Comments of American Society of Corporate Secretaries on S7-19-03

American Society of Corporate Secretaries
521 Fifth Avenue
New York, New York 10175

December 22, 2003

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan G. Katz, Secretary

Via e-mail: rule-comments@sec.gov

Re: Security Holder Director Nominations
(Release No. 34-48626; IC-26206; File No. S7-19-03; RIN 3235-AI93)

Ladies and Gentlemen:

The American Society of Corporate Secretaries, Inc. (ASCS) is a professional association founded in 1946, serving more than 4,000 corporate attorneys and other business executives who represent over 3,000 issuers. Job responsibilities of our members include working with corporate boards of directors and senior management regarding corporate governance; assuring issuer compliance with securities regulations and listing requirements; and coordinating activities with shareholders, including proxy voting for the annual meeting of shareholders and negotiation of shareholder proposals. The majority of ASCS members are attorneys.

We appreciate the opportunity to comment on the proposal. We also appreciate the Commissioners and Staff speaking publicly about the proposal, including Alan Beller's comments at the ASCS Issues Update Conference on November 20, 2003.

The proposal states that the proposed rules are intended to improve disclosure to security holders to enhance their ability to participate meaningfully in the proxy process for the nomination and election of directors. We support that objective. However, as explained below we believe the proposal is not the best method of achieving the objective.

Our comments address three flaws we have identified in the proposal, which we believe are counterproductive to the objective:

First, the proposed new nominations system is likely to make the relationship between investors and boards more adversarial because the system culminates in a contested election. Additional adversarial proceedings will diminish the chance for meaningful interaction of shareholders with management and boards. Adversarial proceedings will also result in disputes where the Staff, the Commission and the courts to will need to take an active role.

Second, the proposed changes would allow a fundamental change to the state law process for the nomination of directors based on actions of as few as 5% of the shareholders. This means that the other 95% of shareholders might have to take additional actions or be subject to the will of a few. We are concerned that this will be compounded because so many institutional holders outsource voting analysis to a third party like Institutional Shareholder Services (ISS), meaning that the decision of one entity, such as ISS, rather than decisions of actual shareholders might control the triggers for many issuers.

Third, the proposal would change the state law process for the nomination and election of directors through changes to the shareholder proposal rules. This leaves some disconnects in the mechanical process for elections. These disconnects will drive up the cost of compliance with the new system. We also believe the disconnects will require frequent intervention by the Staff, the Commission and the courts.

The proposing release also states that the proposed new system "would apply in those instances where evidence suggests that the issuer has been unresponsive to security holder concerns as they relate to the proxy process." Under the proposal, we see no clear link between the triggers to the proposed new system and unresponsive issuers. Our comments address ways to build such a link into the system.

As has been our practice with comments on other rule proposals, we have tried to offer practical solutions to the issues we have identified. In addition to the comments in this letter, we have also answered a number of the specific questions asked in the proposal on Attachment A. We participated in a survey of ASCS and Business Roundtable member companies. A summary of the survey results is included as Attachment B.

Require A Clear Link To Unresponsiveness By the Issuer and Reduce Chance the New System Will Be Used As Leverage for Other Reasons

The two triggers as proposed do not clearly link to any unresponsive behavior by the issuer and they allow the new nominations system to be used for leverage in other circumstances. To avoid this unintended result, we suggest two preconditions to use of the triggers:

A Town Hall Meeting Precondition

In addition to adding a clear link to unresponsive behavior by issuers, this precondition also has the major advantage of facilitating meaningful interaction among shareholders, directors and management. We believe adding this link is consistent with the proposal's objective, and reduces the likelihood of adversarial interaction.

The town hall meeting process would be triggered by any majority vote of the outstanding shares on any shareholder proposal on any subject.

The town hall meeting process would also be triggered by the written request of holders of at least five percent of outstanding shares, held for one full calendar year prior to the proposal, who state that they intend to hold for an additional full calendar year after the request and who state publicly the reasons for their belief that a board is ineffective.

In both of these situations, the issuer would then be required to host a town hall meeting as follows:

Publicize the town hall meeting for two months in advance.
Allow town hall meeting participation, in person or by interactive electronic means, by every shareholder who provides his/her name, address, reason for concern with the board, ownership data and meets specified ownership thresholds for one full calendar year prior to the town hall meeting and who state that they intend to hold the shares for a full calendar year following the meeting.
We suggest ownership thresholds of at least 100 shares for individual holders.
For institutional holders, we suggest ownership thresholds of at least one percent of outstanding shares.
Participants from the board will include at least the chair of the audit, compensation, nominating and governance committees. Participants from management will include at least the CEO and the CFO and the highest human resources/compensation executive.
Web cast the town hall meeting.
Provide a report on the issuer's website after the town hall meeting noting the substantive issues raised at the town hall meeting and indicating the board's plans to address the issues, with a time frame being noted.
Provide quarterly follow-up reports on the issuer's website until the plans are fully implemented.

After the town hall meeting had been completed, the triggers for the new nominations system could be initiated at the following annual meeting, but only if the shareholders wishing to activate the triggers certified in writing that they believed the board had failed to make a good faith effort to address the concerns articulated at the town hall meeting.

A Precondition for Disclosure By Participating Shareholders

The push of the new process to encourage interaction and dialogue should work both ways.

Shareholders should be required to publicly state their concerns with the effectiveness of the board as a precondition for calling a town hall meeting.

Shareholders initiating a trigger to the new nominations system should also be required to make public disclosure about how the board's ineffectiveness warrants the use of the new nominations system. If the final rules require a town hall meeting, then the certification would address how there had been no good faith effort by the board to address the concerns raised at the town hall meeting. If the final rules do not require a town hall meeting, then the certification would address how the board was not effective in specified circumstances.

These disclosures would have three benefits:

Allow other shareholders to make a clear, fully informed decision about whether or not to support the actions of the initiating shareholders.
Help the board and management understand the concerns of shareholders.
Help diminish the use of the proxy process, and this new nominations system, as leverage in addressing issues that are not directly related to the effectiveness of the board.

The Decision to Change the Nomination Process Should Be The Clear Will Of a Majority of the Shareholders

No trigger for the new nominations system should apply unless it is approved by the vote of a majority of the outstanding shares. The new nominations system is a fundamental change from the state law process and our survey shows it will be expensive. It will also distract the board and management from other business matters. As a result, we think it would be unfair to the majority of shareholders to apply the new nominations system if that majority had not specifically decided it should apply.

We agree that a shareholder proposal asking that the new nominating system apply is a good trigger, as long as it is approved by a majority of the outstanding shares. The proposal should include a particular concern about the board and how that concern has harmed all shareholders. This will help diminish the use of the proxy process, and this new nominations system, as leverage in addressing issues that are not directly related to the effectiveness of the board.

We believe the specific shareholder proposal asking that the new nominating system apply, by itself, is adequate and no second trigger is needed.

However, if a second trigger relating to only one director is to be included in a final rule, we believe a withhold vote trigger is not appropriate. Shareholders may wish to withhold votes from a particular director for a number of reasons (some having nothing to do with the particular issuer but instead to the director's actions at other companies or his/her personal characteristics). Some of those shareholders may not wish to also trigger the new nominations system. These shareholders should not be forced to choose. This can be remedied by changing the standard from "withhold votes" to a no confidence referendum proposal, which should reference specified reasons relating to the director's service at the issuer. This change would allow other shareholders to participate in the triggering no confidence referendum on a fully informed basis and only with specific intent to do so.

The rules should also require that institutional investors must make an independent analysis in determining whether to vote in favor of a triggering event, whether to make a nomination under the new nominations system or vote for a shareholder-nominee for director in a contested election. The Commission should include in the new rule a process for the Staff to audit institutional investors compliance with this requirement, to insure that a vendor is not determining these important matters in accordance with guidelines applied blindly without specific analysis.

Thresholds for Initiating A Trigger Should Be Increased

In terms of which shareholders can initiate a trigger, we believe the proposal permits holders of too few shares to cause expense for the other shareholders. We also believe the low thresholds permit several activist holders who hold shares in many companies (for example, because they invest based upon an issuer's being included in an index rather than a qualitative decision about an issuer) to vote for triggers across the board as an "insurance policy" rather than on a reasoned basis where there is a particular concern.

In all cases, we believe the holder must have a long-term interest in the issuer so that the holder must have held the shares for two full calendar years before initiating the trigger and state an intent to hold the shares for two full calendar years after the year in which the trigger is initiated.

