On Federal Reserve Chair Janet Yellen’s last day of work, the Fed imposed severe penalties on Wells Fargo, both punishing it for years of bad acts and barring it from future growth until it actually fixes its problems, thereby making it unlikely that the bank will be able to keep pace with fast-growing rivals. In its 2 February 2018 statement, the Fed excoriated Wells Fargo’s board for inadequate oversight and announced that, in addition to the eight members of the board who have already resigned, four additional board members will need to resign before year end.
The Fed is not the only oversight body to demand board accountability in recent weeks. In January, the U.S. Olympic Committee demanded that the entire board of USA Gymnastics resign in the wake of the Larry Nassar sexual abuse scandal or lose its accreditation. The board complied. This demand for resignations from oversight bodies at financial and nonprofit institutions serves as a bellwether for what likely will be another very busy year for activists demanding board accountability.
Increased focus on the role of the corporate board is a natural outcome of the trend towards longer time horizons for activist investors. Many activists are no longer looking for the quick sale of a division, or of the entire company, to force a bump in the stock. Instead, they are holding their stock for four to five years and seeking to effect operational changes and management accountability. Board control has increasingly become the weapon of choice for activists looking to effect long-term organizational changes. Senior management is often the target. This was particularly evident in 2017 at CSX Corporation, Buffalo Wild Wings, and Rent-A-Center, where successful battles for board control by three different activists led to the ousting of the companies’ CEOs. Elliott Management launched a proxy fight at Arconic, but then settled with the company when Arconic’s CEO resigned.
Despite some high-profile wins for activists such as Engaged Capital, Marcato Capital Management, and Mantle Ridge, management had its successes as well. Of the 82 proxy fights that were launched in 2017, just over a third (30) went to a vote and just over half of those (17) were decided in favor of management. Jamba Juice and ADP both won their fights against high-profile activists.
The increased focus on the efficacy of boards should serve as a wake-up call for both corporations and activists. Corporate board membership is not a perk but a job. More and more active, if not activist, shareholders such as Blackrock and Neuberger Berman have publicly stated they are paying close attention to the qualifications of both the management and dissident nominees. Thorough and independent due diligence of potential candidates, whether corporate or dissident, is more critical than ever.
Board nominating committees should carefully consider the value individuals bring to the board when considering their applications. A résumé of board seats at known companies is no longer qualification enough. Instead, each board member should have a proven track record of experience that will bring clear value to the corporation. These committees must also carefully consider the potential for undisclosed conflicts of interest, both real and perceived. Lack of diversity and entrenchment are areas on which activists are increasingly focusing when targeting a board.
In turn, activists must also carefully vet their own nominees and ensure they are not only independent from the company being targeted but, if not employed by the activist, independent from the activist itself. Résumé fraud, noncompete agreements, and lack of performance are among the leading issues that disqualify nominee candidates—it is far better to identify these issues prior to proposing a slate than to have your opposition discover these concerns. No matter how attractive a candidate may seem, activists should make sure their director nominees comply with many of the guidelines set out by the two leading proxy advisory firms, Glass Lewis and ISS, including those regarding the number of corporate boards on which a director nominee should sit. Both advisory firms have clear recommendations in this area and have recommended voting against nominees who violate these guidelines.
With fights looming at E.W. Scripps, Mellanox, and Qualcomm, the 2018 proxy season is off to a busy start. Corporations and activists alike should heed the lessons from others and carefully consider the ability and willingness of their members or nominees to serve as appropriate corporate stewards, and undertake appropriate due diligence before putting forward their nominees.
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