For boards and senior management teams of publicly traded companies, a major law change by the U.S. Securities and Exchange Commission will soon go into effect for what some pundits believe could be a period of renewed activism ahead.
The new rule states that for annual shareholder meetings held after August 31, 2022, parties in a contested election must use universal proxy cards that include all director nominees presented for election.
Without going into all of the details, the rule gives shareholders the ability to vote by proxy for their preferred combination of board candidates, similar to voting in person. It addresses longstanding concerns that shareholders voting by proxy were not able to vote for a mix of dissident and registrant nominees in an election contest, as they could if they voted in person. And very few shareholders, even before COVID, attend annual meetings in person.
As Gary Gensler, chairman of the SEC, said in a press release late last year, “Today’s amendments will put (all) candidates on the same ballot. They will put investors voting in person and by proxy on equal footing. This is an important aspect of shareholder democracy.”
No one knows for sure what will happen, and maybe nothing, but major law firms around the nation, proxy advisors, the National Institute of Investor Relations, and others have been talking it up big time in articles, webinars and conference panels.
On one hand, many smart minds – including our friend and long-time proxy campaign strategist Keith Gottfried, who recently addressed a PondelWilkinson staff meeting – believe that because it will be easier and less costly to run election contests, this hotly debated issue will “change the playing field dramatically” and foster greater shareholder activism. Gottfried, who just launched Washington, D.C.-based Gottfried Shareholder Advisory LLC, a boutique strategic advisory firm focused on shareholder activism preparedness and defense, said companies in the $300 million to $1 billion+ market cap range could be particularly vulnerable.
On the other hand, there is the thought that the new rule will stimulate a seismic shift in how activism is carried out. Rather than causing tumult at the annual meeting, there could even be increased engagement between issuers and activists that may foster cooperation and settlements.
Our overview advice is for corporate boards, CEOs and CFOs to be armed with information and get ahead of the matter now to eliminate a potential sting and be prepared so there will not be an issue later. Consider the following:
- Take a fresh look at your shareholder activist preparedness and defenses in order to react quickly, sans panic, for potential increased shareholder activism. With the help of a professional, revisit advance notice bylaws, corporate disclosure policies regarding director elections and determine whether changes are needed
- Keep an eye on your peers. If there’s increased activism there, it may be coming your way as well.
- Don’t get complacent in thinking that because your larger shareholders may have been quiet, they are not paying attention to your company. Periodically reach out pro-actively to them for updates.
- Deploy best communications practices day-to-day, including transparency on quarterly conference calls and in press releases.
- Think about conducting a Reg FD refresher training session for your senior staff and board. Having such a session “on the record” is a healthy omen that the company is sensitive to this important governance matter.
- Consider providing shareholders with an in-depth look at your company by hosting an investor day that showcases the operating tier of management, not just the senior-most corporate staff.
- Know what your shareholders are thinking, even to the extent of conducting a third-party perceptions survey. The shareholders will appreciate that you are having an objective party ask candid questions. As the issuer, you may learn a thing or two and ward off a problem you may not even know existed.
- Pay close attention to ESG matters, which are top-of-mind these days throughout the investment community in both large and small companies.
- Be mindful of board composition, including diversity, experience and tenure.
- Be alert, listen and do not be afraid of “well-wishing” shareholders who like to give advice on corporate growth, valuation and other board and management matters. Embrace them and pay attention to what they are saying. Often their biggest demand is for a company’s sale, not necessarily to “fix” anything or for a board seat.
It’s not only in politics, where voting rights issues are surfacing. The SEC’s new universal proxy rule is something to at least start thinking about seriously. If nothing else, it should prompt action for companies to take an inner look and be certain that best governance and communications practices are fully in place.
Roger Pondel, email@example.com