Sent: Tuesday, December 16, 2003 7:33 PM Subject: S7-19-03 BY E-MAIL, rule-comments@sec.gov Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street NW Washington, DC 20549-0609 Re: File No. S7-19-03, Security Holder Director Nominations Dear Mr. Katz: As a director at Intel Corporation, and over time a number of other publicly traded corporations, I hereby comment on the Securities and Exchange Commission ("SEC") proposal to require companies to include shareholder nominees for director in company proxy materials under certain circumstances. I think this proposal is an example of good intentions gone astray. I believe that if companies are obliged by rule to include shareholder nominees in their proxy materials, sound principles of corporate governance will be undercut. Under the ethic and practice of good American boards today, each independent director is responsible to all shareholders -- not just to a faction. Each director is motivated to fulfill his or her duties by being accountable to all shareholders - not just to a faction. That accountability is reflected in the law of fiduciary duty -- which is at odds with the notion that a director represents a faction of shareholders. The director's function within boards is to adhere to the highest standards on a personal level but also to seek, where appropriate, positive impact on the whole board and management -- as opposed simply to championing the point of view of a faction of shareholders. The director's reputation for honesty and capability is shaped in the view of the entirety of the shareholder population -- not just by the opinion of a faction. When a director is nominated by, and plainly would owe election principally to the advocacy of, a faction, as opposed to a whole population, of shareholders, then all these principles and norms would be at risk. Your proposed rule indeed would probably generate a new set of duties, or exceptions to extant duties, and a new set of norms. These exceptions and altered norms of conduct could cause a deterioration in the selection, performance, and function of independent directors -- certainly a deleterious effect of a proposal intended to improve corporate governance. Still other concerns arise from your proposed rule. Boards should take very seriously the nominating process. This proposal undermines the board's responsibility and accountability for such selection. Good boards spend much time conferring in private, without management, on critical issues, with an assumption that such deliberation is done in the best interest of all shareholders. This proposal tends to undercut the assumption and thus may subtract from the commitment to such deliberation. Generally, NASDAQ and New York Stock Exchange listing standards strengthen the role and independence of boards of directors and board nominating committees. This proposed rule undercuts those standards.Finally, the proposed rule could turn director elections every year into proxy contests, substantially disrupting corporate affairs, causing significant costs to the company and all of its shareholders, and dissuading from board service well-qualified individuals who enjoy public recognition and might not want, in effect, to run for office against the nominees of factions of shareholders. A significant number of corporate governance reforms have now been adopted by Congress, the SEC and the securities markets. Still others are being put in place. I urge you to review the operation of these reforms before determining whether the proposed rule is necessary or even wise. Certainly shareholder protections have been increased by the various reforms; the proposed rule might tend to undo much of the good work already accomplished. Thank you for considering my concerns about the proposed rules. If you would like to discuss these comments or any other issue, please do not hesitate to contact me at 202 662 3230, or reed_hundt@mckinsey.com. For the record, I was chairman of the Federal Communications Commission from 1993-97, and so am not unaware of the regulatory process. If you permit me to express a general opinion as a former government official: you are doing fine work, but on this rule I think you are going too far too soon and probably in the wrong direction. Sincerely, Reed Hundt