Cascade Investment, LLC
October 31, 2003
The Honorable Jonathan G. Katz
Re: NYSE Proposed Rule Change relating to corporate governance, SR-NYSE-2002-33; NASD Proposed Amendments to NASD Rules 4200 and 4350 regarding board independence and independent committees, SR-NASD-2002-141.
Dear Mr. Katz:
Cascade Investment, LLC ("Cascade") submits this comment to address amendments to its pending rule proposal by the New York Stock Exchange dated October 8, 2003 and submitted to the Commission. This comment supplements the comment letter previously filed by Cascade on July 3, 2003.
The NYSE has amended its rule with respect to the controlled company exception, to clarify the obligation of disclosure if a company is relying on the exception and the basis for that exception. The NYSE adds a footnote to its release that states "this exemption will affect a small percentage of listed companies." This footnote highlights the basic difficulty that the Commission faces in approving the controlled company exception: the substantive obligation of the Commission under Sections 6(b)(5) and 15A(b)(6) of the 1934 Act, 15 U.S.C. §§78f(b)(5) and 78o-3(b)(6), to approve SRO rules only where they do not unfairly discriminate among issuers. If the vast majority of issuers must comply with the independence requirement, what is the justification for not applying the rule to all issuers? And additional disclosure as to the issue does not remedy the basic fact that permitting some issuers not to comply discriminates among issuers.
The rationale offered by the SRO's for the controlled company exception is that it recognizes that majority shareholders, including parent companies, have the right to select directors and control certain key decisions, such as executive officer compensation by virtue of their ownership rights. This rationale misconceives the burden placed on issuers by the independence requirement. The director independence requirement simply imposes a minimum qualification requirement on the majority of directors: that they not be too closely tied to the issuer. It does nothing to undermine the right of parent companies or shareholders to exercise their franchise among those directors having such qualifications. This exception is particularly important in the case of dual class shares with unequal voting rights that result in an investor or group controlling the voting power without owning a majority of the company's outstanding shares or outstanding equity value. As we highlighted in our July 3 comment letter, these equity structures give rise to increased concerns over self-dealing, corporate abuses and other conflicts - precisely the types of issues best addressed by independent directors.
We also note that the NYSE has amended its proposed rules with respect to the definition of independent director. Cascade believes that the proposed rules, as well as the pending NASD rules, do not go far enough and give clear enough guidance to ensure that directors who are labeled "independent" do not have conflicting loyalties that in fact undermine their independence. While Cascade does not advocate that the Commission adopt the strict independence definition for director service on audit committees as under Section 10A(m)(3)(B), 15 U.S.C. § 78j-1(m)(3)(B), and SEC Rule 10A(b)(1)(ii), 17 C.F.R. § 240.10A(b)(1)(ii), Cascade does believe the proposed independence standard of the NYSE even as revised is too vague. Accordingly, Cascade believes that the Commission should not approve the revised independence definitions in their present form.
Cascade is pleased that the NYSE's amendment addresses company contributions to charitable organizations. However, Cascade believes that the NYSE's definition should parallel the NASD's definition by expressly disqualifying directors who are employed by charities receiving significant contributions from the Company.
Cascade appreciates the opportunity to comment on these important rule proposals. I can be reached at 425-893-6360 if you would like additional information.
Cc: Alan L. Beller, Esq.