MARCO CONSULTING GROUP
June 11, 2003
Mr. Jonathan G. Katz
RE: File No. SZ-10-03
Dear Mr. Katz:
The Marco Consulting Group, Inc. ("MCG") is a registered investment adviser to some 500 institutional investors whose aggregate asset value is in excess of $80 billion. MCG is the proxy-voting agent for the equity investments of most of its clients.
We are writing to comment on the SEC's review of proxy rules and regulations, which we believe represents a wonderful opportunity to enact long overdue governance reforms.
IMPROVING THE QUALITY OF BOARDS OF DIRECTORS
For years corporate governance reformers had thought that placing independent outsiders on boards of directors was an effective way to ensure that their interests would be protected. Thus it was disappointing that three of the most egregious players in the recent wave of corporate scandals-Enron, Tyco and WorldCom-all had a majority of independent outsiders on their boards.
Improving the quality of boards of directors is clearly a paramount goal. The biggest obstacle to reaching that goal is that, practically speaking, shareholders vote only on candidates nominated by incumbent directors, whose campaigns are funded by the corporation. Shareholders, theoretically, can run their own candidates, but under the current system they are denied access to the corporate proxy statement and card. It is so expensive for shareholder nominees to campaign that it happens very rarely-usually in the context of a hostile takeover.
The SEC can remove that obstacle by adopting new rules to permit shareholder-nominated director candidates to appear in the corporate proxy statement and on the proxy card. The rules should be drawn so that they encourage long-term shareholders to nominate candidates who will represent their interests and are immune to manipulation by short-term investors aiming for a low-cost hostile takeover. Requiring a minimum ownership/holding period and limiting the number of nominees to less than a majority of the entire board would be possible ways to do this. If only minority representation is being sought, there would be no need to require 13D disclosures.
It is impossible to predict how many shareholders would take advantage of such new rules on access to the corporate proxy for director nominations, but common sense dictates that the mere potential for such challenges will encourage incumbent directors to be more responsive to shareholder concerns and more effective in discharging their fiduciary responsibilities.
Another way to improve the quality of boards of directors would be to prohibit the New York Stock Exchange's "10-day" rule that allows brokers to vote on uncontested elections of directors if the beneficial owner has not provided voting instructions at least 10 days before a meeting. These broker votes are inevitably cast in favor of the nominees to the board and constitute an unwarranted stuffing of the ballot box.
The justification for the "10-day" rule is that uncontested elections of directors are "routine." In the wake of the recent wave of corporate scandals, a better argument could be made that the scrutiny of even uncontested director nominees is one of the most important votes shareholders cast. At MCG, we typically spend more time on this issue than any other on the proxy ballot, examining the nominees' backgrounds and relationships to determine which nominees are truly independent outsiders. We traditionally withhold authority from all insider nominees if there is not a majority of independent outsiders. Given the experience with Enron, Tyco and WorldCom, we are considering withholding from all insider nominees in the future if there is not a two-thirds majority of independent outsiders.
We respectfully submit that there is no public policy justification for continuing to allow the landslide of broker votes pursuant to the "10-day rule" to overwhelm the votes of other shareholders who take the time and effort to actually scrutinize the qualifications of directors even in uncontested elections.
ELIMINATING THE "ORDINARY BUSINESS"
In the decade since the last SEC reform of proxy voting rules, the use of shareholder proposals has increased dramatically in both frequency and effectiveness. In 2002 nearly 100 precatory shareholder proposals received majority votes.
We believe companies too often resort to the "ordinary business" exemption in an attempt to keep obviously valid, widespread shareholder concerns off the ballot. For example, in recent years Disney attempted to use that exemption to bar a shareholder proposal on auditor conflicts of interest and National Semiconductor invoked it to bar a proposal on the expensing of stock options. The SEC eventually ruled in favor of both shareholder proponents, but all shareholders are not prepared to fight through the no-action letter process for their rights.
Former SEC Chairman Harvey Pitt indicated support for the elimination of the "ordinary business" exemption and we urge the SEC to follow through on that sentiment.
We welcome this opportunity to comment and would be pleased to answer any questions you have about our views.