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August 26, 2008 01:00 AM

Institutional investors chafe under power of big shareholder vote counter

Red flags fly after Broadridge miscounts Yahoo CEO poll

Nicholas Rummell
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    An embarrassing vote-counting error revealed after Yahoo Inc.’s high-profile annual shareholder meeting earlier this month has renewed concerns about the way investor votes are tabulated in the U.S. — and raised questions about the company with a near-monopoly on the business of processing shareholder votes: Broadridge Financial Solutions Inc.

    A printing error led most Yahoo shareholders to believe embattled CEO Jerry Yang had received the support of 85% of shareholders, when in fact a recount revealed only 66% supported him. After Broadridge was notified of the glitch, it fixed it within minutes, according to the company, but news of the slipup raised more than a few eyebrows. Indeed, if executives at a large hedge fund hadn’t made a stink after the 85% figure was released, the error might not have been noticed at all.

    Some big investors have noticed, though. “We believe the system needs to be carefully inspected to determine what other errors could occur and increase transparency,” the Florida State Board of Administration, Tallahassee, said in a statement. “We hope the Yahoo voting error was an anomaly, but without further ability to confirm the votes cast, investors and companies are left without recourse.”

    Chuck Callan, senior vice president of regulatory affairs at Lake Success, N.Y.-based Broadridge, said the mistake reflected a confluence of highly unusual factors, including one large shareholder submitting a huge number of dissenting votes for a single nominee. As a result, the eight digits typically allotted for tallies of dissenting shareholder votes were not enough to catch the total votes cast against Mr. Yang.

    No similar errors have occurred in the last five years at Broadridge, Mr. Callan insisted, adding the company has taken steps to ensure similar slipups are avoided.

    Nevertheless, several corporate governance and investor relations experts say they’ve been burned by Broadridge in the past.

    “What we have now doesn’t work,” observed Meagan Thompson-Mann, a visiting research fellow at Yale University’s Millstein Center for Corporate Governance, who authored a paper in June criticizing the company and calling for a public commission on proxy modernization. “You sit at a desk, you press a button, and you put a lot of faith in Broadridge. (But) a lot of times these problems aren’t caught.”

    When she served as corporate governance counsel at the Railways Pension Trustee Co. Ltd., London, from 2003 to 2007, Ms. Thompson-Mann said, Broadridge mistakenly stated the U.K. fund could vote shares on loan to other parties, even though regulations there forbade it.

    Other critics, including New York University professor Marcel Kahan and University of Pennsylvania professor Edward Rock, say Broadridge has too much power in the U.S. In an August 2007 paper, the duo said Broadridge is “an accident waiting to happen” and suggested it be removed “from its position as the key, monopolistic actor at the center of the spider web,” noting the firm has “a very profitable business” and would likely “oppose any substantial reform.”

    Big investors seem to have complaints, too. At a February voting standards round table convened by the Millstein Center and attended by institutional investors, several participants reportedly complained that Broadridge did not have a good way to verify how votes are cast.

    Officials at the Council of Institutional Investors declined to comment for this story, as did executives at the $232.4 billion California Public Employees’ Retirement System, Sacramento, both of which sent representatives to the February event. But a Florida pension official described how Broadridge had mistakenly split the votes from that state’s fund, even though the fund always voted its shares unanimously, alleging that Broadridge was unable to verify the votes and explain how the problem occurred.

    No comment on 'anecdotes'

    Broadridge declined to respond to what it called “anecdotes.” Mr. Callan said a steering committee that includes institutional investors and corporate issuers regularly audits the company’s processes and regulatory compliance. The Securities and Exchange Commission and the New York Stock Exchange also meet with the company about once a year to discuss issues and examine some of its processes.

    According to Broadridge, a survey completed in June found nearly all of a random sample of some 6% of its institutional investor clients rated its service good, very good or excellent. An NYSE working group two years ago also stated that ADP Inc. (Broadridge’s predecessor company, which spun off Broadridge last year as its own public company) was “viewed by the institutional community as impartial, reliable and efficiently administered.”

    Still, many experts say few transfer agents and brokers that verify votes for investors do much better than Broadridge, and note that the proxy voting system itself is broken, riddled with loopholes that allow over- and undervoting

    “Broadridge has done a lot to clear away obstacles, but it’s a system that’s jerry-rigged,” said Stephen Davis, director of the Millstein Center and principal at governance consultant Davis Global Advisors, Madison, Conn. “There are problems that are built into the system…. (And) outside the United States, the inaccuracies and failures are much greater.”

    With the rise of activist investors and more votes being made public — the mutual fund industry in recent years has been required to disclose many votes, and other institutional investors often do as well — the vote-counting system has clearly improved but has not yet evolved, said Patrick McGurn, special counsel at RiskMetrics Group Inc., New York, a proxy advisory firm that competes with Broadridge in Europe but uses the company in the U.S.

    The initial undercount at Yahoo was probably an isolated incident, but instances of votes cast but not recorded are not rare, Mr. McGurn said. “There’s plenty of room for slippage.”

    He suggested the SEC or another regulator step in to oversee how proxies are voted. However, many industry experts say the SEC has tied the issues of broker voting, overvoting and other quirks to the larger — and more contentious — issue of shareholder access to proxies. — Financial Week, a sister publication of Pensions & Investments

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