Council of Institutional Investors
August 20, 2003
Jonathan G. Katz
Re: File No. S7-14-03
Dear Mr. Katz:
The Council of Institutional Investors, an organization of more than 130 public, corporate and union pension funds with over $3 trillion in investments, supports the Securities and Exchange Commission's proposal to require expanded proxy statement disclosure of the director nomination process and the means, if any, for shareholders to communicate with directors.
The Council commends the Commission for taking steps to reform a fundamental weakness in the current U.S. corporate governance model-the fact that investors have few, if any, meaningful and cost-effective ways to participate in the director nomination process.
The proposed disclosure reforms are a significant first step. We look forward to the second, most important step for investors-the adoption of rules giving shareholders access to management's proxy card to nominate potential directors.
The Commission's work in these important areas will go far beyond the changes mandated by the Sarbanes-Oxley Act of 2002, and these reforms will be of lasting importance to investors in the U.S. capital markets.
The board of directors-responsible for overseeing corporate strategy, monitoring corporate and management performance and setting executive compensation-plays a starring role in the governance of U.S. companies. Unfortunately, directors have long been viewed as isolated from the investors they represent, largely unaccountable to the shareholders who ostensibly "elect" them and too cozy with corporate management. And the director nomination process has been seen as a management-dominated exercise in which cronies and friends of friends are picked to sit on boards.
Shareholders have been unable to address these longstanding problems, largely due to limitations imposed by companies and the securities laws. Some companies don't have nominating committees, others won't accept shareholder nominations for directors, and our members' sense is that shareholder-suggested candidates are rarely given serious consideration. Shareholders can now only ensure that their candidates get full consideration by launching an expensive and complicated proxy fight.
It's the rare company that has even been willing to have shareholders communicate with outside directors. Instead, shareholder communications, including those addressing non-trivial governance issues appropriately handled by the board, have tended to be "screened" and handled by corporate executives-further isolating directors from the shareholders who elect them.
The issue of shareholder-director communications is of such importance to our members that the Council formed a joint task force with the National Association of Corporate Directors to study the issue. The goal of the task force is to investigate the current barriers to director-shareholder communication, evaluate how some companies and directors have overcome them and issue recommendations or "best practices" based on its findings. We expect to release the report sometime this fall.
The Council believes that the proposed disclosures will provide shareholders with a more complete picture of the processes and policies of nominating committees and boards and some much-needed specifics on avenues for shareholder-director communications.
The Council strongly supports the proposed disclosures regarding the director nomination process, particularly the disclosures about the process for identifying and evaluating candidates, the qualifications and standards for director nominees, the source of candidates, and the policies and procedures for shareholder-suggested candidates. We believe the expanded disclosures will help investors understand and more effectively participate in the director nomination process.
We also applaud the enhanced disclosure applicable to companies not nominating candidates suggested by an investor or group of investors owning at least 3 percent of the stock for a year. Such disclosure will give shareholders an additional tool to evaluate the responsiveness of their elected representatives.
The Council believes the proposed more specific, detailed disclosure requirements are appropriate and of most value to investors. Too often, broader, less detailed disclosure standards become boilerplate and of limited help to investors. We believe the proposed disclosures are targeted and not too onerous for companies and address those issues of most importance to investors.
Furthermore, we agree that the proposed changes should apply to all companies-including small companies and mutual fund companies-with registered securities.
We believe the following modifications would strengthen the proposed rules and provide greater transparency to investors.
Some issues were not addressed in the proposal release. To further strengthen the rule changes, the Council recommends the following:
Thank you for your leadership in this important effort. Please contact me or Ann Yerger with any questions.
CC: Chairman William H. Donaldson