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15 Jul. 2010 | Comments (0)

With more than 600 billion shares being voted electronically at more than 13,000 shareholder meetings every year and the growing practice of share lending and the proliferation of short selling by hedge funds, it’s no wonder the so-called “proxy plumbing” is getting “clogged.” But when you consider that shareholders are about to be granted more power than ever, the need for a more accurate and transparent proxy system becomes paramount. It’s hard to imagine that such a complex system as the proxy voting infrastructure has been operating under rules from the 1980s. That’s the justification for the SEC’s 5-0 vote Wednesday to issue  a concept release on making changes to that system, as SEC Chair Mary Schapiro spelled out in a July 9 speech in Chicago at the annual meeting of the Society of Corporate Secretaries and Governance Professionals. [Read Schapiro’s prepared text and watch her comments during the July 14 SEC open meeting.] To get a good idea of just how much the proxy voting system has changed in the past three decades, consider the quick history lesson that Alan L. Beller, a partner at Cleary Gottlieb Steen & Hamilton LLP, related at the Society’s meeting last week. “It got to a point [about 25 years ago] that [actual paper] shares were immobilized and stored in a depository because companies couldn’t keep up with the volume of shares sold on Wall Street,” Beller said. “They had actual runners who used steam trunks to deliver the shares to brokerage houses. Needless to say, that caused lots of inaccuracies.” Even with high technology to keep track of and transmit virtual shares of stock, there are still quite a lot of inaccuracies and a lack of transparency in today’s markets. Thus, the need for some new rules. The concept release, which is the first step toward the SEC issuing new rules, is broken down into three areas:
  • Accuracy, transparency, and efficiency of the voting process
  • Communications and shareholder participation
  • Relationship between voting power and economic interest.
The 151-page release deals with such specific matters as:
  • Over-voting and under-voting
  • Vote confirmation
  • Proxy voting by institutional securities lenders
  • Proxy distribution fees
  • Issuers’ ability to communicate with beneficial owners of securities (objecting beneficial owners vs. non-objecting beneficial owners – see Council of Institutional Investors white paper on the OBO/NOBO distinctions)
  • Potential means to facilitate retail investor voting participation
  • Data tagging proxy-related materials
  • Role of proxy advisory firms (possible conflicts of interest)
  • Dual record dates
  • Empty voting (decoupling of voting rights from economic interest in shares)
One of the early public comment letters depicted a good example of what is wrong with the proxy voting system, although the incident involved a French company listed on the Paris Stock Exchange. Guy P. Wyser-Pratte, president of  the institutional investment manager and broker-dealer Wyser-Pratte Management Co., described how possibly thousands of shares in Lagardere SCA, a media and aerospace company, were not properly transmitted during that company’s annual general meeting in April. He wrote: “I proposed two  resolutions for inclusion on the proxy statement of  Lagardere SCA. In view of the contested nature of this shareholder meeting, I took great care to electronically vote a portion of our shares, and to be present myself with an admission card and vote in person the remainder of our shares for this AGM. The electronically voted shares were duly transmitted by the usual process, via the custodians of the shares of my clients in the United States. “But on the day of the AGM [annual meeting], upon arriving for the actual vote, held in Paris on April 27, 2010, I was informed by a representative of Arlis BNP Paribas, the official registrar for the shareholder vote, approximately 5 minutes before the start of the general meeting, that an important number of my electronically transmitted votes were not taken into consideration -and were thus not registered for ‘technical reasons.’” To read his full letter, click here. To send a letter to the SEC during the 90-day comment period, click here.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin


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