The 2010 Proxy Season: A Brave New World

This post comes to us from David Drake, President of Georgeson Inc, and is based on the executive summary of the Georgeson 2010 Annual Corporate Governance Review by Mr. Drake, Rhonda L. Brauer, Rajeev Kumar and Steven Pantina. The full review is available here (registration required).

A brief look back to the 2009 proxy season reveals one of the most contentious seasons in recent memory. Investor support for board nominees was at an all-time low, proxy contests were at an all-time high and support for shareholder-sponsored resolutions had dramatically risen. As the 2010 proxy season approached, corporate directors knew that it was incumbent on them to restore the trust that was shattered by the market downturn.

The 2010 proxy season was the dawning of a new era in the way director nominees are elected because, for the first time, uncontested director elections were to be considered “non-routine” under New York Stock Exchange (“NYSE”) rules and thus could not be bolstered by the uninstructed broker discretionary vote. Companies also had to make adjustments in anticipation of the new legislation being drafted by Congress that had squarely focused its attention on reforming our financial system and that would impose new requirements on publicly traded companies to rein in perceived egregious compensation practices. Although companies knew that the reform efforts could not be enacted during the current proxy season, they were aware that the proposed changes could reshape the landscape of corporate governance in the United States. The past season demonstrated that companies are starting to prepare for the brave new world that shareholder activism and congressional reform are in the process of creating.

Activists Remained Focused on Executive Compensation as Say-on-Pay Reached New Milestone

Executive compensation remained the focal point for activists in 2010. Shareholder resolutions demanding advisory votes on executive compensation continued to dominate. Allowing shareholders to cast a non-binding vote on a company’s executive compensation practices, commonly referred to as say-on-pay, has been at the center of the debate on corporate governance reform in the United States for the past few years. First introduced as a shareholder proposal in 2006, say-on-pay received a significant boost in momentum in 2007, when Aflac Inc. announced that it would allow shareholders to vote annually on its compensation practices, beginning in 2009 (although Aflac Inc. accelerated its schedule and first allowed for the vote in 2008). By the end of the 2008 proxy season, a total of 11 companies had agreed to submit management resolutions to a shareholder vote beginning in 2009, though many did so in response to majority-supported shareholder resolutions. Today, the number of voluntary adopters has grown to nearly 70 companies, [1] with another 280+ publicly traded companies required to submit say-on-pay resolutions to shareholders as a condition for receiving government money under the Troubled Asset Relief Program (“TARP”). [2] Interestingly, a number of TARP recipients that have already repaid their debts to the government decided to continue say-on-pay votes even though they were no longer legally required to do so. This included many of the financial giants, including JPMorgan Chase & Co., Goldman Sachs Group Inc., State Street Corp. and SunTrust Banks Inc.

Although there were concerns that small groups of activist shareholders could use say-on-pay votes to advance political agendas and create distractions for boards, support for management resolutions has been extremely strong. In fact, support for management-sponsored say-on-pay resolutions remained high, averaging over 87% of votes cast in favor. However, perhaps providing a harbinger of challenges to come, the 2010 proxy season also saw the first management say-on-pay resolution fail when the resolution at Motorola failed to garner a majority of votes cast in favor. Resolutions also failed on the ballots of Occidental Petroleum and KeyCorp. The results of this year’s say-on-pay votes yielded many important clues about how say-on-pay votes could evolve in the future.

First, although there were concerns that shareholders would either misuse the system or uniformly vote down proposals without any discernable reason (the “sledgehammer effect”), results from the past two proxy seasons have thus far shown that shareholders have wielded their votes cautiously. Of the 75+ management-sponsored resolutions that Georgeson tracked during this proxy season (comprising both voluntary adopters and TARP-mandated adopters), only seven companies had against votes of 30% or more, including the three companies that experienced failed referendums. This is similar to the 2009 results, where only six companies had against votes of 30% or more.

