American Society of Corporate Secretaries
Re: Request for Views Regarding Possible Changes to the Proxy Rules
Dear Mr. Katz:
This letter is being submitted on behalf of the American Society of Corporate Secretaries, an organization whose nearly 4,000 members have a significant amount of collective practical experience in the area of corporate governance.
We appreciate the opportunity to express our views regarding possible changes to the proxy rules and their interpretations regarding procedures for the election of corporate directors.
Citigroup Shareholder Proposal. On April 14, 2003, the Securities and Exchange Commission announced that it had directed the Division of Corporation Finance to formulate possible changes to the proxy rules regarding procedures for the election of corporate directors. Earlier that same day, the Commission denied a request by AFSCME to review and reverse the Division's grant of no-action relief for a shareholder proposal requesting that Citigroup provide shareholders with direct access to its proxy statement. The proposal recommended that shareholders owning 3% or more of Citigroup's stock be given the ability to nominate director candidates to be included in the company's proxy statement and be accompanied by a 500 word supporting statement in favor of such nominees.
Majority Vote Proposals. It is generally known that there exists a high level of frustration among shareholders with respect to the shareholder proposal process. In particular, shareholders are concerned by what they perceive as inadequate responses to shareholder proposals that are supported by a majority of votes cast. While we recognize the frustration regarding majority vote proposals, we do not believe that providing for election contests within an issuer's proxy statement is the appropriate response. We urge the Commission not to blur the important distinctions between the issues surrounding majority vote proposals and issues involving control of the corporation.
Shareholder Democracy. We fear that the popularity in the public press of the concept of "shareholder democracy" serves to place a veil of patriotism on proxy contests fought within an issuer's proxy statement. While we certainly do not oppose giving shareholders a greater voice in the nomination process for directors, we do not believe that infusing elements of the political process into the proxy process will result in greater corporate accountability. We urge the Commission to be cautious of the emotionally charged nature of this term. There are fundamental differences between the process of electing directors and the political process - the most important, in our view, being the fact that boards that nominate candidates are under a fiduciary duty to make decisions in the best interests of all shareholders. Voters in political elections are free to make choices based on which candidate would serve the voter's own individual interest.
II. ISSUES RAISED BY SHAREHOLDER ACCESS TO PROXY STATEMENTS
Fiduciary Duties of Directors.
Under general principles of corporate law, the annual election of directors is an important tool for maintaining the legitimacy of the control over assets held by management. Directors have a duty to nominate persons that they believe will serve the best interests of all shareholders. Shareholders, while free to nominate candidates and wage contests for their election, do not have a similar fiduciary duty. Unlike the case in a political democracy, it is the duty of the incumbent directors to select successors who will benefit the corporation. Clearly, proxy contests serve as a check when this process breaks down.
Proxy material proposed by management is, under basic principles of corporate law, prepared to benefit shareholders. Encouraging annual contests within the confines of an issuer's proxy statement waged by shareholders who are under no duty to advance the best interests of all shareholders is unwarranted and unwise. Furthermore, a contested election within an issuer's proxy statement will serve to confuse shareholders. The current system of requiring separate proxy materials for an election contest promotes full disclosure and a proper level of accountability.
We believe that contested elections will result in constituency boards, which is counter to the focus of recent regulatory and legislative initiatives. The core principle behind recent reform efforts is assuring that directors are independent and accountable to all shareholders. As a result of these new independence requirements, board nominating committees need to perform an extensive amount of due diligence on both candidates and current directors in order to determine whether there are any relationships that may impact the individual's independence. In addition, audit committee members are subject to financial literacy and expertise requirements. The Commission and the SROs have placed these responsibilities solely on the issuer; apparently taking for granted that the issuer's current board controls the nomination of director candidates. Would the nominating committee have the authority to do the same type of due diligence regarding the candidates in the contested election context?
While we support many of the recent governance initiatives, we fear that boards of directors are becoming so engaged in process requirements that there is less time to adequately engage in strategic and long-term thinking. This situation will be made significantly worse if individual directors are forced to campaign for their board seats.
