S7-10-03: Possible Changes to the Proxy Rules
From: Klafter, Cary [cary.klafter@intel.com]
Sent: Tuesday, June 10, 2003 6:26 PM
To: rule-comments@sec.gov
Subject: S7-10-03: Possible Changes to the Proxy Rules


Securities and Exchange Commission 
450 Fifth Street, NW, Washington, DC 20549 
attn: Jonathan G. Katz, Secretary 

Dear Mr. Katz: 

This email is in response to the SEC's request for views in Release No. 34-47778 
regarding possible changes to the proxy rules. These views are submitted on 
behalf of Intel Corporation. Intel is a Delaware corporation that has over 
3 million record and beneficial owners.  We estimate that approximately 2/3 of 
outstanding shares are held by institutions and approximately 1/3 of outstanding 
shares are held by "retail" accounts. We are aware of a number of institutional 
managers each beneficially holding 1% or more of our outstanding shares, but no 
party or group has filed with the SEC as a 5% stockholder. 

We proactively engage directly with our institutional and retail investors 
through, e.g., our Investor Relations and Corporate Social Responsibility groups. 
We believe it is important and proper to tell our story directly to our investors, 
and to that end we have long-term involvement with many of our institutional 
investors and with social investment and other special-interest groups. We receive 
assorted shareholder proposals each year, and in most cases they are not preceded 
by any request from the proponents to meet with the company to discuss the topics 
in question. Each proposal is submitted for consideration to the Board's Corporate 
Governance Committee, which then recommends a course of action to the full Board.  
We seek to meet with each proponent, and this often results in the proposal being 
voluntarily withdrawn and/or with the company voluntarily adopting the substance 
of the proposal. When we voluntarily adopt a shareholder proposal we often describe 
the action in our proxy statement or elsewhere in our public documents. We 
occasionally receive unsolicited letters proposing the consideration of  individuals 
for election to the Board, and we have disclosure in our annual proxy statement 
explaining how to make these submissions and how they will be forwarded to the 
Board's Nominating Committee for consideration. 

Since the overall topic of proxy rule changes is extremely broad in scope and 
coverage, we are limiting ourselves to some brief points on a limited number of 
sub-topics. We do plan to comment further if and when actual rule proposals are 
published in the future.

Recent developments. We note four trends which have developed in recent years, 
and which ought to be dealt with explicitly in any consideration of rule changes:

a) The Internet is a major communications medium and its use by corporations is 
becoming explicitly recognized in various SEC rule-making initiatives. The Internet 
is much easier and less expensive to use than the mail/paper-based proxy system. We 
support the consideration of Internet-based disclosure and polling tools in lieu of 
the mail/paper-based proxy system.

b) Many stockholder proxy proposals have become broad, political referendum campaigns 
often employed by single-issue special-interest groups. Often, the same proposal is 
submitted to 10s or 100s of issuers during a proxy season; the proponent is either 
a single person or entity or is part of a group that has allocated the list of target 
issuers among the group members. Generally the proposal is submitted without any 
advance attempt by the proponent to discuss the matter with the issuer; submission 
is not a last step by a frustrated proponent, but rather the first or only step by 
a proponent with little interest in discussing or negotiating anything. Because the 
same proposal is submitted to a very large number of issuers, little or no attempt 
is made by the proponent to consider whether individual factors concerning an issuer 
make the proposal appropriate or not. This state of affairs is most assuredly not 
the scenario contemplated by the current proxy rules, nor is it the scenario described 
by many proponents seeking to expand "shareholder access" to the issuer's proxy 
statement. 

