From: Moye, Melissa [MelissaMoye@AmalgamatedBank.com] Sent: Sunday, December 21, 2003 11:46 AM To: rule-comments@sec.gov Subject: File No. S7-19-03 December 22, 2003 Mr. Jonathan G. Katz, Secretary Securities & Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Re: Reform of Proxy Access Rules, File No. S7-19-03 Dear Mr. Katz: This letter is being submitted on behalf of the Amalgamated Bank LongView Funds (the “LongView Funds” or the “Funds”) in response to the proposed rules relating to shareholder director nominations published by the Securities and Exchange Commission on October 23, 2003. The LongView Funds commend the Commission for its leadership and initiative in proposing this significant governance reform, which in our view is long overdue. We believe that the Commission’s proposal to reform proxy access rules represents an important step toward meaningful reform of shareholder access rules and, ultimately, board composition and responsiveness. We urge the Commission to adopt a final rule giving shareholders access to the proxy card and proxy materials prepared by publicly-traded corporations for the purpose of nominating candidates for the board of directors. We believe that the proposed rule correctly analyzes the rationale for this reform and incorporates a number of procedures that will make the rule operate effectively and with the intended purpose. These comments will respond briefly to the detailed proposal set out by the Commission and make some modest suggestions for revisions. However, on balance, the LongView Fund support this initiative and urge prompt adoption of a final rule with many of the features embodied in the proposed rule. Interest of The LongView Funds The Amalgamated Bank LongView Funds are a family of index funds offered to pension fund investors who wish to invest in indexed products as part of their portfolios. As index funds, the LongView Funds make a long-term investment in the companies comprising these portfolios, as the Funds cannot sell its stake in an individual company and still maintain replication of the target index. The LongView Funds have over $7 billion under management and vote proxies each year for at least 1500 publicly-traded corporations. Unlike most index funds, however, the LongView Funds are not passive investors. Each year the LongView Funds undertake a corporate governance program that identifies 25 or so companies that pose issues with respect to their corporate governance practices. The Funds typically submit shareholder proposals to these companies to initiate a dialogue about practices that may have an effect on long- term shareholder value. Where possible, the LongView Funds negotiate changes in corporate practices that will enhance performance. When it is not possible to negotiate such changes, the LongView Funds present those resolutions at annual meetings to be voted on by the shareholders. The LongView Funds have had considerable success over the past decade in the work of engaging companies in dialogue to effect changes in company practices. A number of companies have reformed their governance practices in response to these initiatives. Based on more than a decade's worth of this experience, we believe that the sort of dialogue that can occur as a result of shareholder resolutions is important, but limited. Ultimately, decisions about the direction of a company are made by the board of directors, and in this regard, shareholders have very little influence over the process. This is contrary to the traditional maxim of corporate governance, in which shareholders elect the directors, who in turn choose management. As things have turned out in practice, shareholders have very little input into the shareholder nomination process and have had little choice but to vote an uncontested management slate for the board each year. In large part, this is a result of the way things operate under the current rules on proxy solicitations. Shareholders do not have the right to nominate candidates whose names and credentials will appear in a company’s proxy materials. As a result, the only way that a shareholder may challenge a management candidate is to run an independent candidate or candidates, which entails circulating competing proxy materials at the shareholder’s own expense. This can be expensive, disproportionately so if one is not interested in taking over the company, but rather in simply injecting some new blood into the board of directors of an underperforming company. The Commission’s proposed rule will modify the current regime in a limited, but highly significant way. The proposed rule builds on the philosophy behind section 14 of the Securities Exchange Act of 1934 and Rule 14a-8, which is that companies should not solicit proxies unless they given shareholders adequate information about significant issues that will be raised at the annual meeting. As a result, companies are required to print and let shareholders vote on resolutions that meet certain threshold criteria for significance and are sponsored by shareholders who have maintained a specified level of ownership in the company for a specified period of time. Companies are required to print such resolutions even if the board of directors believes that the recommended policy is not in the best interests of the company. The proposed rule contemplates that shareholders who have maintained a certain level of share ownership for a certain period of time should be able to nominate candidates and have the names and credentials of those candidates included in company-prepared proxy materials, even if the board of directors does not favor that particular candidate. The LongView Funds support this initiative. There are a number of underperforming companies in the Funds’ portfolios, and it is difficult to believe that the management slate should be elected or re-elected without opposition