Corporate Governance (aka, CorpGov.Net)
9295 Yorkship Court, Elk Grove, CA 95758
August 17, 2003
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: File No. S7-14-03 (Proposed Rule: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors)
Dear Mr. Katz:
I am the editor of CorpGov.Net ("http://www.corpgov.net) and PERSWatch.Net (http://www.perswatch.net/), two Internet publications aimed at enhancing the sustainable wealth generating capacity of corporations. CorpGov.Net provides information to individual and institutional shareholders. PERSWatch.Net is focused on members of California Public Employees Retirements System (CalPERS). I am also an individual investor.
I recommend that the SEC delay further action on its S7-14-03 rulemaking until the Commission has adopted rules allowing shareholders to place their board nominees on corporate proxy cards. That rulemaking is far more important than the rule currently under consideration.
In response to the Commission's "Solicitation of Public Views Regarding Possible Changes to the Proxy Rules," a few managers and those representing them, argued that time is needed to see the impact of recently enacted laws, regulations and listing standards. If the Commission adopts the rules described in File S7-14-03, I am concerned those arguments will again be used in an attempt to delay much more substantive changes.
While the rules proposed in S7-14-03 are positive, they would not result in any fundamental shift in power. With a little creative spin from attorneys and investor relations specialists, many firms could easily comply, while conducting business as usual.
For example, the proposal attempts to prompt healthy debate by requiring a nominating committee to explain the specific reasons for not including a candidate recommended by shareholders with 3% of a company's voting stock. First, that threshold is so high that even the largest shareholders, such as CalPERS, won't be able to meet it unless they form groups with other large institutional investors. They aren't likely to be motivated to undertake such action unless a company has already experienced precipitous losses. Restoration of value will be difficult, at best, and the proposal cuts out any likely prospective contribution from smaller shareholders.
Second, and more important, the proposed rule is more likely to result in the production of sanitized junk. Does anyone really expect to see a disclosure that says: "we chose Jones' old college roommate because they're a better fit with the current board, or we picked former Senator X because he can help us lobby for tax breaks?"
Do members of the Commission believe incumbent directors will look at the requirement to explain their actions and conclude, in good faith, their challengers will be better stewards of the company? I sincerely doubt such rules will result in any director stepping down. I think it is also highly unlikely that directors will drop a nonincumbent nominee they have selected, in favor of one recommended by shareholders.
The disclosures set forth in the rulemaking for nominating committees might be informative, if the rule were amended to require committees to disclose meeting transcripts. Of course, if the rule were expanded to include such a requirement, most meetings would become carefully choreographed plays, with any real debate held elsewhere.
If shareholders can easily place their own nominees on the corporate proxy card, there will be no need for elaborately regulated nomination and communication schemes. If directors face real contests, nominating committees will be forced by competition to explain why their candidates are superior and directors will rush to communicate with shareholders in order to ensure reelection.
For my views the important topic of opening access to the ballot, see:
I would welcome the opportunity to discuss my comments with Commissioners or staff. Please contact me at the phone number below.
James McRitchie, Editor