The Shefa Fund

June 12, 2003

Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609

Re: S7-10-03 and SEC Release #34-47778

Dear Secretary Katz:

The Shefa Fund, a public foundation which brings Jewish teachings and ethics to contemporary issues concerning wealth and assets, submits the following comments in response to the Securities and Exchange Commission's solicitation of views (SEC Release #34-47778) regarding File Number S7-10-03, concerning shareholder proxy access and the election of corporate directors.

The Shefa Fund works for more responsible corporate behavior on a range of issues, including: diverse and independent boards; excessive executive compensation; shareholder rights; improved investor and stakeholder engagement; and disclosure of social and environmental risks. We have also been deeply troubled about investors' inability to truly "elect" directors for the corporations that they own. We applaud and effort to examine new rules that would allow investors greater choice in the board election process. Our members are encouraged by the Commission's efforts to revitalize discussions concerning shareholders' access to the proxy ballot, and believe that a review of existing rules concerning the election of directors is long overdue.

We firmly accept the principle of the separation of Church and State and we believe that it is informative to examine issues through an ethical perspective based on religious values. Judaism teaches that a person is responsible for any damage done by his or her property. This responsibility is beyond the limited liability of corporate law, it is a moral and ethical responsibility. A shareholder is an owner of property. The Directors of a corporation have ultimate responsibility for how the actions of the corporation. Shareholders must have the ability to elect Directors who they think will fulfill that responsibility in an ethical manner.

The closed nature of the nominations process has led to abuses of power as seen in recent corporate scandals. The biblical verse, "Do not put a stumbling block before the blind," has traditionally been applied to economic matters to prevent tempting people. Closed systems of power tempt people to abuse that power.

Some of the organizations that The Shefa Fund's has worked with have had years of experience with the process of nominating candidates for Corporate Boards -- and of being dismissed by nominating committees when trying to put forward candidates for elections. Several of them have spent much time and expense investigating potential nominees for Boards, and have been summarily dismissed or repeatedly ignored by nominating committees -- even after several attempts to garner a response from Board members involved in the nominations process. Examples include:

  1. Responsible Wealth, a coalition of wealthy individuals concerned about shareholder rights and executive pay, nominated candidates for Disney's Board for two out of the last three years. In neither 2001 nor 2003 did anyone at Disney contact the proposed candidates in any fashion. In 2001, Responsible Wealth heard nothing from the company; in 2003, it received a brief note saying neither candidate was being considered for the Board. Disney's response to the 2001 nominations was raised at the 2002 annual meeting, and a process was agreed upon that included contacting the people nominated. There is no evidence that Disney has followed this process.

  2. The Rose Foundation, together with the As You Sow Foundation and the U.S. Steelworkers Union, nominated a short slate at Maxxam Inc. in 1997, 1999, and again in 2000. The Foundation spent roughly $200,000 each year to put two nominees forward at a company with a small shareholder base of 9,000 investors. The candidates were highly credentialed former Senators and Congressmen, or had backgrounds as former federal judges or White House Counsel. The nominating shareholders all agree the process was extremely time, cost, and work intensive: three people worked full time for six weeks to accomplish basic tasks related to legal, vote solicitation and paperwork requirements. In one year, the two candidates garnered 15.2 percent of the vote, or 44 percent of the common stock outside executive control. None of the six nominations were elected to the board, and the company presented shareholders with several additional barriers, including control of the venue -- which led to complications in counting last minute votes cast by shareholders.

The Shefa Fund believes that the significant lack of shareholder access to the corporate proxy -- and the self-perpetuating board that results -- is a primary obstacle to preventing future corporate abuses and restoring investor confidence.1 Without adequate checks and balances in our market economy, no amount of regulatory amendment will resolve imbalances in corporate power, the likes of which we've seen can destroy shareholder value in a matter of weeks. The few shareholders that do spend tens of thousands of dollars to submit an alternative slate for the Board usually don't take that step until concerns and liabilities have become unmanageable. By this time, it is too late because shareholder value has already begun to evaporate.

Entrenched managers and directors will only improve corporate governance, executive compensation standards, and stakeholder engagement when held accountable by investors, and can be voted out by shareowners for failure to act in investors' best interests. Access to the proxy is one of the most significant reforms the Commission could undertake to make Boards accountable for their actions.

Board-selected candidates are re-elected under the current system, even if they receive a few votes each. Theoretically, there could be a majority of shareholders who withhold their votes from a candidate, and still that nominee would be elected to the Board. The current process in no way resembles a true election of directors. It is merely a rubberstamping formality, with shareholders ratifying the Board-nominated slate of candidates.

