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Shareholders Need Robust Disclosure to Exercise Their Voting Rights as Investors and Owners

Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission*

Feb. 20, 2013

In the next few months, thousands of public companies will hold their annual shareholder meetings. I would like to take this opportunity to emphasize the importance of robust proxy disclosure to shareholders and to highlight areas in which the disclosure can be substantially improved. I share the desire expressed by many investors for additional information that would enhance their ability to make informed voting and investment decisions.1

The annual meeting is an opportunity for shareholders, who are the true owners of public companies, to exercise the right to vote, in person or by proxy,2 for the election of directors and other matters submitted for approval, including stock plans, charter amendments, advisory votes on compensation, and other important policy matters.3 The annual meeting also provides an opportunity for shareholders to submit their own proposals for consideration, subject to the corporation’s charter and bylaws and applicable state law.4

To facilitate informed voting and thwart manipulation and abuse, the rules of the Securities and Exchange Commission require issuers and other parties that solicit proxies to provide shareholders with a proxy statement with specific information regarding the meeting, the proxy process, and the matters to be voted on, including director qualifications and compensation. Issuers must also provide shareholders with an annual report containing financial and other information regarding the company and its business.5

In recent years, investors have increasingly focused on corporate accountability. In December 2009, the SEC took steps to enhance the information that companies provide to shareholders in connection with the solicitation of proxies.6 The amendments required public companies registered under the federal securities laws to make new or revised disclosures about compensation policies, the qualifications of board members, the board’s leadership structure and role in risk oversight, and board diversity policies, among other things.7

Many public companies have made a good effort to enhance the quality of their proxy statements, and I appreciate such efforts. However, many other companies continue to fall short of providing the robust, clear, and useful disclosure required by law. Some companies appear to view our proxy and other disclosure requirements as a box to be checked, or an obstacle to be overcome, rather than an opportunity to engage and inform their shareholders. I urge public companies to live up to both the letter and the spirit of our rules, and to provide investors with all the information they need to exercise their franchise — including all the information necessary to evaluate the candidates for director, both individually and as a board. A proactive approach to proxy statement disclosure will benefit capital formation, as well as investors, by helping to bring back the kind of trust that investors must have in their corporate boards.8

Compensation Risks

A key provision of the 2009 amendments is Item 402(s) of Regulation S-K, which requires a narrative discussion of a company’s compensation policies and practices relating to risk management.9 Although, by its terms, this rule requires such disclosure only “to the extent” that risks arising from the issuer’s compensation policies and practices are “reasonably likely to have a material adverse effect,” it would be prudent and appropriate for all issuers to discuss the role of compensation in risk management in their proxy statements.

By their very nature, policy decisions on compensation create incentives, and therefore have consequences that go beyond the dollar amount paid. The manner in which companies assess and respond to the risks and rewards embedded in compensation plans and other policies is inherently material to investors.10 Few if any issuers may disregard the effects of compensation on risk management without exposing the company and its business to potentially material adverse effects.

Moreover, risks relating to compensation go beyond the immediate incentives of a particular compensation plan or policy. The relative pay of different classes of employees, such as the ratio between CEO compensation and median pay, can also create risks to an enterprise, including the risk of employee, customer, and shareholder discontent.11 Decisions regarding executive compensation may also affect succession planning and related risks. Companies should consider whether additional disclosure is necessary to enable stockholders to assess such risks and the manner in which any such risks may be affected by a company’s compensation policies and practices.

Issuers should also consider including enhanced disclosure in the proxy statement regarding the relationship between executive compensation actually paid and a company’s long-term performance. Policies and practices that reward management despite poor performance, or that result in a poor correlation between pay and performance, may adversely affect risk management by sending the wrong signals to a company’s executives and by impeding the board’s ability to exercise the oversight for which it is responsible.12

It is recognized that the discussion called for by Item 402(s) will vary among different companies and industries. Investors are not looking for boilerplate, and there is no one-size-fits-all solution that issuers can take off a shelf. Rather, I urge public companies and their counsel to apply thought and judgment to the principles set forth in the rules, and, most importantly, to be guided by a clear vision of the investors who are relying on the disclosure to make important voting and investment decisions.

Leadership Structure and Risk Oversight

Another important provision of the 2009 amendments that may not always be well understood is Item 407(h) of Regulation S-K,13 which requires disclosure of the board’s leadership structure, the board’s role in risk oversight of the issuer, and the effect that such role has on the board’s leadership structure.

