Speech by SEC Commissioner:
Statement at SEC Open Meeting1
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
July 1, 2009, 2008
Thank you Chairman Schapiro. I, too, would like to once again recognize the efforts of our staff, particularly the Division of Corporation Finance and Division of Trading and Markets, as well as the Division of Investment Management, the Office of the General Counsel and the Office of Economic Affairs, for their work on all three releases that are before us today. I also would like to join the chairman in welcoming back to the Commission Meredith Cross, who makes her first appearance today as Director of the Division of Corporation Finance.
For the sake of efficiency, I will address all three of the items on today's agenda in my opening statement.
Shareholder Approval of Executive Compensation of TARP Recipients
I'll start off by talking about the proposal to adopt rules that would require registrants that are TARP recipients to provide an annual separate, non-binding shareholder vote to approve the compensation of executives. This shareholder vote is required pursuant to the American Recovery and Reinvestment Act of 2009. Because the rules we propose today are intended merely to specify and clarify the operation of this requirement in the context of the Commission's proxy rules, and do not reflect a policy judgment of the Commission on so-called "Say-on-Pay" votes, I support the proposal.
It is worth noting that, outside the context of TARP recipients, the Division of Corporation Finance for many years has consistently allowed precatory shareholder proposals, pursuant to Rule 14a-8 under the Exchange Act, whereby shareholders request that companies adopt Say-on-Pay policies. While I can appreciate the public sentiment and taxpayer interest that gave rise to the call for shareholder input into compensation practices at taxpayer subsidized companies, this federal mandate paints all TARP recipients with a broad brush and, as a result, imposes undue costs on all TARP companies, without regard to the preferences of the shareholders of each affected company.
I believe that this demonstrates the inefficiency of federal mandates and one-size-fits-all solutions to address problems found at individual companies, and further illustrates the weaknesses associated with federalizing corporate governance law, which is traditionally — and properly — the purview of the states. Nonetheless, because again we are proposing these rules pursuant to the federal statute, I am pleased to support it.
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I want to pause for a moment as I turn to the other items on today's agenda to point out the significant number of Commission actions — including some that I am supporting today — that, if ultimately adopted on the Commission's anticipated schedule, will all become effective for the 2010 proxy season. These include the Commission's proxy access proposal that was proposed in May, today's Order approving the elimination of broker voting in uncontested director elections and today's proposal relating to Proxy Disclosure and Solicitation Enhancements. I have significant concerns about the stresses that such a large number of changes will place on the system, as well as concerns regarding how all of these changes will ultimately work together and the resulting impact — particularly in the context of director nominations and elections. Over the next several months, it is critical that the Commission be cognizant of these effects in considering adopting final rules and their implementation schedule. We must also bear in mind that these changes come at a particularly critical time, during which fundamental legal and regulatory changes are being considered that are likely to significantly alter the environment and economic landscape in which U.S. companies operate. Taken in isolation, a cost here and there may not change cost-benefit analysis, but taken as a whole they might come together and reach the tipping point at which we see U.S. companies reincorporating elsewhere.
Proxy Disclosure Enhancements
Because the proposed rules regarding Proxy Disclosure Enhancements fall within one of the Commission's core competencies, I am pleased to support them, as additional information in the hands of investors is generally a very good thing. In this regard, it is notable that we have been careful not to cross the line from requiring disclosure to making substantive judgments about companies' policies and practices. Accordingly, the amendments that we propose today:
- Require additional disclosure in the CD&A, where material, about the relationship between a company's overall compensation policies and practices and its risk-management policies, but do not propose to limit compensation amounts or regulate the design of companies' compensation and risk-management policies;
- Require additional disclosure about director nominees, including the experience, attributes and skills that the company believes qualify them to serve on the board or on specific committees of the board, but do not set additional substantive limitations or requirements for board or board committee membership;
- Require disclosure about a company's leadership structure, including whether the chairman of the board and CEO positions are split, whether the board includes a lead independent director, and other information, but is explicit that the Commission makes no judgment about what is an "appropriate" or the "right" leadership structure; rather, the proposal acknowledges that the appropriate structure will depend on the individual circumstances facing each firm; and
- Require additional disclosure about the use of compensation consultants where a company has engaged a compensation consultant to make recommendations on executive compensation plans or policies as well as to provide other services, but do not propose to regulate the services for which a company may hire these consultants.
