from Third Quarter 2009
Corporate Board Member
by Julie Connelly
The election of directors, once pretty much a breeze for anyone the nominating committee chose to put on the ballot, has become a lot less certain. Not only has plurality voting given way to majority voting at more than two-thirds of the Standard & Poor’s 500 companies, but management has lost its ace in the hole, the uninstructed broker vote. Until now, brokerage firms holding shares on behalf of their retail clients were able to vote those shares as they liked if the investors didn’t instruct them otherwise on which nominees to support, which many didn’t.
In July the Securities and Exchange Commission approved the New York Stock Exchange’s proposed amendment to its Rule 452, which would declare uncontested director elections nonroutine events at both NYSE and NASDAQ companies. And that, notes Larry Sonsini of Wilson Sonsini Goodrich & Rosati in Palo Alto, California, chairman of the NYSE’s Proxy Working Group, which has been reviewing the entire proxy-voting process, would effectively exclude broker votes from the election tally because “the election of directors is not a routine matter.”
As long as directors were elected by plurality, the broker vote hardly mattered. But “in the light of majority voting, not every election is a foregone conclusion,” says attorney Claudia Allen, a partner at Neal Gerber & Eisenberg in Chicago and chair of the firm’s corporate practice group. That’s because the volume of votes cast by brokers customarily accounts for nearly 20% of the total, according to Broadridge Financial Solutions, a proxy-processing firm. In fact, the percentage of individual shareholders who don’t vote their shares after receiving proxy materials from their brokers is even higher, about 66%. And brokers holding those shares almost always vote heavily in support of management, the board, and their board nominees.
Some board elections would have had dramatically different outcomes if the new rule had been in effect during the 2009 proxy season. Consider Citigroup, which elects its directors by majority. The American Federation of State, County and Municipal Employees urged shareholders to vote against two members of the audit and risk-management committee who were up for reelection— C. Michael Armstrong, 70, former chairman and CEO of AT&T, and MIT professor John Deutch, 71—arguing that they had failed to understand the risks the bank was taking in its subprime-mortgages and derivatives businesses. The two were handily reelected, but only with the help of the 1,732,444,835 broker votes each received. Take away those votes and neither got a majority: Armstrong was opposed by 54.8% of the shareholders who voted, and Deutch by 51.2%. In other words, neither would have been elected. “You need 50% in order to continue to serve,” says Mike McCauley, senior officer for investment programs and governance at the State Board of Administration of Florida, which manages the Florida Retirement System, an organization that also opposed the two directors’ reelection. “With less than that, you are not representative of what the shareholders want.”
The change in Rule 452 means that shareholder activists will have much more influence on director elections. For one thing, outfits like RiskMetrics Group and Glass Lewis & Co. hold enormous sway over many institutional investors and in effect have voting muscle where large blocs of shares are concerned. The change may also hold companies hostage to raiders, since shares controlled by the likes of Carl Icahn are significantly more powerful with management-supporting brokers out of the voting picture.
So individual boards will need to make sure their companies become more adept at communicating to retail shareholders that voting is important and that the directors who are being nominated deserve to be elected. Simplifying the byzantine proxy-solicitation process is an important next step. Sonsini’s working group is already pushing for this. “You can’t just stop with Rule 452,” he says. “Shareholder education and access to the proxy, and companies’ access to shareholders, should all be reviewed and revised.”