We suggest that if one shareholder initiates the trigger acting alone, that shareholder should hold five percent of outstanding shares. If a group of shareholders initiates a trigger, the group must hold three percent of outstanding shares.

Thresholds for Nominating A Candidate After a Trigger Should Be Increased

In terms of which shareholders can nominate a candidate after a trigger has succeeded, we believe the proposal permits holders of too few shares to cause expense for the other shareholders. We also believe the low thresholds permit several activist holders who hold shares in many companies (for example, because they invest based upon an issuer's being included in an index rather than a qualitative decision about an issuer) to act without input from other shareholders.

In all cases, we believe the holder must have a long-term interest in the issuer so that the holder must have held the shares for two full calendar years before making the nomination and state an intent to hold the shares for two full calendar years after the year of the election if the nominee is elected.

We suggest that if one shareholder, acting alone, makes the nomination, that shareholder should hold ten percent of outstanding shares. If a group of shareholders is to make the nomination, the group must hold five percent of outstanding shares.

Modify New Nominations System to Eliminate Concern About "Special Interest Director" and To Allow Boards To Opt Out of Contested Election

Having the shareholder-nominator choose the director candidate, and having that person "run against" one or more of the board's nominees, creates a number of concerns. First, it would be very challenging to convince issuers and other shareholders that the shareholder-nominated director truly represented the interests of all shareholders and not just the interests of the shareholder-nominators. That lack of trust, along with the contested election, may create an adversarial relationship between the shareholder-nominated director and the board-nominated directors.

To avoid those concerns, we suggest the following alternative process to be used once a trigger and the thresholds for nomination are satisfied:

- The shareholder-nominator would submit up to ten characteristics for the new director, all related to the concerns about the issuer specified in writing by the shareholder -nominator (for example, if a concern is that the compensation paid to executives is unreasonable, a qualification might be at least five year service on another issuer's compensation committees).

- The issuer's nominating committee would submit up to ten qualifications that, in their judgment, best match skills and characteristics needed by the board at that time, all taken from a list of attributes in the issuer's corporate governance guidelines (for example, if the audit committee had only one financial expert and the only other independent directors who was qualified as a financial expert had recently retired, financial expertise might be relevant qualification).

- The issuer and the shareholder-nominators would attempt to agree upon a recruitment firm expert at locating director candidates. If they could not agree, the SEC Staff would supervise random assignment of a recruitment firm from a list of approved firms to be prepared by the SEC Staff annually in consultation with issuers and investors.

- All candidates would have to be independent of the issuer and the shareholder-nominators, using the applicable listing standards plus any independence standard included in the issuer's corporate governance guidelines. We think it is imperative that all directors be held to the same independence standard.

- The recruitment firm would identify three candidates, who best meet the shareholder-nominator's and the nominating committee's specified qualifications.

- Both the shareholder-nominators and the issuer's nominating committee would interview the candidates and provide feedback to the recruiting firm.

- The recruiting firm would choose the candidate who best meets both parties' qualifications and preferences and that party would be the nominee. The recruiting firm would provide a written report that would disclose the qualifications specified by the shareholder-nominators and the issuer's nominating committee and the reasons it believes the candidate meets these qualifications. The report would be included in the proxy statement so that all shareholders would understand the criteria by which the nominee was selected.

- To allow boards some control in managing costs, distractions and board collegiality, if a trigger is met and a candidate is nominated, boards should have the following options for handling the nomination: increasing the board size to accommodate the new candidate, asking a standing director to resign or not stand for re-election in order to create a vacancy for the new candidate, or allowing the new candidate to run against the board-nominated candidates in a contested election, replacing one only if she or he gets more votes than one of them. Where the nomination process was triggered by a referendum where a particular director received a vote of no confidence, then if the board chose a contested election the new candidate would run against that particular director.

Mechanical Concerns

Our comments on Attachment A to questions C5 and K-3 in the proposal highlight a number of areas where the current mechanical system and rules relating to shareholder registration (the nobo/obo system for example) do not allow transparency; identification of, or electronic communication with, true beneficial owners; end-to-end confirmation of the vote (particularly murky, for example, in the case of loaned/borrowed shares, common in hedging transactions) and increase issuers' costs by forcing communications through third party providers.

Currently, these issues are vexing but present a significant problem only in change of control contests, where there typically are court interactions and other delays and costs that mask the impact of these issues. Under the new system, with the opportunity for contested elections at many issuers on a frequent basis, these mechanical issues take on a new significance that should be thoroughly considered as part of the change proposed by the new nominations system.

Timing

Many of our members feel the current system, as recently modified by the new final rule on Disclosure regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors (File No. S7-14-03) and the new New York Stock Exchange/NASDAQ corporate governance listing standards, should be allowed to settle and be tested before the Commission can assess whether the proposed rules are required.

Should the Commission determine that the proposed rule, or a modified version, is required without such a test period, we believe the final rule, including the triggering events, should not become effective until a full calendar year following the date the final rule becomes effective. This would allow time for the mechanical issues to be addressed. And it would facilitate the goal of encouraging interaction by providing adequate time for companies to adopt thoughtful plans and processes and, where needed, to add corporate governance staff. We note that should the town hall meeting precondition be included in the final rule, we believe no phase in period to its applicability would be needed.

Request for Audits, Reports, Roundtables and Reconsideration

There remain many questions for which empirical data does not yet exist. Several of these are critical to understanding the true cost of the proposed fundamental change in the state law process for the nomination of directors these include:

Whether institutional investors apply an analytical process in determining to vote for a triggering event or a shareholder nominee, or instead farm out this analytical process to one of several service providers. It is critical that the choice of changing a fundamental process of nominating and electing directors is not inadvertently concentrated at a service provider rather than utilized by boards and shareholders.
The cost to issuers, and non-participating shareholders, of each triggering event and contested elections.
The number of nominees submitted and an assessment by an independent party of the qualifications and accomplishments of such nominees as compared to the other board members.

We suggest the Commission hire auditors to assess these matters and issue public written reports each year for five years following the year in which the final rule becomes effective. Further, we suggest annual roundtables involving the Commissioners and Staff, institutional investors, individual investors, issuers, proxy solicitors and service providers involved in the proxy process such as ISS and ADP during that five year period. Finally, we suggest a sunset provision be added to any final rule that requires a formal consideration by the Commission at the end of the third and fifth years following the year in which any final rule becomes effective of whether the rule should be left in place as is, modified, or rescinded, based upon whether the new nominations system is achieving the stated purposes, what the cost is, and other benefits and detriments.

Please call either of the undersigned should you have questions about the comments provided in this letter.

Cordially,

American Society of Corporate Secretaries
Securities Law Committee

By: Susan Ellen Wolf
Co-Chair, Subcommittee on Director Nominations
Chair Securities Law Committee
(908) 301-0374

By: Pauline Candaux
Co-Chair, Subcommittee on Director Nominations
(215) 761-6242

cc: Hon. William H. Donaldson
Hon. Paul S. Atkins
Hon. Roel C. Campos
Hon. Cynthia A. Glassman
Hon. Harvey J. Goldschmid
Alan Beller
Martin Dunn
M. Margaret Foran, Chairman of the American Society of Corporate Secretaries
David Smith, President of the American Society of Corporate Secretaries

Attachment A

In responding to the questions in the proposal, we have used the numbering from the proposal.

A.1. Should the Commission adopt revisions to the proxy rules to require companies to place security holder nominees in the company's proxy materials? Are the means that currently are available to security holders to address a company's perceived unresponsiveness to security holder concerns adequate?

We believe the director nomination and election process should be left to state law. Many issuers already have charters and bylaws that provide for consideration of shareholder nominees.

However, we acknowledge that some issuers have been unwilling to hold meaningful dialogues with shareholders, senior management and independent directors, which has created a lack of trust in the current system. Based on that lack of trust, we agree that some additional requirements may be appropriate.

A.2. What would be the cost to companies if the Commission adopted proxy rules requiring companies to include security holder nominees in company proxy materials?

Per our survey (results summarized on Attachment B), we estimate significant average costs for the triggering events as well as election contests.

A.3. What direct or indirect effect would this procedure have on companies' corporate governance policies relating to the election of directors? For example, will companies be more or less likely to adopt cumulative voting policies and/or elect directors annually?

Issuers will be reluctant to make other enhancements to their policies relating to the election of directors until the final rules have been in place and their impact is understood, we estimate at least five years. This reluctance will be based on the need to make sure the issuer is using systems which best addresses the interests of all shareholders, consistent with directors' fiduciary duty under state law.

