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Universal proxies: what boards should know and how companies can prepare

9 minute read 10 May 2022
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EY Center for Board Matters

Boards should expect a higher volume of proxy contests in coming years.

In brief

  • Beginning in September 2022, new rules will allow shareholders to elect directors from a full list of candidates nominated by both the company and a dissident in contested board elections.
  • Universal proxies will give investors more effective means to influence the makeup of the board.
  • The new rules may lead to a higher volume of proxy contests and could mean that more individual directors become targets.

For decades, contested director elections at US publicly traded companies have largely followed the same competing proxy card format, forcing shareholders to choose between mutually exclusive slates of directors and turning high-profile proxy contests into real-life exercises in game theory.

That process is about to change and companies, as well as their boards, must be vigilant in preparing a new approach to contested director elections.

To read more about these changes download the PDF and reference the side bar on page 2

What is changing?

In November 2021, the U.S. Securities and Exchange Commission (SEC) finalized the adoption of changes to the rules governing contested director elections, or proxy contests. These rule changes were being discussed as far back as 2014 and were formally proposed by the SEC in 2016 but were not meaningfully advanced until recently.

In a proxy contest, both the company and the dissident have historically distributed separate proxy cards. Each side’s proxy card has listed only its own nominees. Shareholders not attending the annual meeting and voting by proxy could only vote on a single card, limiting their choices to either the nominees on the company card or nominees on the dissident card, with no option to mix and match. Conversely, shareholders voting in person could select candidates nominated by either side.

For all shareholder meetings at US publicly traded companies after August 31, 2022, new rules will require companies and dissidents alike to use a universal proxy card listing all candidates properly nominated by the company or a shareholder. While each party in a proxy contest may still produce and distribute proxy cards and accompanying proxy solicitation materials, candidates from the opposing slate will now be included in each party’s card.

Implications for boards

To understand the implications for boards, directors need to understand how universal proxy rules will impact shareholders.

Until now, most shareholders have had to adopt an “our card vs. their card” mentality rather than being focused on the individual nominees. This has left many shareholders feeling constrained in their ability to support moderate changes to the board. Now these shareholders will have more options to express their opinion on the optimal makeup of the board. When faced with more candidates for election than seats on the board, investors no longer must first decide if dissatisfaction rises to the level of pushing them to abandon the company card in order to effectuate changes to the board

For dissident shareholders, the impact of the new rules likely depends on the individual activist. For the largest, highest-profile activists, these changes may provide incentive to move forward with the occasional marginal contest that would not have previously been pursued. This is because activists know that shareholders may be more comfortable voting for marginal change at the board level than wholesale slate changes.

The real impact on the dissident side will be with small- and medium-sized activists where these changes make running a proxy contest much more palatable from a cost perspective. Also, the increased ability to attract shareholder votes shifts the leverage in favor of the activists in any settlement negotiations, which could further increase activists’ incentives to initiate a proxy contest in the first place. As a result, some activist campaigns that would have not been viable from the dissident’s perspective, and thus never initiated, will now see the light of day.

In addition to typical activist shareholders, other groups such as shareholder advocacy groups and special interest groups may see these new rule changes as a way to increase their voice on matters related to environmental, social and governance (ESG); diversity, equity and inclusion (DE&I); and employee rights either via threatened or actual proxy contests.

The bottom line: Boards should expect a higher volume of proxy contests in coming years, with more individual directors being targeted and more shareholders potentially willing to vote for change.

How to prepare

Companies and boards should prepare for the possibility of becoming targets of an activist campaign and recognize that the campaign may involve dissident director nominees. While the traditional rules of activism preparation continue to apply, companies and boards must be even more focused on key issues related to the board itself to dissuade or defend against a contested election. Some key actions companies and boards can take to best prepare themselves are: 

The status quo is no longer acceptable as shareholders demand more than just a rising share price from their portfolio companies. The changing proxy contest rules will make it easier for traditional shareholder activists and others to seek board representation. Management teams and boards should recognize these changes now and act decisively to prepare.

Questions for the board to consider

  • Do the board and senior management team understand the new universal proxy rules and the potential implications for the company?
  • Has the company conducted a holistic activist vulnerability analysis and taken action based on the findings? Does that include directors believed to be vulnerable?
  • How is the board regularly challenging and refreshing its composition in light of strategic and risk oversight needs? Does the proxy statement clearly communicate the rational for each director’s role on the board?
  • Does the company have direct dialogue with shareholders to understand their views on the company’s strategy and governance? Do select individual directors participate in those conversations? Are board composition and skills regularly discussed with shareholders?
  • What is the company’s response plan in the event an activist does emerge? Does the board understand its role and has it participated in simulation exercises?
  • Has the company reviewed and updated its articles of incorporation and bylaws since formation to address potential shareholder activism risks?

Summary

The way board directors are elected in a proxy contest is changing in a big way. Starting in September 2022, universal proxy cards will be required, listing all board candidates, including those nominated by the company or a shareholder. The change will provide a more even playing field for those voting by proxy and give investors more options to express their view on who should be on the board. Boards are likely to see a higher volume of proxy contests in coming years, and more individual directors could be targeted.

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