November 14, 1997 Mr. Jonathan Katz, Secretary Securities and Exchange Commission 450 5th Street, NW Washington, D.C. 20549 Dear Mr. Katz: I am writing in response to the SEC’s Proposed Rules on Shareholders Proposals, File No S7-25-97. The Jessie Smith Noyes Foundation is a private philanthropy with $73 Million in assets that funds grassroots activities on environment and reproductive rights. We seek to maintain consistence between the way our assets are managed and our grantmaking values. To this end we screen our portfolio and engage in mission-related venture capital. We are also active shareholders with the companies in which invest. We see shareholder activities as adding value to our grantmaking. The proposed rules are antagonistic to our concerns as shareholders. We urge the Commission to resist changes that will handicap small shareholders, in particular and give more power to corporate management. Such changes would be antithetical to the National Securities Market Improvement Act of 1996 (PL No. 104-290) the goal of which was to increase, not decrease, access to the shareholder process. Shareholder voting rights connected to stock shares are part of our assets. Therefore, the exercise of these rights is a fiduciary responsibility. Limitations on voting rights resulting from limited opportunities for investors to file resolutions resulting from the proposed rules, will, therefore, ipsofacto, reduce the value of the assets. This was clearly not the Congress’ intention in 1996, nor is it the SEC’s intentionin the proposed rules. However the clear consequence of the proposals will harm us all, especially smaller investors. Corporations will argue that democracy is about majorities. That is not correct. Chinese elected officials receive majorities of staggering proportion, but no one would claim this is democracy. Democracy is about being heard regardless of whether you are rich or powerful. And democracy is about letting vocal minorities persevere in their quest for what they believe to be right and just, as was the case of our Founding Fathers. Good management knows that - whether elected or corporate- and listens. That is shareholder democracy. Important changes start small and take time. We have heard that the SEC is trying to achieve a balance between corporate management and shareholders. What is needed is not balance, but leadership. SHAREHOLDERS RIGHTS MUST BE PROTECTED. Otherwise corporate democracy will become corporate totalitarianism. The Foundation and other socially responsible fiduciaries will be allowed to vote for little else than a "Chinese-style" slate of candidates, and a company to audit the books. Issues central to our philanthropic mission and our portfolio’s performance—the environment, equal opportunity, community right-to-know, workplace issues—will be left, in the words of the Business Roundtable, to be "more appropriately discussed in other forums." But the reality is that there are no other forums. The resolution process is the appropriate forum. The Noyes Foundation tried to engage Intel in dialog, but they refused until we filed a resolution. Because the Noyes Foundation was able to file and re-file a shareholder resolution, Intel began a dialogue with our grantee, the SouthWest Organizing Project, a community group Intel had previously identified as "a vocal minority." Intel also changed their Environmental, Health and Safety Policy committing the company to share information with communities around the world. The Noyes Foundation, as a result, added value to its grantmaking, and its assets. Under the proposed rules, we might never have been able to get our resolution on the proxy. As a small shareholder working with a community we would not have been able to muster the 3 percent override proposed in the new rules. The cost would have been prohibitive. Our first filing received 4.8 percent, and 8 percent abstentions, showing considerable concern among shareholders. The new rules would have precluded re-filing. Yet it was only after we re-filed that Intel came back to us with the proposed policy changes. It is important to observe that the filing of a shareholder resolution is usually the outcome of a failed effort at dialogue. Without the possibility of filing resolutions, opportunities to engage management in dialogue would be greatly restricted. The resolution process is essential if shareholders are to have any possibility of effecting the companies' whose shares they own. The Commission must exert leadership in interpreting the responses to proposed rules in order to fulfill the congressional mandate. We sincerely hope that our voice and the voices of other small shareholders will not be drowned out in this process. The commission must recognize that smaller shareholders do not have the teams of lawyers and the resources available to management. As a result this reply, and others like it, may not be as polished as those emanating from corporate and beltway law firms. Much of the text of the proposed rules is bolstered by data from the Questionnaire circulated in February 1997. I repeat what I observed in replying to that Questionnaire: the instrument was invalid. Since it was not based on a valid sample of interested parties we learn nothing more than what an unrepresentative