December 9, 1997 U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Request for Comments on Amendments To Rules On Shareholder Proposals, Securities Exchange Act Release No. 39093 (September 18, 1997), File No. S7-25-97. Attn.: Jonathan G. Katz Secretary Ladies and Gentlemen: The Business Roundtable is pleased to submit this response to the recent release by the Securities and Exchange Commission (62 FR 50682, September 26, 1997; the "Release") requesting comments on proposed amendments to Rule 14a-8 and related rules governing the process by which shareholders can submit proposals to be included in a company's proxy materials.1 The Business Roundtable recognizes the importance of the shareholder proposal process to excellence in corporate governance in the United States. As we observed in our Statement on Corporate Governance published in September, annual meetings of shareholders provide an important forum for communication between management and shareholders and among shareholders themselves. The consideration of both management and shareholder proposals, however, takes place largely through the proxy process, which gives all shareholders, rather than only those who attend the meeting, a chance to consider relevant matters. Matters brought to shareholder attention through the proxy statement should be matters of significance to the business of the company and to stockholders as a whole. Other matters, such as those relating to personal grievances or political and social issues that will not have a material effect upon the company, are more appropriately discussed in other forums. A key element of the Commission's rules addresses the bases on which a company may exclude shareholder proposals from the company's proxy statement. It is important to note that the rationale for the exclusionary rule is to provide an orderly gatekeeping process to balance the interests of all shareholders from the claims by some that they have a right to command the resources of the company and the time and attention of all shareholders. The inclusion of proposals of little or no significance not only involves additional publication and dissemination expense, but often diverts attention from matters more relevant to the overwhelming majority of shareholders. Many companies have seen the value of their annual meetings substantially diminished by shareholders who seek to dominate meetings to promote discussion of proposals that are of minimal interest to most shareholders. The net effect is that all shareholders are often asked to underwrite the direct and indirect costs associated with the interests of a small but organized and insistent few. For this reason, it is essential to the proxy statement and annual meeting process that the goal of open discussion be tempered by judicious consideration of materiality. The Commission's plain-English initiatives, which we applaud, implicitly recognize that shareholders have limited time to spend on their decision-making efforts. The right to command a portion of this limited resource is and should itself be limited. Placing before shareholders too many voting decisions on matters that do not have a significant impact on the value of their investment carries the risks of reducing attention devoted to more material issues, creating shareholder apathy about voting, or causing investors to delegate voting responsibility to others, thereby breaking the link between voting and pursuit of economic returns. That this may already be happening is suggested by the growth of services that advise institutions on proxy voting policies, sell pre-packaged voting guidelines, and vote on behalf of some clients. The Business Roundtable commends the Commission on its efforts to craft a package that balances the needs of the various participants in the shareholder proposal process and on its efforts to engage all interested constituencies in a dialogue on this process. We specifically commend the Commission for retaining an approach that, with the exception of the "override" proposal, generally preserves the existing framework of proxy rules and the Commission's important role as an arbiter in that process. The Business Roundtable endorses in principle the package presented in the Release. We believe that the proposed changes, as a whole, will increase shareholder access to companies' proxy statements and that such right will be balanced by the obligation to achieve higher levels of shareholder support or be eliminated from future proxy statements under the proposed increased resubmission standards. However, we wish to emphasize our view that, in certain important respects, the proposals as currently drafted would work to the detriment of companies and their shareholders and should be modified in order to preserve the integrity of the process under the new rules. In summary, we note the following: We believe it is critically important to raise the resubmission thresholds substantially, as proposed in the Release, as a means of culling proposals that have been rejected by overwhelming percentages of shareholders. Without this element, the package as a whole would be substantially unbalanced. We see some theoretical appeal to the concept that endorsement by a material percentage of a company's outstanding shares might well be a basis for inclusion in the company's proxy statement of a proposal that would otherwise be excluded under the ordinary business or materiality exclusions. However, unlike other elements of the proposed package, this provision is completely new, and in its current form is unworkable. We can accept the Commission's proposal to reverse Cracker Barrel as an element of a comprehensive package of amendments that also address interests of the issuer and the entire shareholder community. No