Speech by SEC Commissioner:
"The American Corporation and its Shareholders: Dooryard Visits Disallowed"
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
Society of Corporate Secretaries and Governance Professionals
Hotel Del Coronado
San Diego, California
June 27, 2009
Thank you, Neila, for that wonderful introduction. I am delighted to participate in this year's conference. And, I particularly appreciate your willingness to change the placement of this speech in your program so that I could attend.
I have enormous respect for this Society and its members. In fact, once, long before there were governance professionals, I persuaded David Smith to allow me to join the Society, even though I have never served as a corporate secretary. Although that was years ago, I am delighted to see that there are still familiar faces here today. Most important, as I'll highlight later, each of you sits at a critical juncture in our corporate governance system.
For those of you whom I haven't met before, I am a New Yorker by birth, a Washingtonian by trade, and a future Mainer when I retire, but at the moment, my heart is in San Diego, not only because I'm standing before you today, but because both of my sons are living here right now.
Although I returned to government as an SEC Commissioner a little less than a year ago, I now stand second in seniority among our Commissioners. I am not an SEC or securities law newbie, however. I spent 17 years at the Commission in the Office of General Counsel and the Division of Corporation Finance before serving as General Counsel at the CFTC and Senior Executive Vice President, Regulatory Policy & Programs, at FINRA.
I know that each of you is living through the excitement and perils of changes in our legal, regulatory, and business landscapes. We in government are as well. There are a wide range of important issues before the Commission now, but, given that I am the only thing standing between you and the fabulous weather outside, I'd like to focus my comments today on just a couple of topics affecting corporate governance that are very important to me — shareholder access and the role of the corporate secretary as internal gatekeeper.
Before I get too much further, though, let me give you the standard disclaimer that the views I express here today are my own and do not necessarily reflect the views of the Securities and Exchange Commission or my fellow Commissioners.1
In preparing for my speech today, I took the opportunity to browse through your Web site. I was very pleased to read your Position Statement on Corporate Governance, in which you call for "governance excellence in fact not just in appearance."
Like you, my fellow Commissioners and I have spent, and will continue to spend, a fair amount of time this year considering matters that affect corporate governance, with a particular focus on proxy and voting reforms designed to strengthen shareholder rights.
For example, next week, we will take up a broad package of corporate disclosure improvements related to compensation policies and incentive arrangements. We will consider possible disclosure requirements related to how different compensation structures and practices drive risk-taking. We will also consider proposals for enhanced disclosure about director nominee qualifications, company leadership structures, and the board's role in the company's risk management process. In addition, we intend to consider a proposal for disclosure of compensation consultant potential conflicts of interest.
Our thinking on corporate governance issues in this country appears divided, however. There are those who believe that the capital markets themselves will improve corporate governance. And, there are those, like me, who believe that making improvements in corporate governance will enhance the capital markets. No matter which view you ascribe to, I think we can all agree that the relationship of the capital markets to corporate governance is complex and dynamic.
We have all seen an increased focus on corporate governance at the federal level over the past year. With resignations of CEOs and mandatory Say on Pay legislation for TARP recipients, I think it is fair to say that the Obama administration and the Congress are taking the initiative to demand governance excellence in fact and not just in appearance. This theme runs throughout the Administration's white paper, which includes a recommendation for mandatory Say on Pay votes at all public companies.
The trillions of dollars lost in shareholder value in our markets and badly shaken investor confidence have raised serious questions concerning corporate accountability and management oversight. Have boards exercised appropriate oversight of management? Are directors appropriately focused on shareholder interests? Should boards be more accountable for their decisions regarding such issues as compensation structures and risk management?
It strikes me that a particular person's answers to these questions depends on a number of variables, and it appears that one of them is whether that person sits inside or outside the corporate boardroom. I'd like to suggest to you that the views of corporate directors and management really shouldn't diverge (or at least not much) from those of thought leaders in the shareholder community. In my view, a shift in the direction of greater shareholder participation would simply be good business.
As we all know, in the modern corporate structure, shareholders generally do not have a seat in the boardroom. Instead, shareholders, as owners of the corporation, elect the board of directors to oversee management, who act as stewards over corporate assets. In their 1934 book, The Modern Corporation and Private Property, noted authors Berle and Means characterized this relationship as one where:
The stockholder is…left as a matter of law with little more than the loose expectation that a group of men, under a nominal duty to run the enterprise for his benefit and that of others like him, will actually observe the obligation.2
I am not quite so pessimistic, however. I believe that there are directors and managers out there who work very hard to honor their responsibilities to shareholders.
To me, however, the fundamental question in corporate governance is: Should shareholders have a real say in determining who will oversee management of the companies that they own? As most of you probably already know, I believe strongly that the answer is yes.
I believe that shareholders have been largely shut out of the director nomination and election process and that the Commission's current proxy rules have been a significant contributor to that problem. Our proxy rules have frustrated shareholders' efforts to carry out their important role in nominating, and electing, directors.
