NACD: ‘New universal proxy card rules and growing access to proxy voting will sow disorder in the boardroom–but bring enlightenment in the long term’

Signs of invigorated activism abound. In January, activist Nelson Peltz launched a proxy battle against Disney, the company’s first. He called it off in February only after Disney promised major restructuring. Meanwhile, five dissidents have launched a campaign to serve on the board of mattress maker Purple Innovation. Third Point has announced plans to launch a Bath & Body Works board challenge. And Loan Depot is facing a proxy contest sponsored by its own executive chair, now simply chair (having lost his CEO role).

This new and seemingly frenzied activity was inspired in part by the Securities and Exchange Commission’s (SEC) new universal proxy rule, passed in 2021 and effective for all annual meetings held after Aug. 31, 2022. Now proxy voting cards for public companies allow shareholders to select candidates from two different slates–the one from the shareholder and the one from the company’s independent nominating and governance committee (or its equivalent). Previously, shareholders had to pick one slate or the other. Now they can mix and match candidates.

Meanwhile, the number of companies that can avail themselves of such proxy cards is growing. Proxy access, which has been increasing since the 2010 SEC rulemaking allowing it, provides the mechanism needed for use of such a card. (Absent proxy access, dissident shareholders must still mail out their own cards as in the past.) Today, two-thirds of the S&P 500 and one-fifth of the Russell 3000 have proxy access, according to research from the Council of Institutional Investors–and even to this day, shareholders are still proposing it where it is not yet in force. 

A 2011 legal challenge from the Business Roundtable and Chamber of Commerce vacated the SEC rule that would have mandated such access, but that court ruling only slowed the widespread adoption of proxy access–it did not prevent it. The new proxy access frontier is to broaden the policies already in place. This spring, a proxy proposal at Apple wants to raise the minimum number of shareholder nominees on a card from one to two. Most companies have proxy access policies that ensure at least two shareholder nominees and few (14%) set a minimum of only one nominee, notes the proposal.

What do these new venues for activism mean for boards?

As more special-interest dissidents wrest board seats via the new mix-and-match proxy voting card, there will be a period of painful adjustment for boards targeted by activists.

However, losing control of the proxy process may be just the jolt that boards needed to do a better job with nominations, evaluations, and communication.  

In our NACD comment letter on universal proxy, which was quoted in the release of the final rule, we said that the mix-and-match approach was suboptimal. The “key to excellent board composition,” we said, “begins with a valid slate–the best-case scenario–put forth by an independent nominating committee that has considered shareholder nominees thoughtfully.”

Furthermore, we expressed the hope that boards would “continue to improve their work in creating optimal boards and in communicating their methods for achieving them.” In particular, we noted that companies are “making more extensive voluntary disclosures about director skills and qualifications, board diversity, board succession planning, board evaluations, and audit committee financial experts.”

Finally, we said that if boards continue to improve their work in creating optimal boards and in communicating their methods for achieving them, “proxy contests will become rare.”

I still believe that today–even with proxy access and the universal proxy card in wide use. I urge all boards to do a better job in director nomination and evaluation–and to make their processes transparent. Let this new wave of shareholder activism be a wake-up call to us all.

Peter R. Gleason is the president and CEO of NACD.

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