United Brotherhood of Carpenters and Joiners of America
June 13, 2003
Mr. Jonathan G. Katz
Re: File No. S7-10-03
Dear Mr. Katz:
The United Brotherhood of Carpenters and Joiners of America ("UBC") would like to commend the U.S. Securities and Exchange Commission ("SEC") and the staff of the Division of Corporation Finance for their consideration of possible changes in the proxy rules and regulations concerning corporate director nomination and election processes. The Commission's decision to provide the investing public an opportunity to present their views on ways to improve the corporate director nomination process and other issues related to corporate director elections is very timely and will contribute to the process of improving corporate governance practices and policies.
The UBC represents over 600,000 working men and women in the United States and Canada in the construction, wood products and related industries. Our members' retirement interests are held in 100 Taft-Hartley pension trusts with cumulative assets of approximately $38 billion. Over the past two decades, UBC funds have been leading shareholder activists working to improve corporate governance and enhance long-term corporate and pension fund value.
We believe the SEC should begin a broad director nomination process reform effort that includes a limited proxy access right for non-management board candidates, as well as enhanced proxy statement disclosure related to a corporation's director nomination and election practices and procedures, and shareholder participation rights in these processes. The proxy access right should be crafted so as to provide significant long-term shareholders a tool for challenging and improving poor corporate performance. The proxy access right outlined below involves a two-step process with a requirement that an eligible shareholder or group of shareholders first avail themselves of a company's internal nomination processes before proxy statement access is provided. Such an access right will provide serious shareholders a real mechanism for reform while promoting an environment in which constructive dialogue between shareholders and corporate directors and managers is encouraged. Such a process will serve the best interests of shareholders and companies.
The UBC's efforts to promote meaningful shareholder participation in the director election process have been longstanding. The corporate director nomination and election processes are at the core of all corporate governance systems, and with the exception hostile director election challenges, these processes are completely controlled by a corporation's board of directors. Shareholders have been relegated to the role of passive participants only able to vote for company-selected director nominees and slates. On December 16, 1986, the UBC commented in a Securities and Exchange Commission hearing on the issue of one-share one-vote:
Much has changed since 1986 in the world and in the field of corporate governance. Shareholders, regulators, legislators and reform-minded corporate directors and managers have improved the corporate governance landscape in many positive ways. Enhanced corporate disclosure requirements have equipped shareholders to better monitor and challenge poor corporate behavior and performance. Shareholders are now able to monitor director meeting attendance records and can more easily withhold a vote for a particular board nominee. The expansion of confidential voting rights as a result of strong shareholder advocacy helps to protect the integrity of the corporate voting processes. These are important improvements, but the director nomination process continues to lack meaningful shareholder input because even limited access to the proxy statement to advance the candidacy of a non-management candidate is denied. With regard to corporate director nominations and elections very little has changed.
In 1999, UBC pension funds, along with other Taft-Hartley pension funds, drafted and submitted a proxy access shareholder proposal to approximately twenty corporations. The proposal outlined a proxy access right for a 2% shareholder, or a group of shareholders with a 2% percent ownership position, to advance the candidacy of a single non-management candidate in a company's proxy materials. While no ownership term for eligibility was specified in the proposal, it was designed as a right that would be available only to long-term shareholders. The proxy access proposal was part of a package of shareholder proposals designed to promote corporate governance policies and practices that would focus corporate executives and boards on creating long-term corporate value. Certain proposals, such as one calling for triennial elections, were designed to relax short-term investor pressures on corporate managers and directors. These were balanced by the creation of an important accountability mechanism, a limited proxy access right for shareholders to advance a candidate for the board of directors.
The advocacy for this mix of proposals prompted a meaningful dialogue with a broad range of leading companies in 1999 and 2000, including PNC Bancorp, Keycorp, General Dynamics, Enron, Bank One Corporation, Texaco, DuPont, International Paper, Procter & Gamble, J.C. Penney and others. These conversations helped inform our position on the access to the proxy issue now under consideration and convinced us that a limited proxy access right should be considered going forward. The proxy access proposal was advanced by the proposing funds based on our strong belief that a limited proxy access right for significant engaged long-term shareholders was a critical accountability mechanism within a progressive corporate governance system. And it is important to note that this advocacy for an proxy access right preceded the wave of corporate scandals at Enron, Worldcom, Sprint, and numerous other companies. Even before a wide range of scandalous corporate behavior was revealed, we perceived the access right to be a critically important component of shareholder rights to improve poor long-term performance.
