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Changing the
"Case for Change"
Any activist who has prosecuted a proxy contest knows about the "case for change". It's the core tenet in appealing to Institutional Shareholder Service (ISS) and Glass Lewis, the two gatekeepers of support from a substantial portion of institutional investors.
With a year of experience under universal proxy card (UPC), we understand how the "case for change" idea needs to change. The two proxy advisors should adapt to the new UPC environment the entire logical construct they use to assess proxy contests. They should dispense with the "case for change" concept and follow a more sophisticated, nuanced approach.
What is this "Case for Change"?
ISS originated it decades ago, as a way to think about company and activist arguments for their nominees in a proxy contest. Glass Lewis adopted a similar form of thinking.
Of course, it applies only to proxy contests, where an activist seeks to replace one or more incumbent directors. ISS expresses it succinctly in FAQs for its voting policies (FAQ 96, p. 35):
ISS' current two-prong framework for proxy fights:
▪ Is there a case for change?
▪ If so, how much change/which nominees?
ISS does not anywhere define "case for change", explain what it means, or describe what it looks for. Its voting guidelines set forth some general criteria in voting in contested elections (p. 18), but nothing specific about the "case for change".
Similarly, Glass Lewis does not address contested elections in its voting guidelines. Separate guidelines from 2021 describe generally how they analyze proxy contests. There, Glass Lewis expects an activist "to disclose detailed information regarding its rationale for initiating a proxy contest and its plan for improvement at the company" (p. 6).
In those same guidelines, Glass Lewis also assumes the company is right: "We generally believe incumbent management, with access to more and better information regarding the company, should be given the benefit of the doubt regarding its strategic business decisions."
ISS likes generality. It notes "ISS' proxy contest framework is broadly structured by design, reflecting our case-by-case approach to these analyses."
From this somewhat vague guidance has sprung the accepted wisdom that an activist needs to show, somehow, that it has a compelling (or compelling enough) plan for a portfolio company. Only then will ISS and Glass Lewis consider activist BoD nominees. It's not enough that a company could have serious business or corp gov problems, or it has one or more deficient directors. The activist must state a persuasive vision for the company, based on (as Glass Lewis might put it) less and worse information.
Thus, every attorney and proxy solicitor advises activists to develop a "case for change" like a mantra. In practice, activists follow that advice quite literally, like Engine No. 1 or Blackwells, a couple of recent examples.
It Used To Make Sense
Before UPC, shareholders had only a binary choice in a proxy contest. They would choose between the BoD plan and nominees and the activist plan and nominees. The directors would derive automatically from there. Even though shareholders technically vote on directors, they in effect would vote on the company or activist vision for the company.
So, proxy advisors would first assess those plans. If an activist had a better plan, then and only then would proxy advisors assess whether the activist's director nominees improve on the company incumbents.
UPC transformed a binary election into a continuous vote on directors. Shareholders now express preferences with more precision than before. Around the time the SEC implemented the new UPC, ISS and Glass Lewis said UPC would not change their approach. Yet, it should.
Under UPC, the "case for change" has become much less relevant as director credentials become more relevant. To compare and vote for company or activist candidates, shareholders do not necessarily also need to assess their respective plans.
Even successful companies can use new directors. Under UPC, an activist can nominate a single superb candidate to replace an obviously less qualified incumbent. The obsolete "case for change" thinking precludes proxy advisors from supporting that superb challenger. We don't need a compelling "case for change" to see that Nelson Peltz improves on incumbent Michael Froman.
An alternative
Perhaps shareholders and proxy advisors still want to consider what an activist wants to accomplish at a portfolio company. It could provide useful context for considering director qualifications.
We propose a better way to assess that context and director candidates than the vague "case for change". Sure, each of the company and activist can describe a vision, thesis, or plan for the company. ISS or Glass Lewis can evaluate each and decide which one will serve shareholders better.
Next, shareholders can ask, which directors are best suited to implementing the preferred plan? Importantly, would one or more of the activist nominees support the plan better than one or more of the incumbents? If so, the proxy advisor would recommend a challenger even though it prefers the company plan. Similarly, the proxy advisor could also recommend an incumbent to implement the activist plan.
In this way, we address the point of the proxy contest, directors. Shareholders want to know how to vote, and UPC allows them to vote for only as much or little change as they want.
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