Mr. Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Katz:
We appreciate the opportunity to provide you with our views on the Securities and Exchange Commission's proposed rule regarding security holder director nominations (the "Access Proposal"). We strongly support the corporate governance reform efforts of both the New York Stock Exchange (the "NYSE") and the SEC. In fact, Aetna had already put in place many of the NYSE-directed practices that will go into effect in 2004. We believe that these practices will make boards of directors more independent and accountable to shareholders. However, we oppose the Access Proposal. As described below, we believe that the Proposal is overly broad in its application and that for the large majority of companies it applies to, it is unnecessary. We also believe that the Access Proposal will have unintended consequences, including being disruptive to governance by boards of directors, favoring special interests groups, and being unduly burdensome on companies.
New director independence provisions and new disclosure regarding nominations and shareholder communications are a better solution; these should be allowed to function before additional regulatory actions are considered
Proxy contests are very expensive, distracting and time consuming, and are a poor mechanism for selecting qualified board members. We submit that in many or most instances contests under the Access Proposal would be used by special interest groups that represent a narrow base of shareholders and short-term interests. In this regard, we believe that a 1% ownership threshold and one year holding period for a group submitting a direct access proposal is too low, and does not signify long-term ownership or any significant commitment to the company's long-term performance. A board made up of a majority of independent directors and an independent nominating or governance committee, both now mandated by the NYSE rules, are well suited to weigh the long-term interests of all the company's shareholders. We also believe that the new SEC rules regarding enhanced disclosure of the director nomination process and shareholder communications with the board will enhance the ability of shareholders to participate meaningfully in the director nomination process. It is our belief that, in general, boards would be receptive to suggestions from significant shareholders for qualified director candidates, and would consider those individuals in good faith. We believe it would be better for the SEC to allow these recent independence and disclosure reforms time to operate before imposing a proxy access mechanism that is unproven and which may have serious unintended consequences.
The proposed triggering events are problematic
We do believe that if a director receives substantial withhold votes, as outlined in the Access Proposal, that is a strong indication that shareholders are not satisfied with director performance. However, when such withhold votes would result in triggering access to the company proxy statement, it is not clear whether that would be an indication of anything other than a desire by those shareholders to use a withhold campaign as a means to obtain such access.
We do not think that mere passage of a proposal asking for proxy statement access should be a triggering event, since it may not provide any indication at all of shareholder dissatisfaction with the company or the board, or of unresponsiveness by the company to concerns of shareholders. We believe that there is a real risk that this type of proposal will become routinely submitted to companies across corporate America by groups of shareholder activists, and once faced with such a proposal, we believe there is a high likelihood that a large number of shareholders, although satisfied with the company and board, will generally vote in favor, along corporate governance "party" lines, of these proposals in order to secure an option to access the proxy statement for a director nominee at a later time. Said another way, there is no downside to shareholders to making this type of shareholder proposal to reserve their right to get director nominee access at companies at a future time, or voting for it, even if there is no dissatisfaction with the company or the board. We also believe that large institutional investors and proxy voting services may institute guidelines for voting on these proposals that are driven by their general philosophy on corporate governance matters, and not by the performance of the specific company or board at issue. We submit that if this is included as a triggering event there could be general campaigns to trigger and maintain such access at a large number of companies even where shareholders are satisfied with the board and the company and where the company has been responsive to shareholder concerns.
For the same reason, we believe that a triggering event under the Access Proposal should not be tied to the status of Rule 14a-8 shareholder proposals generally. These proposals are often made by special interest groups or activists to further a narrow interest, whether or not the proposal is in the best interests of the company and its shareholders generally. Often such a proposal must be precatory in nature since the matter at issue under state law must and should be decided by the Board of Directors. Boards should be free to determine such matters solely on their merits without having to also take into account whether their decision will result in triggering shareholder access to the proxy statement. Also, as stated above, in our experience, the passage of a shareholder proposal on a specific, selected item of governance in isolation seldom indicates a general level of dissatisfaction by shareholders with the performance of the company or its board or a general unresponsiveness by the company to shareholder concerns.
Thresholds for triggering a shareholder nomination are too low
Given the potential unforeseen negative consequences of the Access Proposal, we believe that the proposed threshold of 5% to submit a nominee is too low, and will result in frequent contested elections, even where shareholders generally are satisfied with the make-up of a Board. If the Access Proposal is put in place, we believe that, at least initially, a threshold of at least 10% would be more appropriate.
Liability and cost for advancing shareholder nominees should still rest with the proposing or nominating shareholder
If the Access Proposal is adopted, it should assure that companies do not have any liability for information they are required to include in the proxy materials at the request of a proposing or nominating shareholder. That liability should rest entirely with the shareholder. We would also ask the Commission to consider whether it would be appropriate to require a nominating shareholder, should they not ultimately receive at least a threshold level of votes in favor of their candidate (e.g. 25%), to reimburse the company for both the actual internal and external costs to the company of the election contest.
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Lastly, we are concerned, as other legal commentators are, that the SEC may not have the authority under the federal securities laws to adopt the Access Proposal, since we believe that it would grant significant substantive rights, which are typically within the province of state law. We believe that the SEC should carefully consider this issue and may need to reject the Access Proposal, in its entirety, on this basis.
We appreciate your consideration of our views on the Access Proposal. We would be pleased to discuss our comments further with you or members of your staff. If you have any questions regarding this letter, please feel free to contact me.