We think this reluctance would be a bad thing, as it would chill the evaluation and implementation of specific corporate governance enhancements as appropriate for a particular issuer given its unique circumstance at a particular time.

B.2. Should companies be able to take specified steps or actions that would prevent application of the proposed nomination procedure where such procedure would otherwise apply?

Yes. There is no link between the proposed nomination process and the idea in the proposing release that the "mechanism would apply in those instances where evidence suggests that the issuer has been unresponsive to security holder concerns as they relate to the proxy process."

We suggest that the final rule clearly provide that the right to change the nomination process is only applicable to unresponsive issuers, and contain safeguards to prevent the process from being used for leverage in other circumstances.

One way to accomplish that is to add preconditions that would apply prior to the right to use the triggers. One precondition we think would work to facilitate meaningful interaction is the town hall meeting concept. This precondition also has a major advantage from our perspective, in that we believe it would facilitate meaningful interaction among shareholders, directors and management, which clearly supports the proposal's objective without fostering adversarial interaction.

The town hall meeting process would be triggered by any majority vote of the outstanding shares on any shareholder proposal on any subject.

The town hall meeting process could also be triggered by the written request of holders of at least five percent of outstanding shares, held for one full calendar year prior to the proposal who state that they intend to hold for an additional full calendar year after the request and who state publicly the reasons for their belief that a board is ineffective.

In both of these situations, the issuer would then be required to host a town hall meeting as follows:

Publicize the town hall meeting for two months in advance.
Allow town hall meeting participation, in person or by interactive electronic means, by every shareholder who provides his/her name, address, reason for concern with the board, ownership data and meets specified ownership thresholds for one full calendar year prior to the town hall meeting and who state that they intend to hold the shares for a full calendar year following the meeting.
We suggest ownership thresholds of at least 100 shares for individual holders.
For institutional holders, we suggest ownership thresholds of 1% of outstanding shares.
Participants from the board will include at least the chair of the audit, compensation, nominating and governance committees. Participants from management will include at least the CEO and the CFO and the highest human resources/compensation executive.
Web cast the town hall meeting.
Provide a report on the issuer's website after the town hall meeting noting the substantive issues raised at the town hall meeting and indicating the board's plans to address the issues, with a time frame being noted.
Provide quarterly follow-up reports on the issuer's website until the plans are fully implemented.

A Precondition for Disclosure By Participating Shareholders

The push of the new process to encourage interaction and dialogue should work both ways.

Shareholders should be required to publicly state their concerns with the effectiveness of the board as a precondition for calling a town hall meeting.

Shareholders initiating a trigger to the new nominations system should also be required to make public disclosure. If the final rules require a town hall meeting, then the certification would address how there had been no good faith effort by the board to address the concerns raised at the town hall meeting. If the final rules do not require a town hall meeting, then the certification would address how the board was not effective.

These disclosures would have three benefits:

Allow other shareholders to make a clear, fully informed decision about whether or not to support the initiating shareholders actions.
Help the board and management understand the concerns of shareholders.
Help diminish the use of the proxy process, and this new nominations system, as leverage in addressing issues that are not directly related to the effectiveness of the board or a particular director.

If so, what such steps or actions would be appropriate? For example, should companies that agree not to exclude any security holder proposal submitted by an eligible security holder pursuant to Exchange Act Rule 14a-8 be exempted from application of the proposed nomination procedure for a specified period of time?

This would result in a number of proposals being included in proxy materials that do not benefit shareholders, for example those that are impossible to implement (for example, one of the authors of this letter has negotiated a proposal asking that moon rocks be used at a power plant instead of nuclear fuel) or that relate to a personal grievance (for example, a proposal about severance pay from an ex-employee who was fired).

C.1. As proposed, the new procedure would require a triggering event for security holders to be able to use the security holder nomination procedure. Is this appropriate?

Limited and specific triggering events are appropriate prior to mandating a fundamental change in the state law process for the nomination and election of directors, which would result in dollar costs to all shareholders and would distract the board and senior management from important business and strategic matters.

If so, are the proposed nomination procedure triggering events appropriate?

The proposal's trigger that a shareholder proposal asking that the new nominating system apply is a good trigger, but only as long as it is approved by a majority of the outstanding shares. We suggest that the proposal be required to include a particular concern about the board or a director and how that concern has harmed all shareholders that is the basis for the initiating shareholders action. This will help diminish the use of the proxy process, and this new nominations system, as leverage in addressing issues that are not directly related to the effectiveness of the board or a particular director.

We believe the specific access shareholder proposal trigger by itself is adequate and no second trigger is needed.

However, if a second trigger relating to only one director is to be included in a final rule, we believe a withhold vote trigger is not appropriate. Shareholders may wish to withhold votes from a particular director for a number of reasons (some having nothing to do with the particular issuer but instead to the director's actions at other companies). Some of those shareholders may not wish to also trigger the new nominations system. These shareholders should not be forced to choose. This can be remedied by changing the standard from "withhold votes" to a no confidence referendum proposal, which should reference specified reasons relating to the director's service at the issuer. This change would allow other shareholders to participate in the triggering no confidence referendum on a fully informed basis and only with specific intent to do so.

For any trigger, we believe a vote of at least a majority of outstanding shares is appropriate given the costs involved and the fundamental change from the current state law process for nominations.

Are there other events that should trigger the procedure? For example, should the following trigger the procedure: lagging a peer index for a specified number of consecutive years; being delisted by a market; being sanctioned by the Commission; being indicted on criminal charges; or having to restate earnings once or restate earnings more than once in a specified period? Should the election of a security holder nominee as a member of a company's board of directors be deemed a triggering event in itself that would extend the process by another year or longer period of time?

While the list of horrors above would be alarming to many investors, using such events as triggers may cause further harm to an issuer without any link to the problems listed. For example where the board has put into place a new management team, the new team has fired the wrongdoers and is busy implementing a turnaround, we see no corresponding benefit to the majority of shareholders to layer on the additional costs and to distract the board and the new management team with a contested board election.

Such a provision also carries the implication that the issuer is bad and is being punished by having the new nominations system apply. There is no link to directors' actions or qualifications. If the process is to achieve the objective, it must foster cooperation and interaction. And the costs of the new process would impact all shareholders and all other stakeholders (like employees and customers), not the wrongdoers.

C.2. How long after a nomination procedure triggering event should security holders be able to use the nomination procedure, if not two years, as is proposed (e.g., one year, three years, or longer)? Should there be other ways for the operation of the procedure to terminate at a company? If so, what other means would be appropriate? For example, should companies be able to take specified actions that would terminate operation of the nomination procedure? If so, what such actions would be appropriate?

We believe that one year is the appropriate time period. Much changes from year to year about a particular industry and a particular issuer. . Thus, the triggering event could relate to a problem long-solved. Further, the shareholder base also changes. As a result, a longer period might cause inadvertent costs and burdens for shareholders who do not favor use of the process.

C.3. As proposed, the nomination procedure could be triggered by withhold votes for one or more directors of more than 35% of the votes cast. Is 35% the correct percentage? If not, what would be a more appropriate percentage and why? Is it appropriate to base this trigger on votes cast rather than votes outstanding? If not, please provide a basis for the recommendation, including numeric data, where available. Is the percentage of withhold votes the appropriate standard in all cases? For example, what standard is appropriate for companies that do not use plurality voting? If your comments are based upon data with regard to withhold votes for individual directors; please provide such data in your response.

Shareholders may have reasons for withholding votes, but at the same time not wish to also trigger the new process. They should not be forced to choose. This can be remedied by changing the standard from withhold votes to a no confidence referendum.

We believe the correct percentage is 51% of outstanding shares voted in favor of the no-confidence referendum. The new nominations system is a fundamental change from the current state law process for nominating and electing directors. We believe there will be significant dollar cost and distraction of the board and senior management from important business and strategic matters. As a result, we do not believe it is fair to the other shareholders to implement such a process if less than a majority of outstanding shares agrees that the change is needed.

We also believe that any shareholder calling for the referendum or against the director in the referendum voting should be required to provide a written statement as to why he or she is dissatisfied with the director's performance as it relates to the issuer in question. This would prevent the practice that some members have experienced where dissatisfaction with a director at one issuer is used as the basis of a withheld vote for that director on other issuers' boards. Even our members who have full time governance staff and regularly reach out to investors to understand their concerns report that certain activist institutional holders refuse to hold a dialogue and instead wish only to use the proxy process as leverage for other issues or to gain publicity for a cause having little to do with the issuer and its board. The push of the new process to encourage interaction and dialogue should work both ways.