Many issuers provide only minimal discussion in response to the board leadership question. If the same person serves as both principal executive officer and chairman of the board, the reason given is often simply “efficiency,” “streamlined decision-making,” or “depth of knowledge.” If the CEO and chairman positions are separated, the proxy statement might say something to the effect that separating the two positions permits the CEO to concentrate on “day-to-day business,” while allowing the chairman to lead the board in providing “independent oversight.” Although Item 407(h) specifically requires the disclosure to indicate why the registrant has determined that its leadership structure is appropriate “given the specific characteristics or circumstances of the registrant,” such analysis is often missing.

Investors deserve better than mere boilerplate. As the Commission stated in the adopting release, “We believe that, in making voting and investment decisions, investors should be provided with meaningful information about the corporate governance practices of companies.”14 As the National Association of Corporate Directors has stated, “Every board should explain, in proxy materials and other communications with shareholders, why the governance structures and practices it has developed are best suited to the company.”15

Item 407(h) also requires companies to describe the role of the board of directors in the oversight of risk. Recently, the U.S. Government Accountability Office found that economic output losses from the 2007-2009 financial crisis could exceed $13 trillion.16 Given the magnitude of that crisis, which continues to be felt, it would be difficult to overemphasize the importance that investors place on questions of risk management. Has the board set limits on the amounts and types of risk that the company may incur? How often does the board review the company’s risk management policies? Do risk managers have direct access to the board? What specific skills or experience in managing risk do board members have? Issuers that offer boilerplate in lieu of a thoughtful analysis of questions such as these have not fully complied with our proxy rules and are missing an important opportunity to engage with investors.

Board Diversity

Another disclosure provision enhanced by the 2009 amendments is the requirement to disclose board nominating policies regarding diversity. As owners and investors, shareholders are keenly interested in the quality of the boards that direct the management of public companies.17

In recent years, investors,18 academics,19 consultants,20 and corporate insiders21 have observed that increasing diversity improves board performance or otherwise benefits shareholders. As one investor put it:

Diversity is a critical attribute to a well functioning board and an essential measure of good governance. In an increasingly complex global marketplace, the ability to draw on a wide range of viewpoints, backgrounds, skills, experience and expertise internally increases the likelihood of making the right decisions. Director and nominee diversity that includes race, gender, culture, age, and geography helps to ensure that different perspectives are brought to bear on issues, while enhancing the likelihood that proposed solutions will be nuanced and comprehensive.22

Diverse boards help companies recruit talent, retain staff, and boost productivity. Diverse boards also enhance a company's responsiveness to an increasingly diverse world of customers and stakeholders.23

Unfortunately, reports show that women and persons of color continue to be severely underrepresented on corporate boards. According to the Alliance for Board Diversity (“ABD”), in 2010, white men held 74.5% of the board seats in Fortune 500® companies; while minority men represented only 9.9% of directors on Fortune 500® boards; and minority women just 3.0%. White women held 12.7% of Fortune 500® board seats in 2010, according to the ABD. As a whole, women comprise more than half the U.S. adult population, but held fewer than 16% of the Fortune 500® board seats in 2010. In 2010, ABD counted 32 Fortune 500® companies without a single woman or person of color on the board.24

The director totals for this group of companies include 7.6% African-Americans (compared to 12.6% of U.S. population), 3.0% Hispanics (compared to 16.3% of U.S. population), and 2.1% Asian Pacific Islander (compared to 4.8% of U.S. population).25

U.S. proxy rules require companies to disclose whether, and if so how, a corporate board or nominating committee considers diversity in identifying nominees for director. If the company has a policy regarding the consideration of diversity in identifying director nominees, the proxy statement must disclose how this policy is implemented, as well as how the company assesses the effectiveness of its policy.26 This requirement is not limited to companies with a written policy; and companies with de facto policies regarding board diversity must disclose such policies as well. Although the rules do not define diversity for this purpose, and the adopting release acknowledges that companies may define diversity in various ways, numerous commenters cited by the Commission in the adopting release made clear that investors are particularly interested in board policies regarding gender and/or racial diversity, and find such information useful in making voting and investment decisions.27

To truly meet the needs of investors, a proxy statement would need to state the gender and racial or ethnic background of incumbent directors and nominees, and whether or not the board or nominating committee takes such aspects of diversity into account in identifying and/or evaluating potential board candidates. The proxy statement should disclose how the board defines diversity. If a company has no women or persons of color on its board, it should state whether or not it has considered increasing the size of its board to enhance diversity — and if not, why.

There are a number of organizations that seek to train and identify women and persons of color as potential board candidates, as well as executive search firms with a recognized expertise in diversity searches.28 Among other things, issuers should disclose whether or not — and why — it uses such resources in developing a talent pool for director succession.

