By:  Cydney Posner

Quoting from a Dow Jones Newswire article, Corporate Counsel is reporting that an NYSE committee has decided to recommend that the NYSE amend its rules to prohibit brokers from voting in director elections in the absence of instruction from beneficial owners. Any rule change adopted by the NYSE would require SEC approval.

Under the current rules (which govern essentially all brokers in voting matters, even with respect to Nasdaq-listed companies), when shareholders do not provide voting instructions, brokers are still allowed to vote shares held in street name on all matters that are determined to be "routine." In most cases, the NYSE considers director elections to be routine. Brokers regularly vote in favor of routine proposals and director candidates and, as a result, they typically vote with management.

With the rise in shareholder activism, particularly in connection with the election of directors, this practice has come under scrutiny. Activist investors view the practice as one that can affect the outcome of elections. Corporate counsel cites the example of the election of Michael Eisner to the Disney Board, in which 45% of the votes were "withheld"; however, hundreds of millions of votes were cast in favor of Eisner by brokers who did not receive instructions from the beneficial owners of the shares. Without the broker vote, a majority of votes cast would have been withheld. (Although, in the end, the result was the same, in that Eisner was ultimately forced to relinquish his seat.)

Apparently, brokers will still be permitted to vote on other routine matters, such as auditor ratifications; however, the concept of brokers' voting in the absence of shareholder instruction will be the subject of further evaluation. In the past, counting of broker votes has been critical in many instances in allowing companies to achieve a quorum.

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