C.4. Should the nomination procedure triggering event related to direct access security holder proposals trigger the procedure only where a more than 1% holder or group submits the proposal? If not, what would be a more appropriate threshold, if any? For example, should the standards otherwise applicable for inclusion of a proposal under Exchange Act Rule 14a-8 apply? Should the required holding period for the securities used to calculate the security holder's ownership be longer than one year? If so, what is the appropriate holding period? Should that holding period be shorter than one year? If so, what is the appropriate holding period?

In terms of which shareholders can initiate a trigger, we believe the proposal permits holders of too few shares to cause expense for the other shareholders. We also believe the low thresholds permit several activist holders who hold shares in many companies (for example, because they invest based upon an issuer's being included in an index rather than a qualitative decision about an issuer) to vote for triggers at many companies as an "insurance policy" rather than on a reasoned basis where there is a particular concern.

In all cases, we believe the holder must have a long-term interest in the issuer so that the holder must have held the shares for two full calendar hears before initiating the trigger and state an intent to hold the shares for two full calendar years after the year in which the trigger is initiated.

Furthermore, we propose a five year disqualification for eligibility to nominate shareholders if a holder fails to hold for two years after the meeting at which the holder initiated a triggering event.

C.5. Are the existing methods under Exchange Act Rule 14a-8 sufficient to demonstrate that a proposal was submitted by a more than 1% security holder? If not, what other methods would be appropriate?

No. We believe that only beneficial owners, representing the real economic interest in the corporation, should be entitled to designate board candidates under the proposed rule. Intermediaries, custodians and other agents should be disqualified from acting without authorization from the ultimate beneficial owner. To enforce this requirement, there must be an unbroken chain of authorizations from the registered share position back through each successive intermediary layer to reach the beneficial owner. Each step in this chain of authorizations should be transparent, fully documented and verifiable. There should also be a form of certification of beneficial ownership to be completed by the person(s) claiming that authority. This information will be additionally useful in determining whether the proposed candidate has any conflicts of interest and in verifying whether the candidate fulfills the independence requirements set forth in the proposed rule and in applicable listing standards.

C.6. As proposed, a direct access security holder proposal could result in a nomination procedure triggering event if it receives more than 50% of the votes cast with regard to that proposal. Is this the proper standard? Should the standard be higher (e.g., 55%, 60%, or 65%)? Should the standard be based on votes cast for the proposal as a percentage of the outstanding securities that are eligible to vote on the proposal (e.g., 50% of the outstanding securities)?

We believe the correct percentage is a majority of outstanding shares voted in favor of proposal without the ability to count broker non-votes. The new nominating process is a fundamental change from the current state law process for nominating and electing directors. We believe there will be significant dollar cost and distraction of the board and senior management from important business and strategic matters. As a result, we do not believe it is fair to the other shareholders to implement such a process if less than a majority of outstanding shares votes in favor of the trigger.

C.7. Should direct access security holder proposals be subject to a higher resubmission standard than other Exchange Act Rule 14a-8 proposals? If so, what standard would be appropriate?

Yes. We believe 20% of outstanding shares in the first year and 40% of outstanding shares in the second year, with a five year wait after the second year is appropriate given the fundamental issues involved. Other shareholders should not be penalized by costs and distractions without significant support for the matter.

C.8. We have proposed that nomination procedure triggering events could occur after January 1, 2004. Is this the proper date? Should it be an earlier date? Should it be a later date?

It should be a later date to ensure a smooth transition. This would allow time for the mechanical issues noted in response to question C5 and K3 to be solved. And it would facilitate the goal of encouraging interaction by providing adequate time for companies to adopt thoughtful plans and processes and, where needed, to add corporate governance staff.

C.9. What are the possible consequences of the use of nomination procedure triggering events? Will there be more expense and effort related to votes on direct access security holder proposals? Will there be more campaigns seeking "withhold" votes? How will any such consequences affect the operation and governance of companies?

While no one will know unless and until the proposed rules are adopted, we anticipate significant increases in proposals and withhold vote campaigns, even at issuers that are not troubled and who are thought to have good governance processes. This will force issuers to focus on such matters, as opposed to focusing on operational and governance matters most appropriate for that particular issuer, given its circumstances.

C.10. Should companies be exempted from the security holder nomination procedure for any election of directors in which another party commences or evidences its intent to commence a solicitation in opposition subject to Exchange Act Rule 14a-12(c) prior to the company mailing its proxy materials? If so, should the period in which security holders in such companies may use the nomination procedure be extended to the next year (assuming that a nomination procedure triggering event is required)? What should be the effect if another party commences a solicitation in opposition after the company had mailed its proxy materials?

This question makes obvious some of the difficulties of implementing the proposal. In our view, to avoid chaos in the nomination and election process, issuers should be exempted in these circumstances. We do not believe that the period should be extended, but rather the new face of the issuer after the contested solicitation should be allowed to be evaluated by shareholders before the proposed nomination procedure is again invoked. A ready remedy to the situation of a solicitation after the issuer has mailed its proxy materials is not apparent. We believe this situation would be chaotic and not in the shareholders' best interests.

C.11. We have discussed our consideration of and requested public comment on the appropriateness of a triggering event premised upon the company's non-implementation of a security holder proposal that receives more than 50% of the votes cast on that proposal. Should such a triggering event be included in the nomination procedure? In responding to this question, please also consider the following questions:

a. Should a security holder proposal that receives more than 50% of votes cast operate as a nomination procedure triggering event regardless of the topic of the proposal, or would it be appropriate to instead require that the proposal relate to a specified category of topics (e.g., corporate governance matters)? If so, how should that specific category of topics (e.g., corporate governance matters) be defined?

No. Due to the fundamental change in the state law process for the nomination and election of directors, we believe only a majority vote of outstanding shares on a specific access proposal should be a triggering event.

However, given the perceived need for establishing a dialogue and encouraging interaction, we would not object to the town hall meeting being required in the year following a meeting where any shareholder proposal received approval by a majority of outstanding shares.

b. Should a company be required to file an Exchange Act Form 8-K stating whether or not it implemented a security holder proposal that is eligible to trigger the rule? Is it appropriate to require that companies make such a statement on Exchange Act Form 8-K? Would this impose unnecessary liability on companies that make a determination regarding implementation of a security holder proposal with which security holders may disagree?

We do not object to an 8-K filing.

D.1. Will the proposed disclosure requirements in Exchange Act Forms 10-Q, 10-QSB, 10-K and 10-KSB provide adequate notice to security holders? Should additional notices be required? If so, what form should that notice take and at what time should it be made public?

Those disclosures are adequate.

D.2. Should the company's notice be filed and/or made public in some other manner? If so, what manner would be appropriate?

If another notice is determined advisable, a press release disseminated in the same manner as other corporate press releases would be adequate.

E.1. Are the proposed thresholds for use of the proposed procedure appropriate? If not, should there be any restrictions regarding which security holder nominees for director would be required to be disclosed in the company proxy materials under the proposed procedure? If so, should those restrictions be consistent with the ownership requirements of Exchange Act Rule 14a-8? Should those restrictions be more extensive than the minimum requirements in Exchange Act Rule 14a-8?

As previously stated, the proposal would result in a fundamental change in the state law process governing the nomination and election of directors. Accordingly, the ownership thresholds should be more extensive that the minimal ownership requirements under Rule 14a-8.

In terms of which shareholders can nominate a candidate after a trigger has succeeded, we believe the proposal permits holders of too few shares to cause fundamental change and expense for the other shareholders. We also believe the low thresholds permit several activist holders who hold shares in many companies (for example, because they invest based upon an issuer's being included in an index rather than a qualitative decision about an issuer) to make nominations without input from other shareholders.

E.2. Is it appropriate to include a restriction on security holder eligibility that is based on percentage of securities owned? If so, is the more than 5% standard that we have proposed appropriate? Should the standard be lower (e.g., 2%, 3%, or 4%) or higher (e.g. 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)?

Yes. The inclusion of shareholder nominees in the issuer's proxy materials is likely to result in increased costs, the diversion of management attention from the business of running the company, and may discourage qualified individuals from agreeing to serve on Boards. Because of these ramifications, which will be felt by all shareholders, it is entirely appropriate to require that a nominee be proposed by a holder or group of holders with a substantial economic stake in the issuer.

E.3. Should there be a restriction on security holder eligibility that is based on the length of time securities have been held? If so, is two years the proper standard? Should the standard be shorter (e.g., 1 year) or longer (e.g., 3 years, 4 years, or 5 years)? Should the standard be measured by a different date (e.g., 2 years as of the date of the meeting, rather than the date of nomination)?