group of respondents believe Overall, we believe the present system works reasonably well. Since it isn’t broken, don’t fix it, except for Cracker Barrel. The small shareholder will be especially burdened. More Specifically: 1. Resubmission Thresholds for Resolutions ( c ) (12): The proposal Rules provide for a huge jump in votes for shareholder resolutions to be resubmitted from one year to the next. The present Rule requires 3, 6, and 10% of the vote for a resolution to be resubmitted while the proposal jumps to 6, 15 and 30% over a 3 year period. This proposal significantly penalizes shareholder proponents on social issues in particular but also governance issues. It will have the effect of insulating management of a company from important issues being raised by investors. This is a monstrous jump that serves no useful purpose other than giving more power to management. The number of shares in Intel necessary to reach 15% or 30% of the vote is astronomical; 269,700,000 and 539,400,000 respectively. Noyes had 100 shares when it filed its first resolution with Intel. The threshold leaves power in the hands of large institutional investors and the company. Since on new issues many of the large investors are slow to move the likelihood of achieving the higher thresholds becomes remote. Many companies are well aware that a vote of 10% of the shares is a significant indication of concern about an issue since so many institutional investors automatically vote for management on all issues, particularly social issues, and all unmarked proxies automatically are voted by management for their position. Management controls the voting process and has the odds stacked in their favor. On most occasions shareholders try to communicate with management. Only if there is no reply or the company is unresponsive, is a shareholder resolution filed. Most proponents are interested in positive changes by a company not the exercise of filing a resolution. They seek results. Resolutions are the result of failed efforts at dialog as was our experience with Intel. But to make it more difficult to file a resolution leaves management with the impression that they can ignore reasonable requests by shareholders, leaving them less accountable for their actions. Was South Africa unreasonable? Intel thanked Noyes, after the fact, for forcing the dialogue with them. In addition, often companies seeking to be in touch with their shareholders study and evaluate proposals even when they receive a vote of 5-10% and change their policies or practices accordingly. Since all resolutions are advisory it’s only the advice of investors the company is receiving whether the vote is 10%, 51% or 75%. The management is not legally bound by any of these votes. In its September 18 release the SEC does not reveal that an extremely small percentage of corporations have ever received a shareholders resolution. The SEC did report, however, that the average cost of processing shareholder resolutions to the few companies which receive them is $36, 603 a year. Each percent of shares in a mid-to major corporation represents hundreds of millions of dollars of investment. The SEC is proposing disenfranchising billions of dollars of shareholder value in order to achieve a meager savings of less than $40, 000 per resolution. This enormous increase in resubmission levels is overkill, damaging the interest of investors. Often too, a new issue takes some time before institutional investors develop policies allowing them to support this new proposal. The new voting thresholds make it even more difficult for a new idea to gain a tradition of support. It’s also unnecessary to push the threshold so high. Why should the SEC try to protect corporate management from issues that concern shareholders? Often resolutions simply prod management to talk to their investors and take their concerns seriously. The present thresholds are reasonable and fair. Companies may well argue that a key tenant of democracy is majority rule. If that were so then votes of 50 percent or more would be binding not advisory. It is also important to note that a new study published by the National Association of Corporate Directors reported that shareholder initiatives have a high "success rate." According to the group’s 1997 corporate governance survey, 1,100 surveyed CEOs reported that 80 percent of the governance changes that came up for a shareholder vote in the past two years eventually became company policy-regardless of the vote tally. The NACD said the 1997 results reflect a "sea change" in CEO attitudes. Thus it is clear that the companies themselves recognize that high votes are not the only signal of a need for change. 2. Personal Grievance ( c ) (4): In a major departure from past tradition the SEC proposes that if a company receiving a resolution from an individual or concerned institution argues that this resolution is motivated by "personal grievance", the SEC will simply issue no opinion and step aside. The company can then omit the resolution from its proxy statement leaving the filer with no option but to sue the company in a court of law. Why should the SEC abdicate its responsibility here? It would be much simpler to state that if a resolution has merit on its face and can’t be omitted on other grounds, it should be eligible for the proxy. The new proposal allows a company to argue that an individual or religious investor or trade union has a "personal grievance" or hidden motive or special interest motivating them and just by arguing that case opens the door for them to omit a proposal. An effort at a failed dialog could be called a personal grievance, if the resolution process were abrogated by high thresholds for filing or re-filing. Thus, the proposal imposes a double whammy . 