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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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April 28, 2008 12:01 AM ET
The controversial practice of broker voting is once again in the spotlight, thanks to Washington Mutual's highly contentious annual shareholder meeting earlier this month. In the days leading up to the gathering in Seattle, an investor group looking to unseat some WaMu directors for their alleged failure to oversee subprime-related risk and align executive pay with performance pressed the company to exclude so-called broker votes, those cast by brokers on behalf of shareholders who choose not to weigh in on the director elections. Their argument: Brokers typically side with management when voting proxies, thus giving an unfair advantage to incumbent directors. Their worries were warranted, given the election results. None of WaMu's 13 directors received a majority of no votes, although shareholders withheld 40% or more of all votes from two of them—HR committee members James Stever and Charles Lillis. A third director, Mary Pugh, who leads WaMu's finance committee, resigned after getting just 50% of votes in favor. CTW Investment Group, the union-backed assemblage leading the campaign to shake up WaMu's board, argued that without the broker votes, both Mr. Lillis and Mr. Stever would have failed to snag a majority of shareholder votes. Last year, the group said, broker votes counted for 19% of the votes cast in WaMu's 2007 director election. Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees, agreed that the inclusion of broker votes distorted the election results. “A 40% withhold vote is high enough that both Stever and Lillis would not be elected if the process were not distorted by the ballot stuffing due to broker votes.” Indeed, while more than two-thirds of S&P 500 companies have adopted majority voting—thus giving shareholders the ability to remove directors who fail to receive a majority of “yea” votes—broker voting strips much of that shareholder power away. Depending on the level of retail ownership in a company, governance experts estimate that these “phantom” votes can provide management with a handicap of up to 20% in elections. Last May, the New York Stock Exchange submitted a final proposal to amend the broker-vote rule, known as Rule 452, to prevent brokers from voting in place of shareholders in director elections. While exchange officials had expected to have the rule change in place at the start of this year, the Securities and Exchange Commission never approved it (a September e-mail from the Big Board's parent, NYSE Euronext, to member companies said the agency was now considering the change as part of a “broader range of issues relating to shareholder communications and proxy access”). SEC spokesman John Nester said the regulator was “still working on the issue with the New York Stock Exchange” but declined to comment on when, or if, the change will take place. CTW is demanding that the SEC act quickly to approve the NYSE proposal. In a testy letter dated April 17 to SEC chairman Christopher Cox, the group said it found the agency's pace of action on the broker voting issue “puzzling,” since Mr. Cox testified last summer before the House Financial Services Committee that the SEC would approve the change in time for the 2008 proxy season. “With rising levels of shareholder opposition to directors in uncontested elections, it is essential that you take prompt action on this matter before shareholders are disenfranchised yet again,” the group wrote. Claudia Allen, a partner at law firm Neal Gerber & Eisenberg, said one of the alternatives to changing Rule 452 currently being considered is “proportional” voting, in which a broker would vote uninstructed shares in the proportion that other shares have been voted. For example, if 80% of the votes cast were in favor of electing a director, a broker would vote 80% of its uninstructed shares in support. Last year, the Securities Industry and Financial Markets Association asked their member brokers to consider a form of proportional voting that is based solely on retail votes. In March, three large brokers—Merrill Lynch, Goldman Sachs and Morgan Stanley—agreed to adopt proportional voting, limited to shares held on behalf of retail clients. “I don't think any of us would be terribly surprised to see proportional voting as an ultimate solution from the SEC,” said Ms. Allen. Another alternative is what's called client-directed voting, which was recently floated by Steve Norman, corporate secretary at financial services firm American Express. Under this proposal, when investors sign their brokerage agreements, they could instruct the broker how to vote in the event that a proxy is not returned. Ms. Allen said it's unlikely the SEC will take any action on Rule 452 before 2009, when the agency again has a full staff (it is currently down two commissioners, and all three serving members are Republicans). “I think they have to be at full strength to address this issue.” In the meantime, it remains to be seen whether any companies will voluntarily choose to exclude broker votes in their election tallies. Last summer, Roger Headrick resigned from the board of CVS Caremark despite being re-elected with 57.2% of the total votes cast; CTW claimed he only won 43% of the votes once 264 million “phantom” votes were eliminated. As for WaMu, it responded to the criticism over broker votes cast at its shareholder meeting in a statement, noting that “while there have been proposals to change this system, the SEC has not approved any rule changes” and that all votes at its annual meeting were “validly cast and will be honored.” FW
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