December 22, 2003
Dear Mr. Katz:
This letter is submitted on behalf of the Business Roundtable, an association of chief executive officers of leading corporations with a combined workforce of more than 10 million employees in the United States and $3.7 trillion in annual revenues. We appreciate this opportunity to provide our views on the Commission's proposal to require companies to include shareholder nominees for director in company proxy materials under certain circumstances (the "Proposed Election Contest Rules"). Due to the importance with which we view this proposal and the significant number of questions raised in the proposing release, we are providing below general comments on the proposal and are submitting more detailed comments in an attachment to this letter.
The Business Roundtable has long been a strong supporter of good corporate governance. We have issued numerous statements addressing corporate governance, including Principles of Corporate Governance, released in May 2002, and Executive Compensation: Principles and Commentary, from November 2003. We strongly supported enactment of the Sarbanes-Oxley Act of 2002, implementation of the Commission's rules related to the Sarbanes-Oxley Act, and revisions to the corporate governance listing standards of the New York Stock Exchange ("NYSE") and NASDAQ Stock Market, Inc. We share the Commission's belief that corporate boards and management must hold themselves to high standards of corporate governance.
In light of the commitment of the Business Roundtable and our members to good corporate governance, we have spent considerable time reflecting on the Proposed Election Contest Rules. We undertook several surveys of our members' companies and reviewed surveys conducted by the American Society of Corporate Secretaries, the results of which are described in the detailed comments submitted herewith. We regret to report that our review leaves us convinced that the proposal would not result in better corporate governance and suffers from the following serious flaws:
First, the Commission is authorized only to regulate disclosures in the proxy process. The proposed rules, however, extend well beyond disclosure, and thus exceed the Commission's statutory authority. Rather, they would regulate corporate governance in a manner the Supreme Court has said is reserved to the states.
Second, the procedures by which this proposal has been put forward violate the Administrative Procedure Act and other important constraints on agency rulemaking. The short 60-day comment period allowed by the Commission has been insufficient for interested parties to comprehensively review and comment on the proposal, a failing made all the more serious by the unusual extent to which the proposing release relies on the public to provide evidence that ordinarily is gathered and reviewed by an agency before proposing a rule. These shortcomings have been exacerbated by the Commission's apparent reliance on data that it has declined to make available to the public for review.
Third, the Proposed Election Contest Rules would initiate sweeping, harmful changes in corporate governance practices while failing to achieve the Commission's expressed regulatory objective of improving the proxy process at unresponsive companies. By overlooking the voting practices of institutional investors and the incentives and leverage the rules would give special interest groups, the proposal seriously underestimates the frequency with which election contests would be triggered even at healthy, well-managed companies. The proposal likewise does not adequately recognize the expense corporations will feel compelled to incur to ensure that each of their directors' primary loyalty is to the company and all shareholders, rather than to a coalition of union pension funds or other special interest groups. If the election of alternative directors did occur under the Proposed Election Contest Rules, dual loyalties and divided boards would result-a problem that the Commission has partly foreseen, but has not resolved.
For the foregoing reasons, we oppose the adoption of the Proposed Election Contest Rules. We believe adoption of the proposed rules would be particularly inappropriate at this time, given the significant recent corporate governance reforms by Congress, the Commission, the NYSE, and NASDAQ that are still being implemented.
At the conclusion of the attached detailed comments, however, we identify significant modifications to the Proposed Election Contest Rules that would be necessary if the Commission were to proceed to a final rule notwithstanding the problems inherent in the proposal. (Principles of administrative law would require that, before these changes and any other significant modifications to the proposal could be adopted in a final rule, there would need to be a second round of notice and comment.) Most importantly, any final rule would have to target only companies whose shareholders actually and objectively lack adequate access to an effective proxy process. In this connection, we believe that the trigger relating to shareholder access proposals would have to be eliminated; the votes required for any action under the Proposed Election Contest Rules would have to be a majority of shares outstanding rather than a majority of shares voted; the ownership threshold for shareholders to nominate directors would need to be increased to 25 percent; and a process would have to be established for the Commission to resolve disputes that arise under the rules.
In sum, to address a perceived problem that is only vaguely identified and wholly unsubstantiated, the Proposed Election Contest Rules exceed the Commission's legal authority and would initiate significant changes in corporate governance at a time when the impact of the many important reforms of the last year is only beginning to be understood. The Business Roundtable, which strongly supported enactment of the Sarbanes-Oxley Act and the other recent corporate governance reforms, respectfully submits that the Commission should not proceed with this rulemaking.
cc: Hon. William H. Donaldson, Chairman, Securities and Exchange Commission