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‘Cookie-Cutter’ Governance
Jamie Dimon worries about the diminishing role of the American public company.
The CEO and chairman of JPMorgan Chase & Co., in his 2023 annual letter, cited more stringent reporting requirements, increased expenses due to litigation and regulation, activist shareholders and “the relentless pressure of quarterly earnings” as factors driving companies from public markets.
Also at fault? “Cookie-cutter board governance” due to the influence of proxy advisors and the introduction of the universal proxy card in 2022.
On Jan. 31, 2022, the U.S. Securities and Exchange Commission began requiring public companies to use universal proxy cards in contested director elections, meaning all candidates — those nominated by the company and dissident groups — appear on the same card. The rule aims to put investors voting by proxy on equal footing with those voting in-person by allowing all shareholders to vote for a mix of nominees as opposed to separate slates of candidates.
But in his letter, Dimon said the practice “makes it easier to put poorly qualified directors on a board.”
Are Dimon’s concerns about the universal proxy justified? His 2022 shareholder letter warned that the changes would make it too easy for activists to launch contests to disrupt corporate boardrooms and could make proxy season more “like a political campaign” colored by special interests.
“While there are legitimate complaints against entrenched boards,” he wrote, “good boards often tend to interview prospective candidates for their brains, integrity, work ethic, management and collaboration skills, and experience.”
But an analysis of Russell 3000 companies by FTI Consulting, released in November 2023, found the number of activist targets in the 2023 proxy season stayed roughly in line with the six-year median. The number of seats gained by activists in 2023 was below the median from 2017 through 2022, and their rates of success held steady.
FTI found that 1,195 Russell 3000 companies added new directors in the first three quarters of 2023, compared to a median 1,345 in the first nine months of each year from 2017 through 2022. The number of directors added also declined, to 1,895 — well below the previous six years’ median of 2,276.
“Slower turnover among public company directors is not something that would have been expected during the first year” of the universal proxy card, said FTI.
The universal proxy card is still new, and I’m reluctant to draw conclusions about governance impacts based on one year of data. But new directors can enrich boardrooms — and whatever the cause, boards grew more entrenched in 2023.
• Emily McCormick, vice president of editorial & research for Bank Director
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