“They Are Merely the Agents”: Prepared Remarks before the American Bar Association

Good morning. I am pleased to speak before the American Bar Association for the Federal Regulation of Securities Winter Meeting. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the SEC staff.

When President Franklin Roosevelt and Congress came together to craft the federal securities laws and the SEC to oversee them, they understood the critical role that corporate governance plays to protect investors and facilitate capital formation.

Rules around corporate governance help better align the interests of managers with those of shareholders. This helps to build trust, which lowers risk premiums for investors and lowers the cost of capital for issuers. Trust also promotes greater participation by investors in the markets. Put another way, good corporate governance is good for issuers and investors alike.

When Roosevelt and Congress were setting up the federal securities laws, debates around corporate governance were far from new. Those debates go back to the first joint-stock company founded in 1602, the Dutch East India Company.[1] In preparing for this speech, I found an article from 1825, where a critic in the New-York National Advocate wrote: “We complain of directors considering themselves the company, when they are merely the agents.”[2]

In the 1930s, corporate governance was fresh on Roosevelt and Congress’s minds. In a series of high-profile Congressional hearings, Ferdinand Pecora and others uncovered widespread abuses where executives at Insull, National City Bank, and other corporations enriched themselves while hurting shareholders of their own companies and damaging public trust in financial markets more generally.[3]

In the wake of the hearings, Roosevelt and Congress enacted laws in which the federal government, through the SEC, had a role to play to address these issues. This role would stand alongside state law.

Further, though Congress conceived the SEC primarily as a disclosure-based agency, there were places where the securities laws went beyond disclosure alone, particularly in a number of areas related to corporate governance.

In addition to disclosure by issuers regarding corporate governance itself, I think of three other areas where Congress included provisions related to corporate governance. First, Congress included provisions related to how corporate governance can help enhance the integrity of all other disclosures. Second, Congress included provisions related to shareholder voting and acquisition of control of issuers. Third, Congress included provisions regarding executive compensation and ill-gotten compensation, including insider trading.

As securities laws practitioners, you recognize where these principles appeared in the first federal securities laws.

In Section 11 of the ’33 Act, Congress imposed on directors and officers liability for inaccurate registration statements. In Section 14 of the ’34 Act, Congress required disclosures and guardrails around solicitations of authority to vote on shareholders’ behalf, so-called proxies. Section 16 of the ’34 Act included a prophylactic rule about insider trading relating to short-swing profits.

Subsequently, in the decades after the New Deal, Congress repeatedly revisited, reaffirmed, and expanded the SEC’s role with respect to disclosure and guardrails related to corporate governance. Let me focus on three instances.

In the Williams Act of 1968, Congress added provisions to Section 14 relating to tender offers and disclosure requirements from beneficial owners attempting to gain control of a company.

In my first job on Wall Street, working in mergers and acquisitions, I observed time and again as board members, with a tender offer on the table, asked their lawyers for briefings not only on state law such as Delaware law, but also on the federal securities laws—including the Williams Act. I took comfort in knowing there were such federal laws on the books, seeing how they build trust in the markets and companies’ governance.

After Enron and Worldcom’s historic bankruptcies, as part of the Sarbanes-Oxley Act of 2002, Congress revisited corporate governance-related issues in the securities laws. Congress required companies to have audit committees and enacted provisions to promote audit integrity. Further, Congress added to insiders’ accountability for accurate disclosures[4] and enacted an important clawback provision.[5]

Following the 2008 financial crisis, as part of the Dodd-Frank Act of 2010, Congress again returned to corporate governance-related issues in the securities laws. In Dodd-Frank, Congress mandated that the SEC enact several additional rules on corporate governance regarding clawbacks and executive compensation, for example.

Rulemaking Initiatives

In the last two years, the SEC has taken on a number of rulemaking initiatives related to corporate governance.

Through these rulemakings, we are working to update our ruleset to keep pace with ever-evolving technology and business models, as well as to implement Congress’s mandates.

These projects draw broadly upon those principles going back to the 1930s.

Executive Compensation

First, we took on a number of unfulfilled Dodd-Frank mandates related to executive compensation.

Last year, we fulfilled a Dodd-Frank mandate by adopting a set of clawback rules.[6] In essence, if a company makes a material error in preparing a financial statement, an executive may receive compensation for reaching a milestone that was never actually hit. It’s common sense to require issuers to “claw back” that erroneously awarded pay. That money belongs to the company and its shareholders. Such rules ensure that executives don’t keep compensation they should not have received. The rules also strengthen the incentives for executives to make sure a company’s financial disclosures are accurate, promoting the integrity of financial statements.