Having said that, it is important that our disclosure requirements strike the right balance between requiring information that is important to investors, on one hand, and not being unnecessarily burdensome to reporting companies, on the other. We must be conscious that disclosure obligations that are time-consuming or expensive to produce, or that intrude too far into daily affairs of the company, risk distracting management from the tasks for which they are hired — increasing the value of the companies they run — and thus injuring the very investors we seek to protect. I will be quite interested, therefore, to review the comments that we receive on this proposal — especially with respect to whether investors and reporting companies believe we have properly struck this balance.
In particular, with respect to our amendments to the CD&A, I note that, while there is no question that compensation structures can drive inappropriate risk-taking, we also must recognize that the short-term focus of many boardrooms and management suites is also a reflection of, and response to, broader shareholder demand for short-term performance. Nevertheless, disclosure regarding compensation policies at individual companies that encourage inappropriate risk-taking certainly can be material to investors, and I look forward to reviewing the comments we receive on these proposed amendments.
Proxy Solicitation Amendments
I am also pleased to support the proposed rule amendments relating to the Proxy Solicitation rules, which are generally intended to clarify the operation of certain rules and to facilitate the proxy solicitation process. There are two amendments which I am particularly interested in getting comment on — the amendments to the introductory text in Rule 14a-2(b)(1) and the amendments to Rule 14a-4(d)(4). These amendments do give me a little pause, as I question whether the amendments that we propose today may have unintended consequences. I therefore urge interested parties to review these amendments particularly closely.
While I support the Division of Corporation Finance's desire to codify its historical position under Rule 14a-2(b)(1) that a soliciting person who sends an unmarked copy of management's form of proxy is not sending a "form of revocation" within the meaning of that rule, I believe this proposed rulemaking provides an opportune time to consider whether additional protections might be appropriate. When a soliciting person that is eligible to rely on this rule sends an unmarked form of proxy to a shareholder, the soliciting person may be particularly likely to influence the shareholder's vote. However, because such a soliciting person is not required to comply with the ordinary rules relating to proxy solicitations, shareholders may not have significant information about the soliciting person that might be material to their voting decision, such as any relationship that the soliciting person has with the company. Accordingly, I look forward to reading comments regarding whether, for the protection of investors, a soliciting person that provides an unmarked form of proxy should be required to file or provide to shareholders specified information about itself.
I also look forward to reviewing comments on our proposal to codify the position recently taken by Division of Corporation Finance2 permitting a person soliciting in support of its own "short slate" of director nominees to "round out" its slate by seeking authority to vote for nominees named in another soliciting person's proxy statement. I have some concerns that the practical ramifications of the Division's no-action position — and of codifying this position in our rules — are difficult to predict, particularly in light of the Commission's recent proxy access proposal.
Unfortunately, I am not able to support the Commission's Order today approving the proposed change to the New York Stock Exchange's Rule 452, which will eliminate broker voting of uninstructed shares in uncontested director elections. Although I agree with the animating principle behind the amendment to Rule 452 that, in light of the critical role that the board of directors plays in all aspects of a company's life, the election of directors is not merely a "routine" matter, I believe that we are doing investors a tremendous disservice by approving this amendment without closely analyzing the effects this action is likely to have and determining what other changes to the proxy voting process should be adopted concurrently with this rule change.
At the outset, it is important to recognize, as the Order acknowledges, that the amendment to Rule 452 will affect substantially all public companies — not merely companies listed on the NYSE — so this amendment will have far-reaching effects.
