Speech by SEC Commissioner:
Statement at SEC Open Meeting on Facilitating Shareholder Director Nominations
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
May 20, 2009
Everyone agrees that it is a bedrock principle that shareholders own the corporation. But what does ownership mean? At the very least, it means that shareholders have the right to determine who runs the company and have a say on broad policy matters. Legally, shareholders already have the right to elect directors as well as the right to nominate directors and to make proposals in shareholder meetings. As a practical matter, however, it is very difficult for shareholders to exercise all their rights of ownership.
Today’s proposal is designed to take these legal rights and implement them in a modern world — specifically, the right to make a nomination and have it considered.
The fundamental problem shareholders face is putting their candidates before the other shareholders so that other shareholders can evaluate those candidates and make an informed voting decision. In modern public companies, with shareholders dispersed throughout the 50 states, and often around the world, it is simply not possible for shareholders to meet in person and decide who will sit on the board of directors.
As a result, company representatives ask shareholders for permission to act as the shareholder’s proxy, and to vote the shareholder’s securities on the matters presented at the shareholder meeting. When the shareholder meeting actually is held, the shareholders will have already signed their proxy cards and will have made their voting decisions. If a shareholder attends the meeting and makes a valid nomination for director, as is his right, the shareholder’s nominee has essentially no chance of being elected as a director. Most shareholders will have already instructed a proxy to vote their securities at the meeting, and the nominating shareholder will not be able to make his case for the nominee. The principal alternative, waging a proxy contest, is not cost effective, especially when not part of a change of control.
As former SEC Chairman Ganson Purcell said in 1942, “[W]hereas formerly … a stockholder might appear at the meeting and address his fellow stockholders. Today he can only address the assembled proxies which are lying at the head of the table. The only opportunity that the stockholder has today of expressing his judgment comes at the time he considers the execution of his proxy form, and we believe … that [this] is the time when he should have the full information before him and ability to take action as he sees fit.”
Proxy access has been an issue before the Commission at various times since the 1940s. In just the past few years, the Commission has proposed three rules, and held four roundtables related to the proxy process and proxy access. We have collected a great body of valuable information about the topic and we are ready to act. Investors have made very clear in their letters and comments on prior proposals that the SEC’s proxy regulations can better facilitate their rights.
Now is the time, with the country demanding renewed accountability, to finally take seriously the modern realities of proxy voting, and to give meaning to the fundamental shareholder right to elect directors. Our proposal today is an important step.
If adopted, today’s proposal would open up the company’s proxy materials and require companies to disclose the existence of, and other important information about, certain shareholder nominees. Investors will receive the proxy materials and be able to read about the shareholder candidates and decide how to instruct their proxy on how to vote. The rights of shareholders to nominate directors and to have their candidates considered by the shareholders would be revitalized.
In addition to directly nominating candidates, today’s proposal also would improve shareholders’ ability to make proposals concerning the director election process and make proposals to provide more disclosure in the company proxy statement.
In addition to enhancing the ability of shareholders to effect their right to nominate candidates for the board and have those nominations considered by the other shareholders, today’s proposed rules should create other important benefits.
By enhancing the ability of shareholders to participate in determining the board, the proposed rules should:
- Increase accountability and independence of board members; and
- Increase shareholder interest in participating in board elections and in other shareholder decisions.
Furthermore, as former Commissioner Harvey Goldschmid noted: "Shareholders, under our free-market system, not only supply capital, but have the right economic instincts. If they understand the system, they want corporate efficiency, honesty, productivity, and profitability.” By facilitating shareholder rights, today’s proposal would help shareholders advance these important goals.
In closing, I support today’s proposal, and I look forward to public comments. If adopted, the proposed rules should facilitate the ability of shareholders to exercise their core right to determine the board of directors in a more informed way. These proposed changes to proxy regulation should help provide fair corporate suffrage and enhance traditional shareholder rights.
I join the Chairman and fellow Commissioners in thanking the staff for their hard work and careful thinking in developing this proposal.