A change in the way asset managers define overboarding may deter activists from nominating their own employees to company boards, according to a client memo from law firm Olshan Frome Wolosky.
A Shorthand For The Number Of Board Commitments
Overboarding, a shorthand for the number of board commitments institutional investors think individuals can handle without sacrificing some of their care and attention, has been subject to ratcheting standards over the past few years and frequently appears in the red-line policy updates captured by Proxy Insight Online. The current industry standard, albeit by no means ubiquitous, is that non-executive directors should hold no more than four public company board seats, while CEOs may hold one additional board seat before investors consider withholding their support.
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Olshan’s memo, published this week, points out that the world’s largest asset manager and key swing vote BlackRock has for the first time included fund executives alongside public company CEOs as prospective directors which should be more circumspect about their time commitments. BlackRock isn’t clear whether the policy applies only to fund principals and chief investment officers, or if it could apply to other key employees.
"Shareholder activist funds seeking to nominate directors at companies where BlackRock is a shareholder, which will often be the case in the large to mega-cap space, will need to factor in BlackRock’s new overboarding threshold when deciding whether to include a principal of the fund in its slate of nominees," Olshan lawyers Steve Wolosky, Andrew Freedman, and Ron Berenblat reasoned.
For better or for worse, voting decisions are likely to be at BlackRock’s discretion. The memo cites Proxy Insight Online data showing that BlackRock has only voted to elect one activist fund manager to a board in 13 contested votes in 2019 and 2020, showing that the bar was already high in proxy fights.
Criticism For Activist Employees
Activist employees often receive the harshest criticism from issuers in proxy fights. In addition to their time commitments, companies focus on supposed conflicts of interests based on their funds’ holding periods, or their lack of managerial skills. In the proxy fight between Procter & Gamble and Trian Partners, some shareholders questioned the age of Trian’s candidate Nelson Peltz, although the company itself did not make much of an issue of its advisory retirement age during the fight.
Of course, activists looking to join boards can always play for a settlement. Whether uncontested elections become problematic depends on how widely and strictly the policy is applied. According to Activist Insight Online, at least 50 employees of dedicated activists hold at least two public board seats and 20 of those sit on more than two boards.
Some high-profile tests could be looming. Jeff Ubben, who has just launched a new fund, already sat on the boards of Nikola, Enviva, and AppHarvest when oil supermajor Exxon appointed him to its board. His candidacy is uncontested, although activist fund Engine No.1 argues the board is in need of further refreshment and has nominated four candidates to replace other directors.
Nelson Peltz, who now sits on five boards, will be up for election at Wendy’s and Invesco next month. Hitherto, he has had little to worry about, receiving between 89% and 95% at four annual meetings last year despite being overboarded by previous standards. BlackRock is thought to have voted in favor of Peltz.
If BlackRock applied its policy strictly and other firms follow, big names in the activist world could be in trouble. But for what it’s worth, I don’t think the likes of Ubben and Peltz are going anywhere fast.
Josh Black, Editor-in-Chief, Insightia
Board Diversity Concerns
Board diversity concerns are gaining traction in Japan, where diversity laggards are being subject to high levels of opposition in director elections.
Trend Micro faced significant shareholder dissent toward its auditor election proposals at the Nikkei 225 software company’s March 25 annual meeting, following concerns over its current board, which has only one female member. Proposals to re-elect auditors Fumio Hasegawa and Yasuo Kameoka both received 38.2% opposition, while a proposal to re-elect fellow auditor Koji Fujita received 35.5% opposition, according to Proxy Insight Online data.
Board diversity concerns have also resulted in significant levels of opposition this year at Cybozu and Kura Sushi, while the lack of a corporate diversity policy resulted in 14.2% opposition against Nachi-Fujikoshi Chairman Hiroo Homma.
The upswing in opposition follows changes to asset managers’ proxy voting policies focused on smaller markets with fund managers expecting improved diversity standards internationally, rather than solely in the U.S. and Europe, as in previous years.
Updated Board Diversity Policies
A significant number of diversity policies were updated this year, with BlackRock, Goldman Sachs, and Dimensional Fund Advisors announcing that, for the first time, they will oppose nominating committee chairs where Japanese companies fail to feature at least one female director.
Some fund managers are further tightening this expectation. State Street Global Advisors (SSGA) expects TOPIX 500 companies to feature at least one female board member from 2021 onwards, with all incumbent members of the nominating committee being opposed, should this target not be met for three consecutive years. Calvert Research & Management goes a step further, opposing nominating committee directors on Japanese boards that fail to feature at least two female directors.
Companies taking note of increased investor demands for board diversity are proactively making commitments to boost their female representation. The Bank of Japan (BOJ) announced on March 23 it has set a two-year target to increase its number of female managers to 10% by 2023, from its current 6%. BOJ will also aim to increase the diversity of its nine-member board, which currently features only one female director.
30% Club, an investor initiative dedicated to improving gender diversity on boards, has also recognized that more Japanese companies are proactively engaging with diversity concerns than ever before.
The number of women in board-level positions in TOPIX 100 companies increased to 12.9% in 2020, compared to 10.5% the previous year, while the number of companies with more than three female board-level members increased to 22 in 2020, compared to six in 2019.
"Active stewardship plays a critical role in accelerating progress," said Yuki Sugi, Co-director of Research, Japanese Equities, at Allianz Global Investors. "Direct engagements allow investors to share with investee companies the initiatives, tools, and good practices that they have observed from leading companies – and which have proven to be effective in the Japanese context."
Rebecca Sherratt, Corporate Governance Editor, Insightia