June 13, 2003
Jonathan G. Katz, Secretary
RE: File No. S7-10-03
Dear Mr. Katz:
On behalf of the American Corporate Counsel Association, ACCA's Corporate & Securities Law Committee is pleased to have the opportunity to comment on "Possible Changes to the Proxy Rules." ACCA has more than 14,000 individual members who act as in-house counsel to more than 6,000 business entities. The Corporate & Securities Law Committee is the largest of ACCA's committees, with over 4,600 attorney members, most of whom work in public companies that are subject to the Commission's disclosure requirements.
ACCA recognizes the importance of the Commission's request for comments as this project is currently in the conceptual stage. We have drawn on the practical experiences of many of our members to provide you with information that hopefully will assist the Commission in its consideration of potential changes to the proxy rules. Since the overall topic of proxy rule changes is extremely broad in scope and coverage, we are limiting ourselves to some brief points on a limited number of sub-topics. We do plan to comment further if and when actual rule proposals are published in the future.
We would first like to mention that every company is still implementing a record-level of new regulations resulting from the Sarbanes-Oxley Act of 2002, stock exchange listing standards and SEC rulemaking during the past year. Many of these changes are not yet effective - and some have not even been adopted yet.
The core principle behind most of these reform efforts is assuring that directors are independent and accountable to all shareholders. As a result of these new independence requirements, nominating committees need to perform an extensive amount of due diligence on both nominees and incumbent directors to determine whether there are any relationships that may impact an individual's independence. In addition, audit committee members are subject to financial literacy and expertise requirements. The Commission and the self-regulatory organizations have placed these responsibilities solely on the company; apparently taking for granted that a company's board of directors controls the nomination of director candidates.
More importantly, until all the new rules are fully implemented, it is difficult to gauge the extent of the collective change on corporate culture. Until the impact can more accurately be assessed, we believe it is appropriate to wait before making the proposed changes, which will cause large-scale changes to the regulatory landscape. Clearly, much of what is noted in the SEC press release constitutes a dramatic change. The bottom line is that the Commission should ensure that any proposed changes are proven to produce good corporate governance practices and truly benefit shareholders through enhancing shareholder value.
Finally, the proxy rules should not be revised on the basis of anecdotal input extrapolated to suggest that institutional investors and special-interest groups are being uniformly kept from meaningful discussion with companies. We do not believe that this is the case, and it ought not be the basis for imposing an inappropriate regulatory regime on all public companies. The Commission should gather sufficient hard evidence before it proposes to overhaul any fundamental corporate governance tenets that may have unintended dramatic consequences.
Even if companies were not going through such significant changes at this time, we would urge the Commission to proceed with caution when considering what clearly is a fundamental change to the manner in which companies are governed. Changes to this framework requires a comprehensive understanding of complex factors of our market economy - from the interplay of the broader regulatory infrastructure to the manner in which proxy advice is given and followed - since changes in selection of director candidates could ultimately result in realignments of American boardrooms. Further, the election of directors is at the core of how a Board functions and how a company is governed and this has traditionally been the province of state rather than federal law.
Rather than altering this fundamental component of a company's governance framework, we believe it is wiser to address the issues that investors believe are most critical at this time with increased disclosures. For example, if investors are primarily concerned about a board's inadequate responsiveness to a shareholder proposal that receives a majority vote, the SEC might propose that companies disclose in a timely manner what actions the company implemented in response to shareholder proposals that pass.
Another logical disclosure proposal could be a requirement that the nominating/governance committee publish a report in the annual meeting proxy statement to address the processes employed to identify and evaluate qualified director candidates and evaluate shareholder nominations. The audit and compensation committees already include reports to stockholders in proxy statements - and the nominating/governance committee could address any concerns with a report as well.
Due to the myriad of state law problems, we highly recommend that the Commission continue to follow the staff's recent decision to allow companies to exclude binding shareholder proposals regarding bylaw amendments along the lines of the recent AFSCME proposals. Lacking statutory authority, we believe the SEC should tread carefully before federalizing substantial aspects of corporate law, a public policy field that rightfully is the province of the states.
Despite the recommendations above, we cannot stress enough the importance of moving cautiously in conducting rulemaking in this area. The need to assess the impact of Sarbanes-Oxley and its related rulemakings cannot be overestimated. At more than a few companies, corporate culture truly is changing - and the need to allow these changes to take root is great.
We offer the Commission any assistance it needs to consider this critical proposal. If you wish to contact us for more information, you can contact Broc Romanek at 703.237.9222.
American Corporate Counsel Association
cc: William H. Donaldson, Chairman