at each one of them. In fact, that is what happens every year, with disgruntled shareholders having no choice but to cast a symbolic “withhold” vote against directors at underperforming companies. The LongView Funds believe that opening the company- prepared proxy materials shareholder nominations would benefit shareholders by permitting candidates to come forward who can provide shareholders with a choice, as well as an enhanced dialogue between the board and shareholders about a company’s future direction. Although the Commission’s proposed rule would move toward this goal, there are some specific issues that should be addressed and modified, as we now discuss. I. TRIGGERING EVENTS The Commission has proposed a two-step process, whereby two triggering events are contemplated. First, holders of one percent of the common stock for over a year must sponsor and have the shareholders adopt a resolution endorsing the concept of shareholder nominees in the proxy materials. Second, 35 percent of the yes-and-no vote is cast to “withhold” support from a management nominee. If either event should occur, the proposed rule would allow the holders of five percent of the outstanding shares to nominate a candidate and have that candidate’s name and credentials appear in the next year’s proxy materials. The LongView Funds would recommend the following modifications. A. There is no need for a 1% threshold. To the extent that the Commission should enact triggering events and limit the right of access to shareholders who have a specified level of ownership in a company, those limitations should operate as a sufficiently effective “gatekeeper” against frivolous or insubstantial efforts to nominate a candidate. There is no need to impose an additional ownership threshold in order for shareholders simply to ask their fellow shareholders whether to open proxy materials to shareholder-nominated candidates. B. Lower the “withhold” trigger from 35% to a significant, though less stringent, standard. The LongView Funds submit that proposed threshold for triggering a right of access to the proxy is too restrictive. A 35% vote to “withhold” support from a management nominee would affect very few companies, particularly large publicly-traded companies. We understand that it is extremely rare to attain that high a level of opposition. For that reason, we suggest a lower level, such as 20%. This figure is selected based on a recognition that even this lower threshold may be difficult to attain, even when there is an organized “vote no” campaign by shareholders. C. Lower the threshold of support for nominations from 5% to 3%. The LongView Funds submit that any shareholder or group of shareholders who holds at least three percent of the outstanding shares should be eligible to submit nominees who are willing to serve and who would therefore be eligible for inclusion in the company-prepared proxy materials. We suggest a three percent threshold, rather than the five percent threshold proposed by the Commission, for three reasons. First, three percent is the figure that the Commission proposed five years ago in the rulemaking proposal that resulted in the current version of Rule 14a-8, when the Commission proposed (but did not adopt) a proposal to give shareholders the right to override the exclusions in Rule 14a-8(i) if at least three percent of the shareholders supported a particular resolution. We note in this regard that a one-year holding period is in line with current requirements and makes it more likely that any shareholder proponents are long-term holders. Second, three percent is the current level of support that is required for resubmission of a shareholder proposal in a subsequent year. Three percent thus serves (and has served for some years) as a benchmark for determining a level of interest in a topic sufficient to warrant inclusion of a proposal at the company’s expense on two occasions, not just once. We would not that the Commission proposed raising this threshold in its 1998 rulemaking, but ultimately concluded to retain three percent as the benchmark in the Rule. Third, and to be practical about it, a three percent threshold will be a significant barrier at many publicly-traded companies. As a result, it is likely that nominees put forth by a group of shareholders holding that large a percentage of outstanding shares will reflect a level of dissatisfaction that warrants inclusion of the candidates in the company-prepared proxy materials. D. Additional triggers. The LongView Funds believe that the proposed triggers are too limited in nature, given the Commission’s view that access should be triggered by indications of corporate governance failure. We believe at least two additional factors should also trigger the right of shareholders to nominate a candidate for the board and to let the shareholders decide in a race by that candidate for the board how they assess the competing arguments from management and the nominating shareholders. – A material restatement of financial results; – The filing by a SEC of an administrative action or a complaint in federal court charging the company or its executive with violations of federal securities laws; II. INDEPENDENT NOMINEES. The LongView Funds agree that any nominees should be independent of the company. We share the concern noted by other commenters, however, such as the Council of Institutional Investors and CalPERS, that comparable restrictions on shareholders nominating a candidate might hamper the ability of such shareholders to nominate qualified candidates. We suggest therefore that the Commission modify the rule to provide for disclosure of any connections to the nominating shareholders along the lines suggested by these commenters. III. EFFECTIVE PERIOD. The LongView Funds believe that the proposed two-year period within which candidates may be nominated is too short. For