Progressive Investment Management
June 11, 2003
Mr. Jonathan G. Katz, Secretary
Re: S7-10-03 and SEC Release #34-47778
Dear Secretary Katz:
Progressive Investment Management, a Portland-based money manager with over $150 million under management, submits the following comments in response to the Securities and Exchange Commission's solicitation of views concerning shareholder proxy access and the election of corporate directors (File Number S7-10-03).
We are encouraged by the Commission's efforts to revitalize discussions concerning shareholders' access to the proxy ballot, and feel that a review of existing rules concerning the election of directors is long overdue. The significant lack of shareholder access to the corporate proxy -- and the self-perpetuating board that results -- is an enormous obstacle to preventing corporate abuse and restoring investor confidence.
Entrenched managers and directors will only improve corporate governance, executive compensation rules, and stakeholder engagement when held accountable by investors, and can be voted out by shareowners for failure to act in their best interests. That is unlikely at present: theoretically, there could be a majority of shareholders that withhold their votes from a candidate, and still have that nominee elected to the board. The current process in no way resembles a true election. It is merely a rubberstamping exercise, with shareholders formally ratifying the Board-nominated slate. It is this lack of true executive oversight, a very dangerous conflict in governance structure, which has contributed to the corporate malfeasance of the last few years.
Access to the proxy is one of the most significant reforms the Commission could undertake to make boards more accountable for their actions. At present, investors need to strengthen the incentives for management to nominate directors that ask the tough questions of executives. That's precisely what was needed at Enron, Tyco, and WorldCom -- where there was a majority of independent directors.
Although state law permits investors to nominate and solicit votes for their own candidates, because of the high costs involved, it rarely happens. The few shareholders that do spend tens of thousands of dollars to submit an alternative slate for the Board usually don't take that step until concerns and liabilities have become unmanageable. By this time, it's too late because shareholder value has already begun to evaporate. And the process is always more beneficial to management than investors: Management uses shareholder assets to print, mail, and solicit votes for its nominees to the Board. Shareholders, meanwhile, end up spending about $2 per investor to run a competing candidate -- which means a separately mailed proxy, costly legal fees, and possibly millions of dollars for the entire process. Shareholders most often vote on candidates nominated by directors, and rarely with any choice: if there are eight board openings, then eight names typically appear on the proxy.
Greater shareholder access to the proxy better aligns the interests of investors with the interests of management; reaffirms that shareholders are the beneficial owners of companies; attempts to rebalance the special interests of top executives when they pervert the system of corporate governance and fiduciary trust; makes it possible for investors to have a more meaningful voice in the governance of corporate affairs; empowers directors to voice opinions and strategies contrary to "groupthink"; and eliminates the confusion of separate proxy ballots.
We recommend the Commission explore the following ideas to provide a more level playing field for investors, and more adequate opportunities for shareholders to both nominate candidates and to solicit support for them with fewer cost burdens and paperwork:
CEOs will not relinquish power and authority easily, for many have traditionally wielded control over their boards. Investors are now looking to the Commission to bring fairness and balance to director representation. This is an opportunity for the SEC to put meaning back into the term "board independence."