For a shareholder to understand an issuer and its industry to the degree needed to assess what qualifications a director needs, a longer term view is needed. We suggest to have this longer term view, a holder must have held the shares for two full calendar years before making the nomination and state an intent to hold the shares for five full calendar years after the year of the election if the nominee is elected.

E.4. As proposed, a nominating security holder would be required to represent its intent to hold the securities until the date of the election of directors. Is it appropriate to include such a requirement? Would it be appropriate to require the security holder to intend to hold the securities beyond the election of directors (e.g., for six months after the election, one year after the election, or two years after the election) and to so represent?

Yes. We believe there must be an intention to hold for some reasonable time after the election or there is no valid interest in who will serve on the board. We believe a reasonable time for a holder with a long-term interest is five full calendar years after the election.

Furthermore, we believe there should be a five year disqualification for participating in a triggering event or nominating shareholders if they fail to hold for the required period after the meeting.

E.5. Is the eligibility requirement that a security holder or security holder group must file an Exchange Act Schedule 13G appropriate? Should there be a different mechanism for putting companies and other security holders on notice that a security holder or security holder group has ownership of more than 5% of the company's securities and intends to nominate a security holder? Is it appropriate to permit the filing to be on Exchange Act Schedule 13G rather than Exchange Act Schedule 13D? If not, why not?

It is impossible for the issuer to know if the nomination of a director is the first step in a takeover attempt. A security holder or security holder group should be required to provide the expanded disclosure required by Schedule 13D and be required to adhere to the applicable filing deadlines.

E.6. Should the procedure include a provision that would deny eligibility for any nominating security holder or nominating security holder group that has had a nominee included in the company materials where that nominee did not receive a sufficient number of votes (e.g., 5%, 15%, 25%, or 35%) within a specified period of time in the past? If there should be such an eligibility standard, how long should the prohibition last?

Yes. It is not fair to other shareholders to suffer the costs and distractions of the procedure unless there is significant support. Unless the nominee was elected, we believe there should be a bar of five calendar years.

E.7. Should security holders be allowed to aggregate their holdings in order to meet the ownership eligibility requirement to nominate directors? If so, is it appropriate to require that all members of a nominating security holder group individually meet the minimum holding period? Is it appropriate to require that all members of the group be eligible to file on Exchange Act Schedule 13G?

We do not think shareholders should be allowed to aggregate as only those with a significant ownership interest should be allowed to cause an issuer to fundamentally change the state law process for the nomination and election of directors.

Should shareholders be allowed to aggregate, each shareholder should be required to state under oath its particular dissatisfaction with the issuer and the director(s) involved.

F.2. Is it appropriate to use compliance with state law, federal law, and listing standards as a condition for eligibility?

Yes, board-nominated nominees are subject to these rules and shareholder-nominated nominees should be held to the same standards.

F.3. Should there be requirements regarding independence from the company? Should the fact that the nominee is being nominated by a security holder or security holder group, combined with the absence of any direct or indirect agreement with the company, be a sufficient independence requirement?

The nominee should be independent under the applicable listing standards and any additional standard set forth in the issuer's corporate governance guidelines.

F.4. How should any independence standards be applied? Should the nominee and the nominating security holder or nominating security holder group have the full burden of determining the effect of the nominee's election on the company's compliance with any independence requirements, even though those consequences may depend on the outcome of any election and may relate to the outcome of the election with regard to nominees other than security holder nominees?

The nominees and the nominating shareholders must have the responsibility of confirming that the nominee is independent. The nominee should be independent under the applicable listing standards and any additional standard set forth in the issuer's corporate governance guidelines. Whether or not the nominee individually is independent is not dependent on the outcome of the election. The nominating shareholder should not be permitted to nominate a non-independent director, even if that is technically allowed because a majority of other directors would be independent.

F.5. Where a company is subject to an independence standard of a national securities exchange or national securities association that includes a subjective component (e.g., subjective determinations by a board of directors or a group or committee of the board of directors), should the security holder nominee be subject to those same requirements as a condition to nomination?

Yes. Many institutional investors disfavor non-independent directors. The nominee should be required to meet the same independence standard as other independent directors. These would include the applicable listing standards and any additional standing set forth in the issuer's corporate governance guidelines.

F.6. Should there be requirements regarding independence of the nominee from the nominating security holder, nominating security holder group, or the company? If so, are the proposed limitations appropriate? What other or additional limitations would be appropriate? If these limitations generally are appropriate, are there instances where they should not apply?

Yes. It is critical to combat the perception that, if elected, the nominee would favor the interests of the nominating shareholders over other shareholders.

F.7. Should there be any standards regarding separateness of the nominee and the nominating security holder or nominating security holder group? Would such a limitation unnecessarily restrict access by security holders to the proxy process? If such standards are appropriate, are the proposed standards the proper standards? Should other standards be included? Should any of the proposed standards be eliminated?

Yes. They must be completely independent of one another in order to combat the perception that, if elected, the nominee would favor the interests of the nominating shareholders over other shareholders. To further combat this perception, nominees should be required to certify that they are aware of their duties to act in the best interests of the company and all of its shareholders.

F.8. Should there be a prohibition, as is proposed, on any affiliation between nominees and nominating security holders or nominating security holder groups? If so, are the proposed rules appropriate? For example, we have proposed a definition of "immediate family" that is consistent with the existing disclosure requirement under Item 401(d) of Regulation S-K. Is this the appropriate definition for purposes of addressing relationships between the nominee and the nominating security holder or nominating security holder group? If not, what definition would be more appropriate?

There should be a prohibition on any affiliation between nominees and nominating shareholders, or groups, to avoid the "constituency director" problem. We think that nominees should also meet the independence tests set forth in the listing standards and the issuer's corporate governance guidelines. . It is important that all "independent" directors on a company's board be measured against the same independence standards.

F.9. Should there be exceptions to the prohibition on any affiliation between nominees and nominating security holders or nominating security holder groups? If so, what exceptions would be appropriate?

No. Exceptions would not be appropriate since directors have a fiduciary duty to represent all shareholders, not a particular group of shareholders.

F.10. Should there be a nominee eligibility criterion that would exclude an otherwise eligible nominee or nominating security holder or nominating security holder group where that nominee (or a nominee of that security holder or security holder group) has been included in the company's proxy materials as a candidate for election as director but received a minimal percentage of the vote? If so, what would be the appropriate standard (e.g., 5%, 15%, 25%, or 35%)?

Yes. If a nominee was not elected in the past, he or she should not be eligible for re-nomination.

F.11. As proposed, the rule includes a safe harbor providing that nominating security holders will not be deemed "affiliates" solely as a result of using the security holder nomination procedure. This safe harbor would apply not only to the nomination of a candidate, but also where that candidate is elected, provided that the nominating security holder or nominating security holder group does not have an agreement or relationship with that director otherwise than relating to the nomination. Is it appropriate to provide such a safe harbor for security holder nominations? Should the safe harbor continue to apply where the nominee is elected?

No. As is the case with independence standards, the requirements for no affiliation should be continuous and not subject to any safe harbor. There will be a perception that there is a continuing relationship between the candidate and the shareholder or shareholder group that nominated him/her.

G.1. Is it appropriate to include such a limitation on the number of security holder nominees? If not, how would the proposed rules be consistent with our intention not to allow the proposed procedure to become a vehicle for changes in control?

There should be no more than one "mandatory" nominee per year, regardless of the size of the board in order to make sure the procedure is not misused for the purpose of facilitating a change of control.

G.2. The proposal contemplates taking into account incumbent directors in the case of classified or "staggered" boards for purposes of determining the maximum number of security holder nominees. Is that appropriate? Should there be a different procedure to account for such incumbent directors? Also with regard to staggered boards, should the procedure address situations in which, due to a staggered board, fewer director positions are up for election than the maximum permitted number of security holder nominees? If so, how?

Only one "mandatory" nominee per year should be permitted regardless of board size, in which case no special process would be required for classified boards.

G.3. We have proposed a limitation that permits the security holder or security holder group with the largest beneficial ownership to include its nominee(s) where there is more than one eligible nominating security holder or nominating security holder group. Is this proposed procedure appropriate? If not, should there be different criteria for selecting the security holder nominees (e.g., length of security ownership, date of the nomination, random drawing, allocation among eligible nominating security holders or security holder groups, etc.)? Rather than using criteria such as that proposed, should the company's nominating committee have the ability to select among eligible nominating security holders or security holder groups?