Investors need to strengthen the incentives for management to nominate directors who would ask the tough questions of executives. That's precisely what was needed at Enron, Tyco, and WorldCom -- companies with a majority of independent directors.

The ability for shareholders to propose candidates for the Board in a less-costly and more efficient manner empowers directors to fulfill their duties both to shareholders and to management. By its very nature, shareholder oversight empowers directors to do their jobs better. According to the Conference Board's Commission on Public Trust and Private Enterprise: "The most significant matter on which shareowners regularly vote is the election of directors."2 Although state law permits investors to nominate and solicit votes for their own candidates, because of the high costs involved, it rarely happens. And the process is always more beneficial to management than investors: Management uses shareholder assets to print, mail, and solicit votes for its nominees to the Board. Shareholders, meanwhile, end up spending about $2 per investor to run a competing candidate, which means a separately mailed proxy, costly legal fees, and possibly millions of dollars for the entire process.3

In reality, shareholders most often vote on candidates nominated by directors themselves, and rarely with any choice: if there are six board openings, then six names typically appear on the proxy. Greater shareholder access to the proxy for Board elections would:

  • Better align the interests of investors with the interests of management.

  • Reaffirm that shareholders are the beneficial owners of companies.

  • Attempt to rebalance the special interests of top executives when they pervert the system of corporate governance and fiduciary trust.

  • Make it possible for investors (institutional and individual investors) to have a more meaningful voice in the governance of corporate affairs.

  • Empower directors to voice opinions and strategies contrary to "groupthink."

  • Eliminate the confusion of separate proxy ballots.

It is critical, however, that proxy rule changes not be used as a tool to facilitate hostile takeovers by short-term investors. At the same time, long-term shareowners that are engaged in a company's governance and long-term outlook should have the representation they deserve. Current regulatory fixes, both those already posed by the Commission and those of the NYSE and Congress (Sarbanes-Oxley), have not done enough to ensure that directors are acting independently of management. New reforms do not go to the crux of the problem -- that directors usually ignore shareholder concerns and interests. Therefore, getting directors to actively oversee executives for the long-term benefit of the company and its investors is a challenge. Examples of corporate boards that are unresponsive to shareholder concerns are commonplace: in 2002, only 14 out of 98 majority votes on shareholder proposals were adopted by corporate management.4

The SEC first considered equal proxy access back in 1942, and then again in the 1970s when it held hearings on related concerns. The Business Roundtable supported the concept of proxy access during those hearings, but is now asking the Commission to delay a rulemaking in the hopes that independent board regulations will ameliorate such intransigence. But remember that companies like Tyco, WorldCom, and Enron all had seemingly "independent" Boards, and this fact did nothing to alleviate the conflicts that lead to damaging executive corruption.

Furthermore, the Conference Board's Commission on Public Trust and Private Enterprise strongly endorses equal proxy access for shareowners,5 as does the AFL-CIO ($400 billion in assets), the Council of Institutional Investors ($3 trillion in assets), CalPERS ($138 billion in assets), Bob Monks (corporate governance expert and author), and numerous institutional investors, foundations, and individual shareowners.

The Shefa Fund believes that the criteria below would provide a more level playing field for investors, and more adequate opportunities for shareholders to both nominate candidates and to solicit support for them with fewer cost burdens and paperwork than currently exists.

The Shefa Fund recommends the Commission consider the following:

  • Foremost, that the SEC eliminate section (i)(8) of Rule 240.14a-8, concerning criteria for proposal exclusions on the proxy: "If the proposal relates to an election for membership on the company's board of directors or analogous governing body."

  • That a shareholder or group of shareholders nominating a candidate own shares for a minimum of one year before proposing a nominee. This would decrease, but not entirely eliminate, the possibility of investors using equal proxy access as a takeover device.

  • An investor or group of investors own at least 1% of shares (in aggregate) in the company in order to nominate a candidate or candidates, with a standard no higher than 3% of shares. While some proponents have argued for a 5% or higher minimum, The Shefa Fund feels that smaller investors would be disenfranchised by this share threshold.6 Additionally, a recently settled shareholder lawsuit at Hanover Compressor sets a legal precedent for a 1% floor for director nominations by investors.7 The Shefa Fund also supports a combination of a percentage threshold plus a minimum number of shareholders to meet the nominations criteria.8

  • Investors, singly or cumulatively, can nominate up to half of available positions for the Board, regardless of how many investor groups organize to nominate them. If more than half of the nominees are put forward by shareholders, those candidates with the largest aggregate share support behind them should make it to the ballot.

  • A complete ban on broker votes or uninstructed share voting. "Brokers usually vote with management to keep on a potential customer's good side," notes Business Week last October.9 To Forum members, that indicates an extreme conflict of interest, and shows that brokers are not fulfilling their fiduciary duty to clients. However, we support broker votes counting for a quorum, so that the business of the meeting may commence.

