Speech by SEC Commissioner:
The SEC and Corporate Governance — An Overview in the Wake of Dodd-Frank
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
2010 New America Alliance Latino Economic Forum
November 18, 2010
Thank you for that kind introduction.
I am delighted to be here today. My relationship with New America Alliance goes back for many years and I was pleased to participate in last year’s Latino Economic Forum. It’s great to be among a group that values the strength that diversity brings to our communities, our economy and our Nation.
Last year I shared some of my thoughts on "The Power of the Shareholder & the Rise of Corporate Democracy." I began those remarks by noting that the 2009 conference took place at a pivotal time - a time when the need for shareholders to have a voice in corporate democracy had never been greater. As evidenced by the Dodd-Frank Act, it turned out that Congress agreed. In fact, the Senate Report on the financial reform bill stated that, “During the crisis, it became apparent that investors needed better protection, [and] shareholders needed more voice in corporate governance.”1
For today’s remarks, I will return to the topic of corporate governance. I will discuss some of the changes resulting from the financial reform legislation and initiatives that are underway at the Securities and Exchange Commission.
Before I begin, I need to do two things. First, I need to issue the standard disclaimer 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.
Second, I would like to give my congratulations to today’s award winner. Dorene Dominguez is being recognized for distinguished business achievement in Latino entrepreneurship.
I am hopeful that Ms. Dominguez’s efforts will be joined by the efforts of many others to improve the economic prospects of the Latino population, and of all Americans. Everyone in this room knows the challenges to our economy, and the painful levels of unemployment and underemployment. I am concerned that these challenges are exacerbated in the Latino community as the statistics illustrate greater rates of unemployment and underemployment even as compared to the dismal numbers in our society as a whole. For example, the statistics by the Bureau of Labor Statics reported that in October, 12.6% of the Latino population was unemployed, compared with 9.6% of the total workforce.2
Everyone knows that the Latino population is a significant part of our society. There are over 48 million Latinos in America according to the latest census estimates, which is a substantial portion -- 16% -- of all Americans.3 However, the 2010 census estimates also revealed that Latinos make up an even greater share of America’s core working-age population (15.2 million people, or over 18% of all Americans aged 25-44)4 and of the young people who will be the future backbone of our economy (16.75 million people, or over 22% of all Americans under the age of 18).5 It is therefore incumbent upon us, the business and government leaders of America’s Latino population, to continue to blaze a trail and to help restore the strength of the economy. We also must endeavor to create a fair economy, one that provides shared prosperity, so that all of our young people can compete for good jobs and provide for future generations to come.
I applaud all of you who are providing leadership in these challenging times.
And make no mistake — these are challenging times. Everyone in this room, and people across the country, are working toward a recovery from the financial crisis. And, at the SEC, our efforts in this direction include a host of initiatives to implement the Dodd-Frank Act. That Act contains over a 100 provisions directing the SEC to promulgate rules and conduct studies.
Many of these provisions relate to corporate governance, and enhance the ability of shareholders to have a say on the decisions made by the companies they own. Congress clearly was concerned about the fairness of executive compensation and the incentives to take on short-term risk, among other things. The approach taken in Dodd-Frank in response to these issues is to seek to empower shareholders with information and influence. By contrast, Congress did not seek to directly cap CEO pay and otherwise prescribe business activity.
The corporate governance reforms arising out of Dodd-Frank fall into two general categories: shareholder rights and executive compensation. The specific areas I will discuss today are:
- Say on pay, which requires companies to ask their shareholders to express a view on the company’s executive compensation policies;
- Limiting the ability of brokers to cast shareholder votes using their customer’s securities;
- Compensation committee independence; and
- New compensation and corporate governance disclosures.
Say on Pay
The first corporate governance provision I will highlight today is the requirement that companies give their shareholders a so-called “say on pay” vote. Dodd-Frank requires all companies to solicit a shareholder vote at least once every three years on the compensation of their highest paid executive officers. Shareholders will have a similar “say” on golden parachute arrangements. The Commission has already proposed rules to implement this requirement, and I look forward to comments from the public.
As I noted in my remarks last year, in 2009 the SEC affirmed the importance of having director elections reflect the votes of shareholders, and approved a New York Stock Exchange Rule amendment that ensured only shareholders — not brokers holding their securities as intermediaries — can vote on the election of directors. At the time, there were many who predicted that negative consequences would flow from this action, including failure to obtain a quorum at the annual stockholder meeting, and a reduction in retail shareholder voting.6 I am happy to report that the studies of the 2010 proxy season have found that these dire predictions did not occur.7 I am sure that responsible preparation by many companies for the changes in the rules played a role in securing these results.
There is a postscript to action in this area as Dodd-Frank has a requirement that builds on the prior SEC action. Dodd-Frank requires that only shareholders, and not their brokers, vote on compensation decisions, such as the say-on-pay votes I just described. The New York Stock Exchange has already implemented this requirement.
In addition to requirements related to say-on-pay and limiting broker voting, Dodd-Frank also includes requirements about the composition of the compensation committee. The Act requires that compensation committees of listed company boards be comprised entirely of independent directors. Additionally, Dodd-Frank also proposes a tighter definition for what it means for a director to be independent. Specifically, Dodd-Frank requires that stock exchange listing standards for director independence consider consulting, advisory and other compensation paid by the company to the director, and whether the director is affiliated with the company, a subsidiary, or an affiliate of the subsidiary.
