See the rulemaking and comments already posted to SEC site. I’m concerned that provisions meant to facilitate voting on broker platforms may lead us right back into what is essentially broker voting. See discussion of Enhanced Broker’s Internet Platform beginning on page 37. I would much prefer a more open system as I described in my Harvard Law post, An Open Proposal for Client Directed Voting. See also proxy plumbing comments by Moxy Vote and proxy plumbing comments by VoterMedia.org. Continue Reading →
Tag Archives | proxy plumbing
This Week in the Boardroom: 12/13/12. TK Kerstetter, Chairman, Corporate Board Member; Ken Bertsch, CEO, Society of Corporate Secretaries and Governance Professionals; Jeff Morgan, CEO, National Investor Relations Institute (NIRI) discuss recent hot topics and something of what to expect in 2013. Continue Reading →
Jay M. Hoffman and Melissa Ghislanzoni of Miller Thomson in Toronto recently posted Empty Voting – Waiting for a Regulatory Response. While focused on Canada, the post applies equally to the US. The recent Telus decision of the British Columbia Court of Appeal “appears to signal a green light for the continuation of empty voting, at least until a regulatory response is implemented.” That case involved Mason Capital Management LLC, a US hedge fund. The Court found no violation of law, ”to the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.” Continue Reading →
The new SEC Investor Advisory Committee (SECIAC) met for the first time last week. It appears there may be agreement by Committee members to first concentrate their efforts on retail investors. At least that was the message of several Committee members and the expressed wish of Commissioner Luis A. Aguilar. The SECIAC would do well to recommend leveling the playing field between retail and institutional investors and between investors of all types and corporate management. Retail investors are more likely to return to the market if the scales aren’t so often tipped against them. Continue Reading →
The Changing Profile of Board Recruitment, in the November/December issue of The Corporate Board by Bonnie W Gwin of Heidrick & Struggles, discusses a continued risk aversion among the leadership of the Fortune 500.
Companies seeking to fill directors’ chairs with only current or former CEOs will find it nearly impossible to increase diversity on the board. This may create a conundrum for corporations who want to do both.
Companies are torn between the safety and reliability of veteran leadership but also Continue Reading →
The Canadian Coalition for Good Governance (CCGG) released their 2011 Best Practices for Proxy Circular Disclosure. Companies in many countries will find this a useful document since it discusses the primary communication link the board and its shareowners.
CCGG outlines how to articulate, in plain language, the governance practices and activities of the board, the qualifications of directors, the issuer’s executive compensation programs and alignment with shareowner interests without exceeding the company’s risk appetite.
Keith Paul Bishop writes:
Section 951 of the Dodd-Frank Act requires companies that are subject to the SEC’s proxy rules to include in their proxy statements “a separate resolution subject to shareholder vote” to determine whether a shareholder vote on executive compensation will occur every 1, 2, or 3 years. When the SEC was considering amendments to its rules to implement this Continue Reading →
The Harvard Institutional Investors Roundtable will convene tomorrow, bringing prominent members of the institutional investor world together focus on lessons from the first year of say-on-pay votes. During the second Continue Reading →
The Securities Transfer Association (STA) released a study, 2011 Transfer Agent Survey to Estimate the Costs of a Market-Based Proxy Distribution System, that evaluates the costs to public companies of beneficial owner proxy processing services over providing those same services to registered shareowners.
The study concluded that public companies could save more than 42% if proxy services were subject to free market competition instead using a Continue Reading →
The Canadian Society of Corporate Secretaries announces the Shareholder Democracy Summit ─ a Canadian first. CSCS has invited key stakeholders to gather this coming fall on October 24 and 25 in Toronto for an important national summit on shareholder democracy.
CSCS President Lynn Beauregard announced today that invitations to register for the Shareholder Democracy Summit will be issued in the coming weeks to all key participants. The CSCS President remarked that when Canadian shareholders vote, whether they are individual shareholders or one of our largest institutional shareholders, their voice is often not heard or it is misheard. People think it’s like voting in an electoral campaign – once a shareholder fills out Continue Reading →
Worth Reading … SEC Comment Letters on Proxy Plumbing | Governance Center Blog. Gary Larkin, writing for the Conference Board, points to several comment letters worth reading. I’m pleased to have my letter among those listed. I’ve greatly abbreviated Larkin’s list and added a few nominees.
- The Corporate Governance Network, James McRitchie, Publisher, Oct. 20. Excerpt: The issue of blank votes was previously discussed in my May 15, 2009 petition to the SEC to amend Rule 14a-4(b)(1)… In this section I address the need for Voting Instruction Forms (VIFs) to meet the same standards as proxies… Broadridge’s ProxyVote.com appears to fall short of full compliance with SEC regulations with regard to notifying the voter being solicited as to how blank votes are counted.
- Wachtell, Lipton, Rosen & Katz, Oct. 19, Excerpt: …The prevalence of empty voting, and the increasingly sophisticated and manipulative ways in which it is employed, risks allowing voters who are not economically aligned with a corporation and its economic shareholders to subvert the corporate machinery to the detriment of those shareholders, the corporations that they own and, ultimately, the American economy…. The singular role that proxy advisory firms play in the field of corporate governance and elections, and the broad reach of their influence, calls for comprehensive and particularized regulation by the Commission for the protection of all investors…
- The Corporate Library, Nell Minow, Chair, Oct.19. Excerpt: …. I would support the UK approach of putting the burden of proof on institutional investors to show why they have not been actively engaged in exercising those rights, and I would support a vigorous enforcement program to address the issues of conflicts of interest we have documented in the repeated failure of institutional investors to vote against value-destroying compensation plans (even when proxy advisory services tell them to do so).
- Center for Capital Markets Competitiveness (part of the U.S. Chamber of Commerce), Tom Quaadman, Vice President, Nov. 15. Excerpt: …we recommend that the CCMC and ISS develop standards that would set forth a formal process that ISS would observe to formulate and update its corporate governance policies.
