I join Chairman Schapiro in thanking the staff for their outstanding work on this Concept Release addressing proxy mechanics. The Concept Release is the culmination of significant work, led by the Division of Corporation Finance and undertaken by all of the rulemaking divisions, the Division of Risk, Strategy and Financial Innovation, the Office of Investor Education and Assistance, the Office of the General Counsel and the Office of International Affairs, over the last year or so. I also want to thank the Chairman for her leadership and to commend the staff for its thorough, thoughtful and fair analysis of the issues in this complex area. I am happy to support issuing this more than timely and important Concept Release.
Over the last 14 months, the Commission has considered a number of significant rules and taken other actions affecting the proxy solicitation and voting process:
Last May, the Commission proposed rules that would mandate proxy access.
Almost exactly a year ago, the Commission issued an order approving an amendment to NYSE Rule 452 to eliminate broker voting of uninstructed shares in uncontested director elections, and proposed rules to require enhanced proxy disclosures and to make certain amendments to our proxy solicitation rules.
In December, the Commission adopted final rules relating to enhanced proxy disclosures.
The Commission has taken these actions under the banner of protecting and empowering shareholders by arming them with accurate, complete and useful information and ensuring that they have the opportunity to participate meaningfully in the proxy voting process, particularly in the election of directors and in relation to corporate governance matters. Some of these rules I support, others I do not.
Of course, a prerequisite for these rules, and for all of our proxy rules, to fulfill these purposes is that the proxy process be sound—a proposition subject to some doubt and significant dispute.
In several of our releases over the last 14 months, the Commission has stressed that it has sought to address issues regarding the accountability and responsiveness of public companies and their boards of directors to the interests of shareholders. While this accountability is absolutely critical, it is equally critical that the Commission be accountable and responsive to investors and issuers having valid complaints about the effectiveness, efficiency and fairness of our proxy system.
I and several of my colleagues on the Commission, as well as many issuers, investors, commentators and other market participants, have noted for many years that the proxy system, in many ways, is creaking and may not be fair to all participants in the proxy process. There is a broad range of issues that must be addressed by the Commission promptly in order to lay a proper foundation for the proxy system. Indeed, the rules underlying the proxy system are commonly referred to as "plumbing"—not because they are mundane, but because they are important.
As many, including the NYSE's Proxy Working Group, have argued, these issues must be addressed holistically, not on an ad hoc basis, as the proxy process is complex and highly interrelated. I am gratified that the Concept Release recognizes this fact and addresses all of these issues together.
Some of these issues are longstanding; others, I fear, we have created, exacerbated, or risk exacerbating. In particular, our recent rulemakings and proposals, while seeking to empower shareholders, would act, in my view, to empower only the "right" shareholders—institutional investors, labor unions and public pension funds—to the detriment of retail shareholders.
To highlight a few of these issues:
we have been aware for some time now that our rules act to empower entities that may be conflicted, such as proxy advisory firms that provide vote recommendations to institutional investors on matters for which they also provided consulting services to the issuer;
some of these vote recommendations can be based on erroneous information about the issuers' policies, yet issuers have little opportunity or ability to correct the erroneous information and no ability to undo the impact of such recommendations when they result in an adverse vote;
we also allow institutional investors to set their voting preferences in advance, to be executed on their behalf by proxy voting services such as proxy advisers—in some cases to be voted automatically in conformity with the recommendations of those advisers; retail shareholders, on the other hand, are not afforded the same opportunity;
moreover, by approving the amendment to NYSE Rule 452, we have largely disenfranchised those retail shareholders who are happy for their shares to be voted by their brokers on their behalf in favor of public companies' candidates for directors in uncontested elections, but who otherwise would choose not to spend their time completing proxy cards for all companies in which they own stock; and
by approving amended Rule 452, we have also made it more difficult for companies to achieve quorum; meanwhile our system of denying companies the ability to contact objecting beneficial owners makes it difficult for companies to solicit proxies to ensure a quorum or for other purposes.
The Concept Release addresses these and many other issues head-on by discussing the issues in detail and requesting comments on potential regulatory responses to such matters as, among others:
the potential conflicts of proxy advisory firms,
issuer communications with shareholders,
means to facilitate retail investor participation—including through advance voting instructions (commonly referred to as "client-directed voting"),
over-voting and under-voting,
proxy distribution fees, and
empty voting.
I look forward to reviewing the comments of market participants affected by these issues and other commentators. With the benefit of public comments, I am hopeful that the Commission can ultimately adopt comprehensive rules to address these important issues.
I note, with some concern, that the Commission faces an onslaught of required rulemakings in the upcoming 18 months pursuant to the Dodd-Frank bill that is expected soon to become law. These rulemakings will occupy significant staff resources. Notwithstanding this task, the Commission must not let the issues addressed in this Concept Release to languish. Without promptly addressing the weaknesses and biases in the operation of our proxy rules, the Commission's efforts and actions to empower all shareholders will remain uneven at best, and ineffective or even harmful at worst.
Similarly, notwithstanding the Commission's need for the input from market participants in the rulemakings that may be mandated by the Dodd-Frank bill, I urge investors, issuers and other market participants to focus on the issues raised in this Concept Release and to provide meaningful comments. With your help, I hope the Commission can place the U.S. proxy system on a firm foundation for the years to come.