Mr. Jonathan Katz
Securities and Exchange Commission
450 Fifth Avenue NW
Washington, DC 20549

Re: File No. S7-19-03

Release Nos. 34-48626 16 26206

Dear Mr. Katz:

Walden Asset Management manages approximately $1.2 billion for investors who are strongly supportive of good corporate governance practices, as well as, good corporate citizenship. Walden and its clients believe that as shareowners we need to be informed and actively engaged with companies in which we invest. Thus we regularly correspond and meet with company representatives to promote changes in policies and practices that we believe benefit shareholders and are socially beneficial. We also take very seriously our rights and responsibilities as investors and file shareholder resolutions if we believe management is not responsive to important concerns. Among the many corporate governance issues for which we have sponsored resolutions and/or held dialogues with management are:

  • Annual election of directors
  • Ratification of auditors by shareholders
  • Attendance of directors at stockholders meetings
  • Diversity of gender and race on the board
  • Board independence and independence of key board committees (before Sarbannes-Oxley)

Many, many companies are responsive to these calls for reform. Yet there are still too many companies that seem unaware that management and the Board need to be responsive to their shareowners.

The continuing wave of scandals has obviously heightened the anxiety and concern of investors, individuals and institutions, who are damaged by corporate fraud and improper conduct. These scandals have contributed to a crisis of confidence in the market, but have also strengthened the resolve of investors to push for meaningful reforms in corporate governance and ethical conduct.

The SEC has quite properly opened up a public discussion of the issue of shareholder nominations to Corporate Boards. In its earlier release and request for comments the SEC proposed a series of thoughtful and detailed reforms regarding additional disclosure related to making Board nominations and the nomination process. There seemed to be little debate about those changes and the fact that they will be implemented is definitely helpful for investors.

Moreover, the SEC, in an historic step, proposed the opening up of the process for investors to nominate candidates and put them on the company proxy statement for a vote. We commend the SEC for opening up the discussion about the role of investors in nominating Directors through this proposal.

As you have heard from so many other investors, we are concerned that the current system presents management's slate for an up or down vote and allows little shareholder participation in one of the most important corporate governance decisions made each year. We believe it is important to open up the process, particularly in those cases where scandals or corporate malfeasance may illustrate a lack of sufficient accountability by the Board and the need for new energy and perspective on the Board. It is unreasonable in those cases to assume that a Board Nominating Committee would present a fresh, energetic slate with new candidates for the Board if they are potentially part of the problem. To expect otherwise defies logic. Thus there is an urgent need for an opening of the process for shareholder nominations.

We are aware that the SEC's proposal is being challenged by a number of business leaders, including the Business Roundtable and the Society of Corporate Secretaries who are strongly opposing this reform. Unfortunately some of the untoward opposition from the business community seems to be an overreaction based on unrealistic fears. Company objections project an onslaught of candidates for the Board whose election will create division and the intrusion of "special interests" on the Board. The objections ignore the obvious - that we can imagine no candidate receiving a majority vote of shares unless she/he was qualified and could add significantly to its Board deliberations. In addition, investors willing to vote for an outside candidate will first need to be convinced that the company is acting irresponsibly or is insensitive to investor interests. The concern that investors will vote imprudently for new candidates that have "star names " is misguided. The extraordinary event of a candidate being presented and elected will only occur, we expect, if the Board is not doing its job and needs to be changed.We believe it is inappropriate for the Business Roundtable to oppose investors having that right in these extreme circumstances.

Turning to the proposal presented for comment, we begin with some general comments.

  • Shareholders should have the right to nominate candidates for the Board using the proxy process. At the same time the Rule should include provisions that would prevent the frivolous nomination of candidates.
  • This process would not and should not be a substitute for the regular process of the Nominating Committee to consider and present a slate of Directors for election. This new process should be for extraordinary situations.
  • The process should allow reasonably swift reactions by investors so that a nomination would be able to occur within one calendar year.

In light of the general comments above, we believe the present proposal and the series of proposed triggers present unreasonable impediments to the nomination process. We offer the following specific observations and recommendations.

First, the proposed two year process leaves investors without timely recourse to address a company with significant problems. Indeed, the triggers create a cumbersome set of hurdles for investors to present nominees. Initially, as proposed, investors with 1 percent of a company's shares must present a resolution opening up the process, and in order to proceed with the nomination process, they must garner 50 percent or more of the shareholder vote. Only then, can a director nomination be made for the following year's proxy statement.

Instead, we believe the nomination process should be open to any investor, or group of investors, with 5 percent of outstanding shares, provided they have owned those shares for a sufficient period of time (1-2 years). Upon satisfying these requirements, investors should have the opportunity to present an official nomination for the proxy at the next annual general meeting. Hence, we believe investors should have this right without triggers.

However if triggers are to exist as an additional step in the nomination, we propose that an alternative trigger be the passage of a shareholder resolution with 50 percent or more of the vote that is not implemented by management. Such an action would then allow an investor(s) with 5 percent of the shares to initiate the nomination process. It is important to note that while a 50 percent vote would allow a nomination to proceed, many investors who made such a proposal would not necessarily want to take this next step.

We also propose the addition of "immediate trigger events" allowing shareholder access to the company proxy statement for the current annual election of directors. We suggest that concerned investors should have immediate access to the proxy in instances where the company has violated certain predetermined parameters. We agree with CalPERS' suggestion that specific events such as significant SEC enforcement actions and indictment on criminal charges of any executive officer or director directly related to his or her professional duties are critical events and should trigger a shareholder's right to gain access to management's proxy for the nomination of independent director candidates. We also believe that the attainment of a predetermined level of fines or citations from government agencies, such as the Environmental Protection Agency, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration or the National Labor Relations Board, constitutes sufficient grounds for granting shareholders access to management's proxy. We believe that these immediate trigger events should also require 5 percent shareholder support in order to gain access to the proxy.

We believe the SEC has played an important and creative role in opening up a public debate on the rights of investors to nominate Board members. We urge the SEC to stand firm and ensure that a Rule is created that will allow such a right to be developed and implemented.


Timothy Smith
Senior Vice President