Uninstructed votes cast by brokers in board elections have been a growing flashpoint between directors and investors, with the Securities and Exchange Commission caught in the middle. So far, the SEC has been unwilling to strip brokers of the role, despite pressure to act not just from shareholders but from the NYSE Euronext and others. After dragging its feet for nearly two years, the SEC, now with a full slate of commissioners, has been quietly working on a compromise that’s likely to leave no one happy.
As much as 85 percent of all shares in U.S. public companies are held in “street name,” meaning they are held of record in bank or brokerage accounts for the ultimate owners. NYSE rules allow brokers to decide how to vote shares on “routine” proxy proposals—including uncontested director elections—if the owner hasn’t provided voting instructions at least 10 days before a scheduled meeting. Experts estimate that brokers typically vote about 20 percent of street-name shares.
Council of Institutional Investors (CII) and other shareholder advocates argue that since brokers almost always side with the management slate, the broker vote is akin to stuffing the ballot box. After much argument, CII convinced the NYSE to join the fight. In the fall of 2006, the NYSE submitted a plan that would redefine director elections as “non-routine,” which, in effect, would eliminate the broker vote.
The SEC hasn’t responded, although Chairman Christopher Cox and staffers have said repeatedly that the agency intends to deal with the matter.
The clear implication is that the SEC is considering this so-called “mirror voting” approach as an alternative to the wholesale elimination of the broker vote.
The issue has become all the more important over the past two years due to the spread of majority voting rules. Today some twothirds of S&P 500 companies have adopted such a standard, which means many more directors now could lose their posts if they can’t count on the 20-percent broker vote.
Behind the scenes, the SEC has been moving toward a compromise solution. In a May exchange of letters with CII, the Commission said it was waiting to hear from the NYSE’s Proxy Working Group about an effort several major brokerage firms made in 2007 to vote the uninstructed shares of their customers in proportion to actual votes received from retail customers. The clear implication is that the SEC is considering this so-called “mirror voting” approach as an alternative to the wholesale elimination of the broker vote.
While mirror voting has plenty of supporters, CII is currently not one of them. It argues that it won’t stop the abuse, since management or friendly outside investors would still be free to transfer their shares into broker accounts and amplify their voting power. The Council argues that if shareholders don’t vote their shares, they shouldn’t be voted by anyone else, no matter what method is used.
Despite the objections of CII, now that the Commission is back to full strength, it seems likely that, at the very least, the mirror voting compromise will be on the table.