U.S. Securities and Exchange Commission

Speech

Governance and Transparency at the Commission and in Our Markets

Chairman Jay Clayton

Remarks at the PLI 49th Annual Institute on Securities Regulation - New York, N.Y.

Nov. 8, 2017

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Shareholder Engagement and the Proxy Process

An area not on the near-term rulemaking agenda that is worthy of discussion is the proxy process, including how investors participate in corporate governance at public companies. Shareholder engagement is a hallmark of our markets, and our proxy rules – to use a highway analogy – provide a key lane for engagement, as well as much debated guardrails. Given the core role of the proxy process in public company governance, I believe the Commission should be “lifting the hood” and taking a hard look at whether the needs of shareholders and companies are being met. How are shareholders of all types getting information, and what information are they getting? Even if well-informed, are shareholders able to effectively participate in the voting process? What are the costs and burdens of the proxy system on companies, and how are they borne by shareholders? How are proxy rules affecting the ultimate beneficial owners of public companies – a majority of whom are “silent” retail investors?

Over the years, participants in the proxy process – companies and shareholders alike – have expressed concerns about a variety of proxy matters. In 2010, the SEC solicited input on several proxy matters in a concept release on the U.S. proxy system.[14] Since that time, the SEC staff has taken steps to enhance the proxy process, but calls for action are becoming more frequent and are growing louder. [15] It is clear there are still opportunities for improvement. I believe the Commission should consider reopening the comment file on the 2010 “Proxy Plumbing” concept release to solicit updated feedback from market participants about what works and what does not work in our proxy system.

While there are a number of proxy matters that are timely for review, I will touch on two topics today: retail shareholder participation and shareholder proposals.

Retail Shareholder Participation. I have become increasingly concerned that the voices of long-term retail investors may be underrepresented or selectively represented in corporate governance. For instance, the SEC staff estimates that over 66% of the Russell 1000 companies are owned by Main Street investors, either directly or indirectly through mutual funds, pension or other employer-sponsored funds, or accounts with investment advisers.[16] And, if foreign ownership is excluded, that percentage approaches approximately 79%. Yet it is not clear whether in our rulemaking processes the views and fundamental interests of long-term retail investors are being advocated fully and clearly, either by individual investors or groups that represent them. Since I arrived at the agency, I have made concerted efforts to reach Main Street investors across the country, and this has resulted in productive conversations with individuals, as well as those who advocate for them.[17] Many others at the SEC, including Rick Fleming, our Investor Advocate, and the Office of Investor Education and Advocacy, concentrate on retail investors generally and have specific outreach efforts focused on investors who are teachers, students, serve in the military, or live in retirement communities.[18]

A majority of Main Street America’s dollars are invested in vehicles where the investor – the person with their money at risk – is not the voting shareholder. Often voting power rests in the hands of investment advisers who owe a duty to vote proxies in a manner consistent with the best interests of the fund and its shareholders.[19] A question I have is: are voting decisions maximizing the funds’ value for those shareholders?

In situations where the voting power is held by or passed through to Main Street investors, it is noteworthy that non-participation rates in the proxy process are high. In the 2017 proxy season, retail shareholders beneficially-owned 30% of the shares in U.S. public companies; however, only 29% of those shares voted.[20] This may be a signal that our proxy process is too cumbersome for retail investors and needs updating.[21]

Shareholder Proposals. The shareholder proposal process is a corporate governance issue that is subject to diverse and deeply held beliefs. Various stakeholders – companies, fiduciaries, individual investors, and investor groups – have established views on the appropriate set of rules for shareholder proposals, and there seems to be little ground for building a consensus. While I am supportive of rules that allow shareholder proposals, I am searching for a way to reconcile the multiple positions and find common ground.

History has shown that shareholder proposals can gain traction and lead to corporate governance changes that better track the long-term interests of Main Street investors. They also create costs, including out-of-pocket costs and the use of board and management time that otherwise could be devoted to the operation of the company itself. Some are of the view that companies should focus as much energy on shareholder engagement as is demanded. Others want management to dedicate as much time as possible to company operations for the benefit of all shareholders. The shareholder proposal process is not the only piece of this puzzle, but it is a piece worth examining.

Questions exist about the appropriate level of ownership that should be required to submit shareholder proposals, as well as whether our current resubmission thresholds are too low. The concern is that the thresholds allow proposals that shareholders previously rejected to be repeatedly resubmitted even though they receive a small fraction of shareholder support. We hear strong views on all sides, but one of my guiding principles is that we have to consider whether our rules are serving the long-term interests of Main Street investors. We need to make sure that those investors have a seat at the table as we examine the proxy process.

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