The 2008 proxy season will see continued tension between corporations and shareholders over the election of directors, friction caused by the Securities and Exchange Commission’s rejection of easier proxy access for shareholders, and its indecisiveness on broker voting of proxies.
The SEC voted 3-1 on Nov. 28 to deny proxy access to shareholders by allowing corporations to omit shareholder proposals seeking to use corporate proxy materials to nominate directors. On another director-election issue, the SEC has yet to take any action on a New York Stock Exchange proposal to ban broker discretionary voting of uninstructed custodial shares in uncontested elections for directors.
So on these two issues, the SEC not only continues to prohibit shareholders from using corporate proxy materials to nominate directors, but also continues to make it difficult for shareholders to unseat unresponsive directors at companies that have adopted a majority-vote standard for elections of board members.
Thus, shareholders can’t easily nominate directors, nor easily muster enough votes to remove a director. The status quo on director elections appears likely to reign in the 2008 proxy season.
Shareholders have no adequate recourse for either situation. To nominate directors, they will have to engage in proxy contests, which can incur hefty costs communicating a nomination to other shareholders. To unseat directors, shareholders will have to overcome dependable blocks of broker votes for management candidates.
Having stiffed shareholders on the proxy access issue, Christopher Cox and the other two commissioners who carried the vote should at least move forward to adopt the NYSE proposals prohibiting the discretionary broker voting in director elections as soon as possible.
NYSE executives won’t comment on the SEC delay of the broker-voting proposal but must be disappointed about the inaction. In a letter to listed companies, the NYSE noted, “It was our intention to have the rule change in place and effective by Jan. 1, 2008. Based on recent conversations with SEC staff members, however, we learned that our proposed rule filing is being considered by the commission as part of a broader range of issues relating to shareholder communications and proxy access. As a result, our rule filing will not be approved for the 2008 proxy season.”
An SEC spokesman said the commission hasn’t disclosed the reason for the delay on the NYSE proposal. The NYSE submitted the broker proposal in 2006. The SEC has yet to even put forth a proposed rule on the issue and seek public comment.
The NYSE recognized a need to update its rule on broker voting of uninstructed shares, noting in its proposal, “the goal of the NYSE has been to not allow the broker to vote on any proposal that substantially affects the rights and privileges of stockholders,”
The current rule for counting broker votes has tipped close votes in director elections in favor of management, such as earlier this year in the election of Roger L. Headrick as director of CVS/Caremark Corp., who won with a 43% vote against him. His election margin was believed to be cast by the broker votes, according to William B. Patterson, executive director of CtW Investment Group, which led a successful effort seeking Mr. Headrick’s resignation.
Pension funds and other shareholder activists must urge the SEC to act soon on broker voting.
The SEC has demonstrated with its inaction since it first proposed a proxy access rule in 2003 that it won’t advance an initiative on the issue without intense pressure.
The SEC last July proposed new proxy access proposals in reaction to a 2006 Court of Appeals ruling in lawsuit by the $850 million American Federation of State, County and Municipal Employees staff pension plan, Washington. That ruling allowed for introduction of proxy access shareholder proposals. The SEC closed off that ability with its November decision.
Pension funds need to keep the pressure on Mr. Cox to keep his promise to reopen proxy access in 2008. The AFSCME fund could file proxy access proposals at corporations for the 2008 proxy season and file suits to challenge omissions based on the SEC’s new rule. The SEC should draft a new proxy access proposal suitable to the whole shareholder community, including individual shareholders, and adopt it for the 2009 proxy season.
Because of resignations, the SEC will have two new commissioners next year, who by law can’t be Republicans. This will tilt the balance on the five-member commission, now dominated by three Republicans, in favor of Mr. Cox, if he truly wants to give shareholders more say in director elections.
Pension funds and other activist investors should urge Senate Democrats to give President Bush their choices soon for nominees supportive of expanding shareholder rights, including proxy access and ending broker voting for directors.
Sadly, the SEC has been out of touch with the concerns of shareholders and the NYSE, all of whom seek to improve corporate governance.
