September 3, 2003
Mr. David A. Smith
Mr. Jonathan G. Katz
Re: File S7-14-03 (Proposed Rule Regarding Director Nominations and Communications)
Dear Mr. Katz:
Thank you for the opportunity to comment on the proposed rule referenced above. Like many others whose comment letters appear on the Commission's website, I offer lukewarm support for this proposed rule only insofar as it is a "first step" toward real reform.
The proposed rule would amend 17 CFR §240.14a-101 ("Schedule 14A - Information Required in Proxy Statement") by adding paragraph (h) to Item 7. In my opinion, paragraph (h) could and should be deleted, in favor of requiring every registrant's directors to disclose their home addresses on Forms 3, 4, and 5. Form 3 is the "initial statement of beneficial ownership", Form 4 is the "statement of changes in beneficial ownership", and Form 5 is the "annual statement of beneficial ownership".
The Commission could easily implement the requirement that directors disclose their home addresses on these forms by adding an instruction to that effect at 17 CFR §240.16a-3, and by adding concurrent instructions at 17 CFR §249.103, §249.104, and §249.105.
This simple change would not generate any new paperwork, since corporate directors already routinely file Forms 3, 4, and 5. It would not generate any new drivel or boilerplate in the proxy statement. It would rob corrupt management of the ability to filter non-trivial communications from shareholders to directors, by giving shareholders a direct, efficient means of writing to their representatives on corporate boards. It would also serve to routinely remind directors of their fiduciary obligations to place investors' interests ahead of management's.
This simple change would also facilitate service of process during shareholder lawsuits, which one might characterize as the ultimate shareholder-to-director communication, and a form of shareholder communication that is increasingly on the rise in the post-Enron era. Corporate attorneys and directors exploit the ambiguity in the current rules by filing Forms 3, 4, and 5 that list the registrant's business address in lieu of an individual director's address, and they do so quite purposefully.
To starkly illustrate my point, the Commission's attention is called to the Forms 3, 4, and 5 filed on EDGAR since 1996 for directors and officers of State Street Corporation (NYSE: STT), which is organized under Chapter 156B of the Massachusetts General Laws. The SEC's attention is also called to the altered "Certificate of Change of Directors or Officers" that State Street Corporation filed with the Massachusetts Secretary of the Commonwealth on January 17, 2003, which is viewable at: http://www.shareholdersonline.org/pdf/011703changecertificate.pdf.
The Commission and its staff can plainly see that State Street altered the face of the form promulgated by the Massachusetts Secretary of the Commonwealth by striking through each occurrence of the word "residential", and used the Corporation's address for each director - in lieu of his or her residential address, as the form requires. The Corporation's address is also the one that State Street's directors have used on the Forms 3, 4, and 5 filed with the SEC.
As the saying goes, "form follows function". Here, the function of striking through each occurrence of the word "residential" on the face of the form promulgated by the Massachusetts Secretary of the Commonwealth and substituting the Corporation's address is at least twofold, in my view: (1) to hinder direct shareholder communication with directors; and (2) to hinder service of process. Clearly, the Massachusetts Secretary's form embodies a public policy that the residential addresses of corporate directors should be a matter of public record; State Street's anti-disclosure tactics defeat the functions and purposes of that public policy.
Chapter 15 ("Stockholders' Lawsuits") of Massachusetts Corporation Law and Practice, Southgate & Glazer, contains the following passage at §15.3 ("Service on Directors and Officers"):
By striking through each occurrence of the word "residential" on the face of the form promulgated by the Massachusetts Secretary of the Commonwealth, and by using the Corporation's address on this form and on Forms 3, 4, and 5 in lieu of each individual director's residential address, the Corporation and its directors have heeded the unspoken message of the treatise quoted above: namely, to make direct shareholder communications of any kind - and service of process in particular - more difficult by concealing directors' residential addresses.
At this point in my analysis, the Commission's attention is called to the fact that the treatise quoted above, Southgate & Glazer, is authored and edited by attorneys at Ropes & Gray. Headquartered in Boston, where it is considered by many to be that city's most powerful law firm1 it also has offices on the renowned "K Street" of Washington, DC, and represents a number of prominent registrants before the Commission, the courts, and other governmental bodies. With regard to the Commission's proposed director nomination and shareholder communication rule change, Ropes & Gray has created an "SEC Alert", dated August 13, 2003, and has published it on the front page of its website for its corporate clients to review.2Clearly, the Commission's current rulemaking initiative is on Ropes & Gray's radar.