Second, shareholders will not hesitate to vote against a resolution if they have concerns about a company’s compensation practices. In fact, the reasons that say-on-pay proposals failed at the three companies mentioned above are fact specific: at Motorola, shareholders seemed to be concerned about compensation practices related to the business separation (the CEO had been scheduled to receive a multimillion-dollar payment even if Motorola’s planned split into two publicly traded companies was unsuccessful) and responsiveness to shareholder proposals; at Occidental Petroleum, shareholders seemed to have focused on the magnitude of CEO pay and disclosure around its peer comparisons; and at KeyCorp, a TARP company, the against vote seemed to have focused on a perceived pay-for-performance disconnect.

Finally, despite the challenges of high withhold/against votes, say-on-pay may result in fewer majority withhold/against votes on compensation committee and other board members. As previously mentioned, compensation committee members have been a common target for withhold/against votes for poor compensation practices, and at least six of the 41 directors that received majority withhold/against votes were targeted by one or more of the larger proxy advisory firms (e.g., ISS, Glass Lewis and PROXY Governance) for poor compensation practices. However, notwithstanding the failed say-on-pay resolutions, none of the nominees at these companies garnered less than a majority of votes cast in favor. In fact, at KeyCorp, each of the directors was elected with at least 80% of votes cast. This result lends itself to the conclusion that, while directors may receive some withhold/ against votes on their ultimate confirmation, the number of withhold/against votes may be reduced because say-on-pay resolutions give shareholders an alternative outlet to voice concerns about compensation practices.

Starting in 2011, all publicly traded companies will be required not only to conduct say-on-pay referendums but also votes on proposals to determine how often the referendum will occur (discussed in greater detail below), subject to any exceptions the Securities and Exchange Commission (the “SEC” or the “Commission”) may create. Thereafter, many believe that activists will turn their attention to other issues, including refocusing on majority voting in uncontested director elections, which was not addressed in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act” or the “Act”). While many large-cap companies have already adopted majority voting, many more, particularly mid-cap and small-cap companies, remain potential targets for resolutions on this issue.

Equity Retention Policies in Focus

With say-on pay-becoming mandatory, it may be the case that proposals relating to equity retention policies will be the primary executive compensation-related shareholder resolutions next season. Resolutions on this topic have sought to ensure that the interests of executives are aligned with those of their shareholders by proposing that companies adopt policies that would require named executive officers (“NEOs”) to retain a significant portion of the shares granted to them as part of their compensation package (usually 75%) through their employment and for a period following the end of their employment (usually two years).

In support of the resolution, proponents have argued that rigorous stock ownership guidelines that require executives to retain equity through retirement are essential to align management’s interests with those of shareholders. Without such policies in place, proponents have maintained that executives will continue to be incentivized to engage in excessive risk taking in the short term instead of focusing on superior long-term stock performance. In response, most companies argued that with the implementation of more traditional stock ownership guidelines, significant steps have already been taken to ensure that the interests of management are aligned with shareholders. It is worthy to note that, of the 29 companies that received proposals on equity retention policies, 22 had traditional holding requirements for executives (most requiring the retention of five to 10 times base salary for the CEO, with declining thresholds for other NEOs). However, none of the policies reviewed contained requirements for executives to retain their equity through retirement. These statistics appear mostly consistent with recent trends. According to recent reports, two-thirds of S&P companies have implemented some form of stock ownership guidelines, [3] including 87% of the top 250 companies within the S&P 500, [4] yet very few mandate that executives’ equity be retained through retirement.

Even with the lack of company guidelines requiring that equity be retained through retirement and with support from the larger proxy advisory firms, shareholder response to the resolution was relatively modest, averaging only 24% of votes cast in favor. These results seem to indicate that, for now, shareholders do not believe that extending holding requirements beyond the period of employment is necessary to ensure that management’s interests are aligned with their own.

Shareholders’ Ability to Take Action Remains at the Forefront

The demand that shareholders have the right to call a special meeting remained the most popular among takeover defense-related shareholder proposals, with 43 proposals submitted to a vote this year. The continued popularity of this proposal should come as no surprise after the resolution received very high support from shareholders in 2009, despite a significant change in tactics (almost 40% of companies targeted had provisions in place with a trigger between 20% and 33%). In 2010, proponents (predominantly individual holders) moved forward with a similar plan by submitting over 70 resolutions. However, proponents were less successful than they had been previously, suffering defeats both on the ballots and with the Commission.

