What's All This I Hear About Voting for Directors of Public Companies?

Well, there are a number of things going on relating to the election of public company directors, but the most significant is the recent amendment of Rule 452. The SEC adopted that amendment effective for director elections at annual meetings after January 1, 2010. The new rule eliminates broker discretionary voting authority on the election of directors. In other words, your broker will no longer be able to vote your shares for you in a director election.

What does that mean in the case of your everyday retail shareholder (i.e., you or me individually)? It means that if we do not respond to proxy materials received from the company (if, for example, they end up in the round file), the shares will not be voted at all. This could affect the ability of public companies to get their directors elected even if there is no substantive reason that they should not be.

The companies most likely to be affected by this rule are the smaller cap companies that tend to have a large retail shareholder base. In the case of companies with a large number of institutional investors, it will generally be easier to get a response from those shareholders. Institutional investors tend to vote their shares on their own, although they often follow the recommendations of Risk Metrics, Glass Lewis or other institutional shareholder services organizations. But, retail shareholders often do not vote on their own. This could cause smaller cap companies to spend time and resources to prepare follow-up mailings or make phone calls to investors.

It will be interesting to see how this amendment to Rule 452 affects director elections starting in 2010. Hopefully, as the SEC and other regulators consider some larger issues relating to shareholder voting (e.g., proxy logistics, proxy access and other shareholders' rights), a comprehensive system that considers all the current issues will be implemented.