Investors who have remained quietly on the sidelines could start making a lot more noise in the months and years ahead.
First-time activists accounted for 37% of all shareholder campaigns in the first half of 2022, the highest level in recent years, according to Harvard Law School’s Activism Vulnerability Report, released in early October. “This may portend that activism is entering a new stage… characterized by operational and strategic activism becoming fused with corporate governance and ESG,” the report says.
A new “universal proxy” rule, which went into effect in September, could add fuel to the fire. Previously, shareholders who nominated board members were required to mail their own proxies and supporting materials, which was expensive and time consuming. But the SEC now requires firms to send all shareholders a single uniform proxy card that lists the names of all nominated board candidates, whether they are endorsed by the company or not.
This avoids the appearance of an “us versus them” proxy fight, which tends to happen with two slates of board candidates, and allows shareholders to easily vote for the combination of nominees they prefer.
Contested board elections are “exceedingly rare,” according to the Council of Institutional Investors. “Based on recent contests going to a vote in the Russell 3000 index, the SEC’s new rule would have no impact on 99% of director elections,” CII reported.
But that could change.
“We expect the universal proxy to create a rich environment for first-time activists, particularly with small or ESG-focused funds, to seek minority board representation,” says the corporate law firm Vinson & Elkins in a special report. “And these activists will probably seek just one seat in most instances; trying to lean on companies to relent using an uncompelling ‘What’s the harm in adding just one director?’ argument.”
The new rule could also have an unintended benefit—motivating incumbent directors to become more actively engaged with shareholders, whether those board members are specifically targeted by activists or not, says the law firm Glass Lewis, which specializes in corporate governance.
Finally, the uniform proxy rule gives ESG shareholders more leverage in settlement negotiations, says Ernst & Young: “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.”
Vinson & Elkins believes ESG activism will continue to gain momentum “unless institutional shareholders abandon these causes, which, in our view, is an impossibility.”