The big news this proxy season is the SEC’s vote to prohibit brokers from discretionary voting of stock the firm holds for their clients, in Board Elections. Shareholder Advocates see this as a hard won victory that has been in the works since 2006. Corporations worry that the new rule will be disruptive to the functioning of Corporate Boards and the Proxy Process. For many years there has been a fight brewing with large activist shareholders and corporations. Corporations have been mostly successful in keeping shareholder activists’ candidates out of the Proxy and off of the Director Slate. Campaigns to change the rules have mostly been unsuccessful. With the SEC approving the amendment to NYSE Rule 452, the activist groups may have achieved their goal in a roundabout way.
A.) What does this new rule mean to a CFO? In most companies the CFO is ultimately responsible for all SEC filings, including making sure that the proxy is mailed out to shareholders on time for the Annual Board Meeting. This process has been getting easier with the advent of e-Proxy Voting. In the past, the proxy votes were tallied to see if there was a quorum to elect the typically unopposed slate of Directors. With the success of blocking non-management nominees from the slate, the activist shareholders were left with two choices: (1) Wage an expensive legal battle or (2) Vote no or withhold votes for the proposed slate. Voting No or withholding votes most of the time did not effectuate change. Brokers typically cast their clients’ votes with management. It was not their job to be activists. Therefore, the corporation was able to fairly easily reach a quorum for their chosen slate.
With the amendment of NYSE Rule 452, corporations may not be able to get a quorum as easily as before when activist shareholders choose to vote no or withhold votes. Corporations can no longer depend on the Brokers to be the deciding vote and the votes used to reach a majority quorum. CFOs may have to start to budget more money to send out more notices to garner shareholder votes in order to reach a quorum. It could be a very expensive exercise. Complicating this issue is the new access to E-Proxy voting. It is cheaper for the company but so far shareholder voting has not gone up but instead has gone down with the transition to E-Proxy Voting.
B.) What does this new rule mean to a CFO? Numbers, Numbers, Numbers. Now all shareholders will be holding management more accountable on a quarter to quarter basis. Management may be in the untenable situation of being afraid to carryout good long term strategic plans because in the short term the plan does not produce immediate results or has a temporary negative impact due to implementation costs.
C.) What does this new rule mean to a CFO? On the positive side, CFOs who have been in the position of having to tell the CEO and Board of Directors….NO, now have a powerful ally in the shareholders.
For a good summary of how the Amendment to NYSE Rule 452 may affect your corporation read: Willkie, Farr, & Gallagher, LLP: Discretionary Voting by Brokers Prohibited in Director Elections
Read the SEC Announcement at http://edgar.sec.gov/rules/sro/nyseamex/2010/34-61292.pdf