A very active SEC has recently rolled out significant new regulations affecting executive compensation disclosure and director elections, and may soon enact new climate disclosures rule. Given the intense investor interest in these topics, these changes, if not handled carefully, could increase a company’s vulnerability to activism and lawsuits, and damage trust and reputation. Viewed more positively, these changes create an opportunity to start telling your best board and oversight story now.
The new Universal Proxy rules may prove to be extremely consequential.
Universal Proxies in Contested Director Elections: What Is the New Requirement?
For shareholder meetings held after August 31, 2022, the SEC now requires the use of a “universal proxy card” in contested board elections. Both sides (or all sides, if there are more than two soliciting parties) will still distribute their own proxies and ballots, but they now must include all director nominees regardless of the nominating party. So instead of choosing between competing board slates, investors now can more easily pick and choose among all individual director nominees.
Long sought by activist and other investors, this change is expected to make it easier and more cost effective to wage board election contests and more likely that at least one dissident nominee will be elected.
What Companies Should Do NOW
With intensifying investor scrutiny of boards, their diversity, qualifications, and oversight of an expanding array of topics (including ESG), nearly every board seat in corporate America is at risk. For this reason, companies must not just tell their best collective board story, but also make the best case they can for all individual nominees and their unique contributions to the board. The proxy is where everything should come together.
Boards operate largely outside the public eye, so investors may over-rely on available metrics like gender, race, ethnicity, tenure and meeting attendance when making their voting decisions. In fact, clients have already told us they fear that older, longer tenured and less diverse directors—regardless of their quality and unique competencies—are likely to be targeted.
Following are some of the ways companies are showcasing board strengths in their proxies as well as IR messaging.
- Substantive board and CEO cover letters, including creative photography, can set the “tone from the top” and help humanize board and executive leadership. Our research shows that such cover letters are highly likely to be read. In the case of a combined CEO/board chair position, consider giving the lead independent director (LID) their own cover letter to help demonstrate the substantive nature of their position.
- Revisit director bios, particularly focusing on the descriptions of each individual’s qualifications to serve on the board.
- Board diversity graphics can further highlight relevant aspects of diversity, including gender, age, tenure, race/ethnicity and national origin.
- Board refreshment timelines can highlight longer term refreshment.
- Board skills matrices can reinforce unique experience and competencies a director brings to the board. Increasingly, these include relevant ESG, human capital, cybersecurity, and similar competencies
- Present key board processes in digestible “process flow” formats, including:Board oversight of risk, and of ESG/HCM
- Board evaluation
- Director recruitment/board refreshment
- Executive succession
- Shareholder engagement and responsive actions
Most larger investors access the SEC-filed and web-hosted digital version of the proxy. Including links to director videos can help bring directors to life for investors.
Having advised and worked on dozens of proxy contests during my career, when an activist threat emerges or becomes real, companies will do two things:
Why wait? Telling your best story now may send a message to potential activists that you are not a soft target on these issues, and that they should find more vulnerable targets.
To assist you in benchmarking your sharpened board and other disclosure stories, please review DFIN’s 10th Edition, Guide to Effective Proxies.