NEW YORK Aug 31 U.S. investor activists have turned once landslide shareholders elections into much closer contests, but there are growing concerns that corporate voting technology is out of date and some election outcomes might not be accurate.
A new academic paper by two law professors suggests that a wave of disputes over shareholder ballot results could be on the way as votes on merger deals and director elections become much more closely fought.
And in what's sure to be a controversial proposal, they suggest that the mechanics of elections should be revamped before regulators contemplate giving shareholders additional voting rights. Expanding shareholder voting is a hot topic now before the U.S. Securities and Exchange Commission.
The study's authors and other critics of the current system draw parallels with the notorious punch card ballots used in the 2000 U.S. presidential race in Florida, when a recount dispute focusing on "hanging chads" and inscrutable ballots had to be resolved by the Supreme Court.
"Like in the presidential election in 2000, we learned that the voting system in Florida was not accurate enough to say with confidence who actually won," said Marcel Kahan, an author of the study, a working paper awaiting publication titled "The Hanging Chads of Corporate Voting."
"In fact, the system is so complicated and so much lacking in transparency, we don't even know how big the problems are," said Kahan, a New York University law professor.
Kahan and co-author Edward Rock, a business law professor at the University of Pennsylvania, say the current system is "crude, imprecise and fragile" in large part because the bulk of shares are indirectly held by owners, creating layers of complexity when sending out and counting ballots.
Given the existing problems, this is not the time to expand the opportunities for shareholder voting, they suggest. Shareholder activists are pushing to be able to place their own director nominees on company ballots, among other proposals.
Rock says that while the so-called shareholder democracy movement is one "I have a certain amount of sympathy with, if you're serious about that, then you have to make sure the technology of voting is up to it, and it's not."
HOTLY CONTESTED RACES
Problems with the voting system aren't new. But today, there are more close votes, making the actual tallies much more important, Kahan and Rock say.
Proposals to re-elect directors, for instance, used to only need a plurality of votes to pass, meaning directors could keep their seats with a single "for" vote. But under investor pressure, more companies have enacted majority voting standards for directors in uncontested races to be re-elected.
At CVS Caremark Corp (CVS.N) director Roger Headrick narrowly won re-election with 57.2 percent of the vote at the annual meeting in May, although a labor union group complained that the vote was swung by millions of votes cast by brokers who had not received specific instructions from their clients. Headrick has subsequently retired from the board.
Other proposals also have been closely fought. The merger between Compaq and Hewlett-Packard Co. (HPQ.N) in 2002 was approved with only 51.4 percent of the shares.
In another slim victory, French insurer AXA (AXAF.PA) prevailed in its 2004 acquisition of MONY Group with 53.8 percent approval. The approval came only after the original MONY shareholder meeting date was changed when it appeared the deal would be rejected. A new meeting date allowed more recent shareholders, who bought MONY stock after the deal was announced, to cast ballots on the merger.
And in a closely watched vote this year, a proposal giving shareholders more say over executive pay packages at Verizon Communications Inc (VZ.N) passed in May with just a hair over 50 percent of the votes.
AN ARCANE SYSTEM
Kahan and Rock say the voting problems don't lie with the more than 12,000 U.S. public companies themselves, which outsource much of the balloting procedures to third parties.
The two professors blame a decades-old U.S. system of custodial ownership of shares by banks and brokers that was originally designed to facilitate clearing and settlement of trades. The system ended the days when shareholders needed paper share certificates to prove they were stockholders.
But before votes can be tallied, the third parties need to go through the chore of identifying and locating the true owners so that they can receive proxy materials and cast ballots.
Companies themselves do not know the identities of many small shareholders and it can be hard to determine who actually owns shares when it comes time to vote, Kahan and Rock conclude.
The growth of short-selling also has had complicated things. When brokerages lend shares to short sellers, which bet that stock prices will fall, it's often not clear whose shares are being lent and who has voting rights, Kahan and Rock said.
One remedy, they say, would be to require all investors to be known to companies, so that corporations can send them ballots directly.
That's a view supported by the Business Roundtable, which says it sees many problems with the current system and asked the SEC several years ago to look at the matter.
The commission has not directly taken up the issue so far, said Tom Lehner, the trade group's director of public policy.
"The system is in need of reform because it hasn't kept up with technology," he said. Voting "should be a lot more efficient than it is."