SEC approves elimination of discretionary broker voting for directors and proposes (more) enhanced proxy disclosure

By Cydney Posner

At an open meeting this morning, the SEC voted to propose amendments to rules under the Securities Act and the Exchange Act designed to enhance the required disclosures about compensation and other corporate governance matters, and to clarify certain of the rules governing proxy solicitations. The SEC also approved, with two dissents, amendments to NYSE Rule 452 and corresponding Listed Company Manual Section 402.08 to eliminate discretionary voting by brokers in the election of directors. When available, the SEC's press release will certainly provide more detailed disclosure regarding today's actions.

SEC Chair Schapiro has been signaling the SEC's intentions regarding enhanced proxy disclosure through numerous interviews and speeches, so little of it comes as a surprise. (See posts on 4/6/09 and 5/4/09.) While all of the commissioners enthusiastically embraced the enhanced disclosure proposal, Schapiro did repeat concerns expressed by investors that proxy statements are in danger of becoming unreadable because they are "packed" with so much information. (Of course, looking at the bright side of that statement, you might be heartened to learn that any shareholder even looks at the proxy statement enough to reach that conclusion.) Then Schapiro invoked that favorite bromide that the SEC wants better disclosure, not just more disclosure and urged commenters to "focus on whether the right information is being disclosed in the right way, not just on adding to an already weighty document," and to let the SEC know to "the extent any item of current disclosure is unnecessary."

The proposed enhanced disclosure requirements include:

• In CD&A, discussion of the relationship between a company's risk profile and its compensation policy and practices regarding all employees generally, if it could be material to the company. The SEC is not looking for general statements about risk or compensation policies, but rather a targeted discussion specific to the particular company (of course). New Director of Corp Fin Meredith Cross, in response to a question from Commissioner Walter, noted that, for NEOs, this type of disclosure, if material, is already required in CD&A.
• In the Summary Comp Table, disclosure of the aggregate grant date fair value for options under FAS 123R (or whatever it's called now under the FASB Codification), marking a return to the original proposal.
• Under S-K 401, expanded discussion of the qualifications of directors and nominees, including disclosure of the experience and skills that qualify that person to serve as a director and, where applicable, as a committee member, disclosure of any directorships held during the past five years (not just current directorships) and extension of the requirement to disclose "bad boy" legal proceedings from the past five years to the past 10 years. Commissioner Aguilar noted that the proposal also requests comment on disclosure related to Board diversity.
• Under S-K 407, a discussion of why the company's leadership structure is the best structure for the company, such as the reasons why the company has separated or combined the positions of CEO and Board Chair or why the Board has a lead independent director, as well as a discussion of the Board's role in risk management and its effect on the leadership structure.
• Enhanced discussion of the use of compensation consultants and potential conflicts of interest, including fee disclosure, other services provided and the source of the recommendation of the consultant.
• Acceleration of the announcement of shareholder meeting voting results by requiring an 8-K to report the results within four business days after the meeting.

The SEC also proposed changes to some of the rules related to proxy solicitations, in some cases codifying staff positions, including:

• Rule 14a-2(b) regarding exempt solicitations, a clarification that an unmarked proxy is not a form of revocation and that a "substantial interest' may be present even if the person is not a shareholder;
• Rule 14a-4(d), a change to provide that a soliciting person may round out a short slate with other short slates, not just management nominees;
• Rule 14a-4(e), a clarification of conditions under which proxies will be voted; and
• Rule 14a-12 regarding pre-proxy solicitations, a clarification that information regarding the identity of the soliciting persons must be included in the filed soliciting materials.