Prior to the start of the annual meeting season, a number of companies were able to keep the special meeting shareholder resolutions off the ballot by taking a proactive approach with the SEC. According to Georgeson’s research, 16 companies that had received the proposal decided to submit a similar management sponsored resolution with higher ownership thresholds. Despite opposition by the shareholder proponents, the SEC granted no-action relief to companies under rule 14a-8(i)(9), as it determined that the shareholder proposal would conflict with the proposal submitted by management at the same meeting and that “submitting both proposals to vote could provide inconsistent and ambiguous results.” [5] It will be interesting to see whether shareholder proponents decide to approach the same companies again next year and, if so, whether the newly approved threshold has any effect on shareholder voting.

With respect to those shareholder proposals that were submitted to a shareholder vote (43 resolutions), support was also lower. Average support for the resolution dropped 5%, to 43% of votes cast, with the number companies receiving a majority of votes cast in favor falling from 25 in 2009 to just 13 in 2010. Average support among the 24 companies that had previously adopted the measure with a 25% or less threshold was less than 42% of votes cast in favor, seven percentage points lower than the overall average and three percentage points lower than similar proposals from last year. In the current environment, it is not clear whether the current trend of lowered support was simply an anomaly or indicative of lowered support overall. Thus, companies faced with this issue are urged to examine the proposal and its effects closely and to engage shareholders early to gauge their sentiments about the companies’ given threshold.

Shareholders Seek Right to Act by Written Consent

The 2010 proxy season saw shareholder proponents introduce a new (though, in some ways, redundant to the special meeting proposal discussed above) resolution asking companies to provide shareholders with the right to act by written consent. An action by written consent gives shareholders the right to approve certain corporate matters without having to call a meeting of shareholders or to give notice to all shareholders about the matters being approved. In some instances, an action by written consent could be more efficient (the consent solicitation ends when the vote requirement is met and consents delivered to the corporate secretary) and cost-effective than holding a special meeting. Shareholders could also use the written consent process to try and effectuate change, including using the right to call a special meeting and, in some cases, to remove directors. However, oftentimes an action by written consent has a different vote requirement. Under Delaware law, for example, the default standard permits shareholders to take action by written consent on “any action which may be taken at any annual or special meeting of such stockholders…if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.” [6]

The written consent shareholder resolution appeared on the ballots of 16 companies in 2010, including 13 companies that already provided shareholders with the right to call a special meeting. Proponents of the resolution believe that the implementation of anti-takeover defenses is significantly correlated to a reduction in shareholder value and stated that the right to act by written consent gives shareholders the opportunity to raise important matters outside the normal annual meeting cycle. Companies argued that allowing shareholders the ability to act by written consent would adversely affect minority shareholders. Specifically, companies maintained that allowing action by written consent, including possible removal of the entire board, could be taken without the knowledge of smaller shareholders and their having had the right to raise objections. For those companies that already gave shareholders the right to call a special meeting, it was noted that shareholders already had the right to raise important matters outside the normal annual meeting cycle and with lower thresholds than are required to take an action by written consent.

In spite of the fact that most targeted companies already provided shareholders with the right to call a special meeting, support for the shareholder resolution was strong, averaging 52% of votes cast in favor overall, including nine resolutions that garnered a clear majority of votes cast in favor.

The irony of the relatively strong support for both the special meeting and written consent proposals is that these purportedly critical shareholder rights are rarely used even when they are made available. The success of these proposals can be attributed to two main factors: 1) the power and influence of the proxy advisory firms that generally support them; and 2) the growing belief on the part of the institutions that any enhancement of shareholders’ ability to influence and control corporate boards, no matter how obscure or arcane, is a good thing.

