September 15, 2003
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Mr. Jonathan G. Katz,
Re: Shareholder Access Proposals
Dear Mr. Katz:
My law firm, Sullivan & Cromwell LLP, has separately submitted specific comments on the proposed changes to the proxy rules set forth in Release No. 34-48301 that I fully endorse, including the statement that we generally support the efforts of the Commission to enhance the transparency of the director nomination process. Recognizing that the proposed rules are only the first phase of a two-step process in which even more far-reaching rules regarding the director nomination and election process may be proposed, however, the purpose of this letter is to comment more broadly on the shareholder access initiative as outlined in the Staff Report "Review of the Proxy Process Regarding the Nomination and Election of Directors," dated July 15, 2003 (the "Staff Report"). Specifically, this letter is in response to specific aspects of the current proposals according special status to certain shareholders and those discussed in the Staff Report relating to the possibility of adopting rules by which certain "triggering events" will force corporations to engage in "mini" proxy contests. As the Commission considers what rules to adopt and what further rules to propose in this area, I would respectfully urge that the Commission give serious consideration to the potential to do irreparable harm by the adoption of rules, under the banner of corporate governance, that fundamentally alter the way the boards of public companies function. The absence of meaningful and unbiased empirical data justifying a sweeping revamp of the director election process and the fact that prior Commissions have decided against such measures strongly argues for caution in experimenting with the management and governance of all U.S. public corporations.
Difficult though it may be to do after witnessing what I would agree were too many financial accounting debacles in the recent past, I nevertheless believe that it is vitally important that corporate governance be kept in perspective: it is not an end in itself. Corporations exist to grow and produce profit for their shareholders within the bounds of the law, and in that process, provide employment opportunities and wages for millions of people. It is unquestionably the case that many successful and highly profitable corporations have existed and operated for many years that do not fit whatever corporate governance profile may be touted currently by one corporate governance group or another. If there is indeed anything more than a coincidental correlation between "model" corporate governance, however defined, and success as a public corporation, I cannot help but wonder how so many corporations could have succeeded in the past. Whether or not there is a meaningful connection, however, I would posit that if certain corporate governance initiatives can be shown over time to support corporations in increasing shareholder wealth, they will be embraced - even demanded - by the marketplace. Finding the dividing line between "helpful" and "harmful" corporate governance practices is admittedly a difficult task but, I would submit, much more capable of being identified by relying on the collective wisdom of the marketplace over time, aided by the significant tools to encourage director independence and responsiveness recently provided by Congress and the Commission in the form of Sarbanes-Oxley.
In the larger sense, I would be very concerned about any set of Commission-mandated rules that were premised on a construct, contrary to most state corporation laws, that directors are purely agents of shareholders (whoever that large and diverse group may be at any particular moment in time) and therefore must explain themselves or be forced into a "mini" proxy contest on directors every time the Board of Directors makes a business judgment that a 3% shareholder, or even a majority of the shareholders (at that time), may disagree with. My concern is that the rules, as proposed and as outlined for proposal in the Staff Report, could have the deleterious effect of encouraging, even promoting, a view that directors, at least a majority of whom are likely to be independent, should cease to act on their own best judgment and simply acquiesce to shareholder initiatives (some with motives not related to best interests of all shareholders) because of the adoption of disclosure rules implicitly based on the assumption that board decisions that run counter to current shareholder sentiment are presumptively wrong or a sign of malfeasance. Some of the rules being proposed and others discussed in the Staff Report are really not disclosure rules. They are, in fact, rules reflecting normative judgments about how corporations should be run and are intended to influence, some might say, coerce directors into making certain business decisions. This is the case because some of the rules that have been proposed or discussed, if adopted, would require directors and the corporations to "suffer the consequences" that the rules would impose if the directors exercise their business judgment in a manner contrary to how the Commission believes certain matters should be decided.1
I also cannot fail to remark upon the relatively narrow constituencies that seem most interested in the Commission taking sweeping action in this area. In fact, based on the comment letters received by the Commission, as set forth in the Staff Report, it would appear that the most determined impetus for some of the most significant changes in the director nomination and election process comes from organizations with social and other agendas that can be quite distinct from, and at times be in direct conflict with, the investment objectives of investors generally. 2 The heavy concentration of comments from organizations that by their very nature are at odds to one degree or another with corporate management should, at minimum, suggest a healthy degree of skepticism in evaluating such comments. While I do not question the right of special interests to make their voice heard, I would hope that the Commission will take note of the possibility that non-corporate agendas are being advanced in the name of corporate governance. Given the broad and diverse nature of the investor community, there also seemed to be a relative paucity of "demand" from broadly-based institutional and other investors for dramatic rule changes. In light of the unprecedented changes in corporate governance and reporting practices mandated by Sarbanes-Oxley that are still in the process of being developed and implemented by corporate America, I respectfully would urge that this is a time that the Commission should give investors and publicly-held corporations a chance to find the proper balance in this area before imposing far-reaching changes on the director nomination and election process that may have unintended, but nevertheless, significant adverse consequences for public U.S. corporations.