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Feature

John Endean
President
American Business Conference

Endangered: The Individual Shareholder Vote
A new mechanism is needed to capture and record your individual holders’ preferences on important voting matters. Such a mechanism is at hand.

By John Endean

Notice and Access, a signature achievement of the Securities and Exchange Commission under chairman Christopher Cox, permits companies to use the Internet to deliver their proxy materials to shareholders electronically. The notice and access rules have saved companies and, therefore, their shareholders, millions of dollars in print and postage costs, while sparing thousands of trees from being pulped for proxies each year.

But, there has been a downside.

Electronic delivery seems to have suppressed the voting of shares held by individuals in brokerage accounts — so-called retail shares — in corporate elections. According to the latest data, issuers using notice and access found on average that less than 17% of their retail shares were cast in their elections. The prior year, before notice and access, these same issuers had a participation rate of a little over 34%.

Thirty-four percent of total retail shares is bad enough; half that amount is abysmal. It translates into a muted voice for individual shareholders when compared to the power of institutional investors, who typically must vote the shares they hold.

And it deprives smaller companies, whose stock tends to be disproportionately owned by individuals, of the savings promised by notice and access. What smaller issuers might save through electronic delivery is counterbalanced by what they would have to spend to round up their retail vote through expensive solicitation efforts.

A Diminished Interpretation of ‘Routine’
For decades, the proxy system has partially compensated for the low voting rate of individual shareholders with something called the broker vote. Under that rule, if individual shareholders choose not to vote, their brokers may vote their shares, but only on routine matters. Over the years, the number of issues considered routine has been whittled to three: establishment of quorum for the annual meeting, the appointment of an auditor, and the election of directors if those elections are uncontested.

Because of its narrow application to a few routine matters, the broker vote is not equal to the challenge posed by the low rate of individual shareholder voting under notice and access. A new mechanism is needed — and soon — to address the problem, or, as both SEC Commissioners Luis Aguilar and Elisse Walter have recently warned, notice and access, for all of its benefits, could be scrapped.

Fortunately, a mechanism is at hand, thanks to Stephen Norman, the corporate secretary of American Express Co. and something of an eminence grise on corporate governance matters.

A Directive ‘On All Matters’
Norman has suggested a new instrument, Client Directed Voting (CDV). Under CDV, investors would give their brokers general instructions on how they wanted their shares cast on all matters, routine and not routine. For illustrative purposes, Norman has suggested five options, including:

— always voting as management recommends;
— always voting against management recommendations;
— abstaining on all matters;
— voting according to the brokerage firm’s voting policies; or,
— voting shares in proportion to the way the brokerage’s other clients have voted their shares.

If investors did not declare a preference, the default choice would be proportional voting.

Unlike the broker vote, CDV gives brokers a record of client preferences they would follow each proxy season if the client chooses not to vote his or her shares. Clients could change them as they saw fit. Moreover, and this is the main point, if they vote, clients could vote as they wish; CDV would not apply.

CDV is merely a mechanism that would capture and record shareholder preferences when shareholders themselves, for whatever reason, do not vote.

CDV is analogous to the voting procedures commonly followed by institutional investors via a proxy advisory service. Through prearrangement, an advisory service can automatically cast an institutional client’s shares according to the client’s guidelines or those established by the service itself. It is hard to see how this procedure is any different from CDV. In both cases, the individual shareholder and the institution always have the option of voting as they see fit.

Conceptually Elegant
Client Directed Voting presents a conceptually elegant way to reap the efficiencies of Notice and Access without forcing companies, particularly smaller firms, to spend money chasing retail votes. It would raise the profile of the individual investor within the corporate governance community. Finally, it would serve to remind individual shareholders — in a way the broker vote does not — that their stock ownership comes with a right to vote.

Perhaps knowing this, they might be encouraged to learn to access proxy statements on the Internet, look a little more closely at what those statements contain, and vote their shares themselves.

John Endean is president of the American Business Conference, a coalition of CEOs of midsized American companies founded by Arthur Levitt Jr. in 1981.

He can be contacted at jendean@americanbusinessconference.org.