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August 10, 2009 01:00 AM

Mum on a recount

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    Roger Schillerstrom

    Something mysterious happened during proxy-vote counting at Waddell & Reed Financial Inc.: A preliminary tally on a non-binding say-on-pay proposal at the company's April 8 annual meeting changed from 50.6% in favor to 48.5% by the time the company filed its 10-Q report on July 28.

    Shareholders have been kept in the dark about the change in the outcome, or any proxy-voting problems. Only shareholders who heard the preliminary result announced at the meeting and then read the recent 10-Q would be aware of the discrepancy. And they would be left to wonder because the 10-Q gave no information about any problem, only the final number.

    Not surprisingly, Waddell & Reed management opposed the shareholder resolution proposed by Boston Common Asset Management. In its proxy statement, Waddell & Reed officials wrote: “While the company supports the goal of giving stockholders the opportunity to provide feedback related to executive compensation, the board believes that direct communication with stockholders is a much more effective and accurate method of expressing support or criticism of our” pay practices.” The company said a “say-on-pay” vote would not provide clear guidance to management, nor would it be in the “best interests of the company or our stockholders.” Rather, such a vote could hurt the company's ability to attractive and retain top executives, the proxy said.

    That's all well and good, but if the company is so keen on maintaining communications with its shareholders, then why has Waddell & Reed management been so reluctant to share information on the change in the proxy vote?

    The only detailed public information from the company came in a Delaware Chancery Court filing.

    On May 15, Waddell & Reed petitioned the court to count 3,260,788 votes that had been omitted in the counting by Broadridge Financial Solutions Inc., a company that tabulates the proxy votes of the most U.S. companies, including Waddell & Reed. The omission was caused by a “technological error” in the transmission to Broadridge by RiskMetrics Group, a company used by investors to submit their proxy votes electronically, according to the petition.

    The “omitted votes affected the outcome of the proposal,” the petition states. Of the omitted votes, 3,257,879 were no votes, while only 2,909 were yes votes.

    Georgeson Inc., a proxy solicitation company retained by Waddell & Reed to track the voting, noticed the omission. That led to the ensuing petition to the court, which allowed the votes to be counted.

    Waddell & Reed, RiskMetrics and Georgeson officials either declined to comment or couldn't be reached.

    The problem occurred through no one's apparent fault. Georgeson and Waddell & Reed deserve credit for making sure omitted votes were counted.

    But Waddell & Reed's handling of the matter without informing shareholders leaves a bad taste. It shows the lengths to which a company will go to avoid communicating with a huge block of its shareholders that have expressed a deep sentiment about a serious corporate governance matter.

    While every vote should be counted, the petition gives no information on whether Waddell & Reed sought a canvass to see if other votes also were omitted in error. If not, it should have.

    In addition, Waddell & Reed should have informed shareholders of the problems. Proxy voting is a matter of increasing concern for shareholders, as it is the only way for them to directly influence corporate governance and change policies and practices they deem harmful to the financial performance of the company, such as misaligned pay packages.

    Because every vote deserves to be counted, investors need to know when problems occur, why and what can be done to improve the integrity of the process and the power and rights of shareholders.

    Investors must be able to trust the integrity of the process. Academic research, as well as that sponsored by RiskMetrics, has shown better corporate governance can improve shareholder return of corporations.

    The lack of disclosure shows an unwillingness on the part of Waddell & Reed to engage shareholder concerns. The firm should know better, because its business is money management, and representing the interests of investors with corporations.

    The proposal was non-binding. Even if 100% of the votes were in favor, Waddell & Reed has no obligation to implement the pro posal. Indeed, after the preliminary majority vote in favor, Waddell & Reed informed Boston Common it would not discuss the issue.

    The best that can be said is that Waddell & Reed went to great lengths to include the omitted votes just to reduce any pressure to adopt a non-binding shareholder voice on pay. A similar proposal sponsored by BCAM achieved 49.5% of the vote last year, and achieved a similar lack of response from Waddell & Reed regarding a discussion with concerned shareholders.

    The unwillingness of Waddell & Reed, and some other companies, to communicate with shareholders, both in the proxy-voting process and discussion on corporate governance issues, is a bigger problem than vote-counting errors, and tougher to remedy.

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