Advice for Companies about Universal Proxy
We usually don't concern ourselves here very much with advice for companies. BoDs and management already have too many law firms, bankers, proxy solicitors, PR firms, and others scrambling for boardroom access. Companies also have significant advantages in the structure and conduct of BoD elections, with advance notice provisions, controls over shareholder lists and communication, favorable proxy rules (at least until universal proxy), biased voting procedures, and all the rest.
Yet, we've received significant interest in universal proxy cards (UPC) from issuers and their advisors. Thus, we comment here on what companies might do as the new regulation takes effect September 1. We intend this also to serve shareholders and activist investors well, as we seek to contribute at least something to bringing the parties together constructively.
Our advice follows from the general observation that proxy contests will become much more personal under UPC. Earlier, we noted under UPC:
Shareholders can compare individual nominees explicitly, between company incumbents and activist candidates. A resourceful activist will make this comparison easy for other shareholders. ... Under UPC, shareholders can act directly on these individual choices. An activist should make clear to other shareholders the advantages of its specific nominees compared to each incumbent, and urge votes following these distinctions.
We can think of two ways companies should respond to these very personal comparisons between incumbent directors and activist nominees: improved shareholder engagement and serious BoD refresh.
Shareholder engagement
Shareholder engagement means many things. These range from routing inbound calls from shareholders to IR, to cultivating substantive, ongoing relationships with significant investors. Most companies seem to gravitate to the former, and insulate BoDs from shareholders. Most investors prefer the latter, which takes time and energy that BoDs and executives might prefer to devote elsewhere, or just not expend at all.
We'd like to see year-round communication at a personal level between directors and significant shareholders, without intermediaries such as company executives or outside counsel. Assign a few significant shareholders to each director, and task each with ongoing, meaningful contact. Provide personal email addresses and mobile phone numbers. This matters now with UPC. If fund PMs know directors individually, then it becomes easier to vote for them, and harder for an activist to tell a negative story about them.
We expressed our views about how this should work years ago, with a simple five-point plan. If a company wants something more detailed, we found this recent webinar from ISS Corporate Solutions interesting and informative.
BoD Refresh
Most companies don't seem to take this seriously enough. Sure, they undertake a pro forma BoD review, but we've never seen a director retiring from a BoD due to poor fit with the company's needs.
Too often a BoD refresh program entails checking meeting attendance, confirming ongoing interest in serving, and completing a D&O questionnaire. Lately it has also addressed long-overdue BoD diversity efforts.
A more serious process critiques first the experience and expertise of each director, relative to company needs. We've long demanded only financial literacy and fierce independence, with industry background and proper "temperament" largely irrelevant. Investment banking, human resources, and other relevant disciplines frequently make sense depending on what decisions (M&A, hiring) the BoD will need to make.
The process must also review director engagement and independence. It asks, how involved is this director, relative to their other obligations and other directors? How often does this director ask nosy questions of management, and refuse to stop asking until they get answers?
A BoD can continually replace tired directors having obsolete credentials with more suitable ones. Otherwise, an activist investor will refresh the BoD for you. As unpleasant the former is, the latter is worse. UPC makes it much easier for the activist than before.
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Shareholder engagement and BoD refresh are hardly novel. BoDs should have done this well long ago and should do it well now. Not enough do, even today. The personal nature of proxy contests under UPC makes it more urgent and important than ever for companies to finally do well what they should have done well all along.
