September 10, 2003
Jonathan G. Katz
Dear Mr. Katz:
I am Senior Vice President, Secretary and General Counsel of Emerson Electric Co. I am writing to provide the Commission with my comments on its "Proposed Rule: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors" (Release Nos. 34-48301; IC-26145; File No. S7-14-03). Among other things, the Proposed Rule would require the disclosure of the reasons why a nominating committee rejected a candidate for director ("Rejected Candidate") who was proposed by shareholders who satisfy certain size and holding period requirements.
Without commenting on the rest of the Proposed Rule, I am writing this letter to set forth my opposition to the disclosure regarding the proposed director candidates as described above. I believe that such disclosure would:
Accordingly, I respectfully urge the Commission not to adopt the proposed disclosure regarding proposed director candidates. The above points are discussed in more detail below.
1. The proposed disclosure would invade the privacy of members of the nominating committee.
Setting forth the reasons for the rejection of a Rejected Candidate would invade the privacy of the thought processes of the members of the nominating committee. For example, what if the nominating committee in its opinion determines that the candidate does not have the necessary intellectual capacity? Has an offensive personality? Not a team player? Is only interested in his/her own special interests? Has poor business judgment? Is unbalanced emotionally? The possible list of negatives is endless.
Any of these reasons could obviously suffice as a basis for the nominating committee to reject a candidate, but the vast majority of directors- really, any thinking person-would be extremely uncomfortable to say such things in a public disclosure. Therefore, to force the directors on the nominating committee to make comments of this nature invades their privacy.
It is not a sufficient answer to say that such comments could be cloaked in more generalized language, as that would obviously not satisfy the requirement for "specific reasons" in the Proposed Rule.
2. The proposed disclosure would potentially embarrass and ridicule the candidate.
The reversed side to point number #1, of course, is the effect such disclosure might have on the reputation of the Rejected Candidate. While the Proposed Rule would not require the name of the candidate to be disclosed, it does require the name(s) of the shareholder(s) who propose the candidate. We think that the novelty, and significance, of such recommendations make it likely that the names of such candidates would become known. Even in the unlikely event that the name of a candidate does not become generally known, the family, friends and close business associates of the candidate will surely know. Therefore the specific reasons for rejection, which are required to be disclosed, could expose the rejected candidate to tremendous embarrassment and ridicule.
3. The proposed disclosure would potentially expose the issuer or members of the nominating committee to suit for alleged defamation.
And then, of course, the next step is litigation. Would not a Rejected Candidate feel a great motivation to salvage his/her reputation? Salve his/her wounded ego? The temptation to bring suit for defamation to avenge the real or perceived insult could easily prove overwhelming. Exposing the issuer or committee members to such litigation would not serve the best interests of the issuer or its shareholders.
4. Board members would be discouraged from serving on a nominating committee for the above reasons.
To avoid the consequences described above, any director would be naturally wary of accepting appointment to the nominating committee. The responsibilities, and potential legal/reputation exposure, of public company directors is being enhanced greatly as a result of the corporate governance changes that have been instituted or proposed by Congress, the Commission and the stock exchanges in the last year and a half. The Commission should be careful not to increase the disincentive for good directors to serve on boards or committees in whatever position they can contribute, by unwisely adding to the burdens of service without sufficient benefit.
For the reasons discussed herein, I respectfully urge the Commission not to require disclosure of the reasons why a candidate recommended by certain large shareholders, is rejected by a nominating committee.
I appreciate the opportunity to comment on this important matter. Should the Commission have any questions regarding my comments, please do not hesitate to contact me.