Crafting a shareholder voting rights policy.

• Author: Hardiman, Joseph R.
• Position: Chairman's Agenda: Balancing Shareholder Interests

Crafting a Shareholder Voting Rights Policy

One of the most important decisions a public company must make concerns the voting rights of its shareholders. From the vantage point of the National Association of Securities Dealers Inc. (NASD), an organization that operates and regulates one of the largest securities markets in the world, an acceptable shareholder voting rights policy should meet two tests: It should be fair to the shareholders and it should be compatible with corporate efficiency and capital raising.

This is easier said than done. Voting rights issues have come to involve other parties besides shareholders and management. Securities markets are involved with voting rights from both a listings standard and an investor rights perspective. Congress, the Securities and Exchange Commission (SEC), state securities commissions, and state legislatures have interests in voting rights from varying standpoints of public policy. Attorneys, accountants, academicians, and the media also have views on the issue.

Over a five-year period, from 1985 to late 1990, the NASD gradually developed a shareholder voting rights policy for the 2,500 companies in the National Market System (NMS), the upper tier of the Nasdaq Stock Market, which at this point appears nominally to satisfy all parties concerned. The process makes for an interesting case study. Here are selected highlights.

The NASD is the largest self-regulatory organization of the U.S. securities industry, with 6,000 member firms - from the largest to the smallest - and 425,000 securities professionals registered with it. Like the stock exchanges, the NASD operates by statutory authority and under the oversight of the SEC. In 1971, out of the sprawling, obscure over-the-counter market, it launched the Nasdaq market which rapidly became the fast-growing and the second-largest equity market in the U.S.

The Quest for Parity

As the Nasdaq market grew, the movement toward parity of treatment for its leading securities with exchange-listed stocks was begun. A priority objective was to secure for Nasdaq/NMS securities - the larger Nasdaq securities traded with real-time price and volume reporting - the same exemption from state Blue Sky registration which listed securities enjoyed. As state securities administrators were approached on this issue, a number of them pointed out that Nasdaq/NMS companies were not subject to corporate governance requirements similar to those that the exchanges imposed.

In mid-1985, the NASD filed with the SEC a series of corporate governance requirements for NMS companies which included: at least two independent directors on the...