We’ve heard a bunch about this subject, especially in this season of annual meetings. What’s the big deal?

Here’s the deal: the SEC, through its power over the NYSE listing regulations, changed how brokers vote their clients’ shares in corporate elections. This has started to have an interesting and potentially significant impact on these elections. And, it may just make it easier for activist investors to influence elections.

For the past few decades, brokers that have custody of a client’s shares in a corporation have the right to vote these shares in that corporation’s elections. So, any client (institution or individual, hedge fund or not) that doesn’t have the electronic equivalent of the good ol’ stock certificate doesn’t actually own the shares, or at least the right to vote those shares - their broker does.

This made sense a few decades ago, when corporations scrambled to have a quorum present, in person, at an annual meeting. They could rely on a few stockbrokers, rather than hundreds or thousands of shareholders, to represent enough shares to conduct business.

Shareholders retained the final right to vote the shares, of course. They would “instruct” brokers how the broker should represent the shareholder in a given election. Even today, when an investor complete a proxy card, they don’t really cast a vote, but merely instructs the custodian how to vote on their behalf.

But, what should a custodian do if they don’t receive these instructions? After all, then as now, most shareholders didn’t care about these elections. So, to allow corporations to do business at annual meetings, stockbrokers could vote the “uninstructed” shares in their custody as they saw fit.

Stockbrokers begat mutual funds, who “saw fit” to vote shares to support management almost all of the time. Maybe it was just easier, or maybe these fund companies wanted cordial relations with management so they could have fund management and investment banking relationships, but for whatever reason, with one exception, custodians rarely strayed from supporting management.

The exception? Contested matters, including “non-routine” shareholder proposals and contested director elections. For awhile now, brokers could not vote “uninstructed” shares at these times. A good deal of debate and attorney fees have been devoted to determine what is and is not contested.

The SEC just helped resolve that debate, by determining that custodians may not vote (hence, broker “non-vote”) uninstructed shares in any director election. So, even for a slate of directors that have no opposition, the only votes that count are ones for which investors give explicit instructions.

This matters now, as boards and management look to round up votes to support incumbent directors. They can no longer count on brokers to automatically support these incumbents. Given the low participation of retail investors in elections, management must now actively solicit votes from institutions.

This matters even more, as investors require incumbent directors to win a majority of votes cast in these elections. Previously, almost all elections required only a plurality of votes cast, and incumbents could obtain that easily, between votes from insiders and stockbrokers.

At underperforming companies where investors are unhappy but not unhappy enough to nominate competing directors, look for at least a few directors to lose their spots as investors withhold enough votes to prevent directors from winning a majority.

And, at companies with contested elections, look for activist investors to start winning more elections outright.