Shamrock Holdings, Inc.
December 21, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-19-03
Dear Mr. Katz,
We strongly support the SEC proposed new proxy rules that allow shareholders, under certain circumstances, to include a limited number of their nominees in a company's proxy. We believe that good corporate governance leads to improved shareholder value and protects shareholders from the harm that can result (and in the past has resulted) from an insulated board and management. Opening up the board election process will increase accountability and further motivate directors to be actively engaged in their oversight function and thereby more effectively discharge their fiduciary duties. That, in turn, should increase investor confidence in public companies and the marketplace.
The SEC Proposal allows shareholders a greater opportunity to participate in corporate democracy. The utilization of the normal proxy process to effect change to boards of public companies has been limited. The primary reason, we believe, is the extraordinary costs and impediments associated with a proxy contest; a single mailing to shareholders often costs millions. While the company may utilize corporate funds to pay these costs, concerned and dissatisfied shareholders have no such piggy-bank. Fortunately, the SEC Proposal will help reduce this financial constraint to shareholders' participation in the selection of board members.
Based upon our direct investment experiences at Shamrock (direct investors of approximately $2.0bn over the last 25 years in public and private companies, including having served collectively on nine public company Boards in both the US and overseas), we believe that the concerns expressed in opposition to the SEC Proposal are overstated. Those concerns generally fall into the following categories: access is destabilizing and disruptive; access will negatively impact the "collegiality" of a board; access will make it difficult to recruit qualified directors; and election contests permit special interests inappropriate access.
Far from destabilizing boards, the prospects of shareholder nominees will most likely create more incentive for board members to be engaged. The possibility of a recall should cause the directors to be more effective in their duties. The proper discharge of those responsibilities should lead to better operating performance, thereby reducing the potential for shareholder concern or value dissipation.
In addition, we believe the SEC Proposal will encourage directors to be more active in speaking directly to their shareholder constituency. This would be a positive development that would mitigate the more typical patronizing attitude and bunker mentality demonstrated by many boards. We have witnessed this first hand. In our opinion, open and honest communication predicated on a complete and relevant set of facts can hardly be considered destabilizing or inappropriate. Unfortunately, we have too often encountered board members who know very little about the Company on whose board they sit, are unwilling or unable to invest the time and effort necessary to learn and, as a consequence, attempt to "hide" from dialogue that might expose their shortcomings and insecurities.
Concerns that contested board elections would damage board collegiality are misunderstood and misplaced. Constructive tension in the boardroom should be embraced, not avoided. The greater danger is a board that acts as a "rubber stamp" under the guise of collegiality. The SEC Proposal provides a modest platform to achieve that goal by allowing shareholder nominees to bring a different view and new ideas to the boardroom. That will increase dialogue and result in better board decision making and improved oversight, a consequence that should result in enhanced corporate performance.
We believe there is a large untapped pool of qualified individuals capable of dynamically and faithfully serving as directors. Concern over finding qualified directors is a myth perpetuated by those in the "club" who are unwilling to admit new members. In our experience, the positive influence of new and fresh voices of board members nominated by shareholders is significant and cannot be underestimated.
Opponents to the SEC Proposal neglect to point out that inclusion of a non-board approved director nominee does not automatically result in the election of that nominee. It is still necessary for a plurality of a company's shareholders to elect directors; thus the risk of misaligned special interest groups achieving board representation is remote. We believe that a plurality of shareholders are capable of making an informed choice. If we cannot trust the judgment of shareholders, whom should we trust and why? Of course, regardless of who nominates a director, corporate law is absolutely clear that upon election the nominee has a fiduciary duty to serve the interests of all shareholders.
The SEC Proposal contains high hurdles before the nominating procedures can be utilized. Only long term shareholders with large shareholdings are eligible. These are shareholders that have had a significant financial investment in the company for an extended period. It is our belief that they will prudently and responsibly utilize the process in the new Proposal.
We believe the triggering events in the SEC Proposal would occur infrequently. A board nominee receiving a "withhold" vote of more than 35% of the voting shareholders is unprecedented and would only result if there was widespread unhappiness with the board nominee. The other predicate act, a majority of voting shareholders approving a proposal that the company become subject to these new rules, demonstrates that shareholders are keenly interested in opening up the nominating process. This would only result from active efforts of a large, long-term shareholder. Attention to shareholders' concerns should not be viewed as a burden; rather it should be seen as an opportunity to be responsive to this primary constituency. It is entirely appropriate that a company allow access to its proxy statement under these limited circumstances.
Based on our experience, we believe the SEC Proposal could become even more effective in improving corporate accountability by modifying or eliminating several of the impediments contained in the current proposal. A simpler framework would permit shareholders with a minimum ownership threshold (a sliding scale based on the company's market capitalization) to have limited access to the proxy as contemplated in the SEC Proposal. We also believe that the proposed rule inappropriately excludes shareholder nominees that are affiliated with the nominating security holders. The critical issue should be independence from management, not shareholders. The fact of their significant investment ensures an alignment of interest. Shareholder representation and involvement on boards should be encouraged, not discouraged.
The ownership requirements in the SEC Proposal should be made more flexible. A 5% threshold for small cap companies may be appropriate because it insures that only those with a significant financial stake in the company can utilize the new rule. However, requiring the same threshold for mid and large cap companies may preclude shareholders that have a very large and meaningful investment from utilizing the proposed rule. It is precisely in those situations, where the costs of solicitation are so high due to the typically large shareholder base, that proxy access is most needed. A 2% or 3% ownership level for larger companies would be more appropriate.
Moreover, we believe triggering events for access to the company proxy statement should also include (1) the failure of a company to separate the role of Chairman of the Board and the CEO; (2) underperformance of a company's peer group during a two or three year-period; (3) the company or its management becoming subject to an SEC cease and desist order; (4) a restatement of year-end results in any of the five most recent fiscal years; (5) the adoption or retention of a so called "poison pill" rights plan; and (6) the failure of a company to implement any precatory resolution approved by shareholders (not just those resolutions sponsored by a 1% or greater shareholder).
The SEC Proposal raises other issues that should be addressed after adoption. For example, we question why the ability to utilize proposed Rule 14a-11 is limited to passive or institutional investors (13G filers). The characterization of the proponents should be irrelevant. It should not matter whether the shareholder is an activist or an institution. The ownership requirements, both as to amount and duration, are more than sufficient to overcome fears that short-term, "hit and run" investors would abuse the proposed rules. The SEC should also make it explicit that soliciting other shareholders in order to satisfy the minimum ownership threshold should be an exempt solicitation under Rule 14a. In addition, shareholders acting together only to satisfy that ownership requirement, or jointly agreeing on a nominee(s) for proxy inclusion, should not be deemed to be a "group" under Rule 13d.
In summary, our actual experiences as directors of public companies has led us to conclude that far too often boards hide behind rules and avoid important and necessary dialogue with shareholders. When a board's position of impregnability is challenged (or even systematically examined), which we believe the SEC Proposal does, the established Director and executive community push their defense mechanisms into overdrive rather than choosing to proactively address the fundamental obligation to communicate and work together with the shareholders. The grave concerns put forth by opponents to proxy access reform should be disregarded in favor of advancing the legitimate interests of shareholders. We believe the SEC Proposal represents a much needed first step in empowering shareholders. The triggering events, security holder eligibility rules, and nominee number restrictions of the Proposal strike an appropriate balance, at this point in time, among the concerned participants of our capital markets. Accordingly, we urge the SEC promptly finalize new Rule 14a-11.