Speech by SEC Commissioner:
"What's Next?": Remarks Before The 2010 Fall Meeting of the Council of Institutional Investors
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
San Diego, California
September 20, 2010
Thank you, Dave, for your very kind introduction. I would also like to thank Ann Yerger for inviting me to be here today.
As the daughter of a New York City public school teacher, I feel especially honored to be here. My mother's work as a language teacher and guidance counselor gave me my first, real glimpse into the world of public service. And, I know that she was proud of my decision to pursue a career in public service. Not too long after I was chosen to serve as Deputy Director in the Division of Corporation Finance, she said to me, "Elisse — you've got a wonderful husband, good kids, and a great job. What's left for us to fight about?"
I wish that we could say the same — "what's left for us to fight about" — with respect to the Commission's efforts to address investor concerns in the corporate governance arena. Our Chairman, Mary Schapiro, has worked tirelessly to bring to rest a number of long-standing issues on this front, and I, for one, am very thankful for all her hard work and proud to have served at her side as the Commission has accomplished so much. The song goes — What a Difference a Day Makes — but I would say (if I sang, you would run from the room in horror) — What a Difference a Year and a Half Makes.
Yet, with each step that we take, it seems that there continue to be those who wish to fight the last fight. I want you to know that this Commissioner is committed to moving forward. As the investor's advocate, I believe that it is our job at the SEC to move forward with a 21st century investor protection mission.
Before I go any further in my remarks, however, I should remind you that I speak only for myself and not for my fellow Commissioners or the SEC's staff.1 And, you should probably also know that the views I am sharing with you today may not necessarily represent my views tomorrow or even the next time I vote. I often say that in a joking manner, but it really is true as we work to implement legislation at an unprecedented pace.
So, I understand that inquiring minds want to know what's next for the Commission. There is an oft-cited quote that is oft-attributed to the famous physicist Niels Bohr: "[p]rediction is very difficult, especially if it's about the future." I would imagine that the Dodd-Frank Wall Street Reform and Consumer Protection Act, or "Dodd-Frank" for short, probably makes prediction very easy about what's next for the Commission in the coming months and years.
Of course, we all know that the "devil is in the details," and I want to remind you that I very much look forward to hearing from all of you with your thoughts and ideas as we continue on our Dodd-Frank rulemaking odyssey.
Although some of the reforms do not lend themselves to the notice and comment process, there are a great many that do. And we are soliciting comment ourselves, even where comment is not necessarily required. As I have said publicly a number of times before, rulemaking is a public-private partnership, and I very much appreciate the thoughtful comments we have received so far and look forward to those to come.
Let me remind you, though, that when we do make a request for public comment, we are not launching a public opinion survey. We need to hear more than just "your proposal is a great idea" or "your proposal is a terrible idea." I want to understand your reasoning and see the data or underlying empirical evidence for your views. I also ask you to offer alternative solutions. And, most important, I want to know whether our proposals and your alternatives will work and if not, why.
While we move forward with the Dodd-Frank rulemaking and studies, at the same time we will also carry on with business as usual. We will continue our work on important matters like "proxy plumbing" that were on our agenda before that legislation was enacted.
Since our time together this morning is brief, and I would like to spend most of it answering your questions, let me just highlight a few matters relating to executive compensation and corporate governance.
Under Dodd-Frank, advisory say-on-pay votes are required at least once every three years. And, a separate advisory vote on the frequency of say-on-pay, which I have heard some refer to as "say-on-when," is required at least once every six years. Shareholders will also have a "say-on-parachutes" related to golden parachutes for executives when there are mergers, acquisitions, and major asset transactions. Dodd-Frank also requires that every institutional investment manager subject to Exchange Act Section 13(f) report at least annually how it voted on any of the required votes.
As I have said publicly before, I believe that "Say-On-Pay" provisions can build investor trust because they promote increased shareholder participation and increased accountability of board members and corporate management. I anticipate that proposing releases for rules addressing these provisions will be completed soon.
Companies will also have to disclose the relationship between senior executives' compensation and the company's financial performance and calculate and disclose the median total compensation of all employees and the ratio of CEO compensation to that of employees. Let me pause at that point for a moment: we have already heard that these calculations will, at a minimum, be quite difficult. When you comment, please give us constructive suggestions as to how to implement this requirement in a way that both truly carries out its word and intent and also is pragmatic.
There will also be new independence standards for compensation committees and conflict of interest standards for boards that retain compensation consultants. And, companies will be required to develop "clawback" policies for reclaiming incentive-based compensation from current and former executive officers after a material financial restatement.
When I was Deputy Director in the Division of Corporation Finance, I lived through the implementation process after the Commission's 1992 executive compensation rulemaking. So, I know all too well that there are very strong feelings around these matters. I am hopeful, though, that we will agree that the Commission's rulemaking efforts this time around will bring the sunlight that investors need to make better informed investment and voting decisions.
Before I leave the subject of executive compensation, though, let me turn briefly to Dodd-Frank's elimination of broker discretionary voting for executive compensation matters. As you know, we recently approved an amendment to New York Stock Exchange's Rule 452 to prohibit member organizations from voting uninstructed shares if the matter relates to executive compensation. We also clarified that the changes cover the specific items I talked about a few moments ago — including say on frequency and say on parachutes. Although we approved these changes on an accelerated basis, we are still requesting comments, and I look forward to hearing from commenters. As I have said in the past with respect to our approval of the Rule 452 changes in election of directors, this is an area where I still would very much like to see data and empirical evidence.
With that, let me briefly mention a few thoughts from our business as usual. Of course, near and dear to my heart is our recent rulemaking where we adopted the first Commission program in its history that facilitates shareholder director nominations. I never doubted our authority to adopt rules in this area, but I was very pleased that Dodd-Frank specifically clarified our authority to do so. I sincerely hope that we will move forward with a smooth implementation of this new process.
In that regard, I want to note one practical point to keep in mind as the first access season approaches. As you know, access is only available when you have a right under state law to nominate directors. Many companies have requirements in their bylaws that are applicable to shareholders seeking to nominate a director. These apply to an access nomination or a traditional proxy contest nomination. For example, a bylaw may require that the D&O Questionnaire be submitted for each nominee. So, as a practice point, be sure to check for any of these requirements.
I also think that the new director qualifications disclosure has the potential to add real value to the landscape of information available about corporate directors. In the first year, some companies did a really nice job explaining why they have chosen their particular directors, while others probably could have done better. I am hopeful that over time companies will really embrace this new disclosure requirement as a way for them to get their stories out to investors about why their directors are the right people for their boards.
We are, of course, also moving forward with our work to modernize the proxy system. The comment period on our "proxy plumbing" concept release closes next month — on October 20. Some of the matters I want to understand better include: voter participation (in particular, retail participation) and ways we can help investors more easily exercise their franchise rights; any difficulties shareholders face, and to what extent, in confirming that their votes have been accurately transmitted and tabulated; and whether shareholders have all the tools they need to understand and evaluate conflicts of interest in the proxy advisory industry.
I know that the Council has for many years been deeply concerned about the issues I have talked about thus far this morning. And, before I move on to answer your questions, I want you to know that these are issues that keep me awake at night, too.