Statement by SEC Commissioner:
Remarks at Open Meeting Regarding Shareholder Access Proposal
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
Commission Open Meeting
October 8, 2003
This is an important day for corporate governance, as my colleagues have said. I would like to stress at the outset that today is an important step in a process. It could significantly enhance corporate governance efforts, and it could provide meaningful reform that will benefit investors. I salute the Chairman in engaging this debate so that the various issues and interests can be addressed.
Shareholder frustration about the lack of appropriate input in the director nomination process is not a novel problem. As the Chairman said, as early as 1942, the SEC considered this issue but did not implement changes. This issue was taken up again in 1977 and 1992. In each of these distinct time periods, each marked by different SEC members and staff, no significant changes were made to the SEC's shareholder access rules. In fact, I have direct personal experience in this area, having been at the SEC in 1992 under Chairman Breeden when we last made major changes to the proxy solicitation and shareholder communication rules rules that have stood the test of time, although they were severely criticized at the time.
And so here we are again, further along in the direct access process than we have ever been, but still left trying to fashion a fair mechanism to a recurring shareholder complaint. I join the Chairman and my colleagues in thanking the staff of the Division of Corporation Finance for their hard work. You have endeavored to "thread the needle", and you have done a great job in putting this proposal together.
A threshold issue is one that I take very seriously. What authority does the SEC have to regulate the nomination and selection of corporate directors in this way? I see two concerns that need to be addressed. First, since this is not a disclosure provision, does the Securities Exchange Act give us the ability to impose substantive rules on director selection? Second, although the staff has tried to draft around this issue, are we indirectly preempting state law, which traditionally governs the selection of directors? I recognize that the Sarbanes-Oxley Act authorizes the SEC to take action in certain corporate governance matters that are traditionally within the state law realm. But, I should note that Congress was in the main rather careful in how it authorized and directed the SEC to act in this governance area. I understand that if this rule is adopted, some will challenge it on authority grounds. We must consider these issues thoughtfully during this process, and not cast them aside as mere technicalities.
Shareholder access is an issue where there is much controversy and many reasonable people disagree. Alan you've done a great job here, but I can guarantee that just about everyone you ask will dislike some part of this proposal.
I appreciate fully the different sides of this debate. One side of me call it the free market side believes that owners of a corporation should decide for themselves how they wish to govern themselves and choose their representatives to oversee management, who are their employees. Let the chips fall where they may, without government telling the owners how to do it. The best protection is that a majority of shareholders must decide any of this, so let the majority of owners rule.
The other side of me call it the pragmatist or the paranoid side can recognize the fears expressed by many that allowing untrammeled shareholder access to the company's proxy card with only procedural safeguards might open the floodgates to the special interest groups seeking to hold a company hostage until their pet "stakeholder" issues are addressed.
Commissioner Glassman has also raised a point to consider during the comment process that the best course of action now might be to be patient and wait to see how the recent governance reforms enacted by Congress, the SEC and SROs play out.
I have also heard complaints that permissive shareholder access rules might facilitate the creation of special-interest directors meaning directors that are nominated by a certain block of shareholders to represent that block's interests in one particular issue. This is a troubling proposition arguably even contrary to existing statutory and common law and it has certainly NOT been successful in Europe.
When we first started to look at this issue, I was deeply concerned that we might frame the discussion on choosing a wholly arbitrary number as we looked to decide what percentage of shareholders should be necessary to achieve greater access to the proxy. With such an approach, I feared that we would not have spent enough time considering whether shareholder access is a good idea and whether it might be a necessary improvement.
The triggering mechanism first suggested by the staff in July and now elaborated in the current proposal is a creative idea. It provides an objective standard rather than some arbitrary numerical threshold. It suggests that the permissive access rules, the corporate world equivalent of upsetting the apple cart, would only apply in limited cases cases in which a company is obviously not appropriately responding to its owners' requests.
BUT, and this is critically important, as we move through the comment process, we need to focus on the details like: (1) how should we set the triggers?; (2) how should votes be counted?; (3) who can make nominations?; and (4) who can be nominated? Here, more than ever, the devil is in the details.
This is a unique proposing release. I cannot remember a release that has so many pages of questions seeking public input. More than half of the substance of this release is request for comment. WHY? Because the devil is in the details of this proposal and, frankly, we don't have all of the information that we need to work out the details.
We know that this proposal is geared to addressing so-called "problem" companies. This proposal is NOT geared towards reshaping the proxy contest landscape or, more importantly, to challenge the fundamental concept that managers, and not stockholders, manage the affairs of the corporation.
It is for this reason that we do not know the appropriate levels of shareholder ownership or the number of withheld votes that are necessary to trip the triggers that we have proposed. As the proposal notes, we have studied some data that is available to us to determine how often these triggers might have been activated in the past. This data is of limited use, of course, because, if these proposals are adopted, we will be at a new beginning Day One, if you will. We will have created new standards that will themselves change shareholder and corporate behavior. We have done our best to propose appropriate guidelines based on what we know now, but I think it is fair to say that we need help from the public to let us know how we did.
I should also note that there is a tendency for government to build on and further "refine" regulatory projects. For this reason, we need to speak clearly as to our philosophical basis for this rule. This is critical we do not want to open the door to a slippery slope that will eventually lead to a situation that has "morphed" out of recognition from what we originally intended when we considered this very difficult issue.
These are significant issues but I do not want to undercut the significance of how far we have come with this proposal. We are further along in this process than we have ever been, and the staff has tried to balance the various interests. I support the recommendation of putting this proposal out for comment, and I am optimistic that public input will help us fill in the blanks.