The Shefa Fund
June 12, 2003
Mr. Jonathan G. Katz, Secretary
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:
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:
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:
"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.
cc: Chairman William Donaldson