U.S. Securities and
October 19, 2010
Thank you, Barbara, [Franklin, former Secretary of Commerce and current
NACD Chair] for that kind introduction.
It is a pleasure to be here with you today, at a moment when so much
about what you do — and what I do — is being fundamentally transformed. I
have some idea of the challenges you face — as I am in the trenches on many
of the same issues you’re grappling with, trying to ensure that the SEC
meets Congressional mandates and investor needs effectively, but also with
minimal regulatory burden.
And so I know that — as individuals who sit at the intersection of
shareholders and management in an increasingly complicated economic era —
your responsibilities as corporate directors are growing at a dramatic rate.
And honestly, the expectations for how corporate governance can fortify our
economic system — through vigilance, risk management and transparency — have
never been higher.
Shareholders expect you not only to know your business — how to control
risk, market, compete, profit and grow in an increasingly global marketplace
— but, in many cases, to know about and effectively oversee the impact that
your businesses may have on the financial system.
At the same time, much of the regulatory framework within which your
businesses operate is also changing. As SEC Chairman, I recognize that many
of our new rules, and the rules that we will be adopting over the next two
years, will profoundly impact both how your boards fulfill their
responsibilities, and how you communicate those activities to your
In a moment, I’ll give you an overview of the new rules that I expect the
Commission will consider as we move forward on the agenda that Congress has
created through the passage of the Dodd-Frank Act.
Before I do that, though, I’d like to explain the Commission’s role
regarding directors and corporate governance.
First, our responsibility is to ensure that our own rules support and do
not interfere with governance characteristics that market participants — or,
in some cases, Congress — have identified as significant.
When consensus has been reached that certain features are relevant to
effective governance, then our rules regulating disclosure and the proxy
process should ensure that this information is provided. How that
information is interpreted and acted upon is up to board members and to the
shareholders who elect them.
Second, when it comes to the securities markets, we are the guardians of
honest disclosure. Companies and boards must tell their shareholders,
current and prospective, the truth — and the whole truth — about those
matters which are important to investment decision-making, including
With this in mind, let me now outline for you some of the specific
projects that are on our agenda.
Making Engagement a Priority
Speaking both as a regulator and as a former board member, I believe that
it is vital that shareholders and board members move beyond the minimum
required communications and become truly engaged in the shared pursuit of
high quality governance.
For boards and their companies, engagement means more than just
disclosure. It means clear conversations with investors about how the
company is governed — and why and how decisions are made.
But engagement is a two-way street. As the report of the NACD’s Blue
Ribbon Commission on Board-Shareholder Communications points out, boards can
also benefit from access to the ideas and the concerns investors may have.
Good communications can build credibility with shareholders and potentially
enhance corporate strategies.
Over the past 20 months, we have taken several steps that we believe
support more effective communication between shareholders and boards. But we
have a lot more work ahead of us.
The rulemakings required by Dodd-Frank will significantly increase
disclosure requirements. And, looking further ahead, we are still receiving
comments on our proxy plumbing concept release, a key component of which is
a review of the current limitations on company-shareholder communications.
But let me add here that we’re not just interested in communications
between boards and investors. As we move to consider Dodd-Frank requirements
and public comments on our proxy plumbing release, we would like to engage
with you, as well. Your voices will help ensure that the right balance is
struck between the goal of increased disclosure and the burdens new rules
might present. We look forward to hearing from you.
Increasing Disclosure Regarding Directors
Last year, the SEC took one step that I believe has great potential to
improve communications concerning a very important point — that is, why a
company’s board members are the right people for their positions.
We adopted new regulations that, for the first time, required describing
what in the director’s background and skill-set led the board to select that
individual. In the past, all that was presented in proxies about director
candidates was a very brief biography that did little to communicate
important information regarding the unique or significant value candidates
might add to a particular company’s board.
In just their first year, these rules resulted — with some exceptions —
in proxy statements that were more informative. They gave investors greater
insight into the qualifications of board candidates, and a better
understanding of how candidates’ skills and experience suited the needs of
In one example, the proxy tells investors that “Ms. Gray”— of course, not
her real name —“has spent her career in consumer businesses and brings key
financial and operations experience to the Company….[she] possesses broad
expertise in strategic planning, branding and marketing, business
development, retail goods and, sales and distribution on a global scale. Ms.
Gray’s positions as chief financial officer and her service on the audit
committees of other companies…also impart significant expertise to the
Board…Through her most recent experience… including with on-line selling,
Ms. Gray provides the Company with valuable insight and guidance.”