Despite Rule Change, Opposition to Director Nominees Declines

The 2010 proxy season marked the beginning of an important change in the way public company director nominees are elected in the United States. In July 2009, the SEC approved an amendment to NYSE Rule 452 (“Rule 452”) that eliminated the so-called broker discretionary vote in uncontested director elections, beginning with director elections held on or after January 1, 2010. The amendment re-categorized uncontested director elections from a “routine” matter to a “non-routine” matter, which meant that, for the first time since Rule 452 was adopted in 1937, brokers no longer had the right to vote their clients’ uninstructed shares in uncontested director elections. The practice of most brokers had been to support the board’s recommendations on routine matters (although recently some brokers had adopted the practice of voting uninstructed shares in proportion to the shares that received voting instructions), thus providing companies with an automatic increase in the number of votes cast in favor of the nominees. Heading into the 2010 proxy season, there was concern that the combined effect of the elimination of Rule 452 in uncontested director elections along with continued investor dissatisfaction would result in an upward trend in withhold/against votes on director nominees. So far, those concerns have proven to be unfounded.

Although some anticipated that director withhold/against votes would increase again, the number actually decreased for the first time since 2006. Among the companies tracked (Georgeson tracks all S&P 1500 companies that hold their annual meeting within the first six months of the calendar year), directors receiving withhold/against votes of 15% or greater declined over 27% from 2009. Similar declines were experienced across the board, with withhold/against votes of 20% or greater declining 28%, those garnering 30% or greater withhold/against votes declining 32%, and those garnering 40% withhold/against votes declining 41%. Finally, the number of directors who received majority withhold/against votes dropped to 41 directors at 24 companies, a decrease of over 48%. It is worth noting, however, that the number of directors who received majority withhold/ against votes would have been significantly lower if Rule 452 had not been eliminated. Georgeson estimates that 15 of the 41 directors who failed to receive majority support would have received majority support had the discretionary vote been applied. [7]

The decline in director opposition can be attributed to a number of factors. First, there appears to be an inverse correlation between market conditions and director opposition. When market conditions declined from their highs in mid-2007 to their lows in early 2009, opposition to director nominees soared. Then, as the 2009 proxy season came to a close, market conditions began to improve and opposition to director nominees subsided. Comparable trends can be found from 2004 through 2006, when opposition to director nominees steadily fell amid strong performance and high stock returns. Second, it seems that boards of directors are engaging with their shareholders on a more consistent basis and are more aware of shareholder concerns. For instance, it was reported that in the wake of the market decline, both total CEO compensation and executive perquisites, including excise tax gross-ups, dropped at top U.S. companies in 2009. [8] Finally, beyond executive compensation reform, companies continue to make concessions to shareholders on hot-button governance issues such as the elimination of classified boards, the adoption of say-on-pay provisions, the reduction of supermajority voting requirements and, most recently, the allowance for shareholders to have the right to call a special meeting or act by written consent. While some of these changes have been prompted by majority-supported shareholder resolutions, many others have been the result of proactive boards seeking to adopt perceived best governance practices, or at least willingness on the part of boards to modify governance practices to avoid negative vote recommendations from proxy advisory firms.

Although the decline in withhold/against votes is a noteworthy development, companies should be cautioned against complacency. It is apparent that shareholders have become more engaged over the past few years and have shown a willingness to voice their opposition to director nominees for myriad of issues. Actually, those 41 directors who received majority withhold/against votes from their shareholders faced withhold recommendations from the larger proxy advisory firms for a variety of reasons, ranging from implementing a poison pill without shareholder approval, to poor meeting attendance, to excessive fees paid to auditors for non-audit services. Board members who serve on compensation committees should be particularly cautious of shareholder concerns relating to compensation. Specifically, shareholders have shown a willingness to withhold their votes or vote against compensation committee members who fail to properly link pay to performance; provide executives with excessive perquisites, including excise tax gross-ups; and allow for single-trigger change-in-control provisions.

With corporate governance in its current state of flux, Georgeson urges companies, their management teams and their directors to remain vigilant. Companies should have a working knowledge of their shareholder base and understand the voting patterns of different groups of shareholders. To the extent a portion of the shares are held by institutional investors, it is important to know whether those institutions have developed internal voting guidelines or follow the recommendations of one or more of the proxy advisory firms. This is not to suggest that boards should succumb to every whim expressed in the plethora of voting guidelines and principles. But with an understanding of these issues, companies can often avoid unnecessary surprises at their annual meetings.

