The New York Stock Exchange (NYSE) announced this week it would move ahead to restrict voting by brokers in director elections beginning in 2008. The proposed rule change, which must get final approval from the Securities and Exchange Commission, is welcome news to investors who have long argued that the practice of allowing broker votes on elections skewed results in favor of management.

NYSE Rule 452 allows brokers to vote on certain "routine" proposals if the beneficial owner of the stock has not provided voting instructions to the broker at least 10 days before a scheduled meeting, according to the exchange. Director elections have been considered "routine," though shareholders and others have long argued against such a designation, particularly in recent years as institutional investors have pushed for majority voting in director elections and the ability to nominate board candidates.

"The goal of the NYSE has been to not allow the broker to vote on any proposal that substantially affects the rights of shareholders," Catherine R. Kinney, the NYSE's president and co-chief operating officer, said in an Oct. 24 press release. "[T]he election of directors is simply too important to ever be considered routine."

The NYSE estimates that 80 percent of all public company shares are held under the name of brokers. At some issuers this year, the casting of these undirected broker votes for incumbent directors may have spared them the embarrassment of failing to receive a majority of votes cast. At 20 S&P 500 companies this year, directors received withhold votes that exceeded 30 percent, according to ISS data.

The proposal follows recommendations of the Big Board's Proxy Working Group, created in April 2005 and chaired by Larry Sonsini of Wilson Sonsini Goodrich & Rosati, which is also looking at ways to improve the proxy and shareholder communications process. The group has created three subcommittees to: review the shareholder communication process; to examine the fees and costs in connection with the solicitation of proxies; and to educate investors to achieve greater shareholder participation in the proxy voting process.

Still, voting on directors has taken up much of the group's time, according to observers, with investors actively pressing members to eliminate broker votes on elections. "The election of directors is the most important shareholder franchise," Sonsini said, reflecting those views.

"It's certainly a step in the right direction," Council of Institutional Investors head Ann Yerger told the Dow Jones newswire. The plan would restore "some integrity" to the director election process, she said, because allowing discretionary voting for directors was the equivalent of saying that "ballot boxes should be stuffed" in favor of management-backed candidates.