Council of Institutional Investors

August 20, 2003

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

Re: File No. S7-14-03

Dear Mr. Katz:

The Council of Institutional Investors, an organization of more than 130 public, corporate and union pension funds with over $3 trillion in investments, supports the Securities and Exchange Commission's proposal to require expanded proxy statement disclosure of the director nomination process and the means, if any, for shareholders to communicate with directors.

The Council commends the Commission for taking steps to reform a fundamental weakness in the current U.S. corporate governance model-the fact that investors have few, if any, meaningful and cost-effective ways to participate in the director nomination process.

The proposed disclosure reforms are a significant first step. We look forward to the second, most important step for investors-the adoption of rules giving shareholders access to management's proxy card to nominate potential directors.

The Commission's work in these important areas will go far beyond the changes mandated by the Sarbanes-Oxley Act of 2002, and these reforms will be of lasting importance to investors in the U.S. capital markets.


The board of directors-responsible for overseeing corporate strategy, monitoring corporate and management performance and setting executive compensation-plays a starring role in the governance of U.S. companies. Unfortunately, directors have long been viewed as isolated from the investors they represent, largely unaccountable to the shareholders who ostensibly "elect" them and too cozy with corporate management. And the director nomination process has been seen as a management-dominated exercise in which cronies and friends of friends are picked to sit on boards.

Shareholders have been unable to address these longstanding problems, largely due to limitations imposed by companies and the securities laws. Some companies don't have nominating committees, others won't accept shareholder nominations for directors, and our members' sense is that shareholder-suggested candidates are rarely given serious consideration. Shareholders can now only ensure that their candidates get full consideration by launching an expensive and complicated proxy fight.

It's the rare company that has even been willing to have shareholders communicate with outside directors. Instead, shareholder communications, including those addressing non-trivial governance issues appropriately handled by the board, have tended to be "screened" and handled by corporate executives-further isolating directors from the shareholders who elect them.

The issue of shareholder-director communications is of such importance to our members that the Council formed a joint task force with the National Association of Corporate Directors to study the issue. The goal of the task force is to investigate the current barriers to director-shareholder communication, evaluate how some companies and directors have overcome them and issue recommendations or "best practices" based on its findings. We expect to release the report sometime this fall.

SEC Proposal

The Council believes that the proposed disclosures will provide shareholders with a more complete picture of the processes and policies of nominating committees and boards and some much-needed specifics on avenues for shareholder-director communications.

The Council strongly supports the proposed disclosures regarding the director nomination process, particularly the disclosures about the process for identifying and evaluating candidates, the qualifications and standards for director nominees, the source of candidates, and the policies and procedures for shareholder-suggested candidates. We believe the expanded disclosures will help investors understand and more effectively participate in the director nomination process.

We also applaud the enhanced disclosure applicable to companies not nominating candidates suggested by an investor or group of investors owning at least 3 percent of the stock for a year. Such disclosure will give shareholders an additional tool to evaluate the responsiveness of their elected representatives.

The Council believes the proposed more specific, detailed disclosure requirements are appropriate and of most value to investors. Too often, broader, less detailed disclosure standards become boilerplate and of limited help to investors. We believe the proposed disclosures are targeted and not too onerous for companies and address those issues of most importance to investors.

Furthermore, we agree that the proposed changes should apply to all companies-including small companies and mutual fund companies-with registered securities.

We believe the following modifications would strengthen the proposed rules and provide greater transparency to investors.

  1. Companies should be required to provide prompt 8-K disclosure of any changes to procedures for shareholders to submit recommendations for director candidates. Such disclosure would ensure that shareholders interested in submitting candidates are fully aware of relevant procedures.

  2. Companies should be required to disclose whether the same criteria are used for shareholder-submitted and nominating committee-nominated candidates, and if not, what the differences are. This would ensure that shareholders have adequate information to identify and submit qualified director candidates.

  3. Companies should have to disclose the names of third parties used to identify director candidates and whether the company's management, the board or the nominating committee retained the third party. This information would help investors evaluate the independence and effectiveness of search firms or other consultants retained to identify director candidates.

  4. In addition to the name of each candidate's sponsor, companies should be required to disclose the sponsor's title and firm and any professional, familial or financial relationship between the candidate, sponsor, company and company executives. The Council has long held that certain relationships, no matter how small, may compromise a director's objectivity and loyalty to shareholders, and these relationships should be disclosed to shareholders.

  5. Companies should have to include the name of any rejected candidate-suggested by a 3 percent holder or holders-who consents to being identified in the company's proxy statement. Shareholders can use this information to assess the board's performance in the nominating process and to decide whether they would suggest the candidate or join other shareholders in recommending the candidate in future years.

Some issues were not addressed in the proposal release. To further strengthen the rule changes, the Council recommends the following:

  1. Require disclosure of company policies regarding director attendance at shareholders' meetings and specific attendance details in the 10-Q along with the voting results. Directors are elected by and are accountable to shareholders. Accordingly, it is appropriate that shareholders have an opportunity at least once a year to look their elected representatives in the eyes and ask questions. Too often directors-and sometimes even corporate executives-do not attend annual shareholders' meetings. We believe it is appropriate for companies to disclose whether or not they have policies regarding director attendance at shareholder meetings. Also, the Council believes shareholders should be provided specific information on whether each director did or did not attend the meeting. Such disclosure could readily, and at minimum cost, be added to the voting result detail disclosed in 10-Qs, and it would be of tremendous value to investors.

  2. Clarify that any shareholder or group of shareholders submitting a director candidate will not jeopardize their 13G filing status. The Council believes that the SEC's intent is that such an activity would not result in loss of 13G status. However, continued concerns over certain gray areas have chilled investor interest in pursuing certain actions. We urge the SEC to create a safe harbor for the following activities: submitting director candidates for consideration by company boards or nominating committees; "short slate" campaigns that do not constitute a majority of the board, and "just vote no" efforts in which shareholders urge other shareholders to withhold votes from directors.

  3. Require enhanced disclosure of relationships between directors, corporations and corporate executives. Details regarding the director nomination process are of vital importance to investors, but so are meaningful disclosures of director links to companies and company executives. Investors should have access to sufficient information for them to make their own assessments of a director's independence. Current disclosures are weak and definitions proposed by the exchange fall short of ones used by most investors. Too often in the past shareholders have learned of ties between directors when it's been too late, with a company mired in a scandal and director independence called into question. We urge the Commission to act on the Council's rulemaking petition submitted in October 1997 and amended and resubmitted in October 1998.

Thank you for your leadership in this important effort. Please contact me or Ann Yerger with any questions.


Gary Findlay
Council of Institutional Investors

CC: Chairman William H. Donaldson
Commissioner Paul S. Atkins
Commissioner Roel C. Campos
Commissioner Cynthia A. Glassman
Commissioner Harvey J. Goldschmid
Alan L. Beller, Director, Division of Corporation Finance
Martin Dunn, Deputy Director, Division of Corporation Finance