The Securities and Exchange Commission seems to be making its own New Year’s Resolution for 2010: finally moving forward on that top-to-bottom review of proxy voting that SEC officials have talked about for years.
SEC staffers have already begun examining how corporate proxies are distributed and votes are tabulated, and a concept release seeking public input on several issues should arrive sometime soon, SEC Chairman Mary Schapiro said in a speech last month.
“We want to ensure that the U.S. proxy voting system as a whole operates with the degree of reliability, accuracy, transparency and integrity that shareholders and companies have the right to expect,” she said, speaking Nov. 4 at a Practising Law Institute conference.
Schapiro
Schapiro said the concept release will ask questions about how to ensure accuracy in vote tabulation; whether current SEC rules adequately address threats such as “over-voting” or “empty-voting,” where investors lending shares to others might distort the true count of a vote; how to address the abysmal voting rate among retail investors; and whether the current beneficial-owner system should be changed so companies can communicate with their shareholders more easily.
SEC spokesmen declined to comment beyond Schapiro’s public remarks, but she isn’t the only SEC official dropping hints about what’s to come. At a Nov. 19 speech before the International Corporate Governance Network, Kayla Gillian, one of Schapiro’s top advisers, said the Commission is increasingly worried about the accuracy of proxy voting—especially now that broker-dealers are no longer allowed to vote in director elections without specific instructions from their shareholder clients.
Other SEC officials have been talking about a comprehensive look at federal proxy rules since 2007, often saying other issues such as shareholder access to the proxy statement should also be rolled into the discussion. Outsiders say the review is long overdue.
“A comprehensive look at the whole system is needed,” says Niels Holch, executive director of the Shareholder Communications Coalition, a group comprised of the Business Roundtable, the National Investor Relations Institute, the Society of Corporate Secretaries & Governance Professionals, the National Association of Corporate Directors, and the Securities Transfer Association. “Tinkering with any part of it could have unintended consequences.”
Allen
That does not mean making changes will be easy. Current proxy voting mechanics are “incredibly Byzantine,” says Claudia Allen, chair of the corporate governance practice group in the law firm Neal Gerber Eisenberg.
Allen faults the myriad intermediaries involved in proxy voting, and the difficulty of recordkeeping and vote tabulation. Any effort to revise the system, she says, is “somewhat like playing a game of Whack-a-Mole. If you fix one problem, another one pops up.”
The Business Roundtable first sent a petition to the SEC raising concerns about voting accuracy and shareholder communications in 2004, and they were also items on the agenda of an SEC forum in 2007. But accuracy has become a major worry since then, given the advent of majority-vote thresholds for director elections just when close voting results became more common.
Goodman
Previously, “the precise accuracy of the vote didn’t matter a whole lot,” says Amy Goodman, a former SEC staffer and now a partner at law firm Gibson Dunn & Crutcher. “Today it does.”
“It’s ridiculous that it is so expensive and difficult for issuers to communicate with street-name shareholders.”
— Amy Goodman,
Partner,
Gibson Dunn & Crutcher
For example, a cliffhanger vote in April at Bank of America forced Ken Lewis to step down from his role as chairman; shareholders approved the measure by only 50.34 percent. (Lewis is still CEO, although he plans to retire as soon as the bank can recruit a replacement.) And in 2008, a tabulation error at Yahoo miscalculated the votes in favor of then-CEO Jerry Yang. At first Yang appeared to win 85 percent of votes cast, but in reality he had only 66 percent.
Cacophony of Reforms
The SEC review comes amid a host of other controversial initiatives related to corporate elections, including a pending proposal to allow shareholders to place nominations for directors in the corporate proxy statement. The SEC has drafted a proposal to allow some proxy access, which will come up for a final vote by the Commission sometime in early 2010.
Proxy voting is also reeling from the double-whammy of the end of broker voting in director elections and a steep decline in retail voting that has been exacerbated by 2008 rules pushing companies to post proxy materials online rather than mail them to voters. The SEC is already trying to reform its e-proxy rules to reverse that trend.
Those two dynamics alone are already making “no” votes more influential, Allen says, and it will mean more close votes and possibly more directors failing to win election.
Another problem is the non-objecting beneficial owner/objecting beneficial owner system of tracking shareholders, commonly called the NOBO/OBO system. The vast majority of stock today is held “under street name” by brokers, banks, or some similar entity, rather than the actual shareholder, the beneficial owner.
