Unless you’ve been living under a rock somewhere, you know of course that NYSE Rule 452, aka the “broker-may-vote rule”, aka the “ten-day-rule” – which allows brokers to cast votes in their own discretion on “routine matters” if no votes have been received from their customers 10 days before the meeting – will no longer apply to director elections for Annual Meetings held in 2010 and thereafter.
We’ve been amazed by how much confusion there has been as to the real effect of the new regime…and by how much heat, and how little light has been shed on this matter by most commentators. No surprise, we guess, since most of the comments have been coming from proxy solicitors who are literally salivating at the chance to call all of your retail shareholders during the dinner hour to “get out the vote”.
Here are our OWN top-ten tips on what you need to know and do to be properly prepared…plus one to grow on:
1. Inform your top-management – and especially your Directors – about the rule change, and about what, exactly, it means to the voting results, and potentially to them. And do so as soon as you can figure it out: For example, you can expect a lower Quorum than usual – about 20% lower on average…and there is the potential for even more troubling outcomes if a “Vote-No Campaign” should target one or more specific directors, since the old “broker vote” was always in their favor, and won’t be there in 2010 to pad the percentages with added “yes” votes.
2. Before you go before the top-management team, be sure you have figured it out, of course, and gotten your own company’s projected numbers nailed down tightly: Please remember that the “averages” don’t really matter here: All that counts is how your own company’s votes turn out. It is a simple matter to find out exactly how many broker-votes there were at your last annual meeting, so you can compute the likely 2010 quorum number and assess the impact that “votes no” against given directors – or, heaven forbid, a potential Vote-No campaign, or worse, a Vote-No recommendation from one or more proxy advisory firms could potentially have on the outcomes.
3. Plan to have at least one “routine item” on your ballot, to assure that you will HAVE a quorum when your meeting convenes: Brokers can still, and will, cast votes in favor of “routine items” that are on the ballot, which , of course will count toward the quorum. Several proxy solicitors have told us that some companies are resisting this approach – maybe because they’re not required to ratify the auditors. Maybe they’re just being stubborn…or maybe it’s because they’re afraid their tabulator will charge them extra. But folks, the cost of getting it right vs. the cost of having to adjourn, and reconvene the meeting later is peanuts, compared to the downside risk here.
4. Handicap the likely votes for – and against each director – strictly on the q-t at first: The most common reason for big Votes No against directors is low meeting attendance. But this, as we’ll note below, can often be headed-off at the pass, with a well-written explanation in the proxy statement, plus an assurance that a repeat in the coming year is not expected. If there have been “performance problems” at your company – or even a spell of “bad press” – you can expect the audit committee and comp-committee members to get more than the usual number of “reflexive” Votes No. Another thing that tends to draw fire, and often takes people by surprise, is a director who is on the board of some other company that has had bad press, or who is “over-boarded”. If you have failed to implement a shareholder proposal that got a majority vote last season, you can virtually guarantee a higher than usual number of Votes No against nominating committee members and/or the lead director. Here, by the way, is where good proxy solicitors will fully earn their keep.
5. Consider sharing your best-case and worst-case scenarios for the 2010 meeting with the directors:This, of course, is a mighty ticklish situation. But often, such sharing can solve the problem if there is one, since NO director wants to run a serious risk of having high votes-no, much less failing to get 50%+ votes-Yes. And frankly, YOU can’t afford to have a director who receives such news “by surprise” at the meeting itself. Plus - and make sure you present it this way - you’re only sharing info, and ideally it should be info with a lot of solid third-party input that you can cite, to be sure that there ARE no surprises.
6. Start drafting your “expanded information” about board members and board composition NOW: At every one of the many industry conferences we’ve attended this fall, the main takeaway from SEC staff in attendance has been this: the SEC’s proposed rules for expanded disclosure here WILL be largely adopted. But also, as we’ve been reminding for five or more years now, director elections are more like political elections with every passing year. And, as we’ve also been reminding – only half in jest, or less – directors who are “old, ugly…academics, or ex politicians, or who are on more than two or three boards” are increasingly at risk – even though YOU may know they are among your best directors. So start prettying up those bios – and do the best you can with those pictures (but easy on the airbrushing, so as not to be accused of false-disclosures) starting NOW.
7. Start work on the section regarding the director nominating process at your company - and in light of the very particular business environment you find yourselves in: This is the best place, we think, to address those hard to describe but critically important issues of board composition and group dynamics; and how things like “diversity” and particularly important “skills and skill sets”…and yes, “continuity” – and even the sometimes dumb-sounding ideal of “collegiality” – really need to be continually reassessed and re-balanced, and planned ahead. Above all, you need to make it crystal clear that this is what your board is actually DOING. If you really want to head self-appointed nominating committees and Vote-Noers off at the pass, this is the place to begin.
8. Do not foolishly think that because you still have plurality voting, you have no need to worry about directors who may not achieve a majority of the votes cast: As we’ve warned before, this argument does not cut the mustard with professional investors…And face it; such a situation can be deeply embarrassing to affected directors…and is indeed a red flag…And it is one that WILL get press attention in 2010, we guarantee.
9. Regardless of the way your hypothetical handicapping comes out, recognize that IF a Vote No campaign should arise unexpectedly – or if there should suddenly be some unexpected “bad press” around your meeting time — your individual investor votes – which are almost always more favorable than not – will be your “swing votes”: They will likely make the difference between a targeted director achieving a majority vote…or not. Also, please note well, individual investors have been voting less and less often with every passing year. So understanding your company’s numbers, and having a plan – and a program in place – to educate your individual investors about the voting process, the importance of the issues….and the importance of THEIR VOTE is essential, we believe. (See our next two articles for more.)
10. Pay special attention to getting out your employee votes in 2010: Check your numbers for 2009 here. Often, employee ownership – via various kinds of employee plans you may have, coupled with shares that employees and their families own as individuals – adds up to 10% or more of the total voting power. And ordinarily, you should be able to count on all of them as “friendly votes.” If not, you really need to get cracking! But note that employees have been voting less and less often with every passing year. So plan to educate them too. And be sure to guarantee them complete confidentiality where their votes are concerned. In our experience, virtually every employee has at least one director they just don’t like and just won’t vote for. If they think there’s the slightest chance that the management will ever know how they’ve voted, they will not vote at all.
A tip to grow on: Do rely on experts if you think you need help here. And do recognize that having a good proxy solicitor on board, both before and during the meeting, is usually mighty cheap insurance. But please…use those outward calling- programs sparingly, and with special care. Pay attention to what will be said, and by whom…and when: Badly timed and badly executed programs can and will backfire on you, and can actually cost you votes in the end.
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