Speech by SEC Commissioner:
Opening Statement — Shareholder Proposals Relating to the Election of Directors
Commissioner Annette L. Nazareth
U.S. Securities and Exchange Commission
November 28, 2007
I am very disappointed this Commission meeting has been convened today to vote to deny shareholders the opportunity to exercise their state law rights. One of the most fundamental shareholder rights in America is the ability to elect directors, and director elections form the core of shareholder power. As Chairman Cox himself has said, “the federal proxy system should protect and enforce that most important legal right, not stand in its way.”1 I wholeheartedly agree, which is why I am voting against today’s amendments. This release, which I have termed the non-access release, stands in the way of shareholders’ rights to elect the directors of the companies they own. I do not see a principled way to vote for the non-access release and claim to be supportive of shareholder rights in the longer term. Indeed, if this amendment were truly intended to be a temporary stopgap measure, then it would have a sunset provision. It does not. Ultimately, our votes here today are the actions that matter, not our unenforceable aspirations for change.
The ostensible purpose of the non-access release is to provide certainty in what the release portrays as a very uncertain current state of affairs. If certainty were so important, it could have been provided after the AFSCME decision2 and before the 2007 proxy season, when any uncertainty surely was greater than it is now. The Commission did not act last year, and we received only three no action requests concerning director nomination bylaw proposals. Any fear about a flood of such proposals did not materialize. The staff took “no view” on one request, and the other two requests were withdrawn. Only three director nomination bylaw proposals appeared on corporate ballots in the last proxy season. The shareholders of those companies had the opportunity to decide whether they wanted such bylaw changes. One proposal passed; two did not.3 Today my fellow Commissioners are voting to deny shareholders any future opportunities to make such decisions for themselves.
The non-access release paints a picture of an “escalating” state of uncertainty in this area. This dire state apparently has developed since the proposing release, as the proposing release contained none of these predictions of doom and gloom that might occur if there is further litigation. Indeed, nothing has happened since the proposing release that would justify reaching this conclusion. Everything described in today’s release as causing uncertainty occurred well in advance of the proposing release. Even the LongIslandCare Supreme Court case4 was decided six weeks before our July open meeting. Yet the LongIslandCare decision was not mentioned in any of the discussion at the open meeting nor in the proposing release. I find it striking that so much emphasis is now placed on a case that apparently no one thought worthy of discussing at the proposing stage and that, as far as I am aware, did not appear in any of the literally thousands of comment letters we received on the non-access proposal. And certainly nothing in the case compels this particular outcome today. It is entirely within the Commission’s authority to further shareholder rights, but the majority has determined not to do so.
I do not believe that we are in a state of great uncertainty, let alone an escalating one. The discussion of uncertainty contained in the release appears to be a post-hoc rationalization of a path that was ill-conceived in the first place. The non-access proposal and interpretation was an eleventh-hour maneuver, included as an alternative only after it was clear that an access proposal would fail to pass with a shorthanded Commission.5
Unfortunately, the “access” release itself was quite flawed, with provisions that commenters viewed as hostile to any form of access. For example, the disclosure requirements in the “access” proposal demonstrate the internal resistance to the proxy access issue. The disclosure would have been more burdensome than in the takeover context, demonstrating to me that some in the agency view access to the proxy as more threatening than a corporate takeover. The Commission did not consider, address, or even solicit comments on other options consistent with our proxy system, such as applying existing disclosure requirements and prohibitions on false and misleading statements to nominations done through bylaw procedures. Alternatively, the Commission could have proposed revising Rule 14a-8(i)(8) to allow companies to exclude proposals that do not require a nominating shareholder to comply with the proxy contest disclosure rules.6 If the problem is one of disclosure — and clearly fulsome disclosure concerning the proposing shareholders is appropriate — the solution is to address the disclosure directly, not to eliminate this bylaw avenue altogether. The adopting release provides no explanation of why precluding shareholder rights altogether is a better option.
We held three days of roundtables in May in which participants discussed a number of issues relating to the proxy. I was struck that the Commission’s rules in the proxy area sometimes prevent the exercise of fundamental state law rights. Most state laws allow shareholders to amend the corporate bylaws unless limited by the bylaws or charter.7 The SEC’s role in adopting the proxy rules stems from Congress’s belief that “fair corporate suffrage is an important right,” and the federal proxy authority is intended to reinforce, not supplant, state law rights.8 Our authority under Section 14(a) is to adopt proxy rules that are “in the public interest or for the protection of investors.”9 The more principled way to eliminate any uncertainty is to clearly allow director nomination bylaw proposals, thereby affirming rather than denying shareholder state law rights. The ability to introduce such a bylaw is in the public interest and would serve the protection of investors by providing a method to ensure Board accountability in situations in which the investors determined it was necessary.
