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Keeping Pace: NYSE Rule 452: How to Prepare for the Loss of Broker Discretionary Voting in the Election of Directors and be Successful in a Volatile Governance World
July 2009
With the Securities and Exchange Commission adoption of the amendment to New York Stock Exchange Rule 452 comes a fundamental shift in the treatment of an uncontested Election of Directors from a discretionary to a non-discretionary proposal. Brokerage firms, which previously could vote uninstructed shares in their discretion on the election of directors, will be required to vote only shares for which they receive instructions from their beneficial owners. The impact of this rule change which will not be in effect until the January, 2010 will vary depending upon a company’s retail ownership; however, when considered in combination with the movement toward eliminating classified boards, adopting majority vote standards in the election of directors, and distributing proxy materials electronically, one fact is indisputable – the Election of Directors has fundamentally changed. For every company, the future will bring far greater prospects for shareholder activism, with even more influence held by institutions and their proxy advisory firms.
As we look ahead to 2010, we encourage you to keep two thoughts in mind:
The “Routine” Annual Meeting is Becoming a Distant Memory For any remaining proxy sentimentalists or wishful thinkers, gone are the days when proxy statements weighed 50% less, quorums were achieved two weeks earlier, and most directors received support from 98% of the votes cast and questions arose when one nominee garnered only 96%. The new landscape of majority vote standards, say on pay, and proxy access (yes, it is coming too) makes every director election a potential challenge, whether or not an activist shareholder is coalescing opposition – the system, itself, is now structured to facilitate an activist agenda even without a specific catalyst. In many cases, a much lower level of opposition will be required to prevent a director from being re-elected or to compel a director to resign – without a costly opposition campaign or extraordinary effort to quash the broker discretionary vote.
The Approach to Electing Directors Must Change To be successful in this environment requires a year-round strategy focused on engagement with institutional investors, profile management, and board education. The ever-growing number of triggers for director opposition – from poor attendance records, to the unilateral adoption of a shareholder rights plan, to approving executive agreements with tax gross-ups – exposes every company to the possibility of a contentious board election. Reacting to shareholder activism is far less effective than proactively addressing issues and engaging investors before the activism takes hold. Now is the time to evaluate your board’s exposure, consider solicitation strategies, develop relationships, and educate directors.
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