August 24, 2007
To: Nancy Morris, Secretary, U.S. Securities and Exchange Commission
From: John Chevedden
Date: August 24, 2007
Re: Comment on File Number S7-16-07
I am writing to comment on File Number S7-16-07, the Release proposing amendments to the Rules under the Securities and Exchange Act of 1934 concerning shareholder proposals and electronic shareholder communications. This Release addresses access to the proxy for the nomination of directors as well as shareholder proposals. It is on the latter topic that I wish to provide comments. Specifically, as an investor who takes seriously my responsibility to be engaged and informed, I feel strongly that the SEC¹s suggested proposals to eliminate or curtail the shareholder resolution process should not be adopted.
I have sponsored shareowner proposals for more than 10-years and I conscientiously vote my proxies. I consider the proxy process to be a vitally important tool in communicating with the Board, management and other investors on key issues such as governance reforms, executive compensation, climate change, workforce diversity and human rights in overseas factories.
There is a long history of positive results from shareholder resolutions, demonstrated by companies making specific reforms, changing policies and increasing transparency. Annually, approximately one-quarter to one-third of resolutions are withdrawn because constructive dialogue with companies results in win-win agreements. The rising support votes for shareholder resolutions across a range of governance, environmental and social topics is evidence of the mounting importance of shareholder resolutions to the general investing public.
The SEC asks for comments on the right of a company to ³opt-out² of the shareholder resolution process, either by obtaining approval from shareholders through a proxy vote, or, if sanctioned under State law, by having a Board vote authorizing it to opt-out. Either option would have significant negative consequences. The most unresponsive companies would be most likely to opt-out because resolutions are an important mechanism to strengthen corporate accountability. Furthermore, enabling companies to opt-out would result in an uneven playing field with some companies allowing resolutions and others prohibiting them.
This change would dilute the value of each of the shrinking number of shareholder proposals because it would give companies, that did not initially ³opt-out² of the shareholder resolution process, the option to ³opt-out² once a shareholder proposal topic won strong shareholder support.
The Release asks, ³Should the Commission adopt a provision to enable companies to follow an electronic petition model for non-binding shareholder proposals in lieu of 14a-8?² I strongly oppose this proposed change. The current resolution process ensures that management and the Board focus a reasonable amount of attention to the issue at hand as they must determine their response to the shareholder proposal. In addition, each and every investor receives the proxy and has the opportunity to consider the issue.
To hastily substitute experimental methods such as a chat room or other form of electronic petition for the current proven proxy process erodes significantly a valuable fiduciary responsibility. Chat rooms and electronic forums are welcome approaches yet to be tried and refined to enhance communication with investors, but not at the expense of the shareholder¹s right to file resolutions that has been tested and refined over a 70-year period.
In its Release, the Commission also asks for comments on increasing the votes required for resubmitting shareholder resolutions to 10% after the first year, 15% after year two, and 20% thereafter, compared to current thresholds of 3%, 6% and 10%, respectively. Raising the thresholds as proposed would make it much more difficult for investors to resubmit proposals for a vote, thus further insulating management from shareholder accountability. Over the last 40 years, many proxy topics initially received very modest levels of support, only to garner increased support over time as shareowner awareness and knowledge increased. Adding more restrictive thresholds on resubmitting resolutions simply makes it harder for investors seeking constructive engagement with companies. Hence, I oppose changes in the resubmission thresholds.
The Release seeks comment concerning a proposed serious weakening of the shareholder resolution process a process which has made great strides over a 70-year period. ³Institutional investor activism would not have been possible were it not for the legendary Gilbert brothers, who cleared the path according to ³Power and Accountability² by Robert AG Monks and Nell Minow. In 1932, Lewis Gilbert attended the annual meeting of New York City's Consolidated Gas Co. Gilbert, who held only 10 shares of the company's stock, was disturbed by the chairman's refusal to recognize shareholder questions from the floor.42
Gilbert formed a group with his brother to purchase small amounts of a company's stock and attend its meeting to introduce proposals from the floor. When the SEC adopted Rule 14a-8 in 1942, requiring companies to put shareholder resolutions to a vote, the Gilberts were able to express their corporate governance concerns directly to shareholders via the proxy process. The Gilberts focused on expanding corporate democracy and making management financially accountable to owners, with proposals on such issues as locating meetings at sites that encouraged a large attendance, issuing postseason reports, and opening up the election process.43
42 This section is adapted freely from Lauren Talner, The Origins of Shareholder Activism, Investor Responsibility Research Center, Washington, D.C., July 1983, and Helen Booth, The Shareholder Proposal Rule: SEC Interpretations & Lawsuits, Investor Responsibility Research Center. January 1987. 43 Talner, p. 3.²
Source: ³Power and Accountability² by Robert AG Monks and Nell Minow.