- National Association of Corporate Directors, Barbara Franklin, Chair; Kenneth Daly, President and CEO. Oct. 20. Excerpt: …New technologies and social media are changing the way boards garner information and sentiment from shareholders. Companies can do more to use technology in board-shareholder communications…. We do not believe that, for the most part, proxy advisory firms need additional regulation. However, if companies vote shares on behalf of owners, they should register as investment advisors.
- Lawndale Capital Management, Andrew Shapiro. October 25. Excerpt: …Confidentiality is necessary to allow objective voting to take place and not interfere with the legitimate flow of investment due diligence interaction that would come from retaliatory treatment….changes to the NOBO/OBO regime and other proxy and Section 13 disclosure rules that reduce investor privacy also risk disruptions in the efficient allocation of capital.
- United States Proxy Exchange (USPX), Glyn Holton. Comment Letter. Excerpt: In an honest election, votes that aren’t cast should remain not cast. You don’t offer those votes up to whomever would like a little extra suffrage: “Unused votes here! Who would like ‘em?” That, essentially, is what the post-reconciliation and hybrid methods do, at least as described in the Concept Release. By “recycling” votes other shareowners have chosen not to cast, they boost certain shareowners’ voting power beyond what it would be if individual shares were tracked through clearance and settlement to individual beneficial owners … We do not believe it is a purpose of the Commission to help corporations achieve quorum. If they had more difficulty achieving quorum, corporations might take more effective actions to attract participation by individual investors in the proxy process.
- VoterMedia.org, Mark Latham. September 29. Excerpt: …To maximize the benefit to our economy, CDV should be open and free… Competition among proxy advisors is important to ensure that we get value for money. Letting us retail investors allocate collective funds by vote to competing advisors would also ensure loyalty to our interests… OBO should be the default status for all retail investors. NOBO should be by opt-in only. A NOBO default would increase the entrenchment of corporate management. An OBO default would better protect retail investors’ privacy. Issuers should not be able to solicit proxies directly from beneficial owners… management should communicate with shareowners via the public forums created by Open CDV and competitive markets for public advice.
And for a UK perspective, check out US proxy reform: It’s completely broke, please fix it!
In the words of the STA summary “of the 199 original letters submitted, only two expressed a “very negative” opinion on proposed reforms to any of the issues: the American Business Conference, and Broadridge (which stands to gain the most by maintaining the status quo). The implication is clear: the consensus among all stakeholders – from issuers to academics – is that major reforms are badly needed”.
We seem to have found the definitive diametric opposite of the good old maxim ‘if it ain’t broke, don’t fix it’.
On July 14, 2010 the Securities and Exchange Commission voted unanimously to issue a concept release seeking public comment on the U.S. proxy system and asking whether rule revisions should be considered to promote greater efficiency and transparency. Today is the last day to comment within the formal timeline. Looking through the comments posted thus far, here were some of the more interesting for me:
- Niels Holch, Executive Director, Shareholder Communications Coalition – More than any other group, probably helped establish the framework of the SEC’s release.
- James McRitchie, CorpGov.net. Sure, I’ll plug my work:
- One letter emphasizing the need for open client directed voting
- Another that blank votes shouldn’t go to management; VIFs should follow rules for proxies, with a corrected version (blankvotesVIFs10-20) dated today.
- Mark Latham, VoterMedia.org. Innovative market-based solutions. Open client directed voting, competitive funding for proxy advice, the need for the proxy communications system to be kept outside corporate management’s control — taking the opposite position from many on this last issue but with sound reasoning.
- John C. Wilcox, ICGN. Need for dematerialization of shares, establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights, supports further development of open client directed voting
- Glenn H. Davis, CII. Favors a robust system of client-directed voting, data-tagging for proxy–related materials
- Wachtell, Lipton, Rosen & Katz. Calls for proxy advisory services to be regulated and increase disclosures, a very closed form of client directed voting that essentially brings back broker votes
- Keith Bozarth, SWIB. Does not favor changing private OBO status
Broc Romanek, highlights some other comments at theCorporateCounsel.net this morning. Time is running out.
USPX just provided comments, which attempts a more comprehensive question by question response. A few creative highlights:
In an honest election, votes that aren’t cast should remain not cast. You don’t offer those votes up to whomever would like a little extra suffrage: “Unused votes! Who wants ‘em?” That, essentially, is what the post-reconciliation and hybrid methods do, at least as described in the Concept Release.
We define a reconciliation method as “accurate” if it reproduces the result that would be obtained if, instead of the current system of street name registration, a direct registration system prevailed, with individual shares tracked through clearance and settlement to individual beneficial owners. With an accurate reconciliation method, as so defined, there will never be over-voting of any sort. Votes won’t be recycled, as defined in our response to question 1. No investor will be denied a vote because someone else’s trade failed to settle. Investors’ interest in fair, undistorted corporate elections will be protected.
The Commission should enforce this right (to withhold proxies) by allowing shareowners to prevent anyone from voting a proxy on their behalf. One solution would be to do away with Rule 452 entirely. Another would be to provide a check box on all proxies or VIFs allowing shareowners to withhold their proxy.
Most of the problems with today’s proxy system arise because of the current system whereby shares are immobilized by DTC and shareowners trade security entitlements. This system was intended as a temporary stop-gap in the 1970s, when it was implemented. At the time, technology to support an automated direct registration system didn’t exist. Today, that technology could easily be implemented. Rather than keep patching the broken-down system of DTC and immobilized stock certificates, perhaps resources should be invested in a comprehensive direct registration system. That would solve many problems with the current proxy system, including that of confirming votes.
The OBO/NOBO distinction should be scrapped. Shareowners should not be allowed to refuse direct corporate communications.
