The Introduction Of The Mandatory Universal Proxy Card

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Next week marks the introduction of the mandatory universal proxy card, possibly the most significant threshold in activist campaigns for at least a decade.

Hitherto, activists seeking to elect new board members at U.S. companies had to solicit votes on their own proxy card and investors had to cast their votes on one of two cards – increasing the risk of a disproportionate outcome – unless they could spare an analyst to physically attend the annual meeting.

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From September 1, companies will have to list valid nominees on a single card, cutting the costs of a solicitation, dramatically increasing the choice available to investors, and almost certainly creating a litigator's dream.

Institutional Shareholder Services (ISS), which publishes recommendations for how to vote in contests, said in a recent memo that the new system is "a far superior way for shareholders to exercise their voting franchise" that may increase the appeal of "elective surgery" to upgrade boards and better equip them with the skillsets and experience to weather crises.

That could mean more activism, especially by groups that have traditionally lacked the resources to wage full contests.

"The universe of people who can carry out a proxy fight just increased exponentially," Steve Balet, a partner at Strategic Governance Advisors, told me this week. Founders and ex-CEOs, ESG-focused investors, celebrity activists, and out of work politicians are just some of the potential future dissidents he can foresee using the universal proxy to force companies into taking a stand or changing their approach.

Bruce Goldfarb, CEO of proxy solicitor Okapi Partners, says the reform could lead to more personal campaigns and boards are having to undertake fresh analysis of their vulnerabilities.

"The challenge is more on the company side to identify internally who the potential targeted incumbents might be," he told me in an interview. "Would they be considered weak links based on tenure, diversity, skillset? Would they have a hard time meeting shareholders?"

Balet agreed, adding that management campaign materials would have to evolve beyond the current "CV and tick-box disclosures."

"Boards are going to have to show what expertise directors bring, what specific needs they fill, what the value is," he said.

Universal Proxy Cards Could Lead To Messier Fights

Indeed, ISS noted that it and institutional shareholders more broadly "may require far more engagement with each side – and potentially with every nominee, board or dissident – than has been necessary in the two-card era."

And there will undoubtedly be hiccups along the way. Balet warns that the universal proxy card could lead to messier fights with two or more activists deciding to run competing slates, or a combination of hedge funds and nonprofit activists vying for change at the same time.

However, the proxy voting adviser said it would not discard its traditional approach to proxy contests, asking first whether change is warranted at the company and, if so, which nominees would better serve to enact that change. "An activist leading with a brilliant nominee, but a weak case for change, will be less successful than the activist who leads with a detailed, insightful argument as to why a company may not be performing as well as it should," it said.

"I don't believe there's going to be a situation where a nominee is elected with a big resume where there's not a reason to run the campaign," said Goldfarb.

But ISS conceded that the degree of change required could be up for debate, and investors could decide to be more proactive about using contests to replace seemingly weaker board members.

Some of the biggest changes may not be visible even at the end of proxy season in nine months.

"Like the kid that receives the hot new toy at Christmas, only to become frustrated by its complex instructions, proxy advisers and investors will have to carefully navigate the first few [universal proxy card] contests," said ISS.

Others say it's unclear how many nontraditional activists are preparing campaigns or prefer to wait and see how the changes shake out. "There's going to be a percolation and then an explosion," Balet says. "It may take a couple of years to build up."

Kieran Poole, the host of Insightia's Beyond The Boardroom podcast, recently interviewed Michael Levin of The Activist Investor Blog on his expectations for the universal proxy card. You can listen to the episode here.

-- Josh Black, Editor-In-Chief, Diligent, Formerly Insightia