SEC Commissioner Calls Corporate Secretaries Gatekeepers of Corporate Governance

Corporate secretaries are the gatekeepers of corporate governance for their companies, declared SEC Commissioner Elisse Walter, and as such they can ensure that their boards have the advice and resources necessary to discharge their fiduciary duties. In remarks at the annual seminar of the Society of Corporate Secretaries and Governance Professionals, the commissioner also said that sound corporate governance demands that shareholders have a real say in determining who will oversee management of the companies that they own. In that spirit, the SEC has proposed comprehensive changes to the proxy rules to facilitate the rights of shareholders to nominate directors on corporate boards.

The commissioner believes that directors and managements must take it upon themselves to improve accountability by setting a tone at the top. In her view, corporate secretaries, individually, and the Society collectively, are uniquely positioned to help restore investor trust by promoting accountability in the corporate community. Quoting former SEC Chair Harold Williams, the official said that the access of corporate secretaries to senior management can help sensitize the board and senior officers to important issues involving corporate accountability and the way in which the company might respond. One of the most important roles corporate secretaries can play is to facilitate communication among the board, senior management, and company shareholders.

Regarding shareholder access, the commissioner said that SEC proxy rules have frustrated shareholder efforts to fulfill the important role in nominating, and electing, directors. With shareholders dispersed throughout the country and around the globe, she noted, it is usually not practicable for them to meet together as a group to determine who is best qualified to serve as director. Instead, under the proxy process, the company solicits proxies to vote on behalf of the shareholders at the annual meeting. By the time a shareholder attends the annual meeting and speaks on behalf of his or her candidate for director it is too late, she said, since fellow shareholders have already voted by proxy. The only real alternative that shareholders have today under the proxy rules is to wage an expensive proxy contest.

In order to remove the impediments to shareholder franchise rights that exist in the proxy rules, the SEC proposed a two-pronged approach using both direct access and shareholder proposals. The initiative is designed to ensure that shareholders have a meaningful opportunity to effectuate their rights to nominate directors. Under proposed Rule 14a-11, shareholders would be able to have their nominees included in the company proxy materials that are sent to all voters unless they are otherwise prohibited by state law or a company's charter or bylaws from nominating directors. The proposed rule applies to all Exchange Act reporting companies, including investment companies, other than debt-only companies and foreign private issuers.

In order to have a nominee included in the company's proxy materials, a shareholder or group of shareholders would have to own a specified amount of company stock, with scaled ownership requirements according to company size. Shareholders would be permitted to aggregate their holdings in order to meet these thresholds, explained the commissioner, but would have to meet a one year ownership requirement and intend to hold those securities through the annual meeting date. Shareholders would also be required to certify that they are not seeking to change control of the company or gain more than a minority representation on the board. Also, shareholders may only nominate one candidate or up to 25% of the company's board of directors, whichever was greater.

In addition, the SEC would allow shareholders to propose amendments to provisions of a company's governing documents related to nomination procedures or other director nomination disclosure provisions. The commissioner believes that this approach could give shareholders a real voice in determining who will oversee the management of their companies.