We have serious reservations about allowing anonymous investment in public corporations. We understand this is a foundational issue, but we believe the time is long overdue for public debate on the question.
We believe it is in the public interest that individuals not be allowed to finance corporate activities—with their potential to produce enormous good or enormous evil—anonymously. We understand some believe anonymity is important for the conduct of certain speculative trading activities. We are unimpressed and remind the Commission that its mandate says nothing about facilitating speculative trading.
Disclosure of all beneficial owners would not harm investors. It should occur more frequently than annually and include information on the length of time shares were held, which would facilitate proving ownership for purposes of Rule 14a-8 and proposed Rule 14a-11. We are not concerned about disclosures impairing speculative trading strategies.
It would also be helpful for the Commission to establish guidelines for identifying the beneficial owner or “ultimate investor” entitled to exercise voting rights. For example, full voting rights should be passed to 401(k) plan participants for holdings in the employer’s company.
Banks and brokers should not be offering their retail clients options such as “always vote with management”, “always vote against management” or “vote according to this third party’s recommendations”. Rather, they should be offering their clients the single option of transferring their proxy to a voting platform that would then make all the same options—and many more—available to them.
Because the voting platforms would receive proxies—and not VIFs—they could pass client votes directly to vote tabulators, bypassing the expense and inevitable errors associated with passing votes back to the client’s securities intermediary and then on to Broadridge.
We have serious concerns about rudimentary forms of client-directed voting that would have shareowners making elections such as “always vote with management”, “always vote against management” or “always abstain”. We call such rudimentary forms of client-directed voting “zombie voting”. If offered on proxy voting platforms along side of more robust options, we believe these rudimentary options would be little-used, posing little problem. If offered at the bank or broker level, as part of only a limited suite of options for client-directed voting, we believe these rudimentry options would be quite widely used, causing systemic problems.
Another form of client-directed voting mentioned in the Concept Release would allow shareowners to elect that their shares be voted according to recommendations— or pre-announced votes—of some third party. Again, we believe such options would be appropriate if offered through a proxy voting platfform. If offered at the bank or broker level, they will pose unique systemic issues. In particular, they will likely lead to violations of Rule 13(d).
Rule 14a-2(b)(6) should be revised to provide for discussion of issues related an issuers proxy up to the date voting closes.
We believe all VIFs should be replaced with discretionary proxies.
As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management and have also complained to the SEC about Broadridge’s failure to impartially identify proxy proposals on VIFs (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration and “Corrected” Ballot at Altrea Tips Votes to Management).
At every turn, the deck seems stacked against retail shareowners, in favor of entrenched managers and boards. Now, with the enactment of Dodd-Frank, the SEC is seeking comments on provisions that require rulemaking by the Commission. Additionally, the SEC issued a Concept Release on the U.S. Proxy System with comments due October 20. These opportunities for comment offer our best chance to finally level the playing field in these areas.
Attached (at bottom of post) is a copy of the letter I sent to firstname.lastname@example.org twice yesterday, under two subject fields. One subject was “DF Title IX – Executive Compensation – voting by brokers.” The other subject line was “S7-14-10.” I hope some of you will also object to blanks fields going to management and VIFs that do not impartially identify proxy proposals. Remember, comments are due tomorrow, October 20th.
SEC. 957 of Dodd-Frank prohibits granting discretionary authority to brokers with respect to directors and executive compensation or “any other significant matter, as determined by the Commission.” If beneficial owners fail to provide instructions on how their proxies should be marked with respect to “significant” matters, no one should be empowered to vote on their behalf. The intent of that prohibition should extend to management in the case of blanks items on a partially completed proxy or VIF, as well as brokers completing a totally blank proxy or VIF. The SEC should use its rulemaking powers, not only to conform the provisions of Rule 14a-4 to the mandated and implied intent of Dodd-Frank but should also make a determination that all proxy matters are “significant.” After the complicity of auditors in abusive practices, such as those uncovered at Enron, no proxy item is insignificant.
The integrity of the voting system is critical. The SEC’s current rules send the wrong message to shareowners. They say, “don’t worry about voting. If you fail to submit a vote at all or you leave an item blank, we will allow your votes to be assigned to someone else… but not to someone of your choosing” regardless of possible conflicting or nonaligned interests of brokers, banks and corporate management.
The current rule does not reinforce a robust market or vigilance by shareowners. It does not send a message that voting is important. It is no wonder that shareowners then become shareholders, with only entitlements and no responsibilities, much like gamblers with betting slips. The Commission should encourage responsible ownership, not gambling.
The SEC should regulate the power relationships between actors in the market to provide a level playing field, not tip the balance to one party when the other fails to act. Instead, the SEC should remind each party of the importance of their respective roles. The current Rule 14a-4 misaligns interests by yielding disproportionate control to brokers, bankers, managers and boards, instead of educating and engaging shareowners.
(Thanks to the many individuals who reviewed and provided comments on the attached recommendations to the SEC.) blankvotesVIFs10-18
It should be noted that you can avoid much of the blank vote issue right now by always voting on MoxyVote.com. They use Broadridge’s electronic voting platform too and can’t submit a VIF back to Broadridge without populating (gathering a vote from a user) every item on a ballot. However, their system lets you set up your own default, instead of automatically having your blank vote go to management.
To do so, simply log in to your account at MoxyVote, go to:
- My Profile
- Down the left column, hit the button that says “Prioritize and Manage”
- In about the middle of the page, you’ll see “Default Voting Positions” with the choice of voting
- with the board’s recommendation
- against the board’s recommendation
I’ve got mine set to abstain whenever I leave an item blank. You may want to set yours differently. Using MoxyVote, at least you have a choice right now. You won’t find that at ProxyVote.com, the platform that most brokers send you to. Since most shareowners still use ProxyVote, we still need a change in the rules by the SEC regarding how blank votes are counted. Additionally, VIFs still need to follow the rules applicable to proxies, like providing an unbiased description of each item to be voted on. These descriptions will continue to slant votes to management unless the SEC requires a level playing field, so it is important to comment to the SEC about these issues.
Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice. I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.
The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.
$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?
It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.
Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.
Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →
As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management. (see 4-583 at http://www.sec.gov/rules/petitions.shtml)
The way I read Dodd-Frank SEC.957, it appears to prohibit broker voting for say on pay, directors and “any other significant matter, as determined by the Commission, by rule.” I think that language gives an additional impetus for the SEC to deny both broker votes and blank votes that go to management for all proxy items. After Enron, who can say that even voting on the auditor isn’t significant?
With proxy plumbing and Dodd-Frank, this is the perfect time to ask the SEC to amend Rule 14a-4(b)(1) to do away with both broker and blank votes going to management altogether and to require VIFs to meet the same requirements as proxies.
I’ve attached a draft of my comments below but would very much appreciate scrutiny by others. Are there other rules that need to be changed to accomplish this? Are my suggested amendments reasonable? I don’t want to jeopardize the ability of shareowners to be able to assign proxies or to implement an open client directed voting system, such as that being developed by MoxyVote.com. Does my saving clause protect those abilities?
Please e-mail me at email@example.com with suggestions and/or leave comments here. If we can get rid of blank votes going to management, we’ll win more elections. This is one more change needed to create a level playing field.
Attachment: Draft Letter blankvotes&VIFs10-9.doc
The SEC published Rule 14a-11 providing proxy access in the Federal Register (.pdf). The rule is effective 60 days after being published in the Federal Register, or November 15, 2010. Any issuer whose one year anniversary for mailing date is prior to March 15, 2011 will not be subject to a proxy access campaign in 2011. (Hat tip to The Murninghan Post and commentators) Application of the new access rules to the smallest public companies (“smaller reporting companies” under SEC rules) will be deferred for three years from the effective date. From the release (2010 proxy season transition rules):
Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting. Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.
Here’s a Compliance Week article on the SECIAC, SEC Committee to Get a Makeover Due to Dodd-Frank, 9/13/2010.
From the SEC, Implementating Dodd-Frank Wall Street Reform and Consumer Protection Act — Upcoming Activity. (Hat tip to Doug Chia via Twitter)
The deadline for comments on proxy plumbing is fast approaching, Concept Release on the U.S. Proxy System. See language and comments here.
CalPERS. A report from consultant Wilshire Associates found that activist involvement by CalPERS increased returns at many of the 142 “Focus List” companies. Prior to the pension’s involvement, the companies’ returns averaged 83.3% below their various benchmarks; afterward they yielded returns 12.7% above the benchmarks. Although the cumulative 12.7% is not as high as past results, their corporate governance program still much more than pays for itself. From the report:
Most investment resources in the industry continue to be focused on identifying small misvaluations in publicly traded stocks. This is, perhaps, unfortunate since investors are not earning a satisfactory return on the manager fees and brokerage costs they pay, given the evidence showing that the public stock markets are fairly efficiently priced. However, the evidence is equally clear that many corporate assets are poorly managed and that resources spent on identifying and rectifying those cases can create substantial opportunity and premium returns for active shareholders.
CalPERS announced several actions to address concerns raised by the City of Bell salary controversy, including:
- Posting audit reviews of public agency membership and payroll data submitted to the retirement system
- Highlighting significant findings of public agency reviews and regularly report them to the CalPERS Board
- Establishing procedures and guidelines for CalPERS working-level staff to notify supervisors and senior management of unusually high compensation and salary increases such as those that occurred in Bell
In addition, CalPERS helped establish the Public Employee Compensation and Benefits Task Force, which includes CalPERS staff and representatives public employer organizations, League of California Cities, California State Association of Counties, employee and labor organizations, legislative staff and other, focusing on:
- Options for providing greater public disclosure of public employee compensation, benefits, and other information related to total employee compensation and benefits
- Options regarding caps on total compensation that can be considered for retirement purposes
- Options for mitigating the impact of excessive salaries on the retirement costs of a public employee’s previous public employers and other public agencies in the same liability risk pool
CalPERS had previously announced plans to review the compensation of CalPERS-covered employees who earn $400,000 or more per year in salary. Phase two of the review will look at CalPERS member salaries of $245,000 per year and above.
On September 7, 2010, from 6:00 p.m. – 7:30 p.m., the Sacramento Central Labor Council and PERSWatch.net will host a “CalPERS Candidates’ Forum,” moderated by the League of Women Voters of Sacramento County. The forum will be held in the CalSTRS Boardroom at 100 Waterfront Place in West Sacramento, next to the pyramid. We’re trying to arrange for free parking but haven’t confirmed that yet. This is your opportunity to meet and question the candidates. A video of the forum will be archived on the CalPERS website.
Citigroup. Nice item by David Reilly in the WSJ (Citigroup’s Paltry Debt Penalty, 8/17/10) He sides with U.S. District Judge Ellen Segal Huvelle who refused the SEC’s proposed $75 million settlement with Citigroup over the bank’s failure in 2007 to disclose sub-prime mortgage risks. Goldman Sachs recently paid $550 million for a lesser offense but the SEC only wants $75 million from Citigroup. Why go after only two Citigroup executives for the paltry sums of $100,000 and $80,000 and why should shareowners pay for the execs alleged missteps?
The problem is Citigroup shareholders, under current rules, couldn’t necessarily oversee their company. That is partly due to the difficulty in challenging board directors… For shareholders to be held accountable, the SEC has to let them act more like owners.
Unfortunately, even under the SEC’s most probable proxy access rules shareowners may just have a better view of wrong doing and their money sliding away, since even under the best of circumstances they will only get to nominate 1/4 of the board.