At a minimum, all eligible nominating shareholders should be required to hold a dialogue to attempt to agree. Unhappy shareholders will be a continuing problem for the issuer, not the other nominating holders. To reduce the burden on the issuer, the SEC Staff should referee disputes among eligible nominating shareholders.

G.4. Rather than a limitation on the maximum number of security holder nominees, should there be only a limitation on the number of security holder nominees that may be elected?

No. More nominees will compound the mechanical challenges and increase the likelihood of confusion of other shareholders.

H.1. Are the proposed content requirements of the notice appropriate? Are there matters included in the notice that should be eliminated? Are there additional matters that should be included? For example, is there additional information that should be included with regard to the nominating security holder or nominating security holder group (e.g., disclosure similar to that required from participants in solicitations in opposition with regard to contracts, arrangements or understandings relating to the company's securities), or with regard to the security holder nominee?

To require less than the full disclosures required in other contested situations would disadvantage the other shareholders, who need that information in order to make an informed voting decision.

H.2. Are the required representations appropriate? Should there be additional representations? Should any of the proposed representations be eliminated?

The required representations are appropriate. All other information required in any other election contest should also be required. The nominating shareholders should also be required to certify that their notice to the company does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements not misleading.

H.3. Is it appropriate to require that the notice (other than the copy of the Exchange Act Schedule 13G included in that notice) be filed with the Commission? Should additional or lesser information be filed with the Commission and be made publicly available? Is the proposed filing requirement appropriate? For example, should the notice be filed as an exhibit to an amendment to the nominating security holder or nominating security holder group's Exchange Act Schedule 13G?

Yes, it is appropriate to require the notice to be filed and publicly available and made an exhibit to the group's 13G or 13D filings. There should be penalties for inaccurate information, perhaps a bar from participating in a triggering event or nomination for five calendar years.

H.4. When should the notice be required to be filed with the Commission? Should it be required to be filed at the time it is provided to the company? Should it be required to be filed within a specified period of time, such as two business days, after it is provided to the company, as is proposed? Should the information in the notice that is included in the company's proxy statement instead be filed on or about the date that the company releases its proxy statement to security holders?

It should be filed at the same time it is provided to the issuer.

H.5. What should be the consequence to the nominating security holder or nominating security holder group of submitting the notice to the company after the deadline? Should such a late submission render the nominating security holder or nominating security holder group ineligible to use the nomination procedure, as is currently proposed under the rule? What should be the consequence to the nominating security holder or nominating security holder group of filing the notice with the Commission late? Should such late filing be viewed exclusively as a violation of Exchange Act Rule 14a-6 or should it affect eligibility to use the nomination procedure? Should the failure of a nominating security holder or nominating security holder group to file the notice with the Commission be viewed exclusively as a violation of Exchange Act Rule 14a-6 or should it affect eligibility to use the nomination procedure?

Failure to file on time should disqualify the shareholder from continuing with the nomination (they would need to start over with a new triggering event).

H.7. As proposed, Exchange Act Rule 14a-11 includes a number of notice and other timing requirements. Should these timing requirements incorporate or otherwise address any advance notice provisions under state law or a company's governing instruments? If so, should any advance notice provisions govern? Should they instead be provided as an alternative to the timing provisions set out in the rule?

Advance notice provisions must be followed separately. Failure to comply with either the proposed notice requirements or applicable advance notice requirements should disqualify the shareholder from continuing with the nomination (they would need to start over with a new triggering event.)

I.1. Is it appropriate to require that the company include in its proxy statement a supporting statement by the nominating security holder or nominating security holder group? If so, is it appropriate to limit this requirement to instances where the company wishes to make a statement opposing the nominating security holder's nominee or nominees and/or supporting company nominees? Is it appropriate to limit the supporting statement to 500 words? If not, what limit, if any, is more appropriate? Is it appropriate to require filing of the statement on the date that the company releases its proxy statement to security holders? If not, what filing requirement would be appropriate?

No. Their statement should be included in their notice document, which would be provided as an exhibit to the proxy statement.

I.2. Is it appropriate for the company to make the specified determinations regarding the basis on which a nominee would not be included? By what means should a company's determination be subject to review? By the courts? Should there be an explicit statement by the Commission regarding this review? Should any determination by the company be subject to review by the Commission or its staff? Should there be an explicit provision for such review, as, for example, with security holder proposals under Exchange Act Rule 14a-8?

Yes. The issuer and its counsel must be able to do so (for example, in order to provide comfort to the board that the proxy materials are correct and not misleading). Review should be by the Commission, on an expedited basis, perhaps three days..

I.3. Proposed Exchange Act Rule 14a-11(a)(3) provides that a company is not required to include a security holder nominee where either: (a) the nominee's candidacy or, if elected, board membership, would violate controlling state law, federal law or rules of a national securities exchange or national securities association, (b) the nominating security holder's notice is not adequate, (c) any representation in the nominating security holder's notice is false in any material respect, or (d) the nominee is not required to be included in the company's proxy materials due to the proposed limitation on the number of nominees required to be included. Instruction 4 to proposed Exchange Act Rule 14a-11(a)(3) provides that the company shall determine whether any of these events have occurred. Should the nomination procedure include a procedure for a company to gather information additional to that included in the notice that is reasonably necessary for the company to make its determination in this regard? If so, please respond to the following additional questions.

a. Should the company be provided with a maximum amount of time to request specific information (e.g., three days, five days, one week, two weeks, or one month)?

The issuer should be permitted to gather information as needed. Meeting dates and agenda items sometimes change, which impact the schedules for preparing, printing and mailing proxy materials.

b. Should nominating security holders and/or nominees be provided with a maximum amount of time to respond to such a request (e.g., three days, five days, one week, two weeks, or one month)?

They should provide the requested data on the next business day, provided that the issuer shall provide additional time when practicable.

c. Should the procedure prescribe the type of information that a company may request from a nominating security holder or nominee? Should the procedure specify those representations in the nominating security holder's notice to the company with regard to which the company may request information?

The issuer and its counsel must represent that the information is needed and why, but there should be no other restraints.

d. Should the procedure include a method for a company to obtain follow-up information after a nominating security holder or nominee submits an initial response? If so, should that follow-up method have similar time frames and informational standards to those related to the initial request and response?

Yes, and the same time frames should apply.

e. Should the rule explicitly state that a nominee may be excluded from a company's proxy materials if the nominating security holder or nominee does not provide the requested information in the required timeframe, or if the information does not confirm the representations included in the notice to the company, or is it sufficient to rely on the proposed provision that permits the exclusion of nominees when a representation is false in any material respect?

Yes. Otherwise issuers will be stuck not being able to complete the proxy materials on schedule.

I.4. As proposed, the company must provide the nominating security holder or nominating security holder group with notice of its determination whether to include in its proxy statement the security holder nominee by a date that will generally fall approximately 30 days prior to the date the company will mail its proxy statement. Does this requirement allow the nominating security holder or nominating security holder group adequate time to contest a company's determination with regard to a potential security holder nominee?

Yes.

I.5. As proposed, the rule would not provide a mechanism by which a nominating security holder or nominating security holder group could "cure" a defective notice. Would such a "cure" period, similar to that currently provided under Exchange Act Rule 14a-8, be appropriate? If so, how and by what date should a company be required to notify a nominating security holder or nominating security holder group of a defect in the notice? How long should the nominating security holder or nominating security holder group have to cure any defects? Are there any defects that would not require notice by the company, for example, where a defect could not be remedied?

No. This procedure impacts the fundamental process of nominating and electing directors. It is not appropriate to create periods of uncertainty during cure periods.

I.6. As proposed, inclusion of a security holder nominee in the company's proxy materials would not require the company to file a preliminary proxy statement provided that the company was otherwise qualified to file directly in definitive form. In this regard, the proposed rules make clear that inclusion of a security holder nominee would not be deemed a "solicitation in opposition." Is it appropriate to view the inclusion of a nominee in this manner or should the inclusion of a nominee instead be viewed as a solicitation in opposition that would require a company to file its proxy statement in preliminary form? Should we view inclusion of a security holder nominee as a solicitation in opposition for other purposes (e.g., expanded disclosure obligations)?

Requiring filing a preliminary proxy statement would further burden issuers and the proxy process. If such a process is added, the review period should be shortened to five calendar days and no news from the staff should mean the issuer is clear to print, unless there are other agenda items requiring preliminary filing in which case the existing time periods would apply.

