Speech by SEC Commissioner:
"A Conversation with Roel Campos":
United States Hispanic Chamber of Commerce 27th Annual National Convention & Business Expo
Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
September 21, 2006
Good evening. I'd like to thank Ken Trujillo and Varsovia Fernandez for inviting me to be with you tonight. I feel that I can say with some authority that the United States Hispanic Chamber of Commerce is one of the most important professional partners for any Hispanic business leader to have today. Over the past 27 years, the USHCC has advocated for, promoted and facilitated the success of millions of Hispanic-owned businesses through a combination of hands-on technical assistance and business partnerships, promotion of international trade policies between the U.S. and Latin America, and active monitoring of legislation and government programs that affect the Hispanic business community. Having been a business owner in my prior life, I personally benefited tremendously from the business networks, corporate partnerships, and hard-won policies that have been promoted by the USHCC. Even in my current job as a Commissioner of the United States Securities and Exchange Commission, the USHCC continues to be an invaluable ally and friend. As a strong representative and voice for over 2 million Hispanic-owned businesses, the USHCC clearly and effectively communicates the needs of Hispanic enterprises to my agency, and for that I and my colleagues at the SEC are grateful because better information helps us to craft better regulation. And better regulation should hopefully lead to better business for you all.
Before I begin my speech today I must give the standard SEC disclaimer that that the comments I make here today are my own and do not represent the views of the Commission, the other Commissioners, or the staff.
II. Hispanics in the U.S.
It is a particularly special time for me to be here with you because we also are celebrating Hispanic Heritage Month 2006. Now I mention this very special occasion not only for celebratory purposes, but because I believe that it has a direct bearing on the mission of the USHCC and on this conference in particular. The USHCC's mission is to "advocate, promote and facilitate the success of Hispanic businesses." The purpose of Hispanic Heritage Month is to highlight and honor the success of Hispanics in the U.S. as well as to highlight their growing presence, influence, and clout in this country. It is evident that these two purposes are not only inter-related but symbiotic as well - Hispanic businesses have been tremendously successful, in part, because Hispanics as a whole have - as consumers, voters, and policymakers - become a very powerful and prominent constituency within the U.S. Similarly, Hispanic businesses have been able to expand and thrive, in part, because their consumer and talent bases have also expanded and thrived.
The Hispanic community - already a major population force in the U.S. today - is only expected to mushroom in size and presence. As of July 1, 2005, there were an estimated 42.7 million Hispanics in the United States. This number - constituting 14% of the nation's total population today - means many things to many people. One, it means that Hispanics are the nation's single largest ethnic or race minority. Two, it means that Hispanics are the fastest growing minority group today. Three, it means that 1 out of every 2 people added to the nation's population between July 1, 2004 and July 1, 2005 were Hispanic. And finally, it means that by 2050, Hispanics are expected to number 102.6 million people total and 1 out of every 4 individuals residing in the U.S. Such demographics make it clear that Hispanics will comprise a critical and vital component of this country's taxpayer, investor, and consumer bases. These statistics should not only embolden you personally, but also encourage you as business leaders.
III. Hispanics and Corporate America
The impact of these staggering numbers for American consumerism and marketing has not been lost on our retail corporate partners. The current aggregate purchasing power of Latinos is $768 billion a year, and this power is expected to grow to $1 trillion by 2010. Another way of seeing this is that by 2010 Hispanic buying power is expected to exceed the Gross Domestic Product of Canada! Major companies throughout the world have begun to focus on the Hispanic market as a source of wealth and profitability, and have zoomed in on this community as a particular group to target for tracking, marketing, and advertising purposes.
However, corporate America has failed to adequately account for Hispanics on the "talent" and "production" sides of the economic equation. Hispanic business leaders have done exceedingly well as entrepreneurs - the growth of Hispanic-owned businesses tripled the national average from 1997-2002. However, Hispanics remain grossly underrepresented in executive management and corporate board rooms throughout America. One study estimates that Hispanics account for only 4.5% of all managers and less than 2% of all Fortune 1000 boards. And according to the Hispanic Association on Corporate Responsibility's 2004 Corporate Governance Report, 83% of Fortune 1000 companies still do not have any Hispanic representation at all. Much of this dearth is due to the fact that the primary feeder channel to the boardroom - executive management - is incredibly un-diverse. Less than 1% of all CEOS and executive officers are Hispanics.
