A committee created by the New York Stock Exchange last year to examine issues surrounding proxy voting has published a final report with six recommendations, including one that would end the practice of permitting brokers to vote in director elections when their shareholder customers are silent.
The report comes 14 months after the creation of the committee, the NYSE Proxy Working Group. Most prominently, it recommends amending NYSE Rule 452—also called the broker-vote or 10-day rule—to make director elections a “non-routine” matter; Compliance Week first reported that the the rule was being reconsidered back in May (see Related Coverage at right).
Rule 452 allows brokers to vote on certain “routine” proposals if the beneficial owner of the stock doesn’t provide voting instructions to the broker at least 10 days before a scheduled meeting. If adopted, the change would mean brokers could no longer vote the shares of beneficial owners who don’t provide voting instructions. Critics of the current practice contend that it amounts to ballot stuffing, since brokers side typically with the board and management in director elections.
In recommending the amendment, the Proxy Working Group said the election of directors “can no longer be considered a ‘routine’ event in the life of a corporation.”
“Coupled with hedge fund activism, this could mean that directors who are subject to withheld votes will find it much more difficult to obtain a majority vote,” Broc Romanek, editor of TheCorporateCounsel.net, wrote on his Web site. Coupled with growing majority vote movement, “this is a whole new ballgame. It is not hard to find director elections this year where directors received a majority vote—but would not have done so if this rule had been effective.”
The Proxy Working Group considered recommending eliminating Rule 452 in its entirety, but said it stopped short of doing so because the rule “continues to have an important role in the proxy process today, particularly with respect to allowing issuers to achieve a quorum for regular meetings.”
A spokesman for the NYSE confirmed that the NYSE Board endorsed the recommendations and sent a copy of the report to all NYSE- and Nasdaq-listed companies on June 6 for comment by June 30. After those comments are in, the Board will either refer the report back to the Proxy Working Group or send a rulemaking proposal to the Securities and Exchange Commission.
The Proxy Working Group detailed five other recommendations in its 33-page report:
Education—The NYSE should take a leading role to further educate investors about the proxy voting system. Noting that amending Rule 452 is “likely to have significant consequences for issuers” and based on a “general lack of understanding in the investor community with respect to the proxy voting process,” the Proxy Working Group said the NYSE should work with the SEC, the listed-company community and other appropriate groups to develop an investor education effort to inform investors about the mechanics of proxy voting.
Communication—The NYSE should support efforts to improve the ability of issuers to communicate with beneficial owners. The group said the NYSE should support a review by the SEC of its existing shareholder communication rules, and should convene another committee comprised of representatives of all of the groups involved in the shareholder communication process to find improvements between issuers and beneficial owners.
Evaluation—The NYSE should continue to evaluate the effectiveness and necessity of broker discretionary voting following the amendment of Rule 452 to make the election of directors a “non-routine” matter.
Fees—The NYSE should engage an independent party to analyze and make recommendations regarding the structure and amount of fees paid pursuant to Rule 465, which sets reimbursement for the transmission of proxy materials. In addition to the costs, the analysis should include a study of ADP’s performance and the business process by which the distribution of proxies occurs (ADP is the largest player in the proxy distribution business), and should be done under the supervision of a subset of the Proxy Working Group. The NYSE should then consider revising the existing fee schedule and related issues as appropriate.
Vote Study—The NYSE should request that the SEC study the role of groups making voting decisions over shares in which they do not own or have an economic interest—including various institutional advisory services and proxy voting groups. While it noted that some of those groups have “played an important role in the proxy process in recent years,” the Proxy Working Group also believes that “there is the potential for possible conflicts and/or other issues given the multiple roles such groups may have in the proxy system.”
Related resources, including the Proxy Working Group's report and related coverage, can be found in the box above, right.
SEC To Tweak Compensation Proposal To Address Backdating
The Securities and Exchange Commission plans changes to its proposed executive compensation disclosure rules to address the unfolding stock option backdating scandals.
SEC Chairman Christopher Cox revealed late last week that the Commission is considering revisions to its rule proposals, first unveiled in January, in response to growing concerns over allegations that companies may have manipulated the timing of some executive stock option grants. The agency received a flood of comments on the 370-page proposing release. Final rules are expected before the start of the 2007 proxy season.
Since January, however, dozens of companies have disclosed criminal, regulatory or internal probes into questions about whether they manipulated the timing of some options awards. The wave of investigations shows no signs of stopping any time soon.
Cox
Companies will have to “release all information related to their decisions, and we mean all,” including details on when options were priced, Cox reportedly said in a June 8 speech to the New York Financial Writers Association.
The SEC move comes after several groups, including the CFA Centre For Financial Market Integrity, urged the SEC to require further disclosures to address backdating concerns.
The text of Cox's speech and related coverage can be found in the box at right; Compliance Week will update subscribers as soon as specific information becomes available regarding the inclusion of backdating provisions in the SEC's compensation disclosure proposal.
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