In a recent post about Canadian proxy contest trends, we discussed the growing concern with “The Active Passive investor” and potential issues on the horizon given a surge in the use of “withhold” campaigns. As of late, the prominence of withhold campaigns to signal shareholder discontent to boards of directors in North American markets has seen an even sharper rise.
In an uncontested election of directors, management of companies solicit proxy cards or ballots that allow shareholders to either cast an affirmative vote “for” the director candidate of the board, or “withhold” their voting authority. If a shareholder chooses to “withhold authority” on a director nominee, the voting instructions are considered “no” votes, which increases the percentage of shares “withholding” and reduces the percentage of shares voting “for” the uncontested nominee. This makes it more difficult for a nominee to obtain required approval percentage to be acclaimed.
“Withhold” (or “vote no”) campaigns typically involve public solicitation of shareholders to suggest the withholding of their respective votes from some or all the board’s nominee directors. Public news releases initiating withhold campaigns range in complexity depending on the level of solicitation based on the magnitude of change desired. Beyond just signifying dissatisfaction with the board, shareholders sometimes enlist withhold campaigns to target specific directors as proxies for particular corporate governance issues.
Increasing attractiveness and popularity
A formal proxy contest provides a way to drive change, but often at a cost so great (relative to the size of an investor’s holdings) that it limits their use. Some companies restrict shareholders’ abilities to drive change by precluding participation in formal proxy contests. For these reasons, withhold campaigns have naturally become the alternative.
Passive aggressive investors use these campaigns as less disruptive ways to assert pressure on the board to reform themselves before the involvement of an activist investor – akin to a ‘friendly’ attempt to settle a grievance before starting a lawsuit. Essentially, these campaigns have become a powerful tool for catalyzing corporate change in a manner that shows there is still faith that the board will ‘do the right thing.’ withhold campaigns present a low-cost opportunity for shareholders seeking corporate change, and also create new concerns for management that may be vulnerable to shareholder action.
What to look out for
An important characteristic of withhold campaigns is that they leave the ultimate decision up to the board of directors, meaning that withhold campaigns cannot force a board to act. By the same token, the campaign’s strength is that it sends a strong message saying that there is a clear need for change on the board of directors in order to right the ship. A successful withhold campaign is likely to have affects as serious as a formal proxy contest or other shareholder action, but requires much less to be successful.
There are different ways that a corporation or a board of directors can prepare in order to optimize its response to these types of special situations. Many still choose to be more passive, which tends to involve relying on reactive proxy solicitation (essentially going to battle and fighting back), or building consensus by objectively considering the campaign’s ideas in an attempt to make the situation more cooperative.
Others may take more proactive approaches, such as regularly evaluating business lines and market regions, monitoring the company’s ownership, understanding the activists, evaluating risk factors, or even having engagement plans in place that are tailored to the shareholder base and concurrent issues that the company faces. It is becoming more common for a board of directors to increase engagement and accountability to the shareholders in an attempt to better prevent withhold campaigns.
It will be important for all stakeholders to track how this trend influences the market, and the impact it may have on how businesses prepare for shareholder activism.
The author would like to thank Daniel Lupinacci, summer law student, for his assistance in preparing this post.