Climate Change. With extreme weather mounting and Congress dithering, WRI report outlines what we can do now to reduce GHGs. The summary, “Everything You Need to Know About Global Warming in 5 Minutes,” by Boston investment manager Jeremy Grantham of GMO does a great job of ticking off the causes, consequences, and controversies surrounding climate change. (The Go-Getter Approach to Climate Change, 17 August 2010, MurninghanPost.com.
Cooperatives. If sustainable technologies are about the what of the living economy, local and shared ownership designs are about the who: who will own the productive capacity of the nation, who will control it, and who will benefit from the wealth created. Minwind Energy is an example of shared ownership, an emerging, broad category of ownership design in which ownership is shared among individuals (as in cooperatives or employee-owned firms) or between individuals and a community organization (as in a community land trust, where families own their homes while a nonprofit owns the land they stand on). (A Different Kind of Ownership Society, via Yes! Magazine, Marjorie Kelly and Shanna Ratner, 8/3/10)
Corporate Governance. It is no longer realistic to look to government to rectify problems caused in the private sector, or to simply ignore such problems and their broader consequences. We all need to look for innovative ways to avoid such problems, such as using the governance process to do so. (Why Corporate Governance Matters to Everyone, Marty Robins, The Huffington Report, 8/17/10)
With the specter of dramatic regulatory changes hovering over them, U.S. public companies have been acting aggressively to streamline corporate governance practices and establish their executive compensation priorities, according to Shearman & Sterling’s eighth annual Corporate Governance Surveys of the 100 largest U.S. public companies. Key corporate governance findings include:
- Majority voting in uncontested director elections has been implemented in some form by 82 of the 100 largest companies, up from 75 last year and from just 11 as recently as 2006.
- Despite amendments to NYSE Rule 452 implemented last year (eliminating broker discretionary voting in director elections), no director standing for reelection at one of the 100 largest companies failed to receive majority support this year.
- The number of Top 100 Companies at which the CEO is the only member of the board of directors who is not independent increased significantly, rising to 59 this year from 49 last year.
- The number of Top 100 Companies with classified boards, of which there were 54 in 2004, declined to only 20, and of those 20, more than one-third were either in the process of declassifying their boards or received approval from their shareholders this year to do so.
- Seventy-one companies disclose they maintain an executive compensation clawback policy (an increase from 56 companies in 2009 and 35 in 2007 — representing a 103% increase in four years). This will become increasingly significant, as the new Dodd-Frank Act mandates clawbacks if a material restatement would have affected the amount received.
- There was a decrease in the overall number of compensation-related shareholder proposals; however, advisory say-on-pay policies continued to be the most prevalent proposal. In addition, the survey suggests that companies cannot assume that their say-on-pay advisory resolutions will pass. For example, three public companies (including one Top 100 Company) failed to win majority support in the 2010 proxy season.
Economy. Biflation, generally defined as inflation and deflation occurring simultaneously in different parts of the economy—specifically, rising prices for commodities that trade in global markets and falling prices for things bought with credit domestically, like homes and automobiles. (Is ‘Biflation’ Real?, Newsweek, 8/16/10)
Electronic Board Meetings. Despite the obvious advantages of using technology and moving to electronic meeting management, few companies have achieved buy-in and taken board meetings to an electronic platform. Some have, however – and South Jersey Industries (SJI) is one such early adopter. (Best practice: establishing an electronic meeting management process, Corporate Secretary, 8/17/10)
Global Corporate Citizenship. Prof. Surinder Pal Singh outlines how global corporate citizenship rests on four pillars: values; value protection; value creation; and evaluation. These four pillars not only underpin the long-term success and sustainability of individual companies, but are also a major factor in contributing to broader social and economic progress in the countries and communities in which these companies operate. Along with good governance on the part of governments, they offer one of our greatest hopes for a more prosperous, just and sustainable world. (The Concept of Corporate Citizenship in a Global Environment, Political Wag, 8/17/10)
As the US markets continue to debate whether we are still in a recession, on the road to recovery, or headed for a double recession, the Indian government is busy imposing regulations to boost corporate philanthropy and social responsibility. In an economy that continues to post steady growth despite upheavals across Europe and the U.S., India Inc. is increasingly facing scrutiny for its role—or notable absence—in the social and environmental growth of the country. (Forcing CSR in India: Is Regulation the Answer?, The CSR Blog, 8/16/10)
Green Chemistry. Two California departments within Cal/EPA are working to identify “chemicals of concern” in consumer products. Eventually, they will push companies to substitute less toxic chemicals and maybe even ban some of those that are killing us now.
Greenest Campuses. 162 American colleges and universities rated by the Sierra Club. Also includes first steps on Chinese campuses.
Proxy Plumbing. The Shareholder Communications Coalition consisting of the Business Roundtable, National Association of Corporate Directors, National Investor Relations Institute, Society of Corporate Secretaries and Governance Professionals, and the Securities Transfer Association prepared a PowerPoint presentation to explain its recommendations for reforming the proxy voting and shareholder communications rules. “This presentation document is intended to help public companies, investors, and other interested parties understand how the proxy system can be improved to benefit all stakeholders.” This is an important initial assessment of feedback on the SEC’s proxy plumbing concept release. I suspect I will disagree with several parts but I heartily endorse their call to:
- Do away with the VIF and replace it with a proxy card.
- Pass voting authority directly to beneficial owners.
- Enable beneficial owners to transfer their proxy authority back to their brokers or bank (e.g. client directed voting) or to another third-party.
Research in Progress. Stanford’s Rock Center for Corporate Governance and the Corporate Secretary’s organization are conducting a survey “to get some hard data and research on what companies are actually doing and hopefully figure out once and for all what elements of governance reform actually lead to improvements and which do not.”