The proxy rules should not be revised on the basis of anecdotal input extrapolated 
to suggest that institutional investors and special-interest groups are being uniformly 
kept from meaningful discussion with issuers. We do not believe that this is the case, 
and it ought not be the basis for imposing an inappropriate regulatory regime on all 
public companies.  Intel proactively engages with, and negotiates with proponents if 
we are given the opportunity; where appropriate we do not hesitate to voluntarily 
adopt policies proposed by shareholders. We can match anecdote for anecdote, but our 
stories will be about proponents who file without any request for a preceding 
discussion; proponents who had not bothered to review any of our public documents, 
and so had no idea that their proposals were moot on arrival; and proponents for whom 
no Intel-specific factor means anything in discussion. 

c) Voting advisers/managers such as Institutional Shareholder Services (ISS) have 
become major forces in the proxy voting process, and yet they are basically unregulated 
and unacknowledged in law or regulation.  In many cases, more than a majority of shares 
of an issuer are held by institutions which either grant discretionary voting authority 
directly to a third-party voting manager or which tend to follow the manager's voting 
recommendations without significant independent review. We support the imposition of a 
regulatory and disclosure regime with regards to voting managers that would be analogous 
to those in place for investment managers, for ERISA fiduciaries and for securities 
analysts. Current regulation under the Investment Advisers Act is not meaningful because 
there are no Advisers Act rules or SEC compliance programs which are optimized to focus 
on the business models of voting managers. We note with approval that the SEC and state 
authorities such as in New York have recently taken substantial action in revamping 
the regulatory environment with regards to securities analysts.  We also note that 
numerous of the inquiries raised in Release 33-8236, on credit rating agencies, could 
usefully be employed with regards to voting managers (e.g., product quality, process 
diligence, training and qualification of analysts, business conflicts of interest). 
Finally, we note  the analogies with auditors and the services prohibited by Section 201 
of the Sarbanes-Oxley Act.  Voting managers are "auditing their own work" when they 
issue voting recommendations, or vote as discretionary managers, on proposals as to 
which they have been paid consultants to the issuer or the shareholder proponent.

The increasing employment of voting managers, particularly when combined with the 
referendum-type proposal campaigns,  means that the opportunity for meaningful 
discussion with proponents and institutional shareholders is drastically reduced in 
many cases. The proponent has submitted the same proposal to 100 issuers, the voting 
manager has supported the proposal at each of the issuers and the institutional 
shareholder has already voted in favor of the proposal at the other issuers and so 
has no interest in actually considering the bona fides of the proposal relative to 
a specific issuer. The issuer's proxy statement becomes one of a hundred billboards 
for the proponent, but paid for by all the shareholders. 

(d) The concept of the "long-term investor" is becoming more myth than reality. 
Securities analysts, media commentators and investment managers are increasingly 
focused on quarterly earnings, and the trading horizons of many investors are very 
limited. We have seen data estimating the holding period of institutional investors 
as 11 months on the average. One of the only general exceptions in this regard is the 
index fund category.  We interpret this trend to mean that shareholder interests are 
extremely fragmented and disparate in nature, and that the proxy rules should not be 
revised on the basis that there is one model of investor behavior which holds sway. 
It will not facilitate the interests of shareholders generally to give undue power 
to a small group of shareholders who choose to be explicitly activist as a matter of 
policy; these are often single-issue activists using the proxy process as a political 
forum. 

In this regard, we are specifically  opposed to the undercutting of NYSE Rule 452 
so as to effectively disenfranchise large numbers of shareholders. Rule 452 has 
existed to counter-balance the fact that most shareholders are unknown to issuers 
on account of the record/beneficial ownership rules. It is individual shareholders 
who lose the vote when Rule 452 is cut back, since institutions do vote through 
special electronic means and through the employment of third-party voting managers. 
Cutting back on Rule 452 assumes that individual shareholders are not expecting 
their shares to be voted by the brokers as part of the account servicing process; 
we disagree with that assumption and are of the view that it will be contrary to 
the interests of individual investors to allow the Rule 452 10-day rule to be 
dismantled.

