Software & Information Industry Association
December 22, 2003
Mr. Jonathan G. Katz
Re: File No. S7-19-03
Dear Mr. Katz:
Thank you for this opportunity to submit comments on the Securities and Exchange Commission's (SEC) proposed proxy rule changes relating to the inclusion of information about security holder nominees.
The Software & Information Industry Association (SIIA) is the principal trade association for the software and digital content industry. SIIA provides global services in business development, corporate education, public affairs and intellectual property protection to more than 600 leading software and information companies.
As a preliminary comment, we agree that perhaps the most important outcome emanating from the corporate scandals of the past several years is to understand the pervasiveness of shareholder distrust in the oversight and management of public companies and the competency of boards of directors and senior management. This lack of trust has lead to instability in our financial markets. With this important insight, Congress and the SEC have taken important steps to re-instill confidence, stability, and a long-term shareholder perspective back into the market through enactment of the Sarbanes-Oxley (SOX) legislation, implementing rulemaking for SOX, tightened listing standards, preliminary suggestions regarding the operation and oversight of the New York Stock Exchange, preliminary proposals regarding mutual fund operations, and, most recently, final rules enhancing disclosure requirements around an issuer's process for nominating board candidates and shareholder access to the board.
These steps, which are critically important to correct the abuses of recent years, should be given the opportunity to be fully implemented and assessed before the SEC takes further actions in this area. Until all of the above have been put into place practiced, and measured, we are concerned that layering additional regulation in this area, in the absence of a clearly documented and defined problem, could burden the market through over-regulation. We are greatly concerned that by creating a new tool for shareholders to replace the board more easily, the SEC might, quite unintentionally, increase the very instability in the market that it is trying to combat. We thus would urge the SEC to move cautiously, with more quantitative evidence as to the nature and scope of shareholder access concerns and with a greater understanding of the efficacy of other recently enacted corrective measures, before implementing significant changes in the proxy process.
Third Triggering Event.
The concerns noted above are paramount with respect to the SEC's suggestion as to a third triggering event. As stated in the release, the SEC is considering whether to "include a third nomination procedure triggering event that is premised upon a company's not implementing a security holder proposal submitted in accordance with Exchange Act Rule 14a-8, other than a direct access security holder proposal, that receives support from the majority of the votes cast." In light of the enhanced shareholder access requirements announced by the SEC on November 24, 2003, this additional triggering event is simply premature. If there has been shareholder discontent in this area in the past, the new disclosure requirements-those around the mechanics of communications to the board-should go far to remedy the problem and should be given time to be implemented and measured before proposing or adopting additional regulation in this area.
In addition to the new nomination/access requirements, the SEC has already given shareholders a powerful tool to communicate with the board by loosening up its interpretations regarding what types of shareholder proposals must be accepted under Rule 14a-8. Given the increasing ease of access to vet shareholder proposals that now exists, not only is the proposed third trigger premature, it may have the effect of displacing and discouraging talented board members who may be acting in the collective shareholder interests by not implementing, or by implementing the proposal differently than envisioned in the shareholder proposal. Putting aside real questions as to how the SEC envisions implementation (which we do not mean to suggest is a small consideration by not discussing at length herein), the bigger concern is that the board has the responsibility and mandate to think about the company and shareholders in a holistic fashion that is not required of a shareholder who may be acting in his or her own self-interest. The fact that a shareholder proposal might receive majority approval does not, by itself, mean that the proposal is prudent, carefully scrutinized in terms of all of the business ramifications, or in the collective long-term interest of anyone, including the proposing shareholder. Any principle that in essence requires the board to become the rubber stamp for any shareholder action, in our view, is bad public policy and should be categorically rejected, or at least significantly refined from this initial formulation.1
As an additional matter, we are extremely concerned that this third triggering event misunderstands the nature of the board's responsibilities, particularly as it relates to the non-abdication of its duties, which is a fundamental tenant of the board's fiduciary responsibilities under state governance laws. In fact, the third trigger, as now described, would encourage the board to implement any majority passed proposal and to implement it in a manner that has more to do with arbitrary deadlines than feasibility or efficacy. In the narrow sense, then a board could be exposed to liability under state law for breach of fiduciary duty because it failed to implement a shareholder proposal that passed by a majority, but that may not be in the best long-term strategic interests of the shareholders. Again, a policy that encourages the board to act as a rubber stamp and simultaneously exposes them to liability for following the Commission's rules is bad policy and needs care reconsideration.
If the SEC nonetheless decides to adopt this third trigger, we believe that certain thresholds or conditions must be satisfied before a security holder can avail himself of it. For example, there should be clear documentation that the security has attempted to communicate with the board through the mechanism described in the November 24 publication. Additionally, the security holder should be required to demonstrate that the proposal in question is more than self serving, and reflects some appreciation for the impact of the proposal on the entire business model. The security holder should be required to document that he or she received an inappropriate response, which should be defined to exclude any response back from the board that attempts to document why the board does not favor such suggestion. Finally, because other processes now exist for shareholders to communicate and to more easily qualify proposals for the proxy, this trigger should be limited exclusively to those proposals that relate to corporate governance matters.
Other Potential Triggers.
We also note that the SEC is considering adding other triggers to the operation of this proposal, including conviction or failure to track peer indices or other economic benchmarks. Including economic benchmarks would encourage the very type of short-term earnings management that has been at the root of recent corporate scandals. Proposing action that encompasses recognizably destructive behavior, in our view, represent s substantial backsliding on the SEC's part. We believe that the issue of conviction has already been addressed through the SOX changes to fitness to serve as an officer or director and that no other action on this front is warranted at this time. Moreover, there are longstanding disclosure requirements regarding convictions and suspensions of officers and directors. But, in the event the SEC disagrees with the assessment that significant changes have already been made in this area, the issue of whether a particular board member or officer should continue to serve would be more appropriately addressed separately and not as part of proposed changes to the proxy rules.
Qualifications of Securityholder Nominees.
Finally, although we are generally concerned about whether the problem of shareholder access is so systemic or pervasive as to require additional rules, we note that the only requirement imposed on a shareholder nominee is that he or she be independent of management. That nominee, if approved, will be taking the place of another individual that has been vetted and selected by a nominating committee on the basis of his or her expertise, education, or perceived contributions to the board. In some instances, board members are mandated to meet certain qualifications, as is the case with the financial expert, and to a lesser extent, anyone serving on the audit committee. We ask that if management must include a shareholder nominee in the proxy materials, that the proposal be revised to require any shareholder nominee meet baseline qualification standards, such as education and experience, and that the nominee's qualifications (besides independence) must be disclosed by the nominating shareholder.
Without these additional qualifiers on the proposal, we share concerns about the disruptive impact that these proposals will have on the board, the overall functioning of the issuer, the encouragement of active dialogue between securityholders and issuers, and the ability to protect and enhance shareholder value.
Again, we thank you for this opportunity to comment and would be happy to answer any questions or concerns you have.