Speech by SEC Commissioner:
Statement at SEC Open Meeting on Proxy Disclosure Enhancements Rule Adoption
Commissioner Kathleen L. Casey
U.S. Securities and Exchange Commission
December 16, 2009
Thank you very much, Chairman Schapiro.
I want to begin by commending the staff for their outstanding work on the proxy disclosure enhancements release that we are considering today (the “Release”). In particular, the staff of the Division of Corporation Finance, as well as the Division of Investment Management, the Office of the General Counsel and the Division of Risk, Strategy and Financial Innovation, are to be commended for their thoughtful approach in considering the comments we have received on these rules, and for the tremendous job they have done to improve the Release. So I thank you again for your outstanding efforts.
As I discussed in my July statement when we proposed rules to enhance proxy disclosures, issuer disclosure is the lifeblood of our capital markets, and the Commission fulfills its most fundamental mission when it acts to improve its disclosure regime in order to enhance investors’ ability to analyze issuers’ leadership and financial performance for the purpose of informing their voting and investment decisions.
In this regard, many of the enhancements to our disclosure requirements included in the Release — such as disclosure relating to the relationship between compensation policies and a company’s risks and risk management, revisions to the Summary Compensation Tables, disclosures relating to a company’s board leadership structure and risk oversight role, disclosures relating to compensation consultants, and timely disclosure of voting results — will lead to issuer disclosures that investors may find useful, and I generally support these changes.
However, as crafted, certain aspects of the enhanced disclosure requirements relating to directors and director nominees do not seem likely to achieve this interest.
We are voting today on a single release that contains both rules that I would very much like to support and rules that I cannot support — and I do not have the option of voting separately for certain rules. Regrettably, therefore, I cannot support the Release.
When we proposed rules to enhance our proxy disclosure requirements in July, I noted how important it is for our disclosure rules to strike the right balance between requiring decision-useful information — that is, information highly relevant to investors in making voting and investment decisions — on the one hand, and avoiding mandates that are unnecessarily burdensome to reporting companies, on the other.
In assessing new disclosure rules under this framework, it is useful to consider several questions. From the standpoint of determining whether the disclosure is decision-useful, these questions include:
- First, what disclosure deficiencies are we seeking to address, and why?
- Second, would the disclosure meaningfully enhance investor understanding, or is it likely to significantly expand and / or complicate company disclosures that already are lengthy, dense and oftentimes boilerplate?
- Third, is the disclosure important to a wide range of investors, or does it address primarily parochial concerns of only a small number of investors?
- Fourth, are the proposed disclosure requirements policy-neutral, or will they have a coercive effect? That is, will they elicit information that informs investors, or are they designed to influence companies’ policies and practices to achieve policy objectives that are unstated, and / or that fall outside of our core regulatory mission, and our core competency, of investor protection?
From the standpoint of determining whether disclosure would be unnecessarily burdensome to reporting companies, questions include:
- First, is the disclosure time-consuming and expensive for companies to produce?
- Second, to what extent would the disclosure obligations intrude on management’s conduct of the company's ordinary business operations or on the board’s exercise of its business judgment?
- Third, how widespread is the problem that we seek to remedy? Are the improvements needed at all, most, or just a few public companies?
With these questions in mind, disclosure rules that are not designed to accomplish the paramount objective of providing decision-useful information to investors risk undermining the efficacy of our disclosure regime.
I think it is often easy to trivialize the impact of expanded disclosure requirements on the presumption that disclosure is relatively painless for issuers and that disclosure requirements are always benign — particularly when the disclosure relates to subjects that are widely viewed as inherently “good.” However, when we consider adopting rules requiring disclosure of information that is not truly decision-useful, it is critical to bear in mind that the costs and burdens imposed by these rules are ultimately borne by 100% of a company’s stockholders.
Moreover, as I have noted before, our rules affect each of the thousands of public companies — large and small, with business models that vary widely. We cannot forget that the Commission’s duty is to make judgments about disclosure rules that are in the best interest of all investors, and that apply to all public companies.
So with this background, I want to reiterate my sincere appreciation of the staff’s efforts to craft a Release that gives careful consideration to these concerns.
We received over 100 comment letters from issuers, institutional and individual investors, academics, attorneys and law firms, consulting firms, and many others. The staff has done an admirable job considering these comments, and the Release has been improved in many key respects as a result of their efforts. As I have already said, I support much of what is contained in the Release.
For example, the staff made important changes to the rule requiring that issuers discuss their compensation policies or practices, as they relate to risk management and risk-taking incentives, by adopting a threshold for disclosure that the policy or practice creates risks that are “reasonably likely to have a material adverse effect” on the company.
