Re: S7-10-03 Possible Changes to Proxy Rules
June 12, 2003
VIA EMAIL firstname.lastname@example.org
Dear Mr. Katz:
In America, democracy happens. And it matters. It is the guiding principle that founded this great country and built it to the influential world leader that it is. Yet, sadly, the state of corporate governance and the participation by stakeholders in our corporate/economic system is severely eroding our system of citizen-governing that holds our country together and naturally promotes its peaceful attributes to the rest of the world.
As evidence, I offer the results of my participation in a proxy contest this year at the AAG, Inc. I, along with Richard D. Foley and Robert C. Osborne MD, contended for three director seats and assisted AAG employee/shareholders in the filing of seven shareholder proposals. As small-time investors, we followed the SEC rules to the best of our ability with only our limited personal resources, and tallied an almost immeasurable .00025% of the vote (6,777 votes out of the approximately 23.5 million cast)! We proved that under the current regulations, a legitimate challenge via board "elections" to the power that corporations wield is impossible except for only the wealthiest of people.
Lack of appropriate representation by employee, stockholder and customer constituents in corporations guarantees conflict and destruction of capital. For instance, with democratic elections stymied in the corporate world, there is no meaningful way to bring about constructive change within corporations. Workers in critical industries are forced to turn to large international labor unions who by and large do not support workers participating as corporate owners and watchdoging the business from a stockholder perspective.
Lacking this important participation, employees are alienated from the very businesses that create the wealth that they earn livings from. In contract negotiations, it fosters tactics such as artificially driving fixed labor and pension costs increasingly higher through work slowdowns or threatened strikes. This is argued as the only effective way of increasing workers' share of rising technological productivity that mostly streams to corporations and management. This conflict model of doing business is hugely responsible for many bankruptcies that we've seen lately in a variety of industries. I believe it serves as the general malaise of our stagnant economy.
If markets truly are to be "free" with a subsequent stable level of corporate wealth production, reasonable worker hourly wages should be supplemented with "capital wages," such as significant profit sharing, dividends paid on stock that workers could more broadly own, along with stock price appreciation. But wages from capital requires trust--and that can only be built at the board level outward by appropriate representation of the corporate constituents. And stakeholders can't effectively challenge under the current SEC proxy rules. We know because we proved it.
WE FACED MANY OBSTACLES
There are many inequities in the SEC rules currently governing proxy contests, and as we prepared our proxy campaign we had no choice but to tackle them one by one. (For more detail, you can visit our main Internet web site <www.votepal.com>).
In regards to the seven shareholder proposals sponsored by AAG employee/shareholders whom we assisted, we were confronted by a corporate legal staff that wasted no time in challenging everything we did, including our right to even participate, since we used the stock we owned through our company 401(k) plans to establish the $2,000 minimum SEC requirement. After writing letters appealing to the Commission and the 401(k) plan trustee, our rights were finally recognized. (As a side note, the day before the shareholders meeting in May, 2003, I was told by one company attorney that we proposalists had been "lucky." She said that employee 401(k) stockholders were not true stockholders under the company's by-laws, and that the company merely chose not to contest the distinction, although they certainly "could have.")
The corporate legal staff then went about challenging the writing and required editing of every shareholder proposal we submitted. We complied with most changes to demonstrate that our activism was not meant to be destructive to the corporation or its stakeholders.
This process took time. Many changes that we made were subsequently challenged again by the company to the SEC. This back-n-forth process could have conceivably gone on forever. This appeared to me to be convenient "delay" or "exhausting" tactics by the company to wear down the proposalists and the challenging candidates. And after this lengthy and frustrating process? The company accepted only one proposal (expensing stock options) and wrote letters to the SEC requesting "no-action" on the remaining six (and in their final form of proxy, the company's board unanimously opposed all seven). Fortunately, the SEC did not grant the no action letters the company sought, and allowed a vote to be conducted.
In order to effectively communicate with the company's stockholders, I requested a copy of the shareholders' list on at least four different occasions starting two months before the annual meeting. I was never able to secure it. On one occasion an AAG management director (a fellow employee) told me that I wasn't "asking for it right." I asked her if she could help me ask for it right. She declined. We kept trying to "ask for it right" up until days before the meeting. The day after the annual meeting, I received a fax from the company's Corporate Secretary stating that only "stockholders of record" could request the list, which 401(k) stockholders, of course, do not qualify as.
