Date: 11/21/97 2:00 PM Subject: RE: File No. S7-26-97 / Carol Hillman File No. S7-26-97 November 12, 1997 Mr. Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Dear Mr. Katz: Attached is our response to your invitation for comments on HR 944 and 945. Sincerely yours, Carol Hillman Principal RESPONSE TO REQUEST FOR COMMENTS ON HR 944 AND HR 945 File No. S7-26-97 Congress has before it two bills-HR945 and HR944-that would damage irreparably the ability of the vast number of charitable organizations in America to fulfill their missions. Let's take HR945 first, because it has the potential to create the most harm. This bill would require that shareholders of a public company be given the "opportunity, on a basis proportional to the number of shares owned or controlled by such shareholder, to participate...in the designation of recipients of the issuer's [company's] charitable contributions." HR 945 is bad law for many reasons not the least of which are that: it has the potential for creating enormous added expense for corporations to the detriment of the shareholders the law intends to protect ; it has the added potential of causing immense injury to the citizens who are served by the charitable organizations that receive corporate support. HR945 attacks the very heart of corporate governance. It would destroy a company's executives' ability to use charitable giving programs to help do what shareholders are paying them to do-increase corporate earnings-Most corporate contributions programs, in this day of tight budgets, are expected to link directly to and benefit the corporation's goals. Our firm has just completed a study of contributions trends among 25 major public companies, including companies in Congressman Gillmor's district. Our findings show: 1. Among the 26 companies all but one has seen increased competition during the past year and in all but two cases this has significantly affected their corporate strategy 2. The companies spend an average of $2.5 million on charitable giving annually 3. Almost all view this expenditure as a good business practice 4. For the most part the companies link their community support/charitable giving practices to company strategy. In other words, there is a business reason for these gifts. 5. Often, the companies' employees are involved in deciding who the contributions recipients should be. 6. Measurement of results is an important part of almost all of these programs-both measurement of individual program results and measurement of the impact on achievement of corporate goals So the corporate leadership of these companies (and we suspect they are very typical of the most public companies) are already very concerned that the shareholder investments be made in a manner that adds value to the companies. This proposed legislation would undermine those efforts as well as create deep hardships for the organizations that are being supported. All this comes at a time when the federal government is least able to fill the gaps that would occur were corporate giving to be thrown into a state of chaos; cut back; or even totally eliminated because of the increased costs, lack of linkage to corporate strategic goals and impossibility of administration that would result from this legislation. What's wrong with it? Here's a starting list : 1. The cost of direct shareholder participation would ultimately, in many cases, be more than the actual cost of giving. It could be staggering. The SEC estimates that there are between 12,000 and 15,000 public companies in the United States. Some two-thirds of all Americans, 180 million people, own stock directly or indirectly-60 million of them are direct owners. 2. The legislation ignores the fact that corporate foundation and chief contributions officers are members of a professional group that makes sure their companies' giving is in the shareholders' interest and supportive of corporate strategic goals 3. Focused giving is providing the best return on corporate contributions. The multitude of shareholder interests and the vast numbers of shareholders that would have to be involved in the HR 945 approach would undercut focus and eliminate a return to the corporation on its investment. 4. Direct shareholder involvement would disincent corporate giving by making it complex, inordinately expensive and less relevant to overall corporate goals because of the multitude of differing shareholder interests. 5. Institutional investors are by far the largest block of shareholders. They do not necessarily represent millions of individual shareholders, but they would have a disproportionate impact on giving decisions because of their enormous holdings. 6. Neither institutional nor individual shareholders are necessarily knowledgeable about the communities in which a corporation operates, the more than 600,000 charitable organizations in the United States, or the companies' international activities and business needs. Thus, their involvement in such day-to-day decision-making might, in the long run, be inimical to the achievement of overall corporate objectives 7. To support the HR495 approach, new and costly corporate and government bureaucracies would need to be created. Imagine what it would take just to publish the names of 600,000 US charities and distribute this large telephone directory size book to 60 million shareholders so they could pick and choose between charities to support. 8. Most importantly, the requirements of these bills are so vague that corporations may simply eliminate charitable contributions in order to avoid the cost of compliance. The second bill, HR 944, requires that corporations disclose to shareholders the charities to which they made contributions and the amount of each contribution. Most corporate foundations currently make information on the recipient organizations and total annual giving available either through published annual reports or on request. So why HR944? We believe taking this kind of legislative approach is unreasonable and burdensome. The proposed legislation goes too far and again would necessitate a morass of rules and regulations that would impede corporations from providing this information, rather than facilitating it. Both bills beg answers to two essential questions: 1. Why do this? What's the benefit to society? What problem do these two bills address that needs fixing? 2. How much will it cost? In our study of 26 companies' contributions programs, they gave money to nearly 17,000 charities in 1996. The average grant was slightly less than $4,500. About 20% of a contribution is spent on administrative costs by the charitable organization. Subtract also from that contribution the bureaucratic costs to companies to comply with the provisions of these two bills: time to prepare filings with the SEC and the cost of outside independent scrutiny by, say, their auditor. What about the government bureaucracy that would have to be set up to read all these filings? Our best estimate is that the average $4,500 given to a charitable organization in Congressman Gillmor's district would cost as much as $1,800. Across 600,000 charities, that's apotential cost of $1 billion. Grant recipients in arts, education, social services and the many other organizations would suffer as the money intended for them instead went to Washington to support the bureaucracy or remained in the corporation to foot the bill for compliance. When corporate profits shrink, their contributions budgets also necessarily shrink. Would the Washington bureaucracy set up to oversee Congressman Gillmor's grand design also shrink when corporate giving goes down? We think not. In summary, HR 944 and HR945 are bad law, bad public policy and bad economics.