MID-MEETING-SEASON SANITY CHECK
IMPORTANT REMINDERS ON THE MATH - AND ON THE “OPTICS” - AND ON THE “AUDIBLES” OF VOTE REPORTING
Earlier this week your editors attended a very-large-company meeting of shareholders that was to convene at 8:00 a.m. When the special “extra-early-morning tabulation” came over the wires everone’s attention immediately fixed on one of the 12 directors up for election whose FOR vote of 89.4% jumped out from the page, where all the other candidates were in the 91+ to 94%+ range. The “optics” here were lousy and we were sure that the low vote-getter, and the chairman too, were understandably perturbed.
The first thing we did was to compute the outlier’s percentage from scratch. And, lo and behold, the tabulating agent had used the wrong denominator - incorrectly including Abstentions in the “votes cast on the matter,” which was what the company’s bylaws specify as the standard to be used. Abstentions, as we have written year after year, are decidedly NOT - by definition - “votes cast.”
After computing the percentage correctly, the outlier’s percentage jumped to a very much better looking and totally unremarkable 91.8%. (The other directors picked up a few decimal points in their For votes too, but there was not nearly as noticeable a difference, because the outlier had an unusually large number of abstainers vs his peers.)
Had the company been one of the many companies that still report the voting outcomes for directors by saying “Each director received at least… 89.4% … of the votes cast” the “audibles” would have been even worse than the visuals - and incorrect besides.
Normally, to give the tabulating agent its due, this particular agent has lately been reporting the percentages “With Abstentions” and without them…So we chalked this up as a relatively minor faux pas, AND, we chalked up the fact that the totals on five proposals did not equal the quorum number, due to rounding issues, to the fact that they were rushing to make an unusually early deadline, since normally they fix any rounding errors before sending the report - .
This prompts us to re-issue our annual reminder that the number-one reason for vote-reporting snafus is RUSHING. Never, ever rush to issue the Final Report on the Voting…And never, ever, let yourselves be pushed to finish up fast by over-anxious onlookers.
A reminder as to the proper way to calculate and report percentages also seems to be in order, since there are at least eight ways to do these calculations, depending on the bylaw provisions that pertain to the specific proposal at hand. The “trick” is all in using the proper denominator:
1. Still the most common standard for “approval” of a proposal is “A majority of the shares present at the meeting” - commonly referred to as “the quorum.” Here, the denominator is a big one - the sum of the For, Against, Abstain and Broker-Non-Vote totals.
2. In the past few years, many companies have been wisely changing their bylaws to require
“A majority of the votes present and on the matter.” This makes for a much smaller denominator, and thus, for bigger percentage numbers both for and against votes, since the big BNV number is not included in the calculation.entitled to vote
3. Even smarter companies have amended their bylaws to require “A majority of the votes present and voting on the matter” - which means that abstentions - which are not ‘votes cast’ - are NOT included in the denominator, nor are those BNVs.
4. Many companies have always had a standard of “The majority of votes cast” for the approval of most matters - even before this phrase became widely referred to as a “majority voting provision” - which, like item 3 above, means that there are no abstentions, and no BNVs of course, in the denominator; just the sum of the For and Against votes.
5. A surprisingly large number of companies that adopted “majority voting standards” over the past few years went a step further that the formulation in 4 above, to require - as many of the most economically significant proposals often do as well - that each director must receive a majority of the outstanding shares to be “approved.” This produces the largest denominator of all, and sometimes leads to totally unwelcome and often unexpected outcomes when there are large numbers of BNVs, Abstentions, and Votes-No for some directors….or for other significant transactions.
6. An increasing number of companies require some proposals to receive a majority of the votes cast - without the votes of “interested” or “affiliated investors” - which can often be a challenge for closely held companies to figure out, much less to meet successfully.
7. Many companies have also been putting “caps” on the number of shares that can be voted by large holders - and/or, in a relatively new but fast-growing wrinkle - require that shares above a certain percentage level must be voted in proportion to the votes cast by unaffiliated investors. Provisions like these require issuers, and their tabulators and Inspectors, to do some critically important spadework up-front - to determine exactly who these investor are, exactly where and how their shares are held - and to be sure that someone communicates with the investors themselves - and with the right people at their custodial institutions if they have their shares with one or more banks, brokers or nominees who hold the legal authority to cast the votes - which such holders often do…and then, to walk them through and “do the math” with them.
8. Last but far from least, many proposals require so called super-majority votes in order to be approved…like 66 and 2/3rds percent, or sometimes more: Here, the big question is “Two-thirds of what?” So you will have to go back to the bylaws to see exactly what should be included in the denominator for each such proposal.
Our usual advice to companies on reporting voting outcomes is to avoid reporting percentages altogether: They are not required to be in your 8-K, and, unlike in the good old days of yore, when company-sponsored proposal usually got For votes in the high 90s - that is increasingly not the case today. So why draw attention to votes that are very close, percentage wise - or worse, that have gone badly for the company position. But many times you DO need to calculate them…and if so, be 100% sure that you and your team have calculated and used the correct denominator for each proposal on the ballot before announcing which proposals have been approved…and not approved.
Also, while we are at it, be aware that the only numbers that matter to shareholder proponents are the For and Against votes - and the margins between the two sets of numbers. And these days, as we’ve noted many times before, if a shareholder proposal draws support in the mid-to-high teens, percentage wise, there are issues out there that need addressing.
A FEW COMMENTS ON THE “AUDIBLES”: When reporting on the outcomes at your shareholder meetings, please say that proposals have “been approved” or “not approved”: Do not say that proposals have “passed” - since, unless it’s a binding bylaw proposal - only the board can pass it. And please, we urge you, do not style this, or turn it into this into a seeming “fight” by saying the proposal was “defeated,” This bellicose-sounding presentation can come back to bite you big next year.
HERE’S THE MOST COMMON QUESTION WE HAVE RECEIVED FROM ISSUERS AND THEIR COUNSEL THIS YEAR, THANKS MOSTLY TO CARELESS DRAFTING AND/OR TO CARELESS READING ABOUT THE EFFECT OF ABSTENTIONS…ALONG WITH THE ANSWER: “The Proxy Statement says that Abstentions count as Votes Against. Doesn’t that mean they should be added to the No Votes when computing and reporting the outcomes?” No, no, no….
Stay tuned for more from the meeting front in our second quarter issue where there will be a LOT of new and odd and interesting stuff….Including our comments on State Street’s new and unilateral broadside on what “Abstentions” really mean…to them.