action should be taken on Cracker Barrel except as part of a balanced package. The proposed changes to the rule governing discretionary voting of proxies impose unwarranted new burdens on companies, giving greater weight than ever before to proposals submitted outside the framework of the proxy statement. The result is likely to encourage the submission of proposals outside of such framework to the detriment of the shareholder community as a whole. On other matters, we support the Commission's proposed changes to the rules governing exclusion of proposals motivated by personal grievances (Rule 14a-8(c)(4)), but we also note that the existing rule provides a useful fact- finding mechanism, with the SEC acting as arbiter. On the proposed amendment to the rule that now permits companies to exclude proposals on the grounds of relevance (Rule 14a- 8(c)(5)), we believe the standard for exclusion should be based on a percentage test uniformly applied to all companies. We also support the Commission's proposal to retain the minimum-shareholding requirement for shareholders wishing to submit proposals, but believe that the minimum holding should be substantially larger than as proposed by the Commission. We note in the conclusion some further views based on current public discussion of the proposals. RESUBMISSION THRESHOLDS The Business Roundtable supports the Commission's proposal to raise the resubmission thresholds from the current levels of 3%, 6% and 10%. Resubmission standards serve the important function of culling from the proxy statement those proposals that, after they have had a fair opportunity for consideration by all shareholders, have been rejected by overwhelming percentages of shareholders. Permitting exclusion after testing through the voting process thus respects the rights of all shareholders: those opposed to - - as well as those favoring -- the proposals in question. We expect that the Commission's proposed changes to the shareholder proposal rules, if adopted, will increase shareholder access to companies' proxy statements and result in a greater number of shareholder proposals admitted to a company's proxy statement. It thus becomes even more important to remove those proposals that have not mustered a sufficient degree of support after having exposure to shareholders through the proxy statement and voting process. Also, we believe that a substantially higher resubmission level is essential in light of the proposed new "override" provision. A shareholder who achieves access to a company's proxy materials should be required to win an even larger percentage of the vote at the meeting in order to be eligible for future access. Therefore, while we believe the proposed 15% and 30% thresholds are appropriate for the second and third years, respectively, we believe it would be better to increase the threshold applicable to the first year's vote from the Commission's proposed 6% to 10%. We believe that without the Release's proposed increases in the resubmission thresholds, the package as a whole would be substantially unbalanced. "OVERRIDE" PROVISION In the context of the present package, with a large increase in the resubmission thresholds, The Business Roundtable would see some theoretical appeal to the concept that endorsement by a material percentage of a company's outstanding shares might well be a basis for inclusion of proposals that would otherwise be excluded under the ordinary business or materiality exclusions. To be acceptable to the business community, however, the endorsement percentage could not be less than 5%, the mechanics of the process require very substantial revision to make them workable, and there should be a corresponding benefit to corporations and their shareholders for undertaking the burden likely to be imposed by this process. Neither companies, nor shareholders, nor the Commission have had experience working with this concept. This makes imperative careful implementation with full consideration of its details and potential problems. In general, it should serve as a safety valve for the inclusion of proposals that would otherwise be omitted, but proposals admitted under this new concept should be the exception rather than the rule. The provisions of the rule need to assure the integrity of the process by which the "override" is achieved, while at the same time not distorting the existing processes to accommodate this exceptional mechanism. The need for further study of this prominent building block of the Commission's proposal underscores the wisdom of not adopting the reform package for the 1998 proxy season. The proposal in its current form has numerous structural problems that may result in conflicts over interpretation of the rules, substantial abuse by proponents who try to "game" the new system and, in effect, conduct multiple shareholder solicitations in the guise of assembling endorsements for a proposal, or the inclusion of proposals supported by persons who are not shareholders at the time of the company's meeting. Our concerns are noted below: The percentage required should be uniform for all companies and set at not less than 5%. … The purpose of a business enterprise is to generate economic returns to its owners. Because of this, corporation law recognizes that shareholders receive votes in proportion to the number of shares they hold, which is in proportion to their economic interest, rather than each shareholder receiving one vote. Consequently, it is appropriate that an ownership percentage be the relevant standard and that it be set at a significant level. The proposed 3% threshold is too low a standard, and a more appropriate standard would be 5% to 10%, which is a more commonly recognized standard of materiality. Likewise, it should not suffice that a