September 6, 2007
The Directors of the United Methodist Church Foundation are greatly concerned by the SECs proposals and its questions related to changes in the shareholder resolution process. If the proposals raised were to be implemented, we believe the new rules would have a destructive and crippling effect on the right of investors to file resolutions. Specifically, we are troubled by the following three proposals for comment by the SEC.
1. The opt-out clause
One proposal would allow a company to seek shareholder approval to opt-out of the resolution process or give the Board of Directors the authority to opt-out. If enacted, this would create an uneven playing field and would likely encourage companies with poor governance or corporate responsibility records or unresponsive investor relations to opt-out, further insulating them from investor input and accountability. Furthermore, without this avenue, shareholders would have no means to request a reversal should investor concerns arise later and they would be forced to seek alternative perhaps more aggressive remedies.
Commissioner Atkins has publicly criticized shareholder resolutions as the tyranny of the minority that uses their nominal economic interests to highjack the agenda of all investors. Certainly, this argument is flawed since many shareholder resolutions receive votes in the 25% to 75% range, reflecting significant consensus among investors.
2. Chat rooms or electronic forums
During the Roundtables the idea of an electronic chat room for investors and companies surfaced. The SEC request for comments asks Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding resolutions in lieu of 14a-8?
We object strongly to supplanting an established resolution process with an untested electronic petition process. First, there is no assurance that a company would treat as seriously issues raised electronically through a forum. Also, even today, not all investors have on-line access and therefore not all could participate. Additionally, the shareholder resolution process allows for personal communication and dialogue with management which disembodied chat room discussions do not. Most importantly, this proposal effectively disenfranchises investors who now have the opportunity and fiduciary duty to, one time each year, cast an official vote and/or have an item placed on the official agenda of the annual shareholder meeting through the resolution process. Relative to shareholder resolutions, an electronic forum could not provide management with an accurate barometer of investor interest or concern with respect to the issues raised. In addition, we expect many companies will find an official electronic forum where poll type votes occur to be a hassle with untested benefits.
We would view favorably a companys decision to implement an electronic forum for improving communications with investors, but not at the expense of a shareholders right to file resolutions.
3. Re-submission thresholds
The SEC raises a trial balloon for a significant increase in the votes required for resubmitting resolutions, to 10% in the first year, 15% in year two and 20% thereafter, compared to current thresholds of 3%, 6% and 10%, respectively.
This proposed change represents a significant hurdle, particularly for investor proponents raising new issues which may take time to gain traction but ultimately become legitimate and acceptable positions embraced by many investors and companies alike. We believe the current voting thresholds work well from both the management and investor perspectives – discouraging continuation of frivolous shareholder proposals while allowing those with a significant level shareholder support.
We oppose the provisions for opt-out options and the electronic chat room/electronic petition as a substitute for the right to file shareholder resolutions.
It is not in anyones best interests to have investors become disenfranchised and their rights severely diminished.