COMMITTEE OF CONCERNED SHAREHOLDERS
P. O. Box 2171
Culver City, CA 90231-2171
June 7, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-10-03 ("Possible Changes to Proxy Rules")
Reply to Letter of Comment of Responsible Wealth dated June 5, 2003
Dear Mr. Katz:
On August 1, 2002, the Committee of Concerned Shareholders ("Committee") and James McRitchie, Editor of CorpGov.Net, jointly filed Petition for Rulemaking (SEC File No. 4-461)("Petition") with the Securities and Exchange Commission ("SEC"). The Petition seeks "equal access" to the corporate ballot for ALL Shareholders by using a modification to the existing shareholder proposal procedure contained in Rule 14a-8.
On June 5, 2003, Responsible Wealth, "a network of hundreds of affluent Americans," filed its letter of comment with respect to S7-10-03. Responsible Wealth suggests Director-candidate nominator criteria of: a group of 25, each of whom has owned more than $2,000 of stock in the Company for at least one year, and the entire group owns "1% of the outstanding shares." Further, it suggests a limitation on the number of Director-candidates. This letter is written to comment upon some of the suggestions. On May 26, 2003, we commented upon the suggestions of the AFL-CIO. In substance, our experience has demonstrated that nominator criteria suggested by each is impractical and unfair and would result in a sham upon the investing public.
How will investors be found to form such groups of 25? (1) One could post a call for such investors on an Internet message board. Our experience is that, no matter how egregious the Company's situation, few Internet message posters will lift his/her veil of anonymity to identify himself/herself. Even if some do, another issue is negotiating written terms in forming a group of, essentially, strangers who could be scattered throughout a wide geographic area. (2) One could request that the Company provide the latest available list of shareholders (registered and beneficial). Our experience is that the Company will deny such a request until one registers one's stock and, then, stall until just after a lawsuit is credibly threatened. At such time, the Company (which, under various state corporate laws, is legally required to provide a list of registered share owners at its cost) will refer the requesting Shareholder to its Transfer Agent. The Transfer Agent will then stall and demand $1,000 for the list. Complaints to the Company regarding such exorbitant charges will be ignored.
Would a group of 25 persons be able to decide upon a very few Director-candidate nominees? Some type of written agreement would have to be negotiated as to the rights and responsibilities of group members. Responsible Wealth's underlying assumption is that such a daunting task could easily be accomplished. We found otherwise. Further, such agreements are substantially unenforceable. They are simply a moral commitment among strangers. We found that, even if such a group could be formed, it is very difficult to maintain when the Company causes desertions by partially satisfying the particular interest(s) of some members.
How many groups of 25 would come forward to act as watchdogs at the 9,000+ corporations with publicly traded securities? There are 9,000+ Companies with publicly traded securities where the legitimate corporate governance needs of individual Shareholders should be protected. There are not sufficient groups of 25 investors who will have the interest or the resources to nominate Director-candidates at many of those Companies. Director accountability should be promoted at more than a few Companies. Individual Shareholders should be able to act as their own watchdogs in protecting their investments at all the 9,000+ Companies.
Has Responsible Wealth's proposal considered the market value of 1% of the outstanding stock of major corporations? It is unrealistic to assume that there are 25 individuals whose combined holdings reach that amount. Few Institutional Investors own such amounts. (Our letter of comment dated May 26, 2003 deals with expected non-participation of Institutional Investors other than pension funds.) In effect, the suggestion by Responsible Wealth exempts the largest Companies.
Pejorative phrasing aside, why shouldn't the Director-nomination process be used as a "takeover device"? Both Responsible Wealth and the Petition suggest a one-year stock ownership period to qualify to nominate Director-candidates. "Takeover" attempts, when they occur, do not occur in a vacuum. Opposing views are publicly aired. Nothing would prevent incumbent Directors from revealing whether their opponent was allegedly engaged in an attempted "takeover." The other side could respond. The opposing parties could solicit and compete for approval from Shareholders. Shareholders would vote on the issue. A "takeover" would occur if, and only if, Shareholders (the true owners) approved by casting at least 50% of the votes in favor. In essence, all Shareholders should be trusted to know what is in their collective best interests. That is the American/democratic way. As to a very recent "takeover" attempt, Institutional Shareholder Services placed the "burden of proof" on the Company to justify why a "takeover" should not occur.
The burden of proof used to be on the dissidents to prove their case for change when waging a proxy fight, Mr. (Patrick) McGurn (Senior Vice President of ISS) said, but his company and many others in the investment community have become increasingly skeptical of the ability of existing managements and boards to make significant changes. `You saw time and time again that incumbent boards weren't taking care of shareholder interests,' he said. (6/4/03, New York Times, "An Investment Adviser Urges That El Paso Board Be Ousted")
Why limit Director-candidate nomination to "no more than 25% of the director candidate seats up for election"? Responsible Wealth claims that it "will serve to prevent the direct shareholder nomination of directors to be used as a takeover device." It will also serve to destroy any hope of achieving accountability. In many cases, less than 4 board seats are in contention. Incumbent members of Boards of Directors have subjected successful outsider candidates to isolation and emotional trauma. (See, e.g., media coverage of the election of Guy Adams to the Board of Directors of Lone Star Steakhouse and his subsequent resignation.)
Does Responsible Wealth believe that the Company's Nominating Committee should, also, consist of a group of 25 shareholders meeting its suggested stock ownership criteria? The Committee is not aware of one Nominating Committee that consists of 25 members. Our studies have shown that members of Nominating Committees own (not counting recently granted unexecuted stock options) collectively less than 2/100ths of 1% of the Company's outstanding stock. Some members own no stock whatsoever. Some might argue that the negligible stock ownership of members of the Company's Nominating Committee should be excused, as each Director owes a "fiduciary duty" to the Company and/or Shareholders that outsiders do not owe. However, members are not truly independent as they are beholden to their fellow Directors and/or the Chief Operating Officer for their positions and longevity and, thus, have a conflict of interest in the nominating process. Self-preservation will prevail. As Responsible Wealth's experiences demonstrate, Nominating Committees will find outsider suggested potential Director-candidates to be "unqualified" and/or will decline to "consider" them.
It would be a travesty upon the investing public to enact Rules that contain impractical nominating criteria. Responsible Wealth is advocating hurdles that are so high that they can rarely, if ever, be overcome. On the other hand, the Petition recommends the same reasonable and well-tested nominator threshold criteria used for shareholder proposals. The straightforward and democratic provisions that are suggested in the Petition should be implemented to bring accountability to all corporate boardrooms.
Very truly yours,
Les Greenberg, Chairman
Committee of Concerned Shareholders