Tuesday, September 05, 2006
Panel Proposes NYSE Proxy Rule Changes
FROM SECURITIES INDUSTRY NEWS
Page One
September 4, 2006
Panel Proposes NYSE Proxy Rule Changes
By Chris Kentouris, Senior International Editor
September 4, 2006 - A New York Stock Exchange-sponsored committee has recommended a sweeping overhaul of the Big Board's decades-old proxy rules, calling for prohibition of so-called discretionary voting for corporate directors and further analysis of fees for mailing proxy materials to beneficial shareholders.
The working group also said that the NYSE should support efforts for issuers to improve communications with beneficial shareholders, although it did not specify how. Among the possibilities often cited by corporate issuers and transfer agents is mailing proxy materials to "street name" shareholders directly rather than through financial intermediaries.
The proxy working group was headed by Larry Sonsini, chairman of Silicon Valley law firm Wilson Sonsini Goodrich & Rosati, with major buy- and sell-side firms and some of the largest corporations represented, including Merrill Lynch & Co., Morgan Stanley, Vanguard Group, Exxon Mobil Corp., Pfizer and US Steel Pension Fund. According to know-ledgeable sources, the NYSE board could ratify the proposal affecting discretionary voting as early as October, though implementation may wait until Jan. 1, 2008 to give two newly created subcommittees the opportunity to present their findings to the NYSE. One subcommittee, on proxy fees, is led by Gary Glynn, director of US Steel's pension plan. The other, addressing direct communications, is headed by Exxon Mobil corporate secretary James Parsons.
"We are in favor of eliminating the discretionary voting for boards of directors but feel that issuers already communicate well with their street-name shareholders through their financial intermediaries," says Donald Kittell, EVP of the Securities Industry Association (SIA), which is holding a symposium on proxy issues on Sept. 14 in New York, where these proposals will be discussed.
The NYSE's Rule 452 allows broker-dealers to vote on behalf of beneficial shareholders for "routine items" if they do not receive the investor's vote ten days prior to a corporate meeting. Brokerages typically vote uninstructed shares in favor of management. Smaller and midsized issuers, as well as many mutual fund companies and larger issuers, favor the rule as it makes it easy for them to attain a quorum. (The ten-day rule does not apply to shares held through banks.)
The working group believes that the election of directors can no longer be considered a routine event in the life of a corporation," says the NYSE working group's report, which was completed in June and delivered to the NYSE board. "Directors have authority over the most fundamental issues of corporate governance today, while investors, regulators, courts and others have all recognized the critical role directors play in the life of a corporation."
Against Proportionality
The panel rejected a proportional voting requirement, in which unvoted shares are tallied by brokerages in the same proportion as those received. Charles Schwab Corp., for one, has adopted such an approach on routine matters voted at its own annual meetings. Many issuers also use proportional voting for shares in employee plans.
But the NYSE group opposed the premise, regardless of whether uninstructed shares are voted in proportion to all votes cast at a meeting or in proportion only to those designated by street-name holders who give instructions. The reasoning: Proportional voting assigns votes to shares that have not been voted by beneficial shareholders. Proportional voting may also increase the influence of shareholders who do vote-typically beneficial rather than registered-which can make it easier for companies to win approval for non-routine matters.
The group also declined to define parameters for "vote no" campaigns or other controversial elections that, classified as non-routine, would eliminate the broker vote.
Since 1937, the NYSE has been responsible for setting the policies-and fees-for broker-dealers and banks to communicate with investors holding their shares in street or nominee name. Currently, only financial intermediaries are allowed to select proxy agents for street-name shareholders and they are reimbursed by issuers according to rates set by the NYSE. The American Stock Exchange and Nasdaq Stock Market follow suit.
Up to 80 percent of investors hold their shares on the books of an issuer in the name of a financial intermediary; the rest do so in their own name. Broker-dealers and banks, which must mail proxy materials on behalf of issuers to beneficial shareholders, typically outsource the cumbersome, technology-intensive process to Automatic Data Processing (ADP), the biggest U.S. proxy mailer.
Raising the Fee Issue
Proxy-mailing fees have long been a contentious subject. A few large issuers and their transfer agents have argued for more than a decade that the costs of communicating with street-name shareholders are far higher than those for registered owners. Another bone of contention is ADP's role as a centralized billing and payment processor between 800 banks and brokerages and 13,000 issuers-and reimbursements to financial intermediaries for outsourcing proxy mailings to ADP.
In 2002, following recommendations by a proxy-voting review committee convened at the suggestion of the SEC-it was chaired by American Express Co. and had representatives from the key constituent groups-the NYSE reduced the cost of mailings from 50 cents to 45 cents per beneficial shareholder. It also lowered the incentive fee for eliminating mailings from 50 cents to 25 cents, but only for companies with more than 200,000 street-name shareholders. Still, some issuers maintained that the price cut wasn't steep enough and disputed ADP's analysis of how proxy fee changes would affect the total proxy compliance costs incurred by large and small issuers.
