Corporate Governance (aka, CorpGov.Net)
9295 Yorkship Court, Elk Grove, CA 95758
Mr. Jonathan G.Katz, Secretary
U.S. Securitiesand Exchange Commission
450 FifthStreet, N.W.
Re: File No.S7-14-03 (Proposed Rule: Disclosure Regarding Nominating Committee Functionsand Communications between Security Holders and Boards of Directors)
Dear Mr. Katz:
I am the editor of CorpGov.Net (http://www.corpgov.net), anInternet publication aimed at enhancing the sustainable wealth generatingcapacity of corporations. CorpGov.Net provides information to individual andinstitutional shareholders. I am also an individual investor.
While I stand by my original suggestion of August 17,2003, I suspect the Commission may move forward with its proposed rule, ratherthan postponing action until an open ballot rule is in place as I suggest. If the Commission does move forward ondisclosure before the far more important access rule, my recommendations are asfollows:
- Repeal Rule 14a-8(i)(8). Currently, shareholders arebarred from using shareholder proposals to propose changes in the electionprocess. Remove this rule and we'll see creative proposals from shareholdersregarding how elections can be reshaped to reduce agency costs and increase the sustainable wealth generating capacity of corporations.
- Require additional disclosures regarding how theNominating Committee takes the issue of Board diversity into account whenconsidering candidates. Experience shows that companies that pursue diversity enjoy better share-price performance. (seeCarter, David A., Betty J. Simkins, and W. Gary Simpson. "CorporateGovernance, Board Diversity, and Firm Value," The Financial Review,February 2003)
- Mandate disclosure of fees paid to thirdparty nominee evaluators. Failure to disclose the fees paid to third-partynominee consultants could lead to at least two kinds of abuses. First,companies might pay exorbitant fees (for reasons unrelated to genuineevaluations). Second, companies might also pay token fees, to provide a falsepatina of respectability for their choice of nominees.
- Require corporations to disclose allchanges to their nominating processes or to their governing documents on Form8-K. Shareholders have a right toknow when articles of organization, by-laws, or other rules are changed.
- Require disclosure of company policiesregarding director attendance at shareholders' meetings and specific attendancedetails in the 10-Q, along with the voting results. Directors are, at least intheory, elected by and are accountable to shareholders. Shareholders shouldhave an opportunity, at least once a year, to look their electedrepresentatives in the eyes and ask questions.
- Require disclosure ofshareholder nominated candidates, including the names and addresses of thenominees and shareholders that recommended that nominees, as well as and thereasons the Committee decided to not include the candidates on the proxyballot. Disclosure should not belimited to investors or groups with three percent or more of outstanding sharesin the company. Any thoughtful nominee should be given due consideration. Requiring a company to disclose the names and addresses ofthe sponsors and of the rejected nominees would facilitate direct shareholdercommunication.
- Create atough, uniform definition of director "independence," such as thatoffered by the Council of Institutional Investors (see http://www.cii.org/independent_director.asp),applicable to all directors of all publicly traded companies without regard totheir listing status on a particular stock exchange. When directors with self-dealing transactions and otherconflicts of interest populate the nominating committee, shareholders areunlikely to have faith in the nominating process. Actually, the only truly independentdirectors are those nominated and elected by shareholders.
- End theSEC's special treatment of attorneys, such as the provisions of 17 CFR§229.404(b)(4) and §205.7, which provide a special exemption withregard to reporting business relationships. Corporate attorneys, who mayrepresent companies before the Commission, should be under the samerequirements as anyone else.
- Clarifythat any shareholder or group of shareholders nominating a director will notjeopardize their 13G filing status per the recommendation of the Council ofInstitutional Investors.
- Theproposed rules should also apply to small companies and mutual fund companies,since enhanced disclosure would be of great value to all types of investors.
I would welcome the opportunity to discuss my commentswith Commissioners or staff. Please contact me at the phone number below.
James McRitchie, Editor