Activism Amplified: How Universal Proxy Rules Are Reshaping Corporate Governance

By Josef Rashty

This regulatory update takes a deeper dive into the federal securities rules requiring universal proxy cards in contested board elections, exploring the background of shareholder activism and the corporate governance principles that shape today’s proxy battles.

Key federal securities laws shaping shareholder activism include the Securities Act of 1933, the Securities Exchange Act of 1934, Sarbanes–Oxley (2002) and Dodd-Frank (2010). In 2016, the SEC proposed requiring universal proxy cards in contested director elections. After reopening the comment period in April 2021, the SEC finalized amendments mandating that both management and shareholders use universal proxy cards when soliciting votes – modernizing and standardizing the proxy contest process.

Before the new guidance, shareholders had to vote in person at the shareholder meetings in contested director elections. However, after the SEC’s new regulation, they can vote by proxy for a combination of director nominees from competing slates as if they had voted in person at the shareholder meetings.

The final rules require that management and shareholders use universal proxy cards to solicit proxy votes for their candidates in a contested director election. Under new Rule 14a-19, the universal proxy card must include all director nominees that management and shareholders present for election at the upcoming shareholder meeting. It also requires disclosure in the proxy statements about the effect of all voting options provided.

A High-Profile Proxy Contest: Trian Fund Management and Disney

In early 2023, investor Nelson Peltz initiated a proxy fight to gain a seat on Walt Disney’s board. Peltz disagreed with many of Disney’s strategic decisions in recent years, including the 2019 acquisition of Fox and the board’s succession planning. However, he dropped the proxy fight after the new CEO Bob Iger announced cost-cutting measures.

Trian Fund Management launched a second campaign at The Walt Disney Company – the most expensive proxy contest in U.S. history. Amidst concerns that Disney failed to adapt to industry disruptions, endured chronic management succession failures and underperformed its peers, Trian nominated Nelson Peltz and former Disney CFO Jay Rasulo, seeking to “Restore the Magic” at the company.

Shareholders ultimately voted to re-elect Disney’s proposed board members at the company's annual meeting, albeit that Trian’s campaign remains a success. Victory in a proxy contest extends beyond the number of seats won; it encompasses whether the activist’s pressure results in meaningful change that a board would not have otherwise implemented.

While highlighting Disney’s operational and strategic shortcomings, Trian proposed several business initiatives to improve the company’s performance and enhance shareholders’ value, including establishing financial targets to improve its streaming services, streamlining content under production, introducing ESPN-related (Entertainment and Sports Programming Network) initiatives, and committing to new investments and capital projects.

Strategies of Shareholder Activism

Shareholder activists use their economic power to change corporate policies and the environment. Conservative and liberal groups use activism to boycott or outbid companies that do not agree with their particular political, religious or social values. New proxy rules have encouraged activists to nominate new members and allow shareholders to vote for their preferred directors. Activists’ success rates closely track the frequency of the proxy advisors’ recommendations.

Shareholder activism can take many forms, including proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Shareholder activists may have various goals, including increasing shareholder value, addressing governance practices, taking issue with a company's products or business practices, and disinvesting from certain countries. Shareholders' activists have targeted several companies in recent years, including Papa John's Pizza, P&G, Whole Foods, Tiffany, Yahoo, AOL, Olive Garden, and Hugo Boss.

Best Practices for Preventing Proxy Fights and Engaging Shareholders

Companies should avoid proxy fights if possible. However, if they reach the point of proxy fights, a communication plan is the key. When activists take their campaigns to a shareholder vote, a company’s communication plan is critical to winning the battle. Companies and activists have opposing platforms and each side is campaigning to win shareholders’ votes. Thus, targeting key voters with a clear message and helping them understand how to vote is critical to winning.

Section 404 of the Sarbanes-Oxley Act (SOX) requires public companies to establish and maintain adequate internal controls over financial reporting. This section mandates that management and external auditors assess the effectiveness of these controls. The goal is to enhance the reliability of financial disclosures and restore investor confidence. By ensuring strong internal controls, SOX 404 helps prevent financial fraud, promotes transparency, builds investor trust, and avoids proxy fights.

Shareholders often spur action when company performance subsides, something that is not always within management’s control. Thus, they usually initiate a proxy fight that may be avoidable. At the same time, boards and senior leadership can implement practices to avoid proxy fights and create a more constructive relationship between the corporation and its shareholders. It is important for company leadership to:

• Know their shareholders, investment objectives and goals;
• Communicate actively with shareholders to detect their discontent and frustration signals;
• Monitor the company’s executive compensation and pay to ensure performance criteria is met;
• Implement a succession plan to reassure shareholders about the company’s long-term strategy and how it aligns with its investment goals; and
• Have transparent policies and effectively communicate them to shareholders.

Proxy fights are symptoms of a more significant problem within a corporation. They can occur when shareholders lack confidence in the corporation or its leadership and feel a proxy challenge is the only way to right the course. Institutional Shareholder Services Inc. (ISS) and Glass Lewis are proxy advisory services and they often help companies spot any proxy fights in the making ahead of the annual meeting.

About the Author: Josef Rashty, CPA, Ph.D. (Candidate) is a Texas Society of CPAs member and provides consulting and academic services in Silicon Valley, California. His email address for comments and suggestions is j_rashty@yahoo.com.

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