While the crisis has highlighted legitimate concerns about compensation structures driving excessive risk-taking and the adequacy of firm-wide risk management practices in large financial institutions, our rules apply to all public companies, the large majority of which played no role in the crises. That said, I do believe that this disclosure can be relevant and important to investors and I am, therefore, pleased that these changes in the final release would provide greater clarity to companies in how they meet their disclosure responsibilities under the rule.
I do think that commenters’ concerns that this rule may result in boilerplate disclosure are valid, and we should monitor companies’ disclosures pursuant to this new rule to determine whether further improvements are necessary going forward. However, again because I believe that this disclosure can be useful for investors, I support this new rule.
The staff also carefully considered and analyzed the comments received on the new disclosure requirements regarding compensation consultants, and the final rule was significantly improved as a result. Again, I believe this disclosure can be very useful for investors, and I support the new rule.
I also support the adoption of the disclosure rule relating to a company’s board leadership structure, and the board’s role in the oversight of risk. The staff’s work here is particularly notable, as disclosure requirements relating to a company’s board leadership structure have significant potential to inappropriately influence companies’ policies. I am pleased, however, that the staff has crafted a rule that is evenhanded, and thus will elicit information regarding board leadership structures that will be useful to investors without unduly steering issuer policies.
In addition, I support the adoption of the rule changes relating to the Summary Compensation Table and Director Compensation Table disclosure of stock and option awards to require disclosure of the aggregate grant date fair value of awards, as well as the obligation that companies disclose voting results in a timely filed report on Form 8-K.
Enhancements to Director and Nominee Disclosure
Ultimately, however, I am unable to support the Release because I am not convinced that some of the enhancements to director and nominee disclosure will provide decision-useful information to investors, and at the same time, I remain concerned that these enhancements are unduly burdensome and likely to result in more boilerplate language.
While I generally support providing investors with more information about board members qualifications and/or make that information more readily accessible, I do share the concerns voiced by many commenters that requiring boards to explain why they selected a particular board member will likely not result in meaningfully enhancing investor understanding of how board members are nominated or chosen.
I am concerned that the person-by-person approach adopted in the enhancements to director and nominee disclosures misapprehends the way that companies assemble their boards. A consistent comment of issuers, law firms and bar groups was that nominating committees and boards consider nominees in the broad context of the board’s overall composition, with a view toward constituting a board that, as a body, possesses the appropriate skills and experience to oversee a company’s business. Thus, I believe a person-by-person approach risks undercutting investors’ understanding of a company’s overall approach and goals in assembling its board and nominating board candidates.
In addition, I believe that concerns expressed by some commenters that this rule may result in boilerplate disclosure, and questioning whether these requirements meaningfully improve upon the nominating committee disclosure already required under Item 407(c)(2) of Regulation S-K, are valid. I certainly appreciate the improvements that the staff made to the director and nominee disclosure rule in response to some commenters’ concerns, such as refining the description of the disclosure required and eliminating the requirement to disclose nominees’ qualifications to serve on a particular board committee. Nonetheless, I do not believe the changes are sufficient to address these risks and concerns.
Secondly, these director and nominee disclosures encroach on the decision making authority of boards of directors. This is certainly true with respect to the person-by-person discussion of board nominees, insofar as the rule require companies annually to justify their selection of board nominees based on criteria determined by the Commission. This requirement reflects a judgment by the Commission that individual characteristics of nominees are more important than the considerations that a nominating committee or board actually weigh in considering nominees.
This intrusion is even more evident in the disclosure requirements relating to diversity. Many boards and nominating committees believe board diversity improves the performance of their companies. Indeed, such a view reflects the broad, holistic approach that companies take in composing their boards. While the staff has taken great pains to recognize the validity of varying concepts of diversity, and has drafted this rule to allow companies to define “diversity” rather than dictating a particular definition, nonetheless, the rule goes beyond simply requiring disclosure of how the board considers diversity in identifying director nominees. It also requires that companies disclose how they implement their diversity policies and how their nominating committees or boards assess the effectiveness of these policies.
While a requirement to disclose how a company considers diversity is consistent with the broad, holistic approach that companies take in identifying board nominees, the additional requirements relating to specific diversity policies and their implementation and effectiveness discourage such a holistic view, in favor of a person-by-person approach or a status-based perspective which is contrary to the rule’s purported intent. As I have discussed, I believe that that approach unduly intrudes into boards’ decision making process, and undercuts investor understanding of how companies compose their boards.
I had hoped to support this Release, as I do support most of the rules under consideration and, again, I commend the staff on their work. Because of the weaknesses that I have identified, however, I am unable to do so.