SEC Increases Access to Board Seats for Activist Investors | ETF Trends

Activist investors and hedge funds just got a boost from the Securities and Exchange Commission Wednesday when corporate-ballot rules were changed in a 4-1 vote, reported the Wall Street Journal.

Changes to the rules mean that shareholders with voting rights who are voting their proxy indirectly, whether through mail or email, would be granted a singular ballot with all the candidates included on it for board elections.

Current rules mean that shareholders wanting to vote for all candidates must attend the annual meeting in person; otherwise, they are given the choice of one of two ballots to vote on and submit remotely. The two ballots are split into rival candidates for the board, and as most shareholders do not attend the annual company meetings, it creates an uneven playing field for candidates and benefits companies most.

The new ruling creates an equal opportunity for all candidates and allows activist investors to vote regardless of whether shareholders are present or voting remotely. It’s an important inclusion, mainly when activists are increasingly working on getting voices and representation on corporate boards. Allowing shareholders to split their votes among all the candidates gives them much better odds of being voted onto boards.

“It makes sense that shareholders should be able to see all the candidates in one place, just as they would in person,” SEC Chairman Gary Gensler said in written remarks. “This is an important aspect of shareholder democracy.”

Please Be Seated

The introduction of universal ballots means that it is highly likely that a company will lose some of its board seats to activist investors and hedge funds, but not as likely that it will lose all of its seats and representation. Universal ballots have historically been used very rarely and often are used in proxy fights that are high profile; one such instance was from 2019 when two brothers sold their company to natural-gas producer EQT Corp and then pushed through a universal ballot and successfully replaced seven of the twelve directors.

Activist hedge funds have had some high-profile board takeovers this year, the most notable one being the replacement of three Exxon board members by activist hedge fund Engine No. 1. The new rule change by the SEC gives ESG minded activists a much better chance at earning seats on corporate boards and allowing shareholder concerns about ESG to be given a clear voice and help sway the direction of the company.

The Engine No. 1 Transform 500 ETF (VOTE) is an activist-driven ETF that seeks to invest in the 500 largest U.S. public stocks by market cap that collectively covers 80% of the equity market in the U.S. It takes the opposite approach to an exclusionary ESG methodology by instead investing in companies to engage them on their ESG practices and hold them accountable.

Vote seeks to track the Morningstar US Large Cap Select Index and provide investment results corresponding to the free-float market cap-weighted index. The fund applies proxy voting guidelines to help bring about change from within companies and establish an ongoing dialogue with the management of the companies invested in. It uses a blending of ESG metrics along with financial and operating metrics to guide proxy voting; the advisor typically follows the advice of an independent third-party proxy voting service on how to vote according to the proxy voting guidelines on individual issues within each company.

VOTE carries an expense ratio of 0.05% and is an activist ESG approach to investing.

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