Calvert Group, Ltd.
December 19, 2003
Via electronic delivery: firstname.lastname@example.org
Mr. Jonathan G. Katz, Secretary
Re: Security Holder Director Nominations
Dear Mr. Katz:
On behalf of Calvert Group, Ltd. ("Calvert"),1 America's largest family of socially responsible mutual funds, I am submitting comments pursuant to the Commission's October 14, 2003 "Proposed Rule: Security Holder Director Nominations" (File No. S7-19-03; Release Nos. 34-48626, IC-26206) regarding Section 14 of the Securities and Exchange Act of 1934.
At Calvert, we believe that corporate responsibility matters. In our view, companies that meet high standards of corporate governance, ethics and social responsibility avoid unnecessary financial risk and are better positioned for sustainable, long-term success. Such companies simultaneously deliver value to their shareowners and other stakeholders, as well as to society at large. In the aftermath of two years of corporate scandals, it is clear that a growing number of investors appreciate the nexus between corporate responsibility - including sound corporate governance - and financial returns.
Sound corporate governance, of course, requires that the owners of a corporation (the shareholders) and their elected representatives (the board of directors) exercise conscientious oversight over corporate managers and hold those managers accountable for their actions. Changes to Rule 14a-8 are urgently required if such oversight and accountability is to be achieved.
The recent corporate scandals reveal an almost systemic breakdown in corporate governance, oversight and accountability, shaking investor confidence, and roiling financial markets. In response, government lawmakers and regulators have begun to embrace much-needed reforms. Sarbanes-Oxley created an accounting oversight board, stiffened criminal penalties for corporate wrongdoing, and addressed such issues as the accuracy of corporate financial statements and auditor and analyst independence. Revised listing requirements at the major exchanges address a range of corporate governance issues - including the independence of corporate directors and key corporate governance committees. The Commission also adopted new rules on proxy voting disclosure by mutual funds and investment advisers.
These are all commendable reforms. Yet the most elemental reform of all may be to simply grant to shareowners the right to nominate their own director representatives by providing access to the corporate proxy ballot. This step alone could significantly enhance shareowner and director oversight, strengthen corporate governance, and improve corporate accountability.
There has been much discussion of director independence. Underlying this discussion, however, is the more fundamental issue of director representation. Corporate directors are meant to represent shareowners. Indeed, corporate directors would be unnecessary but for the fact that shareowners are too many and too dispersed to effectively oversee corporate managers and govern publicly-traded corporations themselves. The shareowners must therefore govern through their representatives: the independent directors.
Under our present system of corporate governance, however, for each board seat there is only one candidate - selected and backed by company management, with the election financed by company funds. This process is undemocratic, and is in fact quite an anomaly given that directors are supposed to represent shareowners, not management. It also creates an inherent conflict of interest at the heart of our system of corporate governance: allowing corporate management to hand-pick the directors who are supposed to oversee and police them. This system creates an undue reliance on government regulation and oversight to accomplish what shareowners could often accomplish by themselves if only true democracy were extended to corporate boardrooms.
Calvert is therefore pleased that the Commission has decided to consider new rules enabling shareowner access to the proxy ballot for purposes of director nominations. (See our letter to the Commission dated June 12, 2003, encouraging this initiative.) Regrettably, we find ourselves opposed to the approach the Commission has chosen to take on this issue. In fact, we would strongly urge reconsideration of its central provisions.
We are particularly concerned about the inclusion of so-called "triggering events" - onerous requirements that would create significant obstacles to shareowner access. These requirements would effectively exempt most companies from shareowner participation in director nominations, would create an unreasonably lengthy period of time (at least two years) for replacing directors, and would deny access and input to all but the largest shareowners.
We fully understand that such a rule needs to be designed so as not to facilitate low-cost hostile takeovers by short-term investors or nuisance candidacies by investors who do not have a significant stake in a company's long-term interests. However, if the proposed triggering events are meant to guard against these abuses, then such precautionary measures have in effect swallowed the rule, rendering shareowner access to the proxy ballot essentially meaningless.
The first triggering event requires that nominations would only be accepted at companies where 35% of shareowners withheld support from at least one of the company's nominees in the previous year. This provision guarantees that only a very small number of companies would have to provide shareowner access to the corporate proxy - the Commission itself estimates that only 1.1% of companies would be eligible to receive nominees under this trigger based on "withhold" votes exceeding 35% over the past two years - and essentially mandates a two-year campaign by shareowners to replace a single member of a corporate board. We believe that shareowner participation should not be so severely limited and should apply to a much broader array of companies - indeed, to all publicly traded companies.
