SEC plans to end broker votes


Imagine if every four years the Federal Elections Commission rounded up all the ballots, counted all the votes, and then just assumed that everyone who didn't vote wanted the incumbent to win -- and counted those non-votes as though they were votes for the party currently in power.

Unbeknownst to the vast majority of investors, this is exactly the way it basically works in corporate America. Since 1937, brokers have been able to vote their clients shares on their behalf when they don't cast their own proxy ballots. Wall Street being a chummy place, this has usually meant that shareholders who didn't vote had their votes cast in favor of the current management team.

Given the large percentage of shareholders who don't vote, this gave entrenched directors a serious upperhand when it came to proxy contests -- and meant that activist investors had to win the majority of people who voted their shares and the majority of people who didn't.

According toThe Wall Street Journal (subscription required), "Starting in January, the SEC will change those standards, say people familiar with the matter. The SEC is expected to announce the rule change as early as next week, these people say. Brokers won't be able to vote their clients' shares. Since many small shareholders simply don't vote, that will give more power to institutional and activist shareholders who do."

This is fantastic news for corporate governance and great news for America in general if you believe, as I do, that poor corporate governance was at the root of the financial crisis.

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Last updated: February 12, 2012: 07:20 PM

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