SEC. Rebecca Files finds that cooperation with the SEC through forthright disclosure of a restatement (e.g., disclosures reported in a timely and visible manner) increases the likelihood of being sanctioned, perhaps because it improves the SEC’s ability to build a successful case against the firm. However, both cooperation and forthright disclosures are rewarded by the SEC through lower monetary penalties. (SEC Enforcement: Does Forthright Disclosure and Cooperation Really Matter?, SSRN, 7/14/10)
The SEC settled its suit with New Jersey over securities fraud by issuing a cease-and-desist order, which the state accepted without admitting or denying the findings. No penalties were imposed. According to the SEC NJ claimed it had been properly funding public workers’ pensions when they had not. The SEC has a special unit looking into more public pension disclosures. (Pension Fraud by New Jersey Is Cited by S.E.C., NYTimes, 8/19/10)
The S.E.C. said the fraud began in 2001, when New Jersey increased retirement benefits for teachers and general state employees. New Jersey did not have the money to put behind the new benefits, but every year after that, the state treasurer certified that the pensions were being funded according to the plan.
The SEC finally confirmed they will consider adopting proxy access rules on 8/25. Still no word on threshold, holding period, small issuer exemption. next Wednesday, August 25th at an open Commission meeting. No word on how the big question marks – the ownership threshold and holding period – will be resolved. Sunshine notice. The U.S. Chamber of Commerce has retained Eugene Scalia, the son of U.S. Supreme Court Justice Antonin Scalia, to review the forthcoming SEC rules for a potential legal challenge. (SEC Plan to Pry Open Corporate Boards May Face Challenge, Bloomberg, 8/11/10) J. W. Verret of the George Mason University School of Law has already proposed more than a dozen way to circumvent the law in his paper Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank.
Shareowner Engagement. With the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, power has shifted to shareholders. The 2011 proxy season is a game-changer as the rules require boards to seek shareholder support for compensation programs and even directorship candidates. (Directors, Do You have a Shareholder Engagement Program?, Karen Kane Consulting, 8/12/10)
United States Proxy Exchange (USPX). The USPX is a non-government organization dedicated to facilitating shareowner rights, primarily through the proxy process. They are structured as a chamber of commerce but unlike a typical chamber of commerce—which represents corporate executives—the USPX represents shareowners. Membership includes both institutional investors and sophisticated retail investors—many of whom have finance, corporate or legal expertise from their careers. Together, they work to promote an environment where engaged shareowners create value through the corporations they own. Check out their new website. Please join me; sign up for membership.
The SEC has begun posting public comments regarding their Concept Release on the U.S. Proxy System. I will probably focus my own review on Part IV, section B. “Means to Facilitate Retail Investor Participation.” I sent in a set of initial comments dated 7/16/10, which focus on the need for an An Open Proposal for Client Directed Voting, basically a reprint from my post on the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010.
By posting these comments early, my hope is that others who plan to comment on the Release will read my comments and will be swayed that an open form of what the SEC’s terms “Advance Voting Instructions” is preferable to a restricted form with just a few options. What I would like to avoid is a lot of comments similar to those of Frederick D. Lipman of Blank Rome LLP, who in an otherwise candid and intelligent email said,
I would love to be able to permanently direct my broker to just vote in favor of all management proposals, subject to my ability to revoke that instruction. I would also like the ability to permanently instruct the board of directors’ chosen proxy agents to vote in favor of all management proposals, subject to my ability to revoke that instruction.
While Lipman doesn’t say what his default voting for shareowners proposals should be, I can easily imagine he would have his broker vote against them all, since elsewhere in the email he expresses his concern that “a loud and active corporate governance constituency” could “hijack the shareholder approval process.”
This could occur, for example, if only 20% of the outstanding shares actually voted and they were able to secure the votes of 10.1% of the outstanding shares. In effect, we would be allowing the corporate governance constituency and other activist shareholders with a separate agenda to control the election of directors and other important issues affecting all investors in the company.
Lipman indicates that “If for some reason I decide that I do not like the company, I sell the stock and do not try to change the corporate governance structure. I believe that my attitude is similar to the attitude of most individual investors.”
He may be right concerning the attitude of most individual investors but I think that is simply because as Lipman admits, even though he is the lead author of Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations and Executive Compensation Best Practices (Wiley Best Practices), he does “not have enough economic interest in any of my investee companies to spend the time and effort to analyze their corporate governance situation.”
I don’t find reading proxies a cost effective use of my time either but I don’t subscribe to the idea that shareowners should sell their stock rather than try to “change the corporate governance structure.”
Yes, it can take a lot of effort to submit a shareowner proposal yourself or to run a proxy contest. Unless you hold a large stake in a company, it probably isn’t worth the expense to the individual investor. However, if someone else is undertaking those activities isn’t it worth some very small investment of time to evaluate whether or not they would be likely to improve an already pretty good company?
I urge those who may comment on Part IV, section B to first take a look at sites like ProxyDemocracy.org and MoxyVote.com. These sites are currently in an nascent stage, but they could eventually allow you to align your votes with an organization that reflects your values, even if those values are simply to make as much money as possible in the short-term.
Right now, those announcing their votes in advance are mostly SRI funds like Calvert and Domini or public funds like Florida SBA and the Ontario Teacher’s Pension Plan. As more funds see there is power in announcing their votes in advance because they sway additional proxies we can fully expect more traditional funds like Barclays Global Investors and Vanguard to also announce in advance.
These funds all have access to proxy monitoring services and spend considerable resources actually reading the proxies. Isn’t it preferable to align your votes with a shareowner that shares your values but independently evaluates management than it is to simply trust and vote with management?
I own BP stock but would have welcomed proposals that would have focused management attention more on risk after the Texas oil refinery explosion. Maybe that would have reduced the likelihood of the current Gulf spill. Even the best managers can often benefit from shareowner input. It seems to me they are more likely to get such input if we have an open process for advance voting instructions than one with very few options.
