Lifting the Lid-Activists renew calls for barring broker votes

By Martha Graybow

NEW YORK, April 17 (Reuters) - U.S. investor rights advocates are stepping up calls for reforms of corporate director elections, saying regulators should bar "legalized ballot-box stuffing" by stock brokers who vote without instructions from their clients.

The right of brokers to cast such proxy votes -- even against their clients' interests -- has long troubled activist investors, who say that brokers typically vote in lock-step with company management's wishes and can tip the scales in contested director elections.

Director elections have become a flashpoint this year at companies hard hit by the mortgage market turmoil, including U.S. savings and loan Washington Mutual Inc WM.N.

Activist investors contend that if the broker votes were excluded, two WaMu directors failed to win a majority at the company's annual meeting this week, based on preliminary election returns.

"It's legalized ballot-box stuffing," said Michael Garland, of the Change To Win Investment Group, an adviser to labor union pension funds. "It's as if the incumbent party in the White House automatically gets New York and Florida in the Electoral College."

Investor rights groups are renewing calls for the U.S. Securities and Exchange Commission to enact an 18-month-old proposal by the NYSE Euronext's (NYX.N) New York Stock Exchange to eliminate uninstructed broker votes in all director elections.

Change to Win said on Thursday it had written to SEC Chairman Christopher Cox urging prompt approval of the proposal. An SEC spokesman was not immediately available for comment.

Amy Borrus, deputy director of the Council of Institutional Investors, said her group was also drafting a letter to Washington Mutual asking its board to clarify the preliminary vote totals and not to reseat director nominees James Stever and Charles Lillis if they did not receive a majority victory excluding the broker votes.

"Director elections are arguably the most important votes cast by shareholders, and they should not be distorted by broker votes," Borrus said.

Washington Mutual spokesman Derek Aney said the company believes the voting was valid.

"Our position is that stock exchange rules say that if a shareholder doesn't tell their broker how to vote, then the broker has the ability to vote those shares however they see fit on the shareholder's behalf," he said. "We know there have been proposals to change the system, but there have been no rules changes."

According to the company, Stever got 57.7 percent "for" votes for reelection, while Lillis got 59.2 percent.

Typically when there is no major shareholder opposition in U.S. corporate director elections, the nominees are reelected with more than 90 percent of the vote.

Another WaMu director, Mary Pugh, resigned before the annual meeting. As chair of the finance committee, Pugh had been blamed by shareholders for not protecting the Seattle-based company from risky mortgage lending. Also at the annual meeting, shareholders voted to ask Chief Executive Kerry Killinger to give up his role as chairman.

Broker votes became a big issue last year in an investor campaign to unseat former CVS Caremark Corp (CVS.N) director Roger Headrick. Headrick received about 57 percent of the vote, but activist investors said he would have received only 43 percent if broker votes were omitted. Headrick subsequently retired from the drugstore chain's board.