  • Directors should be elected annually. Though staggered or classified board elections do serve an anti-takeover function, shareholder votes on board performance should occur on an annual basis.

  • Cumulative voting should be used in the election of directors.

  • All nominees should disclose material familial, professional, and financial relationships to the company and its executives in the nominee statement on the proxy.

  • The "for" and "withhold" options on the proxy card should be eliminated, and replaced with standard proxy voting options like those for proxy resolutions: "for," "against," and "abstain."

  • All nominees should be provided equal space, within a reasonable number of words, to provide background information, a supporting statement, relevant experience, and material relationships to the company. A picture should also be included with each candidate's statement.

  • The company in its proxy statement must present candidates --management's and shareholders' -- in the same consistent manner, length, font, style, etc. Management should not segregate its list of nominees from that of investor nominees, but should note clearly that they are Board-nominated candidates.

  • Management or incumbent boards should be prohibited from colluding with shareholders or shareholder associations in order to nominate directors that are in essence management nominees. Penalties should be imposed on executives or directors involved in such schemes.

  • All corporate directors should attend the annual shareholders' meeting. Failure to do so should be reported in the proxy, along with attendance at Board and committee meetings.

  • Shareholders should receive full disclosure in the proxy of shareholder assets spent on proxy printing and related costs for the elections process and solicitation of votes, to ensure that management is not excessively using shareholder monies to support its own slate of candidates. This would enable investors to keep a closer watch on assets spent for the elections process, and deem whether such funds are being used properly.

  • Communication among shareholders holding more than 5% of shares should be exempt from current requirements under Regulation 13-D if it pertains to director nominations, solicitation of votes for directors, organizing aggregate votes for nominations, and the elections process.

"To perform their functions effectively, directors must act diligently and independently of management," notes the Conference Board. Yet directors are usually reluctant to confront executives or fellow board members who have bestowed favor and special status on them by giving them Board positions. The corporate scandals of the last three years have resulted in $7 trillion evaporating from equity markets. Granting equal proxy access to a wider body of shareholders would not only empower investors to berate directors that fail in their duties to shareowners -- it would allow them to remove those directors. It seems there could be no more powerful incentive to encourage boards to untangle themselves from the executive stranglehold. Proxy access would have an immediate impact on the issue of executive pay. It might also result in less shareholder proposals being filed each year, as investors might increasingly feel that their concerns are being addressed by a more representative body.

CEOs will not relinquish power and authority easily, for many have traditionally wielded control over their Boards. Investors are now looking to the Commission to bring fairness and balance to director representation. This is an opportunity for the SEC to put meaning back into the term "board independence."

Thank you for the opportunity to comment on this critical issue. Feel free to direct Alan Beller or other Commission staff to The Shefa Fund for further assistance or questions.


Rabbi Mordechai Liebling
Torah of Money Director
The Shefa Fund

cc: Chairman William Donaldson
Commissioner Harvey Goldschmid
Commissioner Roel Campos
Commissioner Paul Atkins
Commissioner Cynthia Glassman
Alan Beller, Director, Division of Corporate Finance

1 During the drafting of this letter, Martha Stewart was indicted on nine counts of criminal misconduct, and resigned as CEO or Martha Stewart Living Omnimedia. Rite Aid made the cover of the Wall Street Journal because of alleged executive abuse of power, and corruption. It seems that the corporate scandals have in no way abated, even months after Sarbanes-Oxley went into effect. HealthSouth also continues to make news headlines.
2 The Conference Board "Commission on Public Trust and Private Enterprise: Findings and Recommendations" (Part 2 and 3), pg. 16, January 9, 2003.
3 See Lewis Braham, "Bring Democracy to Boardroom Elections," Business Week, 10/21/02, pg. 126.
4 See Council of Institutional Investors mention, re: letter to SEC from AFL-CIO's Richard Trumpka:
5 The Conference Board "Commission on Public Trust and Private Enterprise: Findings and Recommendations" (Part 2 and 3), pg. 16, January 9, 2003.
6 Same, "In evaluating shareowner nominees and proposals, boards should not preclude proposals made by smaller, individual shareowners," pg. 26.
7 See Will Boye, "Hanover Settlement Seen as Breakthrough for Equal Access," 5/23/03, Settlement further states that Hanover's nominating and governance committee will then select two candidates for the board from the list of nominees. After this one-year term, the board is charged with selecting one candidate.
8 See SEC comments made by Responsible Wealth on this issue:
9 See Lewis Braham, "Bring Democracy to Boardroom Elections," Business Week, 10/21/02, pg. 126.