The proxy access right that we advocated for in 1999 was neither designed nor intended to promote election contests that could produce wholesale or disruptive change on a corporation's board. Rather, it was a narrow access right designed to allow a shareholder or group of shareholders with a significant investment in a company to advance the candidacy of a single candidate for a board. During our conversations, company representatives invariably noted that shareholders rarely, if ever, utilized existing nomination rights and processes to advance nominees to the company. Only three companies stated that they had ever received nominees and pointed out that these nominees had nominated themselves. In each instance, the company's nominating committee considered and rejected the nominee for nomination. Most company representatives indicated that a shareholder sponsored director nominee with the support of a shareholder or shareholders with a significant ownership position, such as a 2%-5% ownership in the company, would receive strong consideration for management support. Most assured that at a minimum, such a candidacy would facilitate a communication process including high-level corporate officials focused on the issues prompting the candidacy. In addition to shareholder failure to use existing procedures, the companies identified concerns about board collegiality, which could impair effective board functioning, and concerns about inadvertently facilitating hostile takeovers, as their primary objections to our equal access proposal.
The non-utilization argument against creating a new access right for shareholder director nominations may on its face seem compelling, but we believe it is the result of the complexities faced by concerned shareholders who seek to reform a company by advancing a board candidate. In light of the daunting regulatory and financial burdens associated with a non-management supported director candidacy and in anticipation of a company rejection of a shareholder nominee, serious shareholders are not utilizing their right to develop and prosecute a limited board challenge. Serious ownership activism requires an investment of time and energy to know a company, its industry, its strengths, its weaknesses, or its challenges. Significant shareholders willing to make this commitment should be provided a limited access right to the proxy statement, others should not.
In designing a shareholder proxy access right to advance a non-management candidate, it is important that the goals of such an endeavor help guide the process. The proxy access right should be designed to provide a tool for shareholders to address long-term performance problems being experienced by a company. Companies that over a three to five year period have failed to meet peer group performance levels as judged by a variety of operational metrics should be challenged to rethink their basic corporate strategy and enhance the capabilities of their board and management team. The proxy access right should be designed to promote shareholder-director/manager dialogue on important issues of corporate strategy and performance. The deliberative nature of the access right should provide ample opportunity for shareholders and director/managers acting in good faith to seek a meeting of the minds on areas of contention. The proxy access right should be designed to stimulate shareholders to take a more active role in corporate performance monitoring. Only those shareholders willing to roll up their sleeves and invest time and energy in working for corporate change should be assisted by the access right. Conversely, the proxy access right should not be designed to promote corporate takeovers. If the access right can be used to stimulate disruptive change at a corporation, its availability will harm the interests of shareholder and other corporate constituents.
A meaningful, but measured, shareholder access right to the proxy statement should be established that allows a shareholder or group of shareholders holding 2% or more of the outstanding shares of the company for a period of at least two years to gain access to the company's proxy statement to advance the candidacy of one non-management board candidate. The proxy access should allow for a presentation of biographical information on the candidate and a short statement of the purpose of the nominee's candidacy. In order for an eligible shareholder or group of shareholders to avail themselves of the access right, it would be required that such shareholder or group of shareholders have first utilized the shareholder nomination processes in place at a corporation in conjunction with the previous year's annual meeting. Conditioning the proxy access right on a shareholder's use of a company's nomination processes will stimulate increased use of these rights, promote constructive dialogue, create a process of increasing pressure on incumbent director/managers to address the issues giving rise to the candidacy, and reserve the important access right to shareholders focused on building long-term shareholder value.
In order to make the initial phase of the shareholder director advocacy process meaningful, the SEC should consider instituting new proxy statement disclosure requirements relating to a corporation's director nomination and election processes. The requisite disclosure should be contained in a required proxy statement Nominating Committee Report. Like audit and executive compensation committees, board of director nominating committees should report to shareholders annually on a variety of issues related to the director nomination and election processes. Recently proposed stock exchange listing standards mandating that fully independent board nominating committees be established are critically important steps. But additional steps to provide shareholders information on director nomination and election procedures, director selection criteria, nomination and election timelines, shareholder nomination rights, and other aspects of board nominating committee duties and responsibilities must be taken.
We respectfully submit that the SEC should institute new nominating committee reporting requirements embodied in a Nominating Committee Report that provides the following:
As committed long-term shareholder activists, the UBC is convinced that shareholders have much to contribute to the democratization of the director election process. Just as shareholders have been instrumental in forging corporate governance improvements generally, we believe owner participation in the director nominee selection process will operate to the benefit of the corporation. We urge the SEC to enhance shareholders' ability to engage in responsible activism by expanding reporting and disclosure requirements relating to corporate director nomination and election processes, and creating a measured proxy access right for shareholders to nominate non-management board candidates. Properly structured, such an access right could stimulate serious and significant shareholders to more actively and constructively engage in ownership activities that will focus company executives and directors on enhancing long-term corporate value. We look forward to working with the SEC and its staff as it undertakes this important task.