This week, the Securities and Exchange Commission approved rules that require the use of universal proxy cards that include the names of all director nominees in contested board elections. The rule change, which has been debated for years, gives shareholders the ability to vote by proxy for a combination of board candidates from company management and candidates from activist investors—previously shareholders could only vote for a combination of board candidates if they attended shareholder meetings in person. Now that proxy voters will have the ability to support a combination of directors put forth by management and activists, corporate board members will have to consider how that could affect their individual status as a director.
In a press release, SEC Chair Gary Gensler said the move was made to improve shareholder democracy. “These amendments address concerns that shareholders voting by proxy cannot vote for a mix of dissident and registrant nominees in an election contest, as they could if voted in person. Today’s amendments will put these candidates on the same ballot. They will put investors voting in person and by proxy on equal footing.”
Shareholders are generally in favor of the new rule as it will increase their ability to elect the corporate directors they approve of. News reports suggest business groups largely oppose the rule. Marketwatch.com recently reported that Thomas Quaadman, executive vice president of the U.S. Chamber Center for Capital Markets Competitiveness, wrote to the SEC in June claiming that universal proxy ballots would “increase the frequency and ease of proxy fights at public companies, [and] favor large activist investors and their agendas at the expense of main street investors.” Only time will tell how the rule change actually impacts corporate boards, but here are some possibilities:
The new rule should increase engagement between shareholders and management. The results will be mixed.
Now that shareholders that vote by proxy won’t be limited to voting only for an entire slate of directors from management or dissident investors, expect activists to use this as leverage to get boards to listen to their concerns. Directors may feel greater pressure to negotiate with activists since all shareholders will now be able to select individual director candidates for elections. At the very least, boards will be more inclined to hear what more investors have to say before dismissing their concerns outright.
In theory, more engagement should be better for the company because the board and management will be more in tune with what shareholders want, which theoretically will help the board meet its fiduciary responsibility. However, whether more engagement is good or bad for the company will be determined by the nature of those conversations with shareholders. If the interactions are not genuine and marked by fighting and distrust, then more proxy fights could result. If the engagements are more constructive and both sides are willing to work together to create greater returns, then more might be accomplished.
Additionally, more engagement can potentially lead to greater exchanges of ideas, which may work to improve the standoffish relationship many boards have with their shareholders. Activist investors sometimes offer expertise that boards don’t have and viewpoints that boards can’t conceive. Universal proxy voting may end up being more beneficial than business supporters think.
Director decision-making will likely draw greater scrutiny which could result in greater risk of losing votes in contested elections.
Universal proxy voting will likely mean each director will be judged more by his or her own individual voting record. Some investors will be more inclined to “keep score” on how individual directors voted on specific governance issues. For example, when Glass Lewis says it will recommend against nominating committee chairs of boards with less than two female directors, other shareholders who vote by proxy may be more inclined to follow that recommendation, increasing the pressure on directors to appoint female directors. Directors who don’t take positions that are favorable to some of their company’s largest shareholders may find themselves at greater risk of losing their board seat in contested board elections.