3. An issue must deal with $10 million of company’s business ( c ) ( 5): The rule as proposed leaves open a number of unanswered questions for social issues. Ironically no corporate governance proposal has to meet this test since it is automatically assumed that any governance proposal has to meet this test since it is automatically assumed that any governance reform whether legitimate or eccentric, should be allowed on the proxy. Why this double standard should ever exist is never explained. Why should a social proposal face an additional hurdle? Why is confidential voting ( a governance issue) automatically more important than child labor ( a social issue), or a question of environmental management, which is often a surrogate for good corporate management? How will a company, a proponent or the SEC decide if an issue like child labor, a pattern a discrimination in employment based on race or gender, or environmental damage relates to $10 million of a company’s business? And what if a company is about to make an investment (for example in the 1970’s in apartheid South Africa, or in a country with a horrendous human rights record) which they have not made yet but would be a terrible mistake if they did so. This rule would allow for no early warning resolution by investors, which could often avoid costly liability. 4. The Override Provision- This allows for a shareholder to gather 3% of the shares of a company supporting the filing of a resolution which automatically gets it on the proxy. However this is not necessary for governance resolutions which don’t have the same hurdles to face as social resolutions and it is a huge challenge in today’s climate, to get 3% of the shares supporting the filing of a resolution. In the Intel case Noyes would have had to obtain sponsorship by 53, 670,000 shareholders. For an individual or small investor this is particularly expensive. Large investors will have less of a problem. And since they take time to develop a position on a new issue, they are not likely to be able to respond to smaller shareholders. This is a rule that particularly affects social resolutions. In this case the 3% level makes the override virtually impossible to use, a rule with no practical application, and disastrous consequences. 5. Discretionary Voting by Management - The present and new rules under Rule 14 (a) (4) would allow a resolution to be bought before the shareholders for a special vote at a stockholder meeting without being put on the company’s proxy. This process is separate from using the company’s proxy to present a resolution and requires an investor to do an independent solicitation. The new rule would not give shareholders the chance to vote yes or no on the proposal but only to give them the option of providing management with the discretionary authority to vote as they wish on this resolution and other matters being brought before the meeting. However when the shareholder solicits votes from investors with a separate proxy solicitation they must provide a box for a yes or no vote. This allows an uneven proxy voting process. 6. The new rule ignores SEC’s responsibility and withdraws the right of shareholders to review the statement management plans to put in the proxy opposing a shareholder resolution. Under the present rule the company must provide the text of their statement of opposition to a resolution for review by the investor to insure that there are no false and misleading statements. This allows shareholders to correct errors or mistaken interpretations so both the resolution and the opposition statement are fair and accurate. Many companies change wording when urged to by shareholders and if they refuse to change misleading claims the shareholder is free to appeal to the SEC. The new Rule removes the SEC from this process, allowing no recourse for a shareholder except suing a company for misleading statements in its proxy. This change takes away and important protection for investors. 7. ( c ) (7): "Ordinary Business"—the Cracker Barrel Repeal: The Commission proposes in this area to replace the Cracker Barrel bright line rule allowing companies to exclude all employment-related proposals, regardless of whether they raised "significant social policy issues." In its place the Commission will look at proposals on a case-by case basis. However, the comments by the Commission in the release suggest that the Commission is committed to a very narrow definition of what constitutes a "significant social policy issue". The Commission indicated it would not automatically include proposals dealing specifically with company operations in Maquiladoras or workplace practices resolutions, both areas that have been of concern to religious and pension fund shareholders. This approach to Cracker Barrel