Shareholders of public companies have the opportunity to choose board members during elections. Usually the process is straightforward; however, new universal proxy card rules are poised to bring waves of change. This is particularly true in cases where there are disagreements over who should join the board. Find out how universal proxy cards work, their important business implications and how to prepare.
What Is a Universal Proxy Card?
A universal proxy card lists all board candidates on a single slate. If this sounds ordinary, consider that previously, proxy cards listed subsets of candidates nominated by competing interests, namely the company and dissidents whose leadership vision differs.
Consider situations where dissident shareholders run for open spots on a company board in hopes of changing business decisions. Without the universal proxy card, shareholders would be forced to vote for either the dissident slate or the company slate.
Now, shareholders can choose their preferred candidates directly — choosing some from column A and some from column B — rather than being forced to vote in a partisan manner.
Universal Proxy Card Rules
While shareholders who attended company meetings in person could cast their vote however they liked, those voting by proxy (for instance by mail) could only vote for the names on one ballot. They were forced to elect either the traditional candidates or the opposing side.
The new process gives vote-by-mail and other proxy voters the chance to vote for any candidate they like, just like the in-person voters.
What Is Changing?
As mentioned above, shareholders will now receive universal proxy cards that allow them to vote for any candidate they like, rather than a controlled slate.
This rule change began taking shape in 2014 and was officially proposed to the SEC in 2016. However, it is only recently that the universal proxy won SEC approval. As of August 31, 2022, public companies must use the universal proxy card rather than the old system of proxies.
Implications for Businesses & Shareholders
While the new process is fairly straightforward, stakeholders want to know the implications of the SEC rule change. What will the new voting process mean for publicly traded companies and their shareholders? Will there be more dissent, and more radical candidates elected to boards?
Under the previous system, shareholders had to embrace an all-or-nothing approach, rather than choose some from column A and some from column B.
When thinking about institutional change, this meant shareholders were constrained between "the way it's always been done" and a change-forward approach.
The new system allows shareholders to choose nominees based on their merits. This paves the way for shareholders to vote for the people they think are best suited, rather than only support traditional or Dissident candidates.
The universal proxy card rule change supports activism. It encourages candidates to pursue appointments to company boards because they have the confidence that shareholders can vote for them, rather than voting for a slate.
Analysts expect that more high-profile companies will have Dissidents run for board positions as a result. Dissidents are expected to run for appointment to the board on popular issues such as DEI or ESG. If they win, they may spearhead real change in these initiatives.
Some analysts believe change will be measured rather than radical. While Dissidents may win some spots on the board, the pace of transformation is unlikely to be aggressive given that board candidates must work together.
How to Prepare
Start telling your best board, diversity, qualifications and refreshment story now. DFIN has been helping companies do this for years, through enhanced biographical presentation, board skills matrices, and description of director evaluation, recruitment and refreshment processes.:
As these next steps demonstrate, proper communication with shareholders is key. Some companies overlook the importance of shareholder communications, such as the annual report or proxy statement. By partnering with a third party for annual reports and proxy statement solutions, you can ensure shareholders get the information they need to understand corporate priorities and vote in a way that protects their interests.
- Educate the board on the new rule and its implications: The board must understand the new rule and how elections will change.
- Listen to shareholders to understand what is most important to them and ensure your company is moving in that direction: Shareholders will vote for candidates who promise to act on what is most important to them. Thus, it's important to be an active listener, identify shareholder priorities and demonstrate how the company shares these priorities.
- Do focused scenario planning to understand what might happen if an dissident campaign emerges for a forthcoming board election: Rather than assume it won't happen, assume that it will and determine a course of action should an dissident campaign develop.
- Determine where the company is vulnerable and right next steps: Dissident candidates will seek out vulnerabilities to explore, from share price to operational efficiency to return on investment. By identifying vulnerabilities and planning ahead, you can reduce risk.
With universal proxy, investors can select any one dissident nominee or any one perceived vulnerable or less qualified company nominee. It’s important to describe each board member's unique qualifications to serve on the board, not just the collective board strengths.
Elections using the universal proxy card are already underway. Now is the time to make sure board members understand the rule change, prepare for challenges and take shareholder communications seriously.
DFIN can help with the communications aspect by helping companies convey their story using annual reports and other necessary filings. We are also a resource during this transition. We've developed resources to help guide companies through the rule change, such as this podcast on universal proxy cards.