Lens Governance Advisors, P.A.
45 Exchange Street
Portland, Maine 04101
207/775-4296 (p) · 207/775-4289 (f)(/font>
June 11, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
RE: File No. S7-10-03
Dear Mr. Katz:
I commend the Securities and Exchange Commission reviewing the question of proxy access. The SEC is tackling one the most important issue in American capitalism - the empowerment of ownership to hold fiduciaries to account for their stewardship of owner's interests and assets. At its essence, the legitimacy of the system is the issue. Meaningful access to the company's proxy ought to be a fundamental right of ownership.
The Fiction of Democratic Accountability
After six years of attending annual meetings, putting forward shareholder resolutions, and engaging in occasional proxy contests, I can state the grim reality declaratively: Shareowner democracy is fiction. The words are there, abundantly uttered around proxy season: "ballots," "resolutions," "nominations," "elections," "bylaws". But the truth without hyperbole is that elections for the old Soviet Politburo were as democratic as elections for corporate directors in America today.
Boards are self-perpetuating entities. They are clubs who choose their own members. Worse yet and more commonly, directors are recruited by the CEO, effectively appointed by the CEO, and often coddled by the CEO with lavish perks and privileges. It is no wonder that many directors believe they work for the CEO. With these realities, directors simply cannot be expected to act independently - despite all the most carefully written strictures upon cronyism and conflicts of interest.
The single time each year that owners have the right to vent and vote is the annual meeting and its proxy. Often this is the only moment when the director is physically reminded of his responsibilities and for whom he serves. Regrettably, annual meetings too often have metastasized into tightly scripted, stage-managed presentations that allow shareowners scant time for probing questions and comment. Directors are often present seemingly as silent subalterns, as props for the CEO's production. Sadly, this year we have witnessed annual meetings where even this modicum of accountability has been flouted, where directors did not even bother to show up. According to the New York Times, at the annual meeting of Morgan Stanley recently, CEO Philip J. Purcell was asked whether he had told the absent non-executive directors not to attend. "Mr. Purcell's response, according to a transcript from Morgan Stanley, was, `I am trying to be efficient' with the use of directors' time." Similar frustrations were dealt upon the shareowners of Johnson Controls and Dana Corporation.
Because of the failure to effect even modest corporate democracy through the tools that theoretically exist for it, shareowners are turning to other means to exercise their rights and responsibilities. It is sad testament that the most promising venue for reaffirming ownership and achieving model corporate governance is securities litigation. Two years ago, CalPERS and others pressed then-landmark governance reforms on Cendant in the settlement of class action lawsuits. More recently, Lens Governance Advisors has assisted plaintiff's attorneys Milberg Weiss and their clients achieve dramatic reforms at several firms in the past few months. One such case, a groundbreaking settlement with Hanover Compressor announced last month, bears directly on the question at hand.
The Precedent of the Hanover Compressor Case
Simply put, the Hanover Compressor settlement is historic. While addressing the functionality of one company and the specific needs of its shareowners, the terms of this agreement introduce a number of unprecedented, cutting-edge corporate governance reforms that will inform the public debate and the SEC's deliberation on the proxy access issue.
Clearly the most extraordinary provision of this settlement is the nomination of two outside, independent directors directly by the shareholders. As such a reform is - to our knowledge - unprecedented, the mechanism for achieving this is unique and is outlined as follows:
- The lead plaintiff's counsel and the Chairman of the Board collaboratively will canvass the shareowners with over 1% and less than 10% of the shares to identify possible candidates for consideration as independent directors
- These possible candidates will be reviewed against search criteria created by the nominating committee of the Board.
- Lead plaintiff's counsel will submit a list of an unspecified number of candidates to the nominating committee.
- The nominating committee and the Board will select two director candidates from the list for nomination to two seats on the Board and for inclusion on the Board's slate of nominees in the proxy.
- If there are fewer than two candidates on the list who are acceptable to the Board, then the lead plaintiff's counsel is to supply additional names.
While this method does not lend itself as a definitive model for the SEC's adoption in your new rules of proxy access, it provide a real precedent for meaningful shareowner participation in the nomination process.
More significant than the mechanism itself is the proposition underlying it, a big notion that also ought to underlie the SEC's new rules - the idea that the Board of Directors should be comprised of people not beholden to management or to the clubby nature of the board. This suggests that a board is not simply a self-perpetuating entity, with its members selected and vetted by management. It is, rather, an agent of the shareowners, with an agency empowered not just through legal liabilities but also through the time-tested methods of democratic accountability. When there is real shareowner nomination - such as is provided now at Hanover Compressor - there is a coincident tendency toward real independence and a greater predisposition by directors to confront, to challenge, to ask uncomfortable questions. This is essential to board functionality.
I strongly urge you to reform the rules to give shareowners the tools necessary for their employment of their rights and responsibilities. The corporate governance settlement terms at Hanover Compressor may be found at the following URL:
Thank you for your attention to these views.
Richard A. Bennett*
Governance Consultant to the Firm
*Not a lawyer and not engaged in the practice of law.