As I publish this post, I just received an email from Lipman’s iPhone: “I have no problem with expanding the choices.” I hope that sentiment is widely reflected in future comments to the SEC.
On July 14, 2010, the SEC published its Concept Release on the U.S. Proxy System, aka proxy plumbing. Mark Latham, a member of the SEC Investor Advisory Committee (SECIAC) and author of VoterMedia Finance Blog created a Table of Contents with page numbers, which you can download from his blog in doc and pdf formats. Press release.
As expected, the SEC met this morning and unanimously approved a concept release on revamping portions of the U.S. Proxy System. There is a 90-day public comment period for this release. The SEC staff will collect comments and, if they deem it necessary, make a recommendation to the SEC commissioners for a rule change or series of rule changes in this area. I will be preparing comments around several issues and would welcome input and feedback from readers of the CorpGov.net blog.
Last year, SEC Chairman Mary Schapiro directed the Commission’s staff to undertake a comprehensive review of the U.S. proxy system – the system that governs the way in which shareholders can vote their shares regardless of whether they attend shareholder meetings. Today, more than 600 billion shares are voted at more than 13,000 shareholder meetings every year.
In the three decades since the Commission last conducted a comprehensive review, there have been dramatic changes affecting the operation of that system. Those include technological innovations, changes in the nature of stock ownership, consolidation of proxy distribution service providers, growth in other types of proxy service providers, and new financial products.
What is the U.S. proxy system?
The U.S. proxy system governs how investors vote their shares on matters presented to shareholders at shareholder meetings. Most investors vote their shares by proxy – that is, they give authority to someone else to vote their shares according to their instructions. This means that investors can vote their shares without having to attend shareholder meetings.
Many investors are “record owners” – that is, their names are listed in the company’s shareholder records – and they can vote their shares directly by granting a proxy. The vast majority of investors in U.S. companies, however, hold their shares in “street name” – that is, in customer accounts with a securities intermediary, which is usually a broker or bank. To vote their shares, these investors, who are also known as “beneficial owners,” typically give voting instructions to their securities intermediary or to a third party (known as a “proxy service provider”) retained by the securities intermediary to receive voting instructions on its behalf.
In turn, the securities intermediary will reflect the beneficial owners’ voting instructions when executing its proxy for shares held in its customer accounts. Ultimately, proxies from record owners and proxies from securities intermediaries (reflecting voting instructions from beneficial owners) are delivered to a vote tabulator to determine the outcome of the vote.
What issues does the concept release address?
The concept release, which requests comment on matters relating to the U.S. proxy system, is organized under three general areas:
- Accuracy, transparency, and efficiency of the voting process. See, for example, my May 15, 2009 petition to the SEC regarding blank votes.
- Communications and shareholder participation.
- Relationship between voting power and economic interest.
The specific matters covered in those areas are:
Over-voting and under-voting of shares: At times, a broker-dealer – or other securities intermediary – may cast more votes, or fewer votes, than the number of shares that the intermediary actually holds. This imbalance results from the way securities transactions are cleared and settled in the U.S. markets.
Some securities intermediaries, primarily broker-dealers, have developed methods to reconcile their records and allocate votes to their customers in order to avoid “over-voting.” One of those methods, however, may result in “under-voting,” which occurs when investors who are allocated the ability to vote fail to do so, and other investors who do vote may be allocated a number of votes fewer than the number of shares they hold.
The concept release seeks comment on whether over-voting or under-voting is a problem, and if so, whether the method used by the broker-dealer to allocate votes should be disclosed, and whether the Commission should require the use of a particular method.
Vote confirmation: The concept release explores the possibility of requiring vote tabulators, securities intermediaries, and proxy service providers to provide each other with access to vote data so investors and issuers can confirm that votes have been received and tallied according to investors’ voting instructions.
Proxy voting by institutional securities lenders: Institutional shareholders often lend their securities, and shares on loan generally cannot be voted by the lender unless the shares are recalled. Without sufficient advance notice of the matters to be voted on, lenders may not be able to recall shares in time to vote on matters of interest. The concept release examines whether shareholders would be helped by requiring the agenda items at shareholder meetings to be identified earlier, so that lenders can make a decision to re-call their shares and vote on issues important to them. In addition, the concept release explores whether mutual funds and closed-end funds should be required to disclose the number of shares that a fund votes at a particular meeting, in addition to how that fund votes.
Proxy distribution fees: Stock exchange rules, last revised in 2002, establish the maximum fees that a member broker-dealer may charge an issuer as “reasonable reimbursement” for forwarding proxy materials. In response to concerns about whether this fee structure continues to constitute reasonable reimbursement, the concept release discusses several potential actions, including having the stock exchanges revise the fee schedule or eliminate it in favor of allowing market forces to determine appropriate fees.
Issuers’ ability to communicate with beneficial owners of securities: Some issuers have expressed concerns that they are limited in their ability to communicate directly with their shareholders. These issuers cite the “street name” system of ownership, as well as rules allowing beneficial owners to object to having their identities disclosed to issuers, as reasons for this concern. Among other things, the concept release seeks comments on whether to preserve, eliminate, limit, or discourage the use of objecting beneficial owner status.
Potential means to facilitate retail investor voting participation: The concept release presents several ideas that could potentially improve retail investor voting participation, including:
- Improving investor education
- Enhancing brokers’ Internet platforms
- Permitting advance voting instructions for retail investors – See An Open Proposal for Client Directed Voting at the Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010.
- Enhancing investor-to-investor communications
- Improving the use of the Internet for distribution of proxy materials
- Data-tagging proxy-related materials: At the suggestion of the SEC’s Investor Advisory Committee, the concept release seeks comment on whether data-tagging proxy-related data, such as information relating to executive compensation and director qualifications, might enhance a shareholder’s ability to analyze issuer disclosures to make informed voting decisions.
