Speech by SEC Commissioner:
"The Power of the Shareholder & the Rise of Corporate Democracy"
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
2009 New America Alliance Latino Economic Forum
Waldorf Astoria Hotel
New York, New York
October 29, 2009
Thank you for that generous introduction. I am pleased that I am able to join you today at the 2009 Latino Economic Forum — Shaping a New Era of Business. I am particularly pleased to share my thoughts on "The Power of the Shareholder & the Rise of Corporate Democracy." As is customary, let me say that the views I express today are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.
This conference takes place at a time when the need for shareholders to have a voice has never been greater — and, at such a time, it is incumbent on the SEC to step up and take action. Among other things, this means that the SEC has a responsibility to modernize our rules to give shareholders their voice. These days all the voting action takes place through the proxy process. Shareholder voting essentially no longer takes place at annual meetings where shareholders could gather in a room and debate director candidates or other policy proposals. As a result, while it remains true that shareholders own the company and have the right to determine who manages the company and have a say on broad policy matters, there is currently a chasm between intrinsic shareholder rights and the process in place. I strongly believe in the rights of shareholders and I'm glad to report that the Commission at long last is taking steps toward empowering shareholders and bridging this chasm.
Recent Initiatives at the SEC and by Investors That Seek to Restore Corporate Democracy
Specifically, at the Commission, we have been focused on a number of initiatives that will assist shareholders in their interaction with the directors and management of the companies they own. These initiatives include
- Amendments to the New York Stock Exchange Rule 452;
- A proposal to enhance proxy disclosures in a number of areas that shareholders care about when acting as corporate owners;
- Amendments to the proxy rules that would require company proxy materials to include shareholders candidates for director, often called "proxy access;" and
- Ongoing Commission staff efforts to examine the proxy access system more generally, which some refer to as "proxy plumbing".
I will discuss these initiatives in more detail, but let me start with proxy access.
Proxy access is the description of a proposal that could have far-reaching consequences for the rights of shareholders to elect the directors of corporations — one of the most important decisions that shareholders make.
Legally, shareholders already have the right to nominate and elect directors, as well as the right to make proposals in shareholder meetings. Unfortunately, as a practical matter, it is very difficult for shareholders to exercise these rights of ownership. As you know, state laws allow shareholders to nominate directors, and present their nominees for a shareholder vote — with the actual voting for directors typically occurring at the Annual Meeting of Shareholders. However, the truth is that shareholder voting decisions are no longer made in person at the Annual Meeting.
In today's realities, shareholders of public companies are dispersed throughout the 50 states, and often around the world, and it is simply not feasible for them to meet in person to decide who will sit on the board of directors. Instead, shareholders appoint proxies to vote their shares, and the voting decision is made well before the shareholder meeting. Today, any shareholder who attends the Annual Meeting and makes a nomination for director, as is his or her right, would essentially have no chance of their candidate being elected as a director. By the time of the actual meeting, the other shareholders will have already given their voting power to a proxy — and likely never knew about the shareholder candidate. Today, the only real way a shareholder in a public company can exercise their right to nominate director candidates is to wage a proxy contest, an expensive process.
This may be about to change. In May, the Commission proposed rules that will open up the company's proxy materials and establish a process by which candidates for director — nominated by a long-term shareholder or group of shareholders with a significant stake in the company — would be included in the company's proxy materials. Under the SEC proposal, all of the shareholders will receive the proxy materials, will learn about the shareholder-nominated candidates and will have a real opportunity to decide whether or not to vote for them. In essence, the Commission's proposal is designed to facilitate shareholders' ability to exercise the existing nominating and voting rights they currently have under state law.
In addition to directly nominating candidates, the SEC proposal also seeks to improve shareholders' ability to have shareholder proposals concerning a company's director election process included in the company proxy statement.
We expect to bring proxy access to a vote early next year.
NYSE Rule 452
On July 1, the Commission affirmed the importance of having shareholders select their directors by approving a proposal to amend New York Stock Exchange Rule 452 so that only shareholders — not brokers holding their securities as intermediaries — can vote on the election of directors. The previous NYSE rule on broker voting authorized brokers to make this important vote on behalf of a shareholder if the broker had not received express instructions from the shareholder. It was a troubling result that, on such critical matters, lack of shareholder action would result in an actual vote. With the amended rule, voting results for director elections will only reflect the actual up or down decisions of shareholders, not the decisions of their brokers.
Proxy Disclosure Enhancements
Also on July 1, the Commission voted on proposals to enhance corporate governance disclosures in proxy statements, and help shareholder to be engaged corporate owners. These proposals are designed to provide shareholders with information on a number of important topics, including:
- How the company's compensation policies can affect the company's risks and management of that risk,
- Director and nominee qualifications,
- Company leadership structure, such as whether the roles of CEO and board chairman are separated, and
- The potential conflicts of interests of compensation consultants.
I would like to highlight one additional topic included in the July 1 proposal: diversity on the board. It's amazing to me that in 2009, there still remains a need to highlight the importance of diversity in the boardroom. Nonetheless, the truth remains that there is a persistent lack of diversity in corporate boardrooms across this country — women and minorities remain woefully underrepresented. For example, in 2008, the Alliance for Board Diversity compiled statistics about the composition of the boards of directors of Fortune 100 companies and found that the majority of board members, 71.5%, were white men, and only 28.5% of the board seats were held by women and minorities.1 These statistics are even more puzzling from a bottom-line perspective when you consider that many peer-reviewed studies indicate that diversity in the boardroom results in real economic value for both companies and shareholders.2
Given the apparent lack of diversity and the many studies that indicate the real economic benefits of diverse boards, it should be no surprise that many investors — from individual investors to sophisticated institutions — have asked the Commission to provide for disclosures about the diversity of corporate boards and a company's policies related to board diversity.
