June 13, 2003
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
RE: Request for Reform of Proxy Access Rules, File No. S7-10-03
Dear Mr. Katz:
The public pension funds listed below, with aggregated investment assets in excess of $500 billion, urge the Securities and Exchange Commission to propose a new rule that would provide qualified shareholders the right of proxy access for the purpose of proposing nominees for election to the boards of directors of publicly traded companies. As large long-term shareowners of the securities of publicly traded companies, we view corporate governance as one of the most important tools available for the protection and enhancement of the long-term value of our investments. Public funds have long advocated for corporate governance reforms and embrace the pursuit of corporate governance as a fundamental fiduciary duty.
We believe that qualified shareholders of publicly traded companies should have the right of access to companies' proxy statements and ballots for the purpose of nominating candidates for election to corporate boards. Such a provision would lead to increased accountability of corporate boards to shareowners, and improve the dynamics of board member succession. As recent events have shown, even boards with formally independent directors on key committees have not provided adequate safeguards for the protection of shareholder interests. This failure of governance has cost public pension funds billions of dollars in losses, as evidenced by failures at Enron, WorldCom, Tyco and other companies.
Currently, state law provides shareholders the right to nominate directors, but in reality that right is severely constrained and, de facto, meaningless because of inordinately high costs and burdensome regulatory requirements, which make independent solicitation impractical and near impossible for public funds. Meaningful proxy access will help to level the playing field giving qualified, long-term shareholders a realistic opportunity to nominate and elect candidates of their choice as an alternative to the nominee(s) of self-perpetuating boards.
The procedural regulations established by the Sarbanes-Oxley Act are an important first step to returning confidence to the market, but they do not address the fundamental problem in corporate governance that shareholders are functionally cut off from meaningful involvement in the selection of board nominees. We believe that a proxy access right would be used infrequently and responsibly at companies that have been unresponsive to shareholder efforts to work through company nominating committees, or at companies that have been dismissive of their accountability to shareholders. Nonetheless, the existence of new proxy access rules will do much to make shareholder voices more clearly heard in the boardroom.
We urge the Commission to establish a proxy access rule based on the following general principles:
- Threshold requirement: Shareholders seeking proxy access either alone or with other shareholders to nominate candidates for election to a company's board of directors must achieve a significant threshold of a company's outstanding shares. We believe that this right of access should be exercised only when shareholders representing a substantial ownership stake agree that there is a need for a shareholder-nominated director, but the threshold should not be so high as to make it a right that is virtually impractical to exercise.
- Long-term ownership: To reduce the risk of hostile acquirers abusing this right, only long-term shareholders who, individually or collectively, own the requisite threshold, and have done so for a period of years, which qualify them as long-term holders, shall be afforded access to a company's proxy statement.
- Limits on number of shareholder nominees: In any given year, shareholders exercising these rights cannot nominate candidates to a majority of the seats open for election. These rights are not intended to serve as a vehicle to capture control of a majority of the board. On the other hand, there should be a specific prohibition on management abusing this constraint by organizing or coordinating the efforts of management friendly shareholders to nominate candidates.
- Rule for competing slates: A simple decision rule for competing slates should be formulated. Such a rule should have safeguards in place so that a management friendly slate could not be used as a defense against a bid by independents.
- Access to the proxy card: A company must include a statement soliciting support for each shareholder nominated candidate. The Commission's disclosure requirements should apply equally to incumbent director and shareholder sponsored candidates. The nominee should have the right to include a statement of reasonable length (for example, 500 words) to describe the reasons they should be elected. The company's proxy materials should include the same amount and type of information about shareholder-nominated candidates and candidates nominated by the incumbent board.
- Disclosure requirements: The Commission should establish a filing and review protocol when shareholders exercise their nomination rights under proxy access rules. To ensure the accuracy of materials in the event that shareholder nominees contest company nominees the Commission should review the proxy materials of companies for compliance with Rule 14a-9, 14a-12 and other applicable rules.
- Exemption from 13d: There must be a safe harbor from the filing requirement under the Commission's Rule 13d-1 to ensure use of the shareholder access right. Shareholders should be required to file reports on Schedule 13d only when they seek to change the control of the company. It should be clear that joining with other shareholders, who collectively hold more than five percent of a company's stock for the sole purpose of nominating candidates pursuant to a shareholder right of access rule would not constitute the formation of a group within the meaning of Section 13(d)(3) of the Securities Exchange Act.
- Reimbursement of expenses: Shareholders utilizing the open access rule may seek reimbursement for reasonable expenses from the company regardless of the outcome, but reimbursement should not be mandated through rulemaking.
We thank the Commission for the opportunity to present our views in its review of the shareholder proposal rule and consideration of proxy access. We look forward to continuing involvement as the Commission moves forward with rulemaking in this area. Should you have any questions, please contact Ken Sylvester, Assistant Comptroller for Pension Policy, New York City Comptroller's Office, by telephone at: (212) 669-2013, or by e-mail at: firstname.lastname@example.org.
Very truly yours,
California Public Employees' Retirement System
California State Teachers' Retirement System
Connecticut Retirement Plans and Trust Funds
Los Angeles County Employees Retirement Association
Maine State Retirement System
New York City Board of Education Retirement System
New York City Employees' Retirement System
New York City Fire Department Pension Fund
New York City Police Pension Fund
New York City Teachers' Retirement System
New York State Common Retirement Fund
Pennsylvania State Employees' Retirement System
State Teachers Retirement System of Ohio
State of Wisconsin Investment Board