Desperate Managements: No More Broker Voting

It took three years, but yesterday the SEC approved the NYSE’s rule change on discretionary broker voting, which will bite in the next proxy season.

Sorry, went all jargon-y on you there. See, the way the rules work now, if you don’t tell the broker who holds your shares how you want to vote in a run-of-the-mill director election, the broker can vote your shares however it wants. This rule has been sweet for incumbent boards, since brokers tend to vote obligingly for management nominees.

SInce 2006, the NYSE has been trying to change this so that your broker can’t vote your shares without instructions. But the SEC, which had to give its OK, kept stalling. Until yesterday, that is.

Ostensibly, this has been a high-minded debate about enfranchising retail shareholders, but really it’s part of the epic battle between entrenched managers and shareholder activists. Most retail investors don’t bother voting, so the Big Fear, expressed nicely in this memo from pro-management law firm Wachtell Lipton, is that the new rule will “magnify the already significant influence of institutional investors, activist shareholders and proxy solicitation firms.”

Fans of broker voting love to point out that when retail shareholders do vote, they rarely vote against management anyway. Why do you act this way, retail shareholders? Is it because you think the folks in the boardroom are doing a great job, as Bush-appointed SEC Commissioner Troy Paredes suggested in his dissent? No, Troy. Get real. Ordinary shareholders have lives, leaving them insufficient time to research whether or not to vote the bastards out at each company they've invested in. (Indeed, this time shortage existed even before Hulu.com created a giant time sinkhole.) So they take the easy route and vote for the unopposed candidates whose names happen to be printed on the ballot.

But you know who did have enough time, and the wherewithal, to figure out whether each director deserved our votes? The brokers. I’ve never understood why, since these guys had discretion to vote on my behalf, they weren’t required to vote more discerningly. Hell, if my shares were just going to be voted mindlessly for management, I could have done that myself while catching up on Season 2 of Yard Crashers.

Anyway, that’s all in the past. As Wachtell warns, the new broker voting rules, combined with other reforms like proxy access and majority voting, could cause “a dramatic shift in power” toward the activist camp. Could well be, and that'll be fun to watch, though maybe not as much fun as reruns of Desperate Housewives.