Corporate Governance

Commissioner Paredes and His Anti-Governance Stance: Rule 452 and the Inconvenience of State Law

By J. Robert Brown

We take a break from the commentary on the Commission's shareholder access proposal to discuss some of the events from the open meeting yesterday.

The Commission considered a long overdue amendment to Rule 452 of the NYSE to classify the election of directors as non-routine.  The impact of the change was to prohibit brokers from voting uninstructed shares owned by beneficial owners in uncontested elections for the board.  The provision passed 3-2.

There was a time when uncontested elections didn't matter.  Management's slate always won.  But in an era of majority voting, these broker votes, which invariably favored management, had the capacity to reelect a director who otherwise would not have received a majority.  There is really no good argument for allowing brokers to sway elections by voting shares in which they had no economic interest in them.

Commissioner Paredes voted against amendments to the Rule.  Why?  According to his speech, the reform should be considered only as part of a "comprehensive assessment of the proxy voting system."  This contention nicely sidestepped the merits.  Moreover, it was really a plea for delay.  Any "comprehensive assessment" would presumably take years.  He mentioned some of the issues (over-voting, empty voting, e-proxies) without explaining how and why they justified the continued practice of brokers swaying elections by voting shares where they had no economic interest.  Nor was there any guarantee that even after this "comprehensive assessment" would Commissioner Paredes support the change to Rule 452.

The other argument was that somehow eliminating broker voting "may suppress the voice of retail shareholders."  Astoundingly, he argued that in fact shareholders would prefer to have the votes cast in a pro-management fashion.  As he argued:

• Past experience indicates that, by a wide margin, retail shareholders tend to side with management when voting. The discretionary broker vote, then, would appear to reflect the overall preference of retail shareholders, at least as measured by voting patterns. With proportional voting — which some brokers already have implemented — the broker vote mimics the retail shareholder vote even more closely than when the broker votes with management entirely. Eliminating the discretionary broker vote may cut off an avenue by which the overall preference of retail shareholders can be communicated, thus quieting their voice. In this event, the voice of institutional investors will carry additional weight; yet the interests of institutional investors are not necessarily compatible with the interests of retail shareholders.

There are many many problems with this analysis.  No matter what Commissioner Paredes thinks, Rule 452 was constructed around the principle that on matters of importance, it is inappropriate to have broker votes under the 10 day rule sway the outcome. Yet he would, without any real justification, allow this to happen in the case of directors subject to a majority vote requirement. 

Moreover, while he notes that retail shareholders tend to support management as a global matter, he ignores the fact that broker votes in uncontested elections for the board only matter when there is considerable shareholder opposition to board candidates.  In other words, he would allow brokers to vote in a pro-management fashion at exactly the time when it does not reflect the interests of retail investors.

But the most astounding thing about the position was that in opposing the Commission's access proposal, Commissioner Paredes presented the widespread adoption of majority vote bylaws as evidence of the benefits of private ordering and the enabling approach to governance.  Yet by opposing the amendment to Rule 452, he would in fact prevent a system of majority voting from actually functioning as such.  Shareholders would in fact need a supermajority of votes to overcome the automatic support arising from the discretionary votes of brokers. 

In other words, it is apprently ok to rely on majority voting to vote against shareholder access but to oppose a rule change that interferes with the operation of majority vote provisions.  Perhaps there is a consistency here, but its not readily apparent.

Full post as published by The Race to the Bottom on July 02, 2009 (boomark / email).