"At the time the fee review was completed, only ADP provided information on what it cost to do mailings. There was never any independent analysis," recalls Claudia Holcombe, managing director of transfer agent Computershare, who advocates an independent analysis of proxy fees. But that committee ultimately concluded that the cost incurred by issuers for maintaining registered shareowner accounts far exceeds that of street-name shareowners.
While she was executive director of shareholder services for AT&T, Holcombe testified before a previous proxy review committee as president of the Corporate Transfer Agents Association, now the Shareholder Services Association. The trade group, which represents issuers, has often pointed out discrepancies between what issuers pay for proxy mailings to registered shareholders and fees charged by ADP for street name. The 2002 panel noted that services provided for mailing proxies to street-name shareholders were "very different, more comprehensive and much more complex than the services provided for registered processing."
Counters Charles Callan, SVP of regulatory affairs for ADP, "The NYSE acknowledged the need to address total costs incurred by issuers, not just proxy fees. ADP has been responsive-during the 2006 proxy season, over 45 percent of physical mailings were eliminated, up from 27 percent in 2002. This has resulted in hundreds of millions of dollars in additional cost savings to issuers. In contrast, statistics on total cost savings are not reported for registered processing."
Rekindling the debate over proxy-mailing costs, the SEC floated a proposal late last year to require that proxy statements be delivered on the Internet unless investors expressly request paper documents. The SIA, some issuers, fund managers and even shareholder activists opposed the idea, warning of unintended consequences that would lower investor participation and raise issuer costs. If the SEC's proposal is adopted, the NYSE would have to reduce its proxy fees.
Holcombe endorses the proxy working group's recommendation that the NYSE evaluate fees and find ways for issuers to communicate and send corporate materials to shareholders directly rather than through intermediaries. "Given the move to scrap discretionary voting, some companies will want, or need, to communicate more frequently with beneficial shareholders, hence the push for direct communications," says Holcombe. "In a competing market environment, issuers would have the right to choose either their transfer agent, ADP or other qualified third party as proxy-mailing agent."
However, not all investors want companies to know their identities. As many as 30 percent of all street accounts, and the majority of accounts held by institutional investors, are "objecting beneficial owners," which means that the intermediary cannot reveal the name of the underlying client. Transfer agents, who often mail proxy materials to registered shareholders, could stand to benefit if tapped by issuers to send information to street-name shareholders. Atlanta-based Swingvote, a fledgling rival to ADP, already offers an automated platform that allows corporations to communicate with shareholders while protecting institutional investors' identities.
Page One
September 4, 2006
Panel Proposes NYSE Proxy Rule Changes
By Chris Kentouris, Senior International Editor
September 4, 2006 - A New York Stock Exchange-sponsored committee has recommended a sweeping overhaul of the Big Board's decades-old proxy rules, calling for prohibition of so-called discretionary voting for corporate directors and further analysis of fees for mailing proxy materials to beneficial shareholders.
The working group also said that the NYSE should support efforts for issuers to improve communications with beneficial shareholders, although it did not specify how. Among the possibilities often cited by corporate issuers and transfer agents is mailing proxy materials to "street name" shareholders directly rather than through financial intermediaries.
The proxy working group was headed by Larry Sonsini, chairman of Silicon Valley law firm Wilson Sonsini Goodrich & Rosati, with major buy- and sell-side firms and some of the largest corporations represented, including Merrill Lynch & Co., Morgan Stanley, Vanguard Group, Exxon Mobil Corp., Pfizer and US Steel Pension Fund. According to know-ledgeable sources, the NYSE board could ratify the proposal affecting discretionary voting as early as October, though implementation may wait until Jan. 1, 2008 to give two newly created subcommittees the opportunity to present their findings to the NYSE. One subcommittee, on proxy fees, is led by Gary Glynn, director of US Steel's pension plan. The other, addressing direct communications, is headed by Exxon Mobil corporate secretary James Parsons.
"We are in favor of eliminating the discretionary voting for boards of directors but feel that issuers already communicate well with their street-name shareholders through their financial intermediaries," says Donald Kittell, EVP of the Securities Industry Association (SIA), which is holding a symposium on proxy issues on Sept. 14 in New York, where these proposals will be discussed.
The NYSE's Rule 452 allows broker-dealers to vote on behalf of beneficial shareholders for "routine items" if they do not receive the investor's vote ten days prior to a corporate meeting. Brokerages typically vote uninstructed shares in favor of management. Smaller and midsized issuers, as well as many mutual fund companies and larger issuers, favor the rule as it makes it easy for them to attain a quorum. (The ten-day rule does not apply to shares held through banks.)
The working group believes that the election of directors can no longer be considered a routine event in the life of a corporation," says the NYSE working group's report, which was completed in June and delivered to the NYSE board. "Directors have authority over the most fundamental issues of corporate governance today, while investors, regulators, courts and others have all recognized the critical role directors play in the life of a corporation."
