Speech by SEC Commissioner:
"Restoring Investor Trust through Corporate Governance" — Remarks Before the Practicing Law Institute
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
Corporate Governance — A Master Class 2009
PLI New York Center
New York, New York
February 18, 2009
Good morning and welcome to your Master Class on Corporate Governance. Thank you, David, for your overly kind introduction.
I have to tell you how thrilled I am that David will be returning to the Commission later this month in a dual role as General Counsel and Senior Policy Director. At this critical time in our agency's history, David, with his wisdom, legal and analytical skills, and measured judgment, will be a more-than-welcome addition to the Commission. And, I must say that his wit will be greatly appreciated, particularly in today's tough times.
When I accepted Jim and David's invitation to speak, I learned that an SEC Commissioner has not spoken at this event in quite some time. I am especially honored to be your speaker this morning and after you hear from me, I hope that one of my colleagues or I will be invited back for a return engagement.
Given our time constraints, I'd like to touch on just a couple of topics related to corporate governance: why I believe the Commission should address these issues; and where I currently stand on issues like proxy access. Please keep in mind, though, that my remarks today represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1
It can take years to build up trust and only seconds to destroy it. Today's financial markets prove the wisdom of this adage; look at the speed with which we have seen investor trust erode in recent months. As a result, the Commission, as the agency charged with being the investor's advocate and protecting the integrity of our capital markets, must engage in its own critical self-analysis and address a number of difficult and complex issues.
I have heard rumblings that this is not the time to divert our focus from the current market crisis, and the need for regulatory reform, by addressing other issues such as corporate governance. I couldn't disagree more.
We may have more on our plates today than at any other point in the agency's history. But, the challenges we face should not keep us from doing everything we can to restore investor trust. The Commission must go forward, and it must multi-task. Commission actions to enhance shareholder participation and promote greater board accountability are important steps we can take. They are important because they will allow investors an opportunity to exercise their rights and help to restore the balance in our system for corporate accountability. And, I believe they will also help us restore investor confidence.
As an initial matter, I believe the Commission should move forward with proxy access.
Although the proxy access debate long precedes my tenure as a Commissioner, it is not new to me. When I was Deputy Director of the Division of Corporation Finance in the early 1990s, the Commission dealt with the access issue in the context of amendments to the bona fide nominee rule set out in Exchange Act Rule 14a-4. That rulemaking also removed some unnecessary impediments to discussions among shareholders. The project occupied so much of my time that my children — then about 8 and 11 — were frequent visitors to the office. I was quite taken aback when one of them presented me with a political cartoon he had drawn; the cartoon showed Uncle Sam muzzling a shareholder attempting to speak. I didn't know whether to be proud of his level of understanding or appalled that even a pre-teen understood that our rules had interfered with shareholder communications.
I understand all too well that there are two sides to this debate. On one side, you have shareholders who feel that the current system shuts them out of the director nomination and election process. On the other side, you have those who feel that proxy access would disrupt corporate boards and favor special interest directors.
To me, the fundamental question is: "Should shareholders have a real say in determining who will oversee management of the companies that they own?" I believe strongly that the answer is yes. In my view, the Commission failed to address the question effectively in 2007, when it voted to propose two alternative approaches related to shareholder director nominations. As you know, the first approach, which the Commission never adopted, would have amended Rule 14a-8 to enable shareholders to include shareholder nomination by-law proposals in the company proxy materials under certain conditions. The second approach, which the Commission eventually adopted, amended Rule 14a-8(i)(8) to allow companies to exclude from their proxy materials shareholder proposals that relate to a nomination or an election for board members or a procedure for such nomination or election. I can understand why former Commissioner Annette Nazareth called the second approach the "non-access" proposal. But, quite frankly, I think that both alternatives fail to provide sufficient shareholder access.
I know that the Commission has already devoted substantial resources and amassed an incredible amount of information related to the proxy process. I am very grateful for all the hard work of the Division of Corporation Finance in this area, but we have more work to do, and neither the staff nor I will hesitate to ask additional questions where necessary.
I can tell you today that I have concerns about some of the provisions in the outstanding so-called "access proposal." First, I am very troubled by the 5% ownership threshold. I would be inclined to scale that number back substantially. Second, a tiered approach to ownership to address smaller publicly held companies has some appeal to me, but I need to evaluate further the pros and cons of this approach. Third, I think that the disclosure requirements appear far too stringent and exceed those required in proxy contests. I question whether these requirements are appropriate in this context.