CONTESTING BOARD NOMINEES
Like the "drilling teeth" process of getting shareholder proposals into the company's proxy statement, getting the challengers' definitive form of proxy filed was truly one big mouthful of toothaches. Between requests for changes by the company and Commission, we made numerous and time consuming rewrites to our preliminary filing.
True, some of the delay was due to our mistakes, but the process is extremely complicated (someone should bury EDGAR underground and plant tulips on top)! I feel the Commission should offer some educational guidance to all shareholders. It could be done via the Internet or assistance over the phone.
We tried to keep our proxy statement on one two-sided 8 1/2x14 piece of paper, but due to various proxy rules enforced by the SEC, it ended up 14 pages long.
For instance, the Commission required a paragraph in our proxy statement regarding what the three challengers planned to do if they lost. Who wants to waste time predicting the future? We were trying to run a proxy contest in the present, but were required to write about what might happen months down the road. How could that possibly help us get elected?
The company declined to put our three names on their proxy card. We thought there should be at least one proxy card with all six candidates on it, so we contacted the Commission and informed it of our plans to include all six individuals on our definitive proxy card. The Commission said we couldn't do that without the company's permission. We approached AAG management but they declined. So stockholders were forced to chase around looking for two proxy cards to vote the full slate of six candidates. Obviously, this was one of many reasons why we received so few votes.
TRYING TO HALT THE BROKER VOTE
Who ever heard of an election where ballots not voted get voted? And always cast for the incumbents, no less? We finally got our definitive form of proxy filed on May 5, only 15 days before the May 20 shareholders meeting. Our major push then was to solicit via our web site so that shareholders could vote for us, while attempting to block "third parties" i.e. brokers from voting stock that shareholders were too busy or thought unimportant to send their proxies in themselves.
That involved getting the New York Stock Exchange to declare our contest contested, so all brokers would be prevented from voting the unvoted shares. The NYSE is a private corporation and obviously beholden to government regulations. Our names had appeared in the company's definitive proxy statement, and we had successfully filed a DEFC14A with the SEC, yet the NYSE ultimately declared the election "not contested." They certainly violated their own rules, and cost us millions of votes.
The other thing we were determined to accomplish was not to submit to the stock "poll tax" of voting proxies only through EquiServe and ADP in order for them to "count." We felt that both employee 401(k) stockholders and "street name" beneficial owners have already paid for identification numbers proving their stock ownership. Utilizing this identifying information, I feel a stockholder should be able to fill out his proxy instructions on the back of a golf scorecard, and have it counted at the meeting.
The Commission did provide us "guidance" (plain English--gave us its permission) to provide employee shareholders a place to write their trustee-issued voter control number on our proxy card. This was a huge victory for our campaign. But unfortunately, neither the company nor the 401(k) plan trustee acknowledged the right for employees to vote our proxy card until only days before the voting deadline.
HOW CAN YOU HAVE AN ELECTION WITHOUT FREE SPEECH?
We also had to deal with the archaic speech protocol that current Commission rules require in proxy contests. We feel we wasted not only our time but the limited resources of the Commission. It got to the point where I would edit myself--write what I believed to be true and my strongly held beliefs, but then in parenthesis delete what I had earlier written and add some generic phrase that most (mainly the Commission) might not object as "false and misleading." There's nothing more chilling to speaking openly than being potentially censored by both government regulators and incumbent board directors who conceivably could take reprisals against employees who challenge for employer board seats.
Throughout this whole seven month process, we refused to pay for legal advice, retain attorneys or litigate to assert our rights to participate. If the proxy rules are set up justly, stockholders should be able to exercise their rights by themselves and have an honest chance at holding the system accountable. We obviously proved that this is not true.
Some drastic actions are needed to completely restore democracy back into our corporate institutions. They are the wealth engines that provide the money and substance for people to live decently without being slaves. For only economically free people can truly participate in a political democracy.
RECOMMENDATIONS TO THE SEC TO PUT DEMOCRACY BACK INTO CORPORATIONS
Thank you for providing this opportunity to participate in our participatory democracy as the SEC contemplates these changes. Good luck.