March 15, 2004

Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Dear Sirs:

Re: Proposed Rule: Securityholder Director Nominations

This submission follows last Wednesday's SEC Roundtable on reform of US director election rules.

The Basics

Public investors, by definition, have no direct representation (in the sense that a major shareholder may have one or more representatives) on the boards of the listed companies they invest in. Hence, public investors are not privy to key board discussions or key information on which key decisions are made by the company.

That is why best practice in corporate governance requires there to be two fundamental governance protections of public investors in the listed companies they invest in:

1. An independent and competent board to monitor the strategy and performance of management, and

2. An independent and competent auditor to monitor the reliability of strategic and financial reporting by the company board and management.


The SEC has rightly concerned itself in a perceived breakdown in 2 above, including the imposition of tough rules to bolster the independence of the audit system of US listed companies.

We understand that shareholders in US listed companies usually get to vote to appoint/re-appoint their auditors.

That is not the usual case here in Australia. As a consequence of perceived "auditor shopping" abuses by corporate entrepreneurs in the late 70s/early 80s, our corporate law was changed to omit the annual shareholder vote on appointment/reappointment of the auditor of an Australian listed company and a more "entrenched" audit system was introduced.

In our assessment, based on our ten years' experience of reporting on the governance of major Australian listed companies, that entrenchment of the incumbent auditor is now an anachronism and is itself a significant contributor to a key defect in the audit system in this (and, we suspect, many other) countries:

- viz that the audit firm regards the company, and in particular, its board and management, as "the client" instead of the public investors for whose benefit the independent audit is supposed to be performed.

We have, therefore, submitted to a current parliamentary review of our corporate law that it is time to dispense with that anachronism and to re-instate the right of shareholders to appoint/re-appoint the auditor at the AGM and, thereby, bring home to that firm that its retention in that role is dependent on the will of the shareholders by annual simple majority vote.

The fundamental reason why our current system is now an anachronism is the fundamental change in the structure of our market through the rise of the major institutional investor. In the Australian, as in many other, markets major institutional investors are now responsible for the prudent investment management of millions of citizens' retirement and investment funds. As a consequence, major institutional investors now collectively represent a large proportion of the free float of listed companies in the world's markets. Here in Australia, local and foreign institutions account for well over half the free float.

It is no accident that the decline in our market of the undesirable excesses of the entrepreneurs referred to above has coincided with the rise of the major institutional investor.


We respectfully submit to the SEC that there is a similar anachronism operating in the US market. Only in your case, it is with respect to the first fundamental governance protection of public investors in the listed companies they invest in:

1. An independent and competent board to monitor the strategy and performance of management.

On our understanding, US corporate law for listed companies was changed many decades ago as a consequence of perceived abuses by corporate entrepreneurs of the director appointment/election process. Thereby, a more "entrenched" board system was introduced.

For precisely the same reason that the "entrenchment" of auditors in Australia has contributed to a key defect in the audit system in this country, we suggest that the "entrenchment" of US boards has substantially contributed to a key defect in the board system in your country:

- viz that US boards are too often the lapdogs of charismatic CEOs and other senior management rather than the watchdogs of public investors they supposedly represent.

In fact, the original architects of your current system must be turning in their graves as they contemplate the exploitation of their legacy. Modern entrepreneurs now use it to impose a modern abuse on the intended beneficiaries of that legacy - public investors.

The SEC should give major institutional investors the power and responsibility to fix that abuse, as proposed to the SEC by the International Corporate Governance Network.

Yours faithfully

AAD Easterbrook