The Preface of Southgate & Glazer begins: "This book is by any measure a Ropes & Gray product. Although it expresses our views as individuals and not those of Ropes & Gray as a firm, over forty Ropes & Gray lawyers participated in its drafting, and many more were consulted on particular issues. It is the work of many hands and of an extensive editorial process." The Preface is signed by the two editors (two former Ropes & Gray partners), and dated from Ropes & Gray, Boston, Massachusetts, September 30, 1991. A current Ropes & Gray partner, who represents State Street, is credited with writing the passage that I quoted above.3Mr. Truman S. Casner, Esquire, Chairman of the Executive Committee of State Street's Board of Directors, is a former Ropes & Gray partner. As recently as the Corporation's 2001 Proxy Statement, Mr. Casner - who has been a director at State Street since 1990, and whose current term is set to expire in 2006 - is listed as a "partner in the law firm of Ropes & Gray". In the Corporation's 2002 and 2003 Proxy Statements, he is listed as "of counsel to the law firm of Ropes & Gray". In every proxy statement since 1995 (the earliest available on EDGAR), under the section heading "Certain Transactions", the Corporation discloses that it has retained the law firm of Ropes & Gray, and notes the firm's relationship to Mr. Casner, but stops short of disclosing the amount of fees paid to his firm. Curiously, another former Ropes & Gray partner, the late Edward B. Hanify, Esquire, sat on State Street's Board of Directors before Mr. Casner.
At the last two consecutive State Street annual meetings, I have asked the Corporation's Chairman and CEO, Mr. David A. Spina, to disclose the dollar amount of fees paid to the law firm of Ropes & Gray during Mr. Casner's tenure as a director. Mr. Spina has flatly refused to disclose this information, from which I infer that the fees paid to the law firm of Ropes & Gray during Mr. Hanify's and Mr. Casner's terms as directors have been quite substantial.
Ordinarily, 17 CFR §229.404(b), ("Certain Business Relationships"), requires a registrant to disclose the dollar amount of fees paid to the affiliate of a director or nominee. But the SEC has carved out an exception for the corporate bar at 17 CFR §229.404(b)(4): "...Provided, however, that the dollar amount of fees paid to a law firm by the registrant need not be disclosed if such amount does not exceed five percent of the law firm's gross revenues for that firm's last full fiscal year[.]" [emphasis as in original] Given Ropes & Gray's client base, it is difficult to imagine that any of its clients would singly account for five percent of the firm's gross revenues.
If Mr. Casner were engaged in almost any other business, State Street would be required to disclose the dollar amount of fees paid to his affiliate, so that shareholders could gauge for themselves whether the conflict of interest warrants special attention or action. However, the SEC's exemption permits this particular conflict of interest to remain largely in the shadows. In light of the recently adopted rules regarding corporate attorney conduct (17 CFR §205), not to mention the lessons learned from Enron's cozy relationship with its own external legal counsel, this exemption language seems particularly ill advised. I find it highly unlikely that any attorney at Ropes & Gray will comply with the dictates of 17 CFR §205 with respect to State Street Corporation while one of their own number is Chairman of the Corporation's Executive Committee, or while applicable statutes of limitations make Mr. Casner jointly liable, after he resigns, for any breaches of fiduciary duties, malfeasance, securities law violations, or the like that may have occurred during his tenure as a director.
On August 5, 2003, 17 CFR §205 ("Standards of Professional Conduct for Attorneys Appearing and Practicing before the Commission in the Representation of an Issuer") took effect. Ostensibly, §205.3 requires that attorneys at Ropes & Gray report any material violation of securities laws or regulations, or any material breaches of fiduciary duty, up the chain of corporate control, beginning with the Corporation's "chief legal officer", who must then make a series of determinations that have the potential to escalate the report to a subset of the Board of Directors. Notably, on August 14, 2003, State Street filed its quarterly Form 10-Q, in which it revealed that the Corporation's "chief legal officer", Ms. Maureen Bateman, Esquire, has elected to retire: http://www.sec.gov/Archives/edgar/data/93751/000119312503037254/dex101.htm. While not necessarily a "noisy withdrawal" on her part, the timing of the departure of the Corporation's General Counsel is curious, to say the least.