Clearly, access is vital - but how do we go about gaining this access? This conference itself is living proof of the tremendous talent that exists in the Hispanic community. Moreover, the U.S. Census Bureau estimates that approximately 2.7 million Hispanics hold college degrees and 714,000 hold advanced degrees… numbers which will only continue to grow as the Hispanic population explodes. However, we currently are stuck in an unfortunate chicken vs. egg scenario - we need capital, mentors, and upward mobility to attract Hispanic talent to Corporate America; yet we can not attract Hispanic talent without adequate capital, mentors, and upward mobility. Someone needs to make the first move, and I believe that that it is up to our corporate citizens to hire, advance, and engage the Hispanic community. Doing so will help companies achieve a "double bottom line" - strong business returns as well as advancement of a clear social good. Moreover, I believe that failure by the corporate community to tap into this burgeoning Hispanic talent ultimately will hurt companies who are facing large-scale retirements, difficult competition for talent, and an increasingly complex business environment.
As a Commissioner, I am proud to say that the SEC has recruited, supported and promoted talented Hispanic candidates for some of its most senior positions. In the past year alone, we have been fortunate to welcome Diego Tomás Ruiz, a long-time business executive with Univision, to be the SEC's new Executive Director, and Rose Romero, a former Executive Assistant United States Attorney, to lead our Fort Worth District Office. In the corporate world, we also have seen outstanding examples of Hispanic executives personally pushing for greater diversity both within their ranks and in their outside communities. As I have mentioned before, Jim Padilla, President of Ford Motor Company North America and Commerce Secretary Carlos Gutierrez, former CEO of Kellogg's, are two shining examples of notable Hispanics who made major inroads in enhancing corporate diversity while holding senior executive positions at some of the largest companies in the U.S.
IV. Regulatory and Industry Changes as Windows of Opportunity for Diversity
I'd like to close my prepared remarks by putting on my "securities regulator hat" for a moment. I end on this note because I strongly believe that one way that Hispanics can further push the envelope in the area of recruitment, retention and advancement is by maximizing regulatory and industry changes to increase opportunities for minorities. For example, Sarbanes-Oxley - with its rigorous board independence requirements - provided historic opportunities to incorporate greater diversity on corporate boards. Moreover, these opportunities are only increasing - not decreasing - as the regulatory landscape continues to evolve and change. In fact, the developments that we are seeing right now in areas like shareholder access and corporate transparency will likely provide similar opportunities for Hispanic access and growth in Corporate America.
A. Shareholder Access.
I believe that the changes we've seen with respect to shareholder access - particularly as institutional investors have become much smarter and more aggressive over the last few years - will provide even greater opportunities to diversify our boards. I should note that by "shareholder access" I'm referring to the ability of shareholders to nominate candidates for director. Although the Commission never adopted its 2003 shareholder access proposal that would have, under certain circumstances, required companies to include in their proxy materials shareholder nominees for election as director in certain circumstances, greater shareholder access is nonetheless being accomplished.
First, institutional investors have become much smarter and more aggressive over the last few years and have made their influence felt even without the finalization of the access proposal. Large shareholders have been pressuring companies to adopt shareholder-friendly policies - such as majority voting for directors - through the media, letter writing campaigns, and formal campaigns to withhold director votes and to place ballot initiatives on company proxy materials.
As many of you know, the plurality voting system for directors has created a situation in which it is next-to-impossible for shareholders to remove a director from the board. However, institutional investors have used the proxy process to require individual companies to adopt binding bylaw amendments or voluntary corporate governance policies requiring directors to receive a majority of the votes cast, not just a plurality. While these new policies do not permit shareholders to affirmatively nominate a candidate for election to the board, they do allow shareholders to, in effect, vote off board members without having to engage in a full blown proxy contest. Although many companies have sought to exclude these proposals, the SEC's Division of Corporation Finance has generally not allowed properly-phrased proposals to be excluded. Thus, some companies are not waiting for shareholder pressure and are adopting majority voting requirements on their own.
In addition, a very recent decision by the Second Circuit, in a case entitled AFSCME v. AIG, might open up the door to more direct access to the ballot by shareholders. Specifically, the Court held that a shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot cannot be excluded from corporate proxy materials under Rule 14a-8(i)(8). As it stands, this decision has opened the door wide open, at least in the territory covered by the Second Circuit, for shareholders to submit proposals establishing procedures by which shareholder-nominated candidates can be included on corporate proxy materials.
