The Securities and Exchange Commission, by a 3-to-2 vote along party lines, today approved an important amendment to NYSE Rule 452, which governs discretionary voting by brokers of shares held in street name when beneficial owners have not instructed how such shares should be voted. The amendment makes uncontested director elections (except those at registered investment companies) non-routine matters under the rule, so brokers will no longer be able to vote in favor of management’s slate without instruction from customers.
NYSE Rule 452 governs all brokers. Consequently, this amendment will affect all public companies that have shares held in street name, not just NYSE-listed companies.
This amendment, which will apply to proxy voting for shareholder meetings held on or after January 1, 2010, may have a significant effect on director elections, especially at companies with a large percentage of retail beneficial owners of shares held in street name. Public companies with a substantial percentage of shares held in street name may no longer count on those shares routinely being voted in favor of management’s slate by brokers. As a result:
Vote “no” or “withhold” campaigns led by institutional investors will no longer be offset by a large block of broker discretionary votes in favor of management’s slate. Voting recommendations to institutional investors by proxy advisory firms, such as RiskMetrics Group and Glass Lewis, may consequently be expected to have even greater influence once the revised rule goes into effect.
Companies with majority-voting bylaws or policies may have to work much harder to ensure election of management’s slate.
Companies that do not currently include another routine matter in their annual proxy, such as ratification of auditors, may wish to begin doing so to help ensure a quorum at their annual meetings.
Companies that have experienced lower levels of proxy voting as a result of implementing notice-and-access e-proxy distribution will closely analyze whether to return to full-set delivery to help make up for loss of broker discretionary voting.
Most public companies with substantial percentages of shares held in street name will be working closely in coming months with their proxy solicitation advisers to assess the possible impact of the Rule 452 amendment and to identify and implement strategies aimed at eliciting voting instructions to brokers from more beneficial owners of street name shares. The ability of companies to elicit greater levels of voting instructions from beneficial owners may depend in part on possible SEC reconsideration of the current NOBO-OBO rules, which govern broker obligations to reveal the identity of beneficial owners and thereby facilitate company communications with them.
The amendment to NYSE Rule 452 is the latest in a long line of recent developments relating to election of corporate directors.
In May, the SEC proposed changes to its proxy rules that would, in general, require public companies to include candidates nominated by shareholders in the company’s proxy materials and put them to a vote at company expense. Final action on this proposal is expected before the end of 2009.
Delaware’s legislature has adopted (effective August 1) amendments to its corporation statute clarifying the validity of shareholder-adopted bylaws requiring shareholder access to the company proxy statement for inclusion of non-management nominees or reimbursement by the company of expenses incurred by shareholders who run a separate proxy solicitation in support of those candidates. Similar amendments are underway for the Model Business Corporation Act, which serves as the template for corporation statutes in most other states.
These changes come on top of a campaign by activist shareholders over the last several years to convince public companies to adopt majority voting for directors instead of the previously prevailing plurality-voting system (in which negative votes had no real effect). Today, two-thirds of S&P 500 companies have adopted some form of majority voting for election of directors (according to lawyer Claudia Allen’s Study of Majority Voting in Director Elections).
The full impact of today’s NYSE Rule 452 amendment will depend on the success of strategies public companies and their proxy solicitation advisers devise to cope with it and of promised NYSE or SEC initiatives to educate retail investors about the importance of voting instructions. It will also depend on further SEC reform initiatives relating to the NOBO-OBO rules, “over” and “empty” voting and other so-called “proxy plumbing” problems. Given the uncertainty surrounding these reforms, it is too early to predict the full extent to which the absence of broker discretionary voting in uncontested elections will contribute to reshaping the corporate-governance balance of power with respect to director elections.