NACD: “New universal proxy card rules and increasing access to proxy voting will sow clutter in the boardroom – but bring enlightenment in the long term”

Since September 1, 2022, the universal power of attorney card has been mandatory for all contentious elections – and now the battle for board seats is shaking things up at a growing number of companies.

Signs of busy activism abound. In January, activist Nelson Peltz launched a proxy fight against Disney, the company’s first. He canceled it in February only after Disney promised a major restructuring. Meanwhile, five dissidents have launched a campaign to serve on the board of mattress maker Purple Innovation. Third Point has announced plans to launch a Bath & Body Works Board Challenge. And Loan Depot faces a proxy competition sponsored by its own chairman, now simply chairman (having lost his CEO role).

This new and seemingly frantic activity was inspired in part by the Securities and Exchange Commission’s (SEC) new universal voting rule passed in 2021, which will apply to all annual meetings held after August 31, 2022. Now, public company voting cards allow shareholders to select nominees from two different lists – that of the shareholder and that of the company’s independent nominating and governance committee (or its equivalent). Previously, shareholders had to choose one or the other. Now they can mix and match candidates.

In the meantime, the number of companies that can fall back on such proxy cards is growing. Proxy access, which has increased since the 2010 SEC rules allowed it, provides the mechanism needed to use such a card. (Without proxy access, dissident shareholders will have to mail their own cards, as in the past.) Today, two-thirds of the S&P 500 and one-fifth of the Russell 3000 have proxy access, according to a Council of Institutional Investors study — and to this day it is used by shareholders proposed where it is not yet in force.

A 2011 legal challenge by the Business Roundtable and Chamber of Commerce cleared the SEC rule that would have done so instructed such access, but this court ruling only slowed the widespread adoption of proxy access—it didn’t prevent it. The new proxy access limit is intended to expand on the policies already in place. This spring, a proxy proposal from Apple aims to increase the minimum number of candidate shareholders on a card from one to two. Most companies have proxy access policies that ensure there are at least two shareholder candidates, and few (14%) designate at least one candidate, the proposal said.

What do these new places for activism mean for boards?

As more high-interest dissidents seize board seats via the new mix-and-match proxy voting card, there will be a time of painful adjustment for activist-attacked boards.

However, losing control of the proxy process could be just the jolt boards needed to better handle nominations, evaluations and communications.

In our NACD comment letter on the universal proxy, cited in the final rule publication, we said that the mix-and-match approach was suboptimal. The “key to excellent board composition,” we said, “starts with a valid list — the best case scenario — presented by an independent nominating committee that has carefully reviewed candidates nominated by shareholders.”

In addition, we expressed hope that boards would “continue to improve their work in creating optimal boards and in communicating their methods of achieving them.” Specifically, we found that companies are “making more extensive voluntary disclosures about the skills and qualifications of directors, board diversity, board succession planning, board ratings, and audit committee finance professionals.”

In closing, we said that “proxy contests become rare” as boards continue to improve their work in creating optimal boards and communicating their methods of achieving them.

I still believe that today – even with proxy access and the widespread universal proxy card. I urge all boards to do a better job of nominating and evaluating directors – and to be transparent about their processes. Let this new wave of shareholder activism be a wake-up call for all of us.

Peter R. Gleason is President and CEO of NACD.

The opinions expressed in Fortune.com comments are solely the views of their authors and do not necessarily reflect the opinions and beliefs of wealth.