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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Introductory Remarks at the October 8 Open Meeting:
Proxy Access Proposal


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

Washington, D.C.
October 8, 2003

The first item the Commission will consider today is whether to propose rules following the recommendations contained in the staff's report, issued in July, regarding a limited requirement for certain companies to include shareholder nominees in their proxy materials.

Board unresponsiveness, sometimes tied to corporate governance weaknesses, demonstrates the need for shareholders to have a more meaningful voice in the proxy process. That is difficult under current rules. Shareholders typically are provided proxies allowing a vote only on company-nominated candidates, and disclosure in company proxy material is limited to those candidates. Also, most companies use plurality rather than majority voting for director elections, so candidates are elected regardless of whether a minimum percentage of shareholders approve. Therefore, company nominees are nearly always elected to the board, regardless of the number of shareholders who object to their candidacy.

While shareholders can conduct a proxy contest to elect their nominees, such contests require shareholders to bear the substantial expenses associated with preparing and disseminating proxy materials that comply with our current rules. These costs can frustrate shareholders' attempts to exercise their legal right to nominate directors. Meanwhile, the company's board does not bear the cost of disseminating information about - and soliciting proxies for - its nominees. Instead, the board's proxy solicitation is funded with the company's assets.

Shareholders unable to fund a contest may instead nominate directors at the annual meeting, subject to compliance with applicable state law requirements, as well as the restrictions contained in a company's governing instruments. Yet because companies solicit proxies for their nominees under our current rules, most shareholders vote before the meeting instead of voting in person. Accordingly, a nominee presented at an annual meeting but not included in a proxy solicitation has little chance of receiving the support needed to win election to a company's board.

And though shareholders may recommend candidates to a company's nominating committee to be included in the slate of nominees presented in the company's proxy material, many shareholders have said this is not effective, as companies rarely nominate their candidates.

On at least three previous occasions, dating back to 1942, the Commission has considered the issue of shareholder nominees. However, a decision to publish for comment the package of rules recommended to us this morning would mark the first time the Commission has ever taken the step of formally proposing rules to include shareholder nominees in company proxies.

This is a significant step towards fixing current proxy rules. These current rules may, at times, contribute to present conditions where company nominees are favored over the voice of shareholders. This can leave shareholders with proxy material whose disclosure does not adequately reflect the slate of nominees permitted under governing state laws. Today's proposal seeks to address this problem.

The staff and the Commission have received a significant amount of public input on this matter. Based on that input, the staff has developed a package of rule proposals that attempts to strike an important balance between shareholders who seek a more active voice in the proxy process, and those who have legitimate concerns about the impact of these proposals on the oversight, management, and operation of public companies.

Although today's proposals would require shareholder nominees to be included in proxy materials, the requirement would be limited to nominees of security holders who

  • demonstrate their significant, long-term interest in the company, and
  • are not seeking control of the company's board of directors.

Also, the proposal would apply only to those companies where there is evidence of ineffectiveness in the proxy process.

I'd like to thank all of the members of the staff who have worked on this proposal. They have done excellent work in a tight time frame.

We all recognize that the issue of shareholder nominees in a company's proxy materials is a very serious matter. There are varied and deeply held views on the questions before us, and - if the Commission proposes these rules today - we look forward to considering the comments of all groups that would be affected.



Modified: 10/09/2003