In an open meeting yesterday, the Securities and Exchange Commission voted to approve a change to the New York Stock Exchange’s rule that had permitted brokers holding shares in “street name” for their customers to vote those shares themselves in uncontested corporate director elections if the customers did not vote by 10 days before the annual meeting. It’s about time.
The NYSE had sought since 2006 to prohibit what the Council of Institutional Investors calls “stuffing the ballot box for management” but needed the SEC’s go-ahead to do so. In recent years, shareholders have complained that the rule put a roadblock in the way of “vote-no” campaigns against directors, where a shareholder does not run a dissident candidate but instead urges other shareholders to register dissatisfaction by voting against one or more of the management nominees, because brokers voting customer shares always vote with management.
It is difficult to quantify the impact on director elections of broker voting because the proportion of shares affected varies from company to company. Broadridge Financial Solutions, the dominant vendor handling distribution of proxy materials and tabulation of votes, disclosed that broker votes—which can be cast on a variety of “routine” items in addition to uncontested director election--accounted for 16.5% of votes at shareholder meetings in 2008. Backers of vote-no campaigns have estimated that broker votes likely made the difference between election and defeat for directors at Citigroup, CVS/Caremark and Washington Mutual, among other companies.
The SEC’s move is an important step toward making director elections more meaningful, and Chairman Schapiro should be lauded for ending the SEC’s inexplicable waffling on this issue. The shift toward a majority vote standard in director elections-- which is in place at a large percentage of large-cap companies but less popular among their smaller brethren--has been touted by both shareholders and companies as a way to bring about greater accountability to shareholders. That hope can not be realized, however, if a significant proportion of votes cast do not represent the views of shareholders with a stake in the outcome.
Beth Young — Senior Research Associate, Shareholder Issues, M&A and Takeover Defenses
