Directors Must Defend Themselves In The Universal Proxy Card Era

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Three proactive steps to take to avoid replacement by activists.

Now that the use of universal proxy cards has been mandated, each corporate director may need to reexamine what it will take to remain a member of the boards that they serve on. Activist investors and governance observers are speculating that there will likely be an increase in the number of proxy fights over board seats because of the new rules. All corporate board members are potentially at greater risk.

The changes to the SEC’s proxy card rules became effective as of January 31, 2022 and applies to any shareholder meeting involving a director election after August 31, 2022.

According to the SEC, the amendments to the proxy rules require the use of a “universal proxy card” in all non-exempt director election contests, except those involving registered investment companies and business development companies. A universal proxy card is one that lists all director nominees of all sides in a director election contest—whether or not contested.  

“The amendments will allow shareholders voting by proxy to choose among director nominees in an election contest in a manner that more closely reflects the choice they could make by voting in person at a shareholder meeting,” the SEC said in a statement.

Analysis of the rule changes by Sidley Austin LLP offers recommendations for public companies that can help boards prepare for implementation of the new rules. However, beyond those recommendations, individual board members should consider preparing themselves for the intense individual scrutiny they may face as activist investors become more emboldened in their efforts to gain board seats. The universal proxy card allows shareholders greater choice regarding who will sit on company boards, so directors may need to be more aware of the value they bring to each individual board they sit on and whether their skillset is needed and coveted by a particular board.

Focus on Director Contributions and Abilities

In any case where board seats are at stake, directors may have to openly advocate for themselves in order to remain on that board. Since activist shareholders will be attempting to replace current board members with candidates of their own, each individual director should be prepared to:

• Create a defense for remaining on the board. If a dissident shareholder challenges a director’s position on the board, it will be up to each individual director to offer a defense that will convince shareholders they should not be removed. Keeping a list of notable accomplishments would be helpful, including acknowledging work on committees and important skills and experiences they have that are needed to execute company growth strategies.

• Engage with shareholders concerning director skill sets. Communicating with shareholders and paying attention to shareholder concerns can give directors insights into the type of directors investors approve of. Shareholders generally give clues as to behaviors they approve and disapprove of. Directors may want to show their ability to deal with shareholder concerns.

Demonstrating openness to shareholder concerns could work in a director’s favor. However, if a director is dead set against shareholder positions, then effectively communicating an explanation as to why the shareholder position should not be supported could also strengthen investor trust. An explanation one director offers may wind up speaking for the entire board.

• Ask tough questions about board composition. Activist investors that are seeking board seats generally have doubts about the board’s composition. Directors need to have frank discussions about their board’s composition—including asking questions such as:

  • Does the board have members who have the required skills to execute the growth strategies that the company has articulated?
  • Has the board anticipated changes in the markets that the company serves and enlisted board members that can help give the company an advantage serving those markets?

Answers to these types of questions will help each individual board member know if they are at risk of being targeted by activists for removal.

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