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Monthly Archives: October 2006

October 3, 2006

Overvoting: The Next Big Scandal?

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.

October Eminders is Up!

The latest issue of our monthly email newsletter is now posted.

October 2, 2006

Our Upcoming Perk Survey

Responding to numerous member requests who are grappling with “what is a perk?,” I am in the process of compiling items/thresholds to include in an online survey to help gauge what consensus there might be among practitioners in this area. Please email me any items/thresholds that you want folks to vote upon – your identity will remain anonymous.

At Last! An Opportunity to Comment on ISS’ Proxy Policies

Last week, ISS commenced its first-ever public comment period, allowing anyone to provide input into its 2007 proxy policies. In the past, input was privately solicited from a small diversified group of market players. In my mind, this comment opportunity is at least as important as the SEC’s rule-making process. With director elections no longer routine, ISS’ proxy policies are more important than ever.

The comment period ends next week on October 11th. ISS has made it very easy to submit comments – you can submit your thoughts using their online form; no need to write a separate letter. There are online forms for these six topics:

Director election reforms and majority voting
Definition of an independent director
Corporate performance test in evaluating the effectiveness of directors
Options backdating and springloading policies and equity plan language
Auditor ratification as a ballot item
Climate change reporting and disclosure for shareholders

And ISS wants to hear from everybody, individuals as well as groups. Take advantage of this opportunity or else they might conclude that we don’t want it and not offer it next year! ISS intends to announce its 2007 policies in mid-November.

Investors: Mad about Backdating and Ain’t Gonna Take It Anymore

Speaking of ISS, I taped the bonus panel for the “3rd Annual Executive Compensation Conference” with Pat McGurn and Martha Carter of ISS last week and some of the information was staggering. I knew backdating was a big deal – but getta load of this:

“In ISS’ 2006 Policy Survey, 85% of the respondents indicated that backdating of stock options is very problematic, on a scale of “not at all problematic” to “very problematic.” In situations where a company admits to backdating, 78% of the respondents supported recoupment of the windfall associated with the backdating as a remedy at the company. (Other actions included resignation of any executive involved, including the CEO, and the resignation of the company’s chair of the compensation committee.)” Clawback provisions clearly are “in.”

Next Thursday, hear this ISS bonus panel as well as catch the panel about “how to do clawbacks?” On October 12th, join the 2000 that will participate in Las Vegas – or the more than 3000 that will watch by nationwide video webcast – for the “3rd Annual Executive Compensation Conference.” To be able to understand the practices that you will be describing in the CD&A, etc., you need to attend this major one-day conference that has become a “must” for all directors and all those involved with executive compensation. Note that registration rates are more than half-off for CompensationStandards.com members.

By looking at our agenda for this Conference, you can see that this year’s conference will be even more crucial than before to watch live or by archive. Register today.

Keeping Abreast with Mark Borges: More Analysis and SEC Guidance

I just posted an October Supplement on CompensationStandards.com that compiles the latest blogs from Mark Borges. Mark continues to amaze with his daily insights into the new executive compensation rules, including some recent notes he took on an ABA teleconference in which he participated with Corp Fin’s Associate Director Paula Dubberly.