The Business Roundtable
September 15, 2003
Mr. Jonathan G. Katz
Re: File No. S7-14-03
Dear Mr. Katz:
The following comments are submitted on behalf of The Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. We appreciate the opportunity to provide you with our views on the Securities and Exchange Commission's ("SEC" or "Commission") proposed rules to expand existing disclosure requirements regarding the operation of board nominating committees and to require disclosure of the means, if any, by which shareholders may communicate with members of boards of directors (the "Proposed Disclosure Rules").
The Business Roundtable is an advocate of enhanced corporate governance disclosure, and we note that many of our members' companies voluntarily disclose aspects of the information described in the Proposed Disclosure Rules. Further, our Principles of Corporate Governance, published in May 2002, speak to the important role of nominating/governance committees, and state that nominating committees "should develop a process for considering stockholder suggestions for board nominees." Accordingly, The Business Roundtable supports the SEC's efforts to enhance disclosure concerning nominating committees and to require disclosure concerning shareholder/director communications. At the same time, we are concerned that some of the proposed disclosures will not provide meaningful information to shareholders, while other provisions of the Proposed Disclosure Rules do not take into account technological advances in communication with shareholders. We also believe that the proposed disclosure requirements should be coordinated with the proposed New York Stock Exchange (the "NYSE") corporate governance listing standards. In this regard, we urge the SEC to move expeditiously to approve the NYSE's and the NASDAQ's proposed corporate governance listing standards, both of which will bring about significant corporate governance reforms. Our specific comments on the Proposed Disclosure Rules are set forth below.
I. Expanded Disclosures on the Operation of Board Nominating Committees
As an initial matter, it is important to point out the growing importance and independence of nominating committees. A recent survey of The Business Roundtable concerning the corporate governance practices of our members' companies provides evidence of this important trend. The survey indicated that nominating committees are increasingly independent and are evaluating director candidates, as well as current directors, in connection with the re-nomination process. Moreover, the survey also found that two-thirds of our members' companies have a process in place regarding shareholder nominations of board candidates.
The Proposed Disclosure Rules would require a description of the material terms of any nominating committee charter and where the charter is available. The Commission also seeks comments on whether it should require a company to attach the charter to the proxy statement in lieu of requiring disclosure of the material terms of the charter. While disclosure of nominating committee charters may provide shareholders with useful information, it is not necessary to require that the material terms be described in the proxy statement. Pursuant to the proposed corporate governance listing standards of the NYSE, listed companies will be required to post their charters on their corporate websites. Similarly, the Commission determined in connection with its rulemaking under Section 406 of the Sarbanes-Oxley Act of 2002 that website posting, with appropriate disclosure, of changes or waivers from a company's code of conduct is an acceptable alternative method to reporting such changes on Form 8-K. See Release No. 33-8177 (avail. Jan. 23, 2003). Accordingly, we suggest that the Commission permit companies to post their nominating committee charters on their corporate websites in lieu of describing the material terms of such charters or attaching the charters to their proxy statements. Such an approach would enable shareholders to access the information without adding unnecessary pages to proxy statements.
The Proposed Disclosure Rules would require companies to identify the specific source of each nominee (other than nominees who also are executive officers or directors standing for re-election) approved by the nominating committee for inclusion on the company's proxy card. The Commission's request for comments refers to such sources as the nominee's "sponsor." Typically, director nominees do not have "sponsors." Instead, suggestions for nominees come from a wide variety of sources, including existing directors, officers, shareholders and/or executive search firms. Moreover, the names of possible candidates generally are given to the nominating committee for them to explore further the qualifications and the willingness to serve of the prospective nominee, as well as the needs of the board. The committee then considers the qualifications of those nominees and the needs of the board, and recommends to the full board the candidates to be included in the company's proxy statement. Thus, the source of each nominee is the nominating committee as it is the entity charged with evaluating and recommending candidates. Therefore, we do not believe that requiring disclosure of the "source" of each director nominee would provide meaningful information to shareholders.