Accordingly, I urged the SEC staff to seek input as to whether investors and other market participants require greater information regarding diversity in the boardroom.
Specifically, the release solicited comment on whether the Commission should amend our rules to provide for disclosure of whether diversity is a factor a nominating committee considers when selecting a board member.
The issue of diversity was addressed in just two paragraphs of a release that ran for nearly 140 pages. But investors and other commenters responded. While review of comments is ongoing, the Commission has so far received approximately 140 comments on the proposals and about 60 of the comment letters discussed diversity disclosures. For many commenters, diversity was the main area of focus. I was heartened by the strong interest of investors in information about diversity. This is a topic of great interest to me, and I am grateful to all of the commenters who shared their views with us. In case you are wondering, the views were overwhelmingly in favor, with approximately 55 out of 60, or 90%, expressing support for the SEC requiring disclosure of information related to diversity on the board. I am carefully reviewing the comments and I am hopeful that the Chairman and other Commissioners will see the strong interest of investors in this information and support an appropriate disclosure requirement.
An engaged owner requires information and a say on important corporate policy. One way that shareholders have obtained both is through the SEC's shareholder proposal rule, which requires companies to include proposals of shareholders in the company proxy materials, subject to certain exceptions.
Just two days ago, the SEC staff issued guidance related to the applicability of SEC rules permitting the exclusion of certain types of shareholder proposals. Under this new guidance, some kinds of proposals that previously may have been excluded from the proxy statement will now have an easier time going in. The guidance reverses past statements and states that a shareholder proposal that may involve an evaluation of risk, such as environmental risk, cannot be excluded as a matter relating to ordinary business if it concerns an important matter of policy. Second, the new guidance states a shareholder proposal calling for a company to adopt and disclose a CEO succession plan also may not be able to be excluded as a matter relating to ordinary business.
This new guidance further opens the door for shareholders to engage with the companies they own.
Staff Review of the Administration of Proxy Information Distribution and Voting ("Proxy Plumbing")
As shareholders become more engaged and some of the barriers to their exercise of ownership rights are removed, it is also important that we consider the efficiency and effectiveness of the process by which proxy information reaches investors, and how their votes are tabulated. The SEC has looked at this system from time to time over the years, and it is time for a fresh look.
Accordingly, this summer, the Commission directed the staff to begin a study of the proxy process, focusing on communications, voting integrity, how brokers allocate the votes of beneficial shareholders when they lend their customers' securities and all the other aspects of the process. (Many referred to this as the "proxy plumbing" project.) The study will seek public comment and I look forward to hearing how the process can be improved to benefit shareholders.
Improve Shareholder Participation under E-Proxy
The SEC is also proposing to make repairs to a rule that did not go well for shareholders. In July of 2007 the Commission adopted rules that allow proxy materials to be deemed delivered to shareholders if the shareholders are mailed a paper "notice" indicating where the shareholder can go online to "access" the proxy statement and vote. These rules are sometimes called "e-Proxy" or "notice and access." The idea was to reduce paper and the related costs of printing and mailing.
Unfortunately, following the adoption of e-Proxy, the voting participation of shareholders dropped dramatically. Voting by retail investors, in particular, plummeted. For many investors, access clearly did not equal delivery.
There could be a number of reasons for this — but it certainly appears that the process of how to access the proxy materials online, and how to actually vote shares, was not explained very well. For instance, some shareholders attempted to indicate their voting instructions by returning a marked copy of the Notice, not the actual proxy card. As result, their vote did not count.
I highlighted this problem in a February speech and urged the staff to fix the problem as fast as possible. Just two weeks ago, on October 14, the Commission proposed some improvements to the process. The proposal is designed to better enable issuers and soliciting shareholders to address the confusion that some shareholders have experienced by better informing investors about how the e-Proxy process works, and by directing the SEC staff to work on educational efforts. In addition, the release asks whether the Commission should consider limiting an issuer's ability to use e-Proxy where the issuer has experienced a decrease in shareholder participation, and whether the SEC should consider suspending e-Proxy to provide more time for shareholders to understand and be better prepared.
I hope the proposals fix the problems caused by e-Proxy. Still, I fear it won't be enough. It's something I'll be watching closely.
Study of the Growth of Institutional Ownership
One of the most significant changes in our financial markets since the 1930s and '40s has been the decrease in the relative percentage of securities owned directly by retail investors and the substantial increase in direct holdings by institutions. Estimates indicate that in the 1950s, individuals directly owned more than 90% of public companies, and today that number is closer to 30%.
These trends in retail ownership and market participation raise very important questions for shareholder participation in the capital markets and financial regulation. Accordingly, I believe the SEC staff should undertake a study of the growth of institutional ownership and the consequences for shareholders and the capital markets.
The study should look into the causes and consequences of this trend, and what the SEC's response should be. Should our rules take into account whether they may create incentives for retail investors to invest through institutions rather than directly? Is that good or bad? Do we need to change the manner and content of our required disclosures? These are difficult questions that delve into many of the Commission's regulatory responsibilities. How we proceed will have profound effects on retail and institutional investors, mutual funds, advisers, operating companies, and others.
While it is true that we are far from corporate democracy, the idea is regaining vitality. It is clear that improvements need to be made to improve shareholders interactions with their Board of Directors and management. In addition to the initiatives I've mentioned, I can assure you that we'll be looking at other ways to improve the process to give shareholders a real voice.
You can count on my support for your efforts to strengthen the framework for enhancing the voices of shareholders.
Thank you for your attention.