Warner Music dodges ex-employee’s push for board seat under new SEC rules

Warner Music has dodged a former employee’s attempt to nominate herself to its board, the highest-profile attempt to date to use new governance rules to wage a board fight, as US companies brace for a wave of similar activist challenges next year.

Former WMG executive Dorothy Carvello launched a campaign in early December to put herself forward for a board seat, relying on Securities and Exchange Commission rule changes that went into effect earlier this year.

Carvello, who has separately sued the company behind Lizzo and Bruno Mars, has alleged a culture of sexual assault and harassment going back to her time as a secretary and then talent scout for its Atlantic Records label in the 1980s.

But Carvello had failed to meet the paperwork requirements for the company’s board nomination process, WMG told the Financial Times. She intended to try again next year, her spokesperson said.

In September, the SEC made it easier for even small activist shareholders to canvas large investors. It also allowed investors to vote for any combination of board nominees, rather than having to choose between rival slates picked by the company and its antagonists.

“The SEC made this law that a minority shareholder can run for the board of directors and I’m a shareholder of the Warner Music Group and I wanted to take advantage of it,” Carvello told the FT earlier this month.

Although WMG gave Carvello more time to remedy errors in the notice nominating her to its board, she did not fulfil certain requirements under its bylaws, a company spokesman said. She was not a registered shareholder, having bought her shares through Robinhood, the online brokerage.

Carvello had been all but certain to fail to secure a board seat, as WMG vice-chair Leonard Blavatnik holds a controlling stake. Even so, Elizabeth Gonzalez-Sussman, a partner in Olshan Frome Wolosky’s activist investment practice, described her tactics as “a smart strategic move”, likely costing less to raise awareness of her claims than pursuing them through litigation would do.

WMG said it had made “significant enhancements” to its policies and procedures in recent years, adding that it took allegations of misconduct seriously and was “consistently working toward eliminating all forms of discrimination and harassment”.

The SEC rule changes heralded “a more active proxy [voting] campaign season with many more entrants and new insurgents,” said John Coffee, a Columbia Law School professor.

“We are going to see a lot of new, smaller insurgents who could not afford the cost of a traditional proxy battle, but [now] could nominate a single candidate,” he said. “So we are going to see a lot of one-shot, single-candidate [nominee] slates being pushed by often a public interest firm or someone who is not an established player in this field.” 

Shareholder activism had slowed in the US early in the coronavirus pandemic and in 2021, as a roaring stock market kept aggrieved investors at bay. But 2022 is on track to see the highest number of new campaigns since 2019, according to Lazard.

Many companies have a window open from now until the spring of 2023 to nominate new directors, raising expectations that the coming weeks will bring more campaigns fuelled by the SEC’s changes.

Aimco, a $5bn real estate investment company, said last week that activist investor Land & Buildings had secured enough votes for one of its two board nominees to replace the company’s investment committee chair.

The new rules had also been used in a campaign at a small biotech company, Aim ImmunoTech, but the Aimco vote marked the first time that they had played a role in toppling a sitting director.

These campaigns have caught the attention of law firms that advise large companies on defending themselves against activist attacks, leading some companies to rewrite their bylaws to make it harder for activists to nominate directors.

Carvello’s campaign also illustrated a looming fear for companies: that the SEC’s new rules offer activists an inexpensive way to gain the attention of large institutional investors even if their campaigns are likely to fail.

Strive Asset Management — a conservative-leaning investor that has criticised sustainable investing — claimed victory at ExxonMobil earlier this month when the oil major announced two new board directors.

Earlier this year, Strive had called on the company to replace directors it characterised as being excessively focused on climate change risks. Although it said ExxonMobil had pushed back on its proposals, Strive greeted the directors’ appointment as evidence of its “shareholder impact”.

“[Companies] are worried about these single-issue directors,” said Melissa Sawyer, a partner at law firm Sullivan & Cromwell.

The SEC’s rule change “significantly lowers the cost of running a campaign for activists” because they could now mail a postcard to solicit shareholder votes rather than a big package of materials, she said. Activists “still have to mail something, but it is now two pages versus 100 pages. When you have to mail to 100,000 shareholders, that cost is actually a meaningful difference.”