MessageFrom: Adam Kanzer [akanzer@domini.com] Sent: Thursday, June 12, 2003 6:35 PM To: rule-comments@sec.gov Subject: File # S7-10-03 - Domini Comments on the Election of Corporate Directors June 12, 2003 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549-0609 Re: File No. S7-10-03 and SEC Release #34-47778 Dear Mr. Katz: I am writing on behalf of Domini Social Investments in response to the Commission’s request for public comment on the question of shareholder proxy access and the election of corporate directors. We are very pleased that the SEC has decided to seek public comment on this critical question. In our opinion, reasonable reform in this area is sorely needed to ensure that truly independent directors will be elected to corporate boards, and that incumbent directors will be responsive to shareholder concerns. We strongly believe that the democratization of the board election process is long overdue, and would be a significant contribution to enhanced corporate accountability and shareholder value. Domini Social Investments manages $1.4 billion in assets for individual and institutional mutual fund investors who wish to incorporate social and environmental criteria into their investment decisions. As socially responsible investors, we are committed to active engagement with the corporate holdings in our portfolio, through conscientious proxy voting, letter writing, direct dialogue and the filing of shareholder proposals. Over the years, we have filed more than seventy shareholder proposals on issues ranging from board diversity to executive compensation to overseas labor practices, and have engaged corporate management in dozens of dialogues on these issues. We also seek to influence the structure of corporate boards through our proxy voting policies by, for example, withholding our votes from non-diverse boards, and from non-independent nominees to key committees. These votes, however, are mere token gestures to a self-perpetuating board that has virtually no chance of being removed by a shareholder vote. Corporate directors are shielded by this knowledge. The current process stands as one of the most substantial obstacles to true corporate reform. Before investing in any company, our social research providers at KLD Research & Analytics, Inc. conduct a thorough stakeholder analysis – assessing the many ways in which each corporation impacts its various stakeholders, from employees to local communities, to the natural environment. This stakeholder approach is central to our investment philosophy, and to our work as shareholder activists. We believe that positive relations with stakeholders are an important aspect of the value and intangible assets of a firm. Over the past few years, we have all witnessed a series of numbing crises in the corporate world that have demonstrated a shocking disregard for corporate stakeholders. It has become apparent that the “leadership” of many of our corporations is focused primarily on self-enrichment, to the detriment of all others. Employees, shareholders and entire communities have been left behind, and shareholder value has vanished. Although it has often been noted in the media, it bears repeating that some of the most shocking scandals occurred at firms with independent boards. We strongly commend the SEC for its work to stem this tide of corporate malfeasance, and to restore confidence in the capital markets. We believe that the mutual fund and investment adviser proxy voting disclosure rules were particularly important achievements. These rules will open the proxy process to the more than 50% of American households that hold mutual funds. Now that access to this information has been democratized, we believe this is a perfect time to consider revisions to the director election process. Shareholder access to the nomination process is needed to ensure that boards of directors are accountable to the shareholders they represent. The current process, which purports to protect shareholders’ interests by allowing investors to “elect” corporate directors to hold management in check is an election in name only. Directors are elected by margins that resemble the types of election returns we see in non-democratic nations. This process has led one commentator to note that “a typical American corporation is a shareholders’ republic in the same way that China is a people’s republic.” (James Surowiecki, “The Financial Page: To the Barricades”, The New Yorker (June 9, 2003)) In a global economy where American corporations have a presence in every corner of the world, this is an embarrassment, and reflects poorly on our economic system. The SEC has taken an important step forward for all corporate stakeholders by opening this critically important debate. We believe that the following specific reforms would advance the goals of director accountability and fair corporate elections: 1.Eliminate Section (I) (8) of Rule 240. At present, 14a-8 allows for exclusion of shareholder resolutions if the proposal relates to an election for membership on the company’s Board of Directors or governing body. This makes it difficult or impossible to sponsor resolutions critical of Board performance or elections procedures. Eliminating this provision would be an important step towards legitimate access to the election process. 