Response of Deborah Pastor, CEO of eRaider.com Inc. to
June 12, 2003
Jonathan G. Katz
Dear Mr. Katz:
eRaider strongly supports an election process that results in a true corporate democracy in which shareholders can vote for all legitimate candidates on one ballot. We include excerpts from three relevant documents, plus some comments on voting instructions, which seems to be a neglected part of the debate.
eRaider's Petition for Reform of Corporate Elections
Put the names of all legitimate candidates on one ballot and let shareholders vote. Whatever method is used, mail, Internet, telephone, should be the same for all candidates. Unvoted shares shouldn't count for anyone. No corporate funds should be used to favor one candidate over another. If board members want to campaign or sue, let them spend their own money just like challengers. Managers should not be used to campaign, nor to put pressure on employees. Any legitimate candidate should be allowed to run.
What makes a candidate legitmate? Anyone who makes a timely definitive section 14 filing as a candidate with the SEC, and is not legally prohibited from serving as a director, is legitimate. But we have no objection to qualifications that ensure board independence and turnover. We have no strong objection to having reasonable qualifications such as having owned $2,000 worth of stock for a year (the threshold for submitting a shareholder proposal), receiving the support of 3% of shareholders, not currently serving on more than six other corporate boards or being over 21. We have a mild objection to a nuisance exception that would exclude anyone who ran in the last three years and failed to get 2 percent of the vote. Beyond this, everyone who makes the required legal disclosures is legitimate.
We realize that most people want to put higher thresholds of support or limit the number of shareholder-nominated candidates on the ballot. We disagree. We would like to model corporate elections on our local political elections that also offer access to the ballot with minimal legal qualifications and a modicum of public support evidenced via petition signatures. It's odd that people accept democracy as the best form of government to determine war and peace, administer justice and collect trillions in taxes, but are afraid to trust it for public corporations. The reality is that most elections are determined by large financial institutions; small shareholders seldom vote, generally don't hold a majority of shares and aren't likely to vote as a block. So we don't expect a sea change in director elections.
We know that many organizations far more influential with the SEC than ourselves will make the case for corporate democracy. But eRaider has a unique perspective because we represent the interests of the individual shareholders and we have participated in and observed several proxy contests launched by this segment of the investor population. The current system gives management unprecedented power over the board of directors by preventing anyone but the wealthy from launching effective proxy contests.
Directors have absolute control of public corporations, and director elections are rigged. Despite that, many boards work fairly well, because both the directors and managers of the company are honest and competent. But when boards do not work there is almost nothing shareholders can do about it, and almost no limit to the harm that can be done to shareholder equity. We know those are strong statements. How powerful are directors? So strong that the SEC regards any mandatory proposal by shareholders to be illegal, because it conflicts with directors' absolute control. So even if 99 percent of shareholders vote that the board must, say, account for management stock options as an expense, not only can the board ignore that vote, the resolution itself is an illegal attempt to curb board power. The "business judgment" rule protects almost any decision by the board except clearcut fraudulent self-dealing. Even if the board does engage in clearcut fraudulent self-dealing, shareholders generally have to sue to stop it. Shareholders pay their own legal expenses, the board fights them with company funds. If shareholders win, they discover that the board has used company funds to buy an insurance policy to pay the judgment. That's right, boards of directors buy insurance with shareholder funds to repay themselves if they are found by a court to have cheated shareholders.
How rigged are corporate elections? The official company ballots, mailed out with shareholder funds, include only the board-nominated candidates. There are no spaces for write-in, you can only vote for the board's candidates or withhold your vote. Even if 99 percent of shareholders repudiate the incumbents by voting "withhold," those candidates still win the election. The board controls the entire election and vote counting process and will often manipulate it if necessary to help its candidates. The board uses company funds to campaign for its chosen candidates and will often sue other candidates (again using company funds). Challengers must pay their own campaign and legal expenses. The voting system is extremely inefficient, challengers must solicit by mail and gather physical signed proxy cards, which can be challenged by the board. Board approved candidates can usually accept Internet and telephone votes, which cannot be challenged in practice. Shareholder telephone numbers and email addresses, compiled with company funds, need not be disclosed to challengers. Moreover the board usually counts all unvoted shares (the large majority of all small shareholders) as votes for their candidates.
Recent corporate reform focuses on protecting shareholders but regulation alone will not solve the problem of board accountability. We don't want protection from bad boards - we want the right to kick the bums out. Americans didn't fight the revolution to make King George nicer, they fought for the right to pick their leaders.
A full discussion of our arguments for free and fair corporate elections can be found at:
eRaider's Suggestions for Contested Election Designation and Voting Instructions
If our petition is adopted, then the need for the reform of beneficial voting instructions and contested election designation is unnecessary because the candidates will be on the company proxy. But if the SEC allows only limited access to the ballot, say one representative or a short slate, then there still must be a way that shareholders can run a larger slate and have a level playing field.
Therefore we want to discuss a major obstacle to corporate democracy: the SEC's jurisdiction over proxy ballots. The rules have become outmoded. This issue is not as glamorous as candidate access to the proxy, but it is important and will continue to be important after other proposed reforms.
Decades ago, when a dissident filed a definitive proxy ballot with the SEC, almost all shareholders could use it to vote. Currently, 90% of individual beneficial owners hold shares in street name or own through an employer-sponsored 401(k) plan. The SEC has effectively ceded control of voting instructions by the large majority of individual shareholders to the New York Stock Exchange, ADP and 401(k) rustees. The first two organizations are more likely to be sympathetic to management than dissidents, and have not been responsive to our efforts to get votes counted in our column. 401(k) plan trustees are often selected by and from company management. In our experience, about a third of shares that individuals try to vote for us are disqualified, and we are dealing with the largest and most motivated individual shareholders. Even institutional shareholders have reported problems getting their votes counted properly.
