As we approach the 2009 annual meeting season, we are alerting clients to reconsider the impact of changes in “routine” broker voting on corporate director elections. In effect, companies who have not yet adapted to the new proportional voting policies now in use by a number of brokerage firms may find themselves unprepared for the upcoming proxy season. Notably, these proportional or “mirror” voting policies could make electing company-endorsed directors more difficult than ever.
Director elections are one of a number of “routine proposals,” so designated by the New York Stock Exchange under NYSE Rule 452, which call for discretionary voting by brokers as member organizations. Discretionary voting is designed to allow brokers to vote their client’s shares in cases where the broker has not received any instructions from the client or “beneficial owner”. As a matter of course, brokers had always voted these uninstructed shares in favor of the recommendation of the issuer’s board – creating an automatic advantage for proposals recommended by management.
Many brokers (including Schwab, Ameritrade, Morgan Stanley, Merrill Lynch, and Goldman) now allocate unvoted shares in proportion to how their actively voting beneficial owners have instructed votes to be cast. So, for example, if a brokerage firm’s clients have voted 30 percent for a proposal and 70 percent against, the broker now uses its discretion and allocates the unvoted shares in this same proportion. The net result of this change is that retail investors who provide voting instructions to their brokers have an opportunity to disproportionately influence the outcome of a proxy vote – with their votes sometimes effectively counting twice as much.
This opportunity is not lost on organized activists, who - in certain exempt solicitations - can now actively campaign more effectively against directors or Company-sponsored proposals. Instead of being able to count on all uninstructed brokerage shares as votes to be cast for management, companies may find that they need to garner additional votes from other segments of their investor base to ensure their directors win election campaigns. This effect can be outcome determinative for companies who have adopted a majority vote standard for the election of directors.
Tracking this new retail vote influence is of even more importance to companies. Companies may be surprised to see vote support that had been previously expected evaporate as discretionary votes are cast. While all brokers issue instructed votes ten days prior to an annual meeting (as well as discretionary votes if that broker does not vote in a proportional manner), brokers who issue discretionary votes in a proportional manner designate the unvoted shares 72 hours before the annual meeting and then update their votes daily to reflect any new instructions. Although this may seem like very little notice, a good proxy solicitor should be able to estimate the impact of proportional voting approximately a full week to ten days prior to the meeting date.
As a matter of policy, the SEC may discontinue the designation of routine status for director elections within the next two years – meaning that brokers will not vote in the method outlined above. The consequences of the loss of broker votes may impact the ability of a company to achieve a quorum in an uncontested election campaign without an active solicitation. In the meantime, the current broker policies themselves (combined with the volatile markets and heightened corporate governance scrutiny) are reason enough for companies to examine updated solicitation strategies in the new proxy season.
This post was submitted by Bruce Goldfarb, the President & CEO of Okapi Partners, A New York City - based proxy solicitor and experts on issues relating to shareholder activism. We're pleased to have Bruce as one of our newest Blog & Tacklers and look forward to his contributions in the future.