Preparing for Broker Vote Change

The elimination of broker votes in director elections may well tip the scales of power from corporate boards to shareholders. Companies should prepare now so they won’t be left dizzy by the rule change.

The Securities and Exchange Commission ended the practice of “broker voting” in director elections this summer, a move that may prove to be the most important development in shareholder activism in more than a decade, Rachel Posner, general counsel at proxy solicitation firm Georgeson, said in recent Webcast on the topic.

Historically, broker-dealers were allowed to vote as they saw fit in uncontested director elections when clients hadn’t provided the firms with any instructions—and typically the firms then rubber-stamped whatever management recommended. Now, starting Jan. 1, such votes will be prohibited, leaving shareholder activists that much more influential.

“The increased risk for a failed director election in the wake of the elimination of the broker vote, particularly for a company with majority voting in place, is obvious,” Posner said during the Oct. 15 Webcast. “The results are staggering.” In 2008, for example, 16.5 percent of shares were voted by brokers exercising discretionary voting, according to Broadridge Financial Solutions.

Posner encouraged senior executives and board members to speak with their transfer agents and proxy solicitors, to determine the best way reach retail investors (who own an easy majority of outstanding shares in the United States) and maximize their participation. In today’s world of online notice-and-access for proxy materials, reaching that audience will not be easy.

“Depending on the circumstances of your director election, you may need to budget for additional costs relating to follow-up mailings and telephone solicitations of retail investors,” advised Bradley Finkelstein of the law firm Wilson Sonsini Goodrich & Rosati.

An outreach campaign targeted at retail shareholders can help defuse the potential shortfall in director support, Posner said. Don’t discount the old-fashioned telephone; such solicitation calls to larger retail investors can be a useful tactic to drum up votes. Generally, telephone campaigns encourage shareholders to vote and direct the shareholder to record votes by phone, she said. “While call campaigns may not by themselves result in a huge turnout, they can provide that swing vote that results in the successful director election, even in a close vote.”

Posner

Posner also urged companies to alert shareholders to the rule change itself—perhaps with catchy reminders in proxy packages or on investor-relations websites—so they know that their votes are more valuable now. “We would recommend that in the initial post-broker voting year, companies plan on including eye-catching informative inserts that alert voters to the change,” she said. Keep in mind, she added, that it will take time before educational efforts get shareholders in the habit of voting in greater numbers.

Companies should also take care to develop a response plan in the wake of a failed director election, Posner advised, such as removing a inside director from serving on a key board committee.

“It’s important for everyone to work with their PR firm and their proxy solicitation firms to communicate” that response, Posner said. Filing a press release or additional definitive proxy materials, or putting a letter to shareholders in a Form 8-K are all ways to achieve this, she said.

What Now?

The exact effect that the rule change will have will vary from company to company depending on numerous factors, such as the composition of a company’s shareholder base. For example, Finkelstein said, companies should know what percentage of their shareholders are institutional or retail investors, and which institutions have long- or short-term investment strategies.

Experts cited several other key factors to watch, including:

Historical voting patterns and shareholder participation;

Agenda items likely to be addressed in future annual meetings, and how those proposals may affect the ability to achieve quorum to conduct business of the meeting;

The likelihood of brokers adopting “client-directed” voting, where the client gives standing instructions on the broker on how to vote in director elections and other issues;

The corporate governance profile of the company, especially as it pertains to shareholder activism or the chance that a proxy advisory firm will recommend against a director’s election.

Companies should also analyze the effect of broker voting on past director elections, to gauge how its end might affect future ones, Posner said. “Certainly taking a forward-looking approach as well as a backward approach will be helpful.”

Companies would also do well to heed past issues and board actions that have resulted in recommendations against director nominees. Such issues include, among others:

Failure to adopt shareholders proposals that have been approved by company’s shareholders;

Any perceived lack of independence of a board or key committee;

Certain compensation practices such as re-pricing options, tax gross-ups or poor pay-for-performance practices;

Directors serving on too many boards;

Failure of directors to attend at least 75 percent of board meetings; and

Adoption of a shareholder-rights plan without shareholder approval.

“The biggest threats are withhold campaigns,” Posner said. “We recommend that companies re-evaluate their position on a wide array of governance issues and practices, and to at least consider modification of certain practices or adoption of best practices in order to avoid either failed director elections or high opposition votes that would create credibility and public relations problems.”

Tonello

And one easy step to keep broker votes around: since brokers can still vote uninstructed shared on other, “routine” items on the meeting agenda (such as ratifying the choice of external auditor), ensure that at least one such routine item is on the agenda for every meeting, says Matteo Tonello, the Conference Board’s associate director of corporate governance.

Tonello says companies should also regularly communicate with their 10 largest institutional shareholders to inform them on the business strategy, including new efforts for improving shareholder value.

Said Posner: “Companies with largely institutional ownership have little trouble with quorum issues, and their focus should be on the successful election of directors.”