I know that many public companies already provide good disclosure on board diversity and diversity policies. But other companies can and must do better. I look forward to the day when corporate boards reflect the diversity of our communities.

Disclosure of Corporate Political Spending

Investors have also been clamoring for information on how corporations use corporate resources for political purposes. A rulemaking petition filed with the SEC by a coalition of law professors seeking public disclosure of such payments has received over 380,000 letters of support.29 This is an unprecedented display of support. The petition argues that information about corporate spending on politics is important to shareholders and that the Commission’s rules should require this information to be disclosed.30 The petition recognizes that designing disclosure rules in this area would involve choices comparable to those presented by other Commission disclosure rules, including questions regarding the types of political spending subject to disclosure, the frequency and timing of disclosure, and the extent of any de minimis exemption.31 In that regard, while the petition does not offer a prescription for the exact design of rules to require disclosure of corporate political spending, it encourages the Commission to use the existing proxy-disclosure regime as the method for providing investors with this information.32 I agree that this is information that that would enhance the ability of shareholders to make informed voting and investment decisions. It is reported that over 100 major companies have already begun to provide corporate political transparency through voluntary reporting. I commend these companies for listening to investors.33


Disclosure of corporate governance information in the annual proxy statement also promotes capital formation, as studies have shown a statistically significant relationship between governance quality and cost of capital, in which the market rewards companies perceived to have better governance practices.34 Public companies that understand the importance of good corporate governance will make sure that their proxy statements provide shareholders with all the information they need to exercise their rights as investors and owners.

* The views expressed herein are those of Commissioner Luis A. Aguilar and do not necessarily reflect the views of the Securities and Exchange Commission, any other Commissioner, or the Commission’s staff.

1 See, e.g., notes 8, 10-12, 23, 24, infra, and accompanying text.

2 As attending shareholder meetings in person is not practicable for most shareholders, state law typically allows shareholders to vote at the annual meeting by proxy. See, e.g., Section 212(b) of the Delaware General Corporation Law, 8 Del. C. § 212(b). As part of its mission to protect investors, maintain fair and efficient markets, and facilitate capital formation, the SEC seeks to ensure that the proxy process functions as a reasonable substitute for in-person meetings.

3 For instance, many public companies, including a vast majority of the companies in the S&P 500, ask their shareholders to ratify selection of the company’s independent auditor at the annual meeting. See, J. Robert Brown Jr., The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors, 2 Harv. Bus. L. Rev. 61, 84 n.125 (2012), available at

4 A shareholder may be entitled to have a proposal included on the company’s proxy card and to have the proposal and a supporting statement included in the company’s proxy statement, subject to the provisions of SEC Rule 14a-8, 17 C.F.R. 240.14a-8.

5 Since 2007, issuers have been permitted to fulfill their proxy delivery requirements by posting the proxy statement and related materials on an Internet web site, providing shareholders with notice and instructions for obtaining access, and sending hard copies on request. See, Release No. 34-55146, Internet Availability of Proxy Materials (Jan. 22, 2007) and Release No. 34-56135, Shareholder Choice Regarding Proxy Materials (Jul. 26, 2007). While Internet access to proxy materials may provide certain benefits, I am troubled by statistics that indicate lower shareholder response rates to proxy solicitations when the notice-only option is used. See, e.g., Release No. 33-9108, Amendments to Rules Requiring Internet Availability of Proxy Materials (Feb. 22, 2010).

6 See, e.g., Release No. 33-9089, Proxy Disclosure Enhancements (December 16, 2009), at p.4, available at Comment letters relating to the rule as proposed, SEC File No. S7-13-09, are available at

7 Id., p.1.

8 See, letter from Sisters of Charity, Shareholder Education and Advocacy, SEC File No. S7-13-09 (Sep. 15, 2009).

9 17.C.F.R 229.402(s).

10 See, Letter from California Public Employees’ Retirement System, SEC File No. S7-13-09 (Sep. 16, 2009); letter from AFL-CIO, SEC File No. S7-13-09 (Sep. 14, 2009), at p.2.

11 Letter from Calvert Group, Ltd, SEC File No. S7-13-09 (Sep. 15, 2009). Section 953(b) of the Dodd-Frank Act requires the Commission to further amend Item 402 to require disclosure of (a) the median annual total compensation of all employees of the issuer, (b) the annual total compensation of the CEO, and (c) the ratio between such amounts. The Commission has not yet complied with its obligations under that section of the Dodd-Frank Act.

