Everyone at risk from Rule 452 changes

Oct 15, 2009

Georgeson prompts companies to do the analysis and prepare for the worst

Which companies are at risk from Rule 452 changes eliminating the broker vote in director elections? ‘Without trying to scare companies... everyone is at risk for something,’ declared Georgeson’s Rachel Posner in a webinar today.

Small companies, companies with high retail ownership, companies with poor corporate governance, companies lacking in transparency, companies faced by withhold vote campaigns – any and all could face difficulty electing directors without the broker vote, which has traditionally backed management.

Some commentators have called the end of the broker vote the most important development in activism and shareholder voting in more than a decade, said Posner, senior managing director and general counsel at Georgeson, a proxy solicitor owned by Computershare. After analyzing recent proxy votes that could have gone against key directors if the broker vote hadn’t supported them, she is inclined to agree.

‘The increased risk for a failed director election in the wake of the elimination of the broker vote, particularly for a company with majority voting in place, is obvious,’ she said.

‘The impact varies according to a confluence of circumstances that vary by company,’ she explained, listing the composition of a company’s shareholder base, historical voting patterns, its corporate governance profile and planned agenda items as factors that should be analyzed.

Posner recommended replacing the lost broker vote by staging a retail investor outreach campaign. ‘Call campaigns combined with mailings can increase the turnout significantly,’ she said. ‘They can provide the swing vote that results in a successful director election, even in a close vote.’

Any company worried about obtaining a quorum can simply put a routine measure on the ballot, such as auditor ratification, which is considered good governance anyway.

But getting a quorum is not an issue for the vast majority of companies. ‘The biggest threats are withhold campaigns,’ Posner said. ‘We recommend that companies reevaluate... a wide array of governance positions and practices... to avoid failed director elections or high opposing votes that would create credibility and PR problems.’

Some governance problems likely to draw withhold vote or ‘vote no’ campaigns – and negative recommendations from proxy advisors – include tax gross-ups (where companies pay the tax on perks or other remuneration for executives), over-boarding (directors serving on many boards) and poison pills. 

‘The consequences of ignoring possible outcomes could be severe,’ Posner said. 

Georgeson’s annual corporate governance review will be made available on the firm’s website (www.georgeson.com) in the next few weeks.

By Neil Stewart