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June 11, 2003

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

Re: S7-10-03 - Notice of Solicitation of Public Views Regarding Possible Changes to the Proxy Rules

Dear Mr. Katz:

On April 14, 2003, the Securities and Exchange Commission (SEC) announced that it has directed 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. The SEC's Press Release indicated that the review will address the following topics:

  • Shareholder Proposals;

  • The corporate director nomination process;

  • Elections of Directors;

  • The solicitation of proxies for director elections;

  • Contests for corporate control; and

  • The disclosure and other requirements imposed on large shareholders and groups of shareholders.

The Pennsylvania State Employees' Retirement System (SERS), established in 1923, is one of the oldest and largest defined-benefit retirement systems in the United States. SERS, which currently manages over $21 billion for the exclusive benefit of its 200,000 members and beneficiaries, applauds the Securities and Exchange Commission for undertaking this effort to consider revisions to the proxy rules and changes to the procedures for electing corporate directors.

SERS has a long history of involvement in corporate governance issues going back well over a decade. SERS has been and continues to be very active in the Council of Institutional Investors (CII). Founded in 1985, CII is an organization of large public, labor, and corporate pension funds, which seeks to address investment issues that affect the size or security of plan assets. Today the Council has over 130 pension fund members whose assets exceed $2 trillion. It is recognized as a significant voice for institutional shareholder interests.

Currently I serve as Co-Chair of the CII Board of Directors. I also serve as Co-Chair of CII's newly established Task Force on Improving Director-Shareholder Communication; the Task Force is a joint effort of the Council of Institutional Investors and the National Association of Corporate Directors.

In addition, during the past year, I had the privilege to serve as a member of The Conference Board's 12-member Commission on Public Trust and Private Enterprise (Commission), a group Co-Chaired by John W. Snow, Chairman and CEO of CSX, and subsequently named Treasury Secretary, and Peter G. Peterson, Chairman of the Blackstone Group, Chairman of the Federal Reserve Bank of New York and former U.S. Secretary of Commerce. The Commission was formed to address the causes of declining public and investor trust in companies, their leaders and American capital markets. In January 2003, the Commission issued its final report which articulates a series of principles and "best practice suggestions" covering the three areas of executive compensation, corporate governance, and auditing and accounting as they relate to publicly held corporations.

Clearly SERS level of involvement in these organizations reflects its keen interest in improving corporate governance. SERS, as a long-term shareowner, is particularly concerned about the issue of access to the proxy which is currently under review by the SEC. The SEC's existing rules with respect to corporate governance have become outmoded. Shareholders currently have limited ways of effectively participating in the governance process. The SEC needs to change the proxy access rules in order to facilitate shareowners' ability to meaningfully participate in the process.

The Conference Board Commission's Findings and Recommendations on Executive Compensation, Corporate Governance and Auditing and Accounting are pertinent to the SEC's review of the proxy rules, and more generally, provide excellent guidance on the overarching principles guiding shareholder access issues. The following excerpts from the Commission's report articulate relationships among shareowners, directors and management which serve as the foundation of the modern corporation. They then go on to discuss the roles and responsibilities of shareowners and the difficulties that stand in the way of shareowners to exercise their responsibilities.

...Investor trust in our corporate system is premised on a series of relationships among shareowners, boards of directors and management. Shareowners invest their assets in corporations managed by professionals. This separation of owners from managers is an important feature of the modern corporation. A key role of the board of directors is to provide oversight to ensure that management acts in the best long-term interests of the corporation and thus in the best long-term best interests of its shareowners...

...Shareowners, particularly long-term shareowners, should act more like owners of the corporation. As shareowners, they should have the ability to participate more readily in the corporation's election process through involvement both in the nomination of directors and in proposals in the company's proxy statement about business issues and shareowner concerns regarding governance of the corporation...

...Shareowners' current involvement in the corporation's governance is primarily through the corporate electoral process where shareowners are given the statutory right to vote on only a limited number of matters of significance to the corporation...

...The most significant matter on which shareholders regularly vote is the election of directors. Under current SEC rules, management is not required to include a shareowner's nomination for a board position in the company's proxy materials. If the company refuses voluntarily to include a shareowner's nominee, the shareowners only alternative process for putting a nominee before the shareowners is to print, mail and pay for his or her own proxy material. This process is usually prohibitively expensive. As a result, unless the incumbent board of directors voluntarily includes their nominees in the company's slate of

nominees, shareowners have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest.

A second way that shareowners have participated in the electoral process is by submitting proposals to be included in the company's proxy statement. Typically, these proposals are advisory only, intended to provide management with the proponent shareowner's views on these issues. Under current SEC rules, however, management can omit a shareowner proposal if, among other reasons, it relates to the ordinary business operations of the company. This

"ordinary business" exclusion has often operated to omit proposals that were of considerable importance to shareowners.

The Commission believes that corporations have an obligation to recognize the legitimate interests of shareowners in the nominees presented for election as directors and in other issues that properly come before a meeting of shareowners.

The compact among shareowners, boards and management has been significantly undermined by widely reported instances of egregious corporate misconduct during the past several years, which has seriously eroded the trust that investors and the general public have in corporate governance and the capital markets more broadly. The SEC needs to reform the corporate governance process so that shareowners have access to the proxy to nominate directors to create a more realistic election process that holds corporate directors accountable to shareowners. The ordinary business exception has proved to be counterproductive both in terms of keeping important issues off the proxy as well as dissipating SEC staff time and resources in ways that do not protect investor interests. The CII has made a series of recommendations that speak to the implementation of the Conference Board Commission's more general principles and findings. These more specific recommendations on shareholder access issues and recommendations are in CII's May 10, 2003 letter to the SEC and are supported by SERS.

  • The single most important reform is to give shareholders more of a voice regarding who represents them on corporate boards. CII believes that reasonable access to company proxy cards for long-term investors to nominate candidates for directors would substantially contribute to the health of the U.S. corporate governance model and U.S. corporations by making boards more vigilant about their oversight responsibilities.

  • Enhanced shareholder access to management's proxy cards must be carefully structured to ensure that such a mechanism would not impose unnecessary costs or burdens on companies and not be used for change-in-control purposes.

  • The SEC needs to review and modernize the 13D filing requirements to ensure that the rule applies only to an investor or group of investors attempting to truly change the control of a company.

  • To ensure that shareholders have a meaningful opportunity to vote on directors, broker votes should be prohibited on contested and uncontested elections of directors.

  • Shareholder proposal rules should be updated to streamline the process for companies, shareholders and the SEC.

  • It's time for the SEC to improve the disclosure requirements regarding director relationships, executive compensation and director compensation.

The SEC has a unique opportunity to significantly reform the processes by which shareowners exercise their input into corporate America. Providing shareowners access to the proxy to nominate directors and greater shareowner input to proxy materials on non-trivial business matters is critically important in re-establishing corporate accountability. This is an important component in the process of restoring confidence in corporate America and the public markets. We look forward to a concept release and eventual rule making in this area.


Peter M. Gilbert
Chief Investment Officer

Cc: William H. Donaldson, Chair
Paul S. Atkins, Commissioner
Roel C. Campos, Commissioner
Cynthia A. Glassman, Commissioner
Harvey J. Goldschmid, Commissioner
Alan L. Beller, Director of Corporation Finance