Re: File No. S7-19-03

December 22, 2003

Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609

Dear Secretary Katz,

The Coalition for Environmentally Responsible Economies (CERES), a membership coalition of institutional investors with $350 billion, would like to submit 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 shareholder nominations for corporate boards, also known as shareholder proxy access.

CERES members have worked constructively with companies for 15 years. CERES present focus is on sustainable corporate governance and the fiduciary and investment risks of climate change. It staffs the Investor Network on Climate Risk, which was established at the United Nations Summit on Climate Risk, convened by investors of $1.016 trillion, including sixteen Treasurers and Comptrollers of States and Cities. CERES members are active investors, filing shareholder resolutions each year at the most problematic companies, engaging in active dialogue with companies, and forging path-breaking and trust-building interactions with companies in all industrial sectors.

CERES concurs with the arguments set forth by Christian Brothers Investment Services, the Jessie Smith Noyes Foundation, Social Investment Forum, and Walden Asset Management in their comments on this proposed rule, who hold that access to the proxy provides us with a critical way to communicate the views of the shareholders we represent on many issues that affect the long-term interests of all corporate shareholders and corporate stakeholders.

CERES commends the Commission for its effort to allow shareholders to nominate directors to the board and supports the proposal of rules that do give shareholders this ability. Yet, the proposed rules (including triggering events, ownership thresholds and other nominating procedures) need to treat all investors equally, small as well as large, in order to promote robust participation.

In order for such a rule to increase the accountability of boards to shareholders and help ensure improved corporate governance, the process for shareholder nominees must follow some basic principles:

    * Shareholders should have the right to nominate candidates to the board. The rule should balance the need to prevent frivolous nominees and the requirement to offer a reasonable chance for shareholder nominees to appear on a ballot.

    * The nomination process should remain primarily the responsibility of the nominating committee of the board. The potential for shareholder nominees should encourage all companies to adopt a nomination procedure that is open and accountable to shareholders.

    * The process must be broadly inclusive. Since management should be accountable to all shareholders, this process should be open to smaller as well as larger shareholders.

We are concerned that the current proposal creates obstacles to shareholder nominees that would:

  • exempt most companies from shareholder nominees,

  • create an unreasonably long timeframe for replacing underperforming directors, and

  • exclude all but the largest shareholders from the process.

We question, therefore, whether this proposal represents a meaningful improvement of shareholder rights or an effective mechanism of board accountability.

While this proposal aims to empower shareholders, most will have no more rights as the result of this rule. Moreover, the proposal creates classes of shareholders, offering more rights to large than to small shareholders. Companies may feel a sense of accountability to the largest shareholders that they do not feel to others. The result of the proposal is a minimal and uneven expansion of shareholder rights, and a mechanism for corporate accountability that most companies could safely disregard.

Our specific concerns are those of other commentators:

    * Under the current proposal, all but the largest shareholders are excluded from the process. According to figures provided by the Commission, the majority of companies have no more than one or two shareholders that could meet the 5% holding threshold without aggregating the holdings of more than two investors. Given the proposal's restrictions on soliciting group members, it appears likely that most shareholders would not be able to reach the 5% threshold for any company, even as part of a group.

    * The triggering events, as proposed, present an excessively difficult obstacle for shareholder nominees. They would create a minimum timeframe of two years to replace a board member, whereas some companies facing serious corporate governance concerns may require more timely action.

    * According to the proposal, nominations would be accepted at companies where 35% of shareholders withheld director support. However, no more than 1.1% of companies would be eligible to receive nominees under this trigger. Shareholder participation should not be so severely limited and should apply to a broader array of companies.

    * The "Direct Access Proposal" trigger is too restrictive and narrow, as it allows owners, or groups of owners, to be eligible to file such a resolution only if they hold at least 1% of a company's shares. This process should be open instead to all long-term shareholders. The eligibility of shareholder nominees should be judged by their support among owners, not the status of the filer. We are also concerned that other triggers are not considered, such as when boards fail to respond to shareholder proposals that receive majority support, which constitutes a serious governance problem. Any shareholder proposal receiving majority votes and then not acted on by the board should serve as a trigger.

    * Lastly, the proposal does not specify how disputes over the eligibility of nominees will be resolved. The proposal seems to indicate that the company would have control over the decision to omit or allow a nominee. However, experience filing shareholder resolutions outside the U.S. suggests that an independent third party is indispensable for protecting shareholder rights. In countries where these arbiters do not exist, companies routinely exclude proposals on any available grounds.

The following concrete suggestions would address these concerns:

    * Shareholder director nominations should be possible without "triggers." If they are to be used at all, triggers should expand the pool of shareholders eligible to nominate a director, for example, by lowering the ownership threshold.

    * The holding threshold for nominating directors should be lowered to 1%, bringing it in line with the holdings necessary to file a "direct access" proposal. Doing so would expand the ability of smaller shareholders to participate and ensure that more companies would be practically eligible to receive a shareholder nominee.

    * The limitation on the size of security holder groups should be expanded or eliminated to facilitate the participation of small shareholders. Nominees with a broad base of support should be encouraged, not excluded.

    * We believe that any mandatory shareholder resolution receiving a majority vote should qualify as a "trigger," regardless of how the trigger is used. The proposed rule intends to be "tied closely to evidence of ineffectiveness or security holder dissatisfaction with a company's proxy process." Refusal to act on the will of a majority of shareholders is clear evidence of board ineffectiveness despite explicit dissatisfaction of security holders.

    1. The trigger should apply to any proposal, without an ownership threshold for the filer. We believe that companies should act on majority votes, regardless of the status of the filer.

    2. The SEC should apply a standard similar to its "Substantially Implemented" standard (rule 14a-8 subparagraph 10) in determining whether the company has complied, or taken reasonable steps towards compliance, with the terms of a shareholder resolution that received majority support.

    * The process for challenging and omitting nominees and "direct access" proposals should follow the model of rule 14a-8 for other shareholder proposals.

We appreciate the work of the Commission in all its efforts to protect and promote shareholder rights, and thank you for the opportunity to submit these comments.


Ariane van Buren, Ph.D.
Institutional Investor Program
CERES Sustainable Governance Project