The Proposed Disclosure Rules would require companies to disclose information regarding candidates recommended by one or more shareholders who beneficially owned greater than 3% of the company's voting common stock for at least one year if the nominating committee decides not to nominate that candidate. Unlike the other provisions of the Proposed Disclosure Rules, this disclosure is not related to the process followed by the nominating committee, and we do not believe it should be required. The nominating committee has a duty to act in the best interests of the company and shareholders when recommending director candidates. Whether such candidates are recommended by shareholders with large holdings or otherwise does not impact whether a shareholder-nominated candidate satisfies the director qualifications established by the nominating committee. Moreover, including nominee names may raise privacy or liability concerns. The release indicates that the Commission will be considering additional rules regarding shareholder access to the proxy process for the election of directors this fall. We suggest that the Commission not pursue this aspect of the proposals or at least defer its consideration.
II. New Disclosures on the Means for Shareholder to Communicate with Board of Directors
The Business Roundtable supports the Commission's goal of increasing shareholders' understanding of the ways in which they can communicate with boards of directors. However, we suggest that the Commission permit alternate ways of achieving this goal and address several other practical concerns before adopting the Proposed Disclosure Rules.
First, we note that the Proposed Disclosure Rules are somewhat inconsistent with the NYSE's proposed corporate governance listing standards as the Proposed Disclosure Rules apply to communications with all board members while the NYSE proposal only applies to communications with non-management directors. Moreover, the NYSE revised proposal requires "confidential" communications, which we do not believe are necessary or practical. We encourage the Commission to harmonize these requirements.
Second, we agree that the Commission should not require specific procedures for shareholder communications with board members, as these procedures will vary from company to company. In a similar situation, the Commission recognized the need for flexibility when it adopted final rules relating to audit committee procedures for receiving, retaining and addressing accounting, internal accounting controls or auditing matters. See SEC Release No. 33-8220 (avail. April 9, 2003). There, the Commission acknowledged "the variety of listed issuers in the U.S. capital markets" and that a "one-size-fits-all" approach would not work as "the procedures that will be most effective to meet the requirements for a very small listed issuer with few employees could be very different from the processes and systems that would need to be in place for large, multi-national corporations with thousands of employees in many different jurisdictions." Similar considerations apply with respect to shareholder communications with board members.
Third, if a company does not send all shareholder communications directly to board members, the Proposed Disclosure Rules would require a description of the process for determining which communications will be relayed to the directors. We note that the significant and time-intensive responsibilities of public company directors necessitate that company personnel play some role with respect to shareholder communications to directors. Therefore, any requirement that companies disclose whether management plays a role in "filtering" such communications will not provide meaningful information to shareholders; and, in any event, is likely to result in boilerplate disclosure.
The Proposed Disclosure Rules would require companies to describe any material action taken by the board in the last year as the result of shareholder communications. We do not believe that such a disclosure requirement is appropriate. In fulfilling their fiduciary duties, directors make decisions based on input from a variety of sources, including shareholders, management, counsel, and third parties. Accordingly, it would be difficult, and not very useful, to try and determine whether there exists a sufficient nexus between shareholder communications on various topics and board actions to require disclosure.
In response to the Commission's request for comment on whether companies currently provide a means for shareholders to communicate with board members, we note that some companies provide disclosures in their proxy statements and on their websites concerning how shareholders may contact non-management directors and/or the chairs of board committees. In addition, at many companies the corporate secretary or investor relations personnel facilitate communications and/or meetings between shareholders and directors. We understand from our members' companies that those companies, who have established electronic mail addresses to facilitate communications, have found that the majority of communications received address consumer, not shareholder, matters or are unsolicited, mass electronic communications (so-called "spam"). Accordingly, it is necessary for company personnel to identify the substantive electronic communications and provide them to the directors.
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In conclusion, The Business Roundtable supports many of the proposed disclosure requirements relating to nominating committees and shareholder communication. We believe that the adoption and implementation of the Proposed Disclosure Rules, along with ongoing efforts by companies to increase board independence, strengthen the role and independence of nominating committees, and enhance shareholder/director communications, will enhance shareholder understanding of corporate governance practices and investor confidence in general. To this end, we recommend that the Commission permit the full implementation of these rules and the proposed NYSE and NASDAQ corporate governance listing standards before proceeding to propose any additional rules concerning the director election process.
We would be happy to discuss our comments or any other matters that you believe would be helpful.
cc: Hon. William H. Donaldson-Chairman, U.S. Securities and Exchange Commission