Currently, New York Stock Exchange Rule 452, the so-called “10 day broker vote rule,” permits members of the NYSE to execute and return proxy statements with respect to “routine” shareholder proposals if the broker does not receive voting instructions from the stock’s beneficial owner at least 10 days before a scheduled meeting. Among the other matters that the current NYSE Rule 452 considers routine is an “uncontested” election of a company’s board of directors. Rule 452.11(2) defines a “contest” as a matter that “is the subject of a counter-solicitation, or is part of a proposal made by a stockholder which is being opposed by management.” In recent years, an increase in the number of new types of proxy campaigns, including “just vote no” campaigns, has caused critics to question the current definition of a “contested” election. Under the existing rule, such types of proxy campaigns are not considered “contests” and broker votes are counted. As a result, critics argue, the efforts of shareholders to express disapproval of key board actions are diluted.
In April 2005, the NYSE created the Proxy Working Group (PWG) to review the NYSE rules regulating the proxy voting process. In June 2006, the PWG recommended the adoption of an amendment to Rule 452 which would eliminate discretionary voting by brokers on director elections. In its 2006 report, the PWG cited the critical importance of shareholder voting for the election of directors and ultimately recommended that the election of directors be changed from a “routine” to a “non-routine” event. The NYSE solicited and received nearly 50 responses from various interested parties, whose reactions to the proposed change varied across industry lines. Many of those concerned with the amendment argued that certain entities relied on broker votes for purposes of meeting their quorum requirements at uncontested elections. On October 24, 2006, the NYSE filed an amendment to Rule 452 with the Securities and Exchange Commission to implement the recommendation of the PWG to classify the election of directors as a “non-routine” matter. Once implemented, the revised rule would include the election of directors among its 18 other “non-routine” matters, and broker votes would no longer be counted. The NYSE filing proposes that amended Rule 452 would apply to proxy voting for shareholder meetings held on or after January 1, 2008, except to the extent that a meeting was originally scheduled to be held in 2007 but was properly adjourned to 2008.
The proposal was not without its critics. The Investment Company Institute (ICI), for example, argued that the proposed amendment would make it very difficult for mutual fund companies to achieve a quorum at special meetings, resulting in dramatically increased costs and unnecessary delay in the election of directors. The PWG’s consideration of materials submitted by ICI and by other representatives of registered investment companies led to a Rule 452 amendment with the proposed additional change, which was submitted to the SEC for final approval on May 23, 2007. As currently proposed, the amendment to Rule 452 would still add “the election of directors” to the list of “non-routine” matters, but would provide for an express exception for companies that are registered under the Investment Company Act of 1940. The PWG ultimately concluded that these entities were unique from other operating companies in that they are already subject to strict director voting rules under the Investment Company Act.
A corporate governance officer of a Fortune 100 Company (and former member of the NYSE Proxy Working Group) devised what he contends is a superior approach to avoid the potential pitfalls of proxy voting. The concept is known as Client Directed Voting (CDV) and would give retail shareholders the opportunity to pre-select their voting preferences at the time they enter into the brokerage agreement. Shareholders would be given choices within their brokerage contracts; if the shareholder failed to specify a choice, that shareholder’s holdings would be voted proportionally with the brokerage firm’s other clients who voted on the matter in question. It is proposed that shareholders who choose this option would be able to designate voting for or against the recommendations of management, abstain completely, or in accordance with the brokerage firm’s customary voting procedures. Under CDV, shareholders would be given choices on all matters, both routine and non-routine. Proponents of CDV argue that the use of CDV would alleviate quorum concerns, while at the same time ensuring that any given vote is conducted fairly and in a cost-effective manner, since issuers would no longer be forced to spend time and money tracking down votes. CDV remains merely a concept and has yet to be implemented.