TABULATION ERROR
The following table shows the original voting results certified by the inspector of elections, as previously reported:
Director:
Shares For:
% For:
Shares Withheld:
% Withheld:
Roy J. Bostock
832,023,657
79.5%
214,071,927
20.5%
Ronald W. Burkle
849,373,291
81.2%
196,722,293
18.8%
Eric Hippeau
948,862,579
90.7%
97,233,005
9.3%
Vyomesh Joshi
971,594,650
92.9%
74,500,934
7.1%
Arthur H. Kern
814,871,925
77.9%
231,223,659
22.1%
Robert H. Kotick
967,044,818
92.4%
79,050,766
7.6%
Mary Agnes Wilderotter
964,939,727
92.2%
81,155,857
7.8%
Gary L. Wilson
856,006,576
81.8%
190,089,008
18.2%
Jerry Yang
893,055,602
85.4%
153,039,982
14.6%
Yahoo 2008 Press Release (Aug. 5, 2008)
Under SEC rules adopted in the 1980s, companies cannot directly communicate with so-called OBOs—forcing them to go through third parties, and leaving them uncertain exactly who their shareholders are. The vast majority of companies thus use investor communications company Broadridge to reach their shareholders.
“Communicating with beneficial owners through Broadridge is expensive, and even if a company is willing to bear the cost, they don’t know who those shareholders are,” Goodman says. Given current technology, “It’s ridiculous that it is so expensive and difficult for issuers to communicate with street name shareholders. Effectively, the only people who really have ability to exercise their [voting] rights are institutional investors.”
Counting Counts
Holch, meanwhile, says over-voting, empty voting, and hidden voting are all serious problems. Since broker-dealers who hold shares don’t routinely match them to specific customer accounts when shares are loaned out, both the owner of shares and the person holding loaned shares can receive voting instructions, essentially letting two votes be cast for one share: over-voting.
Holch says one solution would be to require all intermediaries to reconcile share positions as of the record date for each shareholder meeting, so they don’t send proxies to ineligible shareholders. Current guidelines allow reconciliation either before or after a proxy mailing, he says, giving room for error.
TABULATION CORRECTION
The following table reflects the corrected Broadridge numbers:
Director:
Shares For:
% For:
Shares Withheld:
% Withheld:
Roy J. Bostock
632,023,657
60.4%
414,071,927
39.6%
Ronald W. Burkle
649,373,291
62.1%
396,722,293
37.9%
Eric Hippeau
948,862,579
90.7%
97,233,005
9.3%
Vyomesh Joshi
971,594,650
92.9%
74,500,934
7.1%
Arthur H. Kern
714,871,925
68.3%
331,223,659
31.7%
Robert H. Kotick
967,044,818
92.4%
79,050,766
7.6%
Mary Agnes Wilderotter
964,939,727
92.2%
81,155,857
7.8%
Gary L. Wilson
750,006,576
72.3%
290,089,008
27.7%
Jerry Yang
693,055,602
66.3%
353,039,982
33.7%
Yahoo 2008 Press Release (Aug. 5, 2008)
Empty voting occurs when someone borrows shares and gets the voting rights along with them, but that person might not have any economic interest in the business itself. Someone could therefore acquire a large chunk of voting power, vote for some proposal detrimental to the business, return the shares to wherever they came from, and make a killing as the stock price tanks by holding a short position in the company.
And hidden voting happens when investors use derivatives to mask some of their true share ownership, letting them control a large block of stock without triggering SEC disclosure rules, Holch explains.
Nathan
But Charles Nathan, a partner at the law firm Latham & Watkins, says proxy voting mechanics “aren’t the real issue.”
“They’re cumbersome, yes, but they work,” he says. Latham believes the major problem stems from another issue the SEC plans to address in the concept release: the influence of proxy advisory firms.
The SEC plans to look at the role those advisory firms play in corporate voting, as well as whether rules are needed to ensure that they base their recommendations on accurate, reliable information and provide adequate disclosure of any conflicts of interest in providing voting recommendations.
Since many institutional investors may have to cast thousands of votes, which can be time consuming and laborious, most portfolio managers outsource voting decisions to proxy advisory firms, such as RiskMetrics Group or Glass Lewis, or to other internal compliance departments.
“There’s a closed circle of people who dominate the voting patterns of Corporate America premised on the notion of good corporate governance,” Nathan says. “But they have no responsibility to the beneficial owners they’re acting for.”
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