Davis Global Advisors, Inc.
By Electronic Delivery
June 11 2003
Re. File No. S7-10-03, Release No. 34-47778
To the Commission:
The Securities and Exchange Commission has instructed the Division of Corporation Finance to "examine current proxy regulations and develop possible changes to those regulations to improve corporate democracy." In response, Davis Global Advisors is pleased to submit comments and recommendations.
Davis Global Advisors (DGA) is a leading independent consultancy specializing in international corporate governance. For 16 years, I have advised institutional investors, corporations, professional bodies, international institutions and stock exchanges on corporate governance. I am also a founder and member of the Board of Governors of the International Corporate Governance Network. Since 1995 DGA has offered consulting services and produced the weekly Global Proxy Watch newsletter, distributed to subscribers in 34 countries, and the annual Leading Corporate Governance Indicators report.
The SEC's initiative in examining proxy rules is timely and gets straight to the heart of weaknesses in the US corporate governance system. Even those most familiar with procedures recognize that many fail adequately to facilitate meaningful shareowner participation. Most director elections, for instance, are "an irrelevancy," concluded Delaware judges William Chandler III and Leo Strine, Jr. in a recent landmark paper. Yet the efficiency and credibility of our market depends on the ability of investors to exercise engagement practices to spur value and performance. We've got to revisit our proxy rules and get them right if we hope truly to empower shareowners in the cause of sustainable economic growth.
Our recommendations are as follows.
1. Ballot Options
Investors in US companies today have no automatic right to vote against directors. Instead, in routine meetings, they have only two options: voting For or Withholding their votes. In effect, depending on corporate statutes, this means that even a minority of investors voting in favor of nominees can elect them. Even an overwhelming vote to withhold has no legal effect. By contrast, various other ballot items do offer the right to vote No. And in virtually every other market in the world, with the exception of Canada, shareowners have the ability to cast their vote against directors. If a majority votes No, the director fails to be elected.
Without reform in this area, director elections are essentially meaningless. Boards can operate as they wish with little expectation that they will be called to account. At the core of any system of accountability is the right of stakeholders to hire and fire their agents. The SEC must seriously consider regulation or legislation to introduce the right of investors to say No if they feel one or more directors are failing to serve their interests. Directors who see their positions at risk depending on their performance will serve more effectively than those entrenched. That can only be good news for investors and for the health of the US market as a whole.
2. Director Election Resolutions
Today, US ballots typically propose a single omnibus resolution with an entire slate of candidates nominated for election. Shareowners have long argued that bundled resolutions breach best practice, as they muddle decision-making and can be used to slip controversial matters in among positive measures. If we believe bundled resolutions are bad in matters of policy and bylaws, they should be equally shunned when it comes to the arguably more important case of director elections. Slate resolutions complicate (but do not prohibit) the ability of shareowners to single out individual directors for votes, thus diluting accountability. Again, in most other markets, directors stand individually for election in separate resolutions. The SEC should consider regulation or legislation to introduce the same standard in the United States.
3. Candidate Nominations
DGA endorses the position taken by the Council of Institutional Investors and the AFL-CIO advocating prudent measures to enable investors with significant stakes to nominate directors. Contested elections, under controlled circumstances, could spur boards further in advancing shareowner interests.
4. Broker Votes
Today, the ability of brokers to cast votes without instruction from shareowners represents a serious gap in accountability at US companies. By all reports, such votes are cast in virtually every case with management on items such as director elections, which are normally classified as "routine" by stock exchanges. Perhaps unwittingly, the system has become an outmoded management-entrenchment device that serves to undermine rather than spur corporate performance. In fact, there should be nothing routine about selecting the top governing body of a company, particularly if the SEC acts to introduce No votes and facilitate contested elections. The SEC should consider regulation or legislation that eliminates this antiquated and damaging practice while helping companies reach their quorum thresholds, the original purpose of broker voting.
5. Voting Issues
Today, boards enjoy unchallenged authority to undertake profound, value-affecting measures such as takeover defenses and acquisitions without any vote by shareowners. Such practices mean that investors in this respect have fewer rights than those available in other markets. For instance, in virtually every other country, including Canada, management must submit a poison pill to shareowners for a vote. If the SEC wishes to enhance the ability of investors to ensure that companies pursue shareowner value rather than narrower interests, it should consider regulation or legislation that compels voting on matters of central strategic import to the company.
DGA supports the SEC's interest in raising corporate governance standards in the United States. Such standards have long been high compared to many countries, but must be periodically reviewed if we are to maintain competitive advantage. In important respects, they are no longer the best. Recent scandals have exposed structural flaws that contributed to the failure of many market actors-including investors-to catch or correct problems at companies before they blew out of control.
We would be pleased to discuss these matters with the Commission and the staff at any time. Please feel free to contact me by email or telephone.