Gary L. Nystrom
250 Gentry Circle, Vacaville, CA 95687 (707) 449-8116 Radar250@AOL.Com
May 30, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549
Reference: Commission to Review Current Proxy Rules and Regulations to Improve Corporate Democracy - No. S7-10-03
Dear Mr. Katz:
I am writing to you to provide my input regarding the possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors.
For over 225 years, the United States of America has been a leader in maintaining, promoting and defending democracy, here at home, and in other far away places where our interests are concerned. While our Constitution gives most Americans the right to vote for the candidate of their choice, shareholders are not necessarily given the same opportunity when it comes to the corporate world.
In the 80's, with the rise of the junk bond market and hostile takeovers, many corporations took steps to add takeover defenses and other restrictions like the poison pills to restrict shareholders' rights. Among the most popular were those measures staggering the terms of the directors, severance packages for executives and limiting the shareholders' right to meet or act. Many of these conditions are still in effect today.
Today, corporations are like individual states, countries and republics where the ultimate authority should rest with the shareholders of the corporation. While one form of corporate governance leans towards democracy, which reserves little power for management and allows the shareholders to react quickly and easily replace directors if needed. The other extreme is something like I have experienced at JC Penney. It is one which leans toward a dictatorship and reserves extensive power to management; places strong restriction on the shareholders and their ability to replace directors if needed, and rewards company executives and directors with increased pay and stock options even though the company is underperforming.
Instead, the voters at many corporations are faced with the same type of selection and election of Directors as you see held today in North Korea, Iraq, Cuba and many other countries where a dictatorship style of government still exists. This is where the director nomination is controlled by a selected few individuals and those selected for Directors are then able to run unopposed. Some directors are actually serving as a director prior to being elected by the shareholders. This, in itself, should indicate the voting for directors is often a token vote or the by-laws of the corporation make it nearly impossible for a member to not be elected or re-elected.
As you know, America has been rocked and continues to be rocked with one corporate scandal after another. Those scandals involving the likes of Enron, WorldCom, Global Crossing, Tyco, Adelphia, Lucent, Xerox and the latest at American Airlines. While some corporations and their most senior executives felt it was okay to fudge the books, some felt it was okay to mislead their investors and their employees by withholding critical information or simply not telling the truth. While some corporate officers are facing possible prison time, much more work must be done to hold all those accountable for their actions and to rebuild trust with the stakeholders.
While voters are attempting to make changes in corporate governance in such companies as JC Penney, the voters are finding road blocks at every attempt, from a request for no action letters, to outright saying they will not honor any such votes if passed. In a recent election held at JC Penney, the shareholders spoke by overwhelming numbers by showing their desire to see a change in the way JC Penney holds its elections and seeking the declassification of our Board of Directors. However, the CEO informed the shareholders that the Board would only take the matter under advisement. Many shareholders feel management will not take the vote seriously and will attempt to resist changing the by-laws to give the shareholders more rights, and again, not honor any changes to improve JC Penney's corporate governance.
The Council on Institutional Investors Corporate Governance Policies states, "all directors should be elected annually by confidential ballots counted by independent tabulators." According to the Council on Institutional Investors, shareholders in 2002 submitted over 50 proposals to have their boards declassified. Investors want and deserve truly meaningful reform and substantive changes. I believe it is time for the Securities and Exchange Commission to begin making the necessary reforms, which will go a long way in addressing investors' concerns and expectations.
Recently, The American Federation of State, County and Municipal Employees' Pension Plan (AFSCME) submitted a proposal to permit shareholders or groups of shareholders holding 3 percent or more of the company's stock to nominate candidates for directors in the company's proxy material. While the Commission let stand its position not to allow this measure to be placed on the Citigroup ballot, I support such a move. On face value, I think it is a great idea because like local, state and national elections, it would provide a field of candidates in which the voters could cast their votes. I do question who would actually represent the employees who, as a group, would also own more than 3 percent? I hope the SEC would not allow management to act as a representative as they currently do in various other employee plans.
Securities and Exchange Commission Chairman, William Donaldson, recently testified before the Senate Appropriations subcommittee that companies need to look beyond the usual candidates for directors. However, I believe the Honorable Fritz Hollings from South Carolina has a better picture of today's board. He stated, "In the early 1960s, boards were composed of drinking buddies'." Today, it appears that CEOs have a three-year term to "get the stock up, take the money and run," but again, maybe the drinking buddy's method still applies today. While many have expressed concerns about out-of-control compensation for CEOs, some board members, like those at JC Penney, have also seen huge increases while the investors at the company have suffered over the past several years through declining profitability, reduced medical benefits, reduced dividends and the laying off of employees who are down in the trenches. This indicates a willingness if you scratch my back I will scratch your back as far as pay is concerned.
The current problem with corporate governance is a lack of an effective procedure by which directors can be held personally accountable for their actions. This would include the removal from office and replacement by a candidate or candidates nominated by shareholders. I believe some states, such as Delaware, give protection to corporations and make it difficult for the shareholders to take action to ensure corporate accountability. While it is implied that the shareholders are the true owners of a corporation, then they should have the legal right to nominate truly independent directors.
I believe the Commission should review two research studies which discuss corporate governance, classified boards and the relationship which affects the shareholders' interests and value. The first study, "Corporate Governance and Equity Prices" conducted by Paul A. Gompers and Joy L. Ishii from Harvard University Business School and Department of Economics along with Andrew Metrick from the University of Pennsylvania Department of Finance, The Wharton School. Both Gompers and Metrick are associated with the National Bureau of Economic Research. Another report is titled, "The Powerful Anti-takeover Force of Staggered Boards: Theory, Evidence, and Policy, conducted by Lucian Bebchuk, John Coates IV and Guhan Subramanian from Harvard University, John M. Olin Center for Law, Economics, and Business. Both of these studies indicate by having staggered boards and running corpora-tions like dictatorships do not necessarily add any value to a corporation as some boards suggest they do but may actually be harmful to the shareholders' interest.
I believe the Commission and the New York Stock Exchange must take corporate reform seriously in order to rebuild the trust of the investors. Many thoughtful investors believe corporate governance procedures and practices, and the level of accountability they impose, are closely related to financial performance. It is intuitive that when directors are accountable for their actions, they perform better.
Finally, after all the scandals, I think it should be very clear to the Commission that changes need to be made. Recently, the Securities and Exchange Commission charged six former senior executives at Xerox with fraud. My question is, like Xerox, Enron, WorldCom and the list goes on, where were the directors? Now, if they are suppose to represent the shareholders and allowed CEOs to act inappropriately, then why should they also not be held accountable to the SEC? Maybe the directors of those companies should be prohibited from serving on other public companies.
I support a change to Rule 14a-8 under the Securities Exchange Act of 1934, whereby the solicitation of proxies for all nominees for Board of Director positions are required to be included in the company's proxy materials, at no cost to any nominee. I also believe the Commission should allow those who own more than 3 percent to provide opposition inputs to such other company proposals like stock options, severance packages, and many other proposals corporations try to pass each year. Tweaking rules and regulations will only minimally improve the quality of corporate governance. What is needed is true reform.