Executive Summary

In recent years, the U.S. Securities and Exchange Commission (“SEC”) and industry service providers have made significant changes and improvements in processing and reporting proxy votes. The SEC provided new rules for use of universal proxy cards (“UPC”) for proxy fights (“contested solicitations”) and industry initiatives have led to reconciliation of ‘voting entitlements’ well in advance of shareholder meetings and confirmations to shareholders that their votes are reported as cast.

As described in more detail below, systems for processing and reporting votes of shares held “beneficially” in accounts at custodian banks and broker-dealers, are accurate, transparent, and fair. This is critical: When it comes to the largest proxy contests, the votes of beneficial shareholders can represent upwards of 95% of the total shares voted. In most contests, the outcome is known at the close of the polls.

However, when it comes to the remaining 5% of the votes, those held in “registered” form directly on the books of companies (or their transfer agents), the process is largely manual and opaque. Opposing sides count their own votes without providing the daily status reports that all sides receive for votes of beneficial shareholders. Therefore, in the closest cases, final tabulations by election inspectors can be delayed for weeks while attorneys for each side examine the votes of registered shareholders in a “snake pit.” Moreover, in contrast to systems for processing beneficial shares, there are no independent audits of the process or votes by an internationally recognized certified public accountant firm.

When it comes to further improving the U.S. proxy system overall, the “last mile” involves looking at how registered shareholder votes are processed, reported, and audited, and how they can be confirmed on an “end-to-end” basis to shareholders.

Regarding the first opportunity for improvement, tabulators for each side and election inspectors can improve the system overall by:

1. Providing independent third-party verification (e.g., by a nationally recognized public accounting firm) of the tabulations they perform and,

2. Receiving and processing votes at the beginning of the solicitation and throughout, instead of simply after the polls have closed.

Regarding end-to-end vote confirmation – it is provided today for routine shareholder meetings and should be provided as well for contested meetings. This aspect of the last mile may require the active involvement of regulators along with new communication protocols and process changes by participants in corporate governance.

Notable Improvements in Proxy Voting and Processing

In recent years, the SEC and industry participants have made significant changes and notable improvements in processing and reporting proxy votes for contested shareholder meetings. We highlight the areas below, including:

• Adopting SEC Rules for Universal Proxy Cards

• Eliminating Over-Voting

• Addressing Breaks in Chains of Custody

• Implementing Best Practices

SEC Rules for Universal Proxy Cards

The most notable change in proxy contests was the SEC’s decision to mandate use of universal proxy cards when soliciting persons (other than the issuer) reach out to owners of at least 67% of shares outstanding. The rule change took effect on August 31, 2022.[1] Universal proxy cards must list all persons nominated for election by boards as well as by other soliciting persons. Through early February 2024, UPCs have been sent in 34 proxy contests (some of which were settled before coming to a vote).

The SEC established rules of the road for use of universal proxy cards in the amendments themselves and in subsequent clarification.[2] The clarification was provided in the SEC Compliance and Disclosure Interpretations (“CDI”) issued in November 2023, specifically to address handling of partially marked, unmarked, overmarked, and unsigned voting instructions.[3] Differences in approaches by soliciting parties in handling these so-called “mismarks” were causing confusion among some voters. (In other respects, roll-out of UPC has gone smoothly.) Instances of mismarks pertain to paper ballots only because digital voting platforms have functions to prevent them.

Elimination of Over-Voting

After a 2018 proxy contest at Procter & Gamble, Trian Partners, which nominated a board candidate in that contest, asserted that over-voting by securities intermediaries in some cases was not reconciled until after announcement of the preliminary tabulation.[4] Since then, practices for routine shareholder meetings have been implemented to reconcile voting entitlements for beneficial shareholders and remediate any issues early in the solicitation process so that every entitled vote is counted. Instances of over-voting have been virtually eliminated.[5] The benefits of this change for routine meetings are carrying over to all other shareholder meetings. For example, education of intermediaries on their handling of omnibus proxies is reducing downstream work by preventing many of the discrepancies from occurring in the first place.

