[Association for Investment Management and Research (AIMR) letterhead]
22 December 2003
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W., Stop 6-9
Washington, D.C. 20459
Re: Security Holder Director Nominations-File No. S7-19-03
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on the proposed rule that would require certain companies to include in their proxy materials security holder nominees for election as director.
The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.
In general, we believe that this proposal is a well-balanced attempt to provide shareholders with more active involvement in the nomination process while building in safeguards that will minimize serious disruption to the proxy process. However, we suggest several changes to the final rules that would better realize the underlying objectives of providing shareholders with a meaningful way to become involved in the proxy system when it appears to have become ineffective. We believe that these changes should provide greater access to the process without threatening the stability of the system.
In particular, we recommend that the final rule provide
These recommendations are discussed in more detail below.
We greatly appreciate the SEC's efforts, through this proposal, to provide shareholders with a mechanism for meaningful engagement in the proxy process. We believe that the proposal sends a strong message that the SEC has heard the cry of shareholders that as investors, they need a way to actively participate in the process-particularly with respect to the nomination of directors. We also believe that the proposal is generally well-balanced. It provides shareholders a more active role in corporate governance issues without threatening certain safeguards currently in place that seek to minimize disruption to board functions or use of the proxy system to further personal agendas.
Central to maintaining this balance is the fact that regardless of the nomination proffered by a shareholder, a majority of the shareholders must approve the nomination for that individual to be elected director. We believe that this requirement alone imposes meaningful constraints on those who may try to use the process for personal or "renegade" agendas, and significantly reduces concerns about potential disruptions this proposal may cause to the corporate boardroom. It is against this "majority vote requirement" and the correlative filtering effect that it will have that we suggest the following changes.
In its proposal, the SEC staff seeks public input on whether the proposal should apply to all, or only a defined category of public companies. In particular, it is considering whether to apply the security holder nomination procedure only to accelerated filers at first, in order to allow the markets to react to this change. After a certain period of time, the SEC would phase in the rules' application to other market participants, including smaller, less seasoned issuers. We do not support this approach.
We appreciate the SEC's consideration of "testing the waters" in the effort to minimize disruption in the corporate process. However, we perceive no compelling reason to limit the proxy changes to accelerated filers or any other subgroup of issuers-even for a relatively short period of time-and recommend that the final rule apply equally to all companies at the same time. As we have stated previously, we think it is optimal to increase additional shareholder participation in the proxy process without sacrificing a stable process, as certain turmoil in the corporate process could ultimately undermine the benefit to be gained by shareholders. However, we believe that adequate provisions have been written into this proposal to minimize serious disruption to the smooth functioning of an affected company. Moreover, there are some indications that smaller companies may have more problems than larger companies with respect to corporate governance practices and excluding them from the initial reach of the proposal may unduly delay achieving the very effects that are most needed.
If, after further consideration, the SEC does apply the provisions first to a select group of issuers, we urge that it set a specific time-frame for extending the rule to all issuers. We believe that it is important for issuers and investors alike to know when they can expect to be covered by the rule.
As proposed, either of two "triggering events" must occur for the security holder access process to apply: (1) the receipt of "withhold votes" from more than 35% of the shareholders with respect to one or more of the nominees for the board of directors for which the company solicited proxies; or (2) submission of a shareholder proposal by a shareholder or group of shareholders holding more than 1% of the company's voting securities for at least one year requesting "direct access" when the proposal received more than a majority of the votes cast on that proposal. The occurrence of either of these events is deemed to indicate that the company's existing proxy process is ineffective, thus giving rise to the need for additional shareholder involvement.
We understand and appreciate the intent not to "open the floodgates" through this proposal so that shareholders could use the proxy process to orchestrate contests for control or further personal agendas. However, one of the rationales for proposing these two particular triggering events cited is that they signal that there is a problem with the proxy system. Both are a strong indication that the shareholders are making a strong statement or requesting an action that is not being addressed by management. In keeping with the spirit, intent, and consistency of that approach, we believe there are other situations where shareholder concerns are clearly being ignored by management. Specifically, we recommend that a company's failure to adopt or act on a proposal that has been submitted by shareholders and approved by a majority vote should also trigger the shareholder nomination mechanisms.
We believe that if a company has failed to implement a shareholder proposal that is valid under state and federal law and that has been approved by majority vote of the shareholders, it raises a serious question about the effectiveness of the proxy system and the board's responsiveness to shareholder concerns. If, indeed, the board is ignoring the clear wishes of the shareholders in such a situation, we can think of no better need to address the board constituency through the proposed nomination process. In urging addition of this third trigger, we are comfortable that allowing shareholders to nominate a director based on this event will not risk serious disruption to the system.