Proxy Contest Activity Surprisingly Declines

One of the most surprising developments from the 2010 proxy season was the decline in the number of proxy contests. From 2005 to 2009, contest activity grew nearly 150%, from 23 in 2005 to 57 in 2009. In fact, the 57 contests tracked in 2009 were the most ever tracked by the Georgeson since we first started tracking proxy contest activity in 1981. The 2009 proxy season also marked a significant milestone for investors, as it was the first time that dissident investors found more success than did management in proxy contests, finding some measure of success in 63% of the contests waged. Coming off last year’s historic results, many believed that the 2010 proxy season would be as busy as, if not busier than, the previous year. That proved not to be the case, however, as the number of proxy contests dropped almost 40%, to just 35. Even more surprising, the level of dissident success dropped from 63% in 2009, to just 31% this year.

A number of factors could have contributed to the dramatic reduction in proxy contests. Ironically, although the past few years have been among the most successful for dissidents, one potential reason for the decline may be that success was lacking in some of the more high-profile contests. For example, Carl Icahn has waged a number of high-profile contests, including formal challenges to the boards of Motorola (2007) and Yahoo! (2008). In the case of Yahoo!, Icahn presented a slate of 10 nominees, but (after spending large sums of money) he settled for just one board seat. In the case of Motorola, Icahn’s nominees were rejected outright at the company’s annual meeting. Similarly, in 2009, Pershing Square Capital Management had its nominees rebuked by the shareholders of Target Corp. In fact, none of these investors chose to wage a formal proxy contest in the United States this year (though Carl Icahn has waged a prolonged campaign against Lions Gate Entertainment in Canada). These high-profile defeats may have left dissidents believing that the potential for gains did not justify the time and cost of waging a proxy contest. Another possible reason for the downturn in contest activity may be that market conditions were not ideal for hostile activity. As the 2009 proxy season began in March, the Dow Jones Industrial Average (“DJIA”) dipped to the lowest levels it has seen since the late 1990s. However, the DJIA rallied by more than 57% by the end of the calendar year, despite only modest improvements in corporate balance sheets. The market rally not only could have contributed to the decrease in the number of contests, but it also may have helped to dampen dissident success.

Proxy Access and Contests

Some have proffered that the decline in the number of proxy contests may be linked to the fact that proxy access was not implemented in time for the 2010 proxy season. Proxy access, a concept that would allow shareholders to nominate directors on corporate ballots (purportedly saving investors thousands of dollars in proxy drafting, mailing and printing costs), has been the subject of debate for quite some time. The SEC first proposed proxy access in 2003, but the measure was met with vigorous opposition by companies and the SEC eventually dropped it. In 2007, the SEC was forced to revisit the issue after a court ruling challenged the SEC’s determination that companies could omit proxy access resolutions under rule 14a-8(i)(8) because it related to an election to office. However, the SEC commissioners voted in November 2007 to let companies continue to reject shareholder proposals that relate to board nominations. Then, in May 2009, the SEC commissioners voted 3-2 to propose rules that would require companies to place shareholder board nominees on company proxy ballots, subject to certain conditions and procedures. Although many believed that proxy access would be in place for the 2010 proxy season, the proposed rule on proxy access drew more than 500 comment letters, many with conflicting views on the subject, as well as a second comment period. Because of the complexity of the substantive issues, concerns about legal challenges to the final rules and the importance of proxy access to corporate governance generally, the SEC has deferred action on proxy access until sometime in 2010. There is a general belief that proxy access will be in place for the 2011 proxy season.