companies experiencing significant governance failures, the process of turning a company around often takes more than one or two years. Thus, particularly if a new team is put in place, shareholders may want to see how things are going before taking steps to nominate a candidate for the board. A longer period would make the rule more effective in achieving its intent. IV. RESPONSES TO OPPOSING COMMENTS. The LongView Funds have various arguments against the proposed rule, but does not find them persuasive. The following is a brief response to some of the arguments that we have heard most frequently. A. “Proxy access would be disruptive to the board’s operation.” The fact that something is new does not make it disruptive. In fact, injecting new blood onto the board or adding directors from a different background can be useful, if the new director is raising issues or questions that the previous board failed adequately to address. Moreover, the fact that a candidate is raising such issues in a director election can be beneficial to shareholders, as it provides for a dialogue between management and the nominating shareholders about the future direction of the company. Such a dialogue may be deemed “disruptive” by those who are unaccustomed to having company policy discussed in that way, but the dialogue can be beneficial to shareholders and may ultimately benefit management and the board by making them articulate and defend positions before shareholders. We note too that this criticism arises out of the historical context, in which insurgent board candidates were usually nominated as part of a takeover bid, simply because the cost of running a slate of directors was so high that it made economic sense only if the result made the cost worthwhile. The essence of the Commission’s proposal is that there should be access in situations where a takeover is not being contemplated. Once the proposal becomes final, companies would surely become accustomed to shareholder-nominated directors, just as they have adjusted to other reforms or changes that have been introduced over the years. B. “This is not a good use of the company’s proxy card and materials.” We dispute the notion that company-prepared proxy materials are the property of management or the board. Proxy materials belong to the shareholders, even if they are prepared by management and the board. It is thus a proper use of those shareholder assets for the shareholders to ask that significant events that are to be voted at the annual meeting be included in proxy materials that are prepared at shareholder expense by the company and mailed to shareholders at shareholder expense. The notion that management and the board should not have to include in proxy materials any items with which they disagree has been answered decades ago by the adoption of Rule 14a-8, in which company-prepared proxy materials routinely include items that management and the board vigorously opposed. C. “Proxy access will be a forum for special interest candidates.” This is not a serious objection, in our view. First, no candidate will ever win a director election unless he or she communicates a message that resonates broadly with the company’s shareholders. If the shareholders decide that they want a particular candidate, why should they be denied his or her services? Second, experience suggests that single-issue candidates are rarely successful, particularly if (as would be the case here) they are running against an incumbent or a candidate nominated by management. We find it difficult to imagine, for example, that a candidate could win election to the board of a restaurant chain on a platform advocating that all restaurants should be smoke-free. Third, whatever limited agenda an individual candidate may have at the outset, he or she will have to act on a range of issues once elected and will have to do so in a manner consistent with his or her legal obligations as a fiduciary. D. “We won’t be able to find able directors.” We are not sure how “able” is defined. Experience suggests that the position of director on a publicly-traded corporation is a highly sought-after position, and logic suggests that this would continue to be the case even if the proposed rule were made final. We believe that the onus is on advocates of this position to explain with more precision and empirical data what exactly they mean when they speak of an “able” or “qualified” director and what criteria they currently use to disqualify someone from being considered “able.” Conclusion In conclusion, the LongView Funds appreciate this opportunity to comment on the proposed rule. We respectfully urge the Commission to conclude the rulemaking process in time for a new rule to be in place in 2004. We urge as well that the comment period not be extended beyond the December 22 closing date. Thank you for your consideration of these comments. Please do not hesitate to contact us if the Funds can provide further information. Very truly yours, Gabriel P. Caprio Chief Executive Officer Amalgamated Bank 15 Union Square West New York, NY 10003 (212) 255-6200 ************************************************************************ This message contains confidential information and is intended only for the individual named. If you are not the named addressee you should not disseminate, distribute or copy this e-mail or its attachments. Please notify the sender immediately by e-mail if you have received this e-mail in error and delete this e-mail from your system. E-mail transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. Amalgamated Bank therefore does not accept liability for any errors or omissions in the contents of this message which arise as a result of e-mail transmission. If verification is required please request a hard-copy version. ***************************************************************************