ESG via UPC may be the next field of play for those interested in corporate governance reform. Corporate Accountability Forums will host a discussion with proxy advisor John Glenn Grau and activist investor Michael Levin on December 1, 2022, at noon Eastern time. How do new universal proxy card (UPC) rules make it easier for those concerned with environmental, social, and governance (ESG) issues and efficacy to run proxy contests? We will use Amazon.com as a potential example. Register to participate in the Zoom discussion or to be notified when the recording is available. Update: Watch or listen to the replay.
ESG Via UPC: What Others Write
Activists seek changes at underperforming companies through deal-making and other means. Increasingly, they are also pressuring companies to up their game on environmental, social and governance, or ESG, issues… Overall, there were 171 campaigns launched as of Sept. 30, up 39% from the same period in 2021, as activists seek out cheaper entry points to place their bets. Companies Brace for Onslaught of New Activists After Change in Proxy-Voting Rules
In the first half of 2022, 37% of shareholder activist campaigns were conducted by first-time activists, a number that dwarfs the percentage led by more familiar activist names, such as Elliott Management or Icahn Associates (23%). According to The Activism Vulnerability Report, FTI Consulting’s most recent quarterly report on the environment surrounding shareholder activism, this may forecast a new era in shareholder activism, one that forgoes the focus on cutting costs and returning cash to shareholders in favor of an approach that fuses operational and strategic activism with corporate governance and ESG. Is Your Board Ready for a New Era of Shareholder Activism?
Campaign strategies may shift from focusing on company versus dissident platforms (i.e., a “slate contest”) to pitting an activist’s best individual nominees against the company’s nominees whom the activist regards as the weakest targets (i.e., a “candidate contest”). ISS Provides Guidance on the Universal Proxy Card
It is a near-certainty that future proxy campaigns are going to focus more on the personal attributes of the individual candidates. Each side will need to make a strong case for the qualifications of each person nominated for a board seat. This process may lead to each side publicly “dissing” the capabilities, experience, and perhaps even the integrity of the other side’s nominees. Side note: My friend, Michael Levin of The Activist Investor runs a fantastic website that covers all the details worth knowing about universal proxy card issues. Here it is: www.theactivistinvestor.com. Activist Battles Are About To Get A Lot More Personal
“The degree of future board exposure to activist campaigns and proxy fights depends in part on the quality of connection between board nominating committees and the shareholder base,” said Peter Gleason, president and CEO of the National Association of Corporate Directors. “If boards and nominating committees do not up their game, I believe that there will be a dramatic increase in proxy fights.”
“It is possible that some shareholders may run ESG-centered contests marketed to this ‘upgrade urge,’” ISS said. “Campaigns purely focused on ESG issues would appear to be better suited for proxy access, rather than proxy fights. After all, an economic activist simply ‘weaponizing’ ESG issues is far less compelling than a significant long-term shareholder, concerned that companies are not appropriately focused on their long-term challenges, seeking board representation.” More board seat battles expected as universal proxy card mandate takes effect
For most companies, the dissident should be able to comply with the 67% requirement relatively inexpensively, given the prevalence of electronic voting thereby avoiding an expensive retail campaign, especially if the goal is one or two board seats. Practical takeaways of universal proxy card voting in contested director elections
Dorothy Carvello nominated herself to the Board of Warner Music Group, the parent of Atlantic Records. Warner Music Group cannot attract top female artists or employees in a corporate culture that she believes is beyond broken. She contends that change must happen from within, not from silencing victims with NDAs and hush money. Sexual Assault, Universal Proxy Cards and Rock & Roll – Shareholder Activism at Warner Music Group
In WMG’s case, the top 12 shareholders own approximately 67% of shares. So, a simple solicitation email or letter to the top 12 Warner shareholders could satisfy the S.E.C. requirement. 12 emails? That can be accomplished over a cup of coffee.
[I am not sure how the author, Dan McDermott, gets there. A database I subscribe to shows the top 20 Warner shareholders own only 23.2%. Ah, my data only looks at institutional investors. Maybe Carvello gets there by soliciting the Class B shares. The article does go on to note Warner has a dual-class structure that will make it almost impossible for Carvello to win at the February AGM. Update: Yes, due to Blavatnik brothers ownership a majority, only 12 emails were required].
Dorothy Carvello’s self-nomination at Warner Music Group will not be the last nomination of a minority shareholder to a public company board. Corporate boards need to be proactively listening to their shareholders and responding to their concerns. It’s entirely possible that a self-nominated, minority shareholder will be elected. At the very least, corporate accountability will never be the same. [I invited Carvello to our forum but unfortunately, she has a scheduling conflict (meeting with her attorneys)].
ESG Via UPC: Blocking with Advance Notice Bylaws
Directors of Masimo recently adopted bylaw amendments that could deter legitimate efforts by shareholders to seek board representation through UPC. Masimo’s advance notice bylaws “resemble the ‘nuclear option’ and offers a case study in how rational governance devices can become unduly weaponized, writes Lawrence Cunningham. Directors of other companies are considering similar proposals.
