And Don’t Help The Corporate Cause At All… In Their Actual And “Model Responses” To Proposed Changes In The “Broker May Vote” Rule… Basically Flicking A Finger At The NYSE And Its Proxy Rule Committee
We can hardly begin to say how disappointed we were with the responses from our normally beloved industry organizations to the SEC’s Proposed Rule Change to NYSE Rule 452, aka the “Ten Day Rule”, aka the “Broker May Vote Rule.”
The Society of Corporate Secretaries and Governance Professionals, NIRI, the SSA and the STA all managed to totally miss the primary point here…and most of the important secondary points too. And to make it worse, they urged members to second their positions, with reminders, and ‘model responses’ coming thick and fast, right down to the wire. What a lost opportunity to stand up for good governance… AND to chide the SEC for its many shortcomings where good governance of the proxy system itself is concerned!
Here, with fresh headlines supplied by your editor to aid the skim-reader, are excerpts from the comments he made to the SEC’s request for them:
Our key industry-orgs totally failed to address the essential point – and the essential purpose of the proposed rule change: “Currently, it is incontrovertible - as the NYSE Proxy Working Group [and the NYSE itself] concluded in 2006 - that while at some time in the past it may, arguably, have been so, the election of directors is no longer a “routine matter.”
Second, our thought-leaders failed to note that this horse has already left the barn: “It seems especially worth noting” we wrote, “since so few commenters have apparently done so, that, in practice, this issue is essentially moot anyway in today’s environment: Investors who are truly concerned about the overall fairness and reasonableness of director elections know how to count. And they also know how to determine exactly how many votes that are ostensibly cast “for” and “withheld” from individual directors were cast by the actual owners. And increasingly, they insist” [as we’venoted in the Optimizer numerous times] “that votes cast by brokers who have not received specific instructions from their customers should NOT be counted in the final report on the voting. This is especially true - and especially important - where there is a majority voting standard in effect. But it is equally true, in my opinion, when there is a plurality voting standard, because votes “for” and “withheld” from individual directors are indeed a valuable corporate governance metric, and a very clear indicator of investors’ satisfaction with the performance of individual directors, and where the real vote - by real voters - should not be disguised by uninstructed broker votes.”
Even scarier, all our thought-leaders failed to point out that the interim “fix” for mostly unwarranted fears that companies will not achieve quorums - namely, proportional voting by brokers - is actually a BAD THING for them…and one that will actually bite many public companies this very year, we predict:“…the rapidly growing practice on the part of brokers to cast uninstructed votes proportionately should also be disallowed if this rule change is adopted, as indeed it should be. From my many years of observing voting outcomes “up close” it is absolutely clear to me that “proportional voting” gives a totally disproportionate weight to the votes of “disaffected shareholders”, who, by definition, have a greater propensity to vote.” (See our full comment letter on the SEC site if you want a real and proper fix to the quorum issue, and read on for fresh evidence that “mirror voting” can be very bad indeed for issuers.)
Very bad, and very sad, from a P-R point of view, the industry responses served to further reinforce the widely-held belief that corporate governance people are reactionaries, obstructionists, foot-draggers who hide behind legalistic minutia and basically, believers in and defenders of the status- quo…who are not really interested in good governance at all: “I also wish to strenuously object to the idea that many of my colleagues in the public-company world have been putting forward; that this reform should wait until all the many longstanding “issues” surrounding the proxy voting system are addressed as a whole. Let me point out that the debate and discussion of the now untenable broker-voting issue has been going on for more than five years. The recommendations of the Proxy Working Group are, already, over two years old. And frankly, there has been no action at all on virtually every other “issue” on the shamefully long list of current proxy-system deficiencies - and there is no timetable on the horizon for dealing with any of them.
Last and far from least, we, in the industry – where most of us really DO believe in good corporate governance, in your editor’s long experience – missed a major opportunity to chide the SEC for ITS bureaucratic foot-dragging…and to demand real action: “The list of unresolved issues is a shockingly long one: a totally out-of-date system surrounding “objecting” and “non-objecting beneficial owners”; incontrovertible evidence that average investors have no idea of how the proxy voting system actually works, as shown in the Working Group’s extensive survey; a system where there has been no competitive bidding-out of the fee and service arrangements in more than 20 years (!); incontrovertible statistical evidence to show that clandestine vote buying, and probable “vote stealing” schemes exist, where the only possible motive is to “rig” the election results…and finally, the fact that nothing at all has been done to further the “investor education programs” that the SEC has been advocating, and promising to foster for at least three years now, again with no timetable, and no action plan on the table.”
P.S. Our “logical thinking skills” as an industry did not look very sharp either: There is absolutely no logical connection between the indisputable but readily-curable bad-governance situations that uninstructed broker-voting and uninstructed proportional voting are causing and the other “issues” that allegedly need to be fixed all of a piece.
And P.P.S. As we read through a sampling of the comment letters, we came upon some fresh and very compelling statistical evidence in the Broadridge letter that demonstrates how harmful to the corporate cause - and to the cause of truly good governance - “proportional” or “mirror” voting can turn out to be:
First, and a very unpleasant surprise indeed, it turns out that only five of the eleven brokers that voted “proportionally” are using only the votes of their individual shareholder population as their “mirror”! In other words, six of the eleven proportional voters are taking the votes of institutional investors into account when they cast votes proportionately. So much for the theories so many companies espoused that proportional voting will somehow “moderate” the influence of proxy advisory firms on voting outcomes. At these six firms, clearly the reverse is true.
In a bit of good news, perhaps, Broadridge reported that in 2007 “Broker votes impacted only 2 directors out of a total of 2,718 in companies with majority voting policies.” (Both of these instances, we’d note, were immediately noted by activists, exactly as we mentioned in our letter to the SEC, who ultimately had their way, while 6 other directors failed to receive a majority vote with proportional and all other ‘broker votes’ counted in).
Now for the bad news: when Broadridge re-ran the numbers on 5.094 directors where there was a plurality standard…as if there was a majority standard…142 directors did not receive a majority of the instructed votes returned, although 68 of them received a “majority vote” after broker votes were counted in.
The real takeaways here, we think, are these:
- First, in 2009 there will almost certainly be a lot more directors who fail to receive a majority vote than the tiny percentage of all directors who failed to do so in 2007.
- Second, all such directors will come under intense scrutiny - regardless of whether there is a majority or a plurality standard – and no one will be able to make a claim that uninstructed broker votes should, properly, be “in the equation”.
- Third, there is a virtual certainty in our book that the 6 brokers who use their entire customer base as the “mirror” when they vote proportionally – and a goodly handful of public companies too - will suddenly discover that this is NOT an automatic ‘gimme’ for directors who have been targeted by “vote no” campaigns.
- And lastly – even if the number of “failing directors” stays in single-digit percentages vs. ALL directors…if it’s one of YOUR directors, he or she will be “toast” in today’s environment…And you, and your company too, will really look BAD if you try to pretend that uninstructed broker votes should count as good ones… as the vast majority of companies that commented on the rule change seem still inclined to do.
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