Assuming proxy access is in place for the 2011 proxy season, it will be interesting to see whether it will have an effect on proxy contests going forward. Although utilizing proxy access may be less costly, the final rule will have its drawbacks. For example, any adopted rule would likely include minimum time and ownership requirements. Further, the proposed rule also limits the number of nominees who can be included on the proxy to no more than 25% of directors and requires nominating investors to affirm that they are not attempting to effect a change of control. With such restrictive requirements, it is hard to imagine that proxy access would be the preferred tool for hedge funds, which on average wage more than 80% of all contests in the United States. That being said, it seems reasonable to believe that groups that have not waged formal contests likely because of the associated costs (such as activist pension funds and social investment firms) would use proxy access. Actually, it has already been reported that such groups have been working to form pools of potential candidates to serve on targeted boards. Activist pension funds have promised that access will be used as a means of pressuring companies to engage and communicate rather than as a tool to wage frequent campaigns. While that seems likely, it still remains to be seen. Proxy access could encourage activists to closely examine target companies for holes in the board’s skill sets. Some have speculated that activist pension funds may use access to focus on board diversity issues. In any event, we think an outcome of the advent of proxy access, combined with the recently increased proxy disclosure on director qualifications, may be to increase governance committees’ focus on who sits on their boards.

Regardless of the status of proxy access, Georgeson expects proxy contest activity to rebound in 2011. In fact, as cash flows increase and corporate balance sheets improve, we may find activists reverting to strategies of years past by requesting stock buybacks, special dividends or other balance sheet restructuring activities.

The Road Ahead

Although a number of important milestones were reached this past year, most notably the elimination of broker discretionary voting in uncontested director elections and the first failed say-on-pay votes in the United States, the 2010 proxy season was largely overshadowed by the ongoing debates surrounding proxy access and financial regulatory reform. The debates culminated in July, when President Obama signed the Dodd-Frank Act into law. While the primary purpose of the Dodd-Frank Act is to bring reform to banks and the financial regulatory system, the scope of the Act goes beyond bank reform and imposes new requirements on public companies, particularly in the area of executive compensation.

Looking ahead to the 2011 proxy season, the Dodd-Frank Act provides shareholders with the right to vote on executive compensation. Under the law, all publicly traded companies will be required to submit say-on-pay resolutions to a shareholder vote beginning January 21, 2011, subject to any exceptions the SEC may create. Moreover, the Act provides shareholders with the opportunity to choose the frequency with which say-on-pay votes should take place (now being referred to as “say-WHEN-on-pay”). This section provides shareholders with the right to choose annual, biennial or triennial votes on executive compensation. These proposals must be submitted no less frequently than once every six years. In addition to say-on-pay votes, the Act requires that companies seek approval of all “golden parachute compensation” (compensation paid in connection with any acquisition, merger, consolidation, or proposed sale or other disposition of all or substantially all the assets of an issuer) at all meetings within six months of the enactment of the Dodd- Frank Act unless such agreements or understandings have been subject to a shareholder vote under say-on-pay. While these votes are non-binding, the Dodd-Frank Act prohibits uninstructed broker voting in both of these items.

Beyond mandating votes on executive compensation, the Dodd-Frank Act imposes further requirements on companies (in some cases, subject to SEC direction), including: (i) requiring all directors who serve on compensation committees to be independent, (ii) requiring greater disclosure about the linkage between executive pay and company performance, (iii) requiring comparisons between CEO pay and median employee compensation, (iv) requiring companies to develop “clawback” provisions that would recoup unearned executive compensation in the event that there was a material misstatement, and (v) determining whether employees and directors are permitted to use hedging instruments.

Finally, the Dodd-Frank Act amended Section 14(a) of the Exchange Act of 1934, the source of the Commission’s authority over proxy rules, to explicitly provide the Commission with the power to implement proxy access, thus likely negating the arguments of some that proxy access is impermissible under federal law.

Practical Advice

The actions by Congress will undoubtedly provide for a challenging 2011 proxy season. Given the breadth of regulatory reform during this past season, Georgeson offers the following recommendations to companies:

  • Know your shareholder base. Are a majority of your shares held by institutional investors or retail shareholders? Have your larger institutional holders developed their own proxy voting guidelines or do they follow the recommendations of a proxy advisory firm? How often do they engage with companies and on what types of voting issues? Without a working knowledge of the voting trends and policies of your shareholder base, it is impossible to predict whether a proposal will garner majority support.
  • Engage shareholders early. One common misconception among companies is that their day-to-day institutional contacts, including analysts and portfolio managers, have significant say in voting proxies. In some cases that may be true (particularly in the case of mergers and acquisitions and proxy contests); however, many institutions have established proxy voting or governance departments. If a company does not have existing relationships with the proxy decision makers at an institution, it is important to develop those relationships. Also, to the extent that the company is aware of a potential problematic issue on the ballot, it is best to engage with institutions to gauge their stance on the matter early. Sometimes a perceived issue may not be an issue at all. In other cases, companies may be able to make concessions to mitigate investors’ concerns. Early engagement can save a company the time and energy required to fix the problem during the course of a solicitation.


