"This is the dawn of a new era for H&R Block," Breeden told shareholders, some of whom applauded. "We believe in the simple principle of holding management accountable for increasing shareholder value."
Ernst acknowledged the shareholder discontent in a press conference following the meeting, but blamed the company's problems on troubles in the subprime mortgage market. Block's Option One Mortgage, has been struggling, and a planned sale of the unit is in jeopardy.
Over the 15 months ended July 31, H&R Block lost $736.2 million, largely from losses in Option One.
"A lot of this vote is about discontent," said Ernst. "We have found ourselves caught in the subprime meltdown. Were it not for us being in that business, our shareholder performance would have been much stronger and this issue probably would not have come to fore."
Breeden had campaigned for seats on H&R Block's 11-member board since late June, accusing Ernst of mismanagement that caused the company's share price through Wednesday to fall 20.7 percent over five years.
Breeden won the support of the three major U.S. proxy advisory firms in getting board seats for himself and Robert Gerard, a former assistant U.S. Treasury secretary; former Chase Manhattan counsel L. Edward Shaw.
Breeden' Greenwich, Connecticut-based Breeden Capital Management LLC, has said it owns 1.84 percent of H&R Block shares.
H&R Block shares were down 7 cents to $19.97 in midday trade on the New York Stock Exchange.
Longtime shareholder and former Block employee Roger Navran said he voted for Breeden's board slate because he had lost faith in Ernst's ability to drive share growth.
"I'm tired of seeing my stock going down," said Navran.
As part of the voting Thursday, disgruntled shareholders passed a non-binding proposal made by AFL-CIO Reserve Fund asking the board to adopt a policy that an independent director serve as chairman of the board. The company's board is expected to take the matter under advisement, H&R Block officials said.
Breeden has said H&R Block's problems are due to losing focus on its core business of tax preparation, where it has in the last two years lost market share to main rival Jackson Hewitt Tax Service .
But Ernst reiterated Thursday that the company's offerings of into mortgages, banking and brokerage services helped complement its tax business. And he said no radical changes in direction should be expected anytime soon.
"He and his group are three directors out of 11. Direction of this company has been set by the full board and not by just one or two people on the board," Ernst said.
Breeden chaired the SEC from 1989 to 1993. His H&R Block campaign is his second as an activist investor. In April, he won two seats on Applebee's International Inc's board.
Three months later, the casual dining chain accepted a $1.9 billion buyout offer from IHOP.