New Voting Rules, New Targets

Investors can now cherry-pick directors from competing slates in proxy contests. Who will activists try to remove?                                         

Long-tenured directors beware—activists may be coming for your board seat. 

The SEC’s new voting rules allow shareholders, whether they attend the annual meeting or not, to cherry-pick director nominees from competing slates, instead of requiring them to select a company’s entire ticket. Based on early indications, activists seem to be targeting more directors of long standing. In one recent campaign, shareholders voted out a director who had served on the board for 18 years. In another, activists targeted two directors, including the longest-serving member of the firm’s board, for being overcommitted and lacking time to do a good job. In that case, however, the opposing sides reached a settlement prior to the election. Law firm Skadden Arps, which represented the targeted companies in both instances, wrote in a blog post that “one consequence of the new rules appears to be enhanced focus on the individual director’s qualifications, including whether a specific director is long-tenured.”

Prior to September, when the new rules went into effect, shareholders were not allowed to vote for individual directors from competing slates unless they attended the annual shareholder meeting in person. If voting by proxy, they had to vote either for the company’s or the challenger’s director nominees. Now, however, shareholders can freely mix and match votes among nominees from both sides. Firms had resisted making this change for years, but the shareholder-rights movement and the push for transparency finally, albeit quietly, brought it about. 

While the sample size so far is small, it is certain to grow as the year goes on, with some elections already underway. According to Michelle Lowry, a finance professor at Drexel University’s LeBow College of Business, the rule change makes it both cheaper and easier for activists to run campaigns; it also gives shareholders more say overboard composition without risking a control change at the company. “Shareholders can shift the conversation to specific directors and see what each brings to the table,” she says. In addition to targeting long tenured and older male directors, Lowry expects campaigns to take aim at those who serve on multiple boards, or have overlapping experience with other board members, or lack critical skills. “They can change one or two directors without changing the entire board,” she says.

Combined with age limits, term limits, and individual director assessments, the new rule could hasten turnover and push slow-moving boards to take action in areas like sustainability, artificial intelligence,  and diversity and inclusion, says Ayana Parsons, a senior client partner for board and CEO inclusion at Korn Ferry. “It puts pressure on boards to be more rigorous and transparent with their own director evaluations and broader board effectiveness assessments,” she says.

Currently, firms must disclose in proxy filings to investors the value a director adds to the board, but the requirements can be broad. Saying a director brings a certain number of years’ experience in the industry or in a specific position is often enough to meet the disclosure criteria. Under the new rules, “boards are going to have shore up the renomination process,” says Parsons. 

Opponents of the change say proxy fights present a Wild West scenario for directors. Board experts often note, for example, that age has no bearing on a director’s value or contributions. With most activist campaigns ending in settlements, some observers worry that the new rule gives more bargaining power to activists and leaves companies negotiating from a position of weakness. 

But boards can strengthen their hand by thinking like activists, says Anthony Goodman, leader of the North American Board Effectiveness practice at Korn Ferry. For years, these boards have tried to neutralize challenges by considering capital-allocation and strategic initiatives from the activists’ point of view. Goodman says they need to start doing the same when it comes to board composition. “Boards need to take a look at their directors and see how they could be targeted,” he says. 


For more information, contact Korn Ferry's Board Succession Planning practice.