[National Association of Corporate Directors logo]
RE FILE NO. S7-19-03
December 22, 2003
Mr. Jonathan G. KatzSecretary
Dear Mr. Katz:
In connection with the recently proposed Rule on Security Holder Director Nominations, we are writing you on behalf of the board of the National Association of Corporate Directors (NACD). NACD is the only membership organization in the United States exclusively devoted to the education of corporate directors and the improvement of corporate governance.
Based on your release for this rule, it is "intended to create a mechanism for nominees of long-term security holders, or groups of long-term security holders, with significant holdings to be included in company proxy materials where there are indications that security holders need such access to further an effective proxy process. This mechanism would apply in those instances where evidence suggests that the company has been unresponsive to security holder concerns as they relate to the proxy process. The proposed rules would enable security holders to engage in limited solicitations to form nominating security holder groups and engage in solicitations in support of their nominees without disseminating a proxy statement."
While we recognize that the current proxy access process is not ideal, it is apparent that corporate boards of directors are now faced with a significantly changed corporate governance landscape. New legislation, regulations, and listing rules will have a profound impact on the governance of American corporations. Of special note with respect to the proxy access issue are new SEC rules requiring additional proxy disclosures regarding board nominating processes and proposed SEC rules concerning mutual fund disclosure of voting policies.
We applaud the SEC's ongoing efforts to ensure the transparency of processes for nominating and electing directors. However, we believe that the proposed Rule on Security Holder Director Nominations may have unintended consequences. In light of the concentration of voting power and influence held by a relatively small number of institutional investors and proxy voting advisors, we are concerned that these rules, if adopted, could result in a surge in proxy contests that would create more harm than good. Good directors might be discouraged from serving on boards of publicly owned corporations as a result. Management and boards might also become distracted from their primary responsibilities to shareholders.
The continuing gap between shareholder requests and board responsiveness cannot be ignored. Commendable groups such as the Council of Institutional Investors and Institutional Shareholder Services are working with us to close that gap. However, of particular concern are those shareholders who put their own agendas before the needs of the entire shareholder base. The solution, of course, is to have boards that are composed of knowledgeable, thoughtful, independent-minded individuals who have the ability, willingness, and courage to discharge their responsibilities to shareholders effectively. Existing reforms will help to ensure that result. Let us give them time to work.
In summary, we recommend that the investing public be given additional time to evaluate the impact of the new environment and rules prior to the launch of yet another regulatory initiative that could dramatically alter the composition and leadership of boards.
We applaud you for your continued diligence in the area of governance, and stand ready to provide further commentary in writing or in person as the need arises.
B. Kenneth West, Chairman
Roger W. Raber, CEO and President