The Dodd-Frank Act mandates a variety of changes to the governance, disclosure and compensation practices of all public companies. Many of the provisions of the Act require further SEC rulemaking and interpretation before definitive responses can be implemented, but companies should become familiar with the pending changes and take preparatory steps where possible. The purpose of this memo, which we will periodically update, is to provide a framework for our recommendations by highlighting certain actions companies should consider taking immediately, as well as certain key provisions of the Act which will require responses in the longer term. (Links to our earlier memos are embedded throughout and in the attached index.)
Posts Tagged ‘Broker discretionary voting’
(Editor’s Note: This post from Francis H. Byrd is based on an Altman Group publication titled Governance & Proxy Review Update.)
(Update: This post has been updated below to reflect information provided in a subsequent Governance & Proxy Review Update.)
In response to the recent decision by the SEC to approve the elimination of broker discretionary voting authority on the election of directors at annual meetings after January 1, 2010, NYSE Rule 452 is front and center on the minds of many in the proxy and governance arena.
The amendment to Rule 452 will be the end of the “stuffing of the ballot box” for the election of directors that some shareholders have long complained about. The question now is to what extent will the change impact the ability of corporations to get their directors re-elected each year? In addition, what should corporations and their advisors be thinking about?
Assessing the Risk
Since the July announcement of the change, The Altman Group has completed numerous analyses for corporate issuers projecting the voting impact from the amended NYSE Rule 452. We will share our findings in the next issue of the Governance & Proxy Review and answer some practical questions that a company should consider in preparing for what is likely to be the toughest proxy season in history.
Strategies to Consider When Counteracting the Loss in Broker Voting
Historical statistics show that approximately 25 to 35 percent of the retail shareholder base will respond by voting without being prompted. The variance in response rates is tied to a number of factors, such as stock price (higher apathy with lower priced stocks) and the distribution of shareholdings (are there a lot of odd-lot holders, for example).
As we pointed out in our comment letters to the SEC, (Comment Letter – March 27, 2009) (Comment Letter – May 23, 2007) (Comment Letter – July 14, 2006) small-cap issuers are likely to bear the brunt of the burden placed on Corporate America by this change. Any issuer with a heavy retail base is likely to incur additional solicitation costs. There is no magic bullet for getting retail holders to vote. Issuers will need to consider the costs, necessity and effectiveness of follow-up mailings and phone solicitation to unvoted holders.
The SEC recently voted (3-2) to eliminate broker discretionary voting in director elections for meetings held on or after January 1, 2010. Previously, brokers were permitted to vote uninstructed shares in uncontested director elections, which were classified as “routine” under NYSE Rule 452. The rule change, which was adopted as proposed, could make it more difficult for directors to be elected under a majority voting standard, as we discussed in our previous newsflash, SEC Proposes Elimination of Broker Discretionary Vote in Director Elections for 2010.
As a result of this change, the number of votes in favor of board-nominated directors will be reduced, since brokers have typically followed the recommendations of incumbent boards in casting their discretionary votes. Other notable implications include:
• In most cases, the new rule should have little effect on a company’s ability to achieve a quorum, since a broker would continue to be able to return a proxy with a vote on a “routine” item – such as the ratification of auditors.
• Brokers are and will remain unable to vote uninstructed shares in contested elections.
The rule change does not apply to registered investment companies. However, the new rule codifies two previously published interpretations relating to investment companies that do not permit broker discretionary votes (i) for material amendments to investment advisory contracts and (ii) on any proposal to obtain shareholder approval of an investment company’s investment advisory contract with a new investment adviser.
Please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden, long-time shareowner activist. See petition File 4-583 here. Send comments to rule-comments at sec.gov with File 4-583 in the subject line.
The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.
This problem is not the same as “broker voting,” which has already been repealed on “non-routine” matters and, we hope, will soon be repealed for so-called “routine” matters, such as the election of directors. For example, even though “broker voting” has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company’s soliciting committee.
See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can seeProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”
Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.
In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVoteplatform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.
The SEC recently published for public comment the NYSE’s proposal to eliminate broker discretionary voting in uncontested director elections, signaling that the Commission’s new leadership is prepared to move forward on an issue that has been on hold at the SEC since it was originally proposed in 2006. The rule change—which would not become effective until 2010 at the earliest—could make it more difficult for companies that have adopted a majority voting standard to elect management’s slate of nominees, as discussed below.
The NYSE has long classified uncontested director elections under Rule 452 as a “routine matter,” giving brokers the discretion to vote shares held in investors’ accounts when they do not receive voting instructions from the beneficial owner within ten days of a company’s meeting. Such uninstructed votes can make up a meaningful percent of the vote and have routinely been cast with management in the past. Several close elections have attracted scrutiny in recent years as activists contended that the outcomes would have been different if broker discretionary votes were excluded. In the absence of SEC action on this issue, a number of brokers have recently moved to voluntary policies of proportional voting, under which they vote uninstructed shares in proportion to how their voting clients cast their ballots. While the proportional voting policy was likely chosen over abstention (which would be closer to the NYSE proposal) in order to address quorum and other concerns, it can also skew voting results by disproportionately magnifying the vote of those retail investors that provide instructions to their brokers—a particular concern in the current climate for embattled companies that may have a dissatisfied retail shareholder base. It can also make outcomes less predictable since, unlike instructed shares, which are cast ten days prior to the meeting, shares voted proportionally are not cast until 72 hours before the meeting.
The NYSE proposal would re-classify director elections as a non-routine matter on which NYSE member organizations are not permitted to vote—regardless of which exchange the company is listed on—without instructions from the beneficial owner. If the SEC adopts the NYSE proposal, brokers would no longer be able to vote uninstructed shares, effectively reducing the number of votes in favor of board-nominated directors. This could make it difficult for directors to attain the requisite majority vote at companies with majority vote standards, particularly if there is a large retail investor base or if directors are facing a “withhold vote” campaign.
The proposed amendment is available here.