certain number of shareholders seek inclusion of a proposal, regardless of their percentage ownership. Use of the "override" should be limited to proposals that recommend but do not require action by the company. … The "override" is relevant only in those circumstances where both the company and the Commission would otherwise agree that the proposal is immaterial or deals with matters of ordinary business. Because of this limited role, the "override" should apply only to proposals that recommend action by the company or the Board of Directors and do not purport to compel any corporate action. Shareholders should be allowed either to propose or endorse only one proposal per company in each proxy season. … Although the Release has been structured to permit a shareholder to endorse a proposal without indicating whether the shareholder intends to vote for it, requiring each shareholder to choose only one proposal to back furthers the important goal of bringing to a vote only those matters which are truly significant to shareholders. Without such a limitation there will be a strong possibility that shareholders will engage in reciprocal endorsement arrangements to assure that they receive support for inclusion of a proposal when they seek it. Shareholders should be required to choose either to seek the requisite percentage endorsement or to seek inclusion on grounds independent of the "override", but should not be permitted to pursue both avenues within the same proxy season. … We believe the system would be more equitable and efficient if proponents who decide to seek inclusion of their proposal in a company's proxy statement on grounds independent of the "override" are limited to that avenue of access for that proxy season. If the company determines to exclude the proposal and the Commission's Staff issues a no- action letter, the shareholder will be free to conduct an "override" solicitation in the following proxy season. Alternatively, a shareholder would be free to submit evidence of the required endorsement in lieu of seeking a decision by either the company or the Commission as to the applicability of either the ordinary business or the materiality exclusions. One might refer to this as an "endorsement" mechanism rather than an "override" mechanism. Restructuring the proposal in this way would make this approach analogous to the Commission's rules which permit exempt communications or proxy solicitations by shareholders, but not both in the same relevant proxy season. In contrast, the proposed mechanics will unnecessarily tax the amount of Commission and issuer resources devoted to a single shareholder request within a single year. … The proposed 40 day response time distorts the entire proxy process to accommodate a method for submitting proposals that should be the exception rather than the rule. If a shareholder were to submit a proposal just after the conclusion of a company's annual meeting for consideration at the company's next annual meeting, the company would be required to take a position on exclusion with respect to the proposal many months earlier than now required. … The imposition of a short response time will discourage discussion with proponents because it will become necessary for companies to object formally to proposals rather than risk losing their rights by the passage of time. The result, we believe, is likely to cause companies to seek to exclude more proposals than they might otherwise if they had the opportunity to discuss alternatives with the proponent. … If the Commission adopts a revised schedule for submission of earlier responses by companies, a company should nevertheless be permitted to utilize the existing time frames for excluding a proposal on the basis of mootness. There would be no point in having a matter that is moot go forward for a vote. The mechanics of the endorsement process undermine its integrity. … The required endorsement percentage should be maintained through the record date of the shareholder meeting. The Release would allow proponents to solicit support up to a full year before any vote on the proposal, without any assurance that the endorsers will continue to be shareholders at the time of the annual meeting. This rule could, for example, be abused by an interest group that passed ownership of a share block from one member to another with each successive group signing an endorsement during its period of ownership. While this concern might be addressed by introducing the concept of a "bona fide" owner, the more important point is that the lack of a continuing ownership requirement undermines a critical purpose of the rule -- to ensure that matters of importance to the company's current owners be brought to a vote of the shareholders. While we do not propose that endorsers promise to continue to own the shares they hold at the time they give their endorsement, a subsequent sale by them should negate their endorsement. Endorsers should be required to advise the company if they sell their shares prior to the record date of the shareholder meeting and companies should have the right to require evidence of the necessary ownership as of such date as well as of the date the proposal was first submitted. … Outstanding shares should be based on a more current date rather than, as proposed, based on the total number of shares outstanding for the year before the year for which the meeting is held. The rule as proposed could cause proposals to be based on an outstanding share number that fails to reflect significant changes in shares outstanding as might be caused by mergers or recapitalizations as well as more routine transactions. Outstanding shares could, for example, be determined as the number published in the company's quarterly report on Form 10-Q most recently