Compass Bancshares, Inc.
VIA E-MAIL to firstname.lastname@example.org
December 18, 2003
Securities and Exchange Commission
Attention: Jonathan G. Katz, Secretary
Re: Proposed Rule regarding Security Holders Director Nominations
Dear Mr. Katz:
Compass Bancshares, Inc. ("Compass") appreciates the opportunity to comment on the proposed rule issued by the Securities and Exchange Commission ("SEC") concerning Security Holder Director Nominations.
Compass is among the top 40 bank holding companies in the United States with over $24Billion in assets and operates over 355 full-service banking offices in Alabama, Arizona, Colorado, Florida, New Mexico and Texas. Compass' investor base includes a large percentage of small, long term, individual security holders. Compass has generated record earnings and earnings per share for these security holders for 15 consecutive years.
Compass has strongly supported the positive reforms of the Sarbanes-Oxley Act of 2002 and the efforts of the SEC to regain the trust of ordinary investors. We agree with the SEC's goals of ensuring corporate boards and management hold themselves to the highest standards of corporate governance and be accountable to long term security holders.
Unfortunately we believe providing security holders access to a corporation's proxy will not serve the interests of ordinary security holders, but instead will: result in a few large institutional security holders gaining power at the expense of ordinary shareholders, enhance special interests group's access to boardrooms and divert precious time and resources from the corporation's business each year in wasteful election contests. More importantly we believe that the proposal is precipitous given that the new listing rules promulgated by the NYSE and NASDAQ relating to the conduct of board nominating committees and improved transparency of the nominating process have not been given time to take effect.
Groups advocating adoption of security holder access to a company's proxy claim that it is necessary to address the headline grabbing fiscal abuses of companies by management, the perceived unresponsiveness of boards who are "asleep at the switch", and to generally improve shareholder democracy. Many of the comment letters received by the SEC in support of the proposed rules make the assumption that every company is an Enron waiting to happen and that Enron could have been saved if only a security holder nominated director had been on the board. Most of these letters strongly advocate abolishing the proposed rule's mechanisms which would trigger security holder access to a company's proxy1.
In reality, Sarbanes-Oxley has effectively put an end to the imperial CEO who appoints friends and toadies to a captive board that rubber-stamps all the CEO's decisions. Boards must now be comprised of a majority of independent directors and the tests to demonstrate a director's independence continue to become more and more difficult. Under the NYSE's and NASDAQ's new listing rules, director nominations can only be made by a nominating committee comprised of independent directors or by the full board. These directors are under a fiduciary duty to nominate directors whom they believe will act in the best interest of the company and all its security holders.
By contrast, under the proposed rules, security holders operate under no such fiduciary duty when making director nominations, rather they are free to act in their own self-interest - even if it is in conflict with the interests of the company or other shareholders. While the proposed rules set out several requirements to ensure the security holder's nominee is "independent" including a certification from the nominating security holder - the reality is that a security holder nominee will answer specifically to the group which nominated them. These "special interest" directors will seek to advance their group's specific political or social agenda without regard to the mission of the company or the interests of the company's small individual security holders. The consequences for a company and small security holders could be disastrous if a special interest director actively campaigned for the company to take a stance on socially or politically divisive issues such as health care, abortion, tobacco, or religion.
The triggering events listed in the proposed rules do not go far enough to protect small, individual security holders from the abuse of the proxy process by larger, wealthier security holders. The proposed rules seem to assume that a large security holder is best placed to protect the interests of all the company's security holders. However, the interests of large and small security holders can often differ markedly. One party may want sustained earnings growth, another quick growth for an immediate stock gain, another will want higher dividends for income. Keeping the thresholds to a security holder proposal that the company become subject to the nomination process at the low rate of 1% of stock entitled to vote will harm smaller security holders by giving privileged status to security holders with stock holding percentages that represent only a tiny minority of the overall security holders. If the threshold for this trigger event was set at higher levels, for example, ownership of 10% of a company's stock, groups of security holders would have to form alliances that would effectively represent a majority of all security holders - not just one or two institutional holders that would be represented by the 1% threshold.
If the proposed rules will create security holders who are to enjoy a privileged status, then they should be long term security holders who have demonstrated a true commitment to a company and its business and are therefore able to represent the interests of all security holders. We strongly believe that a one-year holding period does not qualify a security holder as "long term." In our opinion, any security holder with less than a five-year holding period is analogous to a speculator, hoping to move out of a company's stock as soon as they can make a profit with little interest in a company's long term health. Warren Buffet, the respected advocate of long-term share holding, has been quoted as saying that "if you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes."2
Additionally, if a security holder will be permitted to make a decision as important to a company's long term health as nominating a director, that security holder (or group of security holders) should be willing to make a good faith commitment to the long term prospects of the company. We firmly believe that any security holder who submits a nominee for director should be required to hold some minimum amount of that company's stock for so long as that nominee remains a director of the company. Should the security holder's stockholding drop below a specified percentage, then the security holder's nominee should resign from the board unless requested to stay on by the other independent directors. Only by raising the thresholds for both initial holding period and requiring a sustained holding period can the SEC ensure that short term speculators (such as hedge funds who are able to assemble large but transient stockholdings) are not able to make decisions with such potential monumental consequences for all security holders.
In order to further protect smaller security holders the SEC should also consider raising the threshold for a direct access vote from its current proposal of a mere 50% of votes cast. The significant risks and costs associated with starting an election contest are similar to those of amending the Constitution. Any vote of such paramount importance to a company and its security holders should be approved by no less than a majority of the outstanding shares.
With respect to the third possible trigger, a company's failure to implement a security holder proposal that received a plurality of the votes cast, the SEC must preserve the long-recognized duty of a board to act in its good faith business judgment in a manner in which it believes are in the best interests of the company and its security holders. Any multitude of security holder proposals could receive a plurality of security holder votes, for example, a proposal to pay a special or increased dividend. It is extremely bad policy to substitute the business judgment of security holders for that of a board comprised of mostly of independent directors. By simply rubber-stamping a security holder proposal that received a plurality of votes cast, a board would be guilty of abdicating its fiduciary duty to investigate and make its own good faith determination of the issue - exactly the type of behavior that security holder advocates claim was the downfall of Enron, WorldCom, et. al. Moreover, if 50% or more of security holders voted for a security holder proposal at the annual meeting then a group representing 1%3 of all security holders could be assembled to submit a proposal to open the proxy process via the second trigger mechanism.
It is extremely doubtful that the benefits of permitting security holder access to a company's proxy statement will exceed the costs, namely:
We believe that the arguments for allowing security holder access to a company's proxy have already been satisfied by the increased independence of boards due to the Sarbanes-Oxley Act, the SEC's recently released final rules on Disclosure Regarding Nominating Committee Functions and the new listing standards of the NYSE and NASDAQ. For the foregoing reasons we believe that there is simply no reason for the SEC to rush the implementation of such a complex set of rules. We respectfully submit these comments with the hope that they are helpful to the SEC's consideration of the proposed rules. We would be happy to meet with the SEC's representatives at their convenience to discuss our comments.