12 See, letter from Denise L. Nappier, Connecticut State Treasurer, SEC File No. S7-13-09 (Sep. 15, 2009). Section 953(a) of the Dodd-Frank Act directs the Commission to adopt a rule that would require each issuer to disclose in its proxy materials information showing the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The Commission has not yet complied with its obligations under that section of the Dodd-Frank Act.

13 17 C.F.R. 229.407(h).

14 Release No. 33-9089, Proxy Disclosure Enhancements (Dec. 16, 2009), at p.42.

15 Id., n.129, citing National Association of Corporate Directors, Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies (Mar. 2009).

16 U.S. Government Accountability Office, Financial Regulatory Reform, Financial Crisis Losses and Potential Impacts of the Dodd-Frank Act, GAO-13-180 (Jan. 2013), p. 17, available at The report noted that studies estimating the losses of financial crises based on lost output (value of goods and services not produced) suggest losses associated with the recent crisis could range from several trillion dollars to over $10 trillion. Id., at 16. Also associated with the crisis were large declines in employment and declines in household wealth estimated at $49,100 per family, including aggregate losses of over $9.1 trillion in home equity values. Id., at 20-21. The GAO noted that studies estimating output losses can be useful in showing the rough magnitude of the overall costs associated with the 2007-2009 financial crisis, but their results have limitations. Id. at 17.

17 The board of directors is responsible for management oversight, executive compensation and succession issues, appointment and oversight of independent auditors, approval of financial reporting, and other important decisions. The board of directors owes a duty of loyalty to the corporation and its stockholders, and must discharge its responsibilities for their benefit. When a shareholder marks her ballot to vote “FOR” a candidate for director, she is, in effect, ratifying the selection of that candidate as a steward for her capital. When she marks “WITHHOLD,” she sends a signal to the board that change is needed. Fiduciaries ignore such signals at their peril.

18 See, e.g., letters from Calvert Group, Ltd (Sep. 16, 2009), California Public Employees’ Retirement System (Sep. 16, 2009), General Board of Pension and Health Benefits of The United Methodist Church (Sep. 15, 2009), and Boston Common Asset Management, LLC (Sep. 14, 2009), SEC File No. S7-13-09, available at

19 See, e.g., James A. Fanto, Lawrence M. Solan, and John M. Darley, Justifying Board Diversity, 89 N.C. L. Rev. 901, 930-934 (2011); Renée B. Adams & Daniel Ferreira, Women in the Boardroom and Their Impact on Governance, 94 J. Fin. Econ. 291, 308 (2009).

20 See, e.g., Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value, Virtcom Consulting (2009), available at

21 See, Lissa L. Broome, John M. Conley, and Kimberly D. Krawiec, Dangerous Categories: Narratives of Corporate Board Diversity, 89 N.C.L. Rev. 759, 760 (2011).

22 Letter from Calvert Group, Ltd, SEC File No. S7-13-09 (Sep. 16, 2009).

23 Letter from Trillium Asset Management, SEC File No. S7-13-09 (Sep. 15, 2009).

24 The statistics in this paragraph are from “Missing Pieces: Women and Minorities on Fortune 500 Boards,” 2010 Alliance for Board Diversity Census, (revised, Jul. 21, 2011), available at

25 Id.

26 17 C.F.R. 229.407(c)(2)(vi).

27 Release No. 33-9089, notes 116-117, note 193.

28 Letter from Profs. Lissa Lamkin Broome and Thomas Lee Hazen, University of North Carolina School of Law, to Elizabeth Murphy, Secretary, U.S. Securities and Exchange Commission (Sep. 15, 2009), available at


29 Lucian A. Bebchuk, Co-Chair, Bernard S. Black, John C. Coffee Jr., James D. Cox, Jeffrey N. Gordon, Ronald J. Gilson, Henry Hansmann, Robert J. Jackson Jr., Co-Chair, Donald C. Langevoort, Hillary A. Sale, The Committee on Disclosure of Corporate Political Spending, Petition to require public companies to disclose to shareholders the use of corporate resources for political activities, SEC File No. 4-637 (Aug. 3, 2011), available at

30 Id., at 1.

31 Id., at 10.

32 Id.

33 Press release, “Political Disclosure Hits 100 Companies,” Center for Political Accountability (March 21, 2012), available at Companies provide varying degrees of information about corporate political spending on their public websites and through other means. However, this information is generally not included by public companies in their proxy statements or filed reports. The extent of voluntary disclosure indicates that such disclosure is not impracticable. However, voluntary disclosure alone is not sufficient. A well-drafted rule would improve both the quality and comparability of disclosure, as well as helping to provide a level playing field for issuers.

34 Letter from GovernanceMetrics International, SEC File No. S7-13-09 (Aug. 19, 2009) (with internal cites at n. 1).

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