SEARS, ROEBUCK AND CO.
3333 Beverly Road
Hoffman Estates, IL 60179
December 22, 2003
VIA E-MAIL: firstname.lastname@example.org
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-19-03
Dear Mr. Katz:
We appreciate this opportunity to provide comments to the proposal of the Securities and Exchange Commission to require companies to include shareholder nominees for director in company proxy materials under certain circumstances.
We oppose the proposal for the following reasons:
Thank you for considering these concerns about the proposed rules.
- The recent corporate governance reforms initiated by the stock exchanges and the SEC will make boards of directors more independent and accountable. With the increased independence of boards of directors, the strengthened role and independence of nominating committees and the enhancement of shareholder-director communications, we believe that the issues that led to calls for reform have been addressed. The SEC should allow time for these reforms to work before deciding whether it needs to impose additional, unproven requirements on public companies. We believe that an independent nominating committee is best suited to select qualified director nominees with the mix of skills and experience needed to oversee a public company.
- There is significant risk that shareholder nominees will represent the special interest agendas of the shareholders that nominated them rather than the interests of all shareholders as required under state law, even though the nominee cannot be affiliated with the nominating shareholder. Moreover, there is no mechanism in the proposal that would provide for the removal of these directors if they are not acting in the best interest of all shareholders.
- We believe that one of the triggers in the proposed shareholder access rules specifically, the occurrence of a 35% or greater "withhold" vote on a company-nominated director nominee will have the unintended negative consequence of unduly enhancing the influence of proxy advisory services in proxy elections. A significant proportion of institutional shareholders vote, as a matter of investment policy, according to the recommendations of such services, regardless of the institution's overall view of company management. Proxy advisory services have historically recommended "withhold" votes based on narrow criteria, such as when the board has failed to implement a shareholder proposal that receives a majority of votes cast (regardless of the reasons), and may continue the practice of single-issue "withhold" recommendations. Practically speaking, institutional shareholders that strictly follow the recommendations of proxy advisory services will be compelled to withhold votes according to the guidance of such services, regardless of how narrowly the service has based its recommendation and whether the institution is otherwise pleased with the board's performance. This result contravenes the principle that a director nominee is best selected not on a single-issue or narrow basis, but in light of the nominee's overall mix of skills and experience and the needs of the company.
- The proposed thresholds for triggering a shareholder nomination are too low. For example, even though almost two-thirds of the shareholders may have voted for a candidate, the fact that a little over one-third withheld their vote would subject the public company to the new shareholder nomination procedures. As a result, even companies that are performing well and whose boards, as emphasized in the previous paragraph, are well-regarded by a substantial majority of shareholders could face frequent contested elections. Annual election contests would be distracting and costly and could dissuade qualified individuals from serving as corporate directors. Even in uncontested situations, public companies will expend additional unnecessary resources, both time and money, to ensure that their nominees are elected with less than a 35% withheld vote.
- The proposal will likely give rise to disputes that cannot be resolved promptly, potentially adding costs to companies and shareholder proponents, substantially delaying the proxy process, and requiring significant additional SEC resources. For example, what happens if a company determines that it is not required to include a nominee in its proxy statement, but the security holder proponent disagrees, or if the issuer and proponent disagree on whether the proponent's statement contains false or misleading statements? Is the security holder proponent expected to file a lawsuit to resolve the matter? Does the Division of Corporation Finance expect to resolve these issues through an expedited no-action process? In any case, such disputes will be costly both to public companies and shareholder proponents, and it may be impossible both to resolve these issues and mail proxy material on a timely basis without canceling and rescheduling the annual meeting of shareholders. Moreover, the Division may be required to devote significant additional resources in reviewing or helping resolve these matters, as well in reviewing the additional requests to exclude shareholder proposals under Rule 14a-8 that will likely arise as a result of proposed Rule 14a-11. These significant costs are not, in our judgement, justified by countervailing benefits.
- A proposal of this magnitude raises many issues and questions, and could produce other unintended consequences. In the proposing release the SEC posed hundreds of questions to the public and interested parties cannot consider and meaningfully respond to those questions within 60 days. Because of the proposal's complexity, the comment period should be extended for an additional 60 days to allow adequate study and consideration of the issues and potential ramifications of the proposal.
- If the SEC is going to adopt this proposal, companies should have a reasonable amount of time to anticipate and prepare for actions and events that may ultimately qualify as a triggering event for shareholder nominations. Many companies will have held their annual meeting in 2004, or will be well into the preparations for their annual meeting, before this proposal may be adopted, yet may be subject to the proposal and whatever changes are made to it prior to adoption. In addition, there will be tremendous shareholder and company confusion with disclosures in 2004 proxy statements that attempt to provide information about a shareholder access process that has not been finalized. Moreover, companies will need time to plan for additional governance staff or retain counsel to assist with the proposals that may ultimately qualify as triggering events and related issues. Therefore, shareholder action or voting results during the 2004 proxy season should not qualify as triggering events for shareholder nominations.
/s/ Andrea Zopp
Senior Vice President and General Counsel
Sears, Roebuck and Co.