Effect of state law. Numerous of the proposals submitted to the SEC are of uncertain 
status under the law of many states where issuers are incorporated. One example in 
this regard is the proposal that an investor or investor group holding x% of an 
issuer's shares would be entitled to submit director nominations that would have 
to be included in the issuer's proxy statement. We believe that any such rule 
changes need to be accompanied by unequivocal action with the force of Federal law 
that clearly pre-empts any contrary state law. The views of states and local counsel 
may otherwise differ with the views of the SEC as to the validity of the rules, 
and issuers will be subject to numerous suits from aggrieved shareholders claiming 
that action in accord with SEC rules is without legal basis and contrary to relevant 
state law.  The voting results of company meetings, including the validity of the 
election of directors, may be put in doubt in the absence of needed clarity from 
Federal authorities. 

Shareholder proposals. We are opposed to proxy rule revisions which would have the 
effect of increasing the number of shareholder proposals to be included in issuer 
proxy statements under Rule 14a-8. The inevitable result of such revisions will be 
to increase the number of proposals which deal with topics immaterial to the 
issuer's operations and policies. This result will be directly contrary to other 
policies of the SEC that seek to keep immaterial and confusing disclosure out of 
an issuer's filings. We are more favorably disposed to introduction of disclosure 
requirements relating to issuer engagement with shareholders, and are also 
supportive of Internet-based polling tools as suggested by the SEC staff on 
occasion. Issuers are not run by shareholder referendum under state corporation 
law, and the Federal proxy rules should not create a system which suggests 
otherwise. We note for example that the deletion of the "ordinary business 
operations" exclusion could allow for the inclusion of proposals on virtually all 
activities of an issuer without regard for either materiality, relation to company 
operations or relevant state law. We are also opposed to the SEC's continued  use 
of the "significant social policy" exception to the "ordinary business operations" 
exclusion. This exception is not in the regulations, was not adopted subject to the 
relevant process under the Administrative Procedures Act, cannot reasonably be 
considered merely a regulator's interpretation of the words in a  regulation, and 
is in practice employed in a completely unpredictable manner on the basis of 
anecdotal input. 

We are supportive of the expressed desires of the SEC staff to remove itself 
from the routine adjudication of 100s of Rule 14a-8 claims each proxy season. 
We suggest that, as with other SEC regulations, an issuer be able to interpret 
the effect of Rule 14a-8 and act accordingly without first seeking SEC review. 

Solicitation of proxies for election of directors. We generally oppose proxy 
rule revisions which would allow shareholders to place director nominees in 
the issuer's proxy statement. Such a change would turn the proxy statement into 
a municipal or state voter's handbook rather than keep it focused as an issuer's 
disclosure document and as the issuer's request for proxies. 

The current system, which requires separate solicitation materials for a 
competing slate of directors, is not in disrepair. The proposals for rule 
revision seek to impose "solutions" on the entire universe of public companies 
when the actual "problem" cases can be handled under the current rules.  In 
addition, as noted above, we have substantial concerns about the state law 
status of proposals to limit director nominee "access" to holders of, e.g., 
5% of shares, and then to submit no more than a limited number of nominees. 
Such proposals are also subject to public policy concerns, since the percentages 
and number limits would be based on anecdotal support as best and as such 
would be subject to justifiable criticism for their arbitrary nature. 

We finally note, as a matter of public policy, that the requirements of 
Sarbanes-Oxley and the revised stock exchange listing requirements are barely 
in place and ought to be given time to work before considering a revamp of the 
proxy rules to "fix" perceived problems when the solutions may already be in 
place and in the process of implementation. Many issuers are now required to 
change numerous policies and to change their board and committee memberships 
on account of these brand-new laws and regulations; it would be appropriate 
government policy to actually allow time for the full implementation of these 
changes, and to monitor their effectiveness, without rushing off to "fix" the 
problems all over again in yet another forum. 

We appreciate the opportunity to have submitted these comments. Please contact 
the undersigned at 408-765-1215, or Patrice Scatena at 408-765-9771, if you 
would care to discuss these comments in further detail. 

Cary Klafter 
Vice President, Legal and Government Affairs 
Intel Corporation