A new Securities and Exchange Commission rule that sounds innocuous enough might drive profound changes in how companies and boards conduct their business.
We may soon see the rule’s effect in high-profile board seat battles, like that brewing at Disney, where activist investor Nelson Peltz is making a play to join the board, and at Tesla, where the fed-up investor Ross Gerber vowed to do the same. It might also fan the flames of both the ESG and anti-ESG movements.
Last fall, the SEC began requiring companies to use a universal proxy card for all contested board elections. “Before, there were two proxy cards, the company card and the investor card, and you had to vote for the whole slate,” Rusty O’Kelley, a senior advisor and governance expert at Russell Reynolds, explains. “If there were three people on the company card, you had to vote for all three. There was no ability to split your votes and say, ‘I like these people from the company, but that one from the activist.’” Now, all nominees appear on one slate, giving voters the option to pick and choose.
On its own, the change might not sound like a big deal. But, in practice, it will make running—and winning—proxy campaigns for board seats significantly cheaper and easier, likely encouraging more activists to launch bids.
O'Kelley and Rich Fields, another governance expert at Russell Reynolds, point out in a recent white paper that this requirement arrives when traditional shareholder activism is hopping and institutional investors are wielding their influence. In a proxy contest, the consultants say boards should expect to feel intense new pressures from all sides—from both the Peltz’s of the world and cause-based activists, like environmentalists or unionists, and institutional investors and proxy advisors. All will be examining board composition and scanning for weaknesses in individual directors. They'll ask: Does the board have the right mix of skills for the company’s current needs? Is it diverse enough? Are some directors serving on too many boards at once? Have members with long tenures overstayed their welcome?
“The universal proxy creates a new sense of urgency. Boards need to encourage lower performing directors to leave the board before activists do it for them," a leader at a large institutional investor told O’Kelley and Fields.
Boards need to take stock, even if they aren't expecting a proxy fight, O'Kelley says. “Companies need to ensure that their disclosure really reflects why that director is on that board and the unique skills and experiences they're going to bring relevant to the current strategy."
Companies should expect to feel the new rule’s effect in the upcoming proxy season. In time, the culture of contested board elections could change now that individual directors will be measured against each other. As a trio of attorneys for Sidley Austin write in a National Association of Corporate Directors blog post, “There will be a personalization of proxy contests like never seen before.”
In other words, expect drama.
Lila MacLellan
lila.maclellan@fortune.com
@lilamaclellan
