ISIS Asset Management

15 September 2003

Mr. Jonathan G. Katz, Secretary
US Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Via email

RE: Shareholder Access to Proxy - FILE NO S7-14-03 and SEC Release No. 34-48301

Dear Mr. Katz:

We write on behalf of ISIS Asset Management, a London-based investment manager with approximately $97 billion under management (as of 30 June 2003). We are one of the ten largest active managers in the United Kingdom with substantial holdings in US companies.

ISIS welcomes the Securities and Exchange Commission's efforts for enhancing the processes and transparency of Board nominations and communication. We support SEC actions that will serve to embed and codify the notion that independent directors serve as the elected representatives of shareholders. However, under no circumstances should the SEC's current proposal be considered an appropriate substitute for providing greater shareholder access to the Board election process. In light of best practice standards in other markets and the recent spate of management and Board failures in the US, we urge the SEC to develop a mechanism for serious shareholders to ensure their interests are more fully represented on Boards, a mechanism that does not require aggressive and expensive take-over attempts. ISIS firmly disagrees with regulations that insulate Board members from criticism or replacement - a Board's best protection is to run the company well on of behalf of shareholders.

1. Nominating Committee Disclosure

In general, ISIS supports the SEC's proposed changes believing them to be appropriate and not overly burdensome. However, our biggest concern is that these new regulations will continue to result in boilerplate disclosure crafted by cautious company lawyers rather than meaningful information that helps shareholders understand the unique character and processes at companies they own. For example, under the proposed regulations, we expect that all companies will claim that management nominees and shareholder nominees are subjected to the same level of examination and consideration. As intelligent shareholders we know that this is unlikely, and therefore question the value of this suggested disclosure. We urge the SEC to grapple further with how it can achieve a true "spirit of transparency and disclosure" from companies in reporting.

ISIS supports the recommendations that would lead to greater description of both the procedures for shareholders to submit candidates and the processes the Nominating Committee uses in its evaluation. In particular, the quality of skills the Board is currently seeking, which may be evidenced by specific qualifications, would be helpful. If companies embrace the appropriate spirit of such regulations then we would expect that the qualities and skills required would change over time as the needs of individual Boards and companies evolved. We also ask that the SEC requires Boards to disclose more information on their expectations for diversity.

The current proposal does not go far enough in requiring explicit disclosure of the CEO's role in candidate screening. Although independent Nominating Committees may be tasked with Board building, the CEO often has a strong and unseen role in evaluating and screening final candidates. As members are intended to be independent and provide oversight of the CEO on his or her performance and compensation, it is essential that there be much greater disclosure to shareholders on the role of the CEO in the process. This is of particular important for the vast majority of US companies where the CEO also controls the Board through his or her role as Chairperson.

ISIS generally supports the SEC's proposal for disclosure of candidates' and nominators' names that were rejected by the Committee when these nominations emanate from serious shareholders. However, we believe that holding 3% of outstanding shares is too high a threshold for nominating disclosure purposes. We recommend that the SEC use a lower threshold.

We also strongly support the SEC proposals to require:

  • Disclosure of any material amendments to the Nominating Committee Charter. We believe that posting the full charter on the web site and identifying material changes in the proxy should be sufficient.

  • Disclosure of Nominating Committee members that do not satisfy listing requirements for independence and provide a clear explanation of why they are a member of the Committee. We also urge that non-NYSE and non-Nasdaq listed companies be required to follow similar standards of Committee independence and disclosure.

  • Disclosure of any financial interest between the candidates and sponsors.

  • Disclosure of serious candidate and sponsor names that were rejected by the Committee. However, we would recommend that rejected candidates be allowed to decide if and how they would like to be identified. Similarly, sponsoring investors or groups must be allowed to decide how they will be identified.

In our view, none of the SEC's recommended changes for Nominating Committee process disclosure should be overly burdensome to companies. Well run Boards should already have such policies and procedures in place, meaning that these changes would require some additional staff time for preparing disclosure and possibly some more specific record keeping.

2. Disclosure Regarding Communications with the Board of Directors

Open channels of communication between shareholders and Boards of Directors is an area in which US companies and Boards have poor performance records. New SEC requirements to open and enhance communication are exceedingly welcome. Company web sites, proxy materials and other SEC filings should make the process for how shareholders can contact their Board representatives crystal clear.

ISIS believes that shareholders should have a mechanism short of Board takeover that allows them to nominate directors. Similarly, investors should also have clear routes of communication with their Board representatives short of the formal and, at times, combative shareholder resolution process. We would hope that better systems for assured communication between independent directors and serious investors might provide an effective alternative to the rising number of shareholder proposals filed at US companies each year.

We recognize that independent directors may be inundated at certain companies with letters, emails and requests. However, we do not think such special cases should stand in the way of the SEC raising standards in this essential area. While it may not be practical for a director to read, let alone respond to, a thousand emails on one topic, we do think it is essential for that director to understand the volume of communication and investor concern on such a topic. ISIS believes that it is reasonable for directors to ask company staff to respond to certain shareholder requests. However, we believe that shareholders should be guaranteed that their communications are first sent to the named directors and are not filtered - or ignored - by company management.

ISIS does not necessarily support the idea that a Board should publicly report the kind, volume and action taken on each and every request made to its Directors. However, Boards should be encouraged to design systems for greater transparency with their shareholders about the types of ongoing concerns that shareholders are expressing.

The current SEC proposals to enhance the Nominating Committee processes and shareholder-to-director communication systems are a promising initial change. They provide strong stepping stones toward much needed reform of shareholder access to the proxy.

Thank you very much for your attention to this letter.


Elizabeth Elliott McGeveran
Vice President, Governance

CC: Richard Singleton, Director, Corporate Governance, ISIS Asset Management
Andrew Hudson, Head of US Equities, ISIS Asset Management