2. Allow access to the proxy for an investor, or group of investors, holding a certain minimum percentage of ordinary shares to nominate a candidate for Director. We would recommend 3%, but an appropriate threshold might lie between 3% and 5%. There does not appear to be any magic number that will perfectly balance the various possible unintended consequences of this measure. A low threshold may permit the nomination of frivolous candidates, while a high threshold will effectively shut out all but the largest institutional investors. We are cognizant of the fact that even a threshold of 3% will be insurmountable for many corporate stakeholders, and, as noted above, we believe that a corporation’s responsiveness to its various stakeholders is an important aspect of a corporation’s value. In order to truly democratize the process, and to provide effective checks and balances on management, we would encourage the Commission to consider permitting nominations sponsored by a minimum number of investors (perhaps 50), who meet the current requirements for filing a shareholder proposal ($2,000 worth of stock, held for more than a year, and through the date of the annual meeting). Although this dollar threshold is clearly too low for a single individual to nominate a director, if a substantial number of investors who meet this threshold wished to propose a candidate, we see no reason why they should be barred from doing so. Although some will argue that this will open the process to nuisance candidates, the $2,000 threshold has permitted a wide range of critical issues to be presented on corporate proxies without disruption to the operation of the annual meeting, and the process of assembling a coalition of qualified investors to nominate a single director should discourage all but the most serious nominations. The implications of this proposal would need to be considered carefully, but we believe its adoption would further the cause of corporate accountability, and would open boards to truly diverse perspectives. We would support sensible measures to ensure that this process could not be used as a takeover strategy, such as limiting shareholder nominees to a minority of the board. 3. Although the adoption of one of the proposals noted above would go a long way towards opening up the board election process, these changes will have little effect if a shareholder nominee makes it to the proxy, but has little chance of winning because of the format of the voting process. If a single alternate candidate runs against a slate of incumbent directors it will be nearly impossible for that candidate to garner a sufficient vote to win a seat on the board. We therefore encourage the Commission to consider requiring a corporation to propose two candidates per board seat and/or to permit shareholders to nominate candidates to replace selected incumbents who are running for re-election. 4. Institute a complete ban on broker votes or uninstructed share voting in tabulating proxy resolution results, including uninstructed voting by Trustees of the Corporation for employee-owned shares. We believe the only legitimate purpose of counting these votes is to achieve a quorum. Otherwise, they merely serve to dilute votes cast against management, and frustrate the intentions of a corporation’s shareholders. 5. Replace “for” and “withhold” options on the proxy card for election of Directors with standard proxy voting options: “for,” “against,” and “abstain.” 6. Encourage Directors to attend the annual shareholders’ meeting. Failure to do so should be reported in the proxy, as is Director attendance at Board meetings and committee meetings. We also strongly support a requirement that annual meetings be held in person, in order to preserve this critical forum for shareholder opinion. 7. Disclose in the proxy statement a nominee’s familial, professional, and financial relationship to the Company and its executives in the nominee statement to enable an assessment of a director’s independence. 8. Provide equal space for background information on stakeholder nominees in the proxy to assist investors in making an informed choice. All information on the candidates should be presented in a consistent manner, and corporations should be required to indicate whether the candidate was nominated by the Board, or by a shareholder, and the shareholder (or group of shareholders) should be named in the proxy. For those investors who are seeking to encourage greater representation of women and minorities on corporate boards of directors, a simple photograph of each candidate would make it far easier to obtain this information. We thank you for the opportunity to present these comments, and would be happy to discuss them with you further. Sincerely, Adam M. Kanzer General Counsel and Director of Shareholder Advocacy ------------------------------------------------------------------------ Adam Kanzer General Counsel & Director of Shareholder Advocacy Domini Social Investments LLC mailto:akanzer@domini.com, URL:http://www.domini.com 536 Broadway, 7th Floor, New York, NY 10012-3915 Direct: 212-217-1027, Main: 212-217-1100, Fax: 212-217-1101 Shareholder Information Line: 800-582-6757 -------------------------------------------------------------------------