Miscounting Shareholder Votes
J. Robert Brown | Thursday, August 7, 2008 at 06:15AM An issue that deserves far greater attention concerns the recent miscount of the votes in connection with the election of directors at Yahoo. The commentary has been passing, although as usual Corporate Governance noticed and asked the right questions.
As was recently reported, there was a significant but not outcome determinative miscount in connection with the recent election of directors at Yahoo. The original announced tally showed that Jerry Yang, the CEO, received 85% of the votes cast and Roy Bostock, the chairman, received 80%. After complaints from institutional investors that the tally was inaccurate, Broadridge Financial Solutions went back and recalculated the tally finding that Yang received only 66% and Bostock only 60%. A huge discrepency. The explanation? According to one source, Broadridge claimed the error arose from underreporting share numbers that exceeded eight digits. Don't worry. Chuck Callan from Broadridge, a Senior VP Regulatory Affairs said that "the problem was identified and fixed...the error did not change the outcome."
The error apparently came from Broadridge which was hired by Capital Research and Management, a large shareholder of Yahoo, to transmit its votes to the company. While the published reports make it sound like Broadridge worked only for Capital Research, this is unlikely. Broadridge (the successor to ADP Shareholder Services) is widely used by brokers and other investors to distribute proxy materials to beneficial owners and to tabulate and submit vote totals. See Exchange Act Release No. 43487 (Oct. 27, 2000)("Nearly all large broker and many bank intermediaries currently outsource the proxy material distribution function for beneficial security holders to ADP Investor Communications Services."). In other words, more than the inspector of elections under state law, it is Broadridge that tallies most of the votes in connection with shareholder meetings.
The role of Broadridge represents a gap in the regulatory system. Particularly with beneficial owners, the legal obligation to ensure that votes (voting instructions actually) are properly tallied and submitted rests with the brokers (and banks) under the rules of the stock exchange and the proxy rules (Rules 14b-1 and 14b-2). It is a complicated and circuitous system laden with problems and little enforcement. Brokers, however, typically contract out the responsibility to Broadridge, which has something approaching a monopoly over the services. With the relationship contractual, Broadridge is free of any direct regulation of the Commission or the securities laws. This is a problem. See Marcel Kahan & Edward B. Rock, The Hanging Chads of Corporate Voting, August 13, 2007 ("The complexity of the custodial ownership system, combined with the pressure of numerous shareholder votes, creates a system that is far more complex and fragile than the one anticipated by the Delaware legal structure. There are somewhere around 17,000 reporting companies. Most of these companies are subject to the SEC proxy rules when they solicit proxies. Finally, annual meetings are seasonal, with most taking place during the second quarter of the calendar year. Broadridge delivers more than one billion communications to investors per year. It is an accident waiting to happen.").
With shareholder votes often becoming closer, particularly in an era of majority vote election requirements for directors, the system of counting votes needs to be accurate. The example of Yahoo shows that Broadridge does not have a system in place sufficiently robust to catch mistakes that could amount to 20% of the total votes cast. While in this case, the change did not affect the outcome, that will not always be the case. Indeed, even much smaller mistakes can be outocme determinative. Take a look, for example, at In re Transkaryotic where it was announced that a merger passed but evidence arising in litigation subsequently indicated that in fact it might have failed.
Broadridge has been at the center of other complaints. Some companies have professed disatisfaction with Broadridge over the implementation of the eproxy system recently approved by the Commission. Certainly, return rates by retail investors have been low. And it is not a new problem. It is discussed in my article, The Shareholder Communication Rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility
The system of shareholder voting cannot be sustained where those tabulating votes can make errors in the vicinity of 20%. Moreover, without regulatory oversight, errors in vote tallies will rarely if ever become public. In other words, we don't really know how often these kinds of mistakes occur. It is an area that ought to be examined by the Commission.
Reader Comments (1)
Great to have theRacetotheBottom do the heavy lifting of a bit more research on this one.