advance a Supreme Court nomination with a majority of 51 votes, along with a final confirmation vote by a simple majority—reports Grace Segers on August 12, 2020. Introduced legislation is subject to a filibuster–the last remaining use of the tactic in the Senate in the previous and current administration.
The filibuster has become a tool that is brandished by both the majority and minority parties to ensure that a bill should progress in the chamber. In the current climate of Washington, it is hard to imagine that 60 out of 100 Senators could agree to advance a piece of legislation. And yet they do! In fact, far more often than the public knows.
The requirement of the 60 votes has proven to serve as a check against partisan politics.
With the renewed filibuster interest, it is raising other governance questions worth considering. For a company, does the filibuster compare in a similar way to supermajority voting requirements to approve changes to a company’s Bylaws or Charter, or to adopt management or shareholder proposals? While they may have valid reasons for their uses, the filibuster and supermajority voting requirements could impede the will of the simple majority.
The question to be answered is this, “In today’s complex world, is a simple majority vote too simple?”
Washington, Jefferson and Coffee Talk
It is well-sourced in history that when the Founding Fathers were considering the form of our independent federal government, a discussion ensued whether one or two chambers should be created. In the end, after much discussion, bicameral chambers were created–the House of Representatives and the Senate. In a publication from 1884, New Monthly Magazine, and in 1872, an earlier version, it was surmised that George Washington and Thomas Jefferson discussed whether two chambers were necessary. (For guidance on this, refer to the Thomas Jefferson Encyclopedia, Senatorial Saucer, by Moncure D. Conway, Henry S. King & Co, and in Thomas Jefferson Monticello by Anna Berkes, on February 11, 2008; revised by Nancy Verell on May 1, 2016):
There is a tradition that Jefferson coming home from France, called Washington to account at the breakfast-table for having agreed to a second, and, as Jefferson thought, unnecessary legislative Chamber.
“Why,” asked Washington, “did you just now pour that coffee into your saucer, before drinking?”
“To cool it,” answered Jefferson, “my throat is not made of brass.”
“Even so,” rejoined Washington, “we pour our legislation into the senatorial saucer to cool it.”
The story of the need for a “senatorial saucer” has been repeated often. With the filibuster rule applicable only in the Senate, not the House, it can act as a cooling agent before the passage of legislation by the partisan will of a simple majority.
Supermajority Vote Standards
As the future of the filibuster is debated in the Senate, it calls to mind the supermajority voting requirements that remain at some companies. For example, if a company has a supermajority vote requirement for changes to the company’s Charter and/or Bylaws, or other governing documents, it requires that shareholders vote to support the changes with far more than a simple majority vote. Is this requirement akin to the “senatorial saucer” which could cool proposals that might not be in the best interests of the company or shareholders? Or does the supermajority vote requirement have a chilling effect on the ability of a company to adopt changes that a simple majority of shareholders voted to approve?
Companies and their minority investors may want some protection from potential dominance by controlling shareholders. However, is it possible that proposals on the company proxy may not be able to garner enough votes to pass with a supermajority vote requirement in place? The answer is yes.
The Harvard Law School Forum on Corporate Governance published an article by Hannah Orowitz and Brigid Rosati, Georgeson, on June 10, 2020, which documented that as of June 2020, eight shareholder proposals were filed to reduce the supermajority vote level. In another study, on April 17, 2018, Institutional Shareholder Services (ISS) colleagues, Kosmas Papadopoulos, Robert Kalb, Angelica Valderrama, and Jared Sorhaindo, reported that the supermajority vote standard is “slowly diminishing among S&P 500 firms, reaching an all-time low of 46% of non-controlled firms having supermajority vote requirements for a change the bylaws or charter in 2017.” Additionally, the ISS study indicated:
- Most S&P 400 and S&P 600 companies have retained their supermajority vote requirements at approximately 62% of firms, which has not changed appreciably since 2008.
- About one-half of companies have voting thresholds from 55 percent and two-thirds of outstanding shares, while the other companies have voting thresholds of more than two-thirds of the outstanding shares.