filed before the date the proposal is submitted to the company. The rules should explicitly specify that a proponent conducting an "override" solicitation will not have access to shareholder lists unless they are otherwise eligible under the Commission's rules. … We believe that the rule as proposed does not intend to allow shareholders access to shareholder lists or company mailings pursuant to the Commission's existing rule governing such access (Rule 14a-7), but we urge the Commission to make this explicit. There is no basis to grant a federal right to shareholder lists for the limited purpose of the "override". Other effective means exist for shareholders to communicate with those who might share their interests in the subject matter of the proposals, including forums that represent institutional investors, individual investors and socially active investors. … If proponents pursuing an "override" were given access to shareholder lists under the proxy rules, we would have substantial further comments on necessary amendments to the procedures governing such access. REVERSAL OF CRACKER BARREL Cracker Barrel served the useful purpose of establishing a bright-line test to permit companies to exclude from proxy statements shareholder proposals that addressed employment policies, notwithstanding possible assertions that the issue in question raised important social policy issues. The more general purpose, which we support, was to eliminate proposals that dealt with matters of ordinary business and that should not, in the normal course, be the subject of shareholder vote. While it is often the case that the matters raised are very important in their own right, they are often not appropriate for action by shareholders and are more properly within the purview of the board of directors and management. Because of the nature of some of the proposals, some companies have chosen to permit the proposals to go forward even though they would have been permitted to exclude them under the Cracker Barrel standard. Because of these factors, we understand the considerations that would lead to a reversal of Cracker Barrel, but we emphasize that the relaxation of the Cracker Barrel position, if implemented without balancing adjustments in other aspects of the shareholder proposal rules, will tilt the process unduly toward those shareholders and interest groups who seek to use the process as a forum for special interests. Thus, a reversal of Cracker Barrel should be effected only as an element of a balanced package of amendments that also address interests of the issuer and the entire shareholder community. DISCRETIONARY VOTING OF PROXIES The Commission's proposal to amend the rule governing discretionary voting of proxies (Rule 14a-4) imposes substantial new burdens on companies and would encourage shareholders to submit proposals outside the proxy statement process. This is especially disappointing because we believe the proposed changes were intended to establish greater certainty for companies with respect to their right to exercise the discretionary authority normally granted as part of the proxy process. As proposed, a company would be deemed to receive timely notice of a proposal submitted outside the framework of the proxy statement process if it received the notice at least 45 days (or such date specified by the company's advance notice by-law) before the date on which the company first mailed its proxy materials for the prior year's annual meeting. This aspect of the proposal, in itself, would add useful certainty to the definition of timely notice, but we note that a company would also be required to: "Discuss" the nature of any such matter. Currently, under the Commission's Idaho Power no-action letter, it is sufficient to "advise" shareholders of the nature of any such matter. While we doubt the Commission intended any difference in the resulting disclosure standard, we propose for clarity that the language be revised to continue the "advise" standard expressed in Idaho Power. Add a box to the proxy card enabling shareholders to withhold discretionary voting authority with respect to the matter. Currently, a box on the proxy card is required only if the proposal is the subject matter of an opposing proxy solicitation. We believe the current standard should be continued. File their proxy materials in preliminary form with the Commission. Currently, such filing is not required as a result of amendments adopted by the Commission in 1992 to limit preliminary filings that otherwise unnecessarily add to the cost and time burden for companies and the Commission. A company should not be required to file its proxy materials in preliminary form with the Commission as a result of a shareholder proposal submitted outside the framework of the proxy statement process. Each of the above proposed changes gives greater weight to proposals submitted outside the framework of the proxy statement than they have had before. The result is likely to encourage the more frequent resort to such proposals to the detriment of shareholders whose principal source of information is a company's proxy statement. Although we believe the Commission intended the proposed amendments to address concerns expressed by companies arising from earlier Commission and judicial interpretations of the discretionary voting rule, the amendments as currently proposed impose new administrative burdens on companies and, by encouraging proposals outside the proxy statement process, work to the detriment of the shareholder community as a whole. OTHER MATTERS Personal Grievances The Commission proposes to amend the rule that now permits companies to exclude proposals arising from a personal grievance (Rule 14a-8(c)(4)). The rule now results in the Commission Staff acting in