Governance for Owners USA Inc Peter C. Clapman, Chief Executive Officer
3 Valley Road Scarsdale, New York 10583 Tel: +1 914 886-8701; email: pclapman@computer.net www.g4owners.com
Stephen Walsh Esq. Vice-President, Operations New York Stock Exchange 20 Broad Street New York, NY 10005 29th June 2006
Via email – nyseclientservices@nyse.com
Dear Mr. Walsh,
Re: Comment letter supporting Recommendations of the Proxy Working Group
I am writing on behalf of Governance for Owners USA, Inc. in response to the request for comments on the Report and Recommendations of the Proxy Working Group to the New York Stock Exchange. We are the subsidiary of Governance for Owners Holdings, LLP, an organization in the UK which provides global investment and governance services to institutional investors. We provide stewardship services for such investors in the US and, thus, have a strong interest in the regulatory and policy issues affecting the investment environment. As you know, I was a member of the NYSE Working Group that made these recommendations. I was a strong supporter of the totality of the Report, particularly the recommendation that Rule 452 no longer consider the election of directors to be a routine matter. Under this recommendation, brokers who are not given instructions by beneficial owners for shares held in street name would not be able to vote those shares. In the past, broker votes were almost always voted in their entirety in favour of the management position. This practice had the effect of reducing the accountability of directors to shareholders, and was a powerful deterrent to improving corporate governance standards in the United States. As we know from the Working Group efforts, the majority of non-voting shareholders have no idea that their shares were voted in this fashion, another aspect of the current situation that is contrary to fairness and proper corporate governance.
The independent champion for long-term share owners Subsidiary of Governance for Owners Group LLP (UK)
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The NYSE has appropriately reaffirmed its intention that it should be a leader in corporate governance and investor protections. Consistent with this intention, the Working Group made the determination that reflects common sense and practical realism—that in the current corporate governance environment, the election of directors can never be viewed as routine. This issue, of course, arises in the context of the new and increasing practice of requiring majority vote as the proper standard for director elections. Having elections is certainly a positive development, but to be credible, these elections must be fair. Unless Rule 452 is changed as to the election of directors, the system of elections would remain unfair, and would jeopardize the improving the standards of accountability of directors to shareholders. Currently, it is estimated that for any given company, between 20-25% of the vote is cast by brokers in favour of the management slate of directors. Brokers have no incentive but to support management so this reality is not surprising and cannot be expected to change. Implementation of the recommendation is essential for the majority vote principle for the election of directors to work with integrity and consistent with the good faith of those companies that have adopted the majority vote standard. Regardless of the form it takes—director resignation or inability to serve—the vote has to meet basic tests of actual and perceived fairness. The current rule in practical terms is the equivalent of a 100-yard race where one contestant has a starting line 20-25 yards ahead of the others. If that contestant “wins” the race by 15 yards, is that truly a win? Does a company that adopted the majority vote rule really want to inform shareholders that a director who achieves a vote above 50% ONLY because of broker votes is truly elected? We believe that companies in those circumstances do not want to face shareholders with that position. Any company that would rely on current Rule 452 would be and should be challenged as to whether they adopted majority vote in good faith and were not disingenuous. We do not believe that such companies want that result and to be so regarded. Immediate implementation of this recommendation is necessary and will not negatively affect the great majority of companies that are acting in the interests of their shareholders. Failure by a director to achieve majority vote will be an extremely rare occurrence and will happen only when the company or the director in question has performed badly in clear demonstrable ways. Not all shareholders have similar approaches on corporate governance issues. Thus, failure to achieve majority necessarily will mean that a very wide spectrum of investors, including many investors that traditionally have been highly supportive of management have concluded that particular directors should no longer serve.
The independent champion for long-term share owners Subsidiary of Governance for Owners Group LLP (UK)
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In conclusion, the NYSE Working Group has made a recommendation that when implemented will be essential to the proper functioning of majority vote standards for election of directors. These new standards, which we believe will gain increasing acceptance and become the prevailing norm, are critical to the basic principle that directors are accountable to shareholders. The most practical means to promote such accountability is to provide a better system of director elections and voting that is fair and encourages improved corporate governance. The NYSE can now implement a critical advance in that process. We strongly support immediate implementation of the recommendation to provide that election of directors is not routine and that only shares instructed by the beneficial shareholders of the company shall be voted. Very truly yours,
Peter C. Clapman President & CEO Governance for Owners USA, Inc.
The independent champion for long-term share owners Subsidiary of Governance for Owners Group LLP (UK)