With shareholders dispersed throughout the country and around the globe, it is in most cases simply not practicable for them to meet together as a group to determine who is best qualified to serve as director. Instead, under the proxy process, the company solicits "proxies" to vote on behalf of the shareholders at the annual meeting. By the time a shareholder attends the annual meeting and speaks on behalf of his candidate for director, it is too late. His fellow shareholders have already voted by proxy. The only real alternative that shareholders have today under our proxy rules is to wage a proxy contest. And, only certain shareholders can afford an expensive proxy contest, especially in today's tough economic times.
To address this situation, the Commission has proposed a comprehensive series of amendments to the proxy rules to facilitate the rights of shareholders to nominate directors on corporate boards.
Of course, I am quite aware that there are some who question the SEC's authority to take action to address this problem under our proxy rules. I believe that Congress was quite clear when it gave the Commission "power to control the conditions under which proxies may be solicited" in the Securities Exchange Act of 1934.3
The legislation gave a pretty broad authority to the Commission. But its objective was quite clear. It amounted to a direction to the Commission to establish a suitable machinery to keep the ordinary public stockholder from being taken with loaded dice. It was based on the idea that the investor having put up his money, he ought to have a genuine chance to see what's being done with it, to say whether he likes what he sees, and if he doesn't to propose changes either in the management or in its general policies.4
This description largely encapsulates my view of the Commission's proxy powers today. But, these words are not mine. In fact, these were the words of Commissioner Robert McConnaughey when he addressed this Society back in 1948.
Now, there are members of Congress who have recently proposed legislation to clarify our authority to determine the use of the issuer proxy with regards to the nomination and election of directors by shareholders. Senator Schumer has introduced the Shareholder Bill of Rights Act5 and Congressman Gary Peters has introduced The Shareholder Empowerment Act.6 I am quite comfortable, however, that we have acted, and will continue to act, within authority that we already have. Nonetheless, legislation that reaffirms our authority would remove the distraction of challenges to authority, which Congress long ago gave to the Commission.
Let me turn now to the Commission's proposal,7 which, in my view, squarely addresses removing the impediments to shareholder franchise rights that exist in our proxy rules today in a two-pronged approach using both direct access and shareholder proposals. Our proposal is designed to help ensure that shareholders have a meaningful opportunity to effectuate their rights to nominate directors. Of course, I look forward to the comments we receive. I strongly believe that taking action in this area is particularly important today, in light of the erosion of investor confidence in our markets. It is an important aspect of restoring investor trust.
Under proposed Rule 14a-11, shareholders would be able to have their nominees included in the company proxy materials that are sent to all voters unless they are otherwise prohibited by applicable state law or a company's charter or bylaws from nominating directors. The proposed rule applies to all Exchange Act reporting companies, including investment companies, other than debt-only companies and foreign private issuers.
In order to have a nominee or nominees included in the company's proxy materials, a shareholder or group of shareholders would have to own a specified amount of company stock, with scaled ownership requirements according to company size. Shareholders would have to own at least 1% of the voting securities of "large accelerated filers," 3% for "accelerated filers," or 5% for "non-accelerated filers." Shareholders would be permitted to aggregate their holdings in order to meet these thresholds but would have to meet a one year ownership requirement and intend to hold those securities through the annual meeting date.
Shareholders would also be required to certify that they are not seeking to change control of the company or gain more than a minority representation on the board. This certification would be filed as a notice with the Commission, and also would include the shareholder's intent to nominate a candidate, plus specified disclosure about themselves and their nominee, for inclusion in the company's proxy materials.
The nominees themselves would have to satisfy the general, objective independence standards of the applicable exchange or securities association. The nominee could not have any direct or indirect agreement with the company concerning the nomination. Also, shareholders may only nominate one candidate or up to 25% of the company's board of directors, whichever was greater.
In addition to Rule 14a-11, we have also proposed to amend Rule 14a-8(i)(8) to allow shareholders to propose amendments to provisions of a company's governing documents related to nomination procedures or other director nomination disclosure provisions (so long as those provisions don't conflict with proposed Rule 14a-11). I believe this type of approach, if adopted, could open the door for shareholders to have a real voice in determining who will oversee management of the companies that they own. After all, an election is supposed to involve the right or ability of the shareholder to make a choice. Have shareholders really had a choice in recent board elections? As we noted in the release, some have expressed the view that "without competition for director elections, directors are effectively unaccountable to shareholders and may lose sight of their proper role as representatives of the company."8 Giving shareholders the ability to hold boards of directors accountable to them — including accountability for their oversight of compensation and risk management — would further empower shareholders and help restore investor trust in our markets.
Of course, I'd like to remind you all that the proposal calls for comments by August 17, 2009, which we will, as always, carefully consider. As you probably already know, the release contains a myriad of questions. Please take them seriously. We really want to hear from all of you. By understanding the advantages and disadvantages of the approach and the parameters we've proposed, the Commission will be in a better position to make an informed judgment and determine how to best address proxy access for shareholders.
