Speech by SEC Commissioner:
A Measured Approach to Facilitating Director Nominations by Shareholders
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
August 25, 2010
Public companies in the United States can raise capital around the world. As a result, shareholders of public companies are dispersed throughout the 50 states, and across the globe. The idea that shareholder decisions are made in-person at a company’s annual meeting is anachronistic. Shareholders are no longer able to meet in person to discuss who should sit on the board of directors, make nominations, and vote. Instead, these deliberations and determinations are made primarily through the written process that makes up the corporate proxy solicitation.
Recognizing this reality, for the better part of a decade, the SEC and its staff have been considering how to restore to shareholders the traditional ability to nominate directors.
Today, the staff is recommending rules that will enable owners of a significant, long-term, stake in the company to include in the company’s proxy materials a limited number of nominations — no more than 25% of the board. The staff has described these rules in detail, and I will not repeat what has been said.
The staff’s recommendation has been developed through a robust and public process informed by the participation of many interested parties. In fact, over a number of years, substantial Commission resources have been devoted to these issues. The current effort to address shareholder director nominations got underway in 2003. In that year, the Division of Corporation Finance published a report on the nomination and election of directors.i This report was informed by the staff's review of market practice, as well as several hundred comment letters from the public. Later in 2003, the Commission proposed rules that were designed to enhance the ability of shareholder to participate in director nominations.ii In the five years thereafter, the Commission held three public roundtables,iii and solicited public comment on two other distinct rule proposalsiv to address shareholder director nominations.
In May of last year, the Commission built on this record. The Commission proposedv the rules that, with amendments in response to commenters and continued deliberation, are being adopted today.
The substantial efforts of the SEC and its staff on these issues were enhanced by public participation. A significant effort was made by members of the corporate community, academics, investors, and other commenters to write detailed and thoughtful letters to the Commission on the proposal. Approximately 600 letters were received. These letters responded to the Commission’s call for comment on all aspects of the rules, and responded to several hundred detailed questions contained in the proposal. I, as well as my fellow Commissioners, also have received a number of in-person visits from corporate management, company counsel, and investors to highlight particular facts and viewpoints important to them.
The Commission and its staff have sought to make reasonable judgments to resolve the many competing considerations related to shareholder nominations. These judgments have been informed by the comments received, the staff’s investigation and analysis, and the Commission’s own experience. In addition, careful attention was given to the particular matters that Congress has directed the Commission to consider, including the public interest, investor protection, and the effects on competition, efficiency, and capital formation.
The empirical data and economic costs of the proposals were subject to careful consideration by the Commission and its staff, spearheaded by the economists in the Division of Risk, Strategy, and Financial Innovation. In addition to a review of the economic literature prior to proposing rules, the Division analyzed share ownership based on a number of data sets. The staff’s work was supplemented by studies from commenters, and information from specific companies, including their share ownership characteristics and costs incurred in proxy contests.
The SEC staff analyses and commenter studies also were subject to scrutiny by members of the public in the comment process. In fact, the Commission published a separate releasevi to expressly seek the views of interested persons on data and related analyses that had been prepared and provided to the Commission in the six months after its proposal of May 2009.vii
Clearly, this rulemaking has been a significant undertaking. On the many issues arising from shareholder director nominations in the proxy process, the SEC and its staff have sought to make reasoned and reasonable judgments, aided by a substantial record, and an open and transparent process.
Lastly, I would like to thank the staff for their careful and thoughtful work over the years. I also thank the many commenters on our rule proposals, and the participants in past Commission roundtables, for their contribution to these deliberations.
i See, Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors, Division of Corporation Finance, July 15, 2003, http://www.sec.gov/news/studies/proxyrpt.htm.
ii See, Security Holder Director Nominations, Release No. 34-48626 (October 14, 2003) http://www.sec.gov/rules/proposed/34-48626.htm.
iii Roundtables were held on March 10, 2004 (http://www.sec.gov/spotlight/dir-nominations/transcript03102004.txt), May 7, 2007 (http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf), and May 24, 2007 (http://www.sec.gov/news/openmeetings/2007/openmtg_trans052407.pdf).
iv See, Shareholder Proposals, Release No. 34-56160 (July 27, 2007) http://www.sec.gov/rules/proposed/2007/34-56160.pdf; and Shareholder Proposals Relating to the Election of Directors, Release No. 34-56161 (July 27, 2007) http://www.sec.gov/rules/proposed/2007/34-56161.pdf.
v Facilitating Shareholder Director Nominations, Release No. 34-60089 (May 20, 2009)(proposing release) http://www.sec.gov/rules/proposed/2009/33-9046.pdf.
vi Facilitating Shareholder Director Nominations, Release No. 34-61161 (December 14, 2009)(reopening the comment period on Release No. 34-60089) http://www.sec.gov/rules/proposed/2009/33-9086.pdf.
vii Facilitating Shareholder Director Nominations, Release No. 34-60089 (May 20, 2009)(proposing release) http://www.sec.gov/rules/proposed/2009/33-9046.pdf.