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E-MailWhile a great many things in our financial markets have changed since the day I first joined the Securities and Exchange Commission in 1977 as a baby lawyer in our Office of General Counsel, one thing has remained the same — shareholders still do not have a real say in determining who will oversee management of the companies they own. A shareholder today exercising her franchise right has no choice among candidates. Yet, voting necessarily assumes a choice.
For far too long, shareholders have been effectively shut out of the director nomination and election process. And, since 1934 when Congress extended proxy authority to the Commission, our proxy rules have failed to facilitate — in fact, have frustrated — shareholders’ efforts to carry out their franchise rights to nominate and elect directors that they select.
Five and one-half decades ago, Professor Caplin of the University of Virginia Law School summed up this issue in a way that remains equally true today. He wrote (and I paraphrase):
It has been said…that the shareholders’ right to elect a Board of Directors annually cannot be taken away by any act of the directors or officers of the company. But this right to elect directors has no meaning unless it carries with it the concomitant right to select directors, as well.
In the years that have followed, there have been many here at the Commission who tried to put meaning back into shareholder nomination and voting rights. I am honored to have had the opportunity to continue carrying that torch and proud to be here on adoption day. What we do today is adopt the first effective mechanism to facilitate shareholder nomination and voting rights. And, I believe that we should not allow the majority of a company’s shareholders to take away those individual rights. That properly is left to law, specifically, state law.
For me, this is an easy policy question, and I would point critics to practices in other countries where this question has already been answered. It is also a matter of principle to facilitate individual shareholder rights. Yet, I knew from the day we voted to approve our proposed rules that getting to the adoption stage would not be easy. Certainly, our history over the last decade alone is a testament to the pragmatic difficulties of getting to the finish line on this issue.
And, the challenges shareholders continue to face in exercising their franchise rights have been confirmed in the numerous letters that we have carefully analyzed.
Some challenged our legal authority to adopt rules to facilitate shareholder director nominations. I, for one, never doubted our authority to go forward with adopting new rules. But, I am quite pleased that Congress specifically clarified our authority in the Dodd-Frank Act.
Others suggested that our proposed rules would substitute our judgment for that of corporate directors, or even shareholders. I do not see it that way. The rules before us today are not about control. The rules go no further than requiring a box to be placed on the company’s proxy card if shareholders meet certain eligibility thresholds and request it themselves. The statements in support or in opposition of the candidates that are named in the proxy materials will reflect the judgment of those nominating particular director candidates. And, the votes ultimately cast will reflect the judgment of the company’s shareholders as to who should serve them as directors. This new process gives a shareholder a genuine alternative to exit. To me, that is precisely the way fair corporate suffrage should work.
I also have always believed that our rules to facilitate shareholder director nominations need to be workable. And, I knew that the best way for us to exercise sound judgment would depend heavily on our analysis of thoughtful comments from all of the participants in and observers of the proxy process.
I believe that the parameters drawn in the rules before us today reflect a balanced approach to all of the comments we received. I believe that our determination of three percent and three years strikes the right balance of interest to enable shareholders with a significant, long-term stake in a company to use the new rules in the spirit in which they were designed. The changes that we have made to our proposed rules are the direct result of our careful analysis of the comments we received and our exercise of judgment to ensure that the costs do not outweigh the benefits and that the range of approaches to facilitating shareholder nominations is workable. And, our three-year implementation deferral for small companies will enable us to determine how the rules are working and whether any modification is needed to assure the appropriate balance in the small business context.
Our capital markets will thrive if investors are confident that this is the best place for them to put their investment dollars. I think former Chairman William O. Douglas captured the essential role of investor confidence in our markets when he said: “[N]one of us can afford to forget that this great market place can survive and flourish only by [the] grace of investors.” [1] Keeping a shareholder’s rights of nomination and election shackled due to 20th Century fears is not, in my view, the way to restore investor confidence and protect investors.
Today, as we move past the recent financial crisis, we must do everything we can to ensure investor confidence. In the words of our Chairman, Mary Schapiro:
If there’s one thing the recent financial crisis taught us it’s that the status quo is clearly not good enough. Not for our markets. Not for investors. And, not for our economy. To succeed, we all need to embrace the change — change that is needed to improve our regulatory system, better protect investors and restore confidence in the markets. [2]
The right to vote is meaningless if shareholders have no effective way to offer an alternative to management candidates and do not have a real opportunity without mounting a proxy contest to vote for candidates other than those offered by management. I believe that it is time for us to move past the fears and bring fair corporate suffrage into the 21st Century.
Endnotes
[1] Chairman William O. Douglas, Address at the Dinner of the Association of Stock Exchange Firms at the Commodore Hotel, New York, NY (May 20, 1938), available at http://www.sec.gov/news/speech/1938/052038douglas.pdf.
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[2] Chairman Mary L. Schapiro, Alan B. Levenson Keynote Address, 37th Annual Securities Regulation Institute, Coronado, CA (January 20, 2010), available at http://sec.gov/news/speech/2010/spch012010mls.htm.
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