Speech by SEC Commissioner:
Statement at SEC Open Meeting
Commissioner Troy A. Paredes
U.S. Securities and Exchange Commission
July 1, 2009
Thank you, Chairman Schapiro.
Today we are considering three items. I am pleased to support the proposal clarifying TARP recipients' obligations under Section 111(e) of the Emergency Economic Stabilization Act of 2008 and the proposal enhancing compensation and corporate governance disclosures and addressing certain features of the proxy solicitation process. I look forward to considering the comments we receive on these proposals.
The third item we are considering is a final Order approving an amendment to NYSE Rule 452 that would eliminate broker discretionary voting. Unfortunately, I am not able to support the Rule 452 amendment.
The balance of my remarks this morning will focus on the proposed compensation and corporate governance disclosures and Rule 452.
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The compensation and corporate governance disclosure enhancements illustrate the disclosure philosophy of the federal securities laws at work. Mandatory disclosure is at the core of what the Commission has done for 75 years. Disclosure empowers investors with information that assists investors in evaluating companies — both their financial performance as well as their governance practices. Investors, in turn, are free to voice their views about particular companies and allocate their investments as they see fit with the benefit of a more informed perspective. By expressing their satisfaction or discontent through how they vote and invest, investors discipline the behavior of board members and management.
Although I support the recommendation, there is one note of general caution that I would like to offer. In large part, the disclosure amendments respond to the potential that companies will take excessive risks. As regulatory reforms are proposed to address excessive risk taking, it is important not to overlook that just as a company can assume too much risk, a company also can be overly cautious. Placing undue emphasis on mitigating downside risk can be costly if it chills enterprises from taking the kind of prudent business risks that drive competition, innovation, and entrepreneurism. Our dynamic economy — marked by a constant stream of cutting-edge goods and services and an ever-expanding set of opportunities — depends on the willingness of individuals to take risks.
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With respect to Rule 452, the rule presently allows a broker, as the record holder of shares, to vote on behalf of a beneficial owner on so-called "routine" matters if the beneficial owner has not instructed the broker how to vote within a certain timeframe. Voting to elect board members in an uncontested election is treated as a "routine" matter. Accordingly, although the broker does not bear the economics of share ownership, the broker may vote as it deems appropriate unless voting instructions are received.
The Order before us today would approve the NYSE proposal amending Rule 452 so that no director election would be "routine" under the rule. Broker discretionary voting would be eliminated in all director elections, whether contested or uncontested.
Although I believe it is time to rethink Rule 452, I unfortunately am not able to vote in favor of the Order for two primary reasons: (1) Rule 452 should be addressed as part of a comprehensive assessment of the proxy voting system instead of being amended in isolation; and (2) eliminating broker voting if other changes are not made to the proxy process may suppress the voice of retail shareholders.
The Commission should evaluate the elimination of the broker vote as part of a broader reconsideration of the proxy process. Broker discretionary voting in director elections is just one piece of a proxy system made up of numerous interconnected parts that must work together. Changing one component but not others may have unintended and counterproductive consequences.
A number of matters relating to shareholder voting have been discussed recently, such as e-proxy; company communications with shareholders; proportional voting and client directed voting; so-called "over-voting" and "empty voting"; and the role and influence of proxy advisory firms. Any consideration of Rule 452 would, in my view, benefit from the insights that flow from a more complete evaluation of the proxy process.
I am not alone in recommending an integrated approach to shareholder voting; a number of commenters on the proposed Rule 452 change made the same point. According to statistics the Division of Trading and Markets compiled, of 137 distinct commenters, 28 commenters expressly supported amending the rule. However, 95 expressed concerns, and 93 of these 95 commenters recommended that the Commission defer action on the proposal, for example, to allow time for a more comprehensive review of the proxy process. Notably, in its comment letter, the NYSE Proxy Working Group indicated that the "SEC should consider using the opportunity created by this proposed rule change to review the broader proxy process" and suggested extending the comment period "to receive comments on some of these broader issues."1
Simply put, considering the proxy system as a whole, instead of taking up Rule 452 separately, would help ensure that the desired outcome is achieved and that the public interest is advanced.
Concerning the practical impact of the Rule 452 amendment, the Order suggests that eliminating the broker discretionary vote enfranchises retail shareholders and thus promotes corporate accountability. The core claims are that current Rule 452 allows brokers to vote shares even though they have no economic interest and that discretionary broker voting distorts election results, as brokers tend to vote in line with management.
This is not the only way to characterize the potential consequences of eliminating broker discretionary voting. A competing view of Rule 452 suggests that the rule in fact enfranchises retail shareholders by providing a means through which their voice can be expressed. This view starts with recognizing how retail shareholders vote when they actually cast their ballots. Past experience indicates that, by a wide margin, retail shareholders tend to side with management when voting. The discretionary broker vote, then, would appear to reflect the overall preference of retail shareholders, at least as measured by voting patterns. With proportional voting — which some brokers already have implemented — the broker vote mimics the retail shareholder vote even more closely than when the broker votes with management entirely. Eliminating the discretionary broker vote may cut off an avenue by which the overall preference of retail shareholders can be communicated, thus quieting their voice. In this event, the voice of institutional investors will carry additional weight; yet the interests of institutional investors are not necessarily compatible with the interests of retail shareholders.
These competing views of Rule 452 evidence the value of undertaking a comprehensive review of the proxy system, including the broker vote. For example, eliminating the discretionary broker vote while revisiting OBO/NOBO or improving the workings of e-proxy may yield an outcome that is markedly preferable over what may result if Rule 452 is amended by itself.
The Order notes the need for shareholder education in light of the elimination of broker discretionary voting. I, too, urge that an effective retail shareholder education effort be undertaken to emphasize the significance of voting and to explain the process of shareholder voting.
In closing, I would like to join my colleagues in thanking the many members of the staff who worked on the matters before us today.