From: Jspears@tweedy.com Sent: Thursday, June 19, 2003 4:48 PM To: rule-comments@sec.gov Subject: File No. S7-10-03; Release No. 34-477778; Investment Counselor, Tweedy, Browne Co. LLC's Views Regarding Possible Changes to the Proxy Rules Mr. Jonathan G. Katz. Secretary, Securities & Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0609 RE: File No. S7-10-03 Release No. 34-477778 Solicitation of Public Views Regarding Possible Changes to the Proxy Rules Dear Mr. Katz: I am a Managing Director and analyst/portfolio manager at an investment counseling firm, Tweedy, Browne Company LLC, which manages approximately $8.4 billion of equity portfolio assets for individuals and institutions, of which approximately $3.2 billion is invested in U.S. equities. As of March 31, 2003, the five Managing Directors and retired principals and their families, as well as the employees of Tweedy, Browne Company LLC, had more than $400 million of their own money invested in portfolios combined with or similar to clients’ portfolios. To use Warren Buffett’s phrase, “We eat our own cooking.” The firm’s investment approach is to acquire stocks at discounts to our estimate of the value that we would receive in a merger or acquisition of the entire company. We are, especially by institutional standards, very long-term investors: the turnover in our equity portfolios is typically 10% to 20%, which implies average holding periods of 5 to 10 years. We seek growth in underlying corporate value over these long holding periods, and hope that the companies’ managements will earn good returns on earnings retained in the business and not paid out to the shareholders as dividends. The portfolios that we manage often own, in aggregate, from 5% to 10% of the outstanding shares of the companies in which we have invested our client’s money. Over the past 30 years, in a relatively small proportion of our holdings, we have had occasion to “act like an owner” on behalf of our clients, where it has seemed that appropriate effort could enhance long run returns. From time to time, we have encouraged value-enhancing actions on the part of companies our clients own; such as share buy-backs, spin-offs, stepped-up profit improvement, or the sale of all or a portion of a particular company. Several years ago, we initiated and led a proxy contest to defeat a proposed legal change advanced by the management of First Federal Savings and Loan Company of Roanoke, Virginia, which we believed would have entrenched management and reduced shareholder value. Recently, our firm made a written demand on the independent members of the Board of Directors of Hollinger International Inc. to investigate transactions and payments between entities and persons affiliated with Hollinger, as well as executive compensation issues. Over the past 30 years, we have tried to act as responsible owners and stewards of our clients’ money and our own money. In our opinion, the laws, rules, regulations and procedures pertaining to the election of directors, proxy solicitations, shareholder proposals, communication among shareholders, and 13D group formation largely stack the deck against shareholders acting like owners with respect to most publicly traded corporations. The owners of most U.S publicly traded corporations have not acted like owners for some time because the cost of dealing with the labyrinth of laws, rules, regulations and procedures has been prohibitive. Importantly, institutional investors managing diversified portfolios have often been unwilling to act like owners with respect to securities owned in their clients’ portfolios because, (1) the cost of doing so has been prohibitive – especially in relation to the impact that a particular holding may have on the investment return of a total portfolio, and (2) the typically high legal, printing, proxy solicitation, etc. costs of acting like an owner must often be paid out of an investment manager’s own pocket. It is often difficult for an investment advisor to be reimbursed by clients for these high costs. Consequently, institutional investors, who often own--in aggregate--over 50% of the outstanding shares of many publicly traded companies, tend to not act like owners. And we believe that many officers and directors are well aware of the obstacles that institutional investors must overcome in order to effectively disagree with management. The expensive laws, rules, regulations and procedures serve to insulate management from being held accountable to the owners of the corporation. In light of recent events in the equity markets, it is interesting to step back in time and read the following excerpts concerning corporate governance in the U.S. equity markets from the 1934 and 1962 editions of Security Analysis by Benjamin Graham and David Dodd and Graham, Dodd and Cottle, respectively: 1934 Edition: Summary and Conclusion – The behavior of corporate managements in general during the hectic years from 1928 to 1933 did not reach dazzling heights of wisdom and punctilious rectitude. In fact this behavior was itself responsible in part for the excesses of both optimism and pessimism that marked the period. In our view much of the harm may be traced to the forgetting on all sides of certain elementary facts, viz., that corporations are the mere creatures and property of the stockholders who own them; that the officers are only the paid employees of the stockholders; and that the directors, however chosen, are virtually trustees, whose legal duty it is to act solely on behalf of the owners of the business. In addition to realizing these general truths, and in order to make them practically effective, it is necessary that the public be educated to a clear idea of what are the true interests of the stockholders, in such matters as dividend policies, expansion policies, the use of corporate cash to repurchase shares, the various methods of compensating management, and the fundamental question of whether the owners’ capital shall remain in the business or be taken out by them in whole or in part. Benjamin Graham and David L. Dodd, Security Analysis (New York: Whittlesay House, McGraw Hill 1934), p.521 Interests of Stockholders and Officers Conflict at Certain Points – But a second reason for not always accepting implicitly the decisions of the management is that on certain points the interests of the officers and the stockholders may be in conflict. This field includes the following: 1 Compensation to officers – Comprising salaries, bonuses, options to buy stock. 2 Expansion of the business – Involving the right to larger salaries, and the acquisition of more power and prestige by the officers. 