As noted above, one triggering event pivots on the receipt of "withhold" votes from more that 35% of shareholders with respect to one or more nominees offered by the company. For this provision to be effective, and to accomplish the objective for which it is intended, we recommend that the SEC clarify how this percentage will be calculated. Given that the shareholder voice is what must be addressed, we believe that only shareholder votes cast should be considered in determining the appropriate percentage, and that broker non-votes should be explicitly excluded from the count.
The concept of holding periods and ownership percentages is instrumental to this proposal. One of the triggering events requires action by a shareholder who has held more than 1 percent of the company's voting securities for more than one year. Secondly, only shareholders that have beneficially held more than 5 percent of the company's securities for two years can nominate someone for director, once the triggering event requirements are met.
Members of this committee differed over the advisability and usefulness of these ownership requirements. While we recognize that these holding periods are intended to limit actions to more long-term (therefore more "serious" and less disruptive) shareholders, some questioned whether a shareholder's interests should be less valued simply because the stock purchase was recent. Others were concerned that the 5 percent ownership requirement, in particular, would pose a problem for smaller shareholders who should be entitled to an equal voice in this process.
Regardless of the exact holding periods or percentages favored by certain committee members, the strong consensus of the group favored allowing shareholders more accessibility through both shorter holding periods and reduced ownership percentages. First, we believe that engaging in the proxy access process involves commitments that are not likely to be undertaken casually, but instead will be undertaken by those who in all probability, are the more "serious" shareholders (regardless of the number of, or length of time of, shares held). Thus, we question the need to fear a "flood" of shareholders who will try to take advantage of this system if the threshold limits are lowered.
Moreover, even if a larger than expected number of shareholders seek use of the proposed system, we believe that other requirements in the proposal provide safeguards to limit disruption to the corporate processes. Even if a larger number of nominees are included in proxy materials, they still must be approved by a majority vote of shareholders. This majority vote requirement in itself presents a substantial hurdle, and serves as a reasonable safeguard. Given the interest that shareholders have in the continued viability and financial strength of the company in which they hold stock, we believe there is minimal chance that foolhardy or frivolous actions will result in the election of inappropriate directors.
Given that the underlying goal of this proposal is to provide shareholders with greater access to the proxy process and given other "filtering" mechanisms in the proxy process that minimize potential disruptions, we therefore urge the SEC to reconsider both the holding period and percentage requirements, with an eye to providing shareholders with even greater access to this system.
The proposal notes certain prohibited relationships between the nominee and the shareholder group or individual that has done the nominating, thereby holding the nominee to five standards of independence, including
We strongly support the proposal's separate independence requirements between the nominee and the company. However, we question the necessity of the independence requirements noted above governing the relationship between the nominee and the nominating source.
We understand the desire to minimize the potential for special interest or "single issue" directors to make their way onto the board through the shareholder nomination process. Since such nominees require a majority vote of shareholders, we do not share this concern that parties not meeting the independence standards would use the proxy process to disrupt or otherwise threaten the inner workings of a company.
Instead, we believe that the majority of shareholders will want access to the proxy system to improve the value and workings of their company, not to engage in actions that would work against the company's financial well-being (including disruption of the corporate boardroom). Moreover, we question whether the pool of candidates who otherwise may well serve shareholder interests will be overly limited through these proposed independence requirements, which ultimately works to the detriment of shareholder interests. We therefore encourage the SEC to reconsider that need and applicability of these standards when applied to the nominee's relationship to the nominating person or group.
We applaud the SEC for conducting a review of the proxy voting system and for its proposal to seek ways to better open up the process to shareholders. We believe that this is an important step in sending a clear message to shareholders and corporations alike about the role each should play to create a smooth and meaningful proxy process. As noted above, we encourage reconsideration of a number of points, including (1) adding a triggering event, (2) lessening the ownership requirements, and (3) reevaluating the need for independence requirements between the nominee and nominating group.
If we can provide additional information, please do not hesitate to contact James W. Vitalone at 704.553.0455, firstname.lastname@example.org or Linda Rittenhouse at 434.951.5333, email@example.com.
|/s/ James W. Vitalone, CFA
James W. Vitalone, CFA
Chair, U.S. Advocacy Committee
|/s/ Linda L. Rittenhouse|
Linda L. Rittenhouse
cc: U.S. Advocacy Committee
Rebecca T. McEnally, Ph.D., CFA Vice President, AIMR Advocacy
1 With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional association of more than 68,300 financial analysts, portfolio managers, and other investment professionals in 116 countries of which 56,000 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 127 affiliated societies and chapters in 46 countries.