Speech by SEC Chairman:
Opening remarks at the Security Holder Director Nominations Roundtable
Chairman William H. Donaldson
U.S. Securities & Exchange Commission
March 10, 2004
Welcome to the Securities and Exchange Commission's roundtable to discuss our proposed rules regarding proxy disclosure of security holder director nominations. The proposal has evoked a considerable amount of interest and some strongly held views. Since we published the proposed rule for comment in October, we have received literally thousands of comments - both form letters as well as many detailed, extremely thoughtful, critical, and constructive letters.
It is in this latter vein that we welcome an extraordinary roster of experts to participate as panelists in today's roundtable. I want to take this moment to express the Commission's great appreciation to all of the panelists who will give us the benefit of their expertise and judgment throughout the day. We are grateful that you have agreed to help us wrestle with the complexities of this issue and try to anticipate the consequences of any final rule adoption.
We all know that the Commission has, on several previous occasions, considered proposals regarding the proxy process and the role of shareholder director nominations. But today's roundtable is different. It is set against the backdrop of a remarkable decade in which corporate governance in many instances was grossly inadequate or failed completely. The more notorious breakdowns produced truly record-setting corporate frauds. The discovery of those frauds in turn produced the Sarbanes-Oxley Act and other important changes, including new listing standards, which together have forced a reassessment of the role of the board of directors. These changes mandated that the responsibilities of directors be partially redefined -- redefined with the objective that directors should finally emerge from the long shadow of the "Imperial CEO" of the 1990s and should assert their oversight authority in corporate decision-making.
So the questions of how directors are elected to this refocused and reenergized board, and how the proxy process works, become critical. In the pre-Sarbanes-Oxley world, overly compliant boards of directors often allowed management almost unfettered control over many critical governance issues, including over the proxy process related to nominating and electing directors. As a result, some company boards and management would completely ignore dissatisfied shareholders in the proxy process. Immediately after the annual meeting, shareholder resolutions passed by a large plurality or majority of votes cast were just disregarded and never implemented. And when significant numbers of company shareholders expressed their disapproval of management's director nominees by withholding their votes, management and the incumbent board ignored the withheld votes too. Management and boards refused to respond in any demonstrable way to a clear expression of dissatisfaction of large numbers of shareholders.
So, in addition to implementing the provisions of Sarbanes-Oxley, the Commission took the first step to address this issue head-on last fall. We adopted new standards to address the breakdown in shareholder communications by improving corporate disclosure in two areas. First, improved disclosure regarding the nominating committee process - the process by which committees consider director candidates, including those recommended by shareholders. And second, improved disclosure about the processes by which security holders could communicate directly with members of the board. It is our hope that the transparency created by these standards - which, by the way, are effective for the current proxy season -- will help produce more communication among management, directors, and shareholders generally, but especially with respect to the nomination of candidates for boards of directors.
Today, we consider a second step the Commission could take to address the issue. All of our roundtable's participants are by now familiar with the Commission's proposed rule. The rule would require the inclusion of shareholder nominees in the company's proxy materials, under limited circumstances and only upon the occurrence of certain triggering events. But irrespective of the details of the proposal, I want us to consider for a minute one of the key purposes behind the proposal - which is to address the breakdown in shareholder communications I have just outlined.
Consider the situation faced by a sizeable group of shareholders who are committed to the long-term prospects for a certain company, but who confront a company management that refuses to respond to, or even communicate about, the shareholder group's concerns. The dilemma is that the shareholders have only two practical choices. First, they can choose to cease being committed to the long-term health of the company; in other words, they can sell their stock. Under this choice, they would be forced to give up their belief that with some modest changes in company direction, the company could be more successful in its markets and could therefore be an extremely productive investment over the longer term.
Their second - and only other -- choice is to wage an extremely expensive proxy fight. This contest could be for the entire board of directors or for only some seats on the board - a so-called "short slate." In either case, the proxy fight takes on the trappings of a contest for control. Under this choice too, therefore, the shareholders would be forced to give up their belief that modest changes in company direction could produce the long-term benefits they seek. Instead, they are forced to divert the company's resources away from the business they're building, to the proxy fight they're waging - the last thing the shareholders really want for the company's future.
The proposal up for discussion today is an attempt to find a middle ground between the extreme choices of forcing shareholders to give up their long-term interest in the company and sell their stock, on the one hand, and forcing them to wage a wasteful proxy fight on the other. It is an attempt to find a middle ground that would, under certain restrictions and limitations, provide shareholders having a true interest in the long-term health of the company, with a more effective proxy process that gives them a better voice in this nomination and election of the board of directors. In essence, it is an attempt to find a middle ground that would encourage management and long-term shareholders to communicate more effectively with each other about the company's future. In my view, this attempt to find middle ground is the central purpose of the proposal before us today.
The question, then, is whether the Commission's proposed rule, as drafted, is the best way to achieve this purpose. We are here to discuss, for example, how would the proposal likely work? What consequences - intended or unintended - might the proposal have? Are the specific details of the proposal appropriately crafted? Are some elements unnecessary to achieving the proposal's purpose? And throughout every part of the discussion, we want to hear about alternative solutions - other, perhaps better, ways to achieve the same purpose.
With these objectives in mind, I very much look forward to our discussion today and the follow-on comments we will receive as a result of today's roundtable.
Let us really begin now by calling on Alan Beller and Marty Dunn, the Director and Deputy Director of our Division of Corporate Finance. That division has the responsibility of administering our proxy rules, and they have had the laboring oar in the effort to develop the rule proposal we are discussing today. I thank them and the many members of our staff across divisions whose work on this proposal has been both exceptional and tireless.
Alan and Marty are going to be our moderators for most of the day. Of course, they have organized the questions I have just posed in a much more systematic and methodical program -- one that re-examines whether there is a problem that needs addressing, whether the proposal is a reasonable solution to the problem, and how it would actually apply to companies and shareholders. So I will thank all of our panelists again for being here, and hand it over to Alan and Marty to introduce that program in more detail.