I.7. As proposed, the rule would prohibit companies from providing security holders the option of voting for the company's slate of nominees as a whole. Should we allow companies to provide that option to security holders? Are any other revisions to the form of proxy appropriate?

Many shareholders base their decision to buy or hold a security on their strong opinion of the company's management and Board. Accordingly, shareholders should continue to be permitted to check one box to vote for the board's nominees.

K.3. We contemplate that solicitations in connection with elections involving Exchange Act Rule 14a-11 could involve electronic means. We have provided that, where requested, the company would include in its proxy materials the website address where solicitation materials related to a security holder nominee may be found. Are there other steps that we should take to provide for or encourage the use of electronic means for these elections?

We support the Commission's efforts to increase the use of electronic technology for purposes of disclosure, communication and proxy voting, not just in connection with proposed Rule 14a-11, but with respect to all proxy-related matters and share voting. We believe that the current proxy system is overly complicated, lacking in transparency, far too expensive and ultimately not responsive to the demands of both companies and shareholders to achieve accurate vote confirmation. Electronic technology and improved systems can cure all these ills. Accordingly, we recommend that the Commission undertake several changes to improve the inner workings of the proxy system. These recommendations are applicable whether or not proposed Rule 14a-11 is adopted.

We recommend that the Commission rescind the 20-year-old NOBO-OBO system, with new rules that give priority to disclosure and transparency, rather than investor privacy. In a sense, the system has tried to have it both ways for many years -- requiring full and timely disclosure by companies, but also allowing shareholders to conceal their identity from the companies they own. Issuers have paid a high price for this regulatory inconsistency. We have a disclosure and proxy voting system that is expensive, time-consuming, inefficient and complex. It is impossible for issuers to communicate effectively with shareholders if they do not know who the shareholders are. Furthermore, we believe that in a market dominated by pooled investments, mutual funds, pension funds and trust-administered accounts, it is possible for individual investors to easily conceal their personal identity if they so choose. We believe that institutional investors and others acting in a fiduciary capacity should not be entitled to conceal their identity, their ownership of equity securities, their voting decisions and the agents they employ to act on their behalf. Fiduciaries should be held to the same transparency requirements as the issuers they own. The NOBO-OBO system no longer serves a useful purpose.

We recommend that a system of direct access be adopted, permitting companies to communicate directly with those holding shares in "street name," and permitting shareholders to vote their shares directly rather than through their brokers. This change would unquestionably improve communications and reduce costs. Brokers might object, as they have in the past, because they do not want the names of their customers revealed to competitors. We are sympathetic to this concern, but it can be dealt with simply by disclosing to issuers only the customers' names, not their broker affiliation. The latter will not be needed for voting purposes once voting rights are passed directly to the shareholders. We also think that any broker customer who persists in concealing his or her identity should be required to pay all the expenses associated with setting up a special nominee account and servicing it. The general shareholder population should not have to subsidize these special privacy arrangements.

By bringing transparency to the proxy system, the Commission would also help eliminate technical problems that now plague the system. Among these is the concern about double voting of loaned shares connected with short sales and other hedging strategies. A fully transparent system would allow every share of stock to be identified and monitored for voting, eliminating duplications and other problems now invisible in back-office operations.

M.1. The proposal would provide that a security holder or security holder group would not, solely by virtue of nominating a director under proposed Exchange Act Rule 14a-11, soliciting on behalf of that candidate, or having that candidate elected, be viewed as having acquired securities for the purpose or effect of changing or influencing the control of the company. This provision would then permit those holders or groups of holders to report their ownership on Exchange Act Schedule 13G, rather than Exchange Act Schedule 13D. Is this approach appropriate? Should other conditions be required to be satisfied? If so, what other conditions?

No, the existing Schedule 13D process works well. For certain holders, it would be almost impossible to prove whether the activity was truly intended to be a nomination under the proposed new rule or a step in a takeover attempt. Issuers (and their other shareholders) are entitled to the disclosures called for under Schedule 13D within the specified time periods.

M.2. Should nominating security holders, including groups, be deemed to have a "control" purpose that would create additional filing and disclosure requirements under the Exchange Act beneficial ownership reporting standards?

Yes, attempting to influence or control the nomination and election of directors is clearly a control activity.

O.1. We solicit quantitative data to assist our assessment of the benefits and costs of enhanced security holder access to company proxy materials when there has been a demonstrated failure in the proxy process. Will proposed Exchange Act Rule 14a-11 increase director accountability and responsiveness?

We do not see any link to an increase in director accountability and responsiveness as a result of the proposed contested election process. We believe there will be a decrease in director accountability and responsiveness due to the adversarial nature of a contested election, and we may see a decrease in the willingness of qualified individuals to serve on corporate boards.

However, we believe the town hall meeting process we suggested in response to Question B2 would be more likely to produce less adversarial, more productive interaction, which in turn would lead to greater accountability and responsiveness.

Also, to allow board to further diminish the costs (both financial and in terms of distractions) and facilitating the board collegiality needed for the board to function effectively, we suggest the following alternative process to be used once a trigger is satisfied and an eligible shareholder has indicated the desire to make a nomination under the new nominations system:

- The recruitment firm would identify three candidates, who best meet the shareholder-nominator's and the nominating committee's specified qualifications.

- Both the shareholder-nominators and the issuer's nominating committee would interview the candidates and provide feedback to the recruiting firm.

- To allow boards some control in managing costs, distractions and board collegiality, if a trigger is met and a candidate is nominated, boards should have the following options for handling the nomination: increasing the board size to accommodate the new candidate, asking a standing director to resign or not stand for re-election in order to create a vacancy for the new candidate, or allowing the new candidate to run against the board-nominated candidate in a contested election, replacing one only if she or he gets more votes than one of them. Where the nomination process was triggered by a referendum where a particular director received a vote of no confidence, then if the board chose a contested election the new candidate would run against that particular director.

Attachment B

SUMMARY OF THE NOVEMBER 2003 SURVEYS

In November 2003, members of the Business Roundtable and the American Society of Corporate Secretaries were surveyed regarding the Commission's Proposed Election Contest Rules (the "November 2003 Surveys"). As of December 18, 2003, 137 companies had responded to the November 2003 Surveys.

WITHHOLD VOTES
1. . 24 out of 135 of the companies that answered, or 17.8%, responded that they had directors who had received greater than 20% withhold votes in at least one of the last two years. (Two of the returned surveys had no response to this question.)
2. Of the 24 companies with greater than 20% withhold votes:
  - At 23, or 95.8%, of those receiving greater than 20% withhold votes, Institutional Shareholder Services (ISS) recommended a withhold vote.
  - At 1, or 4.2%, of those receiving greater than 20% withhold votes, ISS did not recommend a withhold vote.

MAJORITY VOTES

36 out of 132, or 27.3%, of the companies responding to the question on majority votes had received a majority vote on a shareholder proposal. (Four of the returned surveys had no response to this question, and one company responded that it did not receive any shareholder proposals.)

Of the 36 companies with majority votes on shareholder proposals, the subjects of the proposals were:

Redeem/shareholder approval of poison pill 22 (41.5% of total majority votes)

De-classify board
12 (22.6%)

Supermajority voting
6 (11.3%)

Expensing stock options
6 (11.3%)

Severance agreements/executive compensation 4 (7.5%)

Presiding director
1 (1.9 %)

Confidential shareholder voting
1 (1.9%)

Unknown
1 (1.9%)

(Note that some companies had more than one majority-vote shareholder proposal.)

Of the 36 companies with majority-vote shareholder proposals, 100% of companies' boards considered whether to implement the proposal.

NUMBER OF DIRECTORS
Of the 137 companies responding regarding the number of directors on their board of directors:
- 16, or 11.7%, have 1-8 directors;
- 121, or 88.3%, have 9-19 directors; and
- 0 have 20+ directors.
INSTITUTIONAL INVESTOR VOTING PRACTICES
1. Of the 113 companies responding to this question, 108 were able to give a rough estimate or range of percentages of shares voted by institutional investors that follow ISS's voting guidelines. The other 5 noted that a majority of shares followed ISS, a number of their top institutional holders followed ISS, or they were unable to estimate but had few institutional investors. The average percentage of shares voted by institutional investors that follow ISS is 40%. Note that some companies giving percentages stated that, although the institutional investors subscribed to ISS, they may only partially follow ISS's voting guidelines.
2. 39 companies specifically indicated that one or more of their institutional investors communicated to the company their adherence to ISS voting guidelines or that the company had knowledge that the institutions adhered to ISS guidelines at least partially. This represents 65% of the 60 companies providing any anecdotal or company-specific information on communicating with institutional investors in connection with proxy voting matters.

