Institutional Shareholder Services

June 13, 2003

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549-0609

Re: S7-10-03

Dear Mr. Katz,

We appreciate the opportunity to submit our comments on the Securities and Exchange Commission's request for suggestions on possible reforms of corporate elections and the proxy voting process. This statement represents the views of Institutional Shareholder Services (ISS) and not necessarily those of our clients.


Enactment of Sarbanes-Oxley by the U.S. Congress and adoption of related rules by the Securities and Exchange Commission (SEC) encourage better governance at U.S. corporations. Tougher penalties for individuals who mislead investors and enhanced oversight of auditors also will help to deter abuses.

While these recent reforms represent a major leap forward, the SEC must take steps to insure that the new reforms are fully implemented and strongly enforced. The big boost in the SEC budget is a plus. Even at this increased funding level, however, the SEC alone will not be able to provide the level of oversight that the investing public demands.

It is impossible to put a SEC cop on every street corner in the marketplace, so Sarbanes-Oxley and the new listing standards proposed by the New York Stock Exchange (NYSE) and the Nasdaq Stock Market seek to augment enhanced enforcement with better boardroom oversight of management. For this process to succeed, the Commission must insure that shareholders can hold boards of directors accountable.

The SEC review of the federal proxy rules provides a real opportunity to provide the investing public with tools that will allow for enhanced oversight of boards. The SEC should take several steps to insure that shareholders can effectively exercise their board oversight responsibilities.

Provide Shareholders Access To The Proxy Ballot-Any democracy is only as robust as its electoral process. Elections at U.S. corporations lack several attributes of any good democratic system. Most nominees run unopposed. Challengers to the incumbent directors lack any meaningful opportunity to place their names on the ballot.

Although some boards invite shareholders to suggest possible candidates to board nominating panels, few of these individuals actually make it onto ballots as nominees. Instead, shareholders who wish to offer alternative candidates must expend enormous sums of time and money to produce separate proxy solicitation materials and forward them to other investors. Few investors are willing or able to afford such costs (outlays now run in the multi-million dollar range at large companies) or to tolerate the no-holds-barred tactics that typically accompany such aptly named "proxy fights."

To level the playing field, the SEC (and, if necessary, Congress) should allow reasonable access to significant investors to place their nominees on the corporation's proxy ballot. To safeguard against abuse, the power to offer such nominees should be limited to significant, long-term investors, who do not seek to change control of the corporation.

  • Qualifying significant shareholdings should vary with the size of the issuer. At the very largest public companies, holdings of as little as 3 percent to 5 percent of the outstanding shares should suffice. At smaller companies, however, qualifying holdings of 10 percent or more may be prudent. Groups of smaller shareholders should be allowed to combine their holdings to reach these ownership thresholds. (To prevent the filing of director candidates from triggering poison pill or other takeover devices, the ownership threshold should be set below the triggering level at companies that have such takeover defenses.)

  • Each qualified shareholder or group should be limited to one nominee at a meeting for each qualified investment stake that it holds. Thus, a shareholder with a 10-percent stake would be eligible to place two candidates on the ballot at a company where the access threshold is 5 percent.

  • Long-term should mean at least one year of continuous ownership of the qualifying block of shares.

  • The number of shareholder nominated candidates at any meeting should be limited to less than a majority of the entire board. Qualified shareholders, for example, could nominate candidates for no more than four seats on a nine-member board at a single meeting. If more shareholders qualify to offer nominees than the number of seats available for shareholder nomination, the individual or group with the largest stakes-rather than the first in line-should receive preference.

  • Shareholder-proposed candidates should get equal time-equivalent space and treatment-in the company's proxy statement as that afforded to the board's nominees. Shareholders who exercise this access right should be required to disclose any expenditure that they make on supplemental solicitation efforts.

  • Use of ballot access should be limited to investors who qualify under the SEC's existing rules regarding exempt shareholder communications. So-called 13D filers and other investors who seek control of the corporation should be prohibited from using the access process to gain seats. Likewise a 13D filer or an individual associated with it should not qualify as a bona fide nominee of a qualified investor.

Allow Ticket-Splitting in Contested Election-Providing access to the proxy would not eliminate full-blown proxy contests. Various investors, including 13D filers, would continue to use such contests as a means of seeking more substantial representation or outright control of a board.

However, even traditional proxy contests limit voter choice. Proxy fights under the current rules leave investors with an all or nothing decision. Investors can support the dissident's slate or the incumbent board's slate. Although the SEC's so-called short-slate rules allow a dissident group to fill out its slate with some of the incumbent board's nominees, these rules do not provide shareholders with the ability to make their own choice of directors by selecting a combination of candidates from competing slates.

Shareholders must have the right to choose the best candidates in any election-not just the best slate. The current proxy process makes it difficult or impossible for investors to cast votes for candidates on more than one ballot in a given election. The SEC should adjust the rules and work with the various players in the back-end of the voting process to provide investors with true choice in contested elections.

