Institutional Shareholder Services

October 31, 2002

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington D.C. 20549-0609

Re: SR-NYSE-2002-46

Dear Secretary Katz:

We appreciate the opportunity to submit our comments on the New York Stock Exchange's proposed rule change relating to shareholder approval of equity compensation plans and the voting of proxies. The statement represents the views of Institutional Shareholder Services and not necessarily those of our clients.

ISS commends the NYSE for proposing a set of rules to require that equity compensation plans be submitted to shareholders for approval. Such actions will contribute significantly to the process of restoring confidence in our capital markets.

Many institutional investors view shareholder ratification of stock option plans as an important shareholder right. Yet growing numbers of companies are adopting option plans that significantly dilute existing shareholdings, often transferring huge sums of wealth to a few, without submitting these plans for shareholder approval. Adoption of the proposed rule will mark a critical step in halting that practice and restoring shareholders' right to vote on equity pay plans.

We applaud the NYSE not only for the proposals it has made, but for the transparent manner in which it has developed them. The Exchange invited public comments, considered them, and revised its draft in light of them. We urge the Exchange to maintain that same standard of transparency in implementing the rules once adopted, and we further urge that decision making of all exchanges regarding shareholders' rights be made transparent.

While we support the proposed set of rules on the whole, we would suggest the following improvements to strengthen them even further.

Exemption for Inducement Grants

We are concerned lest this exemption have the effect of encouraging inducement grants simply for the purpose of avoiding shareholder approval. To avoid that possibility, we recommend that the Exchange consider ways to limit the exemption. For example, the exemption could be restricted to individuals who fill critical management positions. An individual who replaces one of the "five highly compensated executives" named in the prior year's proxy statement could qualify for such an exemption. As further protection, we recommend that inducement grants be put to shareholder ratification at the next scheduled annual or special meeting following such grants. Furthermore, and as a minimum, the SEC and the NYSE should require companies to disclose their use of this exemption in real time by means of a press release, an 8-K filing, or both.

Material Changes

The NYSE has done a service by making clear that option repricings-including the option exchange programs that have become popular in the wake of recent accounting changes-qualify as "material" plan amendments that require shareholder approval.

If this rule is adopted, it most likely will lead to numerous questions as to the definition of types of changes that qualify as material. In resolving these questions, it will be particularly important for the SEC and the Exchange to maintain a high level of transparency. The same commitment to openness that characterized the design of the proposed rules will prove paramount in interpreting them after their adoption. Therefore, we urge the Commission to require that the NYSE and other exchanges engage in an open process in implementing the rules. For example, we would suggest that the SEC require the NYSE to publish all staff determinations, both positive and negative, on requests for exemptions from Exchange rules (and listing standards) on its web site in real time.

Other Exemptions

The NYSE's proposal to waive approval for all shareholder-approved plans acquired via mergers and benefit-type compensation programs (Section 123 plans and parallel nonqualified plans) could provide opportunities to circumvent the approval process. To avoid that possibility, we recommend that the NYSE set a minimum threshold for mandatory shareholder approval. The Exchange, for example, could mandate a shareholder vote on any otherwise exempt program that reserves one percent or more of a company's fully diluted shares for compensation purposes.

Transparency, once again, will play a critical role. We recommend real-time disclosure of the adoption of any programs exempt from shareholder approval.

Broker Votes

The NYSE has taken an important step in proposing a ban on uninstructed broker votes on equity compensation plans. We urge that the NYSE and the Commission proceed further by undertaking a broad-based review of the broker voting process, with a view toward narrowing if not eliminating entirely the right of brokers to cast uninstructed votes.

Uninstructed broker votes significantly distort the voting process. Brokers routinely deliver votes overwhelmingly in favor of management on issues of increasing importance to shareholders - without ever consulting their clients. Investors no longer view many formerly mundane votes, such as election of directors and ratification of auditors, as routine votes, and yet the NYSE continues to permit broker votes on these issues. The one rationale purporting to justify uninstructed broker votes - the need to meet a quorum - has become open to question in light of recent research. If the NYSE inquiry suggests a need to continue uninstructed broker votes for quorum purposes, the Exchange should limit broker voting solely to quorum votes.

Conclusion

We applaud the NYSE for its proposal to improve our corporate governance system, and we hope that our suggestions would strengthen it further. By proposing this set of rules, the Exchange is moving responsibly and effectively to fulfill the critical role that NYSE Chairman and CEO Richard Grasso highlighted earlier this year by stating, "It is imperative that we reinforce trust and confidence in our publicly traded companies and in our markets."

Sincerely,

James E. Heard
Chief Executive Officer

Patrick McGurn
Vice President and Special Counsel