LPA, the HR Policy Association

June 4, 2003

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
[transmitted by e-mail]

Re: File No. S7-10-03

Dear Mr. Katz:

We are responding to the request for public comment regarding the recent directive to the Division of Corporation Finance to formulate possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. We believe that this critical assignment necessitates a thorough examination of the need for transparency in all aspects of the corporate governance process, and our comments are intended to provide suggestions to help you achieve this.

Our comments below focus on the transparency of all organizations involved in the corporate governance process, including those making recommendations on which institutional investors rely in voting shares.

LPA, the HR Policy Association, is a public policy advocacy organization representing senior human resource executives of more than 200 leading employers doing business in the United States. LPA provides in-depth information, analysis, and opinion regarding current situations and emerging trends in employment policy among its member companies, policy makers, and the general public. Collectively, LPA members employ over 19 million people worldwide and over 12 percent of the U.S. private sector workforce.

As the Commission develops its agenda, we believe there are certain lessons that can be learned from the political electoral process. One of the most important of these is the principle of transparency.

In the electoral arena, transparency takes several forms. For example, any individual or group advocating a candidacy through advertising must identify itself each time it "speaks." This permits the electorate to render a judgment as to the independence, reliability and credibility of the speaker. Similarly, every political campaign must report in a timely manner each financial contribution it receives and the name and other identifying information about the donor who made it. This permits the electorate to render a judgment as to the independence or allegiances of the candidate, as well as to assess, in the aggregate, the actions and potential influence of any donor or donors. Transparency alone does not guarantee that such judgments will be rendered or that, when rendered, they will be wise, but it does assure that this important information is available to those members of the electorate who seek it.

In striving for greater transparency, it is not enough, in our view, for the rules of the game to be defined for corporations alone. Rather, just as in the electoral sphere, such rules must apply as well to any organized interests that seek to influence the voting of shares within corporations. Just as voters have a right to know who is trying to influence their candidate preferences, shareholders have a right to know who is trying to influence the exercise of their proxies on matters ranging from the election of directors to issues of corporate governance, and beyond that to matters of corporate social policy that may be brought forward under SEC Rule 14a-8. This is true of individual shareholders, but it is equally and especially true of institutional shareholders - pension funds, mutual funds and the like - who typically have significantly more at stake in such matters.

While it is the case that, in the strictest sense, ownership of publicly-held corporations provides the equivalent of the electoral arena's one person-one vote principle - in the form of one share-one vote - in reality ownership of publicly-held corporations is heavily skewed in favor of institutional shareholders, whose votes in proxy matters are generally determinative of the outcomes. And it is also true that such institutional shareholders rely heavily on outside advice regarding the voting of their proxies. Indeed, the recommendations of such "independent" third parties can be employed, not only to decide how to vote on directorship elections or shareholder resolutions, but to constitute in and of themselves a legitimizing rationale for such voting. And when numerous institutional shareholders, receiving identical advice from the same independent advisory service(s), vote the same way in sufficient numbers to influence the outcome - to shape the decisions that emerge from ownership of publicly-held corporations- then in a real sense, it is the independent advisors that are exercising power, albeit through the agency of the ostensible owners of the shares. In some instances, these advisors are even authorized to vote the shares themselves.

In that world - and it is demonstrably the world that we currently inhabit - it is essential that rules of transparency extend to the community of advisors, to the organized interests whose function is to guide proxy voting. Corporations have a right to know, institutional shareholders have a right to know, individual shareholders have a right to know, policy-makers have a right to know and the public at large has a need to know who these advisors are. Yet under current SEC regulations, some such groups pass under the radar altogether, while for others, it is an easy matter to mask their ownership behind shell corporations and other devices. SEC Form ADV, for example, filed by all investment advisory firms, requires the identification only of owners of 25 percent or more of a given advisory firm, and if that ownership itself takes corporate form, applies a second iteration of the 25 percent rule. It is a simple matter for corporate structures to be designed in such a way as effectively to circumvent this most basic disclosure requirement, and this is, in fact, done.

If the Commission is to achieve its objectives, it is our view that the principle of transparency - full disclosure - must be applied to these organized interests. The failure to do so sets in motion a process by which the influence of such parties is enhanced, as are their chances either for self-dealing or for advancing their own private agendas, even as their identities are masked under cover of law.

Thank you for the opportunity to provide our views on this important matter.

Sincerely yours,


Jeffrey C. McGuiness