What to do when shareholders elect not to vote on a resolution? Recent legal developments in Australia have raised interesting questions about the common practice of the chairman voting undirected proxies for say-on-pay resolutions.

In the majority of markets with developed shareholder voting procedures, for each proposal, the shareholder has three choices; to vote for, against or abstain. Alternatively, shareholders can actively elect for the chairman to direct their votes at his/her discretion (a directed proxy). In cases where the shareholder has not made a choice in any regard (an undirected proxy), it is common for the Chairman to also exercise discretion. In anything but exceptional circumstances (cases of shareholder resolutions or internal board struggles), it is to expected that these votes will be directed in favour of proposals.

This potentially can create conflict of interest, whereby the Chairman has the power to direct discretionary votes on resolutions in which they have a personal interest, such as for example, the approval of the remuneration report which includes the remuneration of the chairman. Indeed, in Australia, under the Corporations Amendments (Improving Accountability on Director and Executive Remuneration) Act 2011, the chairman is currently prohibited from voting undirected proxies on the remuneration report at their discretion.

Given that remuneration report resolutions are commonly amongst the most contentious issues, this could potentially lead to an upsurge of dissenting proxies, and the possibility of such votes being defeated. Many companies would certainly wish to see the back of this recent restriction, given that most chairmen would use their discretion to further swell the number of votes in favour.

However, this prohibition is only temporary, pending an amendment to be introduced later in the year, restoring the power to chairman to vote undirected proxies on remuneration resolutions. Interestingly, the ASIC has not voiced concerns over this, and has gone so far as to publish guidance for those companies intending to hold an AGM in the interim before the repeal of the restriction.

Solutions include an opt-out solution, whereby it is to be explicitly stated on the proxy card that undirected votes will be left to the chairman’s discretion. This would seem to be the simplest solution, involving only a minor administrative change, and would not put an undue burden on companies, their shareholders or proxy voting agents. But it should also be made clear to shareholders that they retain powers to nominate any proxy they wish, including the Chairman, any other directors and non-management personnel, provided that they have clearly done so. Indeed, Manifest considers this to be a sensible course of action, not just in the interim, but also beyond. The clarity of these arrangements enable shareholders to judge the consequences should they not direct their vote.

Indeed, Manifest considers this to be a sensible course of action, not just in the interim, but also beyond.

Companies can apply to the ASIC for relief from the current probation, with the ASIC deciding on wherever it is considered appropriate for the chairman to vote undirected proxies on a company-by-company basis. This stopgap would seem rather more circuitous, and cuts out shareholders altogether.

Manifest recognises the routine nature of chairman voting undirected proxies, but notes the potential conflict of interest. Rather than supporting the automatic prohibition of chairman voting undirected proxies on say-on-pay, as is to be temporarily the case in Australia, Manifest considers that the clear detailing of how proxies might be directed should they not be voted, is the most transparent and effective solution to this dilemma.

Last Updated: 12 August 2011