Statement by SEC Commissioner:
Remarks on Proposed Rules for Shareholder Access to Company Proxy Material
Commissioner Harvey J. Goldschmid
U.S. Securities and Exchange Commission
Commission Open Meeting
October 8, 2003
This is a proud, historic day. We are in the process of shifting the balance of power between corporate managements and shareholders. No longer will managements be able to ignore dissatisfied majorities of shareholders.
Shareholders, under our free-market system, not only supply capital, but have the right economic instincts. If they understand the system, they want corporate efficiency, honesty, productivity, and profitability. In a macro sense, these shareholder interests are consistent with the nation's economic needs.
If all goes well, active, independent directors will effectively represent these basic shareholder interests. But -- and this is the critically important reason for our being here today -- what happens when corporate senior managers are unimaginative, ineffective, or wrongheaded, and a compliant board of directors allows them to remain on a painful or disastrous course?
What realistically can dissatisfied shareholders do? A proxy contest jumps to mind. But the bottom line is that absent special circumstances (e.g.,a hostile takeover attempt combined with a proxy fight to deactivate a "poison pill"), there are virtually no contested director elections in the United States. The costs are too large and the risks too high. In general, shareholders are given the opportunity to vote only on director candidates nominated by the company.
The Commission and staff have carefully crafted new rules -- my favorite is the "direct access proposal" -- that, I believe, will largely negate legitimate concerns in the business community about, for example, excessive disruption and special interests.
The proposed rules will, however, give dissatisfied majorities of shareholders a means of playing a meaningful role in the election process. Many have understandably urged us to go further and faster; others, particularly in the business community, think we are going much too far. But the truth, at least as I see it, is that, while we are acting with care and prudence -- in the weak company/deadwood situation -- the corporate governance dynamic will be enormously improved. No longer will ineffective or unconscionably compensated CEOs -- with compliant boards -- be relatively safe.
The shareholder votes in year one, and the election process in year two, will provide critical stimulants for change in public corporations in which majorities of shareholders have indicated a need for change. If adopted, the rules we proposed today will dramatically alter the balance between corporate managements and shareholders. The proposed rules should help to restore the public's confidence and faith.