[State of Wisconsin Investment Board letterhead]
VIA EMAIL: email@example.com
December 22, 2003
Jonathan G. Katz, Secretary
US Securities & Exchange Commission
450 Fifth Street, NW
Washington DC 20549-0609
Re: File No. S7-19-03 Proposed Rule on Director Nominations by Shareholders
Dear Mr. Katz:
These comments are submitted by the State of Wisconsin Investment Board (SWIB) in support of the SEC's proposed rule on shareholder access to the proxy for nomination of alternate director candidates.
SWIB manages assets of the 11th largest public pension fund in the US and currently invests more than $66 billion of Wisconsin Retirement System and other public assets. SWIB is a member of the Council of Institutional Investors (CII). As such, we also urge you to favorably consider comments that were previously submitted by CII on the proposed rule.
SWIB provides the following observations that we hope will be of assistance to the SEC when considering final action on the rule:
- We note that, although some concern has been expressed about whether Institutional Shareholder Services (ISS) might hold too much sway as a proxy voting consultant to large investors in regard to votes on alternative directors, SWIB does not believe this is likely to become a real issue. SWIB is an ISS client and, like most other large ISS clients, we have our own customized proxy voting guidelines that govern votes on alternate slates.. We do a case-by-case analysis and do not automatically defer to ISS when voting on alternate director candidates. Other large investors are also likely to do their own case-by-case analyses.
- We note that some objectors have expressed worry that shareholders will misuse rights to nominate director candidates and cause damage to companies. However, SWIB and other institutional investors are subject to stringent fiduciary duties. We must exercise our shareholder rights and cast votes prudently, in accordance with what we have determined to be the best financial interests of our beneficiaries. There is no danger that a significant number of fiduciaries like SWIB would nominate or vote in favor of extremist or unqualified candidates or use shareholder rights to disrupt the functioning of boards at well-governed companies. In fact, for the last three years SWIB has co-sponsored one of the country's premier director training programs, the Directors' SummitTM, together with the University of Wisconsin, the National Association of Corporate Directors, NASDAQ, the New York Stock Exchange, TIAA-CREF, Pfizer, CalPERS, Spencer Stuart and other organizations. We believe that enhancing the skills and qualifications of director candidates is becoming one of the highest priorities of institutional investors. SWIB's expectation is that the SEC proposal will ultimately improve the quality of director candidates through greater competition and attention to credentials. The nomination ownership threshold in the rule and requirement that a candidate be elected by a majority vote should effectively prevent misuse of shareholder nomination rights.
- While SWIB may decide at some point in the future to exercise the nomination rights that would be granted under the SEC proposal, those rights would most certainly be used sparingly and as a last resort. This will surely be the case for almost all institutional investors. Instead, SWIB believes that the most important impact of the rule would be to create a dynamic that encourages nominating committees to communicate with large shareholders about director nominations. Such exchanges could only strengthen the American corporate governance system over the long term. Both shareholders and companies would be likely to benefit from improved communications.
- There are fundamental issues of democracy and fairness that underlie debate over the proposed rule. SWIB fears that an SEC failure to grant shareholders meaningful rights to participate in the election of corporate directors may only push the debate elsewhere, to the state courts and legislatures, diminishing importance of the SEC and federal regulation of the proxy process. Indeed, recent decisions have evidenced an increasing state court willingness to protect fundamental fairness of the corporate electoral process. For example, in an opinion written earlier this year, the Delaware Supreme Court stated:
"Maintaining a proper balance in the allocation of power between the stockholders' right to elect directors and the board of directors' right to manage the corporation is dependent upon the stockholders' unimpeded right to vote effectively in an election of directors." MM Companies,Inc. v. Liquid Audio, No. 606, 2002, at pp. 17 and 30 (Del. Sup. Ct. Jan. 7, 2003).
In addition, two Delaware Chancery Court judges recently presented a paper at a University of Pennsylvania Institute for Law and Economics Symposium questioning fundamental fairness of the current corporate electoral process:
"After the 2002 reforms, it is unquestionable that Delaware, the Exchanges, and the federal government each have policies that express the belief that genuinely independent directors who owe their allegiances entirely to the corporation and its stockholders are valuable to investors . . . . If this philosophy is so central to our system of corporate governance, one can rightly ask why the current incumbent-biased corporate election process should be perpetuated. As of now, incumbent slates are able to spend their companies' money in an almost unlimited way in order to get themselves re-elected. As a practical matter, this renders the corporate election process an irrelevancy, unless a takeover proposal is on the table and a bidder is willing to fund an insurgent slate." William B. Chandler III, Chancellor, and Leo E. Strine, Jr., Vice Chancellor, "The New Federalism of the American Corporate Governance System: Preliminary Reflections of Two Residents of One Small State", p. 66, Penn Law and Economics Institute Symposium on Control Transactions, February 8, 2003, to be published in the Penn Law Review.
If the SEC fails to provide a reasonable level of shareholder access to management's proxy, Delaware might replace the SEC as the venue where underlying issues of corporate electoral process fairness are resolved. In addition, SEC promulgation of a shareholder access rule might help to reduce future shareholder litigation by focusing shareholders on effective board membership.
- Canadian shareholders holding five percent of outstanding shares have had the right since 1970 to have alternate director candidates included in management's proxy and stand for election as part of a shareholder resolution. (See s. 137(4) of the Canada Business Corporations Act and s. 99(4) of the Ontario Business Corporations Act.) Existence of this similar shareholder right in Canada has not created problems for corporations and has received relatively little use. (See William J. Braithwaite, Shareholder Access in Canada, Corporate Governance Advisor, Vol. 11, N. 6 (November/December 2003). SWIB believes this experience should calm most concerns of commenters that have been critical of the SEC proposal.
SWIB's Board of Trustees adopted a policy at its November 12, 2003 meeting, to support shareholders' rights to include alternate candidates on management's proxy pursuant to a process that contains protections against abuse similar to those that have been outlined in the proposed rule. We hope the SEC will proceed with its proposal and enact a final shareholder proxy access rule before the 2004 proxy season gets under way.
If SWIB can be of further assistance, please do not hesitate to contact us.
Chief Legal Counsel
cc: Investment Board Trustees