Call it the calamity that wasn't.
The controversial rule change to effectively end the long-standing practice of allowing brokerage firms to vote certain retail shares in uncontested director elections hasn't had the disastrous effects many expected. So far, the highly anticipated amendment of New York Stock Exchange Rule 452 hasn't resulted in an explosion of withhold votes, as some had claimed it would.
Overall, the elimination of the broker vote for director elections had little influence on election outcomes, says Chuck Callan, vice president of regulatory affairs at Broadridge, which processes proxy votes. Among more than 14,000 directors, just 1.3 percent failed to win a majority of votes in 2010, barely changed from 1 percent in 2009, before broker voting was prohibited. On average, support for director candidates was actually higher in the 2010 proxy season without votes from brokerage firms (93 percent in favor) than in the 2009 proxy season with the broker vote (92.5 percent in favor).
“The amendment of Rule 452 had a fairly minimal impact for the 2010 proxy season,” says Claudia Allen, chair of the corporate governance practice in the law firm Neal Gerber & Eisenberg. “The data doesn't indicate that broker voting had kept a lot of directors in office who otherwise wouldn't have been there.”
The change, in effect since Jan. 1, 2010, characterized all director elections as “non-routine,” meaning broker votes wouldn't be allowed, since brokerage firms can only cast votes on uninstructed shares for “routine” shareholder proposals. Previously, in uncontested elections, brokers could vote shares held in street name if they didn't receive instructions from share owners 10 days before the annual meeting. Historically, most uninstructed shares were voted in favor of management. Critics who lobbied for the change said broker votes distorted election outcomes, and essentially stuffed the ballot box in management's favor. Opponents of the change feared that it would result in more withhold votes and lead to rampant turnover of corporate directors.
Other factors in play last year likely blunted the impact of the change. First, many brokerages were already casting broker votes on a proportional basis to reflect the overall vote, rather than voting them all in favor of management. Just under half of uninstructed broker votes Broadridge processed during the 2009 proxy season were reported on a proportional basis. Second, market conditions improved in 2010, which generally means less investor discontent. Many companies also eliminated or amended practices that had been touchstones for withhold or against votes, Allen says.
A separate corporate governance report by Georgeson, which tracks S&P 1500 companies that hold their annual meeting in the first six months of the year, also shows an overall decline in director opposition. Among those companies, 565 directors received withhold or against votes of 20 percent or greater, down from 786 in 2009. The number of directors who received majority withhold/against votes dropped to 41 directors at 24 companies, a decrease of more than 48 percent from the 79 who got majority withhold votes in 2009. Georgeson estimates 15 of the 41 directors would've received majority support if broker discretionary votes all in favor of management had applied.
“Our main concern now is that broker votes aren't completely taken away. That would result in a lot of smaller companies unable to reach quorum or not achieving quorum until the last minute.”
—John Endean,
President,
American Business Conference
Among Russell 3,000 companies, 95 directors failed to win majority support, essentially flat from 2009, according to the Council of Institutional Investors (CII). However, the rule change wasn't completely benign. Those directors lost an average of 5.4 percentage points of reported support due to the change, says Glenn Davis, CII senior research associate. If broker non-votes had been treated as votes cast in favor, he says 40 of the 95 would've been deemed to receive “majority support.”
Although the change to Rule 452 didn't result in the explosion of majority withhold votes some had feared, Davis says the real impact of the change has been increased communication. He says companies are clarifying their appeals for support and engaging more with shareowners, which should have long-term positive effects for issuers and investors. “Everyone understands that broker non-votes aren't going to pad the results anymore, so there's more attention being paid to shoring up support and getting out the vote,” he says.
Quorum Quibbles
One area where broker votes do have a negative effect is quorum, says Callan. Average quorum decreased to 83.4 percent from 85.7 percent last season, Broadridge reports. Companies achieved quorum later, and the smallest companies barely attained quorum even with broker votes, which are still allowed for “routine” items, such as auditor ratification. “The change to Rule 452 created more uncertainty for issuers last year,” he says. “We had many more [quorum] status inquiries and more information requests from issuers last year. Some companies that might've utilized notice and access told us it wasn't the right time to experiment.”
One unknown is whether broker votes will be disallowed for any other ballot items. Beyond director elections, Section 957 of the Dodd-Frank Act required national securities exchanges to eliminate broker votes for matters related to executive compensation, including advisory shareholder say-on-pay votes, as well as any other “significant matter” as determined by the Securities and Exchange Commission. “Our main concern now is that broker votes aren't completely taken away,” says John Endean, president of the American Business Conference, which represents small and mid-sized companies. “That would result in lot of smaller companies unable to reach quorum or not achieving quorum until the last minute.”
VOTE RETURN ANALYSIS
The following chart from Broadridge analyzes vote returns by ballot size during the proxy season:
Source: Broadridge.
Endean, who opposed the change to Rule 452, says there's little proof that broker votes were the “thumb on the scale” that critics claimed they were. “I haven't seen any evidence that votes are more accurate or that the environment for corporate governance has improved as a result of the change,” he says. A problem that remains unsolved is how to improve the low voting rates among retail shareholders. “The SEC should be focusing on finding other ways, such as client-directed voting, to increase the retail shareholder vote,” says Endean.
Another objection raised when the rule amendment was announced in 2009 was that the change to Rule 452 shouldn't be made alone without broader reform of the proxy process. To address that concern, the SEC promised to undertake a broader study of issuer-shareholder communications and other issues related to proxy voting mechanics. The Commission published a “proxy plumbing” concept release last July to solicit comment on possible reforms, but hasn't taken action yet on that release.
With another relatively good year for stock-market returns in 2010, this upcoming proxy season is expected to be similar to last year, without large percentages of withheld or against votes for directors. Even without the padding previously provided by broker voting.
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