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Campos Discusses Shareholder Activism

SEC Commissioner Roel Campos believes the most significant change brought about by the Sarbanes-Oxley Act with respect to the board and management structure can be found in section 301. Section 301 requires that the audit committee, which must be comprised solely of independent directors, must oversee the relationship with the outside auditor. The audit committee and the board must now maintain the integrity of the audit process, Campos said. The significance of the new audit committee process along with the other provisions of the Act are hard to overstate, in Campos' view. The Act has permanently changed the dynamics of the relationship between the board and management, Campos said, and has resolved many of the potential conflicts. Campos' remarks were made at Harvard University and were posted on the SEC's Web site.

Campos said that public company boards tend to be a fairly exclusive club. He noted that compensation committees have not been successful in controlling excessive compensation to CEOs. Many compensation committee members are CEOs or former CEOs, so Campos said they are part of the same club.

Campos talked about the increase in shareholder activism, including hedge fund activism, and directors' responses in recent years, particularly since the high profile scandals. Campos counseled management to at least listen to what large shareholders have to say. He said the SEC's rule proposal from two-and-a-half years ago that would provide a means for shareholders to nominate directors continues to be relevant to the ongoing debate. Campos acknowledged that he may be the only commissioner who continues to support the proposal, which would have provided a mechanism for long-term large shareholders to nominate directors in cases where the proxy process has proved ineffective.

While the SEC's rules generally improve corporate disclosure, the proxy access rule was designed to empower shareholders to have a direct say in who is nominated to the board, according to Campos. He is not optimistic that it will be pursued. However, Campos pointed to other developments since the rule proposal, including the movement to elect directors by means of a majority vote. Many companies have adopted these policies at the request of shareholders who submitted proxy proposals. Campos said this development shows that management in some cases is listening to shareholders and making enlightened decisions. This development is a positive step in favor of shareholder democracy, in his view.

Campos reviewed the status of the SEC's proposed executive compensation disclosure rules and said he hopes the staff will use the comment process to improve them. One area of concern is the disclosure of performance-related targets. Shareholders want to know whether the targets are appropriate and whether they have been met. Companies are concerned that this disclosure will reveal confidential commercial or business information. An alternative may be to disclose the targets after the fact, Campos said. He added that he will keep an open mind on the matter.

Shareholders have tried a number of approaches to excessive corporate pay, including letter writing campaigns, director withhold votes and the submission of proposals seeking votes on executive compensation matters. Campos suggested that shareholders could propose a binding by-law amendment to require shareholder ratification of executive pay arrangements and submit another by-law amendment to require that directors must be elected by a majority of the shares voted at a meeting. This approach would ensure a voice in executive compensation matters as well as the ability to remove directors, he said. The SEC's proposed rules and shareholders' innovative tactics may alter the balance of power, he said.