The New York Stock Exchange said last week that it would no longer allow brokers to vote shares whose owners had not provided instructions for company proxy measures dealing with governance. The move may make it harder for companies to win approval for such measures as declassifying the board of directors and adopting majority voting for director elections.
The restriction follows the exchange's 2010 prohibition against brokers voting such uninstructed shares in director elections, a change that at the time raised concerns that companies might fail to achieve quorum at their annual meetings. In fact, though, most companies were still able to achieve quorum on such plain-vanilla measures as ratification of the company auditor.
Steven Pantina, a managing director at proxy solicitation firm Georgeson, says "north of 95%" of companies ask shareholders to vote on the ratification of auditors. Since the NYSE continues to allow brokers to vote on such proposals, "the application of the rule generally won't have an effect on companies attaining quorum," he says.
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Where the move could have an impact, Pantina says, is on companies' efforts to make governance changes, such as eliminating a classified board structure or moving to a majority vote for director elections, which often require amendments to the company's charter or certificate of incorporation. "Oftentimes charter amendments have much higher voting requirements for approval," he says. "In many cases, it's a majority of outstanding shares. But there are instances where it will require two-thirds, three-quarters or even up to 80% to amend the charter."
To the extent that companies have a large component of retail investors, the elimination of broker votes on governance measures "will require additional solicitation to achieve the requisite vote," Pantina says.
Matthew Gilman, a partner in the Boston office of law firm Pepper Hamilton, agrees that barring uninstructed broker votes could prove a challenge for companies trying to make governance changes.
"Whenever there's an unusual proposal on the ballot, companies would be well advised to use a proxy solicitation firm," Gilman says. "Companies need to really get to know their stockholders better, communicate with them better, get them more engaged in being a stockholder, so that they're more willing to exercise their right to vote, as opposed to sitting back and not doing anything."
He notes that many investors seem to ignore the electronic versions of proxy materials and suggests that companies that need to win support for governance measures try providing shareholders with traditional paper versions of the materials.
Gilman sees the NYSE move as perplexing.
"A lot of times these corporate governance measures could be viewed as being beneficial to the company and the stockholders," he says, citing the example of eliminating potential anti-takeover measures. "And now it's possible it could be harder to get those measures approved, when they could be beneficial to shareholders."
For a look at companies' efforts to bolster voting by investors, see Getting Out the Proxy Vote.
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Susan Kelly
Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.
