Musings: SEC’s Proposal to Report Voting Results

For those that regularly read my blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days after the preliminary voting results are determined. The proposal begs the question as to when “preliminary voting results are ‘determined'” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem to be any exception for other types of contested matters? Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of InvestorRelationships.com (it’s free; just need to input contact info) – in my interview with Carl Hagberg – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

Is Four Days Enough?

I expect that we will see quite a few comment letters from companies that express concerns that a 4-day filing requirement is unrealistic for some meetings – particularly getting a preliminary vote for a contested election in that time period. In my opinion, companies should be able to meet a fairly short deadline (5 business days?) if there isn’t a close call since most votes typically come from “street-name holders” – where virtually all the tabulation has been finished by Broadridge before the polls close. And remember that the voting instruction forms received from street-name holders aren’t even subject to examination by the Inspector of Election – or by anyone else – unless the Inspectors’ Report has been released and the results have been officially challenged in court.

But I do agree that a reasonable exception needs to be carved out – not just for director election contests, but for any meeting where the preliminary results on one or more proposals are “too close to be completely comfortable with” – to allow for more time (and of course, a true proxy contest – where both sides have the right to examine the proxies and challenge their validity – is another matter altogether). In fact, maybe there shouldn’t be a trigger for preliminary results – so these type of results are never required to be filed – because of their “preliminary” nature. Maybe the SEC’s rule should just focus on final results.

The trick here is to figure out how to properly define “too close” so that companies don’t regularly lean on this exception whenever they don’t like the voting results. Perhaps a specified voting percentage is the way to go (eg. 48/52% or closer)?

If companies invoke this type of exception, I imagine investors may not be excited about a lack of a cap regarding how long a company can go without sharing a final result. Maybe a compromise is a filing standard that would require with certification of final results – maybe within 10 business days from the date of the meeting?

What Next for Regulators?

Finally, since the SEC is looking to adopt requirements related to the process by which votes are inspected and reported, it seems like a prime opportunity to tackle overvoting. My sense is different tabulators use different methodologies to resolve overvotes. A closer look at this process has been long overdue to ensure that practices are fairly uniform.

By the way, one beef that investors have had is that some companies have presented the percentage of votes in favor of shareholder proposals as a proportion of all votes cast, rather than as the standard RiskMetrics’ pro forma calculation that excludes abstentions from the total. The SEC should clarify what they want companies to disclose.