December 22, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-19-03, SEC Release #34-48626
Dear Mr. Katz:
I am writing on behalf of Domini Social Investments LLC, in response to the Commission's request for public comment on the above-referenced proposed rule regarding shareholder proxy access.1
Domini Social Investments LLC is a registered investment adviser under the Investment Company Act of 1940. We manage more than $1.6 billion in assets for individual and institutional mutual fund investors who wish to incorporate social and environmental criteria into their investment decisions. As socially responsible investors, we are committed to active engagement with the corporate holdings in our portfolio, through conscientious proxy voting, letter writing, direct dialogue and the filing of shareholder proposals.
We applaud the SEC's attempt to increase, through this rule, board transparency and accountability to shareholders. We also recognize that any rule regarding proxy access must strike a difficult balance between increasing corporate democracy and shareholder rights on the one hand, and avoiding frivolous nominations and inordinate expenditures of company resources on the other.
As socially responsible investors, we are deeply concerned about the accountability of publicly traded corporations to the broad range of stakeholders their operations impact, from their employees to their consumers to the natural environment. Maintaining positive stakeholder relations is, in our view, a sign of good management and can convey a competitive advantage. As shareholders, we consider ourselves a privileged stakeholder-but not the only stakeholder whose interests management must consider or the board of directors protect. We believe that corporations that are responsive to their full range of stakeholders will prosper in the long run. We favor shareholder rights and greater democracy in board elections to the extent that it makes corporate boards more accountable to all of these stakeholders. We do not support measures that merely increase the already substantial influence of large investors who may only be pursuing short-term profits, or who seek access to the proxy in order to take over the company.
We are also concerned by the response of certain critics of this rule (and of the mutual fund proxy disclosure rules) that suggest that these reforms will increase the influence of "special interests" to the detriment of shareholder value. This argument overlooks the fact that a shareholder nominee will still need to win the election to obtain a seat on the board and that institutional investors are bound by a fiduciary duty to vote their shares in the best long-term interests of their clients. A concern about the undue influence of special interests leads us to believe that reform in board elections is needed to open up an insular world that already belongs to such special interests.
Recognizing the difficult path the Commission has embarked upon, we are concerned that the rule as currently drafted may not be an effective means of achieving our mutual goals of greater corporate accountability. Nevertheless, we support the rule as a step in the right direction, and offer the following comments to highlight our primary areas of concern and to suggest areas of improvement:
1) The proposed rule effectively extends the shareholder nomination process over the course of two years and consequently is unnecessarily burdensome. Even with somewhat lower barriers to entry, this rule will not be used with any degree of frequency. Rather, it is our expectation that the threat of shareholder access to the proxy will encourage board members to listen more carefully to shareholder concerns in order to avoid being unseated. A process this difficult, which at best will take two years to run its course, substantially diminishes the potential influence of the rule. In addition, when corporate boards are not responding to serious concerns, two years seems an unnecessarily long time to wait.
2) If triggers are used, we believe that the third potential trigger on which the Commission seeks comment-the failure of a company's board to implement a shareholder proposal that has received a majority vote-is of the greatest importance. This trigger should apply to any proposal submitted by any shareholder who meets the requirements to file a shareholder proposal, not only by those holding at least 1% of the company's stock. A board's failure to act on a proposal approved by a majority of its shareholders-regardless of the status of the proposal's filer or the subject matter of the proposal-should be adequate evidence of a lack of responsiveness to shareholder concerns. Although these proposals may not be about the nominating process itself, it is not the nominating process that is foremost in shareholders' minds when they support a shareholder proposal-it is the accountability of the board of directors. If the board fails to implement a proposal that a majority of shareholders approved, this is a strong indication that the board is not representing shareholder interests. This is true whether the proposal was sponsored by a shareholder holding 1% of the company's stock or by a shareholder who met the minimum requirements for filing a proposal. The issue at hand is the responsiveness of the board, not the legitimacy of the proposal's sponsor.
The SEC should use a standard similar to its "Substantially Implemented" standard (rule 14a-8 subparagraph 10) to determine whether a company has implemented a shareholder proposal that has received a majority vote.
3) In our letter to the Commission of June 12th, we suggested that a large group of shareholders meeting the minimum requirements for filing a shareholder resolution might also qualify to nominate a board candidate. We offered this suggestion recognizing that even a 3% ownership threshold will be an impossible threshold to surmount for most shareholders, and that a large group of long-term shareholders should have a legitimate right of access to the proxy. Such a group could more accurately represent the broad spectrum of a corporation's shareholders than a single investor holding 5% of the company's stock. Nevertheless, if the Commission wishes to require that even a group of nominating shareholders must meet the 5% threshold, we suggest that the limitation on the size of security holder groups be expanded or eliminated.
4) We also question the rationale behind the requirement that a shareholder nominee be independent of the nominating shareholder or group. Boards of directors are charged with a duty to protect shareholder interests. We need directors who are truly independent of management to ensure they are able to carry out that duty. If we wish to align a board's interests with shareholders', we should be concerned that nominees not have connections to management - connections to shareholders are not similarly a concern. Any material connections the nominee has to the nominating shareholder or group should be disclosed in the proxy statement, and shareholder nominees who are not independent of company management should be disallowed. The degree to which a nominee represents shareholder interests will be tested by the outcome of the election.
5) We would like to request that the Commission clarify the procedures under which a shareholder nominee would stand for election. As we also observed in our letter of June 12th, it will be nearly impossible for a shareholder nominee to win an election if she or he runs against a slate of incumbent directors. We therefore suggest that shareholders be permitted to nominate candidates to oppose particular directors who are running for reelection. We would also repeat our suggestion that the Commission institute a complete ban on broker votes or uninstructed share voting in tabulating proxy resolution results, including uninstructed voting by Trustees of the Corporation for employee-owned shares, except where necessary to achieve a quorum.
6) In closing, we would also suggest that the Commission consider what other types of triggers might be effective in highlighting a board's non-responsiveness to stakeholders. We all recognize that corporations do not operate in a vacuum. Too often, however, the only dialogue we consider is the one between the corporation and its shareholders, as if everything that needed to be said were conveyed through that narrow channel of communication. We do have numerous other measures of corporate performance, however, and numerous indicators of a board's failure to serve its watchdog role. For example, EPA, OSHA and NLRB fines may also serve as triggering events, if they cross a certain threshold. Another advantage to using such measures as triggers is that they are objectively verifiable, and represent areas where successful corporations must pay attention.
The unintended consequence of setting a 5% ownership threshold is that certain privileged shareholders may obtain undue influence over the board. The consequence of setting a certain threshold of EPA fines is that the board pays closer attention to the company's environmental performance. We would encourage the Commission to consider the various ways that a corporation's performance might trigger the need for a change at the board level, keeping in mind that the overriding issue is not whether a company's shareholders have concerns about the nominating process - the critical issue is whether the board is doing its job.
Thank you again for the opportunity to comment. Please contact me directly if you would like to discuss any of these ideas further.
General Counsel and Director of Shareholder Advocacy
1 Our previous letter regarding shareholder access to the proxy dated June 12th, 2003 may be accessed at: http://www.sec.gov/rules/other/s71003/domini061203.txt. We also provided comments on the recent rule regarding nominating committee disclosure and shareholder communication with boards of directors on September 15th. This letter may be accessed at: http://www.sec.gov/rules/proposed/s71403/dominisoc091503.htm