In this brave new world, companies will be faced with more challenges than ever. Even with important shifts in the way directors are elected and the types of proposals that shareholders will be required to vote on, companies are often handicapped by an inefficient proxy voting system. Most notably, the current system engenders the over- and under-voting of shares, provides no requirements for proxy vote confirmation, and restricts issuers’ ability to identify and directly communicate with a large percentage of their own shareholders. In some instances, the current system can result in a company not being able to directly contact the beneficial owners of up to 70% of the total outstanding shares.

To help deal with many of the inefficiencies in the current system, the SEC Commissioners voted unanimously to approve the issuance of a concept release seeking public comment on the U.S. proxy system (sometimes referred to as “proxy plumbing” or “proxy mechanics”), specifically asking whether rule revisions should be considered to promote greater efficiency and transparency. This concept release marks the first time in nearly 30 years that the Commission has conducted a comprehensive review of the proxy voting infrastructure and focused on the accuracy and transparency of the voting process. Some of the issues that the concept release plans to address include over-voting and under-voting of shares, the accuracy, efficiency and transparency of the voting process, issuers’ ability to communicate with beneficial owners and proxy distribution fees. Primarily spearheaded by the efforts of the Shareholder Communications Coalition, the concept release has received support from the Business Roundtable, the National Association of Corporate Directors, the Society of Corporate Secretaries and Governance Professionals, the National Investor Relations Institute, the Securities Transfer Association and others.

Some may argue that the current proxy voting system, while large and cumbersome, has been around a long time and produces a result, so why change it? The answer is that the SEC, in its role of protector of shareholders’ interests, is introducing initiatives at an increasingly rapid pace that puts pressure on voting mechanics. The system is already showing cracks in the form of a number of controversial voting occurrences. In a world with Notice and Access, proxy access, mandatory say-on-pay, majority voting in uncontested director elections, and limited broker discretionary voting, the proxy voting system is under real pressure to prevent failed or controversial votes. The only way to reduce the risk of failed or controversial votes is to reform the proxy voting system to allow companies greater access and direct communication with its shareholders.

While the need for change is clearly necessary, there is a danger that the proposed proxy plumbing initiatives will fall by the wayside if individual companies do not actively press the SEC to take action and encourage other companies to participate in influencing the outcome of the concept release. It is not only what is being voted on, but how the voting gets done that is critically important. Comments can be submitted either electronically or in paper form and should be received on or before October 20, 2010. [9]


[1] ISS Corporate Services
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[2] Cari Tuna, Investors Say ‘Yes’ on Pay at TARP Firms, Wall Street Journal (September 2, 2009).
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[3] The Corporate Executive, ‘Hold Through Retirement’: Maximizing the Benefits of Equity Awards While Minimizing Inappropriate Risk Taking (September- October 2008).
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[4] Frederic W. Cook & Co., Inc, Stock Ownership Guidelines: Prevalence and Design of Executive and Director Ownership Guidelines Among the Top 250 Companies (October 23, 2009).
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[5] Response of the Office of Chief Counsel, Division of Corporation Finance, to Baker Hughes’ request for no action relief, filed with the Securities and Exchange Commission on December 18, 2009.
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[6] Delaware General Corporation Law §228(a).
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[7] This statistic assumes that the brokers would have uniformly voted in favor of the director nominees, as opposed to voting on the shares proportionately.
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[8] Wall Street Journal/Hay Group, 2009 CEO Compensation Study (April 1, 2010).
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[9] For more information, please visit Georgeson’s website at
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