So far, I have only mentioned the 2007 approaches. The broader approach to proxy access contained in the Commission's 2003 proposal also merits a careful look. The 2003 approach would have required proxy access after one of two triggering events: either the receipt of withhold votes from more than 35% of the votes cast with regard to one or more directors; or, a shareholder proposal, which received support from more than 50% of the votes cast, submitted by a holder or holders of more than 1% of the company's voting securities for one year, requesting access. In my opinion, the Commission needs to carefully consider a range of approaches as it moves forward with proxy access.
In addition to proxy access, I also believe that the Commission should take steps to upgrade some of the tools that shareholders use to make their voting decisions. One idea that's been discussed recently is enhanced disclosure about director nominees. Let's focus on what your Aunt Millie sees when she reads her annual proxy statement for the company whose shares she's owned for 50 years.
Now, just a short aside: I'm not naive enough to assume that Aunt Millie actually does read that proxy statement. But, one of our critical challenges is to assure that that document, as well as others, is accessible enough that retail investors can and, more often than today, will read it. And, I'm also quite fond of Aunt Millie and like to talk about her.
So, back to Aunt Millie — when she reads her proxy statement and sees a recitation of a director nominee's prior jobs and educational background, can she evaluate whether that director will add value to that particular company? I think that a rule requiring additional disclosure in that regard should be explored to help investors make more informed voting decisions.
Technology and e-Proxy
Another way I believe the Commission should enhance shareholder participation, and particularly make information gathering more efficient, is through technology. As I stated last summer when we adopted the Commission Guidance on the Use of Company Web Sites, I believe that the Internet and electronic communications play a vital role in modernizing the disclosure system under the federal securities laws and in promoting transparency, liquidity, and efficiency in our trading markets. The Internet, in particular, has enabled a greater number of retail investors to have ready access to company information. I am firmly committed to the idea that the Commission should do everything it can to encourage this trend and harness the power provided by technological advances to get the right information to investors, institutional and retail, at the right time.
Although the Commission back in 2007 attempted to improve the proxy process via e-Proxy, I understand that shareholder participation has in fact dropped significantly. I have heard reports that the percentage of retail shares voted dropped from approximately 34% in the year prior to using "notice and access" to approximately 17% in the year issuers first used "notice and access." This concerns me greatly, and I am very anxious to hear where the numbers are this year. Although I am sympathetic to the potential cost savings for issuers, I think that the Commission should implement changes to improve shareholder participation. At this year's SEC Speaks, my fellow Commissioner Luis Aguilar stated that we need to "fix e-Proxy or scrap it." I share his sentiments, and would add that my preference is for us to fix e-Proxy.
Another area where I believe the Commission can act to increase shareholder participation concerns the NYSE's proposed amendments to Rule 452 that would eliminate uninstructed broker votes from director elections. As you probably know, the Exchange's request has been held in abeyance at the Commission for over two years. I believe that we should move forward and determine whether to adopt these amendments.
"Tone at the Top"
So far, I have discussed where I believe the Commission can work to restore investor trust through action in the corporate governance arena. I do not, however, think that directors and corporate managements should rely solely on the government to bear that burden. Instead, I believe strongly that directors and managements must take it upon themselves to improve accountability by setting a "tone at the top" honoring the responsibilities that arise from the trust placed in them by investors. Some have, but all directors and managements should implement their own best practices for corporate governance that promote integrity, transparency, and accountability.
One particular area where improvement is needed is executive compensation. Over the past two decades, the Commission has tried to bring sunlight into this area through enhanced disclosure requirements concerning executive compensation. Another way I believe companies can improve the "tone at the top" on executive compensation is to institute "Say-On-Pay" for shareholders in their proxy materials. In general, the Commission's staff has not objected to the inclusion of these types of resolutions, if non-binding and advisory, in company proxy materials. I also understand that several companies have taken their own initiative to allow "Say-On-Pay" on their ballots, and I encourage more companies to do the same. To me, "Say-On-Pay" can help restore investor trust because it promotes increased shareholder participation and increased accountability of board members and corporate management. And, of course, just yesterday we learned that President Obama signed the American Recovery and Reinvestment Act which requires TARP recipients to permit a non-binding, "Say-On-Pay" vote in their proxy materials and also requires the Commission to issue final rules and regulations within the next year. So, you will certainly be hearing more on this matter from us in the near term.
In closing, I realize that our time together has been brief, and I appreciate the opportunity that I've had to share with you some of my views on some important corporate governance issues and on the important role of corporate governance in restoring investor trust.
I recognize that corporate governance issues remain controversial and there will be obstacles to resolving them, particularly in the midst of a financial crisis. But, they are extremely important and should be a priority for the Commission and corporate America. I am confident that, under the leadership of our new Chairman, Mary Schapiro, the Commission is up to the challenge.
If any of you would like to discuss these issues or any other matters with me, please remember that my door and telephone lines are always open.