repeal will have a modest impact on shareholders’ overall ability to raise social issues. Cracker Barrel must be reversed unequivocally! The commission proposes a "plain English" rewrite of the "ordinary business" exclusion, so that management could now omit a proposal that "relates to specific business decision normally left to the discretion of management." The preamble adds that this change of language does not indicate any intent to change the substantive interpretation of that exclusion. Certainly the use of plain English in federal regulations is to be encouraged whenever possible, but we have two concerns with this proposed change. First the Commission’s choice of language appears unintentionally to change the scope of the ( c ) (7) exclusion. The seminal document for construing this exclusion is a 1976 Release in which the Commission made it clear that a resolution may be excluded only if it (a) involves "mundane" issues and (b) is devoid of a "substantial policy" component. The proposed new formulation appears to embody the "mundane" part of the formulation, but not the "substantial policy" element. Second, even if that is not the Commission’s intent, a decision to substitute existing language with new language will inevitably produce confusion about the scope of the new wording, particularly as new issues arise in the future. The focus now is on "specific" business decisions. How "specific" must they be? There is no guidance from the text, and the proposed footnote suggests only situations when a proposal may be excluded, now when it must be included. The existing text of the "ordinary business" exception has a specialized meaning, built up over more than 20 years and numerous no-action letters as well as court cases. To change such a legal term of art is an invitation to inject more uncertainty and more line drawing into this area. Please note that we do not feel that reversing Cracker Barrel is a carrot that can be used to lessen the impact of the stick if the other proposed rules are enacted. Cracker Barrel must be reversed because it is the right thing to. 8. The Commission intends to raise the threshold dollar value needed to be able to submit a shareholder proposal from $1,000-$2,000. While not affecting institutional investors, this increase will exclude smaller investors, including some small community groups who seek to use the shareholder process to engage a company in dialog after the company has refused to meet with them. It will also disenfranchise many of the increasing number of working Americans investing in stocks. It certainly will not increase the accessibility of the shareholder proposal process, which was the Congress’ intent. 9. Similarly, shortening the time shareholder proponents have to remedy a deficiency in their proposal identified by the company from 21days to 14 days, increases the difficulties faced by shareholders in filing proposals. What are the consequenses of these rule changes? Note the consequences are not unanticipated, they are direct, and knowable now. Preliminary findings of research on filings suggest that virtually all of the South Africa resolutions would not have survived the SEC’s proposed three-year thresholds for re-filing. Most corporate governance resolutions would have been threatened, and none of the Northern Ireland resolutions would have survived. The same can be said for other issues from the environment to board diversity to tobacco. Can we disregard the important role that shareholder resolutions played in creating change on these issues? And it is not hard to imagine that if the filers of these resolutions initially had to obtain sponsorship of 3 percent of shareholders to override corporate decisions not to include them, as the SEC now proposes, many- perhaps most- of them would never have even gotten to a first vote. The same could be said for so-called "personal grievance" resolutions. Most of the South Africa resolutions would have been in trouble if the proposal that an issue must deal with at least $10 million of a company’s sales had been in a place at the time of filing. Resolutions on Northern Ireland also might never have survived this rule. Do we want to leave all of the power in management’s hands? Or do we believe that shareholders have rights as well? We hope that the answer to these questions is obvious. In summary, the proposed rules are not in the spirit of the Congressional mandate to increase access to the shareholder process. They are the opposite: significant barriers to shareholder democracy. We call upon the SEC to preserve the shareholder process as it now is, and not turn back the clock. SEC is a regulatory agency, and must exercise its mandates. The proposed rules are an abdication of the SEC’s regulatory responsibility. We hope that the commission might convene a roundtable prior to the final announcement of the new rules to ensure that they are fully understood. As a foundation committed to shareholder activities we would like to be involved. Thank you for your attention Respectfully Submitted: Stephen Viederman President, Jessie Smith Noyes Foundation noyes@igc.apc.org cc: Chair Arthur Levitt Commissioner Issac C. Hunt, Jr. Norman Johnson, Paul Carey, Laura Unger, Honorable Alfonse D’Amato, Honorable Paul Sarbanes