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Opening Statement at the Proxy Voting Roundtable

Commissioner Daniel M. Gallagher

Feb. 19, 2015

Thank you, Keith [Higgins] for that introduction. I also want to thank the Division of Corporation Finance more broadly for its efforts in putting together this roundtable today, and the panelists for their time and energies in preparing for and attending today. As you are all well-aware, this roundtable will address two topics: universal proxies and retail shareholder participation in the proxy process. I’ll start with the latter, and end with the former.

I am particularly interested to hear if there are ways in which the Commission can improve retail shareholder participation in the proxy process. Retail shareholders are famously rationally ignorant. The cost to an individual shareholder—in time and effort to review scores of pages of proxy disclosures, form a reasoned view on how to vote the proxy, and then undertake the mechanics of casting that ballot—tends to outweigh the benefits of voting. To be frank, I’m not sure we can fundamentally alter this dynamic. But we would be remiss if we did not try. I’m hoping we can hear about ways to make it less costly for individual shareholders to vote. Could we streamline our disclosures or make them less intimidating for retail investors without loss of informational content for institutional investors? This is obviously not an easy feat, but it is an important issue. Could we explore ways to reduce the number of votes to be taken? With annual director elections, potentially-annual say-on-pay, and increasing numbers of shareholder proposals, the number of votes to be cast continues to increase. Is voting on all of these issues the best use of an investor’s time? Finally, could we better use technology to improve voting mechanics? For example, could we allow individuals to delegate the ability to cast their ballots so long as they are cast consistently with certain voting rules preset by the investor? If any of these could induce more individual holders to vote their shares, it would be a worthwhile endeavor. And the benefits may not be limited to individuals; some solutions may also improve matters for institutional investors and other participants in the proxy process who are similarly burdened by today’s inefficiencies.[1]

As for universal ballots, let’s just say I’m trying to keep an open mind. The challenge is that there’s a lot going on right now in this area. This proxy season has seen the resurgence of proxy access as a dominant theme, particularly given the New York Comptroller’s Boardroom Accountability Project targeting companies with proxy access proposals for contributing to global warming, lacking board diversity, or having a negative say-on-pay vote. And the Whole Foods no-action dispute has not helped matters. Moreover, we have shareholder activists that are becoming louder and more assertive by the day, demanding seats on company boards, or launching proxy fights to replace board members. In the meantime, we have growing bipartisan sentiment that our current corporate governance framework is driving companies towards excessive short-termism.[2] What does this mean for the SEC? Our responsibility in the corporate governance arena is a limited one: it is to ensure that our rules establish a level playing field. I’m therefore interested in hearing from our panelists about the pros and cons of universal ballots, as one stand-alone option in this area, including how they may affect the relationship between shareholders and management.

It will then be up to the Commission to determine whether universal ballots have a role to play in ensuring the aforementioned playing field is in fact balanced. To that end, I found quite interesting a recent article in the Harvard Business Review by Professor Guhan Subramanian, calling for a “Corporate Governance 2.0.”[3] In this grand bargain approach to corporate governance, he would, among other things, bring back a variant of staggered boards, adopt proxy access, and tighten disclosures of activist positions in companies. I’m not sure whether this is the right balance, but I like the approach of putting all the issues on the table and seeking to reach a compromise on the right combination of policies—much as I have called for holistic reviews in other areas—rather than an incrementalist approach of considering each policy change in isolation. This approach would require the Commission to study and bring to the table the constituents involved in each of the various pieces of the puzzle under the Commission’s control, to determine how the Commission’s rules as a whole promote the right solution for the U.S. capital markets.[4] To the extent that today’s roundtable helps move us in that direction by giving us better information about one potential piece of the puzzle that would be at issue in a broader study, that can only be to the good.

Thanks again for being here today, and I look forward to the discussion.

[1] See, e.g., Kimberly S. Johnson, 25 Pages or Less: Investors Want Shorter Proxies, Wall St. J. (Feb. 17, 2015) (citing a survey of large investors that would like to see proxies cut to 25 pages or less from their current average of 80 pages).

[2] E.g., Lawrence H. Summers & Ed Balls, Report of the Commission on Inclusive Prosperity (Jan. 15, 2015) at 16, 85—86.

[3] Guhan Subramanian, Corporate Governance 2.0, Harv. Bus. Rev. (March 2015).

[4] I have already been advocating for a comprehensive review of Rule 14a-8 on shareholder proposals, the failings of which were highlighted in a speech I gave last year. See Daniel M. Gallagher, Remarks at the 26th Annual Corporate Law Institute, Tulane University Law School: Federal Preemption of State Corporate Governance (Mar. 27, 2014), available at My concerns about the rule’s many deficiencies have subsequently been borne out, including through the district court’s erroneous decision in Trinity Wall Street v. Wal-Mart Stores, Inc. (challenging 14a-8(i)(7)) and the decision to withdraw the Whole Foods no-action letter pending review of 14a-8(i)(9). This 14a-8 review could be undertaken on its own, or it could be integrated into a broader review of the proxy process.

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