TIME AND COSTS

Much of the Commission's cost estimate appears driven by its assumptions about the number of companies affected. Even for companies that the Commission assumed to be affected, moreover, it assumed a very low average burden per company. For Paperwork Reduction Act purposes, the Commission assumed an average of ½ hour to 22¾ hours per form, including time for both company personnel and outside professionals.¹ Based on assumptions such as these, the Commission's cost-benefit analysis assumes a bottom-line total of 130 companies affected, each of which would be required to invest an average of approximately 14 hours of time and $1,200 of cost for company personnel at $85 per hour, and 10 hours of time and $3,000 in expense for outside professionals' time at $300 per hour.²
Although the Commission's summary does not explain exactly how these estimates were derived, the estimates do not appear to be grounded in empirical data. In fact, the Commission admits that many of its figures "are estimates because there is no reliable way to predict how many more security holder proposals would be submitted based on the proposed amendments, how often the events would be triggered or how many security holders would be able to meet the applicable requirements (e.g., minimum ownership threshold)."³ For three of the eight forms, the Commission assumed that all incremental work could be completed in less than an hour. The Commission furthermore assumed that company personnel would perform 75% of the incremental work with outside professionals performing the remaining 25% of the work on these forms. Accordingly, the Commission assumed that outside professionals would complete their work in an average of 8 to 13 minutes.⁴
To test the reasonableness of the Commission's assumptions, the November 2003 Surveys included a series of questions in which individual companies estimated the time and cost that would be associated with various aspects of compliance with the Proposed Election Contest Rules. The questions and resulting answers are set forth in the chart below.
Several important observations are pertinent to a full understanding of these results. First, the responses to the November 2003 Surveys in many cases required an element of interpretation. These compilations were performed in a conservative manner that, if anything, would understate the respondents' true projected costs. When the respondent provided a range of hours or cost, the midpoint of this range was used to calculate averages. When the respondent stated that hours or costs would be "at least" or "more than" a certain amount, the base amount was included in the average without upward adjustment, but when the respondent stated that hours or costs would be "at most" or "less than" a certain figure, the average was computed based on the midpoint between the given figure and zero. When the response reported time or cost "per person" and the number of relevant individuals could not be easily ascertained, the time or cost was applied to a minimal number of individuals, and in many cases to just one individual.
As one might expect, estimates varied widely from one respondent to the next. To a great extent, this variance may reflect differences in size, approach, and other factors. Nonetheless, even with this variance, the volume of responses provides a database of sufficient size to establish that the Commission's estimates are severely understated. For example, the average estimated burden for company personnel upon "the occurrence of a trigger (e.g., a shareholder access proposal from a greater than 1% holder or a 35% withhold vote for a director)" was 89.5 hours and $39,363 per company - many multiples higher than the Commission's assumed average impact for the entire rule. By applying a simple statistical confidence level test to the data, it can be shown with 95% confidence that the actual average falls in an interval between 68-111 hours and $26,000-$53,000 in incremental costs. Even the lowest ends of these ranges are approximately five times higher than the Commission's estimate for company personnel activity - including all aspects of the rule - and more than 20 times higher than the Commission's company personnel cost estimate. Estimates for outside professionals are similarly understated.
The following outline summarizes the responses obtained from the November 2003 Surveys.

DETAILED RESULTS FROM THE NOVEMBER 2003 SURVEYS

WHAT WILL BE THE AVERAGE HOURS REQUIRED AND ASSOCIATED COSTS FOR: HOURS REQUIRED: ASSOCIATED COSTS:

Preparing and submitting a no-action letter request to the SEC regarding a shareholder proposal? 30.8 hours
(3360.5 hours/
109 companies responding)
$13,896
($1,431,282/
103 companies responding)

Printing and mailing one shareholder proposal in your proxy materials? 34.0 hours
(3023.5 hours/
89 companies)
$15,324
($1,547,762/
101 companies)

In connection with opposing the occurrence of a trigger (e.g., a shareholder access proposal from a greater than 1% holder or a 35% withhold vote for a director), please estimate the hours and associated costs:

Company personnel (including executives)?
89.5 hours
(8324.5 hours/
93 companies responding)
$39,363
($3,109,700/
79 companies responding)

Directors?
13.4 hours
(1191.5 hours/
89 companies)
$11,971
($706,300/
59 companies)

Outside counsel?
54.2 hours
(4391 hours/
81 companies)
$23,138
($1,989,850/
86 companies)

Proxy solicitor?
105.2 hours
(6313 hours/
60 companies)
$77,864
($6,151,250/
79 companies)

Financial printer?
9.9 hours
(426 hours/
43 companies)
$16,757
($1,206,550/
72 companies)

Mailing costs?
10.7 hours
(171.5 hours/
16 companies)
$97,800
(5,867,980/
60 companies)

Average total of specified hours and costs:
192.3 hours
(192.3 hours/
92 companies)
$162,299
($15,256,150/
94 companies)

Other: Outside experts
(0 companies) $25,000-$100,000
(1 company)

Other: Follow-up mailings
(0 companies) $40,000
(1 company)

Other: NOBO list (non-objecting beneficial owners)
(0 companies) $20,000-$25,000
(1 company)

Other: Transfer agent tabulation services, inspector of election
150 hours
(1 company)
$100,000
(1 company)

Other: Independent tabulator extra charges for contested situations
(0 companies) $5,000-$10,000
(1 company)

Other: Transfer agent/ADP assistance
5-10
(1 company)
(0 companies)

In connection with opposing a shareholder access nominee and supporting the company's nominees for director (once shareholder access is triggered), please estimate the hours and associated costs:⁵

Company personnel (including executives)?
182.7 hours
(15,527/
85 companies responding)
$69,497
($5,212,260/
75 companies responding)

Directors?
21.6 hours
(1729/
80 companies)
$26,239
($1,416,900/
54 companies)

Outside counsel?
59.4 hours
(4218.5/
71 companies)
$44,460
($3,512,350/
79 companies)

Proxy solicitor?
126.8 hours
(6217.5/
53 companies)
$136,292
($10,767,050/
79 companies)

Financial printer?
16.2 hours
(665/
41 companies)
$31,854
(2,420,900/
76 companies)

Mailing costs?
13.9 hours
(236/
17 companies)
$168,442
($10,948,710/
65 companies)

Average total of specified hours and costs:
323.9 hours
(27208.5 hours/
84 companies)
$580,321
($52,809,170/
91 companies)

Other: Transfer agent/ADP assistance
5-10 hours
(1 company)
(0 companies)

Other: Follow-up mailings
(0 companies) $40,000
(1 company)

Other: Second mailing to shareholders
160 hours
(1 company)
$1.5 million
(1 company)

Other: Investigation/background check of shareholder nominee
17.5 hours
(35 hours/
2 companies)
$42,500
($85,000/
2 companies)

Other: NOBO list
(0 companies) $20,000-$25,000
(1 company)

Other: Higher ADP proxy fees
(0 companies) $800,000
(1 company)

Other: Public relations firm
(0 companies) $100,000-$150,000
(1 company)

Other: Advertising (if circumstances warrant)
(0 companies) $283,333
($850,000/
3 companies)

Other: Independent tabulator
(0 companies) $10,000-$20,000
(1 company)

Other: Unspecified
(0 companies) $5,000 and $100,000-
$1 million
(2 companies)

In response to a question asking for estimates of internal hours and associated costs spent on a proxy contest if they had experienced one in the past two years, only five companies responded. Among those responses, estimated internal costs were as high as $240,000, while estimated total costs of proxy contests exceeded $15 million.

______________________________

¹ 68 Fed. Reg. 60,784, 60,812 (Oct. 23, 2003).
² 68 Fed. Reg. at 60,814.
³ 68 Fed. Reg. at 60,811.
⁴ Id. The 8-13 minute average was derived by multiplying the total allocation for the lowest three of the eight incremental hours/form estimates in Table 1, 68 Fed. Reg. 60,812, by the 25% portion attributed to outside professional work.
⁵ In connection with opposing a shareholder access nominee and supporting the company's nominees for director (once shareholder access is triggered), companies that noted that they had experienced a proxy contest within the last two years had a significantly higher average estimate of burdens and costs than those that had not.

American Society of Corporate Secretaries 521 Fifth Avenue New York, New York 10175

American Society of Corporate Secretaries
521 Fifth Avenue
New York, New York 10175