a fact-finding mode if a company asserts that a proposal that is neutral on its face is motivated by a personal grievance. The Commission proposes that Staff would no longer act in a fact-finding mode and take no position in such circumstances. If the company excluded the proposal the company and the proponent would then have to resolve any differences through the judicial process. We support the Commission's proposal as an alternative to the existing rule. It is appropriate to exclude a proposal that is neutral on its face when in fact it is motivated by personal grievance for the same reason courts exclude plaintiffs who do not have standing to bring a claim: they waste the resources of the process, and it is likely that if the matter in question is important, it will be best and most appropriately presented by those who have a genuine interest in the outcome. Thus, we would strongly oppose any suggestion that facially-neutral proposals be added to a company's proxy statement without some fact-finding where a company asserts that a personal grievance is present. We believe that the Commission Staff has played a useful role as arbiter in such circumstances, but we also believe that companies would act responsibly when seeking to exclude proposals based on the proposed revised rule, and therefore support it. Relevance The Commission proposes to amend the rule that now permits companies to exclude proposals on the grounds of immateriality (Rule 14a-8(c)(5)). The rule now provides that a company may exclude a proposal if it fails to meet both a quantitative and a qualitative test. First, the rule as proposed would provide that, under the quantitative test, a company would be permitted to exclude a proposal relating to a matter involving the purchase or sale of services or products which represents the lesser of $10 million in gross revenues or total costs or 3% of the company's gross revenues or total assets. We believe that rather than the threshold amount being an arbitrary $10 million for large companies, a more reasoned approach would be to apply a materiality standard based on a percentage test uniformly applied to all. We support the 5% standard in the current rule rather than the proposed 3% standard and we support an economic test on broader grounds than now proposed. Second, the Commission proposes to eliminate the qualitative test that now permits exclusion only if the proposal is not "otherwise significantly related" to the company's business. We support elimination of this vague qualitative standard in the interest of clarity. If the Commission nevertheless determines to retain a qualitative standard, we believe it should be expressed as "is not otherwise material to the company's business". This latter standard would more precisely underscore the requirement that the proposal must have some relationship to an economic materiality test. Eligibility to Submit Proposals Finally, we support the Commission's preservation of the requirement that in order to be eligible to submit a proposal, a shareholder must continuously have held for at least a year by the date of submission of the proposal a minimum amount of securities entitled to vote at the meeting, and to continue to hold those securities through the date of the meeting. We believe, however, that the requisite minimum amount of securities should be substantially higher than as proposed by the Commission. CONCLUSION The Business Roundtable believes the Commission has presented a basic framework from which meaningful and workable changes can be achieved. However, as noted above, several aspects require further study in order to ensure that the new proposals do not exacerbate current problems or create new ones. As we comment on the Commission's proposals, we are aware that certain proponent groups have obtained considerable publicity for their opposition to particular elements of the package. We have sought in our comments to Commission staff and discussions with proponent groups to be receptive to a wide variety of issues and concerns. In the context of the Commission's proposals, including the proposed resubmission thresholds of 6%, 15% and 30%, we have considered in an open manner the application of the "override" concept even though it is a highly problematic concept. If the resubmission thresholds or other important elements of the package are altered as a result of opposition from proponent groups, the concept of the current "package of proposals" will disappear, and it will be more appropriate to consider each element of any revised Commission proposal on its own merits. In such circumstances, we would oppose the "override". Moreover, because of the various technical objections to the mechanics of the override, making the "override" provision workable and fair might render it so complex to administer that it would not be worth keeping at all. In addition to the comments addressed here, representatives of The Business Roundtable's Corporate Governance Coordinating Committee will be pleased to discuss more detailed suggestions and alternatives with the Commission staff. Thank you for this opportunity to comment on these issues. Sincerely, Walter V. Shipley Chairman & CEO The Chase Manhattan Corporation Chairman, Corporate Governance Task Force The Business Roundtable cc: The Honorable Arthur Levitt The Honorable Norman S. Johnson The Honorable Isaac C. Hunt The Honorable Paul R. Carey The Honorable Laura Unger WA972820.163/5+ _______________________________ 1 The Business Roundtable is an association of more than 200 chief executive officers of leading U.S. corporations employing over 10 million people. The CEOs examine public policy issues that affect the economy and develop positions which seek to reflect sound economic and social principles.