Security Holder Director Nominations
[Release Nos. 34-48626; IC-26206; File No. S7-19-03]
The following comments were submitted by 4 officers of General Motors Corporation. The first letter was submitted on December 18, 2003.
Mr. Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Secretary:
I am _______________________ and ____________________________ of General Motors Corporation, a Delaware corporation with 2002 annual revenues of $186 billion and more than 350,000 employees. I appreciate this opportunity to provide my comments on the Securities and Exchange Commission ("SEC" or "Commission") Proposed Election Contest Rules to require companies to include stockholder nominees for director in company proxy materials under certain circumstances.
General Motors has been a leader in developing strong governance standards, and we agree that corporate boards and management must hold themselves to the highest standards of corporate governance. In fact, General Motors pioneered many of the practices now required by the Sarbanes-Oxley Act of 2002, and we applaud the rules adopted by the Commission to implement these requirements. We also support the newly strengthened New York Stock Exchange ("NYSE") corporate governance listing standards, which we believe will foster sound corporate governance and responsiveness and provide more visibility into business practices.
However, I am concerned that requiring companies to include stockholder nominees in their proxy materials will not improve corporate governance but will, in fact, encourage attempts by special interest groups to gain access to boardrooms to support special interest causes that are narrowly focused and not in the best interests of the corporation and its stockholders. The proposed rules go far beyond the SEC's stated intent of targeting a small number of unresponsive companies and will impact many U.S. public companies, even if they have excellent corporate governance practices and have a demonstrated track record of responsiveness to stockholders.
I also am concerned that this process of permitting stockholders to place nominees in company proxy materials would undermine the central role of the board and its nominating committee in meeting the important responsibility of nominating director candidates. The NYSE's recently adopted listing standards have strengthened the role and independence of directors and board nominating committees as the stockholders' representatives in making nominations. In addition, the SEC's new disclosure requirements about nominating committee procedures are intended to facilitate stockholders' access to the nominating committee, so that the board, nominating committee, and stockholders can work together to identify and nominate well qualified candidates. In this regard, I strongly believe that independent nominating committees, equipped with these expanded powers and acting in accordance with their fiduciary duties to the company and all of its stockholders, are best positioned to assess the skills and qualities desirable in candidates for director in order to maximize the board's effectiveness.
Finally, the proposed rules have the very real potential to turn every director election into a proxy contest. I strongly believe that such a change would encourage divisive, contested director elections resulting in substantial disruption of corporate affairs, causing significant costs to the company and all of its stockholders, and dissuading from board service well-qualified individuals who do not want to routinely stand for election in a contested situation.
If the inclusion of stockholder nominees in company proxy materials is to be required, we agree with the SEC that it only should be triggered by objective criteria indicating that stockholders have not had adequate access to an effective proxy process. We do not believe, however, that the SEC has yet proposed triggering events that would reliably identify companies where stockholders are justifiably dissatisfied with corporate governance. In particular, the trigger based on a simple majority-vote stockholder proposal to activate access would apply to any company, not merely those companies that have failed to respond to stockholder concerns. The trigger based on a director's receipt of more than 35 percent of "withhold" votes, while more appropriate than the first trigger, would not give the board and its nominating committee an opportunity to respond to stockholder concerns about a director before the company's proxy process is deemed ineffective. Further, the proposed ownership thresholds for stockholders to submit a proposal to activate access and to nominate directors are too low to justify the cost and substantial disruption the proxy contests would entail. New communication technology, particularly the internet, makes it easier for stockholders concerned about a single issue to form narrowly focused advocacy groups. Permitting ad hoc groups for such stockholders to have access to the company's proxy materials will expose our boards to activist disruption that we do not believe is the Commission's intent. The Commission would also have to establish a process to resolve disputes that arise under the rules.
We believe the SEC should allow the corporate governance reforms adopted by Congress, the SEC, and the securities markets to be fully implemented and tested before proceeding with additional regulation. With the increased independence of board of directors, the strengthened role and independence of nominating committees and the enhancement of stockholder-director communications, we believe that the issues that led to calls for stockholder access will be addressed. If the SEC nevertheless concludes that changes in the director election process are necessary, then we believe it is necessary to substantially revise the proposed rules to better target them to companies not responsive to good governance practices.
Thank you for considering my concerns about the proposed rules. If you would like to discuss these comments or any other issue, please do not hesitate to contact me.
cc: The Honorable William H. Donaldson