One James Center
901 East Cary Street
Richmond, Virginia 23219
September 9, 2003
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-14-03
Ladies and Gentlemen:
We offer the following comments on the Commission's proposed rules regarding disclosure of nominating committee functions and communications between security holders and boards of directors:
1. Qualifications of Directors. The proposed requirements for descriptions of minimum qualifications, specific qualities or skills, and specific standards for overall structure and composition of the board assume a formula approach to the selection of board members that, while possibly desirable in theory, does not match reality. While a board and its nominating committee may work from an "ideal board" template, in most cases board members are selected opportunistically based on a subjective evaluation of the qualifications and "fit" they bring to the position.
Nominating committees may follow many different processes for identifying candidates, depending on the particular needs of the board for which they are recruiting members. Among other reasons, board members may be selected as a result of a major acquisition; to develop a potential successor for the CEO; to provide diversity; to add an international or other representative if a company is expanding into new markets; or to find an "audit committee financial expert."
Further, in our experience, depending on candidate availability, nominating committees may sometimes recommend an individual with skills different from the skills the committee originally sought. For example, a nominating committee may be interested in identifying a board candidate with an operations background, but as the search process proceeds may encounter a candidate with strong financial credentials who would make an excellent audit committee member. The nominating committee may choose that candidate even though it was initially seeking someone entirely different. There simply is no "one size fits all" process for identifying (or evaluating) nominees and, often, no straight path through the selection process. Against this background, It is doubtful to us that the proposed requirements will produce anything other than very generalized, and not very useful, disclosure. Anything else would run the risk of putting nominating committees and boards in a strait-jacket when they have an opportunity to add a candidate with excellent subjective and objective qualifications, but who is perhaps short on some previously described experience standard.
2. Sourcing of Directors. The idea of a single "source" for each new nominee is too simplistic. To cite a fairly common recruiting practice, a nominating committee may establish general objectives for filling a board slot and retain a search firm to assist it. Members of the committee, management or counsel may suggest names to the search firm based on personal knowledge, reputation, etc. The search firm will then gather additional information, perhaps add names from its own data base, make initial contacts, conduct screening interviews and provide a "short list" to the committee for final interviews with the committee. Not only is a source difficult to identify but such disclosure, we believe, is not particularly helpful to security holders.
3. Nominating Committee Charters. We believe that lengthy descriptions of nominating committee charters do not belong in proxy statements. Additional detailed disclosure requirements will interfere with the objective of short, plain English proxy statements which are easy to use. A statement as to where a full copy of the charter can be accessed would allow a security holder the opportunity to access and review the charter. For example, reference can be made to a company's website or the company could undertake to provide copies of the document to those who request it.
4. Significant Shareholders. Our experience is that significant shareholders are quite able to make their views known to a nominating committee. We do not understand the relevance of the proposed three percent, or any other percentage, threshold or see much utility to shareholders in the proposed disclosure.
5. Search Firms. It is difficult to understand the reasons for compelling disclosure of the use of search firms in the selection of directors. There is certainly no articulated benefit to shareholders from this disclosure. Our experience is that there is no clear pattern as to when or whether search firms will be engaged, nor does the use of a search firm always result in a better (or worse) candidate.
6. Communications. The proposed "communications" rules present a number of difficult issues, including the following:
- There are substantive restrictions on the ability of management and boards to conduct a dialogue with individual shareholders, most notably Regulation FD. On many important issues directors can mostly only listen and respond in general terms.
- Many individual directors responsibly take the position that it is not appropriate for them to speak for the company or the board, with that task best left to a designated representative after the board has reached consensus on a matter.
- In our experience, many shareholders who contact companies wish to speak with directors on matters that are administrative, such as lost dividend checks, or involve personal grievances. If use of a screening process is discouraged, which the rule appears designed to do, a good deal of "communication" will be forced on directors that others are better suited to handle.
We support the Commission's goal of enhancing transparency of operations of boards of directors. That said, requiring a company to tell its shareholders how it operates is one thing; dictating process indirectly through disclosure requirements, particularly in an area that is by its nature company-specific, is quite another. We respectfully encourage careful consideration of our comments above.