Against Proportionality
The panel rejected a proportional voting requirement, in which unvoted shares are tallied by brokerages in the same proportion as those received. Charles Schwab Corp., for one, has adopted such an approach on routine matters voted at its own annual meetings. Many issuers also use proportional voting for shares in employee plans.
But the NYSE group opposed the premise, regardless of whether uninstructed shares are voted in proportion to all votes cast at a meeting or in proportion only to those designated by street-name holders who give instructions. The reasoning: Proportional voting assigns votes to shares that have not been voted by beneficial shareholders. Proportional voting may also increase the influence of shareholders who do vote-typically beneficial rather than registered-which can make it easier for companies to win approval for non-routine matters.
The group also declined to define parameters for "vote no" campaigns or other controversial elections that, classified as non-routine, would eliminate the broker vote.
Since 1937, the NYSE has been responsible for setting the policies-and fees-for broker-dealers and banks to communicate with investors holding their shares in street or nominee name. Currently, only financial intermediaries are allowed to select proxy agents for street-name shareholders and they are reimbursed by issuers according to rates set by the NYSE. The American Stock Exchange and Nasdaq Stock Market follow suit.
Up to 80 percent of investors hold their shares on the books of an issuer in the name of a financial intermediary; the rest do so in their own name. Broker-dealers and banks, which must mail proxy materials on behalf of issuers to beneficial shareholders, typically outsource the cumbersome, technology-intensive process to Automatic Data Processing (ADP), the biggest U.S. proxy mailer.
Raising the Fee Issue
Proxy-mailing fees have long been a contentious subject. A few large issuers and their transfer agents have argued for more than a decade that the costs of communicating with street-name shareholders are far higher than those for registered owners. Another bone of contention is ADP's role as a centralized billing and payment processor between 800 banks and brokerages and 13,000 issuers-and reimbursements to financial intermediaries for outsourcing proxy mailings to ADP.
In 2002, following recommendations by a proxy-voting review committee convened at the suggestion of the SEC-it was chaired by American Express Co. and had representatives from the key constituent groups-the NYSE reduced the cost of mailings from 50 cents to 45 cents per beneficial shareholder. It also lowered the incentive fee for eliminating mailings from 50 cents to 25 cents, but only for companies with more than 200,000 street-name shareholders. Still, some issuers maintained that the price cut wasn't steep enough and disputed ADP's analysis of how proxy fee changes would affect the total proxy compliance costs incurred by large and small issuers.
"At the time the fee review was completed, only ADP provided information on what it cost to do mailings. There was never any independent analysis," recalls Claudia Holcombe, managing director of transfer agent Computershare, who advocates an independent analysis of proxy fees. But that committee ultimately concluded that the cost incurred by issuers for maintaining registered shareowner accounts far exceeds that of street-name shareowners.
While she was executive director of shareholder services for AT&T, Holcombe testified before a previous proxy review committee as president of the Corporate Transfer Agents Association, now the Shareholder Services Association. The trade group, which represents issuers, has often pointed out discrepancies between what issuers pay for proxy mailings to registered shareholders and fees charged by ADP for street name. The 2002 panel noted that services provided for mailing proxies to street-name shareholders were "very different, more comprehensive and much more complex than the services provided for registered processing."
Counters Charles Callan, SVP of regulatory affairs for ADP, "The NYSE acknowledged the need to address total costs incurred by issuers, not just proxy fees. ADP has been responsive-during the 2006 proxy season, over 45 percent of physical mailings were eliminated, up from 27 percent in 2002. This has resulted in hundreds of millions of dollars in additional cost savings to issuers. In contrast, statistics on total cost savings are not reported for registered processing."
Rekindling the debate over proxy-mailing costs, the SEC floated a proposal late last year to require that proxy statements be delivered on the Internet unless investors expressly request paper documents. The SIA, some issuers, fund managers and even shareholder activists opposed the idea, warning of unintended consequences that would lower investor participation and raise issuer costs. If the SEC's proposal is adopted, the NYSE would have to reduce its proxy fees.
Holcombe endorses the proxy working group's recommendation that the NYSE evaluate fees and find ways for issuers to communicate and send corporate materials to shareholders directly rather than through intermediaries. "Given the move to scrap discretionary voting, some companies will want, or need, to communicate more frequently with beneficial shareholders, hence the push for direct communications," says Holcombe. "In a competing market environment, issuers would have the right to choose either their transfer agent, ADP or other qualified third party as proxy-mailing agent."
However, not all investors want companies to know their identities. As many as 30 percent of all street accounts, and the majority of accounts held by institutional investors, are "objecting beneficial owners," which means that the intermediary cannot reveal the name of the underlying client. Transfer agents, who often mail proxy materials to registered shareholders, could stand to benefit if tapped by issuers to send information to street-name shareholders. Atlanta-based Swingvote, a fledgling rival to ADP, already offers an automated platform that allows corporations to communicate with shareholders while protecting institutional investors' identities.
