December 18, 2003
Jonathan G. Katz
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549-0609
Re: File No. S7-19-03
Security Holder Director Nominations
Dear Mr. Katz:
At the direction of Chairman William H. Donaldson, and in furtherance of our meeting with him, we are writing to you on behalf of the members of the National Coalition for Corporate Reform ("NCCR")1 to present our counter-proposal to the proposed rules relating to shareholder director nominations published by the Securities and Exchange Commission ("SEC") on October 23, 2003. We are gratified that the SEC has recognized the importance of opening companies' proxy materials to shareholders and has chosen to publish its proposed rules. We also appreciate the opportunity to comment on the proposed rules.
As fiduciaries of our funds, we are obligated to act in the best interests of our pensioners, members, and beneficiaries. Moreover, as long-term investors an important component of fulfilling those fiduciary duties is the protection and enhancement of our investments. In this regard, we view proxy access as a critically important corporate governance tool, particularly in light of the corporate scandals of recent years.
The fundamental purpose of accessing the proxy is to enable shareholders to take meaningful action to protect their investments when a company consistently under-performs, engages in misconduct or destroys shareholder value. However, as we have stated over the past few months, certain provisions of the proposed rules, such as the triggering events, are likely to deny or delay access to the proxies of those companies most in need of reform. The SEC intends that these proposed rules will 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 the proxy process has been ineffective or that security holders are dissatisfied with that process." However, with the threshold for nominations set at 5% ownership, even the combined holdings of the three largest public pension funds will not be "significant" enough to achieve access. We believe that, with the following suggested modifications, the proposed rules will provide shareholders more meaningful access while safeguarding the SEC's vision of limited access.
Triggers: In principle, the NCCR does not believe that triggers are appropriate or necessary. Shareholders are owners and should have the right with reasonable qualifications to nominate directors when necessary. However, since the SEC is determined to implement triggers, we propose modifications to make the triggers more effective. We also strongly believe that there should be an additional event driven trigger.
Under the proposed rule, access to the proxy for nomination purposes is conditioned on one of two "triggering events" occurring:
- At least one of the company's nominees for board of directors for whom the company solicited proxies received "withhold" votes from more than 35% of the votes cast at an annual meeting held after January 1, 2004; or
- A security holder proposal, adopted after January 1, 2004, providing that the company become subject to the shareholder nomination rule, was submitted by a shareholder or group that held more than 1% of the securities entitled to vote for at least one year, and received more than 50% of the votes cast on that proposal.
We propose that, with respect to the first trigger, the percentage of withhold votes be reduced to 20% from 35%. We believe that a 20% withhold vote is clear evidence of significant shareholder dissatisfaction, and represents a significant hurdle for shareholders undertaking a withhold campaign, thereby limiting the number of companies affected by such a trigger. Our analysis of recent withhold votes indicates that there have been no cases of a 35% withhold vote at a sample of 100 Fortune 500 companies. Using the same sample, a 20 percent vote level was achieved at about 15 percent of the companies.
Additionally, we request that the SEC remove the 1% ownership threshold included in the second trigger. We believe that the holdings of a shareholder sponsoring the access proposal are irrelevant - the focal point here should be that a majority of shareholders must vote in favor of the proposal in order to trigger proxy access.
The SEC also requested comment on a possible third trigger - company inaction on a shareholder proposal that receives a majority vote. The NCCR strongly believes that shareholders should have proxy access when a board fails to act on a majority vote proposal. A majority vote is a strong directive from the owners of the company to act on a particular issue that should not be disregarded, often year after year. Such circumstances clearly indicate an ineffective proxy process.
The two triggers included in the proposed rules require a two-year process to elect a director - a triggering event must occur in year one, thereby allowing shareholder nominations using the company's proxy materials in year two. That may be reasonable when underlying shareholder dissatisfaction relates solely to the proxy process. However, a two-year process is too lengthy when substantial mismanagement, or worse, puts the value of shareholders' assets at immediate risk. We strongly believe that there should be an additional trigger tied to specific events such as SEC enforcement actions, indictment of any executive or director on criminal charges directly related to his or her corporate duties, material restatements, delisting by a market, or significant share under-performance relative to an applicable peer group for an extended period. We believe that the occurrence of any of these events should trigger proxy access for the next shareholder meeting at which directors will be elected. Each of these events is consistent with criteria relating to shareholder dissatisfaction with the existing board or management.