In addition, even though a dissident proxy may receive a Definitive Proxy Statement, Contested Solicitation status, that does not mean that the NYSE or ADP will accept the election as contested. Without the "contested" designation from these organizations, any unvoted shares will be voted by the brokers ("broker votes"), who in our experience always vote for management.
We are including at the end of our statement a copy of a letter written to the SEC in 2001 which describes our proxy contest at Goldfield Corporation in which many of our proxies were not recognized by ADP and our extensive telephone, Internet and mail campaign was not recognized as solicitation because we did not conduct it through ADP. Without the "contested" designation and with many of our proxies ignored, we lost our bid to elect a candidate to the board.
Excerpts from eRaider's Proposal to the NYSE
The full text is at:
eRaider.com Inc. proposes that the NYSE redefine what constitutes a "counter-solicitation" or "contest" with respect to NYSE Rule 452(2). The current interpretation recognizes the only way to solicit a vote or contest an election is to mail a solicitation to each beneficial owner. This interpretation ignores technological advances that result in more cost-effective forms of solicitation than postal mailing to all shareholders. These advances, along with changes in regulation and corporate governance, have allowed dissidents to win elections without using the mails. It makes no sense to preserve a definition of "contested" in which a dissident can win an election without contesting it.
In a fast-changing world, we do not recommend changing one specific communication technology for another. An issue should be considered to be subject to counter-solicitation if a dissident has made all cost-effective efforts to inform shareholders of a contest. Sending mail to beneficial owners of small amounts of stock is not only expensive but has been proved to be ineffective. Investors who want to keep abreast of the latest developments in the financial markets do not rely on mail, especially not unsolicited bulk mail. Telephone contact, press releases, news coverage, television interviews, and Internet communication are far better aligned with how serious investors receive financial information today.
The SEC has recognized these technological advances in Regulation FD (Fair Disclosure), which states " . . .technological developments have made it much easier for issuers to disseminate information broadly . . . [I]ssuers now can use a variety of methods to communicate directly with the market. In addition to press releases, these methods include, among others, Internet webcasting and teleconferencing." The SEC deliberately eschewed relying on one method of communication to qualify as public disclosure: "The regulation does not require use of a particular method, or establish a 'one size fits all' standard for disclosure; rather, it leaves the decision to the issuer to choose methods that are reasonably calculated to make effective, broad, and non-exclusionary public disclosure . . ." What the SEC mandates for public disclosure should satisfy the narrower standard of informing individual shareholders.
The only practical way to determine whether a dissident has made every cost-effective effort to reach shareholders is to look at results. Can the dissident prove that enough shareholders were contacted to create a reasonable chance of winning the election? A dissident should not have to demonstrate support of these shareholders, just that they were solicited. We believe that a serious counter-solicitation will include:
Excerpts from eRaider's Account of the contested 2001 election at Goldfield Corp
The complete text is at:
eRaider and Sam Rebotsky decided to run a short slate for the Goldfield Corporation's Board of Directors. eRaider filed with the SEC and received its definitive proxy status (DEFC) on June 01, 2001. At this point, we contacted the American Exchange, of which GV is a member, and confirmed that they had received our electronically filed proxy. At that point, we assumed that the GV election would receive "contested" status. We relied on the wording in GV's own definitive proxy, which went as follows:
This assumption proved to be very wrong.
During the next weeks, we actively solicited by telephone, email and Internet postings. We used part of our website to display all of our proxy material and contact information if someone wanted to call, email or mail us. Shareholders could download the proxy with the voting card or print them off the screen. We mailed out numerous proxies to shareholders who requested them. We posted on all of the active GV boards and ran our own message board. Florida Today and other journals ran articles on our Internet-oriented fight. GV itself mentioned our slate at length in their proxy in the Section entitled "Other Matters". All of the material that need to be filed with the SEC, such as articles, website materials and posts, were properly filed and in a timely matter.
We called ADP to discuss vote-counting issues. By the second week of June, we had discovered from one of the brokers that the election was not being considered "contested". The broker told us that it was ADP who controlled, through their computer system, how broker votes were counted. We then called ADP repeatedly until we got through and were transferred to Philip Fargiano, the Supervisor of the Issuers section of the Investor Communication Services Group at ADP. In several phone conversations, we described in detail our solicitation efforts. We directed him to our website and offered to fax our proxy and other solicitation materials. We drew his attention to the company's own proxy that mentioned our slate and the AMEX solicitation rule. Mr. Fargiano made the following points repeatedly in the face of our arguments: 1) contested status could only be obtained by a solicitation done through ADP; 2) AMEX rulings meant nothing to him as ADP broker clients were listed on the NYSE and so only a "contested" designation from the NYSE was relevant; 3) he did not want to see any proof of any other solicitation efforts; and 4) he did not want to see voting instructions from beneficial owners unless it was a form issued by ADP. One point was made extremely clear to me: that ADP would count broker votes unless we hired them to do a mailing.
ADP seems to have far more control over the counting of broker votes than either the NYSE or the brokers. Even though 1) the SEC granted our proxy definitive status (DEFC); 2) we registered our proxy with the AMEX where Goldfield is registered; 3) we actively solicited via the Internet and email; 4) we received numerous proxies, enough to defeat the cumulative voting proposal; and 5) our dissident slate was openly discussed on management's own proxy; even with all of this, the election was officially uncontested because we did not solicit through ADP. Many of the beneficial owners trying to vote our proxy cards were rebuffed. The others that were accepted were as a result of a Herculean effort on the part of the dissidents and the brokers. As a result, what was in fact a close election, one that might have been victorious had all of the votes voted for our slate been received and processed by ADP, was presented as a landslide victory for management.