The last Dodd-Frank matter I will discuss today is the Act’s mandate that a host of new disclosures designed to facilitate informed shareholder decisions on compensation and shareholder oversight generally. Specifically, the Act requires the SEC to adopt rules requiring companies to disclose the median compensation of all their employees, and present that as a ratio comparing it to the CEO’s annual total compensation. The Act also requires the following disclosures including:
- Disclosures that compare a company’s performance against compensation paid to that company’s executives,
- Disclosure whether the compensation committee retained an independent consultant, and
- Disclosure of the company’s reasons why the company’s CEO also serves as chairman of the board of the company.
As you can see, these are busy times for the SEC, as it works to implement these new Congressional requirements that stretch across every securities arena imaginable. As you might imagine implementing these new rules requires careful thought and explanation of policy judgments and tradeoffs.
The SEC’s New Diversity Rule
Before I conclude, I also want to provide you an update on something I discussed at length last year - and that is the Commission’s diversity disclosure rule that had been proposed in July 2009. In December 2009, following last year’s NAA meeting, the Commission, for the first time, adopted a rule to assess a company's commitment to developing and maintaining a diverse board. Specifically, public companies are now required to disclose
- whether diversity is a factor in considering candidates for nomination to the board of directors;
- how diversity is considered in that process, and;
- how the company assesses the effectiveness of its policy for considering diversity.
This new rule began applying to proxy solicitations on February 28, 2010. A review of the filings received indicates that some companies have done a very good job. One example that satisfies the disclosure that investors demanded was by a company that disclosed that of the 14 directors on the board, three were women, two were African-American, and two were Hispanic. This disclosure is noteworthy because instead of just talking about the diversity policy and how it is implemented, the company gives investors actual facts that show the results of the company's efforts.
For many companies, however, there is a great deal of room for improvement. While some companies provided useful information in the spirit of the SEC rule, many other companies provided only abstract disclosure — often times limiting their disclosure to a brief statement indicating diversity was something considered as part of an informal policy. Many companies did not include any discussion of any concrete steps taken to give real meaning to its efforts to create a diverse board. By leaving out the steps taken and how those efforts are evaluated, these companies fail to provide investors with useful information, and it deprives investors of information they have demanded. I have asked our staff to follow up with some of these companies and I expect this disclosure to improve.
Thank you for inviting me today. In my time as an SEC Commissioner I have very much appreciated the information and input that has been provided by participants in our capital markets. As some of you know, prior to my appointment to the Commission, I was in the private sector for 30 years. Much of that time, I practiced law, including serving as general counsel and head of compliance of a large global asset manager. In addition to my time giving legal advice, I also spent years as a business executive. I try to bring all of these different perspectives to the table as I work in the public interest. However, I also know that it’s important to listen to the voices of investors and industry participants. The NAA has been such a voice.
As an SEC Commissioner, I try everyday to put my experiences and judgment to work on behalf of the American people. Your input helps to inform my decisions. To that end, I ask that the NAA and its members continue to share their perspectives with the SEC and I ask that everyone please consider the Commission’s proposals and share your comments with us.
1 Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 36 (2010).
2 Bureau of Labor Statistics, Economic News Release “The Employment Situation — October 2010,” Nov. 5, 2010, available at http://www.bls.gov/news.release/empsit.nr0.htm.
3 See, Annual Estimates of the Resident Population by Sex, Race, and Hispanic Origin for the United States: April 1, 2000 to July 1, 2009 (NC-EST2009-03), available at http://www.census.gov/popest/national/asrh/NC-EST2009-srh.html.
4 See, Annual Estimates of the Hispanic Resident Population by Sex and Age for the United States: April 1, 2000 to July 1, 2009 (NC-EST2009-04-HISP), and Annual Estimates of the Resident Population by Sex and Selected Age Groups for the United States: April 1, 2000 to July 1, 2009 (NC-EST2009-02), available at http://www.census.gov/popest/national/asrh/NC-EST2009-asrh.html and http://www.census.gov/popest/national/asrh/NC-EST2009-sa.html, respectively.
5 See, Id.
6 See, e.g., comment letter from U.S. Chamber of Commerce, Center or Capital Markets Competitiveness, dated March 27, 2009, Re: File No. SR-NYSE-2006-92.
7 See, BNY Mellon Shareowner Services 2010 Annual Meeting Study, July 2010, (stating that “The largest surprise in our findings was the lack of impact that the change to NYSE Rule 452, which was approved by the SEC and effective for the first time this year, had on the vote. The change to NYSE Rule 452 eliminated the broker discretionary vote for the election of directors. Commentators, industry experts and journalists alike had all weighed in on the negative impact this would have on the proxy vote. Our study has found that this rule has not had the expected negative consequences during the 2010 proxy season.”) http://www.bnymellon.com/shareownerservices/proxy2010.pdf. See also, The Altman Group and Sutherland Asbill &Brennan LLP, Looking Back: 2010 Proxy Season in Review, June 30, 2010, (stating that “Loss of the broker vote was not significant for most companies.”) http://www.sutherland.com/files/upload/Proxy2WebinarFINAL.pdf