In response to the decision, the Commission issued a press release stating that the Commission will consider proposal in response to the Second Circuit's decision at an open meeting on October 18. My view is that the SEC should not seek to retard the rights gained in the Second Circuit decision. I have urged representatives of both corporate interests such as the Business Roundtable and investor advocates such as the Council of Institutional Investors to find a compromise on a form of shareholder access. I am urging our Chairman and my fellow Commissioners to support a reasonable and moderate mechanism that would permit a large shareholder group, with at least one year holding period, to place a short slate - not seeking majority control, to place nominees on the company ballot. What that proposal will be has not yet been determined.
B. Executive Compensation and Option Backdating.
Executive Compensation Generally. I also believe that the new enhancements to corporate transparency - particularly in the area of executive compensation - will indirectly or directly open up new corporate opportunities for minorities. As you all know, the SEC recently adopted new disclosure rules with respect to executive compensation. The new rules don't necessarily allow investors to have a direct say in the level of executive compensation, but the new tabular and narrative disclosures should at least allow investors to have a more clear sense of what executives are making. This type of expanded disclosure will provide investors with a new tool to critically evaluate the companies that they invest in and to challenge the companies that pay over-the-top executive compensation. As these challenges work their way through the public arena, I expect that we will see historic new opportunities for many U.S. companies to diversify and enhance their executive ranks with highly qualified and talented Hispanic and minority candidates. Let me discuss executive compensation - and in particular - stock option backdating a little more.
Stock Option Backdating. Executive compensation has become a "hot" issue, with frequent reports of massive salaries and perquisites for CEOs at companies whose stock price and financial condition have been average at best. In recent months, shareholder outrage has grown, not only because the lack of pay-for-performance, but mainly because it appears that some companies may have been further enriching themselves by fraudulently backdating option grant dates in order to get in-the-money options. Moreover, many investors have been outraged at the practice of timing, or spring-loading, stock option grants.
The SEC is doing a number of things on the executive compensation and option backdating front. First, our Enforcement division is investigation approximately 100 companies that may have engaged in the improper backdating of options. While each case presents its own facts and circumstances, the Commission will not hesitate to bring an Enforcement action where one is warranted. We have already authorized cases against former executives from Brocade and Comverse. As yet, we have charged only officers in option backdating cases. However, if the specific facts are present, it wouldn't surprise me to see charges brought against outside directors.
Second, we have issued guidance in our new executive compensation release regarding timing or spring-loading of options. In short, the release states that companies should disclose any program, plan or practice to time option grants in coordination with the release of non-public information. Further, even if the company does not have such a program, it must still make disclosure if it has nevertheless made one or more decisions to time option grants. Also, just a few days ago, our Chief Accountant sent out a letter summarizing our staff's views regarding the accounting for stock options in the historical financial statements of public companies. Hopefully, this letter will give comfort to those companies who have made innocent and minor errors in documenting certain option grants, while at the same time it certainly should not give comfort to anyone who has engaged in fraudulent or manipulative conduct.
Shareholder Advisory Votes. Let me move briefly to another topic on the executive compensation front. With respect to executive compensation generally, our new rules should provide a great deal more information regarding what executives actually earn in a given year. While, as I noted above, the rules don't allow investors to have a direct say in the level of executive compensation, there are some new developments in this area, many of which are coming from shareholders.
In particular, I'm seeing greater interest in shareholder advisory votes on executive compensation. Although our new rules do not mandate advisory votes, shareholders are using the proxy process in an attempt to put such proposals on corporate proxy materials. Generally speaking, if shareholders comply with all procedural requirements, our Division of Corporation Finance has not been allowing companies to exclude properly-phrased advisory vote proposals. For example, during the past proxy season, the Division has not allowed companies to exclude from their proxy materials the following types of similar executive compensation proposals:
- Requesting shareholder approval of future compensation packages for non-employee directors;
- Requesting limitations on the amount of executive compensation;
- Requesting shareholder approval of compensation exceeding specified amounts (e.g., future severance agreements exceeding 2.99 times the sum of the salary and bonus);
- Imposing performance-based criteria for compensation;
- Requesting separate shareholder approval of "golden parachutes/hellos";
- Seeking recoupment of performance-based compensation in cases of restatement or "significant write-off"; and
- Requesting a board report regarding the amount of executive compensation.
In sum, while the Commission has acted in a significant way regarding executive compensation by requiring full and robust disclosures, it is now largely up to shareholders (in spite of plurality voting for directors, with no shareholder access to the proxy ballot) to take the next step by using that information wisely.
Thank you for your kind attention. With that, I'd like to "open the floor" now and invite you to join in the discussion.