The second triggering event requires a preliminary demand for proxy access by a shareowner or group of shareowners owning at least 1% of outstanding shares for at least a year, and a shareowner vote of greater than 50% in favor of this demand for access. Then, in the following year, shareowners may nominate a single director nominee. Once again, this provision requires a two-year campaign by shareowners to replace a single member of a corporate board, requiring that they prevail in not one but two separate proxy contests in order to elect a single director to a corporate board.
Once a triggering event has rendered a company subject to the new rule - i.e., subject to shareowner director nomination(s) - only shareowners or shareowner groups owning more than 5% of outstanding shares for at least two years (and intending to hold their shares until the next annual meeting) would be eligible for access to the proxy ballot for purposes of specifying a director nominees. This eligibility threshold guarantees that only in very limited circumstances where such large shareowners exist (only 42% of companies, according to the Commission), or where a coalition of shareowners can be assembled after laborious, time consuming and probably expensive efforts, would a company ever have to worry about the remote prospect of shareowners nominating their own representatives to the board.
These triggering events strongly stack the deck in favor of company management and existing corporate boards, placing an onerous, nearly insurmountable burden on shareowners who wish to replace even a single director on such boards. It is difficult to resist the conclusion that underlying the triggering requirements is an unmistakable bias against shareowner access as well as an apparent determination to thwart the same. In effect, the Proposed Rule has been designed, presumably inadvertently, so as to defeat most shareowner efforts to gain access to the proxy ballot for purposes of nominating directors, and seems to be premised on the assumption that such efforts must be discouraged - and, if possible, defeated - as the nomination of (even independent) directors is a privilege (apparently not a right) best left to corporate management.
Clearly, the import of both "triggering events" is that shareowners are not entitled to nominate their own director representatives as a matter of right, but only in the rarest of circumstances where some unusual event or events creates an exception to the rule. (The rule, it seems, is that shareowners must suffer the directors who are chosen for them.)
A third possible triggering event, which the Commission has not proposed but nevertheless requests comment, would allow shareowner nomination of a single director in the event that a company's board of directors fail to implement a proposal by a shareowner or group of shareowners owning at least 1% of outstanding shares, other than a direct access proposal, that received greater than 50% shareowner support at the previous year's annual meeting. Although we would certainly not be opposed to shareowner access under such circumstances, we are concerned that, once again, the Commission seems predisposed against shareowner access except in the rarest of circumstances, and then only after clearing a series of hurdles.
If this is where we find ourselves after the corporate governance meltdowns of the past two years, then we truly have a long way to go.
Calvert has a simple view of shareholder democracy: the right to elect independent directors is essentially meaningless without the right to nominate such directors. Under the present system, so-called director elections are really not elections at all, because shareholders - who, after all, own the corporation - have no choice over who will represent them on corporate boards.
If this system is allowed to remain in place -- then we have learned nothing over the past few years. If the Proposed Rule is not significantly amended prior to adoption, then, we have opted to leave in place a system of corporate governance where shareowners are essentially powerless, where directors are disconnected from the shareowners they supposedly represent, where self-perpetuating boards essentially answer to a small group of management insiders, and where there is ultimately no system of checks and balances to provide effective oversight and hold corporate managers accountable, except by Government regulation.
We would urge the Commission to reconsider its course, and to make significant revisions to the Proposed Rule. Specifically, we would propose the following:
Although there are aspects of the Proposed Rule that we favor - e.g., providing exceptions to the proxy rules for nominating shareowners to enable them to communicate with other shareowners for purposes of forming a nominating shareowner group and soliciting support for shareowner nominees - as well as other provisions that we would question, we have chosen to limit our comments to what we consider to be the most objectionable provisions of the Proposed Rule. Indeed, as noted above, we believe the Proposed Rule's central provisions - including most notably the triggering events and eligibility requirements - essentially undermine and render meaningless the very notion of shareowner access to the proxy ballot for purposes of nominating directors.
We would urge the Commission to reconsider the approach it has taken on this issue. After two years of corporate scandals, shareowners need to be more empowered rather than less, and corporate boards need to be more independent of management and more representative of shareowners. By these standards, the Proposed Rule fails, and needs to be significantly revised.
Should you like to further discuss the points raised in this letter, please do not hesitate to contact the undersigned.