Corporate advocates are asking the Securities and Exchange Commission to hold off on barring "broker votes" from director elections until the agency can conduct a comprehensive review of the proxy voting system.
Corporate groups, such as the Business Roundtable and the Society of Corporate Secretaries & Governance Professionals, also assert that the New York Stock Exchange's rule change could disenfranchise retail investors and make it more difficult for smaller companies to meet quorum requirements.
However, various institutional investors argue that the SEC should go ahead and approve the NYSE's proposal to replace a 70-year old rule that allows brokers to vote uninstructed client shares in uncontested director elections. The rule change, which was first proposed in 2006, is slated to take effect before the 2010 proxy season.
"Shareholders have already waited far too long for this important change, and the costs of further delaying this much needed reform are greater than ever," the Council of Institutional Investors wrote in its March 19 letter.
The issue of broker votes is significant, because an estimated 70 to 80 percent of U.S. company shares are held in "street name" and managed by brokers. If the underlying beneficial owners fail to provide voting instructions within 10 days of a company meeting, then their brokers are permitted by NYSE Rule 452 to vote their shares on "routine matters," including uncontested elections; these votes are overwhelmingly cast for management nominees. During 2008, 16.5 percent of shares were voted with broker discretion, according to Broadridge Financial Solutions.
The issue has gained added importance in recent years as many large U.S. companies have adopted provisions that require board nominees to receive a majority of votes cast in uncontested elections. While most directors receive minimal opposition, discretionary broker voting can blunt the effect of "vote no" campaigns. Investor advocates point to the 2007 vote at CVS Caremark and Washington Mutual's 2008 meeting as instances where management nominees would not have obtained majority support but for broker votes.
The SEC's request for comments on the NYSE's proposed amendment to Rule 452 has generated more than 130 responses. In addition to letters from corporate law firms and trade associations, various companies sent in comments, including: Intel, ExxonMobil, ConocoPhillips, Cardinal Health, Boeing, General Motors, JPMorgan Chase, FedEx, Eli Lilly, Chevron, and Charles Schwab. Among the institutional investors and groups submitting letters in support of the new rule were the California State Teachers' Retirement System, TIAA-CREF, Hermes Equity Ownership Services, the Canadian Coalition for Good Governance, the Florida State Board of Administration, the CFA Institute Centre for Financial Market Integrity, the Ohio Public Employees Retirement System, and Trillium Asset Management.
In their letters, corporate representatives warn that the new rule could disenfranchise individual investors, who have voted less frequently since the SEC adopted "notice and access" rules to permit companies to deliver proxy materials electronically. "While issuers are taking steps to address this decline in retail voting, this is clearly the wrong time to implement new proposals that would further erode retail shareholders' voice in the proxy voting process," the Society of Corporate Secretaries wrote in its March 20 letter.
The group notes that the NYSE rule change would foreclose alternatives, such as proportional voting, whereby brokers vote uninstructed shares based on the votes from clients who provide instructions. Eleven large brokers, representing more than 45 percent of the market, have instituted proportional voting policies, according to Broadridge.
In response to these arguments, the Council of Institutional Investors noted that any decline in retail voting actually has increased the number of broker votes in director elections. "This unintended consequence . . . heightens the need for the Commission to finalize the NYSE proposed rule," the council wrote in its letter.
The council also argues that alternatives such as proportional voting are "deeply problematic," and "could further complicate" the proxy voting process and "result in abuses." The group asserts that proportional voting violates the core global governance principle of "one share, one vote," and inappropriately tries "to interpret the silence of beneficial owners."
In response to what it called "exaggerated" quorum concerns, the council said companies could address that problem by including auditor ratification resolutions (which still are considered "routine" by the NYSE) on their ballots each year.
It is unclear when the SEC will act on the NYSE proposal. As of April 2, the commission had not scheduled the topic for discussion at an open meeting.
To review the comment letters on the NYSE rule change, click here.