Transparency revolution balanced volatile securities markets
Once upon a time, way back in the days of the Great Depression, the gentlemen in Congress felt that the securities markets were a trifle unstable. When the stock market crashed in October 1929, there was more than a little panic in the country. As the SEC’s website says:
‘Congress held hearings to identify the problems and search for solutions. Based on the findings in these hearings, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These laws were designed to restore investor confidence in our capital markets by providing more structure and government oversight. The main purposes of these laws can be reduced to two common-sense notions: 1) Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling and the risks involved in investing; 2) People who sell and trade securities – brokers, dealers and exchanges – must treat investors fairly and honestly, putting investors’ interests first.’
In 1934 the doors of the SEC opened for business and the industrious folks who work there have been regulating the markets for more than 70 years. As the SEC’s first annual report, released for the fiscal year ended June 30, 1935, said: ‘The Commission is vested with broad administrative powers to promulgate rules and regulations and is empowered to enforce these regulations.’ It went on to say, ‘Legislation of the character of the Securities Act of 1933 and the Securities Exchange Act of 1934 comprehends within its scope such a variety of complex situations that innumerable questions necessarily arise...’
I don’t know about you, but when I read about a federal entity that is self-described as having ‘broad administrative powers to promulgate rules and regulations,’ and that we can expect ‘a variety of complex situations’ to ‘arise’, well... the whole thing makes me nervous. After all, these are the same people who produce budgets that can herniate the strongest of men should he be foolish enough to lift the hardcover version. These are the same people who create a tax code that a team of lawyers and a mystic can’t divine. To paraphrase Lincoln: Three score and 13 years later, the SEC has brought forth their magic on market regulation.
Okay, you’re thinking, the SEC is another convoluted manufacturer of crazy-quilt regulations. So what? We’ve all had to live with the SEC for a long time. Nobody likes it, but we’re all still here. What’s the big deal?
The big deal is the potential for a market perfect storm. (I wish I could claim credit for the ‘perfect storm’ phrase, but I scarfed it up from someone else. Can’t remember who it was.) A perfect storm is a collection of weather events that separately would be problematic but not catastrophic; combined, they form a disaster much greater in magnitude.
What events are coming together to form our market’s perfect storm? In no particular order:
‘Say on pay’: Congress is working to grant shareholders the right to go thumbs up or down on executive pay. If shareholders can tell the board what they think of CEO compensation, doesn’t that give them the power, indirectly of course, to vote up or down on anything that senior management and the board do? What better way to express themselves on what a company’s doing than by voting their approval or disapproval on the boss’ pay?
Compensation disclosure: Could the institutions and the ‘say on pay’ folks have asked for a better tool to cause trouble with than the new disclosure procedures? Anybody seen Hank McKinnell around lately?
Majority voting: Doesn’t matter whether you’re using the Intel model or the Pfizer model or any other model, if your directors have to submit resignations when they receive less than a majority of ‘for’ votes, you could have trouble. And given the ‘say on pay’ and compensation disclosure issues mentioned above, and the possibility of the broker vote going away (see below), and the ever-possible likelihood that Institutional Shareholder Services (ISS) is going to give your proxy the hairy eyeball (a technical term I picked up in my youth), you could find yourself with a fistful of resignations about 10 minutes after your annual meeting adjourns. (If you have a declassified board, you could really be in a world of hurt.)
Rule 452 broker vote: The NYSE doesn’t want any part in voting for directors at companies’ annual meetings. (Who can blame them?) They want director votes declared non-routine, meaning the current ‘broker vote’ goes away. The broker vote can represent as much as 20 percent of total shares. Do the math. It’s scary. If 20 percent of your vote goes away, and the institutions vote all of their shares, their shares have a much greater proportional impact.
E-proxies: No one really knows how this is going to play out. Twenty years from now, maybe less, we’ll be talking about the paper-digital debate the same way people laugh over computers that used to occupy gigantic, sealed, air-conditioned rooms instead of sitting on people’s desks. But right now a lot of energy is going into wondering how to manage this process: Should we go digital or stay on paper or both? If both, what’s the mix? Which shareholders get which version? What’s it going to cost? And has anybody noticed the responsible approach the SEC and the NYSE took to setting fees for ‘notice and access’? They’ve left it to the market. But the market is only one player. Nice work, regulators.
Proxy access: As of the time of writing, the SEC has just issued two proposed rules that seem completely contradictory. And SEC chairman Christopher Cox is a true Solomon, voting for both. No matter what the outcome, it seems safe to say that institutions will continue to push for greater access. If and when they get it, imagine the impact it would have when combined with some of the issues mentioned above.
ISS: These guys are a pain, aren’t they? Like the Vatican, they issue bulls (from the Latin word bulla, meaning a notice from an authoritative source). When ISS issues a bull, the scatological pun is also intended. Why? Because they don’t live by their own rules. They’re not publicly traded; their board isn’t independent by their own standards; they’re not responsible to any authority.
You might even have some other things you want to throw in here. What’s to be done about all this?
Cary Klafter is vice president of legal and government affairs and director of corporate affairs and secretary for Intel. He’s also the chairman of the Society of Corporate Secretaries and Governance Professionals’ public company affairs committee. He’s smart and articulate, and if I had my way, I’d put him in complete control of the markets for about six months. He’d straighten things out.
The reason I say that is because I was lucky enough to hear Cary address some of the SEC staff when the Society met with the staff in May this year. Cary referred to much of the trouble above and to some of the things the SEC is doing to deal with the situation. He pointed out that the SEC needs to look at the entire market, needs to approach it holistically. If each of the items above is dealt with as a standalone problem, you get exactly what has evolved: a Rube Goldberg machine of regulations full of unintended consequences.
If we can’t put Cary in charge, let’s at least hope the SEC sees the wisdom of his holistic approach.
