Calvert Group, Ltd.

June 12, 2003

Via electronic delivery:

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549

Re: File No. S7-10-03

Dear Mr. Katz:

On behalf of Calvert Group, Ltd. ("Calvert"),1 America's largest family of socially responsible mutual funds, I am writing to petition the Securities and Exchange Commission (the "Commission") to adopt new rules under Section 14 of the Securities and Exchange Act of 1934 to permit shareholder-nominated director candidates to appear in the corporate proxy statement and proxy ballot.

At Calvert, we believe that healthy corporations are characterized by sound corporate governance and overall corporate social responsibility. The well-governed company meets high standards of corporate ethics and operates in the best interests of shareholders; while the socially responsible company meets high standards of corporate ethics and operates in the best interests of all stakeholders, including shareholders, employees, customers, communities and the environment. In our view, companies that combine good governance and corporate social responsibility avoid unnecessary financial risk and are better positioned for long-term success.

Sound corporate governance, of course, requires that the owners of a corporation (the shareholders) and their elected representatives (the board of directors) exercise conscientious oversight over corporate managers and hold those managers accountable for their actions. Changes to Rule 14a-8 are urgently required if such oversight and accountability is to be achieved.

As the Commission is well aware, recent corporate scandals reveal an almost systemic breakdown in corporate governance, oversight and accountability that has shaken investor confidence and roiled financial markets. Government lawmakers and regulators have responded promptly. The Sarbanes-Oxley Act of 2002 created an accounting oversight board, stiffened criminal penalties for corporate wrongdoing, and addressed such issues as the accuracy of corporate financial statements, auditor and analyst independence, company officials' sales of corporate stock, and funding for the Commission. At the same time, the New York Stock Exchange ("NYSE"), at the request of the Commission, has proposed significant revisions to its listing requirements that will cover a range of corporate governance issues - including the independence of corporate directors and key corporate governance committees. The Commission also adopted new rules on proxy voting disclosure by mutual funds and investment advisers, and is considering other reforms.

These are commendable reforms. Yet the most elemental reform of all may simply be to grant corporate shareholders access to the proxy ballot so that they can nominate their own director representatives. This step alone could significantly enhance shareholder and director oversight, strengthen corporate governance, and improve corporate accountability.

In the aftermath of recent corporate scandals, there has been much discussion of director independence. Underlying this discussion, however, is the more fundamental issue of director representation. Corporate directors are meant to represent shareholders. Indeed, corporate directors would be unnecessary but for the fact that shareholders are too many and too dispersed to effectively oversee corporate managers and govern publicly-traded corporations themselves. The shareholders must therefore govern through their representatives: the directors.

These are elementary principles of American corporate law. Why then do the shareholders who directors ostensibly represent not have effective means to nominate and elect those directors? In theory, of course, they have the right to do so. Most state corporation laws provide that a company's shareholders elect directors, or that shareholders vote for their choice among nominees for boards of directors, or that shareholder proxies will be solicited for the election of directors. In practice, however, such provisions are meaningless. Although state laws permit shareholders to nominate and elect directors, these fundamental rights are effectively unavailable so long as shareholders and their nominees are denied equal access to the corporate proxy.

Instead, shareholders who wish to put their own candidates on the ballot must launch proxy fights at their own expense, while management can freely use company funds to finance the election of their own hand-picked directors. To further complicate matters, companies often erect additional obstacles, including regulatory challenges and costly litigation, to thwart investor-led proxy fights.

Under our present system of corporate governance, for each board seat there is only one candidate - backed by company management, and with the election financed by company funds. This process is undemocratic, and is in fact quite an anomaly, as directors are supposed to represent shareholders, not management. Needless to say, it also creates an inherent conflict of interest at the heart of our system of corporate governance: allowing corporate management to hand-pick the boards who are supposed to oversee and police them. This system creates an undue reliance on government regulation and oversight to accomplish what shareholders could often accomplish by themselves if only democracy were extended to corporate boardrooms.

