Activist board battles to get more personal

Sitting just off Central Park’s south-east corner, New York’s Pierre hotel enjoys distinction as one of the city’s centres for wealth and power. It was the venue for General Electric chief executive Jack Welch’s 1981 speech that laid out his vision of why companies should focus on shareholder value.

Last week, big hedge funds and people in the activist investor ecosystem gathered at the Pierre for an annual conference on how that value might be realised ahead of the new season of shareholder meetings. With the stock market slumping this year and the Covid-19 pandemic largely over, activism is perking up after months of limited action.

This year’s conference buzzed with talk about a subtle but significant change to the activism rule book. A September rule change at the US Securities and Exchange Commission has handed activists a new tool that companies fought for years to keep out of shareholders’ reach.

The SEC oversees corporate governance rules and its rule change affects how shareholders elect board members. Previously, when an activist wanted to shake up a board by nominating fresh directors, these contested elections forced shareholders to vote for a slate of the company’s nominees or those of the activists. Commingling was only allowed if investors showed up in person to meetings — a difficult ask for all but the largest shareholders.

Now, the new so-called “universal proxy” ballot cards give shareholders a chance to pick and choose nominees from all parties. Investors too shy to support an activist now have more flexibility to vote for only the directors they like. Essentially, the menu is à la carte.

Carl Icahn and other activists applauded the SEC for this change, but no one knows how significant it will be. To some people sipping coffee in the Pierre’s marble hallways, the universal proxy does not change the hard work activists need to do to topple incumbent board directors.

But other attendees said the changes would unquestionably spark more activist campaigns. One would mean activists would only need to send ballot papers to 67 per cent of shareholders rather than all of them. This means they could target just the bigger shareholders, making campaigns a little cheaper and broadening the field of potential activists.

“This significantly lowers the barrier to entry for activists of all sizes,” said Rich Fields, head of the board effectiveness practice at consultancy Russell Reynolds.

There are signs that big asset managers will throw their support behind campaigns using universal proxies. Fidelity and other firms backed the SEC change alongside the activists.

Fields said for years big asset managers were reluctant to vote against bonuses for executives. Now, companies are losing executive pay votes in record numbers. If they are willing to vote down pay, they might take the next step. “There is a growing assertiveness and confidence from those investors.”

But companies are fighting back. They are racing to update their corporate bylaws to make it harder for activists to make boardroom challenges, said Elizabeth González-Sussman, a partner at Olshan Frome Wolosky. For example, hedge funds might be asked to disclose their investors, names that activists usually want to protect from public disclosure, she said.

Quietly, companies are also coming to terms with this new activist tool. At the Pierre, there was talk that stress testing has begun at companies to identify which board members might be vulnerable to activist attacks. As a result, difficult conversations have reportedly begun with those who might not be a good fit anymore.

Some companies were said to be contemplating changes such as a mandatory retirement age to refresh board members more quickly. Directors who work on too many boards are low-hanging fruit for universal proxy campaigns.

Activists also said the universal proxy changes would enable more targeted campaigns, a tool more akin to a scalpel than a broad, park-the-tank-on-the-front-lawn type of attack. A member of the board of a defence company might be replaced with someone with more relevant experience, for example. Or board diversity could be improved with the nomination of individual directors.

Overall, they believe these minute changes will make boards more nimble, to the benefit of corporate America overall with much more focus on the individual competence of directors.

“Gone are the days where you are able to add a new director because they have ‘general leadership experience’,” said Chris Couvelier, a managing director at Lazard. “There needs to be a specific narrative to what they add to the board.”

This winter will probably bring more activist campaigns. Thousands of US companies have board nominee filing deadlines in the next six months. This might be uncomfortable for many individual directors, bruising egos.

As Fields said of campaigns after the universal proxy changes: “This time it is personal.”