Council of Institutional Investors The Voice of Corporate Governance

As much as 85 percent of all shares in U.S. public companies are held in "street name," meaning they are held of record in bank or brokerage accounts for the ultimate beneficiary owners. New York Stock Exchange Rule 452, adopted in 1937, lets brokers vote the shares on certain “routine” proxy proposals if the beneficial owner has not provided voting instructions at least 10 days before a scheduled meeting. The uncontested election of directors is among the proposals that the NYSE has, until recently, considered routine.  Discretionary broker votes accounted for 16.5 percent of all votes at shareowner meetings in the 2008 proxy season, according to Broadridge Financial Solutions, the largest provider of proxy processing services.

The Council has long opposed the broker-may-vote rule and has pressed repeatedly for it to be abolished. Allowing brokers to cast votes for uninstructed shares skews voting results and is akin to stuffing the ballot box for management as broker votes almost always are cast in favor of management’s proposals and candidates for board seats. Experts estimate that typically about 20 percent of "street name" shares are voted by brokers without instruction.

Since the fall of 2006, the NYSE three times proposed abolishing broker votes in director elections. Most recently, on Feb. 26, 2009, the NYSE petitioned the Securities and Exchange Commission for an amendment to Rule 452 that would redefine director elections as “non-routine,” in effect eliminating uninstructed broker votes in uncontested director elections.  On July 1, the SEC finally acted, voting 3-2 to eliminate uninstructed broker votes in director elections starting Jan. 1, 2010.  The new rule applies to director elections at all companies listed on U.S. exchanges.  The upshot is likely to be more close votes and more directors failing to win majority support in 2010 elections.

In 2009, many observers believed that excluding uninstructed broker votes might have tipped the outcome in director elections at Bank of America and Citigroup, resulting in one or more directors at each company not being re-elected. The Council sent letters to Bank of America and to Citigroup requesting that their boards disclose the final vote totals, provide details of the broker votes cast for or against each candidate and exclude uninstructed broker votes when determining whether each nominee was re-elected under their majority vote standards.

In 2008, activist shareowners pointed to the April 15 board elections at Washington Mutual as a textbook case for the way broker votes can taint elections. One director resigned after Washington Mutual reported that shareowners had withheld 49.9 percent of votes for her. Some Washington Mutual shareowners, however, suspect that one or more directors running for re-election would not have received majority support if uninstructed brokers had been excluded from the tally. CTW Investment Group, which had led a withhold campaign against two Washington Mutual directors because of risk management and executive compensation concerns, called on the board to demand the resignation of any directors who failed to win majority votes. The Council sent a letter to Washington Mutual asking the board to clarify the preliminary vote totals for the director elections by promptly disclosing the results excluding uninstructed broker votes. The Council also wrote to then-SEC Chair Christopher Cox expressing concern that the commission has not acted on the NYSE’s proposal that would eliminate uninstructed broker votes in director elections. Council members also have sent similar letters to Washington Mutual and the SEC

2007 - The May 9, 2007 board elections at CVS/Caremark Corp. were a case study of the way broker votes can skew elections. Read more about the elections and Council and member actions in response here. Please click below for other 2007 action on broker voting.

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