Contrast that with another example — again, changed slightly from the
original filing. In this one, each candidate presents only the same
bare-bones biography that has been required for decades. Then, the proxy
merely adds a sentence at the end of the section which essentially says:
“our directors each have integrity, sound business judgment and honesty,
which are important characteristics of a good board member.”
Now, we have been told that some board members were advised that they
should keep the new information to a minimum. I disagree. I think filings
like the second one I mentioned increase the distance between boards and
shareholders, to the detriment of both. I urge board members to engage with
those who draft the proxy statements to make sure that this disclosure
accomplishes its goal of better communicating this key information to
In that same rulemaking project, we also adopted new disclosure
requirements addressing other key concerns of shareholders. We required
companies to disclose why they selected a particular board leadership
Why do they have a combined CEO and Chair? Or why have they separated
them? We didn’t take sides on this issue; that’s not our role. But
questioning a board’s structure is the shareholders’ role, so we
wanted boards to give shareholders clear and accurate answers.
We required detailed information about compensation consultant fees when
the consultant does other work for the company. We did this to address
concerns that compensation committees might be receiving advice about
management compensation from consultants who are beholden to management for
It is important that shareholders have that information when considering
the board’s compensation decisions. The Dodd-Frank Act amplifies this
requirement, with consideration of other potential conflicts. So these
disclosures will be changing further as we implement new provisions through
our upcoming rulemakings.
In light of heightened concerns about how boards address risk, we also
added a new requirement, that boards explain how they oversee risk at the
company. Some companies simply recited lines like “risk is overseen by the
board as a whole.”
Not all that helpful, I would say. Meanwhile, other companies provided
detailed disclosures of their boards’ and executives’ risk-related
responsibilities and functions. I believe investors feel better informed and
reassured by these more detailed disclosures.
Further, since misaligned or poorly-calibrated incentive compensation
programs were widely believed to have promoted inappropriate risk-taking
that contributed to the financial crisis, we added a requirement that
companies assess whether their compensation programs expose them to material
This requirement applies to compensation throughout the company — not
just the executive ranks — and to companies in all industries, not just
financial firms. I think it is vital that boards understand how compensation
practices affect risk-taking, and this new requirement brought that issue
front and center for boards.
For financial services firms, Dodd-Frank takes this issue further, and
requires financial regulators to adopt regulations or guidelines that
prohibit incentive-based compensation arrangements that encourage
inappropriate risk-taking. We are working with our fellow regulators in
developing these new standards.
Dodd-Frank and Executive Compensation
Among of the highest-profile governance rulemakings now before us are the
ones required by Dodd-Frank which concern executive compensation.
Dodd-Frank will require advisory say-on-pay votes at all companies at
least once every three years starting at meetings on or after January 21,
2011. Shareholders will also vote on how often they would like to have the
say-on-pay vote, and will have a similar “say” on golden parachutes.
Yesterday we proposed rules on these requirements. And, when you get a
chance to read about them, I hope you will agree that the proposals are
crafted to thoughtfully implement the requirements of the new law in a
Dodd-Frank also required exchanges to amend their rules governing
circumstances in which brokers vote proxies without instruction from
beneficial holders, to prohibit voting on compensation matters, such as the
say-on-pay votes. The New York Stock Exchange has already implemented this
new mandate, putting it in place for the first round of mandatory say-on-pay
votes starting in January.
The next proposal that you will see in this area will be the rules
requiring that stock exchanges mandate new standards of independence for
compensation committees at listed companies. That rulemaking will also
address the conflict of interest factors that boards must consider when
retaining compensation consultants.
Because this new disclosure will apply for all shareholder meetings
taking place on or after July 21, 2011, we are aiming to get a proposal out
by the end of this calendar year.
One of the more widely-publicized provisions of Dodd-Frank will require
companies to calculate and disclose the median total compensation of all
employees, and the ratio of CEO compensation to that figure, in accordance
with rules that govern disclosure of executive compensation.
I understand that there are significant concerns about the potential
difficulty of performing that median employee calculation. We will be
proposing rules to implement this requirement next summer, so there is time
for us to learn of your views and consider them in our rulemaking.
Next summer we will also issue proposals to require disclosure of the
relationship between senior executives’ compensation and the company’s
financial performance, as well as whether employees or directors are
permitted to hedge against a decrease in value of company securities granted
as part of their compensation.
In addition, next summer we will be proposing new standards under which
listed companies will be required to develop “clawback” policies for
reclaiming incentive-based compensation from current and former executive
officers after a material financial restatement.
