Agilent Technologies, Inc.
By E-Mail to firstname.lastname@example.org
Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Katz:
I am the Chairman, President and CEO of Agilent Technologies, Inc., a Delaware corporation with over $6 billion in annual revenues and more than 29,000 employees worldwide. I appreciate this opportunity to provide comments on the Securities and Exchange Commission ("SEC") proposal to require companies to include shareholder nominees for director in company proxy materials under certain circumstances.
We would like to commend the SEC's efforts to improve overall corporate governance through its adoption of regulations that enable the implementation of the Sarbanes-Oxley Act of 2002. We also support the New York Stock Exchange and NASDAQ corporate governance listing standards, which we believe will foster sound corporate governance and responsiveness and will encourage more transparent business practices. We have always believed that corporate boards and management must hold themselves to the highest standards of business ethics and that companies seeking access to the U.S. capital markets must earn investors' trust by insisting on strong governance standards.
Strong governance, however, does not mean that the best long-term interests of shareholders as a group must give way to the short-term interests of even a sizable minority and yet that is exactly what the proposed rules relating to director nominations appear to enable. The rules, as proposed, go far beyond the SEC's stated intent of targeting a small number of unresponsive companies and will adversely affect many U.S. public companies - regardless of their corporate governance practices or their responsiveness to shareholders.
Election Contests by Special Interests. Complicating the director election process by requiring companies to include shareholder nominees in their proxy materials is not good corporate governance and, in fact, will enhance special interest groups' access to boardrooms. The institutional shareholders most likely to take advantage of the proposed election contest rules are the politically active institutions, such as the labor unions and public pension funds, which often have interests that are influenced by political pressures and agendas unrelated to the economic performance or broad governance of the company. In this context, such groups could easily use the rules as proposed to conduct strategic election contests to serve their specific other goals, at great disruption and cost to the company. Furthermore, director candidates nominated by labor unions and public pension funds, even if not affiliated with the nominating shareholders, will inevitably represent the special interest agendas of the shareholders that nominated them rather than the interests of all shareholders. Directors must represent the best long-term interests of all shareholders and to do this, they must be able to work together in a collegial fashion without the formation of special interest adversarial factions.
Nominating Committee Best Suited to Select Candidates. A contested election is not the best way to select qualified board members. An independent nominating/ governance committee is best suited to select qualified directors with the unique mix of skills and experience needed to oversee each company. The SEC's recently enacted rules governing disclosure of the independence of nominating committee members and the processes that the committee follows in selecting candidates help to enhance the role of this independent committee.
However, if access to company proxy materials is given to shareholders, shareholder nominees should meet all criteria set by the nominating/governance committee for the company's nominees. A shareholder nominee should be subject to all independence standards set by NYSE or NASDAQ, including any subjective components of such standards. Such subjective standards were enacted to allow for the variety of facts and circumstances that may arise concerning a nominee. In addition, shareholder nominees should be subject to any other qualifications set by the nominating/governance committee for company-nominated directors. This requirement would ensure that all nominees, shareholder-nominated or company-nominated, would have the sufficient and relevant experience necessary to be effective board members for a particular company. The SEC's new disclosure rules require that companies disclose "specific, minimum qualifications" and "specific qualities or skills". If company-nominated directors are subject to these qualifications, shareholder-nominated directors should also be subject to these qualifications.
Inappropriate Triggers. If the inclusion of shareholder nominees in company proxy materials is to be required, we agree with the SEC that it only should be triggered by objective criteria indicating that shareholders have not had adequate access to an effective proxy process. We are concerned, however, that the proposed thresholds for triggering a shareholder nomination run counter to this goal and are too low. They would result in frequent contested elections. Even companies that are performing well could face annual election contests. Annual election contests would be enormously distracting and costly.
Adverse Impact on Recruiting Top Director Candidates. Although Agilent has not had to search for new directors in order to meet new director independence requirements, we have heard that many other companies are trying to recruit qualified candidates to their boards. The cumulative effect of wide-ranging corporate governance reforms and the increased fear of exposure to personal liability is already making it harder to recruit top director candidates. In addition, I am concerned that this effect could lead to board members being excessively risk-averse when making decisions. Adding the spectre of annual election contests exacerbates these problems.
Transition; Confusion over 2004 Proxy Season. If the SEC determines that changes in the director election process are necessary, then companies should have a reasonable amount of time to anticipate and prepare for actions and events that may ultimately qualify as a triggering event for shareholder access under the proposed rule. Therefore, shareholder action or voting results during the 2004 proxy season should
not qualify as a trigger for shareholder access under the proposed rule. There will be tremendous shareholder and company confusion with disclosures in 2004 proxy statements that attempt to provide information about a shareholder access process that has not been finalized. Moreover, companies may need to add additional governance staff and counsel to assist with the proposals that may ultimately qualify as triggering events and related issues.
Recent Reforms Address Issues. We believe the SEC should allow the corporate governance reforms adopted by Congress, the SEC and the securities markets to be fully implemented and allowed to take effect before proceeding with additional, unproven regulation. The reforms adopted to date are intended to make boards more independent and accountable. With the increased independence and accountability of boards of directors, the strengthened role and independence of nominating committees and the enhancement of shareholder-director communications, we believe that the issues that led to calls for shareholder access will be addressed. Sarbanes-Oxley does not require or even suggest that shareholder access to management's proxy is a necessary element for good corporate governance and accordingly, we would strongly recommend delaying action on this proposal until the reforms adopted over the past year have been given a chance to work.
If the SEC nevertheless concludes that changes in the director election process are necessary now or at a later date, then we believe it is necessary to substantially revise the proposed rules to better target only those companies that have been truly non-responsive.
We support the Commission's efforts to improve corporate governance at all companies and to prevent scandals that undermine investor confidence in our country's public trading markets. However, we feel strongly that the rules as proposed do not achieve this goal and in fact in many cases would have a negative impact through the creation of polarized dysfunctional boards. Accordingly, we would encourage the Commission not to adopt the proposed rules at this time. We feel that investors would be better served by waiting to see if any additional reforms are needed following the adoption of so many governance changes over the past 18 months.
Thank you for considering these concerns about the proposed rules. If you would like to discuss these comments or any other issue, please do not hesitate to contact Craig Nordlund or Marie Oh Huber at 650-752-5000.
Cc: D. Craig Nordlund