Among other things, the rules require exchanges to propose and implement listing standards requiring all issuers on their exchange to develop and implement a clawback policy that fulfills our final rules. In October of this year, those listing standards became effective, and by December 1—last week—all issuers that list securities on those exchanges were required to develop and implement their clawback policies.[7]

We also adopted rules related to disclosure of executive pay versus performance.[8] Fulfilling Congress’s mandate, our final rules require companies to make clear disclosure to investors on the relationship between a company’s executive compensation actually paid and the company’s financial performance. It helps align incentives when a company’s investors understand which factors may influence the compensation of its executives.

In Section 956 of the Dodd-Frank Act, Congress mandated that the SEC—working with five other financial regulators—prescribe regulations with respect to incentive-based compensation practices at financial institutions. We stand ready to work with our fellow regulators to fulfill this mandate and through re-proposing rules in this area.[9]

Insider Trading

Second, few things undermine trust in the markets more than insiders abusing their positions for personal advantage, such as by trading using material nonpublic information.

Company executives usually receive stock-based compensation, which can help align incentives between investors and management. Those executives, however, have nonpublic information about the companies they lead, so it’s important that investors have confidence that these company insiders cannot use material nonpublic information to get an unfair advantage when trading their companies’ stock.

In 2000, the SEC adopted Exchange Act Rule 10b5-1. The rule provided affirmative defenses for corporate insiders and companies to buy and sell stock as long as they adopted their trading plans in good faith, before becoming aware of material nonpublic information. In the subsequent two decades, however, it became clear that gaps had emerged in the rule. Insiders could benefit from the rule’s liability protections while trading securities opportunistically on the basis of material nonpublic information.

Thus, last year, we adopted amendments to fill these gaps, such as by imposing a cooling-off period between when insiders can adopt plans and trade under those plans, limiting the number of plans insiders can have, and requiring insiders to certify that they’re not in possession of material non-public information.[10] The rule went into effect in February 2023.[11]

These steps help align incentives, avoid improper gains, and build trust amongst investors and issuers.

Proxy Voting

The third category of our projects relates to proxy voting. These projects build on those ’34 Act authorities I mentioned, whereby Congress established the SEC’s role with respect to solicitation of shareholder proxies—an important aspect of corporate governance. It is through the proxy voting process and director elections that shareholders, as the owners of the corporation, can hold the board and management accountable for the corporation’s performance.

In 2021, the Commission adopted rules relating to universal proxy.[12] The ability to elect directors is among the most important rights of shareholders. It’s thus important that shareholders—as a company’s owners—get to pick and vote for their preferred mix of candidates when voting by proxy, regardless of who nominated them.

The final rules put investors voting in person and by proxy on equal footing, which enhances shareholder voting.

Additionally, last year, the Commission adopted amendments to enhance the transparency of fund and institutional investment managers’ proxy voting records.[13] Our final rules make sure that investors receive consistent and more detailed information about proxy votes. Importantly, the rules also fulfill a Dodd-Frank mandate including with regard to how investment managers vote on executive compensation—or so-called “say-on-pay” matters.

The Commission also adopted amendments to the rules governing proxy voting advice.  The rules are designed to address issues concerning the timeliness and independence of proxy voting advice, which will help to protect investors and facilitate shareholder voting.[14]

Also in 2022, the Commission proposed amendments to Rule 14a-8.[15] Our proposal, if adopted, would bring more clarity and consistency to how companies evaluate shareholder proposals for inclusion in their proxy statements.

Beneficial Ownership

Lastly, in October, we adopted rules to shorten the deadlines by which beneficial owners must inform the public of their position.[16] Though these rules don’t govern corporate directors and officers, they nevertheless relate to corporate governance principles regarding shareholder voting and corporate control.

The Williams Act, as amended in 1970, provided that beneficial owners with control positions of more than 5 percent had to report those positions within 10 days.

In Dodd-Frank, Congress authorized the SEC to enact rules to modify those 10-day deadlines. Recently, we adopted amendments to shorten these reporting deadlines to five business days. This adoption updates these reporting requirements for modern markets, ensures investors receive material information in a more timely way, and reduces information asymmetries.

Conclusion

Here at the SEC, we have gotten a lot done to update and enhance corporate governance for the 2020s.

Our projects align with our authorities in corporate governance going back nine decades.

They follow Congress’s vision that a federal regulator, the SEC, play a role alongside state law in addressing corporate governance-related issues—to align incentives and build trust in the markets.

That benefits investors and issuers alike.