No More Broker Discretionary Voting for Directors

On July 1, 2009 the SEC voted 3-2 to amend NYSE Rule 452 eliminating brokers’ ability to vote for company directors at shareholder meetings without specific instructions from the underlying shareholder, for meetings beginning in 2010.   The premise for this change is director elections, even when uncontested, are not the “routine matters” they were once thought to be.

In the wake of the severe economic recession seen on a world scale over the past 18 months (and continuing), voting for individuals who will oversee corporate management is now considered anything but a ho-hum process.   This rule amendment was therefore not unexpected, but that does not dilute its significance.   The act of electing a director was once considered a “no-brainer,” not only because brokers could exercise their right to vote discretionarily when not instructed by the shareholder (and did so in favor of management’s director nominees 99.9% of the time), but also because the criterion for election was usually a simple “plurality” of votes cast, not a majority of votes cast as is increasingly the case these days.

Ramifications of this Rule 452 amendment will include:

  • Obviously, more attention by boards on the quality of who they nominate in the first place
  • More focus on potentially disqualifying attributes of candidates in the eyes of proxy advisory groups, like a nominee already serving on enough boards (let alone too many)
  • If it is a compensation committee director re-nomination, even more focus on how compensation has been awarded to company management in the past year
  • More use of proxy solicitors by management to “bring in the vote” that, again, used to happen “routinely”
  • More instances of a director not achieving the necessary majority of votes cast, and thus having to tender his/her resignation pending acceptance of that resignation by the board

We should also highlight a significant point about this rule amendment which is what it did not involve:  doing away with Rule 452 entirely.   That means annual proposals like ratification of the company’s independent public accountants will continue to be considered “routine,” and brokers can continue to vote for them automatically 10 days prior to the shareholder meeting in the absence of the shareholder’s specific instruction.   Most important, Rule 452 can continue to produce enough votes to ensure that companies likely achieve quorum for their annual and special shareholder meetings – a big concern when an amendment to 452 was first contemplated.*   So, by limiting the amendment to the most compelling issue on the table (director nominations), the SEC can be seen as righting the ship during a political storm, without overly rocking the boat.   We therefore think the amendment will be widely, if not universally, accepted.

* Having said this, if there are no other routine proposals on the ballot, like auditing firm ratification, where a broker can vote discretionarily, then reaching quorum may in fact be a challenge.