According to ³Roots of Activism² Ref. http://corpgov.net/news/archives2006/October.html
³Because of Lewis Gilbert, shareholder resolutions are included on the proxy. That right was codified in 1942 so that shareholders could police potential ³fraud and mismanagement² in the companies they owned. In the SEC v. Transamerica Corp., 1947, Gilbert got the court to write, 'a corporation is run for the benefit of its shareholders and not that of its management.'
³The Gilberts pushed issues such as:
³Ending staggered boards Appointing independent outside directors Separating the chair from the CEO Connecting director and executive pay with performance Shareholder approval of company auditors and stock options for executives Requiring directors to own company stock Representation on the board for shareholding groups through proportional representation
³Up until 1987 Lewis Gilbert was 0-for-2000 on his shareholder proposals. Then he was quoted in a WSJ article on the majority vote at Chock Full O'Nuts Corp. on January 30, 1987. Gilbert said, It's the first time we won against management in 50 years.¹ ²
Lewis Gilbert, pioneered the resolution process and subsequently a growing number of investors (ranging from huge institutional investors such as TIAA-CREF, CalPERS, New York State and State of Connecticut pension funds, to religious investors, foundations, trade union pension funds, individuals, and socially concerned mutual funds and investment managers) have filed shareholder resolutions on a wide-range of governance reforms and social and environmental issues.
Until 1987 no shareholder proposal had ever won a majority vote. Yet in 2007 alone the following 42 advisory proposals by individual investors won majority votes in a single year. If the following companies are allowed to ³opt-out² of the shareholder resolution process, there would be no incentive for each of them to respond positively to votes of their shareholders for greater accountability.
Staples (SPLS): 71% for Simple Majority Vote
Pep Boys (PBY): 62% for Poison Pill Vote
Lowe¹s (LOW): 72% for Annual Election of Each Director by
PPL Corporation (PPL): 70% for Simple Majority Vote
Motorola (MOT): 51% for Say on Pay 59% for Recoup Unearned Management Bonuses
Borders (BGP): 68% for Right to Call Special Shareholder Meetings
Time Warner (TWX): 79% for Simple Majority Vote 64% for Shareholder Right to Call a Special Meeting
RadioShack Corporation (RSH): ³Passed comfortably² for Shareholder Right to Call a Special Meeting
AMR Corporation (AMR): 54% for Shareholder Right to Call a Special Meeting
Allegheny Energy (AYE): 50.2% for Majority Vote Director Election Standard 57% for Shareholder Right to Call a Special Meeting 51.7% for Performance-Based Stock Options
FirstEnergy Corp. (FE): 76% for Simple Majority Vote
Zimmer Holdings (ZMH): 78% for Simple Majority Vote
Sierra Pacific Resources (SRP): 62% for Annual Election of Each Director
Newell Rubbermaid (NWL): 80% for Simple Majority Vote
EMC Corp. (EMC): 82% for Simple Majority Vote
IMS Health (RX): 75% for Annual Election of Each Director
CVS/Caremark (CVS): 52% for Independent Board Chairman
MeadWestvaco (MWV): 78% for Poison Pill Shareholder Vote
CSX Corp. (CSX): 67% for Shareholder Right to Call a Special Meeting
EMC Corp. (EMC): 82% for Simple Majority Vote
Colgate-Palmolive (CL): 64% for Shareholder Right to Call a Special Meeting
R.H. Donnelley (RHD): 70% for Annual Election of Each Director
Fortune (FO): 68% for Annual Election of Each Director
Newmount Mining (NEM): 51% for Independent Board Chair
McGraw-Hill (MHP) 77% for Annual Election of Each Director
Sempra Energy (SRE): 77% for Simple Majority Vote
Nicor (GAS): 64% for Simple majority vote
Kimberly-Clark (KMB): 80% for Simple Majority Vote
Wyeth (WYE): 52% for Recoup Unearned Management Bonuses
Corning (GLW): 73% for Annual Election of Each Director
AT&T (T) 66% for Shareholder Right to Call a Special Meeting
Hewlett-Packard (HPQ): 72% for Poison Pill Shareholder Vote 53% for Linking Pay to Performance
Morgan Stanley (MS): 58% for Simple Majority Vote
Goodyear (GT): 65% for Simple Majority Vote
Bank of New York (BK): 70% for Simple Majority Vote
Electronic Data Systems (EDS): 58% for Shareholder Right to Call a Special Meeting
Weyerhaeuser (WY): 77% for Simple Majority Vote
Additionally and perhaps more significantly, in 2007 there were 20 non-binding shareholder proposals, each submitted by individual investors, that were transformed by companies into successful binding proposals. These 20 adopted proposals show that non-binding proposals do work. If the following companies are now allowed to ³opt-out² of the shareholder resolution process, there would be an incentive for each of them to reverse their specific steps forward in greater accountability to shareholders.