Calvert therefore urges the Commission to adopt new rules providing long-term shareholders with equal access to the proxy for purposes of nominating independent directors to represent their interests. At the same time, we understand that such rules need to be designed so as not to allow or facilitate low-cost hostile takeovers by short-term investors or nuisance candidacies by investors who do not have a stake in a company's long-term interests.2 We would therefore recommend that the Commission consider the following criteria for shareholder proxy ballot access:

  • Minimum Ownership Threshold: The nominating shareholder or shareholder group should own a substantial block of shares (e.g., 1% to 3% minimum) or consist of a certain, minimum number of shareholders (e.g., 100), with each shareholder holding a minimum amount of stock (e.g., $10,000).

  • Minimum Holding Period: A majority of the shares held by the nominating shareholders should have been held for a minimum period of time (e.g., one-year holding period).

  • Maturity of Company: Qualifying shareholder groups should have the right to nominate independent directors to represent their interests only for companies whose shares, or those of the predecessor company or surviving company in the event of a merger, acquisition or other re-structuring, have been publicly traded for a minimum of three years.

  • Maximum Permissible Slate: Each qualifying shareholder group should have the right to nominate a maximum number of directors at each shareholder meeting that in all cases should be less than a majority of the entire board, regardless of how many competing shareholder groups are seeking to nominate candidates. While shareholders should have reasonable access to the ballot, this access should not open a back door to corporate takeovers.

  • Exemption from Regulation 13-D: Communications among shareholders holding more than the 1% to 3% threshold should be exempted from Regulation 13-D so long as such communications are confined to director nominations and elections and are not an attempt to change control of a company, either through a tender offer or a proxy contest for board control. A safe harbor should be created, in other words, for shareholder-nominated director slates constituting less than a majority of the board, as well as shareholder-sponsored efforts to urge other shareholders to withhold votes from management-nominated directors.

  • Financial Expert: To the extent regulatory reforms require the chair or other members of corporate audit committees to possess certain minimum accounting or other financial experience and expertise, shareholder groups nominating director candidates should have the opportunity to nominate candidates specifically for those director positions as well.

  • Director Statement: Each director nominee, whether shareholder- or management-nominated, should be provided the opportunity to include a background statement and biography in the proxy statement in support of his or her candidacy.

  • Provisions to Prevent Collusion: The new rules should contain appropriate provisions to prevent management or the incumbent board from seeking to pre-empt an independent shareholder effort to nominate directors by, for example, colluding with a friendly shareholder group to nominate directors who are in effect their own nominees. Such provisions should also apply to the prevention of collusion between shareholder groups seeking to change control of a corporation by combining slates to elect a majority of directors.

Calvert believes the above criteria will allow long-term investors equal access to the proxy for purposes of nominating directors while creating a nomination and election process that is fair and consistent with the policies underlying Rule 13-D.

The time has come to democratize corporate elections and bring accountability to the corporate boardroom by providing long-term shareholders the ability to effectively nominate corporate directors. The result will be improved shareholder oversight, increased accountability by corporate management, strengthened governance by corporate boards and less reliance on government intervention to accomplish what more democratically run corporations may often be able to accomplish themselves. Accordingly, Calvert urges the Commission to amend Rule 14a-8(i)(8) to grant shareholders access to the corporate proxy for purposes of nominating corporate directors, and to adopt such other reforms as are necessary to facilitate the same.

* * *

In addition to the above comments as they relate to the election of directors, Calvert would also like to take this opportunity to comment on the "ordinary business" exemption provided under Rule 14a-8(i)(7). Please note that these comments are being made with reference to the Commission's indication last summer that it is considering the elimination of the "ordinary business" exception, even though it is not a part of the Commission's current request for comments.

