In order to prepare for the elimination of broker votes in director elections that takes effect before the upcoming proxy season, companies should take action now, by analyzing historical shareholder trends and monitoring future extraordinary voting patterns, among other things, The Conference Board (TCB) advises.

As Compliance Week reported, the SEC on July 1 approved a NYSE rule change to eliminate broker discretionary voting in director elections, a move that's expected to increase the power of institutional investors—and activist shareholders, specifically—in influencing corporate affairs through "withhold vote" campaigns, says Matteo Tonello, The Conference Board's associate director of corporate governance.

Besides concerns about increased activist power, concerns have been raised that eliminating broker discretionary voting will disenfranchise retail investors, making it harder to establish a quorum at annual meetings and potentially raising solicitation costs.

Previously in uncontested director elections, brokers could vote shares for which they hadn't received voting instructions from beneficial owners, a practice criticized for potentially distorting election outcomes since brokers traditionally followed the recommendations of incumbent boards.

Since uninstructed votes will be counted as "no" votes as a result of the change, Tonello says, "It could become arduous for companies adopting a majority voting standard to attain the vote required to elect a management's slate of nominees—particularly if there is a large retail investor base or if an activist launches a "just say no" campaign to encourage shareholders to withhold votes for certain directors."

To address those concerns, The Conference Board recommends that senior executives and board members assess the impact of the rule on future annual meetings, especially in light of factors such as the size of the company's retail shareholder base, equity holdings by activists, and recent election results.

The rule change is effective for shareholder meetings on or after Jan. 1, 2010. Since the restriction applies to all NYSE-registered brokers, it affects most U.S. public companies, irrespective of the exchange on which they're listed.

In particular, companies should consider analyzing historical shareholder trends and monitoring future extraordinary voting patterns, possibly with the assistance of specialized services such as securities surveillance reports or Wall Street-perception audits, TCB advises.

That will help to anticipate situations where individual shareholders not voting their shares may magnify the power of short-term, speculative investors and skew election results, says Tonello. If a stock watch service provider is used, he says it's good practice to research its reputation and ensure its means to gather information are proper, since, in the past, the SEC has probed the ethical standards of securities surveillance analysts, who are often paid on commission.

Second, companies should understand the intentions of their larger investors, especially those with a history of activism, and should investigate voting policies by mutual funds and other more passive mainstream asset managers holding stock of the company, to recognize possible voting alliances with activists, according to TCB.

The Conference Board also urges companies to regularly communicate with their 10 largest institutional shareholders to inform them on the business strategy, including new efforts for improving shareholder value.

"A company should approach each proxy season with a thorough assessment of the real voting power of dissident institutional shareholders," the TCB press release states. "Such an estimate ultimately allows the company to determine the level of tolerance for inadvertent ‘no' votes by its retail investors."

TCB also recommends developing a specific strategy, in collaboration with proxy solicitors and investor relation advisers, to improve external communications on corporate matters, engage retail investors, and ultimately increase voting response. Since that's likely to significantly increase the costs of uncontested elections, TCB says nominating/governance committees should monitor the use of corporate resources and ensure appropriate safeguards from insider abuses and conflicts of interest.

Finally, companies should ensure that at least one routine matter, such as auditor ratification, is put to a vote at the meeting since brokers can still vote uninstructed shares with respect to "routine" items on the agenda.

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