3M (MMM) Simple Majority Vote: A 2007 shareholder proposal on this topic was submitted.
Allstate (ALL) Simple Majority Vote: The 2006 rule 14a-8 proposal on this topic won 72%.
Amgen (AMGN) Annual Election of Each Director: A 2007 shareholder proposal on this topic was submitted.
Baker Hughes (BHI) Simple Majority Vote: A 2007 shareholder proposal on this topic was submitted.
Chevron Corporation (CVX) Simple Majority Vote: A 2007 shareholder proposal on this topic was submitted.
Dow Chemical (DOW) Simple Majority Vote: A 2007 shareholder proposal on this topic was submitted.
EMC Corp. (EMC) Annual Election of Each Director: The 2006 rule 14a-8 proposal on this topic won 84%.
Genuine Parts Company (GPC) Simple Majority Vote: A 2007 shareholder proposal on this topic was submitted.
International Business Machines Corporation (IBM) Simple Majority Vote: The 2006 rule 14a-8 proposal on this topic won 61%.
Kimberly-Clark Corp. (KMB) Annual Election of Each Director: The 2006 rule 14a-8 proposal on this topic won 78%.
Marathon Oil Corporation (MRO) Simple Majority Vote: The 2006 rule 14a-8 proposal on this topic won 83%.
Merck & Co., Inc. (MRK) Simple Majority Vote: The 2006 rule 14a-8 proposal on this topic won 78%.
Pinnacle West (PNW) Annual Election of Each Director: The 2006 rule 14a-8 proposal on this topic won 82%.
R. R. Donnelley (RRD) Annual Election of Each Director: The 2006 rule 14a-8 proposal on this topic won 78%.
Schering-Plough (SGP) Simple Majority Vote: The 2006 proposal on this topic won 62%.
Time Warner (TWX) proposal to remove some super majority voting requirements won 87% of shares outstanding and was adopted: The 2006 proposal on removing all supermajority provisions won 83%.
UST Inc. (UST) Annual Election of Each Director: The 2006 proposal on this topic won 64%.
Visteon (VC) Annual Election of Each Director: The 2006 proposal on this topic won 84%.
Wyeth (WYE) Simple Majority Vote: The 2006 rule 14a-8 proposal on this topic won 78%.
Zimmer Holdings (ZMH) Annual Election of Each Director: The 2006 proposal on this topic won 77%.
It would be inappropriate for the SEC, having long established the rule 14a- system for allowing shareowners to place precatory resolutions on the proxy, to now ³devolve² these rights to the states or allow corporations to set their own rules regarding how much shareowner democracy will be permissible.
The system of advisory resolutions that the SEC has established is too important and central to the American system of corporate governance to allow corporations or states to ³opt out² of these important mechanisms.
While new methods, not yet tried and refined, to improve investor management communications would be welcome, eliminating our hard-won right as investors to petition the Board and management and to garner support of other shareowners through resolutions would be a disastrous step backward.
I urge the SEC to uphold the right of investors to sponsor resolutions for a vote at stockholder meetings. The current proposals to enable companies ³opt-out² of the shareholder resolution process and to increase the votes required for resubmitting shareholder resolutions are contrary to constructive investor-management relations.
I strongly oppose any move to take away shareholder rights to file advisory resolutions especially as they are attaining an apex of success as shown in the 62 examples above for 2007 alone.