In accordance with new regulations, boards have established or soon will establish criteria for director nominees. Due diligence will require the board to expend added time and resources in order to gain independent assurance that such nominating criteria are satisfied by opposition candidates included in management's proxy statement. In addition, boards often seek to maintain a diversity of viewpoints and/or a variety of specific skills or background experiences to the benefit of shareholders. Such balance could be significantly more difficult to maintain with the election of opposition candidates, particularly as boards grow smaller in size.
There could be tremendous costs imposed upon issuers if the inclusion of opposition candidates in management's proxy statement adds to the weight of the mailing to shareholders. Given the need to disclose the affiliations of both the candidate and the shareholder or shareholder group proposing the nominee, lengthy additional disclosure would be required. We have attached information regarding mailing costs as Appendix A to this comment letter. In addition, we note that the cost of a proxy contest is not simply the printing of additional pages. Annual contests would divert the focus of management. Anticipation of such contests may further discourage qualified individuals from serving.
Finally, we fear that a system of contested elections will serve to place an inordinate amount of power and influence in the hands of proxy advisory services.
III. POSSSIBLE ALTERNATIVES
We offer the following as possible alternatives to be considered to give shareholders a greater voice with respect to the election of directors and to address the concerns regarding majority vote proposals.
Allow New Regulatory Structures to Take Hold While Enhancing Current Disclosure Requirements. The Society has been a strong supporter of the recent initiatives by the stock exchanges to bolster the independence and effectiveness of nominating committees. While a number of these initiatives are not yet in effect, a significant number of boards are already meeting and exceeding these requirements. Some of these requirements include: a requirement that a board have a nominating/corporate governance committee that is comprised exclusively of independent directors; a requirement that the committee have a charter (disclosed on the company website) that addresses criteria used for selecting directors; and a requirement that the company disclose a method for shareholders to communicate with independent directors.
We believe that regulatory efforts to strengthen nominating committees and boards generally are just beginning to have an impact. Perhaps additional listing standards and disclosure requirements that improve the transparency of the nomination process would be beneficial. For example, the Commission might require a report of the board's nominating/corporate governance committee, as it has with the compensation and audit committees. That report might include information such as whether the committee received any shareholder nominations during the year; the procedure used by the committee to evaluate such nominees, and whether the committee recommended the inclusion of any shareholder nominees in the proxy statement.
Listing standards could be further revised to charge the nominating/corporate governance committee with the responsibility for addressing shareholder proposals. The Commission could also require that the committee's report to be included in the proxy statement address the process used by the committee to review shareholder proposals, including information regarding the use of that process during the prior year.
Amend Rule 14a-8 to Allow Proposals Dealing with Election Contests. As an alternative to allowing contested elections with an issuer's proxy statement, the Commission might consider amending Rule 14a-8 to provide that proposals similar to the AFSCME proposals are not automatically excludable under the rules. Shareholders could then submit proposals provided that the proposal does not violate state law.
Revamp Shareholder Proposal Process. In 1997, the Commission initiated a process to substantially alter the way shareholder proposals are submitted. At that time, participants in the process failed to agree on a revised system. Given that the dynamics of the process and available technology have changed significantly over the last five years, we suggest that the 1997 proposals be re-examined.
IV. SUMMARY AND CONCLUSION
We appreciate the opportunity to comment on this important issue and offer our assistance as the Commission continues its analysis.
Assume, for example, that an issuer has to send out 100,000 packages and its proxy statement and annual report together weigh 14 ounces. The ADP ICSonline website* provides a postage calculator for planning purposes, which adds one ounce for the outgoing envelope, voting instruction form and business reply envelope. If each package weighs 15 ounces, 100,000 packages will cost $86,175 at Standard Rate. If the combined weight of the annual report and proxy statement increases to 16 ounces, Standard Rate is not available. The cost for 100,000 packages would be $395,000. Two ounces of weight would increase the cost from $86,175 to $395,000.
Mailing the annual report and proxy statement separately is typically not a practical option due to the logistics of complex mailings and the timing of final document production.