Early reconciliation is facilitated by the automation of issuer requests of the Depository Trust and Clearing Corporation (“DTCC”) to provide Shareholder Position Reports (“SPR”) to service providers within a few days of “record date.” By comparing the SPR to the records that custodian banks and broker-dealers provide to their service providers, discrepancies can be flagged, researched, and remediated well before the polls close.

Early reconciliation practices were agreed on by industry participants in a working group on end-to-end vote confirmation.[6] They have reduced instances of the over-voting issue that was reported in the P&G proxy fight. In a 2021 vote confirmation pilot by working group members of 100 shareholder meetings, the average percentage of shares not accepted by the tabulator was 0.16%. In the year ending June 30, 2023, this declined to 0.10% in the 2,499 shareholder meetings where Broadridge acted as tabulator of the votes of beneficial shareholders.

Addressing Breaks in Chains of Custody

Industry participants noted after the very close P&G contest that breaks in the voting chain of custody resulted in voted shares not being counted in the final tabulation.[7] Since 2018, industry participants have worked to institute end-to-end vote confirmation for routine (non-contested) meetings on the beneficial ownership side. While end-to-end vote confirmation is not yet provided for contested meetings, process improvements have reduced the potential for discrepancies in all meetings, including those that are contested. End-to-end vote confirmation is now available for virtually all non-contested meetings of U.S. operating companies and was provided for 4,986 meetings in the year ending June 30, 2023.

In building systems to accomplish vote confirmation, the industry working group focused considerable attention on those areas most associated with anomalies, specifically as pertains to positions held in omnibus proxies. Greater communication among participants along with new processes are reducing the most common discrepancies that can arise, and fixes for a problem at a given meeting, particularly around chain of custody, can eliminate the problem for all subsequent shareholder meetings for all issuers whether routine or contested.

Record holder and respondent bank processing of omnibus proxies has been improved through education and communication. North American depositories have aligned to obtain vote entitlement records more easily. More work is underway to align depositories globally and reporting by DTCC and the Canadian Depository for Securities (CDS) can serve as a model. Finally, vote rejection communications have been standardized across participants. As process improvements have been implemented, problems have declined, as noted above.

Implementing Best Practices

Broadridge has published its Standard Operating Procedures for Contested Meetings (the “Contested Meetings SOP”).[8] The Contested Meetings SOP has been shaped by longstanding practices among solicitating parties and recent process improvements. It reflects regulatory requirements under applicable rules, including SEC guidance on the universal proxies.[9]

The Contested Meetings SOP sets forth processes that “are aimed at providing processing compliance, vote accuracy, transparency, and equal treatment for all parties who rely on SEC rules for Universal Proxy.” Key processes covered by the SOP include the creation and approval of voting instruction forms (“VIF”); job set-up on Broadridge systems; procedures for ensuring the completeness of reported positions; vote reconciliation processes; proxy material distribution (through all digital platforms and by mail); issues particular to UPCs; and audit and quality checks.

Audits and quality checks are essential to fostering trust in the U.S. system for shareholder communications and proxy vote processing. The following examples are illustrative of the audits and quality checks that Broadridge provides in processing shareholder meetings:

• All soliciting parties’ VIFs and email forms are reviewed for accuracy by Broadridge’s Vote Audit and Quality Control team and signoffs by soliciting parties are obtained prior to distribution.

• As votes by paper ballot are returned, signatures are validated three times: first, through the scanner; second, by Broadridge’s Vote Execution team; and third by Broadridge’s Vote Audit team.

• Voting reports issued by Broadridge are reviewed and audited before issuance by the Vote Audit team.

• All voting returns are reconciled for completeness.

• In addition, there are several reviews performed after the fact by a Big Four public accounting firm.

  • The reviews meet standards established by the Broadridge Independent Steering Committee (the “Steering Committee”).[10] Among other things, the standards require Broadridge to perform sufficient testing to achieve a “99% confidence level that the projected accuracy rate for processing voting instructions is at least 99%.”

