Corporate Governance (aka, CorpGov.Net)
9295 Yorkship Court, Elk Grove, CA 95758
June 13, 2003
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: S7-10-03 Possible Changes to Proxy Rules
Dear Mr. Katz:
This is in response to your request for public views with regard to possible changes in proxy rules and supplements my comments of May 26, 2003, posted at http://www.sec.gov/rules/other/s71003/corpgov052603.htm and my August 1, 2002 petition posted at http://www.sec.gov/rules/petitions/petn4-461.htm. I am the editor of CorpGov.Net and PERSWatch.Net, two Internet publications that are primarily concerned with enhancing the sustainable wealth generating capacity of corporations. CorpGov.Net is aimed at both individual and institutional shareholders. PERSWatch.Net is aimed at members of California Public Employees Retirements System (CalPERS).
While I stand by my original suggestions, I also believe the SEC should seriously consider the following, largely drawn from Mark Latham's suggestions to the SEC:
Branding. Comparing the quality of one director candidate to another is a complex task. The majority of individuals lack the time and expertise to make detailed decisions on their proxies. Even ISS (Institutional Shareholder Services) probably spends only about four hours of analysis per proxy. The solution, according to Latham is brand reputation, allowing individuals to, for example, vote the same way as CalPERS, Domini Social Investments or any other institutional investor that announces their intended votes in advance. The Commission could promote this possibility by:
- Developing an Internet brand voting system as a pilot program.
- Encouraging others to develop an Internet brand voting system.
- Clarifying regulations that may affect such a system, such as proxy solicitation rules.
- Funding system development.
Company Specific Rules Established by Shareowner Resolutions. Amend rule 14a-8(i)(8) to explicitly allow binding shareowner resolutions on director elections. Defining several standardized levels of access for nominees in the proxy, without actually imposing them as a regulation, could facilitate experimentation and learning. It would enable the investment community to try opening access to the proxy at, for example, $2,000, 1% or 5% thresholds (my numbers, not Latham's) and allow us to learn the pros and cons of a variety of scenarios, rather than requiring that one standard apply to all.
Instant run-off voting. Since candidates with the most votes may actually not be preferred by a majority of voters if there are more than two candidates, require or at least encourage instant run-off voting.
While I would prefer the SEC adopt my own recommendations, Latham's are far preferable to instituting a 5% threshold across the board or limiting the number of shareowner director nominees to one or two per board. Latham would basically empower the shareowners of each company to come up with their own framework to ensure democratic corporate governance, a reasonable approach.
Additionally, listing requirements should require annual elections of all directors. When only a third of a board is truly accountable in a given year, as is typical in most staggered boards, the improved corporate democracy benefits of the above-mentioned reforms are highly diluted.
In addition to the above comments as they relate to the election of directors, I would also like to take this opportunity to comment on the "ordinary business" exemption provided under Rule 14a-8(i)(7). Last summer SEC representatives indicated the Commission would consider elimination of the "ordinary business" exception. The "ordinary business" exemption has been relied upon to exclude many proposals that I believe are worthy of consideration by all shareholders, as well as by management and company directors. It is crucial that shareholders be able to represent their interests to company directors and management on all matters that bear upon important issues of governance and corporate responsibility.
I respectfully request the Commission revise Rule 14a-8(i)(7) to severely restrict its use. For example, it is absurd that proposals regarding the audit process and auditors, such as Latham's "Auditor Reputation" proposals that shareholders be able to elect auditors, have been excluded as '"ordinary business." Given the recent revelations surrounding Enron and Arthur Anderson, selection of an auditor should not be left solely to management's control.
Andrew E. Shapiro, President of Lawndale Capital Management, LLC, included several innovative comments in his June 13th comment letter that I concur with and believe are worth reiterating, with some modification:
With regard to shareholder proposals, level the playing field and no longer require proponents to personally present their proposal. Company proposals are voted on all the time and remarkably, directors don't have to attend their own annual meetings. Certainly, if directors are not required to attend, neither should proponents of shareholder proposals.
The Commission should improve corporate democracy by tightening/relaxing certain rules applying to issuers who fail to implement proposals that receive a majority vote.
For example, if a proposal gets a majority vote and the board ignores the mandate, allow the identical proposal to be submitted again by the same proponent the next year automatically (disallow noaction requests). In addition, expand the statement word limit for resubmitted proposal.
Finally, provide for a reimbursement of costs proposal to be automatically included side by side in the proxy, making this a second proposal that would automatically recur each year the proposal is automatically resubmitted. Companies faced with the prospect of perpetual submission of majority vote proposals with no way to exclude them or outspend and outlast the proponents would be more likely to sit down and work out a compromise. Either through automatic resubmission of the proposal or more parties sitting down to compromise, the no-action workload of SEC staff would be reduced.
I also like Shapiro suggestion to go further and provide additional rights to shareowners in companies that ignore majority vote mandates by lowering the threshold requirement to nominate an alternative short slate. Additionally, if some form of repetitive disregard of majority vote mandate persists, drop the cap on the number of directors that can be nominated onto the company proxy and allow a control slate to be nominated by shareholders to appear.
I would welcome the opportunity to discuss my comments with Commissioners or staff. Please contact me at the phone number below.
James McRitchie, Editor