Today’s release does not appear to reflect much of the learning from the roundtable discussions. I do not recall any of the participants at the roundtables discussing the then-existing status quo as one of great uncertainty, nor do I remember anyone stating that the SEC should simply foreclose this bylaw avenue altogether, as the Commission is doing today. Yet here we are today — with the Commission voting to deny shareholders their rights simply to put this matter behind us at this time.
The roundtables did raise the idea of addressing the proxy access issue through bylaw proposals, and that concept is intellectually appealing. It would facilitate shareholders’ exercise of their fundamental state law and company ownership rights to elect the board of directors.
Allowing a director nomination bylaw proposal on the company ballot puts the decision about proxy access squarely in the hands of the shareholders. At least a majority of the shareholders would have to support the bylaw for there to be any form of proxy access. Only if such a bylaw passed could its procedures then be followed. The Commission would be taking no position as to whether shareholder access to the proxy is a good idea or what form it should take or how costs should be allocated — those decisions could be left to the company’s shareholders. Shareholders at different companies may well have very different positions on this, and allowing these bylaws would also allow for variation in procedures among companies.10 Bylaws regarding nominations may be more appealing at companies at which management acts in its own economic self interest, or chooses to ignore the express will of the shareholders and is unresponsive to them. If a company and its Board are creating value for shareholders and are responsive to shareholder concerns, it seems unlikely that a majority of shareholders would support a bylaw change to the director nomination process. Responsible management need not fear its shareholders.
Some worry that allowing director nomination bylaws will result in a so-called tyranny of the minority, in which a small number of shareholders impose their concerns on the company and the rest of the shareholders. I find such fears unfounded, particularly since at least a majority of shareholders would have to support a change to the bylaws. And a system in which there is a reasonable possibility that shareholders could nominate directors would serve as an important reminder to Boards that they are accountable to their shareholders. Even if a shareholder-nominated director never is elected, the real possibility of that election would serve a useful purpose in maintaining Board accountability. Corporate governance in the U.S. is not well served by inattentive boards that are effectively unaccountable to shareholders and thus place the interests of management over the interests of shareholders. The non-access release never addresses this accountability issue or its competitiveness implications.
The non-access release asserts that the Commission believes that the proposal would not impose a burden on competition. The blue-ribbon Committee on Capital Markets Regulation, which made a number of recommendations concerning improving the competitiveness of U.S. markets, noted that “shareholders of U.S. companies have far fewer rights in a number of important areas than do their foreign competitors,” and that this difference “creates an important potential competitiveness problem for U.S. companies.”11 Yet, the proposing release neither mentioned nor solicited comment on this competitiveness problem. Several foreign investors commented on the lack of accountability of directors in the U.S. compared with in other countries, noting among other things that “[t]he harsh reality is that U.S. corporate governance practices are on a relative decline compared to other leading markets.”12 At least one domestic commenter also mentioned this competitiveness problem,13 but today’s adopting release still does not address it. This strikes me as a fundamental failing of the release, reflecting the Commission’s rush to adopt amendments without fully considering their implications.
I think it is particularly important for the Commission to provide a reasoned explanation for today’s action in light of the overwhelming force of the comment letters received. We received thousands of comment letters on the two proposals published in July — over 34,000 in total, including over 8,000 on the non-access proposal. The vast majority of commenters on the non-access proposal opposed it. Yet the Commission is ignoring the pleas of investors and proceeding down this path less than two months after the comment period closed. I do not think that the Commission should make hasty decisions that impair shareholder rights simply to fit this self-imposed timeframe.
I also note that some commenters argued that the proposed rule change would call into question other no-action decisions concerning Rule 14a-8(i)(8), including allowing majority voting proposals and declassifying Boards. It is important for the Commission to be clear that today’s actions will not have that impact. Although the language of the rule was not changed, the text of the release explicitly states that “[t]he changes to the rule text do not affect or address any other aspect of the agency’s prior interpretation of the exclusion.” The release thus makes clear that the Commission affirms the staff’s prior determinations about proposals concerning matters such as majority voting. The Commission must not back away from prior precedent on these important matters.
