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As overvoting has been my pet peeve for quite some time, I’m pretty excited about tomorrow’s webcast – “Understanding Overvoting and Other Tricky Voting Issues” – where a group of experts will educate us about what overvoting is all about and why you should care.

Education is important because there is so much misinformation out there on the topic and it’s pretty hard to pin down exactly what is going on “behind the scenes” when it comes to director elections. For example, did anyone find it peculiar how it was reported that it would take one month for tabulators to finalize the results of the recent contested election at Heinz? One month!

As evident from this press release, the NYSE is paying more attention to overvoting issues these days as it recently fined UBS, Goldman Sachs and Credit Suisse for permitting overvotes to occur. Here is an excerpt from the NYSE’s press release:

“There are no standard industry procedures that govern a Tabulator’s approach to dealing with over-voting. Depending upon the procedure implemented by the Tabulator, certain customers’ voting instructions may not be represented as originally given. Enforcement’s investigations have not uncovered any instance in which an over-vote improperly affected the outcome of a proxy vote or any instance in which a shareholder who attempted to vote was disenfranchised.

However, by submitting an over-vote, a member firm subjects its customers to the risk that the Tabulator would not accept their votes. Through an under-vote, a member firm subjects its customers to disenfranchisement by the broker-dealer’s own actions.”

In my view, it’s only a matter of time before an overvote will “improperly affect the outcome of a proxy vote” as majority vote standards become more common and investors increasingly challenge boards and management. At a minimum, the time clearly has arrived for standard industry procedures! Floyd Norris of the NY Times recently focused on overvoting and related issues in this column, “Time to Bring Share Lending Into the Light.” And we have posted some overvoting articles in our “Annual Stockholders’ Meetings” Practice Area.

The Impact of Short Selling Tactics

Among the topics to be discussed on tomorrow’s webcast is how lending shares and short selling plays into the quagmire of vote outcomes. Naked short selling has caught the attention of the SEC, as the agency recently proposed to amend Regulation SHO (see our new “Short Sales” Practice Area). And there are groups whose sole purpose is to tackle this issue, such as the National Coalition Against Naked Shorting.

Companies with smallish floats likely are the most vulnerable to short selling tactics in elections. One of our webcast panelists, Carl Hagberg, supports that view and disagrees with those that assume that small floats would lead automatically to higher borrowing costs. Carl believes that those that don’t think illiquid companies are vulnerable fail to account for the facts that (a) you only need to borrow stock for one day (ie. the record date) to get the votes; (b) a lot of “lenders” never even have stock to “lend” – and no one can ever tell since the “loan” is effected by a mere “bookkeeping entry”; and (c) there no penalties if the stock never really moves (who’s checking? no one!) – or if bookeeping “errors” are simply reversed later! Carl’s latest issue of his Shareholder Service Optimizer shows how there is fairly compelling evidence that the Hewlett-Packard/Compaq merger would not have been deemed to have been approved by shareholders “but for” overvoting making the difference.

There clearly are a lot of thorny issues involved – although why some of these issues are thorny is beyond me. For example, if the brokers can keep track of who gets a dividend, why can’t they keep track of who has voted? And why is the disclosure about the ramifications of having one’s shares lent so unclear in most brokerage agreements (what a place for plain English!)? We shall learn more about these tricky issues during tomorrow’s webcast.

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