Shareholders Are About To Be Heard Big Time

One of my favorite reforms instituted by Mary Shapiro‘s new SEC is the curtailing of the Broker Proxy Vote.

I’ll explain briefly and then we’ll talk more in depth about how huge this is tonight on Stock Wars.

Essentially, each Proxy Season, corporations send their ballots out to shareholders.  The problem is, only around 30% actually bother to cast a vote one way or the other.  In most cases, a company could have Adolf Hitler’s name on a ballot for a board seat and only the institutional shareholders would notice.  When individual shareholders disregard their right to vote for a board member in an uncontested election (as most elections are), the broker/dealer that is holding the investor’s shares in “Street Name” will simply cast the vote.

In other words, if you own 1000 shares of IBM and throw your proxy packet in the trash along with the LL Bean catalog and the Val-Pak, E*Trade or Merrill Lynch or whomever holds your stock in a brokerage account for you will do the voting in your name – and they will almost always just vote yes for the incumbent.

Thanks to Shapiro & Co’s July 2009 amendment to NYSE Rule 452, that automatic broker vote is over.  If shareholders don’t send in their ballots, then their votes simply aren’t counted.  This sets the stage for the “No Vote” to mean more than it ever has before.  Without that huge number of automatic “Yes Votes” coming in from the brokerage firms. there are many corporate board members who could find themselves voted out – even in an uncontested election!

To give you an idea of how powerful this rule change may be, in 2004, then-Disney Chairman Michael Eisner‘s vote count NOT INCLUDING the brokerage Yes’s would have had him kicked out with the numbers against him 54 to 46.  Instead, he won by that same margin because of the automatics.

Brokerages are allowed to vote No to a board member, they just tend not to unless there is a substantial activist effort occurring.

Bottom line – there ain’t no shoo-ins anymore, these people will be earning their seats or they’ll get voted out by institutions, even if there isn’t a candidate contesting.  Most corporations expect a board member who gets a less-than-50% affirmative response to tender their resignation and get on the Elven ship to the Undying Lands beyond Middle Earth without a fight.

No Votes matter again and small investors who actually vote will have a proportionately louder voice in the absence of the brokerage firm Yes bloc.