The Council of Institutional Investors (CII), whose members are U.S.-based asset owners or issuers, U.S. and non-U.S. asset managers, and others with more than $29 trillion in combined assets under management, issued a policy on Shareowner Voting Requirements. (Last updated on March 10, 2020) On the level of shareowner voting necessary to amend a company’s bylaws or other action, CII’s policy states:
3.6 Voting Requirements: A majority vote of common shares outstanding should be sufficient to amend company bylaws or take other action that requires or receives a shareowner vote. Supermajority votes should not be required. (Emphasis added)
Considerations for Boards of Directors and Management
For Boards of Directors and management, there are several considerations whether the supermajority voting requirement should remain in place:
What is the history of the supermajority vote threshold at the company and when it was implemented? Does it still serve its original purpose? Consider that companies, like Tesla, that require a supermajority vote under certain circumstances, have encountered difficulty garnering enough votes for the passage of management-supported proposals, much less shareholder proposals. (Refer to published insights by Kosmas Papadopoulos, ISS Analytics, in the Harvard Law School Forum on Corporate Governance, on July 6, 2019.) As an example, the Corporate Finance Institute (CFI) noted in its, “Implications of a Supermajority Provision”:
Although a supermajority voting provision helps ensure that the large majority of shareholders are on board with the corporate action, it may cause gridlock among shareholders and adversely affect the corporate efficiency of the company – it makes it more difficult for corporate actions to pass. A supermajority voting provision may allow for a minority to block the preferences of the majority.
Is the company a controlled company with a small block of controlling shareholders? Results from previous proxy seasons show that controlled companies may find it harder to pass important proposals, given the need for minority shareholder support. For minority investors, however, they may prefer a supermajority vote requirement to “ensure that significant decisions are not made unilaterally by the controlling shareholder(s) depending on the stake of the controlling entity,” as noted in the previously cited article by Papadopoulos.
Supermajority vote requirements can operate like the adoption of poison pills and be an effective anti-takeover strategy.
The company may need to consider whether the ownership in the company has changed since its incorporation and how shareholders perceive the supermajority provisions. If large global fund managers hold extensive amounts of shares today, how does this influence the consideration of the needs of minority shareholders?
How do broker non-votes impact the shareholders’ ability to vote for passage of management and/or shareholder proposals? According to Papadopoulos’ research, the “increase in failed majority-supported proposals in recent years can be directly attributed to the change in the rules pertaining to the treatment of broker non-votes.” Does the company know the overall percentage of votes cast, the votes present at the meeting (even virtual) and the number broker non-votes (not instructed)? How the votes are tallied may well make a difference in the passage of important proposals.
Is It Really Serving Our Interests?
Consider whether the supermajority threshold is getting in your own way to make changes to the Bylaws or amendments to the Charter that may be necessary over time. If the company has discussed changes to modernize or update these documents and the nature of investor ownership will make it difficult, you may need to conduct an expensive outreach to your investors to obtain the necessary votes.
What Do Investors Say?
Have investors mentioned any concerns with supermajority voting requirements during their advocacy or outreach to company representatives? Consider the feedback from the outreach and engagement program that the Investor Relations Officer and/or C-suite officer(s) are conducting. If investors have mentioned concerns with the supermajority voting threshold, it may be time to consider whether the company should make a change on its own. Inaction may cause a shareholder proposal to be filed and the decision will no longer be at your leisure. Shareholder proposals to lower supermajority voting requirements have continued to be filed in the past proxy seasons.
What, if any, are the concerns that would prevent the company from moving to a simple majority vote threshold for changes to key company documents and for all proposals? Would it put the company in alignment with peers, provide insulation from shareholder proposals to call special meetings or encourage investors to vote to withhold or vote against directors?
Some of the most fundamental corporate governance changes have been adopted by companies over the course of proxy seasons or through shareholder engagement (i.e., declassification of boards, the appointment of an independent chair or lead independent director). If the proposal is important enough that the board and management want to include it on the company proxy, a supermajority voting requirement may stand in the way of its passage. In that way, it may operate as the saucer to “cool” the adoption of the very change that the board and management pursued in the first place. On the other hand, a simple majority voting provision may allow the passage of a proposal on the proxy that other investors are not quite ready to support.
As a company and management consider whether their supermajority voting requirement should be revised or remain in place, they will have to balance what is in the best interests of the company and the will of a simple or supermajority of investors. It turns out that making decisions on complex voting issues are not so simple after all. A cup of coffee with Washington and Jefferson in mind might help.
Carol Nolan Drake, J.D.
Founder & President/CEO
Carlow Consulting, LLC