Role of proxy advisory firms: Some companies and investors have raised concerns that proxy advisory firms may be subject to conflicts of interest or may fail to conduct adequate research and base recommendations on erroneous or incomplete facts. As a result, the concept release seeks comment on improving disclosure of potential conflicts of interest, enhancing regulatory oversight over the formation of voting recommendations, and requiring eventual public disclosure by proxy advisory firms of their voting recommendations in Commission filings.
Dual record dates: Companies set a date – known as the “record date” – on which persons who are shareholders on that date are entitled to receive notice of a meeting and to vote at the meeting. If a shareholder sells after the record date, that person (who no longer holds the shares) still has the right to vote. This can mean that holders without an economic stake in the matter can influence the outcome of a vote.
Recent changes to state law, however, now allow for “dual record dates” – one for determining who is entitled to receive notice of the meeting and a later one for determining who can vote at the meeting. The concept release requests comment on whether the Commission’s rules should be revised to accommodate dual record dates.
“Empty voting”: The concept release requests comment on whether “empty voting” and related activities are being used to inappropriately influence corporate voting results. “Empty voting” occurs when a shareholder’s voting rights substantially exceed its economic interest in the company – that is, its voting rights are “decoupled” from its economic interest. For example, if a holder of shares buys a put option to sell those shares, the holder retains voting rights on all of those shares, even though it has hedged away at least some of its economic interest. Empty voting can also occur if a shareholder sells its shares after the record date of a shareholder meeting, but before the meeting. In that instance, the shareholder retains the right to vote those shares, even though it no longer has an economic interest in those shares. The release requests comment on, for instance, whether the Commission should consider requiring disclosure of decoupling activities as a possible regulatory response.
According to a post by Jeff Morgan of the National Investor Relations Institute (SEC Previews Proxy Mechanics Concept Release), tomorrow’s concept release from the SEC will consist of three parts (meeting to begin at 10 am EDT):
- Accuracy, transparency, and efficiency in the voting process: over-voting and under-voting, vote confirmation, voting and securities lending, proxy distribution costs including e-Proxy fees and client-directed voting.
- Shareholder communications and participation, including: the NOBO/OBO classification system, the need to increase retail investor participation in proxy voting, investor education, shareholder forums, whether e-Proxy has been successful, and the feasibility of data tagging proxy and vote filings.
- The relationship between voting power and economic interest of shares, and discuss proxy advisory services oversight, record date issues (dual record date feasibility) and empty voting.
The SEC has given notice they will hold an Open Meeting on July 14, 2010 at 10:00 a.m. to consider issuing a Concept Release on proxy mechanics and soliciting public comment as to whether the Commission should consider revisions to its rules to promote greater efficiency and transparency in the U.S. proxy system and enhance the accuracy and integrity of the shareholder vote. The meeting will be broadcast over the Internet for anyone who cannot attend, via the SEC’s website at www.sec.gov.
One part of proxy mechanics is expected to be “Client Directed Voting.” I have prepared a post on that subject largely based on the work of Mark Latham. I anticipate it will go up at the HLS Forum CorpGov & FinReg within the next few days. In the meantime, see my recent post: Q&A on Client Directed Voting. For further background on broader issues, see my Comparison of “Proxy Plumbing” Recommendations, 11/8/09.
Chris Kentouris takes up the issue of Who Pays for Proxy Reform? at Securities Industry News (1/12/2010) “In one corner is the New York-based Broadridge Financial, which is only too eager to tout the efficiencies of the current system in which it holds a virtual monopoly. It’s actually the world’s largest distributor of proxy materials for broker dealers and banks on behalf of beneficial shareholders. On the other corner are the Washington, D.C.-based Shareholder Communications Coalition (SCC) representing issuers and transfer agents, and The Altman Group, a proxy solicitation firm in New York. They say plumbing in the proxy industry is in major need of overhauling.”
Giving corporate management direct access to shareowners registered in street name “goes hand in hand with giving them a say in who will mail or electronically distributes their proxy materials and counts up their votes.” SCC wants issuers to have unfettered access. The Altman Group wants issuers to have access to objecting beneficial owners during a limited number of times a year, like when proxies go out.
For a more thorough comparison of proposals, see my Comparison of “Proxy Plumbing” Recommendations.
Companies have always been able to communicate with shareowners. The layers they have to go through just add expense that ultimately reduce shareowner earnings… although I’m reluctant to endorse any system that puts corporations fully in charge of their own elections.
As indicated in Co-Filers Wanted on Petition to Eliminate Street Name Registration, the United States Proxy Exchange and CorpGov.net are working on “proxy plumbing” reforms that result in more communication between shareowners. We need to look at safeguards, such as “do not call” lists, so that shareowners themselves decide who can contact them directly outside annual elections and proxy contests. There are many details to work out.
Personally, my major concern is that those under “street name registration” only hold “security entitlements,” not real shares. SEC laws and regulations are written to protect shareholders, not those with security entitlements.
Therefore, Broadridge and others are interpreting requirements that apply to proxies as not applicable to their “voter information forms.” Counting blank votes for management, with only a microtype warning on the ProxyVote screen and summarizing resolutions so voters can’t even guess the subject are abuses that would end with a system of direct registration and the use of actual proxies.
These are issues left unaddressed by SCC or the Altman Group. Let’s hope the SEC gives them full attention.
According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.
Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. (‘Genocide-free’ measure rejected at American Funds, AP, 11/24/09)
I suspect Broadridge claims they don’t have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to firstname.lastname@example.org with File 4-583 in the subject line.)
By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don’t actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.
It was supposed to be a temporary measure. Brokers were in a panic because they didn’t have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.
That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don’t want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can’t accurately count ballots because it can’t audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting… and they can do it either before or after the fact.
As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven’t seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.
A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.
I’m participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.