As you know, SEC rules already require a robust discussion of
compensation decisions in the annual proxy statement Compensation Discussion
and Analysis. But, with these new requirements — particularly the say-on-pay
votes, coupled with new NYSE rules prohibiting brokers from voting
uninstructed shares — it will be particularly important for boards to
communicate the reasons for their compensation decisions effectively to
The Dodd-Frank regulatory timeline is short. But, we are eager to engage
with you as the rulemaking process goes forward. Just as we are creating a
regulatory structure that supports board-shareholder engagement, we have
created an infrastructure that supports communication between yourselves and
We have established a series of e-mail boxes on the SEC website to which
comments can be addressed even before rules are proposed and formal comment
In addition, SEC staff have been instructed to make every effort possible
to accept requests for face-to-face meetings and, where appropriate, to seek
out meetings with those affected by our proposals. Just as the written
comments we receive will be posted on line, we will post memoranda detailing
meeting participants, an agenda provided by persons meeting with staff, and
any materials distributed at the meeting.
One group that is directly affected by these rulemakings, but which we
have not heard from directly, is you, the directors who will be charged with
complying with many of these regulations.
The SEC is in the early stages of another important proxy initiative, as
well. Formally, it’s called our “voting infrastructure” project. Informally,
we refer to it as “proxy plumbing” — an apt term for the complicated and
sometimes creaky system through which information and votes flow during
Every year, over 600 billion shares are voted at more than 13,000
shareholder meetings. Yet it has been 30 years since the Commission has
conducted a thorough review of this infrastructure and, in light of the vast
changes in the intervening years, we believe that it was time for a
Earlier this year, we issued a concept release meant to start a
comprehensive discussion about the state of proxy infrastructure and how it
might be improved. We wanted to hear whether the current plumbing
arrangement enhances the ability of boards and shareholders to engage with
one another by supporting two-way communications that are seen as timely and
accurate. Or, instead, does it inhibit engagement, by interposing barriers
and inefficiencies between the various parties?
I would like to touch on some highlights, grouped under three headings:
the accuracy and transparency of the voting process; the manner in which
shareholders and corporations communicate; and the relationship between
voting power and economic interest.
Voting, of course, is the main point of the proxy process. And so, we’re
looking at several different areas. We’re interested in knowing the extent
to which there is under- and over-voting of shares. We’d like to find a
reasonable way to confirm votes, and to know if this is an issue for
companies, as well.
Do parties who have lent shares need earlier information about the
content of upcoming shareholders’ meetings so that they can decide whether
to recall their shares in order to vote them? And would getting such
information change their behavior?
We’re also extremely interested in whether and how we can facilitate
greater participation by retail investors in proxy voting.
In addition, we’re asking whether data-tagging proxy-related data — such
as information relating to executive compensation — would enhance
shareholders’ ability to make informed decisions when they do vote.
And, finally, we believe that it is important that the right to vote be
tightly tied to the outcome of that vote. As so, we’ve asked if the
phenomenon of “empty voting” is widespread and damaging enough to warrant a
Our bottom line is simple — we’d like to move towards a more accurate and
inclusive voting structure.
Our second concern is ongoing communication between the board and the
shareholders. Most importantly, does the OBO/NOBO system balance the
competing interests of investor privacy and effective communications
appropriately? Or does it erect unnecessary barriers between you and the
shareholders you represent?
And we’d like to know your opinion on proxy distribution. Are fees
reasonable? And, do you see a way to bring greater competition — and
possibly lower price and better service -- to the industry?
Proxy Advisory Firms
Finally, we’ll be examining the role of proxy advisory firms. Both
companies and investors have raised concerns that proxy advisory firms may
be subject to undisclosed conflicts of interest. In addition, they may fail
to conduct adequate research, or may base recommendations on erroneous or
incomplete facts. We intend to fully explore these issues.
We are very interested in discovering if there are reasonable steps we
can and should take to make your communications with shareholders less
cumbersome and more useful to you, and to them.
Technology, investor attitudes and the way financial markets work have
all changed dramatically during the past decade. The way in which we, and in
which you and your shareholders communicate, must similarly change.
The SEC cannot and is not interested in determining the communications
strategies of individual companies. But we are interested in breaking down
barriers that may prevent effective engagement, and affect investor
confidence and, ultimately, financial performance.
The decisions we will be making in the months ahead are decisions that
demand your attention and input.
Directors, who will be affected by these decisions, and who can bring
important insights to the issues that we examine have a great deal to
contribute. And, as the SEC works to encourage engagement between
shareholders and boards, we want very much to engage with you, as well.