Compass Bancshares, Inc.
VIA E-MAIL to email@example.com
September 15, 2003
Securities and Exchange Commission
Re: Proposed Rule regarding Nominating Committee functions and Communications between Security Holders and Boards of Directors
Dear Mr. Katz:
Compass Bancshares, Inc. ("Compass") appreciates the opportunity to comment on the proposed rule issued by the Securities and Exchange Commission concerning Nominating Committee Functions and Communications between Security Holders and Boards of Directors.
Compass is among the top 40 bank holding companies in the United States with over $24Billion in assets and operates approximately 355 full-service banking offices in Alabama, Arizona, Colorado, Florida, New Mexico and Texas.
The Commission's stated goal is to increase security holder understanding of the nominating process and their ability to communicate directly with a company's directors. Compass supports the Commission's efforts to provide security holders with meaningful information to help them understand the nomination process and feels that all legitimate communications should be brought to the attention of appropriate directors. However, while we support the objectives of the proposed rule, in our view, the proposed rule raises a number of very significant issues. We have not addressed each request for comment in the proposed rule, but rather only those issues with which we have concerns or for which we have suggestions for improvement.
Nominating Committee Disclosures Should Not be Made in the Proxy Statement
The Commission proposes to add up to 10 new disclosures to the proxy statement concerning the operations of the Nominating Committee in addition to those disclosures listed in the proposed rule that are currently required by Schedule 14A of the Securities Exchange Act of 1934 ("Exchange Act") and the Proposed Listing Standards for NYSE and NASDAQ listed companies.
Compass believes that many of these new disclosures, to the extent they would prove helpful to security holders, are more appropriately located on a company's website rather than included in a company's proxy statement. For example:
are all the type of generic informational disclosures that are better provided in a special section of a company's website1. We are concerned that the inclusion of all disclosures discussed in the proposed rule, combined with new disclosures required by the Sarbanes-Oxley Act of 2002, will soon make a typical proxy statement resemble the size and weight of a local telephone directory. We believe that security holders would benefit most from a plain English, simple and concise proxy statement that, when necessary, references where additional information may be obtained. Providing the additional disclosures on the company's website would make them more available to security holders because they would be able to access such information at any time rather than once per year via the company's proxy statement.
New Requirements May Result in Little Useful Information for Security Holders
The realities of the marketplace will most likely result in generalized requirements for the qualifications and skills of a typical director as well as for the company's process for consideration of director candidates. Even the most well-intentioned disclosure would most likely be limited to stating that directors "should possess superior academic or business credentials" and "must possess the highest integrity and values." The more that one tries to define what makes a good director the more good directors will be excluded from consideration because of the definition. The "process" of selection is much more an art than a science and is based more on luck, timing and overall "fit" with the existing board of directors. Any process would normally include a review of the candidate's record and qualifications and possibly an interview with other directors, but the needs of the company may not be specific or may be very specific (such as the need for an audit committee financial expert) at any one time. Candidates for the board may arise out of mergers or the retirement of an industry professional even though the board was not specifically looking to fill a particular need. A nominating committee's recommendation of a candidate is oftentimes based as much on intangible factors as it is on fulfilling exact resume requirements. Mandating a company provide detailed requirements where they may not reflect the actual process and then mandating adherence to such an artificial process would remove much needed flexibility and business judgement from the nominating committee.
The New Requirements May Create Potential New Liabilities
One of the unintended consequences of the new requirements may be a rash of litigation based upon new perceived legal duties for individuals or the issuing companies. For example, the requirement to name the source of a candidate's nomination could result in litigation against the source should the director later be found to have been negligent in performing her duties as a director. The sources of many of the Enron and WorldComm directors would most likely be involved in the quagmire of litigation surrounding those failed companies were their identities generally available in the proxy statements.
Any company that nominated an individual that failed to exactly satisfy the specific criteria listed by the company for director nominations could find itself sued for fraud and misrepresentation for failure to abide by its stated criteria when it nominated that individual for election to its board of directors One commenter has already suggested than an issuer be required to file an 8-K whenever the qualification requirements are not met by a proposed candidate2. Requiring a company to list the name of candidates not recommended for election by the nominating committee and to provide detailed reasons why that person was not recommended for election could cause reputational injury to the named person and frivolous litigation over issues of corporate democracy. Moreover, there are not always detailed reasons why a person is not recommended for election. As stated above there are typically intangible reasons why a nominating committee may feel that one candidate is better qualified to be a member of the board of directors even thought that person possesses a lesser "resume" than another candidate. We would urge the Commission to eliminate these disclosure requirements as completely unnecessary for the successful operation of a quality board of directors.
Significant Security Holders
With respect to its new requirement that a company disclose whether it did not recommend a candidate put forward by a large, long-term security holder, we would disagree that a one-year holding period denotes a long-term investor. We would propose a minimum of five years to qualify a security holder as a long-term investor. We would also suggest that the Commission clarify the holding period as it applies to groups of security holders who are aggregating their holdings to qualify as a significant shareholder. It is unclear from the language of the proposed rule whether all members of the group would have to have held the stock for the holding period, or just that one member of the group must have held the stock for the holding period. We would suggest that all members of the group must be holders of a company's stock for a minimum of five years prior to the date of submission of the candidate to the nominating committee. Anything less than this may lead to a group of relatively new security holders seeking out a small but long-term security holder to provide the holding period for the entire group. Moreover we would suggest that any group of security holders be required to disclose any incentives or other arrangements made to any other security holders to join the group with the intention of reaching the 3% trigger level.
Special rights given to larger security holders should also come with special responsibilities to the company and to other security holders. For example, significant security holders should be required to submit only bona-fide director candidates that will represent the interests of all security holders, not just the interests of the group that submitted them. We would recommend that any significant security holder that proposes a candidate for election to the board of directors be required to hold their stock for a term equal to the length of that director's initial term of office. This would discourage any "special interest" security holders from proposing a director and then selling shares immediately following an election and moving on to another company to advance their special agenda.
Direct Security Holder Communication with the Board of Directors
We agree that security holders should have the ability to communicate with individual directors either through the corporate secretary or a special e-mail address. However, in our experience most communications from security holders to directors do not involve the management of a company or its business. Typically they involve a security holder's comments about a company's products or services. Some security holders simply have special agendas and want the company to start supporting a certain cause or donate funds for a charitable purpose. These types of inquiries are not the best use of a director's time or effort.
Direct communications between a director and a security holder also raise implications with Regulation FD and with insider information. Companies should be free to mandate that any director responses should be discussed with the company's general counsel to be certain the response did not raise issues under Regulation FD or unwittingly disclose any material, non-public information.
Additionally, most boards of directors communicate based on consensus. It would be potentially detrimental to normal board functions if directors were expected to answer communications on which the entire board had not reached a decision.
Form Letter Comments
In closing we would also request the Commission not to place too much weight on the number of persons who submit comments based on a form letter provided to them by their employers, unions or pension funds. Such letters tend to promote the self-interest of the organization that prepared them and do not necessarily reflect the thoughts of the persons submitting the comments. A large employer could easily request its employees to submit form comments and the Commission would be inundated with thousands of letters all stating the exact same comments. The substance of each letter should be examined without regard to how many times the same letter has been submitted to the Commission.
We respectfully submit these comments with the hope that they are helpful to the Commission's consideration of the proposed rules. We would be happy to meet with representatives of the Commission to discuss our comments.