From: James McRitchie [jm@corpgov.net] Sent: Monday, March 29, 2004 1:00 AM To: rule-comments@sec.gov Subject: S7-19-03, Security Holder Director Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: S7-19-03, Security Holder Director Dear Mr. Katz: I write this as a shareowner, member of CalPERS, and as the publisher of CorpGov.Net, an Internet site that has facilitated the ability of institutional and individual shareowners to better govern corporations, enhancing both corporate accountability and the creation of wealth since 1995. Together with Les Greenberg, I filed a “Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461,” which the $3 trillion Council of Institutional Investors credits with re-energizing the "debate over shareholder access to management proxy cards to nominate directors." While the corporation laws of every state solemnly recite that shareowners elect the directors, each year we are asked to participate in an exercise, which bears little resemblance to the word "election" as commonly used in any democracy. Currently, it is almost impossible for shareowners to replace directors who they deem to be incompetent and/or corrupt. Until directors can be held personally accountable, e.g., removed from office by shareowners, they will not be responsive to shareowners. Under applicable state corporate law, shareowners can easily nominate candidates. However, only the names of those nominated by the corporation need appear on the corporation's ballot. Shareowners must spend hundreds of thousands of dollars, often millions, to conduct a separate proxy solicitation. Like the petition Mr. Greenberg and I filed, the Securities and Exchange Commission (SEC) rulemaking, “Security Holder Director Nominations, S7-19-03,” would also recognize the right of shareowner to place their nominees on corporate proxies, but in much too limited circumstances. Out of 14,484 public companies filing periodic reports with the SEC, your release estimates the proposed access rule would be triggered at only 73. Further, security holders would make a nomination at only 45 (0.3% of companies). Limiting even this small dose of democracy to “accelerated filers,” an estimated 3,159 companies, would be a terrible mistake. Unfortunately, the smaller companies that may be left out have a lower proportion of independent directors and could more often benefit from additional involvement by shareowners. As proposed, the SEC would allow shareowners to place their own nominees for director seats in corporate proxies only if “trigger” events occur. Unfortunately, the corporation may bleed to death before shareowners can place their nominees on the board. This hurdle simply adds a one-year delay to needed action by shareowners. I recommend that triggers be eliminated. Below are additional recommendations: Shareholder eligibility: The SEC proposed rule would allow shareowners or groups with more than 5% of the company’s stock to have those nominees placed on the corporate proxy. Under your proposal, it would almost always take involvement from very large institutional shareowners, such as CalPERS, to meet that threshold. Smaller shareowners would be largely cut out from the process. It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to sign a letter asking them to divest risky investments in Myanmar. Clearly it will be extremely difficult for shareowners to put together and maintain investor groups for something as complex as nominating directors. In my opinion, far more than 45 companies per year could benefit from shareowner involvement. I recommend that you consider a two-tier approach. Any shareowner owning at least $2,000 of company stock for at least two years should be able to nominate. If more than one slate is nominated, the slate of the nominator with the largest number of shares should be included on the corporate proxy. Filers under this option would have to agree to severely limit their campaign costs. They would not be allowed to hire a proxy solicitor, place ads or even conduct mass mailings (other than via e-mail). Their candidates would rise or fall largely on the basis of their 250 or 500-word statements in the proxy and on their websites. Any shareowner or group of shareowners owning at least 5% of company stock for at least two years should be able to nominate candidates without restriction as to campaign expenditures. If more than one slate is nominated, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy. Candidate limits: The SEC proposal limits most companies to 1 or 2 shareowner nominated directors. In my experience serving on corporate boards, a single shareowner nominated director may be easily isolated since it takes a second to even require discussion of a motion. Not less than 40% of the total number of directors on the board should be eligible for nomination by shareowners. Allowable restrictions: The SEC proposal excludes shareowners from using the process to nominate professionals. Shareowner nominees cannot be employed by the nominating shareowners or affiliated with them in any way. Yes, shareowner nominees should be independent of the company but no such prohibition should apply to the nominating shareowner. Shareowners should be able to nominate activists such as Ralph Whitworth of Relational Investors or Andrew Shapiro of Lawndale Capital Management. When we spot trouble on the horizon, we want experienced turnaround experts on the board to communicate with and to generate the pressure needed to make necessary changes. A major issue would be trust, and such individuals have often gained the trust of major institutional investors and shareowner activists through their affiliations. Rule 14-a(8)(i)(8) should be amended to allow use of the shareholder proposal procedure to modify election procedures and to nominate candidates. Each company is unique and shareholders at each company should be able to tailor the election process to the specific circumstances of each company. Shareowners, for example, should be able to request the Board of Directors to hire a proxy advisory firm for one or multiple years, to be chosen by shareowner vote. The proxy advisor should be able to provide advice to shareholder on all proxy issues, including election of the Board of Directors. For an example of such a resolution see my 1999 resolution to Whole Foods Market at http://www.corpgov.net/news/resolutions/wfmi.html. Additional examples and variations can be found at Mark Latham's Corporate Monitoring site at http://www.corpmon.com. Use of a proxy monitor would be an excellent supplement to shareholder nominated directors, since an independent advisor would provide shareholders with an unbiased comparison between shareholder and board nominees. While the SEC’s proposed rulemaking would set in place a groundbreaking mechanism for shareholder access to the corporate ballot for the purpose of nominating directors, it falls far short of providing shareholders with the power to hold directors accountable. The interests of directors would still be far more aligned with those of management than with shareholders. Shareholders want their directors to be proactive. My recommendations would allow that to happen by giving us the tools we need to monitor and democratically govern the corporations we own. The result would be more efficient, effective and responsive corporations. Sincerely, James McRitchie, Publisher CorpGov.Net 9295 Yorkship Court Elk Grove, CA 95758 916.869.2402