The Nathan Cummings Foundation
May 30, 2003
Re: Release No. 34-47778
Dear Mr. Katz:
The Nathan Cummings Foundation is deeply committed to democratic values and social justice as part of its mission. The accountability and transparency of corporations are of great concern to us, both programmatically and as an investor. The Foundation's core programs include health, environment, and arts and culture, all areas that are inextricably linked with and affected by corporate conduct.
The Foundation's endowment is currently $370.4 million of which $247.1 million is invested in equity-based securities. Approximately $175.7 million is invested in marketable stocks, domestic and foreign. We directly own $77.5 million and the balance of $98.2 million is invested in co-mingled funds. We actively vote the proxies on the direct holdings in accordance with our Board-approved proxy voting policy; we do not delegate that fiduciary responsibility to the investment managers or to a voting service. With the new SEC provisions requiring investment managers to have and disclose proxy voting polices and records, we have begun dialogues with our investment managers regarding their proxy voting policies and practices.
As an endowed institution we take the perspective of a long term investor, one that is concerned with the viability of corporations and our society. This, in turn, leads to a concern about corporate governance and conduct. As a shareholder we have a fiduciary responsibility of oversight. However, we now have only limited ways to exercise that oversight.
Therefore, the Foundation strongly supports the Securities and Exchange Commission's decision to review proxy rules and regulations. We urge the SEC to modernize key aspects of the proxy process, particularly access to the proxy for the election of truly independent directors and broader access to the proxy for shareholder resolutions.
Election of Directors
The Foundation believes that shareholders should be given more of a voice regarding who represents them on corporate boards. Long term investors wishing to nominate director candidates should have reasonable access to company proxies.
Recent corporate governance scandals have revealed how a lack of accountability can lead to conflicts of interest and compromise the very people entrusted to represent the shareholders. In response to these governance failures and the Sarbanes-Oxley Act of 2002, the Commission adopted a broad set of reforms including new rules to enhance the independence of audit committees and outside audit firms, and is expected to approve new exchange listing standards to strengthen the independence of boards of directors and key committees. With these reforms the Commission is taking crucial steps to address structural flaws in our corporate governance system. However, they do not address the basic issue of shareholder representation.
In theory, shareholders are given the right to select individuals to oversee a company on their behalf. Current regulations, however, prevent shareholders from effectively exercising this important right. Indeed, shareholders are largely prevented from having any meaningful input into the selection of directors. Boards of directors, all too often selected by management, determine the on-going slate of directors. As it now stands, shareholders can only recommend their own candidates by launching an expensive and complicated proxy fight.
The issue of shareholder access to management proxy cards has been around for decades. The SEC first considered the issue in 1942, when it proposed giving shareholders access to nominate director candidates. In the 1970s, in response to a series of corporate scandals and several highly publicized bankruptcies, the SEC solicited comments and held hearings on corporate governance issues including shareholder participation in the corporate electoral process.
The Foundation believes it is time for the SEC to act on this important reform. By giving major shareholders the ability to have their representatives included in the board room we will improve the responsiveness of managements to the concerns of the owners and shift the focus back to building long term shareholder value.
The Foundation understands that enhanced shareholder access to proxy cards needs to be carefully structured to ensure that such a mechanism would not impose unnecessary costs or burdens on companies or be used inappropriately by short term investors. Therefore, we support proposals that access be limited to groups holding at least a minimum amount of stock such as 3%, with the minimum holding period being in excess of one year. When such considerations are met, company proxy materials and related mailings should provide equal space and equal treatment of nominations presented by qualifying investors.
We believe that the above criteria would create a fair process to allow long-term, institutional shareholders access to the proxy for their director nominees. Further, we believe that creation of this process will have the added benefit of encouraging incumbent directors to be more responsive to shareholder concerns, thereby increasing corporate accountability even if the process is rarely used.
The Foundation believes that shareholder proposals to be included in proxies are an important means of establishing dialogues with management about key issues of corporate conduct. The rules regulating this important means of communication should be updated to reflect the legitimate concerns of long term investors and should be consistently applied.
The recent corporate accounting scandals and earnings restatements have revealed the preoccupation of corporate managements with near term earnings and stock prices. Often this has been to the detriment of longer term corporate viability, shareholder value and public policy concerns. Long term investors, the true owners, often have a longer time horizon than management and so have a broader perspective on the impacts of corporate operations and conduct.
Shareholder resolutions are really the only mechanism now available to long term investors to engage managements on these important considerations. However, the current rules allow companies to exclude shareholder proposals if they are deemed to relate to "ordinary business." The problem is exactly that: "ordinary business" practices of management are now often not in the interests of the long term investors or our civil society. A related problem is that the Commission seems to have been applying this rule inconsistently. For example resolutions calling for reports on a company's "green house gas" emissions are sometimes allowed and sometimes excluded.
The Foundation supports changing the rules to greatly restrict or eliminate the "ordinary business" exclusion and, more broadly, to streamline the process by which shareholder resolutions are included in proxies. As with the proposed reforms to the director nominee process, we believe that creation of more open process for shareholder resolutions will have the added benefit of encouraging managements to be more responsive to shareholder concerns. Again, this will increase corporate accountability even if the process is not often used.
In conclusion, the Foundation strongly supports the Securities and Exchange Commission's decision to review proxy rules and regulations. We urge the SEC to modernize key aspects of the proxy process, particularly access to the proxy for the election of truly independent directors and broader access to the proxy for shareholder resolutions.
We thank you for this chance to comment on these important topics and look forward to your response regarding our comments. Please do not hesitate to contact us at 212-787-7300 with any questions you might have.