Calvert recognizes that shareholder access to the ballot for corporate directors is a different matter than access to the proxy for shareholder proposals. In fact, however, these two mechanisms of corporate governance are highly interdependent. Shareholders whose interests are not being well represented by current directors could benefit from access both to the ballot for directors, and to the proxy statement for other purposes. At the moment, shareholders do have some access to the proxy statement for shareholder proposals, but the "ordinary business" exemption has been relied upon to exclude many proposals that we believe are worthy of consideration by all shareholders,3 as well as by management and company directors. It is crucial that shareholders be able to represent their interests to company directors and management through both mechanisms - proxy access for director nominations and for shareholder proposals that bear upon important issues of governance and corporate responsibility.

Calvert has long been a proponent of a shareholder's right to a voice in the management of a company, be it through true representation on the board or through shareholder resolutions. Calvert worked closely with the Commission in constructing the 1998 Amendments to Rules on Shareholder Proposals. These efforts were rewarded when the Commission reversed Cracker Barrel, and acknowledged that, there being no "bright-line test" to determine when employment-related issues fall within the realm of a company's ordinary business, substantive consideration of no-action requests should proceed on a case-by-case basis. Nonetheless since that time,4 the Commission has continued to apply the "ordinary business" exception to allow companies to omit shareholder resolutions on matters of critical importance to shareholders. We request that the Commission re-consider this practice of disenfranchising shareholders who should have a right to raise their voice and engage in dialogue with management at annual shareholder meetings.

Calvert has always supported the belief that improving shareholder access by allowing shareholders to be informed of and have an open dialogue with management improves corporate governance and long-term shareholder value. Thus, Calvert hopes the Commission will soon consider replacing the "ordinary business" exception with a more carefully circumscribed rule that enfranchises shareholders to participate in legitimate issues of governance and corporate responsibility.

* * *

Lastly, in response to the direction given the Division of Corporate Finance to "consult with all interested parties, including representatives of pension funds, shareholder advocacy groups, and representatives from the business and legal communities," Calvert offers its experience and expertise as a mutual fund company that regularly engages companies in dialogue and shareholder resolutions. Should you like to further discuss the points raised in this letter, please feel free to contact William M. Tartikoff, Esq. or Ivy Wafford Duke, Esq. at 301-951-4881.


/s/ Barbara J. Krumsiek

Barbara J. Krumsiek
Chief Executive Director
Calvert Group, Ltd.

1 Calvert Group, Ltd. is a financial services firm specializing in tax-free and responsible investing by sponsoring a family of open-end, registered investment companies, with approximately $9 billion in assets under management for more than 300,000 shareholders.
2 See, 1980 Staff Report on Corporate Accountability.
3 For instance, Calvert has strongly supported shareholders' interests and need to have a voice in the expensing of stock options (See Letter to the SEC dated August 12, 2002, co-written by Calvert and Walden Asset Management). Yet, at a time when this was a topic of great public interest and scrutiny, such resolutions were still allowed to be excluded from the proxy as being "ordinary business".
4 Since adoption of the 1998 Final Proxy Rules, Calvert has submitted approximately 68 shareholder resolutions to companies in its mutual fund portfolios concerning issues ranging from corporate governance to corporate social responsibility, and five (5) of these resolutions have been subjected to no-action requests of the Commission. Of these requests, the Commission granted No-Action relief based on Rule 14a-8(i)(7) in the following two (2) cases:

  1. Tootsie Roll Industries, Inc., SEC No-Action Letter (January 31, 2002)(granting no-action relief under Rule 14a-8(i)(7) as the request that Tootsie Roll identify and disassociate from any offensive imagery to the American Indian community relates "to the company's ordinary business operations (i.e., the manner in which a company advertises its products)").

  2. Home Depot, SEC No-Action Letter (February 24, 1998)(granting no-action relief under Rule 14a-8(i)(10) as the request that Home Depot prepare a report on its affirmative action policies and programs relates "to the conduct of the Company's ordinary business operations (i.e., employment related matters)").