3 Payment of dividends – Should the money earned remain under the control of the management, or pass into the hands of the stockholders? 4 Continuance of the stockholders’ investment in the Company – Should the business continue as before, although unprofitable, or should part of the capital be withdrawn, or should it be wound up completely? 5 Information to stockholders – Should those in control be able to benefit through having information not given to stockholders generally? On all of these questions the decisions of the management are interested decisions, and for that reason they require scrutiny by the stockholders. We do not imply that corporate managements are not to be trusted. On the contrary, the officers of our large corporations constitute a group of men above the average in probity as well as in ability. But this does not mean that they should be given carte blanche in all matters affecting their own interests. A private employer hires only men he can trust, but he does not let these men fix their own salaries or decide how much capital he should place or leave in the business. Directors Not Always Free from Self-interest in Connection with These Matters – In publicly owned corporations these matters are passed on by the board of directors, whom the stockholders elect and to whom the officials are responsible. Theoretically, the directors will represent the stockholders’ interests, when need be, as against the opposing interests of the officers. But this cannot be counted upon in practice. The individual directors are frequently joined by many close ties to the chief executives. It may be said in fact that the officers choose the directors more often than the directors choose the officers. Hence the necessity remains for the stockholders to exercise critical and independent judgments on all matters where the personal advantage of the officers may conceivably be opposed to their own. In other words, in this field the usual presumption of superior knowledge and judgment on the part of the management should not obtain, and any criticism offered in good faith deserves careful consideration by the stockholders. Security Analysis, 1934, pp. 510-511 1962 Edition: Management Domination of the Board. After all, the board of directors does at times form an independent and carefully grounded conclusion regarding the merits of the executive officers. In theory the directors should do this regularly, and it is their duty to change the operating management when it fails to make the grade. The theory works badly in practice, because in the typical case the board of directors is not sufficiently independent of the executives. The nonexecutive directors – often themselves a minority of the board – are generally bound to the officers by close ties of friendship and of business dealings. The practical and basic point here is that the officers choose the directors more often than the directors choose the officers. If every board were thoroughly independent of management, the problem of obtaining and keeping good top executives would nearly always be solved, as it should be, by businesslike action at directors’ meetings. But so often the boards and the executives form an indistinguishable whole – i.e., a single “management” – that the businesslike approach must by taken by the stockholders if it is to be taken at all. The frequent lack of an effective distinction between the board of directors and the operation management makes necessary at least a minimum amount of vigilance and initiative on the part of the stockholders acting independently of their directors. Such vigilance is in fact required to assure the satisfactory working of our corporate economy and an adequate flow of new venture capital into publicly owned enterprises. Benjamin Graham, David L. Dodd, and Sidney Cottle, Security Analysis (4th Edition, New York: McGraw Hill 1962), pp.668-669 One of our particular concerns was the failure of stockholders to use independent judgment in matters affecting their interests, and their habit of voting, sheeplike, in favor of anything the management proposes regardless of its merits or arguments advanced against it. Not much improvement in that supine attitude has been shown in the past decade. Incompetent or unfair management is not being remedied, as it should be, through action which follows expert and disinterested guidance or supports justified efforts by some of the larger holders to correct the situation. Where a change does take place, it is almost always the result of the acquisition of so large a holding of shares by new interests that they win by the votes they control rather than by convincing their fellow owners of the rightness of their cause…. Sound investment in common stocks requires sound attitudes and actions by stockholders. The intelligent choice of securities is, of course, the major factor in successful investment. But if the stockholder is to regard himself as a continuing part-owner of the business in which he has placed his money, he must be ready at times to act like a true owner and to make the decisions associated with ownership. If he wants his interests fully protected he must be willing to do something on his own to protect them. Security Analysis , 1962, p. 674 _________ . ________ We have read several of the comment letters concerning possible changes to the proxy rules. In the spirit of the investor-oriented advice and policies set out by Messrs. Graham, Dodd and Cottle, we believe that adoption of many of the suggestions contained in the letters listed below would reduce the cost of acting like an owner and, consequently, would improve corporate accountability and governance in the United States: 1. June 11, 2003 letter from Lloyd Chamber of Hermes Investment Management Ltd. Shareholders in the United Kingdom tend to act like owners because the costs are not prohibitive. 2. May 10, 2003 letter from Sarah Teslik, Executive Director of Council of Institutional Investors. Our only disagreement with the advice contained in this letter is the suggestion that to be eligible for access to proxy materials, investors must have owned the stock for at least three years. We believe that property rights should attach to ownership: if an investor owns an interest in a corporation, then that investor should have the right of access to the proxy materials. 3. May 30, 2003 letter from The Nathan Cummings Foundation 4. June 11, 2003 letter from Kurt N. Schacht, Wyser - Pratte Management. Sincerely, John D. Spears Managing Director Tweedy, Browne Company LLC 350 Park Avenue New York, New York 10022 Tel. 212 916 0600