From: Wakelin, Hallock & O'Donovan, LLP []
Sent: Tuesday, June 10, 2003 3:11 PM
Cc: Kay Evans
Subject: Need for Reform of Proxy Voting Rules

Dear Chairman Donaldson,

I am writing as an individual and as Chair of the Board of Trustees of the Maine State Retirement System. I believe that substantial reform is needed in the proxy voting rules of publicly-traded US corporations. The current system allows small minority groups and management officers to control corporate Boards of Directors, while the holders of a majority of the common stock (pensions and mutual funds) have essentially no voice in corporate management.

I would like the SEC to consider requiring every publicly-traded corporation in America to have one (1) institutional or professional director, who would be nominated by institutions holding substantial interests in the corporation, to represent the interests of the small investors who own mutual fund shares and are pension plan participants. That person should sit on the compensation and audit committees, and would be available to alert institutional holders of corporate malfeasance.

Reform of the proxy voting rules is desperately needed.

Please consider opening up the process so that small stockholders can have some small voice in corporate management.

I have attached a copy of an article which I have written for the Maine Bar Journal (Spring 2003) on this subject.

Thank you for your consideration.

Very truly yours,

David S. Wakelin
Chair, Board of Trustees
Maine State Retirement System
Portland, Maine
Tel: 207-774-3595 


By: David S. Wakelin, Esquire

In theory, public corporations are managed by an independent Board of Directors elected by the shareholders. The Board then sets broad corporate policy, makes critical strategic decisions and elects the officers to implement that policy. Its goal is intended to be growth of shareholder value.

Unfortunately, many publicly-traded companies in the United States are not operated this way in practice. The Board of Directors is not independent, and the officers dominate the management of the enterprise. These companies are not operated to maximize long-term shareholder value, but rather to perpetuate the dominance of the senior officers, who then can afford to live like current day Corporate Royalty.

A majority (over 61%) of the common stock of the largest 1,000 U.S. corporations is owned by institutions, consisting of public and private pension plans, mutual funds and insurance companies.1 The Board election and management rules, in actuality, preclude those institutions from having any meaningful place at the table of decision, the Board of Directors, and this leaves a majority of the owners of the companies from having a voice in corporate matters. It is time for this problem to be rectified by allowing the institutions which hold large percentages of public companies to be able to directly nominate one (1) Director to the Board of Directors of each public company incorporated in the United States and trading on established U.S. stock exchanges.

Often, holders of as little as 3-4% of the shares of a public company get candidates representing their interests on the Board of Directors. A small minority dominates the Board. While this is happening, even succeeding, the holders of 61% of the stock are not directly represented. The CEO's have their own friends and allies on the Board, but not the majority owners.

It is "black letter law" that members of the Board of Directors have a fiduciary responsibility to the shareholders who elect them. In small corporations, the shareholders owning a majority of the stock in a company elect all or a majority of the members of the Board of Directors. Why is it different in public corporations in the United States?

First, Boards of Directors of publicly-traded companies are essentially self-perpetuating. The Nominating Committee is established to designate a "slate" of director candidates, whose names are then included on the annual Proxy Statement. The Proxy Statement is then sent to all shareholders for election. Nominating Committees of many public companies are dominated by the officer group, resulting in the election of acquaintances of the Chief Executive Officer, friends and acquaintances of other Board members, and members of an elite Director Class.

Many Directors are current or former CEO's of other large public companies. Others are former politicians, lawyers and professors from nationally-known business administration schools. Often, the non-CEO Board members currently sell goods or services to the corporation, particularly lawyers or consultants. This nomination process does not produce independent directors that represent a majority of the shareholders.

The Commission on Public Trust and Private Enterprise of the Commerce Board recently released a report indicating that institutions, consisting of public and private pension plans, mutual funds, insurance companies and banks own 61.4% of the outstanding common stock of the top 1,000 U.S. corporations. The largest percentages are owned by pension plans (approximately 29%) and mutual funds (approximately 21%). The beneficial owners of these shares are the individuals who are participants in these pension plans and investors in these mutual funds. At present, these individuals have effectively no voice in electing directors of the largest 1,000 corporations in the country.

It is a very expensive and difficult process for any one institution to elect an individual to a public company Board of Directors through the proxy process. Such a process is essentially comparable to a "hostile takeover", requiring the use of shareholder lists, expensive solicitation materials and direct communication processes. It would be prohibitively expensive and fiduciarily-unsupportable for any one pension plan or large institution to engage in this direct solicitation process, and the pension participants or mutual fund investors could easily challenge the expenditure of funds in such an effort. It would be nearly impossible for the decision makers to demonstrate a direct investment return to the pension participants or mutual fund investors arising out of the election of one or more individual directors.

Thus, few, if any, institutions (including the largest, CalPERS, Fidelity and Vanguard) attempt to nominate candidates to public company Board of Directors. Therefore, the current corporate nominating and director election procedures have failed to provide direct representation to the institutions that hold a majority of the stock of the largest 1,000 corporations. How then could this be improved?

The nomination rules could be changed to require that each publicly-traded company add to its Board of Directors one (1) institutional or professional director who would represent the institutions and small shareholders who own a majority of the stock of the company. This would not be done on a hostile basis, but rather through the timely inclusion of the institutional director's name on the corporate slate. Such an institutional director must be both qualified and truly independent. He or she must agree not to serve on not more than two (2) corporate Boards of Directors at one time, and must further agree to have no business transactions with the corporation whose Board he/she serves on. This includes legal and consulting services, or the sale of any other goods or services.

This institutional director should be included on the Compensation Committee and on the Audit Committee of the applicable Board of Directors. The institutional director would also have the responsibility to make a separate written report which would state his or her participation on these important committees and express any dissent from the decisions made by those committees. These reports could then serve as a basis for action which the underlying institutions might elect to take relative to the companies.

This suggestion may appear radical and potentially divisive. The current defenders of the status quo would argue that this would create more disruption on the Board of Directors than would be warranted by the participation by an independent representative. That response would be short-sighted.

Most large institutions are long term, permanent holders of the stock of the largest companies. Pension funds such as the Maine State Retirement System have committed to own U.S. equities, often through so-called index funds which hold all of the shares of a particular index, and have permanent investments in the largest U.S. corporations. Due to these index investments, the institutional investors have large unchanging investments in the major components of these indices, such as Exxon, General Electric, Merck and General Motors. Institutional investors want these corporations to succeed over the long term, and their institutional director representatives should represent the long term interests of the shareholders, rather than simply the quarter-to-quarter performance goals of many short-term investors. The institutional directors would represent the permanent long-term institutional investors who hold a majority of the common stock and who seek the growth in shareholder value over 5, 10 and 20 year periods, not simply from month-to-month.

Therefore, I submit that small investors and pension participants are unrepresented on the Boards of Directors of most public companies. The time has come to break the choke hold of corporate nominating committees and allow small investors a modest voice at the decision table of corporate America. The time has come for the corporate election process to be reformed, and the election of one Institutional Director to the Board of each public company in the U.S. would be a very good first step.

David Wakelin is an ERISA and benefits attorney practicing in Portland, Maine, and he has served on the Board of Trustees of the Maine State Retirement System for 16 years.

Wakelin, DS - Personal - Article - 2003

1 Report of the Commission on Public Trust and Private Enterprise of The Commerce Board, February 2003. Data as of 2000.