Robert A.G. Monks
P.O. Box 756
Lewes, DE 19958
T: 302-644-7484 F: 302-644-7485
June 2, 2003
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609
Re: No. S7-10-03.
Dear Mr. Katz;
I would like to request the Securities and Exchange Commission adopt new rules under Section 14(a) (8) of the Securities and Exchange Act of 1934 to include shareholder nominated director candidates in the company proxy statement and proxy card.
Discussion about boards of directors is usually confusing. Law makers are apt to talk about the board as defined by statute and regulated by code. This board with a spacious mandate rivaling the first chapter of the Book of Genesis is a myth, as was first observed by Harvard Professor Myles Mace in his 1971 book The Reality of America's Corporate Boards, Directors, Myth and Reality. (the "apparent board") It is my view, as set forth below in more detail, that the Chief Executive Officer ("CEO") dominates and manages the board like any other corporate department. Even if the board of Code and Law is myth, we must ask the further question - is it a useful myth? The last fifty years, after all, have been a time of general corporate prosperity - apparent board or otherwise. Do we really want to change? If we want to continue the present governance reality, shareholder nomination of directors would only create confusion with little compensating benefit. It is only if we agree with Peter Drucker - "Whenever an institution malfunctions as consistently as boards of directors have in nearly every major fiasco of the last forty or fifty years it is futile to blame men. It is the institution that malfunctions."i- that structural change in the pattern of nominating directors is worthwhile. We need be comfortable that the predictable increase in the board's ("real board") tendency towards confrontation is accompanied with an increase in value.
The dominant characteristic of today's apparent board is its capacity to self perpetuate. As a practical matter [which will be discussed below in detail], no independent candidate, acting rationally, can be elected to a board of directors. (A slate of one or more candidates independently nominated in connection with a take-over or tender may fare better.) The only individuals presently capable of election are those whose names are placed on the company proxy card and prospectus. We need to ask at the outset: "Can any participant in a self-perpetuating organization be considered to be `independent' of that entity?" Both those who have served on boards and those scholars who have pondered this question know the answer to be negative. There is always a reluctance to confront, embarrass and combat someone who has conferred a favor; there is always reluctance to join a club just to attack it, irrespective of the issues involved. Unhappily, all of the lawyer driven definitions of independence which have dominated the SRO dialogue have their principal impact - not in assuring meaningful independence - but in providing a safe harbor to accommodate "reliable" nominees. Under virtually all of these painfully wrought legalisms, the board ultimately has the authority to determine whether "conflict of interest" has a material adverse impact on the corporation and, therefore, whether an individual is "independent", thus embedding the culture of self-perpetuation.
The last ten year history of the compensation of principal executives must prove beyond any reasonable doubt that we do not presently have independent directors. Could genuinely independent directors acting as Chair and members of Compensation Committees have produced the atrocity that today shames the entire American corporate system? It is in this area of executive compensation that shareholder nominees would have the largest immediate impact - and the impact would be large. As Committee Chairs, they would bring an energy that is not dependent or relational to the principal officers or incumbent board members. This would inevitably create a level of disharmony in board functioning. We must ask whether this disharmony would be value destroying. Is the gain in independent monitoring of management power worth the possible loss of management effectiveness from diminished board collegiality?
The outstanding governance characteristic of today's Corporate America is the location of practically all effective power in the hands of the Chief Executive Officer. In an essay, I co-authored with Allen Sykes, which is attached to this submission as Appendix A, we tender several possible solutions. Our ultimate suggestion is that all public companies should have at least three directors who are nominated by the shareholders.
The story of my own independent candidacy for the Board of Sears, Roebuck and Company has been best told by Hilary Rosenbergii, a copy of whose work is attached as Appendix B. The reason for my effort is not very different than that of the SEC in asking for these submissions. Something is very wrong and it is important that attention be paid. It can be said with certainty that an independent board candidacy is not cost/effective. Even with the commitment of substantial money, the application of existing laws and regulations makes success virtually impossible. I engaged the "once and future" SEC attorney David Martin, then in the private sector, to represent me. That notwithstanding, I regret to say that - to paraphrase Churchill, "the heaviest cross I had to bear was that of the SEC." My candidacy resulted in some of the obstacles being removed, like the "bona fide nominee" rule which literally prevented me from circulating (of course, at my own expense) a valid ballot. The timing delay between the effective date of the Company's proxy and that of the contesting independent provides opportunity for mischief and the requirement that one cannot "solicit" any individual until and unless that individual has been physically provided with a valid proxy means that a candidate, who cannot bear the huge costs of mailing every shareholder, may not appear on television or buy newspaper ads and must restrict information flow strictly to those to whom a proxy can be proved to have been sent. A slightly less crippling burden was provided by the Department of Labor, where I represented myself having been the Federal Official responsible for ERISA some five years' previously. It turned out that there was no way that I could assure that my soliciting information was made available to the employees of Sears and the beneficiaries of its benefit plans. Maybe, these problems have been solved. I suspect not. There are several others spelled out in Hilary's delightful account. It seems very doubtful that there is any way for an independent candidate to be elected to the board of a company that contests his election competently.
Many American companies have such widely diverse shareholdings that no single owner has a large enough percentage of the total ownership to make involvement in the director nominating process economically rational. In order to facilitate the involvement of shareholders of very large corporations, I proposed a new Shareholder Advisory Committee at the 1992 Exxon Annual Meeting (a copy of the proposal and supporting statement are attached as Appendix C) which the SEC required the company in include in its proxy.iii This new committee, authorized by a by-law amendment, would consist of three paid representatives elected by the company's largest institutional shareholders; it would be funded with a penny a share by the company itself, and have a right to meet with the company, propose candidates for director and publish its views annually in the proxy statement. This is one way to deal with the adverse problems of "collective action" or "free riding" and to make possible involvement by conscientious fiduciaries (It is doubtful if any trust scheme would authorize fiduciaries for the largest funds to pay the entire costs of selecting or electing directors).
This is a very difficult issue, because what is at stake is not the process for nominating directors. What is at stake is the power to control the assets of publicly traded corporations - a power that CEOs have infamously abused to their own advantage and one that they will not lightly relinquish. Allowing independent candidacies for the board of directors would be a clear and effective signal to the market place that the SEC is determined to end the current situation of breach of fiduciary trust.
Robert A.G. Monks
Appendix A - Capitalism Without Owners Will Fail - (http://www.ragm.com/library/topics/MonksSykesCSFI.pdf)
Appendix B - "Taking on Sears" - (http://www.ragm.com/library/books/traitor/TakingOnSears.pdf)
Appendix C - Shareholder Proposal - 1992 Exxon Annual Meeting - (http://www.ragm.com/exxon/EXXSP030592.doc)
|i||Peter Drucker, "The Bored Board," in Towards the New Economic and Other Essays, Harper & Roe, New York 1981, p. 110
|ii|| Hilary Rosenberg, A Traitor to his Class, Robert A.G. Monks and the Battle to Change Corporate America, at p. 215. Chapter 10 - "Taking on Sears". (John Wiley, 1999)
|iii|| I am told that the Commission reversed itself in subsequent years and allowed companies to exclude from their proxy the Shareholder Advisory Committee Resolution.