A snipe hunt: that's what directors of smaller firms are doomed to if the broker vote is eliminated.

• Author: Endean, John
• Position: GUEST COLUMN

IF YOU HAVE any doubt that the interests of smaller public companies are often disregarded by the regulatory system, take a look at the proposal by the New York Stock Exchange to eliminate the use of the broker vote in director elections. Here's a feel-good "reform" idea that will raise the cost of the proxy process for smaller firms. It will neither improve corporate governance nor help directors carry out their responsibilities to shareholders and management.

Administered by the NYSE, the broker vote has for decades been part of the proxy process of all public companies, big and small, regardless of where they are listed. It allows brokers to vote the proxies of customers who have chosen not to respond to their proxies themselves. Broker voting of these "uninstructed" proxies occurs only in regard to matters of routine business relating to an annual shareholder meeting: the establishment of a quorum, the ratification of an auditor, and the election of the board. When they cast uninstructed proxies, brokers typically follow the recommendations of company management.

The broker vote is especially critical for smaller firms, which tend to have a higher percentage of individual shareholders and thus a higher percentage of uninstructed proxies. Without the broker vote, thousands of small companies could not even reach a quorum necessary to hold an annual meeting without new spending every year on proxy solicitors, phone banks, printing, and postage to round up the necessary votes.

Enter the NYSE. Last year, it established a "working group" of issuers, institutional investors, and others to examine the exchange's proxy rules, including the broker vote. While the NYSE trumpeted the "diversity of views" represented on the working group, representatives of smaller issuers were frozen out, as were companies of all sizes not listed on the NYSE.

In June 2006, the working group issued a report recommending that director elections no longer be considered a routine matter subject to the broker vote. Curiously, the exchange's directors did not review this recommendation. Instead, it was sent straight to the Securities and Exchange Commission for approval and implementation, carrying only the blessing of unnamed "senior management" at the exchange. Regulatory rails are rarely so lavishly greased.

I was startled by the working group's recommendation, both in terms of the unrepresentative process that brought it into being as well as by the sonorous vacuity...