Eliminate Broker Voting-The SEC should curtail ballot-box stuffing at annual shareholder meetings by financial intermediaries. The NYSE's practice of allowing brokers to vote (under its "10-day rule") uninstructed shares held by their clients on ballot items that the NYSE labels routine distorts voting results and disrupts the shareholder-director communication process.

A current proposal from the NYSE would fix part of the problem by reclassifying proposals seeking shareholder approval of all stock option plans as non-routine voting items. This proposal, however, does not go far enough.

Many shareowners use their votes on the board of directors, the selection of auditors and other ballot items to communicate their views on these issues. The NYSE classifies the election of directors as a routine voting item unless a full-blown proxy contest has erupted. The NYSE also considers votes on auditors to be routine in most cases. As a result, efforts this proxy season to communicate disapproval of board actions at companies such as Sprint and Tyco were watered down by broker votes.

Attempts to categorize issues as routine or non-routine are a relic of the past. In the current corporate governance environment, there are no routine voting items. Companies should be allowed to count broker votes for the sole purpose of reaching quorum at the meeting.

Disclose Post-Election Report-The current rules for reporting the outcome of annual shareholder meetings are grossly inadequate. Allowing issuers to wait until the filing of their next quarterly report to offer voting results weakens the communicative value of shareholder votes.

Meaningful and accurate real-time disclosure of preliminary vote tallies is voluntary. In many instances, companies report the bare minimum ("the shareholder proposal failed" or "all ballot items passed") or spin the information in ways that sometimes give a misleading impression about the level of voting support or opposition on controversial proposals. This proxy season, for example, numerous companies reported that resolutions had failed to pass at meetings only to report in later SEC filings that support for the proposals was in excess of a majority of the votes cast. Investors also typically receive no post-election information on the cost of the incumbent board's solicitation activities.

To cure these shortcomings and to provide timely disclosures to shareholders, the SEC should require companies to file (as an 8K or via a new post-election report filing) and publish (via press release and on their web sites) the best available results of the voting at the annual meeting (including a breakout, if applicable, of broker votes) and an estimate of the total expenditure made by the company on its solicitation efforts. Requiring real-time, material event disclosure will close the communications gap. Follow-up quarterly filings would provide investors with the official certified vote results and a full accounting (line-item breakouts, for example, of out-of-pocket solicitation costs) of the expenditures made by the issuer with regard to the proxy solicitation.

Such a requirement is not burdensome. Some issuers already announce voting results at meetings, and some firms even issue press releases with preliminary results at the time of the meeting.

Enhanced Disclosure

Support New Corporate Governance Disclosures-The SEC should formulate new disclosure rules that give shareholders a clearer picture of actions taken in the boardroom.

  • Shareholders deserve to know about any and all relationships (personal and professional; monetary and non-monetary) between corporate directors (and their immediate families) and the corporations where they serve on boards.

  • The SEC should mandate disclosure of boardroom disagreements-in the form of split votes, for example-on matters such as executive compensation and the audit process (the pre-approval of certain non-audit related services, for example).

  • The SEC also should provide shareholders with the full picture on executive compensation. Current rules provide loopholes that allow for less than full disclosure of executive severance plans, post-retirement benefits and deferred compensation.

The Stock Exchanges

Support for New Listing Standards-ISS and most investors generally support the pending listing standards changes proposed by the NYSE and Nasdaq. ISS strongly encourages the SEC to move forward on the adoption of these standards as soon as possible. Further delay in their adoption may result in postponement of the effective date of new shareholder approval requirements for stock option plans beyond the 2004 annual meeting cycle.

Broader SEC Oversight of Self Regulatory Organizations-The SEC's delay in adopting the new listing standards appears to stem from its lack of authority to impose listing standards on the NYSE and the Nasdaq. Absent such authority, the SEC can do little more than cajole the Self Regulatory Organizations (SROs). The SEC should seek clear authority from Congress to override determinations made by the SROs that run counter to their self-regulatory mission of investor protection. The SEC should have clear authority to mandate listing standards when the SROs are unable or unwilling to adopt needed changes.

Governance Reforms at Stock Markets-The SEC should continue its efforts to improve internal governance practices at the NYSE, Nasdaq and the other market self-regulatory bodies. The self-regulatory arms of the stock markets typically operate behind closed doors with little or no disclosure to the investing public. A higher degree of transparency is needed in regard to the internal governance of the SROs. The same holds true regarding not only the adoption of corporate governance listing standards at both the NYSE and Nasdaq, but also their enforcement. This is especially important in light of the role that governance listing requirements are now expected to play in setting higher standards for boards of directors of public companies.

Thank you for this opportunity to share our views with the Commission on these important issues. We look forward to working with the Commission and its staff in crafting new rules that will enable shareholders to exercise their voting rights more effectively. Please contact me or ISS Special Counsel Patrick McGurn with any questions.


James E. Heard
Chief Executive Officer
Institutional Shareholder Services