In April 2005, prior to proposing amendments to Rule 452 to eliminate broker voting in uncontested director elections, the NYSE created the Proxy Working Group to review the NYSE rules regulating the proxy voting process. The PWG recommended the rule change that is before us today; in doing so, however, it also emphasized the integrated nature of the proxy process and thus recommended that the amendment of Rule 452 form the core of a larger package of reforms. As recently as March of this year, the PWG suggested that "it may be appropriate [for the Commission] to briefly extend the comment period concerning the proposed amendment to Rule 452 to receive comments on some of these broader issues," in order to allow the Commission to "us[e] the opportunity created by this proposed rule change to review the broader proxy process."
This concern has been echoed by scores of other commenters, who have implored us not to approve the amendment to Rule 452 in the absence of broader measures, such as:
- a significant investor education campaign;
- addressing shareholder communication problems associated with objecting beneficial owners;
- addressing other proxy voting issues such as empty voting and over-voting; and
- addressing dramatically reduced retail investor participation associated with the use of the e-Proxy rules.
These commenters also pointed to a number of consequences that they believe are likely to flow from the elimination of broker voting, including: creating difficulties and increasing costs to achieve quorum; disenfranchising retail shareholders and expanding the influence of institutional shareholders; expanding the influence of proxy advisory and proxy voting firms; dramatically increasing the number of directors unseated, especially at firms with majority voting standards; and other effects.
Commenters point out that these consequences are likely to be particularly pronounced as a result of the confluence of a number of other trends that have emerged over the past several years, including increased adoption of majority voting bylaws, reduced retail voting, state corporate law developments relating to proxy access and the Commission's recent proposals relating to proxy access.
To highlight just a few of these concerns, it is virtually certain that eliminating broker voting will have the effect of dramatically increasing the relative power and influence of institutional shareholders compared to retail holders. With the elimination of broker voting, retail voting levels will necessarily decrease, resulting in the votes of institutional shareholders — who vote in much higher percentages — carrying more weight. I believe that a presumption underlying the push to adopt amendments that ultimately increase the influence of institutional investors at the expense of retail voters is that institutional investors have a greater interest or superior experience in ensuring that companies act to optimize their long-term well-being; If this is so, we have made no serious effort to fully test this presumption, and therefore cannot be confident of such a result.
It is also virtually certain that this rule change will significantly increase the power and influence of the proxy advisory firms that make voting recommendations to these institutional shareholders. It is ironic that a central objection to broker voting is that brokers have no economic interest in the uninstructed shares that they vote on behalf of shareholders, yet a predictable result of eliminating broker voting will be to increase the power and influence of proxy advisory services, who similarly have no economic interest in the firms with respect to which they issue voting recommendations. Moreover, these proxy advisory firms often face conflicts of interests arising from providing corporate governance advisory services to registrants and providing voting recommendations to their institutional investor clients, and have been reported on occasion to make voting recommendations based on inaccurate analyses of registrant corporate governance or other data.
I cannot say with certainty which of the other concerns voiced by commenters are likely to come to fruition and which will not — because we have not done the necessary analysis. Accordingly, in my view, the Commission's Order today far too readily dismisses these concerns. Contrary to the opinion expressed in the Order that "it is not appropriate to delay action on the NYSE's proposal pending consideration of the myriad important and difficult issues relating to shareholder director nominations, proxy voting, and shareholder communication," I strongly believe that, in light of the integrated nature of the proxy voting system, these myriad important and difficult issues provide the strongest possible argument to take a holistic approach to amending Rule 452.
Today's Order also too quickly dismisses client-directed voting, which I believe would ameliorate some of the problems associated with broker voting and represents a potential long-term alternative to eliminating broker voting. In the short-term, client-directed voting addresses some of the concerns surrounding broker voting — in particular the complaint that brokers tend to vote in accordance with management's recommendations — and could allow the Commission and industry participants sufficient time to address the problems plaguing the proxy voting system in a measured and holistic way. In the long-term, I believe client-directed voting should be considered as part of a package of reforms to improve the proxy voting process.
I am disappointed that we were not able to take a more holistic approach before moving forward with approving the amendments to Rule 452 today. Therefore, I am unable to support it.