The only controversy at the meeting, and it was mild at that, revolved around approval of changes to NYSE Rule 452. Rule 452 allows a broker to vote in his discretion on "routine" proposals if the beneficial owner of the shares has not provided specific voting instructions to the broker at least 10 days before a scheduled meeting. Brokers may not vote without instruction on matters determined to be non-routine. "Non-routine" matters are generally those involving a contest or a matter that may substantially affect the rights or privileges of shareholders, such as mergers or shareholder proposals. Among the matters defined as "routine" under the current Rule is an "uncontested" election for a company's board of directors. However, as part of the "shareholder democracy" movement, a number of shareholder activists have conducted "just vote no" campaigns, which, under NYSE rules, do not involve competing solicitations and, therefore, have not been viewed by the NYSE as election "contests" for purposes of Rule 452. This position has led to much consternation among shareholder activists because brokers typically vote in accordance with the board's recommendations and, as a result, they often vote in favor of routine proposals and director candidates. In some cases, concerns have been raised that discretionary broker votes have been responsible for the difference between winning and losing vote-no campaigns. More recently, the democratic impulse has influenced a number of brokerage firms to adopt other policies aimed at a more representative vote, for example by requiring that broker discretion be exercised by voting in proportion to the votes cast by stockholders. As discussed in the email copied below, in June 2006, the NYSE Proxy Working Group recommended, among other things, that the election of directors no longer be viewed as routine under Rule 452, which would preclude brokers from casting discretionary votes in the election of directors. In response to that recommendation, the NYSE proposed changes to Rule 452 three years ago, but the proposal has been repeatedly delayed. Today, with the admonition by Chair Schapiro that "keeping hard decisions on hold indefinitely does not solve problems," the SEC approved the rules changes, with dissenting votes by Commissioners Casey and Paredes. The rule change will be effective for shareholders' meetings held on or after January 1, 2010. (Note that this rule would apply to NYSE member brokers and, therefore, would generally affect all issuers, no matter where listed.)

The main concern expressed by both of the dissenters was less a disagreement with the underlying principal (at least with regard to Commissioner Casey), so much as a concern that the SEC needed to take a more "holistic" approach to this issue, addressing the whole bundle of issues related to "proxy plumbing," including OBO/NOBO lists, "empty' voting and other related matters. Further, to adopt this rule change now in the absence of consideration of a wider group of reforms could result in more influence by institutional voters and proxy solicitors and "suppress the voice of retail voters" (hmmm, even though the rule kicks in only when they don't vote), especially in light of the reduced incidence of retail voting under e-proxy, added expense for issuers that may now need to engage proxy solicitors, and potential difficulty for issuers in establishing quorums at shareholder meetings. In addition, the concern was expressed that, because companies that have adopted "majority vote" policies or bylaws will undoubtedly find it more of a challenge to elect their directors, especially those that have in the past received significant "withhold" votes, the rule change may dampen the movement toward majority voting.

The staff and other commissioners countered that the elimination of discretionary voting was designed to address issues regarding the accountability and responsiveness of public companies and their boards of directors to the interests of shareholders, reflected most fundamentally through the director election process. In addition, while it was important to perform a comprehensive assessment of proxy issues, nothing in the adoption of the proposal would impede the SEC from undertaking that review, which appears to be in process. With regard to "logistics" issues, such as quorum requirements, the staff suggested that the quorum issue could be easily addressed by companies' simply adding a routine proposal to the agenda, such as a proposal to ratify auditors. To the concern that institutions and special interests would unfairly dominate voting, the staff responded that the concern was outweighed by the importance of having a vote by those with an economic interest in the companies. Finally, director Cross dismissed the suggestion that the rule change would discourage any trend toward adoption of majority voting; in her view "the push is to have those with an interest in the shares vote." Because the proposal involves approval of an NYSE rule, no cost/benefit analysis was performed; however, the staff believed that there may be some initial cost involved with proxy solicitors and investor education efforts. Everyone expressed great interest in ensuring that the SEC also engaged in investor education.

The SEC also voted to propose amendments to the proxy rules requiring TARP recipients to include an advisory shareholder vote on executive compensation. This proposal implements the related legislation and is designed to eliminate uncertainty about the responsibility of recipients to provide for an advisory vote. No significant additional disclosure was specified.

The SEC's issued a press release on today's open meeting.

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