The Honorable Jonathan G. Katz
Dear Mr. Secretary:
The Employment Policy Foundation (EPF) is pleased to submit comments regarding the U.S. Securities and Exchange Commission (SEC)'s proposed new rule 14a-11 and related amendments to 17 CFR Parts 240, 249 and 274 regarding security holder director nominations (File S7-19-03). EPF is a non-partisan, economic research and education foundation that focuses on workplace trends and policies. From this perspective, we have carefully examined both the regulatory impact analysis and the substance of the proposed rule.
Our analysis of the regulatory impact analysis found that the SEC has greatly underestimated the administrative cost burdens that would be imposed on companies by the proposed rule. The actual cost may range from $89.4 million to $175.1 million per year. Our analysis on the substance of the proposal concludes that it would replace a structure of collaborative corporate governance among shareholders that has worked well for over 60 years. The rule would create an adversarial approach that is likely to encourage conflict that would be detrimental to general shareholder welfare and endanger the jobs and prosperity of millions of employees who depend on sound corporate governance to maintain the competitiveness of the American workplace.
Proposed rule 14a-11 was developed in response to concerns raised by the SEC that current procedures afford shareholders too little access to the nominating process and frustrate security holders' ability to influence the membership of the boards of directors of the companies in which they invest. Under certain circumstances, the proposed rule requires that names and information regarding nominees proposed by individual security holders or groups of security holders be included in proxy materials prepared and distributed by companies. The proposed rule provides security holders' the right to include such information about their nominees in cases where:
The SEC proposal also amends existing rule 14a-8 (regarding presentation of shareholder-proposed resolutions for vote at shareholder meetings) to require companies to include in proxy statements information about security holder proposals to identify whether the proposal would trigger application of proposed rule 14a-11.
The proposed rule is complex and far-ranging in its implications for corporate governance. It imposes significant new obligations on companies to monitor and report proposals from individual shareholders or organized groups of shareholders and to monitor and report the results of director elections in new ways. In view of the significant changes caused by the proposed rule, the SEC estimate that the total annual national cost to companies and others affected by the proposed rule would be $553,800 is not credible. This number amounts to only $62 for each of the 8,884 publicly traded companies likely to be affected in some way by the proposed rule. The SEC estimate reflects an estimated $155,400 as the cost of 1,828 company personnel hours for all companies affected by the rule ($85 per hour) and $398,400 in outside costs for attorneys and consultants (1,328 hours at $300 per hour). The SEC estimate of cost burden for this rule is plainly understated.
EPF's analysis found that the SEC analysis is significantly flawed on two counts:
Each of these categories of error is discussed in detail below.
The first category of error appears to stem from a failure to conduct a comprehensive analysis of activities that would be required for compliance with the proposed rule. The SEC analysis considered only costs associated with adding shareholder nominees to proxy materials and with adding associated information to required reports for valid shareholder proposals. It did not consider costs associated with the following significant activities that necessarily precede handling of valid proposals. They include:
The SEC estimated that the proposed rule would trigger action and cost for only 142 companies per year-111 operating companies and 31 investment fund companies. This number represents only 1.5 percent of the potentially affected companies. Given the potential that the proposed rule creates for special interest groups and self-interested individuals to gain influence over corporate operations and policies, it is reasonable to expect that five percent to ten percent of exchange-traded companies will be faced with a valid shareholder nominee proposal each year. The SEC estimated the average cost per company to handle a valid shareholder nomination proposal as $4,200, but also reported that the cost of handling shareholder resolution proposals under existing rule 14a-8 averaged $50,000 per case.
It is not credible to assume that the cost of handling a board of directors nomination proposal under proposed rule 14a-11 would be less costly than handling a resolution proposal under 14a-8. Based on the $50,000 cost benchmark and the expectation of 290 to 580 such proposals annually, the national cost of handling valid shareholder nomination proposals would be $14.5 million to $29.0 million.
The table below summarizes EPF's estimates of the various cost elements discussed above. The total cost burden of the proposed rule is likely to be between $89.4 million and $175.1 million per year. Significantly higher costs may result if success of shareholder nominations in some highly publicized cases were to generate added incentives for potential proponents.
Substantive Impact of the Proposal
Beyond the costs of the proposal, the Commission should also consider the substantive impact: How will the proposal change the performance of corporations and will shareholders benefit? In addition, it is appropriate to consider how this proposal will affect the 138 million employees in the American workplace whose jobs and incomes depend on the business success and competitiveness of corporate employers.
The proposed rule will introduce a dangerous new adversarial element in American corporate governance. Rather than protecting shareholder rights by encouraging more independence in board oversight, it will hurt shareholders by encouraging special interests to balkanize corporate boards into factions that represent narrow agendas and special interests. The overall goal of maximizing shareholder wealth may be lost to an escalating process of political conflict about control of corporate policies and power.
If this proposal is adopted, shareholders will lose. The American economy and American workers will lose as well because a corporate governance structure distracted by factional conflicts will be disadvantaged in the face of growing global competition for new ideas and new markets.
The proposal of new rule 14a-11 is the fourth time in the past sixty years that the SEC has considered proposals to change the basic operating rules of corporate governance and to facilitate minority nominations of company directors. On each previous occasion (1942, 1977 and 1992), the Commission decided not to adopt changes in the basic rules of corporate governance. For the reasons stated above, the Commission should decide not to adopt the proposed rule.
Edward E. Potter