ANew York Stock Exchange committee has begun looking at the issue of proxy voting—including whether changes are necessary to the rule that allows brokers to vote in place of silent shareholders.

The Proxy Working Group is also planning to examine the issue of the fees corporations must pay for the distribution of shareholder materials, which is handled almost exclusively by $7.4 billion Automatic Data Processing of Roseland, N.J.

Sonsini

The committee, which is chaired by lawyer Larry Sonsini of Palo Alto, Calif., met for the first time on April 25 in New York. Sonsini told Compliance Week that there is no set timetable for the committee to complete its work. “Ideally, however, I’d like to see something done before the next proxy season, which is early fall,” said Sonsini, a partner in Wilson Sonsini Goodrich & Rosati.

John Wilcox and Paul Conn of Georgeson Shareholder Communications were the first people to appear before the Sonsini panel. Wilcox told Compliance Week that members of the group are “trying to get their arms around a number of issues in which they play a central role.”

The NYSE’s initiative comes at a time when the Securities and Exchange Commission appears to have backed off—at least for the time being—from a controversial proxy access proposal. The rule would require public companies to include in their proxy materials shareholder nominees for director for two years following specified trigger events indicating “unresponsiveness" to shareholder concerns. The rule would give shareholders mandatory access to company proxy materials to promote their own board nominees.

The issue of proxy voting has also been a hot one overseas, where the European Commission is addressing concerns about obstacles to voting across borders of EU member states by circulating a questionnaire asking institutional investors to relay their experiences with costs dealing with share blocking, agenda information gaps and inefficient proxy procedures.

NYSE Can’t Act Unilaterally

A main focus of the NYSE panel is so-called “10-day rule,” under which uninstructed proxies are voted by the brokers representing those shares, invariably in favor of management. The rule got considerable attention last year when a revolt by former directors of the Walt Disney Co. was thwarted after hundreds of millions of broker proxies were cast for embattled CEO Michael Eisner, guaranteeing him reelection to the board even though a majority of actual shareholders withheld their votes from him. [Eisner announced in March that he would step down as CEO on Sept. 30 of this year.]

Wilcox noted that the NYSE’s role in reforming the 10-day rule process is a limited one, because much of it is governed by state law. “There are probably not very many options that can be taken unilaterally by the NYSE without coordinating with other aspects of the proxy system that are not under their control,” he said.

But the NYSE could be part of a reform effort that includes the SEC and states such as Delaware, which is the target of an American Bar Association reform effort. “If [efforts are] coordinated and everything works out smoothly, the NYSE might be able to substantially modify the 10-day rule so they would no longer have to adjudicate whether proposals are material or non-material or whether discretionary voting or not is allowed,” said Wilcox.

With respect to the second major issue to be examined by the NYSE panel—setting fees for proxy materials—Wilcox said the Exchange “would like to get out of that as well.” Wilcox noted that, if the proxy process “were open to competition—if ADP was not the sole service provider—then the New York Stock Exchange would not have to set fees, it could allow competition to establish appropriate fees.”

Although obstacles exist to reforming the 10-day rule and the fee structure system, Wilcox said it is “very important that the New York Stock Exchange is looking at these issues,” adding that it is an encouraging sign that a number of groups with different interests are all focusing on proxy voting simultaneously.

In addition to the ABA and the NYSE, these groups include the Business Roundtable, which has petitioned the SEC to conduct a thorough review of the shareholder communications system, and the United Brotherhood of Carpenters and Joiners of America (often called the Carpenters Fund), which has advocated for the adoption of a “majority vote” rule under which directors must receive a majority of votes cast in order to be elected. “People who are normally fighting each other on these issues are all working on a common objective. That seems to bode well for a very comprehensive review of how things work,” Wilcox said.

Sonsini, the committee’s chairman, told Compliance Week that the panel will ultimately be making recommendations to the NYSE. “If that recommendation [includes] rules changes, it will

have to go to the board and also the SEC,” Sonsini said,

acknowledging that some issues—like majority voting—also implicate state laws.

“We’re looking at the New York Stock Exchange rules in light of that debate—not that we will come out one way or another. We want to take into account all of the dialogue,” he said.

The NYSE task force includes representatives from organizations such as Goldman Sacks, Morgan Stanley, American Express and ExxonMobil, as well as a staff member of the SEC. Sonsini said the group will next meet on May 31 in New York, though subsequent meetings have not been scheduled.

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