The AFSCME decision placed the issue of proxy access bylaws squarely before the Commission. We made a promising start at exploring those issues through our roundtables, but today’s amendments are an unfortunate step backward. Shareholder rights face a long uphill battle with this Commission. I hope we have not completely lost the opportunity to address these issues thoughtfully. Given that all 40 of the largest markets outside the U.S. give investors in public companies the ability to nominate and remove directors, this recognition of shareholder rights is long overdue. Chairman Cox has clearly stated his intention to move forward with proxy access in the very near future. I fervently hope that is the case and that this effort succeeds in the coming year.
1 Statement Concerning Bylaw Proposals to Establish Director Nomination Procedures, Testimony of Christopher Cox, Chairman, U.S. Securities and Exchange Commission, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Nov. 14, 2007, available at: http://www.sec.gov/news/testimony/2007/ts111407cc.htm.
2 American Federation of State, County & Municipal Employees v. American International Group, 462 F.3d 121 (2d Cir. 2006).
3 A binding proposal at Hewlett-Packard Co. received 43% of the vote cast, a non-binding proposal at UnitedHealth Group received 45.3% support, and an access proposal at Cryo-Cell International received majority support. See RiskMetrics Group 2007 Postseason Report: A Closer Look at Accountability and Engagement (Oct. 2007) at 16, available at: http://www.issproxy.com/pdf/2007PostSeasonReportFINAL.pdf.
4 LongIslandCare at Home, Ltd. v. Coke, 127 S.Ct. 2339 (2007).
5 For more discussion of the history of the non-access proposal, see my comments in the Unofficial Transcript of the Open Meeting of the U.S. Securities and Exchange Commission on July 25, 2007, pp. 165-166, available at: http://www.sec.gov/news/openmeetings/2007/openmtg_trans072507.pdf.
6 See, e.g., Comment letter on SEC File Nos. S7-17-07 and S7-16-07 from Gerald W. McEntee, International President, American Federation of State, County and Municipal Employees, Sept. 28, 2007, at 4, available at: http://www.sec.gov/comments/s7-17-07/s71707-65.pdf; see also comment letter on SEC File No. S7-17-07 from Peter H. Mixon, General Counsel, California Public Employees’ Retirement System, Sept. 27, 2007, at 3, available at: http://www.sec.gov/comments/s7-17-07/s71707-38.pdf. (generally agreeing with the principle that a shareholder should provide the information that would ordinarily accompany a proxy contest).
7 See Comment letter on SEC File Nos. S7-17-07 and S7-16-07 from Gerald W. McEntee, International President, American Federation of State, County and Municipal Employees, Sept. 28, 2007, at 4, available at: http://www.sec.gov/comments/s7-17-07/s71707-65.pdf. See also Unofficial Transcript of the Roundtable Discussion on Proposals for Shareholders, May 25, 2007, comments of Jill E. Fisch, T.J. Maloney Professor of Business Law, Fordham University Law School, at 92-93; comments of Donald C. Langevoort, Thomas Aquinas Reynolds Professor of Law, Georgetown University Law Center, at 95.
8 See Shareholder Proposals, 72 Fed. Reg. 43466, 43466-67 (Aug. 3, 2007).
9 15 U.S.C. §78n(a)
10 See Unofficial Transcript of the Roundtable Discussion Regarding the Federal Proxy Rules and State Corporation Law, May 7, 2007, comments of Leo E. Strine Jr., Vice Chancellor, Court of Chancery of the State of Delaware, at 79, available at: http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf (noting that allowing binding bylaw proposals that relate to an election process to go on the proxy would allow stockholder innovation and would be “giving life to the state law right”).
11 Committee on Capital Markets Regulation, Interim Report (Nov. 30, 2006) at 93, available at: http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf
12 Comment letter on SEC File Nos. S7-17-07 and S7-16-07 from Michael O’Sullivan, President, Australian Council of Super Investors, et al., Oct. 2, 2007, available at: http://www.sec.gov/comments/s7-16-07/s71607-445.pdf. See also Comment letter on SEC File Nos. S7-17-07 and S7-16-07 from Michelle Edkins, Acting Chairman, International Corporate Governance Network Shareholder Rights Committee, Oct. 2, 2007, available at: http://www.sec.gov/comments/s7-16-07/s71607-462.pdf; comment letter on SEC File Nos. S7-17-07 and S7-16-07 from Knut Kjer, CEO, Norges Bank Investment Management, et al., Sept. 28, 2007, available at: http://www.sec.gov/comments/s7-16-07/s71607-499.pdf.
13 See Comment letter on SEC File Nos. S7-16-07 and S7-17-07 from Carl Levin, United States Senator, Sept. 27, 2007, at 6, available at: http://www.sec.gov/comments/s7-16-07/s71607-329.pdf.