An article in today’s Wall Street Journal explores how activist investors will benefit from a change in SEC rules banning brokers to vote on their client’s shares. According to the article, brokers have typically voted in favor of standing management and board members thanks to the rule put in place in 1937. A ban to this practice would give activist investors more power by eliminating these management-friendly votes and would allow them to get closer to a majority.
SEC Plans to End Broker Vote Rule, in Win for Activists
By KARA SCANNELL and DAN FITZPATRICK
In a major win for activist investors, the Securities and Exchange Commission plans to toss out decades-old rules in a move that will give activists significantly more power to determine who sits on corporate boards.
The rule change centers on a technical issue: Whether brokers are allowed to vote on their clients’ behalf in director elections. Since 1937, the brokers have been able to vote their clients’ shares, and have typically voted in favor of standing managements and boards.
But starting in January, the SEC will change those standards, say people familiar with the matter. The SEC is expected to announce the rule change as early as next week, these people say. Brokers won’t be able to vote their clients’ shares. Since many small shareholders simply don’t vote, that will give more power to institutional and activist shareholders who do.
The change has long been sought by large shareholders and activists who want to make it easier to dump underperforming boards. They have been stymied, however, by the “broker vote” standards, which diluted their influence.
Investors such as Carl Icahn have long used proxy fights to put pressure on companies and their managements. By eliminating broker votes, they will have an easier time at winning the voting majority necessary to throw out board members. The changes will be most acute at companies with large mom-and-pop shareholder bases. The rule change won’t apply to instances where an activist runs a competing slate of directors.
This month’s fight over the fate of Bank of America Corp. Chief Executive and Chairman Kenneth Lewis provides a test case for how the changes might affect a board election. In standing for election, Mr. Lewis faces opposition from several large investors, including teachers pension fund TIAA-CREF. A separate proposal would require the bank to split the chairman and CEO roles, effectively stripping Mr. Lewis of at least one of his titles.
Change to Win, a coalition of labor unions opposed to Mr. Lewis’ re-election, predicts that 22% of votes scheduled to be cast at the bank’s shareholders meeting will be “broker votes,” based on trends established during the prior two years. If Mr. Lewis wins just over a third of the remaining votes at the meeting, he would be re-elected, according to the group’s analysis.
“Ken Lewis and other directors may only be elected as a result of the broker vote,” said Michael Garland, director of value strategies at Change to Win’s investment arm.
Mr. Lewis has defended his performance and told board members he intends to remain as CEO at least until the financial crisis is over. The bank has said it doesn’t believe a split of the top roles is the right move. It declined to comment for this article.
The move is the first of what is expected to be a series of changes under way at the SEC. The broker vote change was first proposed in 2006, but it languished under the previous SEC chief and was never finalized.
Reviving the broker vote proposal was one of SEC Chairman Mary Schapiro’s first moves since taking the helm in January. The issue was delegated to the SEC staff to approve and won’t require the five commissioners to weigh in. The SEC is expected to take up other issues to expand shareholders’ rights next month.
Several companies, including General Electric Co., Pfizer Inc., J.P. Morgan Chase & Co. and Exxon Mobil Corp., recently wrote letters to the SEC urging the agency to hold off on eliminating the broker vote rule change until the agency undertakes a broader review of proxy rules.
Some companies say eliminating broker votes will make it harder to establish a quorum at shareholder meetings and require costly efforts to encourage voter turnout. Investors call that a red herring.
Under current rules, investors must instruct their brokers on how to vote at least 10 days before the election.
If there are no instructions, brokers are entitled to vote however they wish on “routine” items. Generally brokers vote for management, on the theory that any shareholder who opposed the company’s position would give instructions. In the U.S., about 80% of investors’ stocks are held at brokerage accounts.
Until now, uncontested director elections have been considered “routine.” The SEC rule change is expected to say that such elections are no longer routine items and brokers can’t vote the stock either way without shareholder instructions.
“This is a huge victory for the investor community,” said Ann Yerger, executive director of the Council for Institutional Investors, a Washington organization that represents pension funds holding $3 trillion in assets.