Good morning. Welcome to the SEC staff's roundtable on proxy process. I would like to start by thanking Chairman Clayton for asking the staff to host a roundtable on this very important topic. I would also like to thank Michele Anderson, Julie Davis, and the entire SEC team who worked so hard to bring this roundtable to fruition.[1] Indeed, it has been eight years since the Commission sought comment on the proxy system.[2]
As we all know, the Commission's mission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.[3] Central to this mission are the laws and rules that govern a shareholder's ability to engage with the company that he or she owns.[4] The Commission's proxy rules allow an investor to actively participate in a company's governance structure. They can afford a single investor a powerful voice.[5] The value of this is not abstract.[6] Shareholders often fight for corporate values that empirically have positive, direct, and long-term effects on the corporate bottom line. In this way, the effects of our proxy rules are not confined to just shareholder-company communications. They allow our capital markets to continue to be among the most vibrant and stable in the world.
Unfortunately, our current proxy regime is arcane at best.[7] Some of this is due to the manner in which proxy materials are distributed and votes are processed. In addition, the way in which many investors hold their shares—through broker-dealers or other intermediaries—introduces further complexity into an already opaque system. As a result, the proxy system does not involve just a company and its shareholders. It involves an array of third-parties, such as broker-dealers, banks, custodians, transfer agents, and proxy advisors, to name a few. While this tangled web has helped to create a plethora of cottage industries, it has not necessarily helped to provide transparency to either companies or their investors.
Today's roundtable will focus on three areas within the proxy regime: proxy voting mechanics and technology, shareholder proposals, and proxy advisors. Each of these areas is a spoke in the overall proxy wheel. They form the framework through which shareholders ultimately communicate with the companies they own.
As far as this morning's first panel is concerned, I am interested in hearing how technology can help proxy mechanics. For example, should companies be able to use distributed ledger or blockchain technology to identify and reach their shareholder bases more efficiently?[8] Would standing voting instructions allow companies to hear from their retail investors more effectively?[9]
With respect to shareholder proposals, I would like to hear about the broader shareholder proposal process and, in particular, the numerous pieces of guidance the SEC's staff has issued over the years—from no-action letters to staff legal bulletins.[10] Has the staff guidance remained true to the Commission's rules? Or is the guidance having the effect of silencing proposals that could enhance company value?
Finally, with respect to proxy advisors, I'd like to better understand the role of a proxy advisor in the overall proxy architecture.[11] Just yesterday, a bipartisan bill was introduced in the Senate that would require the Commission to regulate proxy advisors under the Investment Advisers Act.[12] As one Senator noted, "Millions of hardworking Americans rely on th[e] guidance [provided by proxy advisors] for safeguarding their retirement savings."[13] Should proxy advisors be regulated and, if so, how? How would this help or harm investors of all sizes?
Hopefully, today's roundtable will be a new start to a longstanding conversation. Thank you, and I look forward to today's discussion.
[1] The views I express today are my own and do not necessarily reflect those of my fellow Commissioners or the SEC staff.
[2] Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495 (Jul. 14, 2010) [75 FR 42982 (Jul. 22, 2010)] ("Proxy Concept Release").
[4] See Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129 (1993).
[5] See, e.g., "Evelyn Y. Davis, shareholder activist and CEO foil, dead at 89," CBS News MoneyWatch (Nov. 5, 2018), available at https://www.cbsnews.com/news/evelyn-y-davis-shareholder-activist-and-ceo-foil-dead-at-89/.
[6] See Commissioner Kara M. Stein, Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance, Remarks at Stanford University (Feb. 13, 2018), available at https://www.sec.gov/news/speech/speech-stein-021318.
[7] See Proxy Concept Release, supra note 2.
[8] See, e.g., Jeff John Roberts, "Companies Can Put Shareholders on a Blockchain Starting Today," Fortune (Aug. 1, 2017), available at http://fortune.com/2017/08/01/blockchain-shareholders-law/.
[9] See Jill E. Fisch, Standing Voting Instructions: Empowering the Excluded Retail Investor, 102 Minn. L. Rev. (2017).
[10] Over the years, the SEC's staff has issued numerous no-action letters that more or less tell companies whether the staff agrees with their determinations to exclude shareholder proposals. See https://www.sec.gov/divisions/corpfin/cf-noaction/14a-8.shtml. But these letters do not say much as to why the staff agrees. Hence, the staff has also issued a number of staff legal bulletins that describe the staff's thinking. See https://www.sec.gov/interps/legal.shtml. Most recently, the staff issued Staff Legal Bulletin No. 14J, available at https://www.sec.gov/corpfin/staff-legal-bulletin-14j-shareholder-proposals.
[11] In short, proxy advisors help institutional investors by providing analysis and voting recommendations. These larger investors typically own shares in a large number of companies and have fiduciary obligations to vote these shares on behalf of their stakeholders. In this way, the relationship between a proxy advisor and an investor is important. For example, to the extent conflicts of interest are not sufficiently disclosed and addressed, investors could be harmed. To be sure, some have called for greater oversight of these entities in view of their "substantial influence on proxy voting matters." See David A. Katz & Trevor Norwitz, "Congress Increases Pressure on Proxy Advisory Firms," Harvard Law School Forum on Corporate Governance and Financial Regulation (May 23, 2018), available at https://corpgov.law.harvard.edu/2018/05/23/congress-increases-pressure-on-proxy-advisory-firms/. While others for different, but related, reasons believe that appropriate regulation is imperative. See Corporate Governance Fairness Act, infra note 12.
[12] See "As SEC Evaluates Proxy Process, U.S. Senators Introduce Corporate Governance Fairness Act" (Nov. 14, 2018) ("Corporate Governance Fairness Act"), available at https://www.reed.senate.gov/news/releases/as-sec-evaluates-proxy-process-us-senators-introduce-corporate-governance-fairness-act (discussing the introduction of the Corporate Governance Fairness Act, which is designed to "help ensure that investors may confidently rely on the advice of proxy advisory firms by requiring the U.S. Securities and Exchange Commission (SEC) to regulate all major proxy advisory firms under the Investment Advisers Act (IAA)").
[13] See Corporate Governance Fairness Act, supra note 12.