We are particularly interested in making sure that the rules are workable — we do not want to disrupt your ability to hold meetings, or make you spend large sums of money rescheduling meetings. So, even if you would rather we not adopt the proposed changes, please give them your careful attention — and pay special attention to the timeline we included — and give us specific information about any logistical problems and concrete suggestions for ways to address them.
I recognize that "[c]ritics envision special-interest groups, like bondholders, public unions or quick-buck traders hijacking boards against the general good," 9 as financial journalist Roger Lowenstein pointed out in his New York Times piece on June 7th of this year. I also found Mr. Lowenstein's account of his conversation with the investment adviser who told him that "too much democracy can be a bad thing" quite amusing.
Like Mr. Lowenstein, I encourage you to look closely at the proposal. I agree with his assessment that it is designed to "produce a board that is both more flexible and more long-term focused." And, most important, I encourage you to think about whether a more flexible and long-term focused board is in the best interests of your companies. I think it is.
What I personally hope to see is shareholders taking a more active role in their investments. As Robert Monks of Lens Governance Advisors noted this past February:
Without informed and empowered shareholders playing their part, the corporate system simply has no equilibrium. The Corporate Governance Council of the World Economic Foundation recognized that simple physical principle when it concluded that poor and weak governance was a major contributing factor to the massive destruction of shareholder value.10
I am also hopeful that change akin to our proposal would increase the stability of your shareholder base. I have heard a range of views on how desirable a stable shareholder base is to companies today. Yet, I can't believe that companies truly want their investors to be relegated to speaking with their feet.
This alternative, known as the "Wall Street Walk," is simply unacceptable to me. I can't imagine any corporate officer who has raised equity capital or is interested in preserving the market value of his or her company's shares would actually recommend the Wall Street Walk to a shareholder. I believe that the Walk is bad for shareholders, bad for the company, and even bad for management.
Corporate Secretaries As Internal Gatekeepers
So far, I have discussed how the Commission is working to restore investor trust through action that will affect corporate governance. Of course, I do not think that government should bear this burden alone.
I believe strongly that directors and managements must take it upon themselves to improve accountability by setting a "tone at the top." They should take care to honor the responsibilities that arise from the trust placed in them by investors. Some have, but I believe that all directors and managements should implement their own best practices for corporate governance that promote accountability.
Individually as corporate secretaries, and collectively as this Society, you are uniquely positioned to help restore investor trust by promoting accountability in the corporate community. As former SEC Chairman Harold Williams (and my first Chairman when I joined the Commission in 1977) noted in his 1978 address to this Society:
[T]he corporate secretary has access to top management and the board of directors, and through that access, can help to sensitize them to important issues involving corporate accountability and to the ways in which the corporation might respond.11
You are the internal gatekeepers of corporate governance for your companies. You make sure that your boards have the advice and resources necessary to discharge their state law fiduciary duties. You draft the corporate minutes to reflect that the Board has done so. You advise the company on corporate governance matters.
And, in my mind, one of the most important roles you can play is to facilitate communication among the board, senior management, and your company's shareholders. As former Commissioner Roberta Karmel noted in her 1978 speech to this Society, you are "the clearing house for communications."12 In that capacity, you can do much to facilitate a constructive dialog between the board of directors and managers of your companies and the owners.
I understand that this is not an easy role and appreciate the skill and talent it takes for a corporate secretary to carry out this responsibility. As a former deputy director of the Division of Corporation Finance, I am also quite aware of the tremendous time and effort you all expend during proxy season, and I recognize that the time and effort has grown significantly in recent years. But, I believe that opening up the boardroom through shareholder access to the proxy has the potential to greatly improve accountability in the corporate community, and goes a long way towards restoring investor confidence in our markets.
I have always found the members of this Society to be deeply committed to serving as a positive force for corporate governance excellence. And, I think that everyone in this room is aware of positive steps you can take to promote corporate accountability within the companies you serve.
Although I realize this is a little unconventional, I thought I'd close by telling you the title of my speech — it is "The American Corporation and its Shareholders: Dooryard Visits Disallowed." I suspect you may wonder what in the world this possibly means. In Maine, you're told to avoid at all costs the dooryard visit. If neighbors come to your door, you must invite them in. I believe strongly that you should treat your shareholders the same way.
The question of opening up the boardroom door to shareholders is one that we have all debated for years. As you've heard today in the various quotes I've mentioned from past Commissioners, Commissioners have been addressing this issue with you since the earliest days of this Society. But, I believe recent events, in particular, the erosion of investor confidence in our markets throughout this financial crisis, have reinforced the need for change.
Let me set the example by inviting all of you in from my dooryard. If any of you would like to discuss these issues or any other matters with me, please come and talk with me in Washington (or Maine) or pick up the phone and call.