Association for Investment Management and Research28 October 2003 Jonathan G. Katz
Re: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors -File No. S7-14-03 Dear Mr. Katz: The U.S. Advocacy Committee (USAC) of the Association for Investment Management and Research (AIMR)1 appreciates the opportunity to comment on the proposed rule addressing the process by which individuals are nominated to serve as directors on corporate boards, and the ability of shareholders to communicate with those directors. The USAC is a standing committee of AIMR charged with responding to new regulatory, legislative, and other developments in the United States affecting the investment profession, the practice of investment analysis and management, and the efficiency of financial markets. Summary Position As we have stated previously, we believe that shareholders should be provided greater access to the system of nominating directors.2 We believe that the current system does not provide the shareholder with adequate information about the process for electing directors or for the addressing of shareholder communications. Accordingly, we think that meaningful additional disclosure may go a long way to address the current lack of information about a company's policies and procedures in these areas. Thus, we support many of the proposed enhanced disclosure requirements. Moreover, we believe that any regulations relating to the nomination of directors must be applied consistently, regardless of whether the nomination is tendered by shareholders or is generated internally by the company. We also believe that there is a balance to be achieved whereby changes to the proxy voting system do not invite abuses, or the use of the system to further self interests or the promotion of agendas through election contests. We discuss these views in more detail below. Discussion We believe that reevaluating the structure and objectives of the U.S. proxy voting system is a worthwhile effort, especially in today's climate, as investors continue to manifest a certain amount of concern as to whether corporate management is representing the shareholder's best interests. In particular, investors' focus on the composition of a company board stems from their need to insure that individual directors exercise their fiduciary duty to shareholders in fulfilling their responsibility as overseer of many of management's decisions. At issue is whether directors truly represent shareholder interests or are compromised by lack of qualifications, self-interests, or other conflicts of interest. We thus appreciate the SEC's timely and thoughtful response to this issue.
We are strong advocates for measures that increase investor protections. We also are consistent proponents for transparency in the market, whether it be in the form of financial reporting, disclosure of conflicts, or shareholder communications. Thus, we are in agreement with the spirit and objective of this rule proposal.
Nominating Committee
(a) Existence of Committee
We have consistently held that a hallmark of sound corporate governance is insuring the highest level of transparency for shareholders, and certainly the existence of a nominating committee goes a long way in achieving that goal. Under the current proposal, a company would be required to disclose whether it has a nominating committee and, if not, an explanation of why not.
We agree that providing disclosure of the existence of such a committee provides the investor with a basis for evaluating the corporate governance structure of a company. However, we do not believe that offering an explanation for why such a committee does not exist mitigates the lack of transparency that comes with not having one. Presumably, companies can decide to forego use of a nominating committee for a variety of reasons and while the discussion may be interesting, our concern is that such discussion will be reduced to boilerplate language that would add little meaningful information addressing this important consideration. Yet eliminating this requirement from the proposed regulation will not impact individuals who want to invest only in companies with nominating committees, as they can still act accordingly.
We believe that creating and maintaining independent and well-qualified boards that have only the best interests of shareholders in mind is a paramount objective. To this end, therefore, we encourage the SEC to consider the benefit of requiring all publicly-held companies to have a nominating committee. We believe that the creation of such committees will help shore up investor confidence while adding uniformity to the director nominating process.
(b) Independence of Directors
We strongly support aspects of the Proposal that would require disclosure of whether each member of the nominating committee is independent. An understanding of whether a director is an insider or is subject to other conflicts is relevant to an investor's evaluation of a company's governance structure.
(c) Shareholder Nominations
Similarly, we support requirements that a company disclose whether it has a policy for considering director candidates that may be recommended by shareholders. We also support the requirement that if the nominating committee has such a policy, it provide a description of the material elements of the policy, including a statement as to whether the committee will consider director candidates recommended by security holders.
(d) Minimum Qualifications
Although we believe the company and its board should have in place a prescribed set of minimum qualifications to guide the nominating committee, we are concerned that such "qualification statements" may well be met with vague or over generalized statements that impart little useful information as to the experience and background necessary to be a candidate for a director's seat. We are equally concerned for their potential abuse should the qualification statements include requirements that would act to exclude all but a small handful of "qualified" candidates.
Moreover, we recognize that in some situations, a candidate may bring a combination of attributes that is hard to articulate, or that may not fall squarely into categories, but who would make a valuable contribution to the work of the board. Yet at a different time the search for candidates may involve consideration of certain traits that relate to their ability to oversee, for example, internal reorganizations, business plans still in private stages of development, corporate restructurings, and other strategic initiatives that a company is not yet ready to publicly disclose to competitors. Should the final rule require a discussion of a director's minimum qualifications, we recommend that it provide guidance on the type of discussion that would be acceptable.
More importantly, instead of requiring a discussion of minimum qualifications and skill levels, we urge the SEC to focus on the application of whatever qualifications are used. The process by which directors are chosen should not be a two-tier process, but a level playing field for all qualified candidates. Thus, we urge the inclusion in the final rule of a requirement that the companies apply the same qualifications for evaluating all director candidates, be they nominated internally by a nominating committee, or proffered by shareholders. We also suggest that the SEC require the proxy statement to contain a statement addressing generally how the qualifications of the candidates (regardless of how they were nominated) and current directors provide diversity to, and strengthen, the board.
Moreover, requiring companies to apply the criteria for evaluating candidates across the board should provide comfort to the investor that the process has been fair and even handed. We believe that this requirement is more important than, and should replace, the proposed requirement that the company disclose the basis for a candidate's rejection. Not only does the proposed requirement raise privacy issues, but appears to be overreaching. In this case, we believe that the compliance costs outweigh the gain to investors.
(e) Threshold Requirements
Under the Proposal, nominations submitted by certain beneficial owners would trigger additional disclosure requirements. While we are undecided on whether the proposed threshold (beneficial ownership of more than 3% of the company's securities for at least one year) is the appropriate combination, we do believe that holdings in this range warrant additional disclosure, and thus support this aspect of the Proposal.
Communications with Boards of Directors
We welcome measures to open up meaningful discussions between shareholders and the board of directors. Accordingly, we support a requirement that a company disclose whether, and the method by which, shareholders can communicate directly and confidentially with the directors of that company. We think that it is important that shareholders have and fully understand the mechanism for presenting information, concerns or suggestions to the very group that ultimately oversees their interests. Similarly, the inability to provide input directly to directors may be an important factor to some investors in deciding whether or not to invest in that particular company.
Conclusion
We applaud the SEC for conducting a review of the proxy voting system and for these proposed regulations that seek to address ways to better open up the process to shareholders. We think that the higher-level disclosure requirements go a long way in imparting useful information and thus empowering the investor in certain decision-making roles about a particular company. As noted above, however, we believe that certain of the requirements may not serve a useful purpose for investors or companies, and urge the final rule to provide additional guidance for compliance that will provide the investor with meaningful information while preserving the balance between investor interests and corporate efficiencies.
If we can provide additional information, please do not hesitate to contact James W. Vitalone at 704.553.0455, jwvitalone@carolina.rr.com or Linda Rittenhouse at 434.951.5333, linda.rittenhouse@aimr.org.
Sincerely,
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/s/ Linda L. Rittenhouse
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Cc: Members of the U.S. Advocacy Committee
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