Teacher Retirement System of Texas

June 12, 2003

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609

Re: Release No. 34-4778, File no. S7-10-03 by e-mail to rule-comments@sec.gov

Dear Mr. Katz:

We appreciate the opportunity to comment on proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. We are providing comments responsive to the Notice of Solicitation of Public Views Regarding Possible Changes to the Proxy Rules regarding procedures for the election of corporate directors.

With plan assets of approximately $75 billion, the Teacher Retirement System of Texas is among the top ten pension plans in the United States. Currently, over one million public school employees rely on the plan for their pension benefits. Because most Texas school districts do not participate in Social Security, employee benefits through TRS constitute the primary source of retirement income security. Thus performance of the pension trust fund is all the more important to benefit security.

TRS is a long-term investor that continuously owns substantial positions in publicly traded U.S. equity securities. Generally, our ownership tracks closely the market weighting of the Standard & Poor's indices. In other words, we are fully invested in America and we never consider not being so invested. Consequently, one of our primary strategies to promote value preservation and enhancement is to pay attention to the stewards of corporate America, those that are charged with fiduciary responsibility to manage the affairs of the companies on whose boards they sit for the long-term benefit of shareholders. If they do so, we believe that they not only serve shareholders effectively but also provide assurance that the interest of employees, vendors and others are served.

Events of the past few years have illustrated the terrible consequences of ineffective and regrettably fraudulent governance and management activity. We appreciate actions by the Commission and exchanges to improve corporate governance and believe that these efforts will pay dividends to shareholders in the future. We urge you to continue to support regulatory action that will promote the selection and function of strong and qualified, non-conflicted boards of directors. A few of the issues that we continue to be concerned with include:

  • Excessive CEO/management influence over the board and the nomination and election of directors.

  • Lack of true board member independence.

  • Instances in which members serve on too many boards, which may diminish their ability to focus on and contribute to the needs of each board.

  • Instances where the CEO sits on too many other boards and in which subordinate officers sit on other boards. We believe that the challenges of their own company's affairs are sufficient to fully engage their energy and time.

  • Willingness to adopt excessive and wasteful management compensation arrangements, e.g., annual pay and bonuses that are unreasonable even for the most deserving of managers, option programs that over time result in substantial dilution of paying shareholder interests, and compensation programs that do not appear warranted based on company, industry or peer data.

  • Excessive board interlocks. We are not opposed to members that also sit together on other boards, but the practice should be limited and closely scrutinized.

We actively participate in the Council of Institutional Investors and support Council advocacy to strengthen corporate governance. We join the Council in expressing strong support for your consideration of action(s) that will promote responsible, informed, independent and focused fiduciary governance by boards of directors. Shareholders should have strengthened opportunities to reject nominees that they do not support. We believe that it would be constructive to consider options that would allow shareholders to submit qualified candidates for shareholder consideration through the proxy.

Our goal is to promote board composition that is qualified, focused, free from conflicts of interest and that may be reasonably expected to discharge their duties for the purpose of serving the reasonable expectations of shareholders. Where existing board members are viewed as not meeting these expectations, we believe that it is worthwhile to consider options that should be available to shareholders for relief through the proxy process.

Sincerely yours,

Charles L. Dunlap
Executive Director