Brokers and those routine votes

Last week I mentioned that the SEC rules on "routine" broker votes are once again in flux.

Individual investors usually hold their stock in brokerage accounts, registered in its "street name," i.e. the name of the broker. The proxy then, or its agent ADP Proxies, has often voted on routine matters. So: what counts as routine?

Until 2002, most increases the availability of stock options were considered routine, and thus subject to such broker-level rubber stamping. That stopped because of widespread complaints that stock options had become throughout the 1990s an instrument for the distribution of wealth away from shareholders, toward management and employees. Part of the fall-out of the post-dotcom and post-Enron re-appraissal of corporate governance was a change on this point: no more routine broker votes on stock options.

Uncontested directorial elections, though, have continued to be treated as routine. That is what is now up for change.

The first-line regulator on such matters is not the Securities and Exchange Commission but the New York Stock Exchange itself, though the NYSE must submit its rule changes to the SEC for approval. Accordingly, the NYSE has submitted to the SEC a rule change that would prohibit discretionary voting by brokers in uncontested director elections.

Experts at Wachtell Lipton have argued that "the proposed rule change could significantly increase the power of institutional shareholders generally and activist shareholders specifically in influencing director elections and corporate affairs."

The public comment period on this rule change expired Tuesday, March 28.

Here's a link to one of those public comments, what the Investment Company Institute (the trade group for mutual funds and such) has had to say.

The ICI isn't happy. It has concluded "that the proposal would have a disproportionate impact on investment companies and would create significant difficulties for investment companies in achieving quorums and electing ... directors."

For now, I'll leave the issue there, although of course I'll be very happy to hear reactions from readers of this humble blog.

Thoughts on the Berliner charges

Berliner's rumor was rather cleverly crafted. It contained enough specificity of imaginative detail to make it appear that someone 'in the know' was talking.

Here is the i-m he was sending out:

ADS getting pounded - hearing the board is now meeting on a revised proposal from Blackstone to acquire the company at $70/share, down from $81.50. Blackstone is negotiating a lower price due to weakness in World Financial Network - part of ADS’ Credit Services Unit, as evidence by awful master trust data this month from the WFN Holdings off-balance sheet credit vehicle.

The whole incident does tend to reflect poorly on "efficient markets" theory, at least in any very strong form.

On the other hand ... if the EMH is understood on a day-to-day basis (rather than minute to minute) the incident may be educed in the theory's support. ADC did 'get pounded' by the rumopr that it was getting pounded -- yes. But the pounding only lasted for minutes, and at the end of the day the price was back about where it had started. Even before the company had had a chance to issue a denial that the meeting had ever occurred.

Furthermore, the first MSM news coverage that the rumor ever got was coverage of its falsehood under the heading "Anatomy of a Bum Rumor".

Congrats to the folks over at the WSJ blog for getting this story both quickly and accurately.

Third, let me ask a very naive sounding question. Why does exchange self-regulation seem so toothless? Is it really toothless, or is that a false impression? What happened to Mr. Berliner or his employers in terms of their ability to trade on the NYSE hereafter? The SEC's complaint makes no reference to any action by the NYSE itself on that point.

Why not? Hmmmm. The obvious answer is that it is easier to do nothing than to do something, just as in an industrial context it is easier to pollute than to install smokestack scrubbers.

But that obvious answer isn't, by itself a very good one. The problem with pollution is that it's an "external costs," -- the manufacturers with the smokestacks are naturally tempted to pass those costs on to the public at large. But the costs imposed by such disinformation campaigns as Berliner's AREN'T EXTERNAL. They are costs imposed upon some members of the exchange itself by other members thereof.

This should, logically, be the ideal case for self-regulation. Why didn't it happen? I have a theory (I always do) but I'll hold it for now. We'll be back to covering proxy contests in this space tomorrow. Its the height of that season.

Luby's: Fish or Beef

Investors in Luby's, a cafeteria-style restaurant chain, at any one of which you might well find yourself standing in line behind some fellow who's hesitating between the fish plate or the beef, have a choice to make of their own. Stick with the Pappas family, or go with the dissident slate.

And the professional kibitzers -- otherwise known as proxy advisory services -- are saying the "fish" offered by the company's largest shareholder, Ramius, looks good.

They've still got a bit more than a week to fill up their plate and take a seat. The annual meeting is January 15.

Luby's has been a publicly held corporation since 1973 and has been listed on the New York Stock Exchange since 1982. The two members of the Pappas family, Christopher and Harris, arrived in 2001. Currently, Chris P is the CEO and Harris P is the COO. And there's the rub.

But it's a lazy Sunday and I'll stop here, holding back discussion of the pros and cons of Pappas family control for tomorrow.

As for Ramius, I'll simply observe that my regular readers may remember the name.