Storm Clouds Gather over Director Elections--Buckle-Up! The Trip is Likely to Get Bumpy
Domenick de Robertis, Senior Managing Director, and Reid Pearson, Managing Director and Corporate Governance Practice Co-Leader
In response to the recent decision by the SEC to approve the elimination of broker discretionary voting authority on the election of directors at annual meetings after January 1, 2010, NYSE Rule 452 is front and center on the minds of many in the proxy and governance arena.
The amendment to Rule 452 will be the end of the “stuffing of the ballot box” for the election of directors that some shareholders have long complained about. The question now is to what extent will the change impact the ability of corporations to get their directors re-elected each year? In addition, what should corporations and their advisors be thinking about?
Assessing the Risk
Since the July announcement of the change, The Altman Group has completed numerous analyses for corporate issuers projecting the voting impact from the amended NYSE Rule 452. We will share our findings in the next issue of the Governance & Proxy Review and answer some practical questions that a company should consider in preparing for what is likely to be the toughest proxy season in history.
Strategies to Consider When Counteracting the Loss in Broker Voting
Historical statistics show that approximately 25 to 35 percent of the retail shareholder base will respond by voting without being prompted. The variance in response rates is tied to a number of factors, such as stock price (higher apathy with lower priced stocks) and the distribution of shareholdings (are there a lot of odd-lot holders, for example).
As we pointed out in our comment letters to the SEC, (Comment Letter - March 27, 2009 ) (Comment Letter - May 23, 2007 ) (Comment Letter - July 14, 2006)small-cap issuers are likely to bear the brunt of the burden placed on Corporate America by this change. Any issuer with a heavy retail base is likely to incur additional solicitation costs. There is no magic bullet for getting retail holders to vote. Issuers will need to consider the costs, necessity and effectiveness of follow-up mailings and phone solicitation to unvoted holders.
Companies that are at least moderately held by institutional investors have their own set of challenges with the loss of the broker vote. First and foremost a company must understand its vulnerability to a withhold/against vote campaign by activist institutions or a withhold/against vote recommendation from any of the proxy advisory firms. These negative votes will now have a magnified impact given the loss of the broker vote. Problematic issues to consider include directors with poor attendance, non-independent members on key committees (shareholder definitions of independence are typically more rigid than the exchange listing requirements), perceived lack of overall independence, poor compensation practices, or any combination of the above.
It is generally advisable to have an understanding of the RiskMetrics Group (RMG) policy on uncontested director elections. RMG has a fairly extensive list of instances where they may recommend an against or withhold vote on a Board, committee, or individual director(s). Given that RMG can often influence 25 percent or more of a company’s shares, understanding their policy is extremely important. Depending on who the top institutions are, companies may need to also consider the policies of Glass Lewis, even though their guidelines are a bit less transparent, or PROXYGovernance, which tends to be more case-by-case than the other firms and takes factors such as the specific company’s performance and governance practices into account.
The Storm of Other Director Related Issues
In another time, the loss of the broker vote on directors may not have been so alarming. But we believe the change at this point in time has very serious implications for many issuers in light of recent developments, ongoing problems, and other major changes now looming on the horizon:
- The greatly reduced vote response from individual holders at companies using Notice & Access.
- The majority vote standard as a replacement for plurality voting in director elections is becoming more commonplace, and may become a requirement in the not so distant future.
- The rise of “Just Vote No” campaigns by activist institutions targeting certain nominees. We expect these to increase as these investors hold Boards accountable for the current market morass. Consequently, we expect an increased likelihood of success for these campaigns. What would have happened to the directors up for election at Washington Mutual’s 2008 annual meeting without the broker vote? Without the benefit of these shares, we believe at least four of the director nominees who were elected would not have received sufficient votes.
- While the votes for directors are driven down, will hedge fund activists continue to spot weak companies to target? Companies that traditionally receive large against or withhold votes are ripe targets for activists.
- Along with the understanding that the power of proxy advisory firms will be amplified once broker voting goes away, it is also becoming very clear that more and more institutions are adhering strictly to the RMG or Glass Lewis recommendations.
- Finally, Proxy Access, if adopted, should be a concern for all companies, not just those with large retail holdings. Stay tuned, we will be addressing this issue in detail in the near future here in the TAG Governance & Proxy Review.
All of these evolving issues have turned the proxy voting world on its head, and companies need to be prepared. As these issues continue to develop, The Altman Group hopes, as stated in previous issues of this newsletter, that regulators will consider the following:
- What happened to the educating investors to vote initiative? When the NYSE Proxy Working Group’s recommendation on the broker vote was released in October 2006, it stated there would be an education process for investors on the voting process.
- The SEC needs to address other “proxy plumbing” issues first before finalizing any further decisions that burden companies. These issues include empty voting, over-voting, share lending, and the antiquated OBO/NOBO standard, which limits the company’s ability to communicate with its shareholders.
In a speech yesterday, SEC Chair Shapiro commented, “While I have long supported these amendments, I also recognize that eliminating broker non-votes in director elections, along with the potential for proxy access in the 2010 proxy season, will place a greater spotlight on some of the long-smoldering concerns about the mechanics of the proxy voting process within the United States. I have committed to looking at these additional issues — including OBO/NOBOS and the role of proxy advisory and voting services — in the next few months”
Interesting times indeed.