Staying on board
Tom Brown, Consultant at Bladonmore, looks at new rules coming into effect this US proxy season and the implications for board members looking to keep their seats.
This proxy season could prove the beginning of a wild ride for North American boards. While holding onto a board seat has always been practically a foregone conclusion in the US and Canada, a shift is taking place, thanks to rule changes in both countries.
Even before changes to the rules, many of today’s directors were significantly less confident than usual that they’d be coming back. In 2022, 618 directors in the US fell short of majority support; this represents the highest level of director failures in more than five years. Complicating the picture is the rising number of shareholder proposals in the US, with the 510 last year a rise of 106 from the year before.
Side-by-side nominations in US
Hotly contested and yet finally a reality, the universal proxy rule came into effect for all US director elections held after August 31, 2022. And yet the fall-out only started to become evident in early 2023, when the vast majority of proxy votes takes place.
With the arrival of the universal proxy rule, companies must list directors nominated by dissidents (shareholders who oppose a firm’s management or policies) who meet certain criteria alongside their own nominees. Although a dissident must follow a company’s bylaws, having the directors named side-by-side is generally believed to be a boon for outsiders hungry to exert greater control within a boardroom.
Prior to this rule, US public companies and dissident shareholders sent out separate proxy cards, each listing only its own slate of nominees. Not only does that make voting simpler for shareholders, it makes a mail-in proxy vote for a dissident nominee far more likely.
The universal proxy also means that a shareholder can mix and match when choosing among directors, voting for some from Column A (management) and some from Column B (the dissident). This extends to the recommendations of proxy advisors like ISS and Glass-Lewis, rather than them having to choose one slate over another.
This means, rather than having to make the case that a full slate of candidates is better than the status quo, dissidents can now take a more targeted approach to unseat a single director.
Annual elections In Canada
August 31 also saw big changes for director elections in Canada. Now, rather than voting for a full team, investors will cast ‘for’ or ‘against’ votes against each director. Any director that does not secure a majority of ‘for’ votes will be required to leave. In addition, director elections at CBCA companies will be held annually, rather than Director terms running for three years.
In a February 13 Reuters article, Heidi Reinhart, a partner at the Toronto office of Norton Rose Fulbright, said of the Canadian rule change: ‘If I were an activist, this makes things easier.’ She explained that because investors can launch ‘against’ campaigns targeting a specific director, they now have more leverage.
Earlier this year, it seemed as if the implications of the universal proxy rule would play out in at least one high-profile campaign.
A few months ago, Trian Group launched a proxy contest against the Walt Disney Company, with Trian CEO Norman Peltz seeking the board seat held by Mastercard executive Michael BG Froman. In an open letter, Peltz criticized Disney for paying executives large salaries when the company was performing poorly. Disney pointedly rejected the accusations and the need for an outside board seat.
In the end, this splashy test-drive for the new proxy rule did not take place. On February 9th, Trian backed down withdrawing its bid for a board seat after Disney stole the initiative by announcing a restructuring, as well as plans to reinstate the dividend by year-end.
Even without a scuffle at Disney, the universal proxy is being tested at a minimum of four US companies, including: Argo Group International, Apartment Investment and Management, AIM Immunotech, and Diffusion Pharmaceuticals.
Communicate your value
While we are yet to see a wave of dissidents remaking North American boardrooms, sitting board members need to be ready to fight harder to keep their seats than ever before.
Now that it’s simpler for dissidents to get their nominations in front of voters and to rouse shareholders against a sitting board member, the current establishments will need to find new ways to tell the story of their own value to the business and communicate why they’ve taken the strategic decisions that have led the business to where it is at voting time.
If you want to hear how Bladonmore can help you communicate your story to shareholders, get in touch.