What, Exactly, Should Inspectors Of Election Be Inspecting?
Every Inspector of Election signs basically the same oath before an annual or special meeting of shareholders begins – swearing “to execute the duties of Inspector with strict impartiality and to the best of my abilities.”
But what, exactly, ARE “the duties of Inspector” when it comes to actually “inspecting” things?
What, exactly, needs to be “inspected?” How, exactly, should one go about it? And how often should one conduct an inspection of each of the key elements that one should look at before certifying the vote? Let’s never forget that the Inspector is under oath here, so let’s cut straight to the chase:
Back in the old days – from 100 years or so ago – when the venerable Inspectors Oath first came into being and through the early 1970s – the specific duties of the Inspector did not need a lot of definition:
Back then, every single vote – whether by proxy, or in person, via a ballot – was represented by an individual piece of paper. The Inspector, and/or his designated assistants (and yes, Inspectors were almost exclusively men back then) were expected to look at and “inspect” each item, one by one:
They would look to see if it was the right proxy card for that meeting - and whether there was a proper signature on it. Then they would sort the valid proxy cards into piles, according to the voting patterns on each one – like FFF (the most common pattern back then), FAF. FAA, AFF, AAF, etc., etc.. (And note, this example is for a proxy card with one proposal only, although most proxies followed a few fairly narrow voting patterns overall).
Then they’d add up the votes in each pile – originally with an adding machine, with a separate “tape” for each batch. Next, they would have to consolidate all the F and A votes for each proposal that were in each pile. By the 1970s most proxies were on “punch-cards”- which sped up the tabulating a bit, and did a bit more of the math - but the poor Inspector and his helpers still had to sort the cards into the respective voting patterns by hand. And let’s not forget those “Director Exceptions” where separate little individual piles of proxy cards also needed to be made when people crossed out the names or entered the ‘numbers’ of individual directors from whom they wanted to withhold their vote, then continued to vote FFF or FFA, etc., etc., on the proposals, as they chose. With 12 directors and only three proposals with two choices each (there was no Abstain choice back then), the theoretical number of “piles” you could end up with was a daunting 9,216.
Today, however – where some companies have 12 or more directors and 12 or more shareholder proposals, with three choices on each – about 99% of all the proxy cards and proxy votes are recorded with various kinds of electronic systems – like scanners, telephone and internet voting systems – where the instructions themselves, please note, are totally unobserved by the human eye and untouched by the human hand. If anything, one would think that more “inspection” than ever is in order now. But ironically, many “inspectors” seem to think that all they need to attend to are the few proxy cards and ballots, mostly with a miniscule number of new votes that are handed in a the meeting!
So first and foremost in our own Inspectors’ Handbook is the need to personally inspect each of the kinds of systems that are in use by the company’s proxy tabulator – to see how smoothly they run, the kinds of audit trails they leave behind and the kinds of things that could run amok, and if so, how one would know it.
Thus, and, most important, we say, Inspectors need to assure themselves about – and to actually witness – the kinds of quality control procedures and actual “checks” on accuracy that are employed. Broadridge, for example, requires that a human being double- check every single vote over 50,000 shares and serves-up 1% of all the other votes on a screen, at random, to be double-checked by a person. Most other tabulators we’ve inspected tend to spot-check a given number of cards per meeting, regardless of the size of the vote…which is basically “OK” – most of the time – and some make the effort to double-check all “large” votes.
Equally important, we say, is to understand, and to witness exactly what happens to items that “kick out” – or that otherwise need to be handled or re-handled manually – maybe because they’re wrinkled and torn – or maybe – and here’s where big trouble most often arises – if they are last-minute “fixes” – or faxes – or corrections or, worst of all, reversals…to be sure that (a) they are getting into the tally on time and (b) correctly so.
Another thing that Inspectors should look for – and can rely on pretty heavily if they find such things – are reports from the internal and external auditors on the quality of the proof and control systems that are in place at the tabulator’s shop. Some tabulators have extremely robust audits in place, while others rely mainly on spot- checks, and then, concentrate mainly on perceived “high risk” tabulations.
The absolute “gold standard” here is to review the outside auditor’s report on System Suitability and the Design and Operating Effectiveness of the tabulator’s overall control environment, commonly referred to as the SSAE-16. Many tabulators are far too small to justify the expense of such an audit report, and many rely on a one- day or limited-period review, rather than a full-year report. Such situations should ideally require a much higher degree of actual inspection by Inspectors – especially if voting on some matter appears to be “close.”
Despite all the above, a good Inspector needs to have a “good sniffer” or a “nose” for situations that don’t “smell exactly right” or look exactly on target. A few years ago, for example, the against- vote on one proposal we looked at seemed to be a bit off the usual mark. An examination of the actual proxies revealed that the “registration” of one segment of the proxy card print- run was a tiny bit out of kilter – causing the scanner to read some Yes votes as No votes. This was corrected fairly easily, and, while no big harm would have been done here, since mostly small, individual investor positions were affected, it could, in theory, have been a disaster.
When there are shareholder proposals on potentially contentious issues – and especially when the Yes and No votes are “close” – Inspectors need to raise the bar even higher where their “inspecting” is concerned. We start with our ‘sniffers” – to see if the largest voters are voting as we would normally expect. We also look for large un-voted positions – to guard against the possibility that a large investor’s vote somehow got ‘lost in the shuffle’ – or may be arriving at the last minute.
When the voting on any matter is “really close” Inspectors need to raise the bar higher yet, regarding the number and kinds of votes to be inspected closely: Usually we define “close” to be a margin of 1% or less at large-cap companies, and consider others “by appraisal” of the voting population as a whole. Bear in mind too that ½ of 1% voted the wrong way is equivalent to a one percentage point margin. Accordingly, one really needs to look at all items that are 1/4th to ½ of one percentage point of the shares voted – and not the shares outstanding. Many times this is not as hard as it might seem at first – if one knows what one is doing. Very often, the top 50 holders account for 50% - 60% of the shares voted.
Another important “trick of the Inspectors’ trade” in a close vote is to know about, and to follow up on any and all apparent “over-votes” – and exactly how they were resolved. Amazingly, many tabulators stop tabulating a given position with any vote that takes the position over 100% of what appears on the CEDE list. This is exactly what an Inspector should NOT allow – since it is the latest vote that counts. And in Delaware, and in most if not all other states too, we say, the Inspector has an affirmative duty to investigate – AND to report on the ultimate “cure” as part of the Final Report on the Voting.
How often should inspectors inspect the overall operation? At least once every 12-18 months, we say, and whenever there are major systems changes.
Last but far from least in today’s environment, Inspectors of Election really need a backup “team” behind them… since something unexpected or never-before-seen seems to pop up almost every week – and two or more heads are always better than one in such situations.
This is a good way, we think, to introduce our 2014 Team of Inspectors – and to announce that having been sued twice in four years by losers in proxy contests – your editor and his business partner Ray Riley have placed this business in a new legal entity – C.T. Hagberg, LLC.
We have also adopted a new logo for the business – and taken the old, late, great Hanover Bank Trust Division motto – which was drummed into both our heads early-on in our careers – as our own, which we translate into modern English as “Faithfulness and Trustfulness.” This, we believe, is what one should absolutely expect from a sworn Inspector of Election.
We would also like to note that we conduct the kind of due diligence outlined above - not only at Broadridge Financial Solutions - but at numerous other tabulators each year. So if you have a situation this coming proxy season where one of our Inspectors might provide an added level of safety and security where your own Final Report is concerned, please feel free to call us directly, to check on their availability.