  • Broadridge’s Vote Audit and Control Department tests all voting instructions representing at least 50,000 shares (a 100% audit) and applies sampling to ensure the accuracy of those with fewer than 50,000 shares. For these larger share positions, the 100% audit means there is a 100% confidence level in a projected vote accuracy rate of 100%. Broadridge tests smaller share ballots based on a statistical sampling routine designed to achieve a “99% confidence level in a projected vote accuracy rate of at least 99%.” The results are reported weekly to the Steering Committee. Outside auditors designed Broadridge’s testing procedures, they test Broadridge’s processing, and they issue quarterly reports. In all quarterly reports to date, the actual accuracy rate is well above 99%.

  • Broadridge also obtains from an outside audit firm annual attestations of process integrity (provided through an SSAE-18 audit examination). These audit findings are shared with SEC staff as well as the Steering Committee. Copies of Broadridge’s most recent reviews for compliance with Agreed-Upon Procedures (including those designed to ensure vote accuracy) and its SSAE-18 audit are available upon request.

Broadridge takes additional steps for certain contested meetings. For example, for the first time since the universal proxy rule went into effect, a pending contest (at The Walt Disney Company) involves three soliciting parties – one, management, and two soliciting persons other than management — with each providing its slate of director nominees. The very large size of the company and its shareholder base—and the potential additional and novel complexity of three slates—led Broadridge to undertake certain enhanced procedures:

• First, for the Disney proxy contest, Broadridge is performing early reconciliation by comparing its custodian banks’ and broker-dealers’ reported positions to entitlements assigned either by the DTCC or by omnibus proxy.

• Second, the Broadridge Vote Audit and Control Department is auditing each voting instruction form representing 250 shares or more, so that there is a “100% confidence level in a projected vote accuracy of 100%” for these votes. Sampling will be used to audit voting instructions representing less than 250 shares to achieve a projected vote accuracy rate of at least 99.9%.

• Third, Broadridge has engaged an additional, internationally recognized, independent audit firm to undertake a real-time audit as votes are received and processed. The results of this review will be available shortly after the meeting date.

The Last Mile

Counting Registered Share Votes in Proxy Contests: Processes for tabulating votes of registered shareholders by third parties do not provide the same levels of timeliness, independent audit and review, and transparency that is provided in processing shares held beneficially in street name. The process for registered shares is largely manual and opaque. Moreover, solicitors for each side often wait until the polls close before presenting their ballots to the inspector of elections. Issues with these votes are resolved in complicated, lengthy, and costly meetings between the inspector and soliciting parties (commonly called “snake pits”) often after the polls have closed.

The practices for shares held beneficially in street name serve as a model for third parties who tabulate or inspect the votes of registered shareholders. Broadridge has called on inspectors of contested elections to work with tabulators to:

• Report discrepancies and enable early reconciliation,

• Report the status of votes daily instead of after the polls close,

• And to disclose the results of independent audits and reviews of process integrity and vote accuracy.

End-to-End Vote Confirmation in Contested Meetings: Providing end-to-end vote confirmation for contested meetings will require the active involvement of regulators along with new communication protocols and process changes by participants in corporate governance. The unique dynamics of contested elections, including the use of “snake pits,” need to be addressed to bring end-to-end vote confirmation to proxy contests. Yet, absent regulatory mandates or a new industry-wide protocol, it would be possible to enable vote confirmation if competing parties were to agree explicitly to provide their votes in real time to the inspector of elections.

Conclusion

Systems for processing the votes of beneficial shareholders are accurate, transparent, and fair. They result from the concerted efforts of everyone connected to proxy vote processing and reporting — including regulators, depository institutions, custodian banks, brokers-dealers, corporate issuers, and service providers.

The system is resilient, trusted, and adaptive. When areas for improvement have been identified and discussed, industry participants have come together to address them. Examples in processing votes for beneficial shareholders include: eliminating over voting, addressing breaks in the chain of custody, and reconciling voting entitlements well before the polls close. The SEC’s new rules for use of universal proxy cards are up and running, and recent improvements have been implemented for handling mismarked ballots.

