By John Weckenmann, Partner, International Client Development, Corporate Practice
After years of debate, the SEC, in a 3-2 vote, recently adopted new rules allowing shareholders meeting certain ownership criteria to nominate candidates for boards of directors using the company’s proxy.
The rule, which has been much criticized by business groups, is expected to make it easier for activist shareholders – including labor unions and public pension funds – to exert influence on board decision making.
Under the new rules, the qualifying shareholder or group of shareholders must have owned 3% of the company’s stock for at least three years. They can nominate one candidate or up to 25% of the board, whichever is greater.
The new rules won’t apply to smaller companies for three years – to allow the Commission time to monitor how the rules are working and make changes if necessary.
Impetus for the new rule comes from the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which gave the SEC explicit authority to implement proxy access. The rules become effective 60 days after they are published in the Federal Register.
The new rules represent a watershed in corporate governance, particularly when combined with two other recent developments: the elimination of broker voting and more widespread adoption of majority voting standards.
What all this means for clients is that their director nominees may now have to “run for election” against nominees put forward by company shareholders. Directors who have served in sensitive board committee positions – such as on compensation committees – are expected to be particularly vulnerable.
Wherever there are elections, of course, there is a need for communications. Companies will need to assess the potential vulnerabilities among company directors and engage with shareholders who have been critical of the board’s performance – to understand and address concerns, when possible.
Companies may also want to make sure that shareholders understand the value that its directors bring to their board positions. This may require raising the profile of certain directors beyond just the proxy statement. One good place to start is with employees – who are often company shareholders.
Finally, companies may find that they need to “campaign” directors – i.e., to get out the vote in a contested election. That will mean employing all the tools at the disposal of communications professionals, including positioning, messaging and targeted communications strategies.
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