March 13, 2009
Re: File Number SR-NYSE11 2006-92
Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change, as modified by Amendment No. 4, to Amend NYSE Rule 452 and Listed Company Manual Section 402.08 to Eliminate Broker Discretionary Voting for the Election of Directors and Codify Two Previously Published Interpretations That Do Not Permit Broker Discretionary Votes for Material Amendments to Investment Advisory Contracts
My name is Douglas Ian Shaw, and, for 20 years, I have been the Corporate Secretary and Investor Relations Officer of Suffolk Bancorp, a regional bank holding company headquartered on Long Island, New York. It is relevant to this discussion that our return on average equity has been 17 percent during that period, which included the commercial real-estate crisis of 1989-1993, and 21 percent during the past ten years including the current recession. This places us consistently among the highest performing companies in the banking industry, a demonstration of our commitment to shareholder value.
The Proposal - Eliminate Broker Discretionary Voting for the Election of Directors
This is a bad idea that has the chimera of “good governance.” For some academics promoting this, it seems like “democracy,” making it a matter of self-important virtue. But underneath, it will enrich primarily proxy solicitation firms, plaintiffs’ attorneys, and an assortment of other consultants who will hire themselves out to solve a problem that some of them had a hand in creating. It will be at the expense of the shareholders of the public companies, particularly small-cap companies, which will be compelled to spend tens of thousands of dollars simply to achieve a quorum for routine meetings of the shareholders.
Confusion of Purposes
Like many other proposals since the fall of Enron, et. al., it confuses the imperatives of civic governance with those of corporate governance. A citizen has no choice but to live with the results of a government’s actions with regard to matters of life and liberty, public policy, and the economy. Accordingly, democracy requires that all citizens have the opportunity to influence government through their vote for representatives. By contrast, publicly held companies are not sovereign, and the relationship of any shareholder with them is entirely voluntary. If shareholders are dissatisfied with any aspect of a public company’s performance or governance, they need only sell their shares and invest in a company more to their liking, with the only cost to them being the acceleration of capital gains taxes if indeed they have a gain in the stock.
In recent years, for convenience, most shareholders have deposited their holdings with brokers. At present, 68 percent of the stock of Suffolk Bancorp is in street name. Granting that a bit more than one third of our ownership is institutional, we would likely be able to count on that portion being voted because of their fiduciary duties, but the rest is held through retail brokers in street name, or in positions of record. The propensity of retail investors to vote the shares of every position in their brokerage account on uncontroversial matters is comparatively low. Even those who hold their shares in positions of record may or may not care enough to return their proxy card, or to vote it on the Internet. Many see it as an unnecessary nuisance or just one more thing to do in a busy life. But our bylaws require a quorum, and typically, it is the broker vote that provides that quorum.
Our only response to this proposal would have be to hire a proxy solicitor to induce shareholders whose shares are held by brokers into voting on an issue for which they have already been provided with a proxy statement and card, as well as Internet voting instructions AND who have also already expressed their indifference by failing to vote through their broker. Complicating this further, in recent years as identity theft has flourished and for other reasons, a growing number of shareholders have objected to the disclosure of their identity. Accordingly, a NOBO (non-objecting beneficial owners) list has become ever less useful as a means to solicit votes. A public company may find itself with worst of all circumstances with a significant number of shareholders who, on the one hand, are indifferent and do not vote their shares, and on the other, refuse to disclose their identity.
What is Routine?
We recognize that certain issues are not routine, and that the particular approval of compensation plans or changes in corporate structure or control is necessary to hold the managers of public companies accountable for their use of the company’s resources. However, the election of directors is a routine fixed by the by-laws and/or certificate of incorporation. Every public company makes provision for shareholders to nominate candidates for director other than those proposed by the current Board. These provisions are disclosed annually in the proxy statement, so there is no impediment to dissidents wishing to elect directors more to their own liking, other than the unwillingness of other shareholders to vote for them. Therefore, if an election is uncontested, it is in every way a “routine” matter.
What Is Truly In The Shareholders’ Interest?
Even in civic matters, citizens are not compelled to vote. They simply may not be prevented from doing so. In corporate matters it has been no different. Shareholders who care about a corporate issue, routine or otherwise, are not and never have been prevented from voting the shares held by their broker. What this current proposal does is to compel them to vote even if they are indifferent, or to take the risk that if a quorum is not reached because of their indifference, to be left with an investment in a company that has leadership with no official imprimatur.
This proposal is distinctly unfriendly to shareholders’ true economic interests. Assuming a typical corporate tax rate of 35 percent, 65 cents of every dollar spent to obtain the votes of beneficial owners who are insufficiently motivated to vote through their brokers comes straight out of net income, and therefore the earnings per share of the very shareholders whose interests the backers of this proposal assert that they wish to protect, including particularly as well, the shareholders who have made the effort to vote. It will result in nothing more than a transfer of wealth from shareholders to consultants that has no further economic benefit to shareholders or society.
We at Suffolk Bancorp, and I as a shareholder personally, are strongly opposed to this proposal.
Douglas Ian Shaw
Senior Vice President and Corporate Secretary
Suffolk County National Bank