That said, there is room to further improve the system overall with continued effort by regulators and industry participants. As explained above, the last mile involves coming together around new practices for reporting and auditing the votes of registered shareholders and for providing end-to-end vote confirmation in proxy contests.

Endnotes

¹ See Federal Register 86 FR 68330, December 1, 2021(go back)

² See the SEC Division of Corporation Finance Compliance and Disclosure Interpretations (CDIs) under Section 139. Scroll to Section 139. Rule 14a-19.(go back)

³ See CDIs 139.07, 139.08 and 139.09, which specifically address handling of “overmarked”, so-called “undermarked” and “unmarked” but signed proxy cards.(go back)

⁴ See December 3, 2018, letter from Trian Partners to the SEC, available at https://www.sec.gov/comments/4-725/4725-4714754-176665.pdf.(go back)

⁵ Early reconciliation of voting entitlements also reduces instances of under-voting which occurred when downstream tabulators failed to notify banks and broker-dealers in time to reconcile votes of valid and entitled shares. A significant factor in the decline in discrepancies is the Broadridge Overvote/Overreporting Prevention Service. Many custodian banks and broker-dealers subscribe to the service. It provides their vote entitlement as represented by DTCC and Omnibus positions. Out-of-balance conditions are communicated to clients within five business days after record date, and up to and through the meeting date, with a request to bring reported positions in line with voting entitlements. Any votes cast in excess of the entitled positions are held until resolved, and they are released once corrected.(go back)

⁶ The End-to-End Vote Confirmation Working Group was convened in the Fall of 2019 at the suggestion of SEC staff following a Roundtable on Proxy Voting Mechanics (November 15, 2018). It consisted of individuals representing all aspects of proxy vote solicitation and processing. The Working Group built on earlier work inspired by a meeting of various proxy voting stakeholders at the University of Delaware Weinberg Center. The Working Group has been chaired by the Society for Corporate Governance (Darla Stuckey) and the Council of Institutional Investors (initially Ken Bertsch and then Amy Borrus). The Working Group’s set a broad Phase 1 goal at its first meeting; namely to provide end-to-end vote confirmation for U.S. domestic routine annual meetings. It was agreed that contested and international meetings at which ADRs played a role would be addressed as a second Phase II. With the onset of Covid, this group diverted its attention for a time to virtual shareholder meetings. It refocused on end-to-end vote confirmation later in 2020, and in 2021 there was a pilot on end-to-end vote confirmation at 100 companies. By 2023, virtually all routine U.S. public company shareholder meetings were conducted with end-to-end vote confirmation protocols. The group focused much of its attention on areas of historic “breaks” in proxy voting.(go back)

⁷ Again, see the December 3, 2018, letter from Trian Partners to the SEC, available at https://www.sec.gov/comments/4-725/4725-4714754-176665.pdf.(go back)

⁸ Contested Meetings Under Universal Proxy – Broadridge Standard Operating Procedures.(go back)

⁹ See the SEC Division of Corporation Finance Compliance and Disclosure Interpretations (CDIs) under Section 139. Scroll to Section 139. Rule 14a-19. See in particular new CDI’s 139.07, 139.08 and 139.09, published November 7, 2023, which specifically address handling of “overmarked”, so-called “undermarked” and “unmarked” but signed proxy cards.(go back)

¹⁰ The Broadridge Independent Steering Committee was created in 1993. The committee’s bylaws provide some flexibility on membership; in recent years the practice has been to have 17 voting members, including the chair plus four representatives for each of four industry groups: custodial banks, broker dealers, corporate issuers, and institutional investors. Since July 1, 2023, Paul Washington, Executive Director of the ESG Center of The Conference Board, has served as chair of the committee. The committee was previously chaired by Stephen Norman, former Corporate Secretary of American Express Company.(go back)