A controversial withhold vote campaign at CVS Caremark’s recent annual meeting has resulted in charges of ballot stuffing and renewed calls for the Securities and Exchange Commission to approve a New York Stock Exchange proposal to revamp its rule for when brokers vote for directors on behalf of certain shareholders.
The incident occurred just as the SEC completed two days of roundtables on proxy voting mechanics and broker voting.
On May 9, CVS Caremark announced that shareholders elected its full slate of 14 directors. They included Roger Headrick, managing general partner of HMCH Ventures and CEO of ProtaTek International, who was the target of a withhold campaign among several shareholder activists. (Several groups also recommended to withhold the votes from Lance Piccolo, CEO of HealthPic Consultants.) Opponents were critical of the way the pair handled the sale of Caremark to CVS and were concerned about their possible roles in Caremark’s questionable stock option practices.
Initially, CVS reported that shareholders withheld about 44 percent of their votes from Headrick and more than 33 percent from Piccolo. Given that CVS had previously adopted a majority voting standard in the election of directors, Headrick seemed to have come within six percentage points of being ousted from the board.
The controversy erupted the following week when CVS Caremark disclosed more details about the vote.
According to the Washington, D.C.-based CTW Investment Group, which played a leading role in the withhold campaign, Headrick received as little as 43 percent of the shareholder vote, excluding what it calls “phantom votes”—those cast by brokers with no economic interest in the company. “To do otherwise would violate the principle of the board’s majority vote policy for director elections,” William Patterson, executive director of CTW, said in a statement.
Patterson is referring to New York Stock Exchange Rule 452, which allows brokers to vote on certain “routine” proposals if the owner of the stock has not provided voting instructions to the broker at least 10 days before a scheduled meeting. Currently, voting for directors is considered to be a routine matter.
Critics of the rule contend that it skews director votes because brokers generally tend to vote in favor of management’s wishes. The rule has attracted more scrutiny in light of the scores of companies that have recently adopted some form of majority voting for directors, since these broker votes could have a major effect on voting results.
“They are entitled to use broker votes,” says Patrick McGurn, senior vice president at Institutional Shareholder Services, one of a number of firms that recommended withholding votes from the two CVS Caremark directors. “They are just taking advantage of a loophole.”
Changes Coming?
Kinney
Last October, the Big Board proposed to amend Rule 452 following a recommendation of the Proxy Working Group, created in April 2005 by the NYSE to review the proxy voting process. “The goal of the NYSE has been to not allow the broker to vote on any proposal that substantially affects the rights of shareholders,” NYSE President Catherine Kinney said in a statement at the time. “Today the election of directors is simply too important to ever be considered routine, even where the election is uncontested.”
The Big Board and the SEC took a giant leap toward changing the rule last week when the NYSE amended its proposal to exempt directors of mutual funds.
The rule change requires approval from the Securities and Exchange Commission. But until the CVS annual meeting came along, the issue seemed to be dormant (see related coverage above, right).
That is now expected to change. Speculation is rampant that the SEC will take up the matter in the next few months. Several experts say the key sticking point is opposition from the mutual fund industry, which doesn’t want the rule to change as it applies to funds.
Meanwhile, activist shareholders who called for the ouster of the two directors are clamoring for CVS Caremark to acknowledge that if the broker votes were excluded, a majority of voting shareholders had withheld their votes from Headrick. They want the board not to seat him.
“The broker votes should be pulled out,” Patterson says. “What they did is not illegal, but it violates the spirit of director elections and is contrary to the law that the New York Stock Exchange intends to put in place in 2008.”
The Council of Institutional Investors, meanwhile, fired off a letter to CVS Caremark Chairman Edwin Crawfor on May 21, saying the CII believes that “the proper vote should be one that excludes such broker votes, and urges you and fellow CVS/Caremark board members to act accordingly. CVS/Caremark’s adoption of majority voting for director elections makes inclusion of uninstructed broker votes highly inappropriate because they can tip the outcome against the preference that shareowners have expressed.”
Mike McGuire, senior director of investor relations at CVS Caremark, says that the company does not know exactly what the broker votes were and that the company will not try to figure it out. “It is what it is,” he says. “Unfortunately, that’s how it works in the market now.”
On the other hand, McGuire concedes the company is likely to be a more responsive to a non-binding measure calling for the separation of the chairman and chief executive officer jobs, which received majority support. “We will listen” to calls for splitting the two positions, but as a solution, he adds, “we will probably end up with a lead independent director.”
Meanwhile, experts say if the NYSE’s rule is not changed, next year there could be even more controversies like the one surrounding the CVS Caremark vote, given the growing number of companies that have adopted a form of majority voting. Says Patterson: “The issue hasn’t been tested yet. Withhold votes were not large this year. But this was a window into what director elections will look like in the future as institutional investors get more acclimated and bring directors under greater scrutiny.”
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