Domini Social Investments LLC
September 15, 2003
Mr. Jonathan G. Katz
File No. S7-14-03
Dear Mr. Katz:
On behalf of Domini Social Investments LLC, I am writing in response to the Commission's request for public comment on the proposed rule regarding nominating committee disclosure and shareholder communication with boards of directors.
Domini Social Investments manages $1.5 billion in assets for individual and institutional mutual fund investors who wish to incorporate social and environmental criteria into their investment decisions. We have been actively engaged with our holdings on issues of corporate accountability for many years, filing shareholder resolutions and engaging in long-term dialogue with corporate management teams. We strongly support the proposed rule, and believe that it will provide investors with valuable information and will enhance corporate accountability. We are pleased to have the opportunity to offer our comments on the importance of this reform, and to offer some suggestions for how the rule might be strengthened.
We appreciate that the Commission has chosen to examine the issues of nominating committee disclosure and board communications separately from the question of shareholder access to the proxy ballot, since the latter issue deserves detailed consideration in its own right. These issues are related, but different in kind, and deserve separate treatment. While we applaud this first proposed rule, therefore, it is our view that it does not render the anticipated rules relating to access to the ballot unnecessary. Rather, we believe that increased transparency regarding nominating committee functions, enhanced disclosure regarding shareholder communications with boards, and greater shareholder access to the proxy ballot will together increase corporate responsiveness to shareholders in ways that are urgently needed. One reform cannot substitute for the other. We refer you to our letter of June 12, 2003 (File # S7-10-03, posted at: http://www.sec.gov/rules/other/s71003/domini061203.txt) for more detailed comments on this matter.
Nominating Committee Disclosure
To turn now to specifics, we strongly support the Commission's suggested enhancements to the current requirements for nominating committee disclosure. We agree that companies should disclose their nominating committee charters, if they exist; that they should describe the independence of their nominating committee members; and that they should disclose the process by which they identify and evaluate director nominees as well as their requirements for directors and their standards for the overall composition of the board. We also agree that companies should disclose the procedures used to consider shareholder nominees to the board (although it is difficult to fully evaluate this portion of the proposed rule without the Commission's forthcoming proposal regarding shareholder access to the ballot). There are a handful of enhancements that we would recommend:
In addition to these recommendations, there is one critical addition we would like to suggest to the Commission's proposed list of increased disclosure requirements. This is disclosure regarding board diversity. Nominating committees should disclose whether, and in what way, they take the issue of diversity (including diversity of race and gender) into account when selecting and presenting new directors. Diversity is now widely recognized as an aspect of good corporate governance, and disclosure on this issue should be explicitly required. These matters are material to both our investment and voting decisions, and increased transparency in this area is sorely needed. For many years, Domini has had a standing voting policy to oppose boards of directors that do not have at least one woman or minority. A number of other socially responsible investors also follow this approach. In addition, many social investors, including Domini, consider the diversity of a firm's board before investing.
Disclosure Regarding Communications with the Board of Directors
The Commission's proposal regarding communication between shareholders and the Board is also a welcome and necessary reform. Although this proposal comes in the context of the nominating process, enhanced communication between corporate boards of directors and shareholders is critically important outside of the board election process. As socially responsible investors, we seek to invest in companies that are responsive to stakeholder concerns. In our definition of `stakeholder', we include employees, consumers, local communities, shareholders and the natural environment. We believe that corporations that can effectively manage these diverse concerns will be better able to compete in an increasingly global economy where mismanagement of stakeholder relations can impose significant costs in terms of regulatory fines, consumer boycotts and loss of reputation. As engaged shareholders, we work to bring these concerns to management and directors on a broad range of issues. Clarity regarding how to communicate with Boards of Directors, and transparency regarding how the Board handles these communications would benefit both corporate directors and investors. Increased transparency regarding these processes would help ensure that directors are not insulated from issues of concern raised by the company's investors and other stakeholders, and enhanced communication channels between directors, investors and other stakeholders will enable directors to more accurately gauge management's performance, and to more effectively perform their oversight functions.
Our colleagues at the Social Investment Forum have offered the Commission a number of valuable suggestions for how this proposal might be enhanced, including a suggestion that companies provide in their annual proxy statement a summary of "the number of communications shareholders and stakeholders have with Boards or individual Board members or committees, plus the responses and/or actions related to those communications." We believe that this proposal would significantly enhance the effectiveness of this disclosure. The current proposal, which would require a `description of any material action taken by the board during the preceding fiscal year as a result of communications from security holders' is helpful, but raises at least two significant issues:
We believe the summary of communications requested by the Social Investment Forum would be invaluable to investors seeking to evaluate a corporation's responsiveness to stakeholder concerns. They would enable investors to make more informed voting decisions on Board elections, and to evaluate the necessity of submitting nominees of their own to the Board. This information could also be used to inform voting decisions on other types of management and shareholder proposals, particularly where these proposals raise some of the same issues that other stakeholders have communicated directly to the Board. Investors could use this information to evaluate the relevance of the proposal to the company's stakeholders, among other factors (The Social Investment Forum's comment letter is posted at: http://www.sec.gov/rules/proposed/s71403/socialinvest091103.htm).
We would also encourage the Commission to evaluate reasonable means to open clear communication channels between the Board of Directors and employees, and their representatives. These communications could also be summarized in the firm's proxy statement, providing investors with valuable insight into the quality of the firm's employee relations, a critical indicator of corporate performance for many investors.
In closing, we strongly support these proposals, but would like to stress once again the critical importance of real reform in the area of shareholder access to the proxy ballot. We thank you for the opportunity to present these comments, and for the important work you are doing to restore investor confidence in the markets and to strengthen corporate accountability.