Be Afraid, Be Very Afraid - Preparing for the Elimination of Broker Discretionary Voting
As described previously, on July 1, 2009, the SEC approved by a 3-2 vote an amendment to New York Stock Exchange Rule 452 to eliminate broker discretionary voting in uncontested elections of directors. Of all the recent proposals (see the ON Securities Cheat Sheet), this was the first to be adopted, and this change may have the biggest practical impact on corporate governance for most companies. The rule change is effective for shareholder meetings held on or after January 1, 2010, and it is likely to make it more difficult to get affirmative votes in favor of management's slate of directors.
So for management of a public company, is this your worst nightmare? Maybe it's a little early to start screaming. But at the very least, it's not too early to do some advance planning to avoid surprises for the board. And for the in-house attorneys I work with, it's always a good idea to avoid surprises for the board. Or you WILL have something to scream about.
So what should a company do to prepare? Georgeson, a leading proxy solicitation firm, recently did a good explanation of the possible impact of the amendment, including three main tips:
- Analyze - run some numbers to determine the possible impact of the amendment on your next election, including the possible impact of factors that might lead proxy advisory firms like ISS/RiskMetrics to recommend a vote against the incumbents.
- Communicate - develop a communication plan to educate retail investors on the importance of voting and a last-minute "get out the vote" campaign, just in case.
- Prepare - develop a damage control plan in case of a large percentage of negative votes (or a failed election, in the case of a company that has adopted majority voting for directors).
I talked to one in-house attorney who has started to run analyses of historical vote patterns to predict how the next election will come out. What is your company doing? And how much impact do you think the amendment to the broker voting rules will have? Post a comment below or send me an e-mail.
I would note that this amendment applies to all public companies, not just New York Stock Exchange-listed companies. Also, as a director of a public company, I can confirm that the elimination of broker discretionary voting is a big deal. We all need to plan for it.
The amendment to Rule 452 will no doubt require companies to increase solicitation efforts, especially if they have a large percentage of retail shareholders or have majority voting requirements for director elections. Also, companies that have previously relied on broker discretionary voting to establish a quorum for the conduct of business may want to make sure and include a matter that is still “routine” under amended Rule 452 (e.g., ratification of auditors) in the agenda for their annual meetings.