Changes to Voting in Director Elections

While we continue to monitor all of the regulations and rule changes proposed by the SEC as well as the different and overlapping versions of legislation proposed in Congress, we know that at least one rule proposal has been approved and will be in effect on January 1, 2010.

New York Stock Exchange Rule 452 will be amended to prohibit brokers from voting shares of shareholders holding their shares in “street name” in all director elections without specific voting instructions from the shareholder. Brokers have historically had discretion to vote uninstructed shares in uncontested elections and have almost always cast them in favor of management’s director nominees. This change applies to both NYSE and Nasdaq-listed companies.

We advise that mid and small-cap companies, which tend to have more retail shareholders, take a more proactive approach to their voting processes in the upcoming proxy season. To assess the impact of the loss of broker discretionary votes on the overall number of votes that will be cast, a company can look at the number of votes cast with respect to a recent non-discretionary proposal and compare that with the number of votes cast in the director election at the same annual meeting.

The vote change can have the most significant effect on a company’s ability to obtain a quorum of shareholders present at the meeting and on the director vote for a company requiring a majority vote for directors. Because shares that brokers do not vote are not considered present at the meeting for quorum purposes, all companies should make sure that at least one agenda item (i.e. ratification of accountants) may be voted on by brokers without specific voting instructions in order to assure a quorum. Also, losing the broker discretionary vote will mean increased influence from institutional shareholders, making it important for companies to know whether any of their directors are vulnerable to “vote no” or “withhold vote” campaigns and the extent to which their institutional shareholders follow the voting policies of proxy advisory firms such as RiskMetrics Group and Glass Lewis.


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