A new Securities and Exchange Commission “universal proxy” rule that went into effect on August 31 may extend the advantage the political Left has in boardrooms.
It could also further empower huge, influential investment firms like BlackRock and Vanguard – as if they needed it.
For many years, well-organized progressive shareholders have engaged corporate directors and executive suites to advance their “Environmental, Social and Governance” priorities, with smashing success.
As a result, every major corporation has bulked up their ESG credentials and staff, and big institutional investors further reinforce that agenda.
This year conservatives responded in increased numbers at annual meetings, doubling their shareholder resolutions during the Spring proxy season, to push back against “woke” ESG policies.
But the “universal proxy” rule may further extend the advantage the better-organized Left – perhaps often backed by BlackRock – has in boardrooms, strangling right-leaning activists’ fledgling efforts in the crib.
The rule mainly addresses the nomination and election of directors to a company’s board.
Under previous SEC rules, each year a corporation’s board would present its recommended nominees on its own proxy statement – and on its associated proxy card, which is the shareholder’s “ballot” – for voting at the annual meeting. If a shareholder, or a coalition of them, wanted their own candidates to be considered on the company’s proxy card, they needed to own at least three percent of stock in the company for at least three years, plus jump through other regulatory hoops – a difficult threshold to clear.
The other way for shareholders to nominate a competing set of directors was to present them on their own separate proxy card.
This rare scenario played out in 2021 when progressive activist investment fund Engine No. 1 proposed a competing set of nominees for ExxonMobil’s board, and three of its choices won slots. The pro-ESG group presented its nominees on its own proxy card, and sent it to enough shareholders to garner sufficient votes to win the election.
The new SEC rule goes well further. Proxies presented to shareholders now will be “universal.” That means that when there are alternate sets of nominees against the corporate board's proposed choices, all nominees must be listed on all proxy cards.
This will allow voting shareowners to pick and choose individual candidates to support from each slate. Under the previous rules, if a shareowner did not attend an annual meeting in person, voters could only support either the company’s slate of recommended directors, or the dissenting shareholders’ choices.
However, the more significant change in director nominee rules is that it will be easier
for “dissident” shareholders to advance their nominees to the “universal” proxy ballots. The three-percent/three-year ownership requirement is eliminated under the new SEC rule – there is now no minimum threshold for ownership, or for length of time of ownership.
The rule removes another barrier for activist shareholders. In the past, those who proposed alternate slates of directors to a corporation’s nominees had to solicit enough shareholder votes earn victories for their recommendations. That imposed significant costs on printing and mailing proxy cards – Engine No. 1 spent $12 million for its campaign, for example.
But this requirement now has been eliminated. In the future, “dissident” proponents need only notify shareholders electronically and point them to their slate of candidates on a website.
The Harvard Law School Forum on Corporate Governance calls the new SEC rule, “proxy access on steroids.”
“We expect a significant increase in proxy contests and threats thereof…,” the law school predicted. “It is nothing less than the most dramatic change in the US proxy system in a generation.”
Under the new thresholds of eligibility, progressive shareholders will be well-prepared to put forth their own slates of candidates. You can be sure of that. And institutional investors like BlackRock will be even more empowered than they already are, should they want their own directors for certain corporations.
While the Left has shown up year after year and shifted the mindset of most companies’ leadership bodies – which are now overwhelmingly pro-ESG – conservative activists, other than the Free Enterprise Project at the National Center for Public Policy Research, have been mostly absent.
This year my organization, National Legal and Policy Center, sponsored 25 shareholder resolutions at corporate annual shareholder meetings – essentially doubling the number presented from our sociopolitical side. But that still pales in comparison to the hundreds of resolutions sponsored by left-leaning groups each year.
Now conservative activists face the prospect of wholly transformed boards of directors. ESG advocates can potentially be more successful under the new SEC rule than before. Conservative proponents who formerly showed up at annual board meetings to resist “woke” policies before an audience of management-oriented directors, now instead may be met with an even more ideologically hostile collection of corporate leaders.
That is, unless shareholder activists on the Right recognize that company policy will go nowhere without the right decisionmakers. Changing corporate minds requires changing corporate bodies.