Once triggered, proxy access would be granted to a shareholder or group owning more than 5% of a company's securities for at least two years. While we acknowledge that unfettered proxy access would not serve the interests of shareholders or the business community, we believe that a 5% threshold is too onerous and will prevent many shareholders, including many institutional investors, from exercising this right.2 Instead, we propose a 3% ownership threshold as an appropriate measure of a "significant" investor.
Number of Nominees: Concerns that it will be difficult for a single director to effect change and that the rule should permit two nominees or up to 35% of the board seats, whichever is larger.
The NCCR advocates that the number of shareholder nominees permitted should in no instance be less than two. Accordingly, we suggest that the rule permit either two shareholder nominees, or a maximum of 35% of the seats on the board, whichever is greater. In our experience, it is very difficult for a single director to promote change or have an effective voice. Limiting the number of nominees to one under any circumstances would impair the proposed rule from achieving its stated goal of providing a mechanism for dissatisfied shareholders to seek greater representation. While we agree that this rule should not permit shareholders to seek control, we view the proposed limitations on the number of nominees as too constrictive. Since shareholder nominees would still be required to obtain a majority vote to be elected, all shareholders ultimately will determine whether shareholders have nominated too many candidates for a particular board.
Time Period for Application of the Rule: Concerns that the proposed two-year time period for application of the proposed rule is too brief and that the rule should remain operative for at least a five-year period.
The NCCR is advocating that the rule, once triggered, should remain operative for a period of five years. The proposed time period of two years is too brief to permit owners the ability to monitor performance and responsiveness and react accordingly. As an unintended consequence of the two-year period, the rule could encourage investors to nominate candidates in situations in which they might otherwise be willing to give incumbent boards additional time to address the underlying concerns that triggered proxy access.
Nominee Independence Standards: Concerns that the broad application of the independence standards will inhibit significant shareholders from seeking seats on boards as part of actively managed governance strategies.
The NCCR is supportive of the concept of requiring that nominees under this rule be independent of the company. We are also generally supportive of reasonable independence standards that would be applied to the relationship between the nominee and the nominating holder or group. However, we have serious concerns that the broad application of the proposed independence standards will inhibit significant holders from seeking seats on boards as part of actively managed governance strategies. For example, CalPERS has significant resources dedicated to actively managed strategies in the governance arena. Under these strategies, external managers such as Relational Investors may seek board representation in an effort to build long-term equity value in a company. As such, these individuals conduct rigorous fundamental research and take significant equity positions. These individuals are perhaps the most desired type of director because they are independent, extremely well aligned with the owners, and very well prepared with an in-depth understanding of the company that other directors typically do not possess.
The NCCR requests a narrow exception to the proposed independence standards that would permit holders of at least 2% to nominate principals of the fund. We believe that this threshold would ensure that the nominating holder is a very significant investor. We also have ultimate confidence in the election process and, once again, point out that any shareholder nominee still must be elected by a majority. We are fully supportive of disclosure requirements that would oblige the nominee to disclose their holdings, qualifications and affiliation with the nominating holder. With this information, it is appropriate to let the owners decide if a significant equity owner should be elected to the board to represent shareowners.
We appreciate the opportunity for communication with SEC staff on this critically important issue. It is our belief that the above recommendations can assist the SEC in crafting a final rule that balances the importance of shareholders' rights with its vision of limited access to the proxy. We remain willing and available to continue a dialogue at the convenience of the staff.
|Richard Moore |
North Carolina Treasurer
| Alan G. Hevesi|
New York State Comptroller
cc: Chairman William Donaldson
|1|| This letter is submitted on behalf of California Treasurer Phil Angelides, California State Controller Steve Westly, Connecticut Treasurer Denise Nappier, Iowa Treasurer Michael Fitzgerald, Kentucky Treasurer Jonathan Miller, Maine Treasurer Dale McCormick, Nevada Treasurer Brian Krolicki, New York State Comptroller Alan G. Hevesi, New York City Comptroller William Thompson, North Carolina Treasurer Richard Moore, Oregon Treasurer Randall Edwards, Pennsylvania Treasurer Barbara Hafer, Amalgamated Bank, CalPERS, CalSTRS, AFSCME and SEIU.
|2||An analysis of the current holdings of the three largest institutional investors - CalPERS, CalSTRS and NYSCRF - show that combined ownership exceeds 2% in only one instance, and exceeds 1.5% in only twelve instances. Since these three investors represent one-third of the holdings of all public institutional investors, it appears it would be necessary to assemble a group of nearly all public pension funds to achieve 5% ownership.