By Dan McDermott
“The VP of the A&R department asked me to sit on his lap in the middle of an executive meeting. I refused and notified the President of Atlantic Records. I was fired the next day.” – Dorothy Carvello.
The #MeToo movement, shareholder activism and the powerful empire of music are about to collide. Last week, a woman named Dorothy Carvello nominated herself to the Board of Warner Music Group, the parent of Atlantic Records. She is not among the group of well-known activist investors like Elliott Management’s Paul Singer or Trian’s Nelson Peltz. Nor is she pushing for a sale or developing a robust thesis for margin expansion. Carvello is a minority shareholder and she’s launching her own independent activist campaign to force WMG to fix a culture she says is broken.
Dorothy Carvello has always been a trail blazer. She was the first female Arts & Repertoire (A&R) executive at Atlantic Records, working with the late Atlantic founder Ahmet Ertegun. She signed talent like Skid Row and worked with some of the biggest rock stars of the 80s and 90s. Her great success came at a price. She has alleged the label fostered a culture that led to repeated sexual harassment.
So how is a minority shareholder able to nominate oneself to the board of a major corporation? A new set of rules adopted by the Securities and Exchange Commission took effect in September requiring the use of Universal Proxy Cards in contested board elections. The Universal Proxy Card rule allows for shareholders to nominate themselves as directors for election on public company boards – on the same slate as the incumbent directors- rather than separate board slates required previously. This distinction- which could be considered benign to the casual reader- has far-reaching consequences to shareholder activism and corporate accountability to shareholders. The path to representation on a public company board, in one regulatory move, has now become less fraught for shareholders looking to agitate change.
Carvello is seeking to become WMG’s agitator-in-chief. For years she has alleged sexual assault by current and former WMG executives against herself, other former Warner employees and WMG female artists. Carvello added in the kicker that Warner Music Group has not been properly paying its artist royalties going back as far as 40 years. Her thesis is simple: Warner Music Group cannot attract top female artists or employees in a corporate culture that she believes is beyond broken. She contends that change must happen from within, not from silencing victims with NDAs and hush money.
Things are about to get interesting for Warner Music Group and public companies as a whole. The Universal Proxy Card rule lowers the cost and time required for an activist shareholder to seek board representation. Under the new Rule, a shareholder must solicit votes from a minimum of 67% of a company’s shareholder base to qualify to be added to a company’s ballot at the Annual Meeting. There is no minimum ownership requirement, just a minimum solicitation requirement of 67% of shares outstanding. That might seem like a heavy lift, but it’s a lot easier to accomplish than one might think. In WMG’s case, the top 12 shareholders own approximately 67% of shares. So, a simple solicitation email or letter to the top 12 Warner shareholders could satisfy the S.E.C. requirement. 12 emails? That can be accomplished over a cup of coffee.
However, fulfilling a solicitation requirement is a far stretch from winning a proxy contest. In Warner’s case, winning a proxy contest is even more difficult given its dual-class share structure with Class B shares (owned by incumbent directors Len and Alex Blavatnik) having 20:1 voting rights. The Blavatnik brothers are unlikely to vote themselves or other incumbent directors off the Board at the Annual
Meeting occurring in late February. Still, being added to the slate of nominees provides Carvello a much larger platform for her message previously unavailable prior to the Universal Proxy Card rule.
The ultimate impact of the Universal Proxy card will be told over time. The rule has only been in effect for little over two months. However, we do know that Dorothy Carvello’s self-nomination at Warner Music Group will not be the last nomination of a minority shareholder to a public company board. Corporate boards need to be proactively listening to their shareholders and responding to their concerns. It’s entirely possible that a self-nominated, minority shareholder will be elected. At the very least, corporate accountability will never be the same.
Dan McDermott is an Adjunct Professor of Shareholder Activism at University of Pennsylvania Carey School of Law and is a Senior Vice President in ICR Inc.’s Special Situations group.