Bloomberg’s Matt Levine speculates bylaws might require disclosure submissions “on paper woven from unicorns’ manes,” with requirements waived for the board’s nominees.
I am working on a model shareholder proposal to reduce the use of such preemptive bylaws, although by the time shareholders get to vote in favor of maintaining a level playing field, many boards will have already tilted the field in their favor.
ESG Via UPC: My Quick Thoughts
Shareholder Recommendations for Directors
- the name, address, and biography of the candidate, and an indication of whether the candidate has expressed a willingness to serve;
- the name, address, and phone number of the shareholder or group of shareholders making the recommendation; and
- the number of shares of common stock beneficially owned by the shareholder or group of shareholders making the recommendation, the length of time held, and to the extent any shareholder is not a registered holder of such securities, proof of such ownership.
ESG Via UPC: Purpose of Meeting with Discussants
The Corporate Accountability Forums session we host on December 1, 2022, seeks to begin to understand opportunities to advance ESG via UPC. Don’t come looking for definitive answers. Come to help us brainstorm questions and possible strategies.
John Glenn Grau
ESG Via UPC: Proxy Solicitor
John Glenn Grau is the founder and CEO of InvestorCom. Since 2000, Mr. Grau has led the firm with over thirty years of experience in the fields of proxy advisory and solicitation campaigns, shareholder identification, corporate governance, and mergers and acquisitions consulting. Mr. Grau provides expertise and guidance to a broad range of clients in the corporate, legal, and investment banking fields.
Prior to founding InvestorCom, Mr. Grau was a founding partner and principal of Beacon Hill Partners, Inc., a leading independent proxy solicitation and stock surveillance boutique of the 1990s, where, during his 10-year position, his responsibilities included: directing the company’s proxy solicitation and stock surveillance services, product development, supervision of client relationships, and pioneering the firm’s corporate governance and investor relations divisions.
Spanning the 1980s, Mr. Grau served as Director of Institutional Research and Account Executive of The Carter Organization, the preeminent proxy contest advisory, stock surveillance, and mergers and acquisitions advisory firm of the 1980s. While there, he worked with various clients such as Drexel Burnham Lambert, T. Boone Pickens, and Carl Icahn.
Mr. Grau holds a B.A in Economics and Accounting from Fordham University in addition to an MBA in Finance from the Gabelli School of Business at Fordham University.
Michael R. Levin
ESG Via UPC: The Shareholder Activist
Homework Assignment
ESG Via UPC: Time for Change
So many people have signed up that we may need Zoom stadium mode 😅. (However, I am determined to make the session participatory.)
I really hope running director candidates can help move us beyond the #ESG #antiESG nonsense debate to a discussion of how to make corporate elections more meaningfully democratic so that corporations become hubs, not only for economic development but also for human development. (Think wage-slaves vs self-actualized corporate citizens)
More and more companies are being run as oligarchs. That isn’t good for maintaining a vibrant middle-class to drive our economy or a vibrant democracy to drive America. Creating more democratic corporations is a task that is key to unrigging our economy and uniting America around inclusive values. (see The Great Democracy)
Most companies would probably do better if long-term investors of money begin to form coalitions with long-term investors of their own human capital. I think both groups can agree, we want a more equitable distribution of profits between executives and workers. We want an engaging worlplace and more democratic corporate governance that welcomes input. We also want to be responsible stewards and don’t want to profit by externalizing costs or endangering our salubrious environment.
Postscript
Another View
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Oops, this is going to put a cramp on shareholders advancing #ESG board candidates. Question 139.06
Question: Can a dissident shareholder conducting a non-exempt solicitation in support of its own director nominees simply file a proxy statement on EDGAR, avoid providing its own proxy card, and instead rely exclusively on the registrant’s proxy card to seek to have its director nominees elected?
Answer: No. Rule 14a-19(e) requires each soliciting party in a director election contest to use a universal proxy card that includes the names of all director candidates, including those nominated by other soliciting parties and proxy access nominees. Rule 14a-19(a)(3) further requires a dissident shareholder to solicit holders of at least 67% of the voting power of shares entitled to vote on the director election contest and to include a representation to that effect in its proxy statement. This requirement is intended to prevent a dissident shareholder from capitalizing on the inclusion of its nominees on the registrant’s universal proxy card without undertaking meaningful solicitation efforts. See Release No. 34-93596 (Nov. 17, 2021). A dissident shareholder would fail to comply with these rules if it does not furnish its own universal proxy cards to holders of at least 67% of the voting power through permitted methods of delivering proxy materials (such as the Rule 14a-16 “notice and access” method). [December 6, 2022]
https://www.sec.gov/corpfin/proxy-rules-schedules-14a-14c-cdi#139.04
First case I know of where a universal proxy candidate won. https://www.globest.com/2022/12/20/aimco-loses-a-board-seat-to-a-land-building-nominee/ Apparently, it was the second case. https://myemail.constantcontact.com/UPDATE–First-Results-From-The-Second-Universal-Proxy-Card-.html?soid=1102906894819&aid=puBCpJDEqYU