June 7, 2006

NYSE’s Proxy Working Group Recommends Elimination of Broker Voting for Director Elections

Last week, the NYSE’s Proxy Working Group unanimously adopted six recommendations embodied in this Final Report and Recommendations. As I blogged last month, the principal recommendation is the one that would amend the NYSE’s Rule 452 (commonly known as the 10-day broker voting rule) to make director elections a non-routine matter. This means that brokers would no longer be permitted to vote the shares of beneficial owners who do not provide specific voting instructions within 10 days of the close of proxy voting. As many of you know, brokers typically side with the board and management when they vote for directors. Here is a related article from BusinessWeek.

Coupled with hedge fund activism, this could mean that directors who are subject to withheld votes will find it much more difficult to obtain a majority vote. Add in the growing majority vote movement and this is a whole new ballgame folks! It is not hard to find director elections this year where directors received a majority vote- but would not have done so if this rule had been effective.

I predicted as much for the recent Home Depot election. Consider how high the level of withhold votes was there without the extended media and Web campaign that took place at Disney a few years ago. Wake up and smell the coffee Mrs. Bueller, the playing field is shifting all around us! The NYSE wants the SEC to approve the rule change so it can be effective for the 2007 proxy season! Better lock in your favorite proxy solicitor now because demand is gonna be sky high!

Thankfully, the Proxy Working Group rejected the idea of totally eliminating broker voting, recognizing that it plays an important role in allowing companies to achieve a quorum for regular meetings.

The six recommendations from the Proxy Working Group are:

1. The elimination of discretionary broker votes for director elections by amending the NYSE’s Rule 452.

2. The SEC’s review of the OBO-NOBO rule to make it easier for companies to communicate with their street-name shareholders.

3. The NYSE’s engagement of an independent party to analyze and make recommendations to the SEC regarding the structure and amount of fees paid to ADP.

4. The SEC’s study of the role of groups like ISS and Glass Lewis that impact the voting decisions over shares in which they have no ownership and no economic interest. The Proxy Working Group believes that there is the potential for conflicts of interest and/or other issues given the multiple roles that such groups play in the proxy season.

5. The NYSE’s taking a lead role in efforts to educate investors about the proxy voting framework.

6. The NYSE’s monitoring of the impact of amending Rule 452 to make director elections a “non-routine” matter.

The NYSE Staff seeks comments by the end of June – it will share these comments with the SEC. After reviewing these comments, the NYSE Board will consider them and any proposed rule changes will then be filed with the SEC so that the SEC can then directly solicit additional public comment. So for those of you worried about the tight window period for commenting now, recognize that the public will have two opportunities to comment. Lots more to come on these groundbreaking recommendations!

Study on Investor Attitudes

As part of the NYSE’s Proxy Working Group process, they had this Investor Attitudes Study prepared by the Opinion Research Corporation to gain a better understanding of investors’ knowledge of the existing proxy voting process.

No surprise that the study results show that investors generally are confused about proxy mechanics since so few of us professionals fully understand how it all works. In fact, I was floored that 25% of the respondents understood that their brokers get to vote in their place if they didn’t respond. My guess is that no more than 5% of shareholders would have understood that…