October 20, 2010
Dear Securities and Exchange Commission Chairman Schapiro:
On behalf of the members of Americans for Democratic Action, Inc. (ADA), I am writing to express our strong support for shareholder voting rights and corporate accountability and transparency.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was primarily aimed at reigning in some of the worst excesses in the banking and securities industry and is a signature achievement of the 111th Congress.
However, we are concerned with one important change that affects companies, commonly referred to as say-on-pay. Under this rule, companies must provide shareholders with the right to cast a non-binding vote approving executive pay and compensation. By definition a non-binding shareholder vote is fairly weak and not much of a curb on executive pay. Still the new say-on-pay rules are an improvement over previous law governing executive compensation decision making.
Apart from the obvious weaknesses of the say-on-pay provision under the Reform Act, and the basic premise that the owners (i.e. the stockholders) of a company ought to have a real vote on what the top executives will be paid, there are important systemic reasons to support say-on-pay provisions. Say-on-pay rules should add greater financial stability, because they help to limit the bonus culture so endemic on Wall Street. This is a culture in which executives are awarded bonuses equal to four or five times their base salary for finding clever (and often risky) ways to achieve short-term boosts in share prices. The bonus culture rewards risky behavior and short term gains, which add to financial volatility and exacerbate long term risk. Also, while the bonus culture has meant massive payoffs to executives if things go well, there have been very few consequences when things go badly. Say-on-pay increases the ability of shareholders, albeit indirectly, to impact executive compensation, as well as the long-term stability of the companies.
Besides helping to maintain financial stability, say-on-pay also addresses questions of economic justice and conflicts of interest. When CEOs select their Boards of Directors, who in turn set the CEOs compensation package, there is a lack of accountability and transparency, and superfluous pay has often been the result. As Wall Street CEOs paid themselves enormous salaries and bonuses, it created an aspirational standard for astronomical compensation in numerous industries. The result has helped to drive income and wealth inequality to its current outrageous and unhealthy levels.
The Reform Act requires companies to provide shareholders with the right to approve executive pay, which must be disclosed in legally required company documents known as proxy statements. Shareholders must be given the right to vote at least once every three years on executive compensation issues. Because it is non-binding, a vote by shareholders may not overrule decisions of the companys Board of Directors, but neither does it preclude shareholders from making compensation-related proposals for inclusion in proxy statements.
The vast majority of investors in U.S. companies, however, hold their shares in street name — that is, in customer accounts (e.g., pension funds) with a securities intermediary, which is usually a broker or bank. To vote their shares, these investors, who are also known as beneficial owners, typically give voting instructions to their securities intermediary or to a third party (known as a proxy service provider) retained by the broker or bank to receive voting instructions on its behalf. The securities intermediary must reflect the beneficial owners voting instructions when executing its proxy for shares held in customer accounts. The Reform Act requires all institutional investment managers to report at least annually on how they voted on any say-on-pay matter, and disallows banks and fund managers from casting discretionary votes (i.e., not according to the wishes of their customers) on say-on-pay proposals.
The U.S. Chamber of Commerce, the Business Roundtable, and other corporate special interest groups are advocating for changes that will protect the rights of CEOs by giving corporations more control over the proxy voting system, and diluting the votes of individual shareholders.
For example, the Chamber is arguing that banks and Wall Street brokers should be allowed discretionary voting on behalf of shareholders – expecting that bankers and brokers will concur with the CEO pay recommendations of hand-picked Boards of Directors and Compensation Committees. The Chamber wants to allow brokers and banks to vote using preexisting instructions, on behalf of their clients, removing from shareholders the ability to obtain independent recommendations from proxy advisory firms. Such a rule change would permit banks and brokers to vote for management against the preferences of shareholders and is clearly in conflict with the intent of the legislation.
At the same time, the Business Roundtable has formed a so-called Shareholder Communications Coalition that wants to give companies more control over shareholder communications by eliminating the rules that help protect shareholders privacy. Such a rule change would expose shareholders to proxy solicitations by management seeking their vote.
We strongly urge the SEC to consider the interests of shareholders before making any changes to the existing proxy system that generally works well. Any rule changes must protect the voting preferences and privacy interests of shareholders and create a level playing field for proxy communications by shareholders. The SEC, in the interest of financial stability, corporate accountability and transparency, must put the interests of ordinary shareholders before the interests of Wall Street executives and their corporate allies. The exorbitant compensation packages which they are seeking to protect by lobbying for technical changes under the guise of being pro-shareholder must not be permitted to succeed. It would undermine the Congressionally enacted legislation, and further exacerbate the exact problem the legislation was intended to address.
Thank you for your consideration of these views.