Universal proxy cards, mandated this month for use for the first time in U.S. corporate board elections, are promising to spice up elections for contested director seats.
Gone are the blue and gold cards shareholders used for decades to vote for a single slate of board directors. As the Securities and Exchange Commission implements 2021 amendments to open up investor choice, public companies will have to use the new style of proxy card that allows investors to mix and match their votes instead of picking an entire slate backed either by company management or an activist.
With the change, the SEC’s Democratic majority is aiming to embolden stakeholder capitalism, according to Michael R. Levin, an activist investor who is also board chair for Comarco Inc. and a director for AG&E Holdings Inc.
Shareholders will be able to calibrate their sentiments more precisely and vote for as much or as little change as they want, Levin said. Activist investors will benefit as shareholders gain new flexibility in changing a company’s business strategy by ushering in independent candidates.
Companies’ exposure to activist campaigns focused on environmental, social and governance issues and proxy fights is expected to rise, offering an easier path for investors like Engine No. 1, which got three of its candidates elected at Exxon Mobil Corp. last year by securing backing from major investors such as BlackRock Inc.
“We expect more activist projects and proxy contests, as all manner of investors will now consider running a [board of directors] campaign, such as ESG proponents or smaller shareholders that until now were content to seek support for a nonbinding proposal,” Levin said.
The average number of votes against S&P 500 directors was already creeping up this year, while opposition to those filling certain roles, such as nominating and governance chairs, has about doubled in the past five years, according to professional services company Ernst & Young LLP.
“The degree of future board exposure to activist campaigns and proxy fights depends in part on the quality of connection between board nominating committees and the shareholder base,” said Peter Gleason, president and CEO of the National Association of Corporate Directors. “If boards and nominating committees do not up their game, I believe that there will be a dramatic increase in proxy fights.”
The cost question
That could give corporate boards some growing pains. One of the biggest concerns will be the increased time and cost of more proxy fights, Gleason said in an email. The SEC, citing data from Factset, said the median cost for proxy fights is $1.65 million for companies, but the price can range from $65,000 to $35 million. The median cost for dissidents is $750,000.
Companies are concerned that universal proxy cards will make it easier for activists or other shareholders to get directors elected with little money or effort, said Melissa Sawyer, global head of Sullivan & Cromwell LLP’s mergers and acquisitions group and co-head of its corporate governance practice.
The SEC requires investors seeking a vote for dissident candidates to inform the owners of at least two-thirds of the voting shares. But there have been questions about whether some may do the bare minimum to communicate an investment thesis and hope they can easily rally disgruntled investors to support their candidates, Sawyer said.
“That’s the fear. Whether it actually plays out that way, I'm not sure,” she said in an interview.
The country’s top proxy advisory firms, Institutional Shareholder Services Inc. and Glass, Lewis & Co., broadly applauded the SEC’s changes. ISS and Glass Lewis said in separate client notes that universal proxy cards increase the strain on corporate boards' weakest links.
However, both firms argue that the effect on director elections will be nuanced. While there will be more interest from corporate gadflies to shake things up, activist investors also will have to avoid weak links on their slates and become more strategic in picking who and how many they will nominate.
“It is possible that some shareholders may run ESG-centered contests marketed to this ‘upgrade urge,’” ISS said. “Campaigns purely focused on ESG issues would appear to be better suited for proxy access, rather than proxy fights. After all, an economic activist simply ‘weaponizing’ ESG issues is far less compelling than a significant long-term shareholder, concerned that companies are not appropriately focused on their long-term challenges, seeking board representation.”
Companies and shareholders are unlikely to realize the full impact of universal proxy cards until the next proxy season starting in late spring, Sawyer from Sullivan & Cromwell added.
“I really don’t think we're going to know the answer to that until we've actually been through a few cycles of annual meetings where someone has used universal proxy,” she said. “I don’t even think we'll know in 2023. We'll just have a few data points probably, but not enough to draw any real conclusions from it.”