Trillium Asset Management
September 12, 2003
Jonathan G. Katz
Dear Mr. Katz:
Trillium Asset Management is a Boston-based investment firm that specializes exclusively in socially responsible asset management. Since our founding in 1982, we have grown to manage $600 million in assets for individual and institutional shareholders.
In addition to screening stocks for our clients according to social and environmental criteria, Trillium Asset Management actively and regularly engages in dialogue with our portfolio companies and files shareholder proposals to advance corporate social responsibility. We are also the original founder of the CERES environmental coalition and the Social Investment Forum. Drawing from our experience as engaged investors and the collective experience of the communities in which we work, we know that shareholder engagement can strengthen a corporation's management, with beneficial impact on the bottom line. We pay careful attention to corporate governance, and have exercised our voice as shareholders on corporate governance matters through our proxy vote and the sponsorship of several proposals concerning executive compensation in recent years.
We applaud the Commission for reexamining challenging questions on the board nomination process and would like to offer our feedback on the proposed rules as they related to disclosure. Neither the nominations or communications issues raised are easy. A fine balance must be sought that democratizes the processes to allow serious shareholder input without opening the doors so wide so as to overwhelm companies, directors and shareholders. The current plethora of candidates running for the California governorship serves as a cautionary example of the importance of good system design.
We wish to emphasize, however, our strong conviction that enhanced disclosure and shareholder access to corporate board directors should in no way substitute for the expansion of shareholders' ability to nominate board directors.
Regarding the Proposed Disclosure Requirements
In general, we support the Commissions proposals related to disclosure required of a company's nominating (or similar) committee. Enhanced disclosure is likely to raise the quality and diversity of board nominees and discourage nepotism, cronyism or other conflicts of interest - but will only do so substantially if combined with enhanced shareholder access to the nominating process.
We encourage adding a requirement that nominating committees disclose whether diversity of board composition is a factor in the candidate selection process, and how the company defines diversity in this context. Some companies already declare this information.
Regarding the specific questions raised by the Commission:
(#4) We favor a requirement requiring the corporations file their nominating charters with the Commission, and also be required to furnish a copy to investors upon request.
(#6) We favor requiring companies to disclose its policy on the consideration of shareholder recommendations, and if it does not have one, to disclose that fact.
(#7) Any changes to the procedures for making nominations should be filed with the Commission in a timely manner.
(#8) Companies should be required to declare any differences in criteria that are applied to shareholder nominees and nominating committee candidates.
(#9) We favor the disclosure of any financial interests between the candidate and sponsor, and the identity of the sponsor.
(#10) We support requiring the disclosure of methodologies used by third parties to search for qualified board nominees.
(#12) The Commission has recommended that the nominating committee declare its reasons for rejecting any nominee brought forward by shareholder(s) owning greater than 3% of common voting stock. We recommend that the threshold for this disclosure be lowered to candidates nominated by a 1% or greater shareholder group. We expect that the formation of 3%-or-greater coalitions would be uncommon. Little would be illuminated about how boards make these decisions if disclosure were limited to those circumstances.
Regarding the Proposed Board Communications Requirements
There is no question that boards are currently unaccountable to their shareholders. This begins with the fact that the board nomination and election process denies all but the wealthiest shareowners the ability to forward alternative candidates. Following from this, board members are free to avoid inquiries from shareholders and are even in some instances prohibited by corporate management from having direct dialogue with shareholders. This is outrageous in light of the prevailing legal theory that boards exist for the very purpose of representing shareholder interests.
While we have had many positive interactions with board directors, we have had several experiences in which our letters to board directors have gone completely unacknowledged. In other cases, management has responded, supposedly speaking for the director(s). Neither of the latter reactions encourages faith in the board's independence, objectivity and underlying loyalties.
We are aware of corporate annual meetings in which no member of the board of directors attends. In other cases, directors' attendance at board meetings is spotty. In another potentially disempowering development for shareholders if the trend catches on, the State of Delaware allows companies incorporated therein to hold annual meetings on-line only if they wish. This would allow directors to escape their one annual obligation to face shareholders and personally engage with them.
We therefore support the Commissions rule proposals laid out in Section B(2), as we believe they will improve board accountability and responsiveness.
In addition, we endorse in toto the recommendations on disclosure made by the Social Investment Forum in its letter to the Commission on this matter dated September 11, 2003.
With respect to the specific questions raised:
(#4) Companies should be required to disclose any reasons why any director(s) will not accept shareholder communications, and how they track and record shareholder communications.
(#5) We favor transparency regarding the "filtering" process as essential to accountability.
(#9) We see no reason to limit disclosure requirements to independent directors.
(#11) We encourage the Commission to provide guidance on appropriate procedures relating to shareholder communications with board members. At a minimum, companies should (a) send a written acknowledgement to the shareholder that their communication has been received, (b) indicate whether the board director has been forwarded their communication.
We support extending the proposed rules to cover small companies and investment companies.
In summary, we support the Commission's proposals. However, we believe that, in themselves, the proposed rules will have only a limited impact in achieving widespread, elevated board responsiveness and accountability. For in the absence of expanded shareholder access to board nomination process, board directors will never have to earn or defend their right to "represent" shareholders.