Warner Music has fended off attempts by former employees to nominate themselves to the board, the highest-profile attempt to date to use new government rules to fight a board, as the US company faces a similar wave of activist challenges next year.
Former WMG executive Dorothy Carvello launched a campaign in early December to put herself on the board, pending changes to Securities and Exchange Commission rules that took effect earlier this year.
Carvello, who separately sued the company behind Lizzo and Bruno Mars, has alleged a culture of sexual assault and harassment going back to the time he was a secretary and then a talent scout for the Atlantic Records label in the 1980s.
But Carvello failed to meet the document requirements for the company’s board nomination process, WMG told the Financial Times. He plans to try again next year, a spokeswoman said.
In September, the SEC made it easier for small activist shareholders to attract large investors. It also allows investors to choose a combination of board nominees, rather than having to choose between competing boards chosen by the company and antagonists.
“The SEC made this law that minority shareholders can be on the board of directors and I am a shareholder of Warner Music Group and I want to benefit from it,” Carvello told the FT earlier this month.
Dorothy Carvello, right, launched a campaign in early December to put herself up for a seat on the board © Amy E Price/Getty Images/SXSW
Although WMG gave Carvello more time to address errors in the notice nominating him to the board, he did not meet certain requirements under the regulations, a company spokesman said. He was not a registered shareholder, having bought the shares through Robinhood, an online brokerage.
Carvello has always been unable to secure a board seat, as WMG vice-chairman Leonard Blavatnik holds a controlling stake. Even so, Elizabeth Gonzalez-Sussman, a partner in the activist investment practice of Olshan Frome Wolosky, described her tactics as “a smart strategic move”, perhaps more valuable in raising awareness of her claims than pursuing them through the courts.
WMG said it had made “significant improvements” to its policies and procedures in recent years, adding that it took allegations of misconduct seriously and was “continuously working to eliminate all forms of discrimination and harassment”.
SEC rule changes announce “more active proxies [voting] campaign season with more new entrants and insurgents,” said John Coffee, a professor at Columbia Law School.
“We’re going to see a lot of new, smaller rebels who can’t afford the costs of traditional proxy wars, however [now] can nominate one candidate,” he said. “So we’re going to see a lot of one-shot, one-candidate [nominee] slates are driven by public interest companies or people who are not established players in this field.
Shareholder activism has been on the rise in the US at the start of the coronavirus pandemic and into 2021, as a troubled stock market keeps investors suffering. But 2022 is on track to see the highest number of new campaigns since 2019, according to Lazard.
Many companies have opened a window from now until the spring of 2023 to nominate new directors, raising expectations that the coming weeks will bring more campaigns fueled by SEC changes.
Aimco, the $5 billion real estate investment firm, said last week that activist investor Land & Buildings had secured enough votes for one of its two board nominees to replace the chairman of the company’s investment committee.
The new rules have also been used in a campaign at a small biotech company, Aim ImmunoTech, but Aimco’s vote marked the first time that they played a role in toppling a sitting director.
The campaign attracted the attention of law firms that advise large companies to defend themselves against activist attacks, leading some companies to rewrite regulations to make it more difficult for activists to nominate directors.
Carvello’s campaign also reflects the company’s fear: that the SEC’s new rules offer activists a cheap way to attract big institutional investors even if the campaign is doomed to fail.
Strive Asset Management – a conservative-leaning investor who has criticized sustainable investment – claimed victory in ExxonMobil earlier this month when the oil major announced two new board directors.
Earlier this year, Strive had called on the company to replace a director it characterized as too focused on the risks of climate change. Although he said that ExxonMobil has pushed back on its proposals, Strive greeted the director as proof of the “influence of shareholders”.
“[Companies] worried about this single-issue director,” said Melissa Sawyer, a partner at the law firm Sullivan & Cromwell.
The SEC’s rule change “reduced campaign costs for activists” because they can now send postcards to solicit shareholder votes instead of large packets of materials, he said. Activists “still have to send letters, but now it’s two pages versus 100 pages. If you have to send an email to 100,000 shareholders, the cost is very different.