Association for Investment Management and Research
2 July 2003
Mr. Jonathan G. Katz
Re: Notice of Solicitation of Public Views Regarding Possible Changes to the Proxy Rules-File S7-10-03
Dear Mr. Katz:
The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to provide input as the SEC considers possible changes to the existing proxy rules. In its Concept Release, the SEC staff seeks comments particularly on aspects of the rules focusing on (1) shareholder proposals; (2) the nomination process; (3) election of directors; (4) solicitation of proxies for director elections; (5) contests for corporate control; and (6) disclosures and other requirements imposed on large shareholders and groups of shareholders.
The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets.
Our comments generally focus on two areas: the existing rules for shareholders to nominate directors, and the rules pertaining to shareholder proposals.
Given the role of the board of directors to oversee corporate management, we believe that shareholders should be provided greater access to the system of nominating those directors. We do not suggest this lightly. The proxy system should not be used to further self interests, or attempts to promote agendas through election contests. We believe that the interests of shareholders will be best served in focusing on creating a board with members that have the diversity of talent, knowledge, the relevant expertise needed to oversee the workings of that company, and a commitment to act on behalf of those shareholders.
We distinguish comments in this area from those addressing reforms to the existing process for submitting shareholder proposals. While we believe that clarification and consistent application of the rules is necessary, we are cautious to suggest more dramatic reform at this time.
Each of these areas is discussed more fully in our comments below.
We commend the SEC for undertaking this comprehensive review of its proxy rules, with an eye to implementing changes. This action is responsive not only to recent proxy challenges that highlight certain shortcomings in the current rules, but also conveys a willingness to involve investors more fully in the proxy process.
We believe that the relationship between investors and corporations in which they hold stock can aptly be viewed as an owner/agency relationship. In many ways, the corporation exists because of the continued ownership by the shareholders, who have rights by virtue of holding stock in that company. Yet, management can find itself embroiled in controversy as it exercises its authority to make business decisions that may ultimately be revealed not to have been in the best interests of shareholders.
We are only too keenly aware of situations where power entrusted to management has been flagrantly mismanaged, often at a great cost to investors-not only through devaluations of stock and earnings losses, but also through the loss of confidence in the corporate system. Once shareholders trusted management to make the "right" choices and to safeguard their interests; however, the recent misuses of power have produced a mistrust of the current system. As a result, shareholders may feel a need to involve themselves more fully in aspects of the proxy process.
Election of Directors
Amending the proxy rules to allow shareholders to nominate directors is one way to increase shareholder involvement in the corporate governance issues of the corporation. Most importantly, we believe that shareholders should be allowed reasonable involvement in a process that creates the body that oversees many of management's decisions that may directly impact shareholder interests.
We understand the rationale underlying Rule 14a-8 that specifically excludes shareholders from working through the company proxy system to nominate directors, as a way to prevent unwarranted election contests. But we believe that there are ways to allow shareholder participation without sacrificing a stable process.
Current proxy rules require fairly extensive disclosure in proxy statements about each director and nominee for director, when there is an election of directors. We support continuation of this disclosure. When casting their votes, shareholders are entitled to know about directors/nominees' business experience, involvement in legal proceedings, business transactions in which they have a material interest and other business relationships, as well as directors' compensation in that position, their past attendance at board meetings, and disagreements with management that have resulted in decisions not to stand for reelection. In addition, there has been much recent focus on ensuring the independence of board members, and how "independence" should be defined. We consider this to be a positive development in addressing corporate governance issues.
We also note, however, that disclosure and independence issues are separate from ensuring that the directors who are nominated and ultimately elected to serve on the board are the most qualified. And, therein lies the need and opportunity for shareholders to make a positive difference in the election of directors process.
We believe that the concept of a board with relevant talents and a fiduciary commitment to shareholders should be the goal toward which board membership should aspire. To this end, we suggest that the SEC consider requiring the proxy statement to contain a statement addressing how the qualifications of each nominee or current director provides diversification to, and strengthens the Board. We also suggest that a similar requirement apply if shareholders are able to nominate directors.
We are not advocating that standards should be lowered randomly or substantially for allowing shareholders entry into this process. We believe that the proxy system is not one to be used for the purpose of furthering personal agendas, or to benefit anyone other than the shareholders of that particular company, and that safeguards must be implanted in any reform of the current system. We believe that by building in safeguards, the proxy rules can be changed and augmented without substantially risking the stability of the proxy process. We urge the SEC to take this approach in conducting its comprehensive review, with an eye to increasing the shareholder's voice.
Basis for Reform
In general, we are more cautious to suggest reform to the current rules pertaining to shareholder proposals for fear that it may result in a disruptive process; however, we believe that there may be room for reform, so that relevant proposals actually get presented for shareholder vote. While we believe that shareholders should be given a more active role in selecting directors, we think there is a fine balance to be achieved in allowing shareholder activism and usurping management's ability to perform its role by making business decisions, formulating business plans, and entering into transactions on behalf of the corporation. In general, we believe that a fully diversified and qualified board of directors, which oversees management, and truly represents shareholders, is in the best position to weigh management's actions.
However, we also believe that certain proposals that have the ability to directly impact shareholders interests (e.g., the expensing of stock options) should be submitted to shareholders for their approval, in keeping with the SEC's approval of new NYSE and Nasdaq rules that require shareholder approval of equity compensation plans. We continue to believe that the number of shareholder proposals that would warrant this approach remains limited. In striking the appropriate balance on whether proposals should be allowed, we suggest consideration of the following: (1) those issues that directly affect shareholders' wealth, such as issuance of stock options, merger and acquisition decisions, and capital structure decisions (e.g., whether to issue large amounts of debt or equity) as contrasted with (2) those issues that affect shareholder wealth only indirectly (e.g., how to organize the various operating units of the company, which products to develop, and other non-capital decisions).
Under current Rule 14a-8, companies can exclude a range of shareholder proposals, including those that deal with proposed actions that have already been substantially implemented by the company. We believe that provisions like this may be easily manipulated by management. We suggest that staff provide interpretations of how companies may apply this.
Under current rules, companies that want to exclude shareholder proposals submit their basis for exclusion to the SEC staff for staff's review. We would hope that this review would provide a consistent treatment that ultimately provides the shareholder with a clear road map of what is acceptable, and what will routinely be excluded under the rules. However, we understand that certain shareholder proposals may be excluded despite the fact that they appear substantially similar to other shareholder proposals that are allowed to go forward. (See, e.g., AIMR Corp., SEC no-action letter (Apr. 17, 2000), 2000 WL 502310: General Motors Corp., SEC no-action letter (Apr. 10, 2000) 2000WL 518080). We therefore suggest that the staff's review of companies' submissions on proxy exclusions provide a consistent and detailed explanation of the determining factors so that shareholders can more fully understand the rationale and thus better prepare future submissions.
We applaud the SEC's efforts to strengthen the proxy system by considering changes to current rules. We urge a comprehensive review of the existing rules and the current barriers that curtail shareholder involvement. We believe that it is important to achieve a balance where shareholders can assume a more active role, while still preserving the needed stability of a solid proxy system.
We look forward to commenting more specifically on the staff's recommendations, once they are issued for public comment. If we can provide additional information before then, please do not hesitate to contact Deborah Lamb at 770.971.7010, firstname.lastname@example.org, or Linda Rittenhouse at 434.951.5333, email@example.com.