Dear Mr. Katz,
Cynthia Richson, Corporate Governance Officer for the Ohio Public Employees Retirement System, asked me to forward the attached comment letter on Security Holder Director Nominations jointly submitted on behalf of the five state pension funds in Ohio. Should you have any difficulty opening this letter, please contact me immediately.
Ohio Retirement Systems
December 22, 2003
Jonathan G. Katz
Re: File No. S7-19-03 Security Holder Director Nominations
Dear Mr. Katz:
The Ohio Retirement Systems (ORS) collectively manage $115 billion in assets and serve 1.5 million Ohioans. We applaud and fully support the Commission's proposed rule on security holder director nominations, particularly in the situation where a company has been unresponsive to shareholder concerns as they relate to the proxy process. However, we also urge you to further examine and consider lowering the barriers contained in the Commission's proposed rule to ensure meaningful participation by long-term shareholders with respect to the nomination and election of directors. We strongly believe that this important reform measure will benefit all investors, not just public pension funds.
In addition, we strongly support the substantive comments contained in the joint letter recently submitted to the Securities and Exchange Commission by the Council of Institutional Investors, the National Association of State Retirement Administrators and the National Council on Teacher Retirement (collectively "Joint Comment Letter"), including the detailed responses to questions raised by the SEC that are contained in the appendix to the Joint Comment Letter dated December 12, 2003.
Our specific areas of concern are as follows:
We strongly believe that the proposed rule should include a trigger in the event of non-implementation of a shareholder proposal that receives a majority vote of the shareholders. This scenario illustrates a classic example of unresponsive management when a proposal receives a majority shareholder vote, yet management chooses to ignore the proposal as they are presently permitted to do under the law in the case of a precatory shareholder proposal.
The proposed rule requires a two-year process where a triggering event must occur in year one, and in year two a shareholder nominee may be included on the company's proxy materials. However, in the case of exigent circumstances, a shorter timeframe than a two-year process is more appropriate. In the case of a material restatement of earnings, bankruptcy, delisting by a market or government investigation for alleged wrongdoing, such as an SEC enforcement action, we urge the Commission to consider adding additional triggers to the proposed rule and reduce the timeframe to less than a two-year process. The rule, as proposed, does not sufficiently address these types of situations where more timely action by shareholders may be required to protect investors from the risk of imminent financial harm.
As proposed in the rule, one trigger occurs when more than 35% of the votes cast at an annual shareholder meeting are withheld from at least one of the company's director nominees. In practice, it is a rare occurrence when "withhold" votes reach the 35% level, even in the situation where shareholders strongly object to particular director nominees as recently illustrated by the annual election of certain Enron directors. As a result, in order to give shareholders meaningful participation in the nomination and election process, we strongly urge you to lower the 35% trigger to a 20% trigger.
As proposed in the rule, to be a nomination triggering event, a shareholder proposal must be submitted by a shareholder or group of shareholders with more than a 1% beneficial ownership interest for a one-year period of time. While we do not object to the one-year ownership requirement, the 1% ownership threshold would unduly restrict the potential universe of investors that could qualify under the 1% ownership requirement to a small number of shareholders (by some estimates, as few as only 20 large U.S. institutional investors). In order to make the process meaningful, we urge the Commission to eliminate the 1% ownership trigger.
Under the proposed rule, the two-year applicable time period, once the rule is triggered, is too brief a period of time. In order for shareholders to effectively advocate for positive change at a company to enhance financial performance over the long-term, we urge the Commission to extend the applicable time period from two-years to five-years once the rule is triggered.
Under the proposed rule, one of two triggering events must occur before access to management's proxy is granted to a shareholder or group of shareholders owning more than 5% of a company's stock for at least two years. A review of available data on public pension fund ownership indicates that public pension funds in aggregate own only 8% of the total U.S. equity market. A closer look at the data further indicates that nearly all public pension funds would need to collaborate as a group in order to achieve a minimum 5% ownership level at any given company. As a result, a 5% ownership threshold is too high and will not permit meaningful access for shareholders to put director candidates on management's proxy. Modifying the proposed SEC rule to lower the required ownership threshold from 5% to 3% appears to be a more meaningful ownership level that can be reached by a group of public pension funds that seek to collaborate with each other on nominating shareholder director candidates.
Under the proposed rule, only short slates are permitted based on the size of the board (one shareholder nominee is permitted if the total number of directors is eight or fewer; two shareholder nominees if the total number of directors is greater than eight and less than 20; and three shareholder nominees if the total number of directors is 20 or more). In order to enhance the effectiveness of shareholder nominees that are successfully elected to the board, we urge you to increase the permitted minimum number of shareholder nominees to two rather than one shareholder nominee. Changing the proposed rule to permit a minimum of two shareholder nominees will greatly enhance the potential effectiveness of these candidates in the event they are successfully elected to the board.
Corporate governance or relational investing is being utilized by a number of institutional investors as an active corporate governance investment strategy designed to enhance long-term financial returns. We do not object to the proposed rule that requires the security holder or group of nominating security holders to satisfy the applicable independence standards of a national securities association. However, we urge the Commission to modify the proposed rule to permit external managers to continue to utilize active corporate governance investment strategies, which may include actively seeking board seats on behalf of their institutional investor clients.
While we are aware of the fact that the proposed rule would apply only in states where applicable state law does not prohibit shareholders or groups of shareholders from nominating director candidates, we sincerely hope that the significant efforts of the Commissions to move forward on this issue are not thwarted by reinvigorated opponents that may try to defeat this watershed corporate governance initiative on a state-by-state basis.
We appreciate having the opportunity to submit our comments on the proposed rule and we applaud the efforts of the Commission on its leadership role in advancing the rights of shareholders.
Richard Curtis, Executive Director
William J. Estabrook
Laurie Hacking, Executive Director
Damon F. Asbury, Interim Executive Director
Thomas Anderson, Executive Director