The following comment on Letter Type P,
Letter Type P:
Mr. Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Katz:
I am on the Board of Directors of _____ publicly held corporations which would be impacted by the Commissionís proposed shareholder access rules. I appreciate this opportunity to express my concerns with these proposed rules.
I understand the Commissionís concern that the Boards and management of some U.S. corporations reportedly have not been very responsive to the views of their shareholders. However, for reasons described below, I believe that the proposed shareholder access rules miss the mark, could do considerably more harm than good and may, as a minimum, be premature.
Over-Broad Scope of Triqgers. My own companies have had no difficulty in communicating with our shareholders and have never been accused of non-responsiveness. But the scope of the triggers for the new rules would be so broad that my companies would be affected along with the non-responsive companies. Given the highly concentrated institutional ownership of most major U.S. corporations, it would take little effort for a shareholder---for motives unrelated to our companiesí performance---to initiate a direct access shareholder proposal and gain majority shareholder support, subjecting my companies to the very onerous access procedures for the following two years.
Bypassing the Nominating Committee. Once triggered, the proposed rules would allow shareholders to bypass the Boardís Nominating Committee, and the Board itself, to place director nominees in the proxy statement. As a result, the Nominating Committee and the Board would have no opportunity to consider the nomineesí ability to fill any needs of the Board in regard to prior business experience, financial expertise (now reqtlired for Audit Committee membership), special technical expertise, compatibility with other Board members or any of the other factors that are so important in assuring the effectiveness of the Board and its Committees. I consider this particularly ironic since the recently approved New York Stock Exchange listing standards now require each listed corporation to have an entirely independent Nominating Committee to help assure that the corporation will have the best qualified and most effective directors.
Disruption of Director Elections. Once triggered, the proposed shareholder access requirements would be very disruptive and costly. They would permit shareholders to run an election contest through the companyís own proxy statement. The resulting expense is sure to be substantial. Because of the importance of director elections, election contests always entail considerable management time and company resources. Another concern is that election contests would make it even more difficult to attract well qualified director candidates--a task that is already challenging due to the recent wide-ranging corporate governance reforms and increased fear of personal liability. This outcome would directly contravene the intent of the newly-approved NYSE listing standards and the spirit of sound corporate governance.
Disruption of Board Business. To the extent that large shareholders succeed in electing their own hand-picked candidates, with no involvement by the Nominating Committee, it is fair to anticipate that normal Board functioning would be disrupted. This process would inevitably create factions on the Board by enabling special interest groups access to boardrooms, inhibiting open discussion among the directors and impeding the efficiency and effectiveness of Boards.
Premature and Perhaps Unnecessary Rule-Making. Since the Commission and the major stock exchanges have only recently completed a series of far-reaching corporate governance reforms (which I fully support), it would be sensible to allow time to observe how these reforms are working before adopting further changes. For example, we have not yet had seen, for even one proxy season, how entirely-independent Nominating Committees will perform and whether any improvements are required. Because the proposed shareholder access rules would carry significant risks and costs, both economic and non-economic, as outlined above, the Commission should be satisfied that they really are necessary and, if so, are well designed to address the problems remaining after the recent reforms. I suggest that it is too early to tell.
I appreciate the opportunity to offer my comments and express my concerns to the Commission. If you would like to discuss with me any of these issues or others, please contact me by telephone at ________________.