The importance of broker voting policies
Financial Week published an excellent article last month about the impact of the “broker vote” on shareholder activist campaigns. Many retail investors don’t realize this, but when you fail to send in your voting instructions, your broker votes on your behalf. In the past, brokers cast these “uninstructed” votes for management, which tends to stack the deck against shareholder activists. But changes are afoot that will have an effect on voting results and, by extension, board behavior.
One proposal that has been discussed by the NYSE is to exclude broker votes on director nominations. Broker votes are already excluded for the most part on shareholder proposals, but the rules allow them on “routine” matters. Director nominations have been classified as routine, and thus broker votes have ben included. But a proposed rule change released by the NYSE in 2006 would reclassify director nominations as non-routine, which would exclude broker votes. The change has yet to be approved by the SEC.
Meanwhile, brokers are making changes that may obviate the need for restrictions on the use of broker votes. Brokers have traditionally voted uninstructed shares on management’s side, but there was no rule requiring that they do so. A few brokers (I believe Schwab was the first) have adopted “proportional voting” instead, which means that the uninstructed shares are cast to reflect the sentiment of the instructed shares. In other words, if the Schwab clients who vote cast their shares 75%-25% in favor of a director, all Schwab clients’ shares will be voted 75%-25% in favor of that director. The FinancialWeek article tells us that three more big brokers — Merrill Lynch, Goldman Sachs and Morgan Stanley — adopted proportional voting in March of this year. According to sources in that article, the SEC may eventually require brokers to use this system.
Proportional voting greatly amplifies the voting power of individual investors who actually vote. If 20% of retail investors vote, as has been the case in recent years, your vote is worth 5 times as much under proportional voting as it would be otherwise. (This is assuming that turnout is not correlated with holdings among retail investors.) Proportional voting makes it even more important that retail investors cast an informed vote, which is where ProxyDemocracy is trying to help.
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