LINDSAY FROST, AGENDA: What's happening to uninstructed votes at brokerages?
Changes in how brokerages vote proxies on behalf of retail investors are likely to cause boards a few headaches this year.
Most companies these days know who their biggest institutional shareholders are and how much stock they hold. But retail shareholders, who typically each own relatively few shares, are harder for issuers to track down.
But these small shareholders really add up: Retail investors make up almost half the ownership of some very big companies. The problem? Retail investors — whether owning stock or mutual funds — often aren’t the voting type. And, some companies, especially small ones, need retail investors to show up to even reach a quorum for a vote.
Under New York Stock Exchange rules, when retail investors don’t send specific voting instructions, their brokerage firms are allowed to vote on their behalf for routine items.
Brokers can vote these uninstructed shares in three ways: discretionary voting, proportional voting, or they can decide to not vote at all. Discretionary voting is when the broker votes the shares however they see fit; typically such votes line up with the issuing company’s recommendation. In proportional voting, brokers vote uninstructed shares in proportion to the shares for which they do get instructions. For instance, if a broker gets 100,000 shares with voting instructions and half side with management, the broker would split the vote of the remaining uninstructed shares half and half.
But for over a decade, the number of issues that brokerages can vote on behalf of their retail clients has shrunk. In 2009, for example, the NYSE stopped letting brokerage firms vote uninstructed shares on director elections. Then came say on pay and later bylaw amendments. So now, brokers can only vote on a handful of routine items.
In fact, sources say some firms have simply decided not to cast votes on any items to avoid the cost and the risk.
Most recently, major retail platform Charles Schwab and its recently-acquired TD Ameritrade unit eliminated the practices of discretionary and proportional voting altogether. Now they won’t vote any uninstructed shares at all.
This change won’t impact companies with large institutional investor bases. But for those with a strong retail presence, vote results on routine items may look different. And directors might have to put more energy —and money — into retail “get out the vote” campaigns.