December 22, 2003
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549-0609
Re: File No. S7-19-03
Dear Mr. Katz:
We appreciate the opportunity to submit our comments on the Securities and Exchange Commission's proposed rule on security holder director nominations.
We support ballot access. Providing significant investors with reasonable access to place their nominees on corporate proxy ballots will improve the performance of boards and, as a result, boost the confidence of investors in corporations. Reform is needed to right a steeply tilted playing field on which management and board incumbents dominate the election process. Shareholder access builds on the Sarbanes-Oxley Act reforms and the new corporate governance listing standards adopted by the major stock exchanges. While those reforms enhance boardroom oversight of management, ballot access will enable shareholders to hold boards of directors more accountable. Ballot access is a market-based reform that provides investors with the tools that they need to fulfill their responsibilities as the owners of America's corporations.
The rule provides numerous safeguards against the potential for special-interest abuses:
While we generally support the current Commission proposal, we recommend a major change an override feature that would enable very substantial shareholders to respond with appropriate speed to redress urgent and egregious problems, such as financial malfeasance, insider trading or other criminal conduct. Such abuses demand swifter action than that envisaged by the two-step, multi-year process of triggering event and subsequent director nomination. Therefore, the SEC should grant a shareholder or group of shareholders who have significant, long-term stakes in a company the unfettered right to propose candidates even in the absence of a triggering event.
We recommend that the SEC adjust its thresholds to require 1 percent ownership to file an access resolution calling for shareholder nominations; 3 percent ownership for the right to make nominations after a triggering event; and 6 percent ownership for the unfettered right to nominate director candidates.
We recommend that the Commission adopt three additional changes to improve the corporate election process:
Eliminate broker voting on board elections and other substantive voting issues. The SEC should urge the stock exchanges to eliminate voting at annual shareholder meetings by financial intermediaries on "routine" items when they receive no instructions from their clients. The New York Stock Exchange's practice of allowing brokers to vote (under its "10-day rule") uninstructed shares held by their clients on ballot items that the NYSE labels "routine" distorts voting results. In the current corporate governance environment, there are no routine voting items.
We urge the Commission to extend the ban on broker voting for equity compensation plans to all substantive items on the ballots of all publicly listed companies. Broker votes should be allowed for the sole purpose of meeting quorum requirements for conducting business at annual meetings.
Failure to change the stock exchanges' brokers-may-vote rules would undermine the Commission's proposed 35-percent withhold vote trigger. It is not uncommon for broker votes to account for 10 percent or more of the tally in favor of incumbent board nominees. No one disputes that all uninstructed broker votes are cast for management. If the stock exchanges do not eliminate the use of broker votes in the election of directors, the SEC should alter its proposal by lowering to 25 percent the "withhold" vote required to trigger access.
Remove the proposed disqualification of nominees who are affiliated with the nominating shareholders. The proposal requires nominees to meet exchange standards on independence, and that qualification alone should suffice. Moreover, alignment between the nominee and nominating shareholders should be encouraged, not discouraged. A shareholder with a significant stake in a company should be able to nominate affiliated individuals.
Disclose timely post-election reports. The SEC should require meaningful and accurate real-time disclosure via press release and related 8-K filings of vote results. The current rules are inadequate: companies may wait until the filing of their next quarterly report to disclose voting results.
Given the importance of the voting process, the SEC should require companies to file (as an 8-K or via a new post-election report filing) and publish (via press release and on their websites) the best available results of the voting at the annual meeting (including a breakout, if applicable, of broker votes) and an estimate of the total expenditure made by the company on its solicitation efforts. Requiring real-time, material event disclosure will close the existing communications gap. Follow-up quarterly filings would provide investors with the official certified vote results and a full accounting (line-item breakouts, for example, of out-of-pocket solicitation costs) of the expenditures made by the issuer with regard to the proxy solicitation.
Such a requirement is not burdensome. Some issuers already announce voting results at meetings, and some firms even issue press releases with preliminary results at the time of the meeting.
We commend the Commission for proposing these reforms, and we strongly urge their adoption.
Chief Operating Officer
LSV Asset Management