Proxy Advisors: Universal Proxy Changes Little (For Them)

ISS thinks it means more work. Glass Lewis thinks it will take awhile for everyone to understand the implications. Both embrace the anticipated personal nature of proxy contests. Otherwise, they expect universal proxy cards (UPC) will change little about how they approach proxy contests.

Last week, ISS and Glass Lewis both published notes reacting to UPC. Glass Lewis posted on its blog, while ISS sent a private note to clients (Sidley, Olshan, and DealLawyers.com blog summarize it). They mainly remind activists what it takes to win their approval, always worth remembering.

Both applaud UPC. ISS says it's a "far superior" way for shareholders to cast votes, while Glass Lewis "generally supports" it. Glass Lewis calls it a "fundamental change".

No change in how they think about a proxy contest: ISS' framework "will remain largely unchanged", while Glass Lewis does not expect its "overall approach...to change". Both use their notes to remind everyone about their two-step approach. ISS asks 1) is there a case for change and 2) if so, how much? Glass Lewis follows a similar process.

Both emphasize the first step, about the case for change. For ISS, that case "will always precede" the second step. ISS prefers "a detailed, insightful argument ... why a company may [underperform]" over a "a brilliant nominee, but a weak case for change." Glass Lewis similarly "require[s] the activist to make a compelling case for change."

At the same time, both like really good director candidates. Glass Lewis wants an activist who will "nominate qualified, unconflicted director candidates who seem better suited to address deficiencies or to facilitate a superior outcome for shareholders." ISS "will continue to highlight to clients those nominees from either party who, during our engagements, appear particularly well-qualified" (our emphasis). ISS also suggests it will likely favor activists that propose a "preventative argument" for its nominees.

Personal contests: They affirm the expected personal nature of proxy contests under UPC. ISS notes shareholders can "target the incumbents they believe to be least valuable," and boards are "far less able to shield their weakest contributors." Glass Lewis "expect[s] ... a greater emphasis on evaluating the respective skills and qualifications of each individual company and dissident nominee, not only for those nominees who are pitted against each other, but also in terms of the board composition as a whole."

More work: ISS notes UPC "will increase the workflow of institutional investors", and presumably their proxy advisors. They "may require far more engagement with each side - and potentially with every nominee..." Glass Lewis "remind[s] clients that each proxy contest is a unique situation, with any particular campaign shaped and evaluated based on its specific fact pattern and individual set of circumstances." In other words, get to them early, and prepare to wait for the report.

ESG: ISS uses its note to reiterate how it thinks about ESG-based activism. ESG proponents have begun to consider proxy contests, which it dubs a mere "upgrade urge" based on UPC. ISS "favors activist campaigns that connect the dots between ESG issues, operational concerns, and shareholder value." It warns against a hedge fund "weaponizing" ESG, which it views as "far less compelling than a significant long-term shareholder, concerned that companies are not appropriately focused on their long-term challenges..."

Not surprisingly, neither acknowledge how their power over director elections will likely increase. Earlier we wrote:

They frequently advise shareholders vote for only some of an activist's slate. Now, these recommendations will have more impact. Proxy advisors that handle proxies for investor clients can implement directly the advice to support only a few specific activist candidates.

Finally, ISS writes its note more ... dramatically. It hauls out its usual stirring, amusing metaphors. We smile as it calls UPC a "hot new toy at Christmas" and cautions that activists may "become frustrated with its complex instructions." We admire its reference to a company as a "patient", that it assesses if it "truly needs intervention", its warning that won't support mere "plastic surgery," and that UPC makes "elective surgery" easier. Well played...