In light of the foregoing analysis, does the Commission really believe that Item 7(h) would prompt State Street's directors to include candid disclosure in the proxy statement regarding the advice they receive from Ropes & Gray on how to evade direct shareholder communications? More generally, does the Commission really believe that Item 7(h) will prompt other registrants to candidly reveal the various devices they use to hinder direct shareholder communication, or prompt any registrant to adopt reformed procedures that are genuinely designed to foster such direct communication? If the answer to these questions is "no", then the SEC should not waste its rulemaking resources on promulgating 7(h), in my view.
My own belief is that - even with the requirements that would be imposed by the New York Stock Exchange's recent rulemaking (see Release No. 34-47672; File No. SR-NYSE-2002-33, http://www.sec.gov/rules/sro/34-47672.htm), or by similar self-regulatory organization rulemaking - corporate counsel like Ropes & Gray will continue to advise clients like State Street Corporation's Board of Directors to employ non-responsive tactics that have the practical effect of thwarting the purpose of the proposed rules. In support of my belief, I cite, once again, to Southgate & Glazer, the Ropes & Gray treatise on Massachusetts corporate law and practice:
The message offered by Ropes & Gray attorneys to directors: (1) avoid responding to your shareholders; (2) force your shareholders to incur unnecessary litigation expenses; and (3) ignore the fact that these tactics have the self-serving side effect of generating legal fees for our firm.
The proposed rule would revise paragraph (d)(2) of Item 7. With respect to Item 7(d)(2)(i), I am of the opinion that most investors don't really care very much whether or not a registrant has a "standing nominating committee". Whether a standing nominating committee is constituted to create a ritualized kabuki dance for nominating cronies, lemmings, and rubber stamps, or whether a subset of the Board of Directors at large does the deed, is immaterial to investors.
Again, the concrete example offered by State Street Corporation is illustrative. As far back as 1995, the Corporation's proxy statements indicate that its standing Nominating Committee will accept shareholder recommendations for nominees upon timely written notice, and state that: "Pursuant to the By-laws of the Corporation, proposals of business and nominations for directors other than those to be included in the Corporation's proxy statement and form of proxy may be made by stockholders of record entitled to vote at the meeting if notice is timely given and if the notice contains the information required by the By-laws." [emphasis added] The By-laws are available at: http://www.shareholdersonline.org/pdf/stt_bylaws.pdf. The section governing shareholder-initiated nominations and proposals of other business is located at Article I, §7.
Currently, shareholders are precluded from using Exchange Act Rule 14a-8 ("Shareholder Proposals") as a means to propose outside director nominees: see 17 CFR §240.14a-8(i)(8), which permits a registrant to exclude from its proxy statement and form of proxy shareholder proposals that pertain to "an election for membership on the company's board of directors or analogous governing body". Therefore, even with a perfect understanding of the Corporation's process for dealing with shareholder-initiated nominations, the practical reality remains that shareholder-initiated nominations will not have access to the "Corporation's proxy statement and form of proxy" unless the Nominating Committee concurs with the recommendation.
But the Chairman of State Street's standing Nominating Committee has a self-dealing conflict of interest. Under the "Certain Transactions" section of State Street's proxy statement as recently as 2002, the Corporation discloses that it has paid for services rendered by Ionics, Inc., but stops short of disclosing the amount of fees paid. Ionics' Chairman and Chief Executive Officer, Mr. Arthur L. Goldstein, is also the Chairman of State Street's Nominating Committee.
Mr. David A. Spina, the Chairman and CEO of State Street, abruptly cut off all discussion of this self-dealing conflict of interest at the 2003 Annual Meeting, notwithstanding the requirements of 17 CFR §249.404 ("Certain Relationships and Related Transactions"), and notwithstanding the fact that Ionics recently embroiled State Street Corporation in a federal lawsuit: Ionics, Inc. v. Namibia Water Corp., et al., 01-CV-10326 NG, U.S.D.C., Massachusetts. Please see http://www.shareholdersonline.org/pdf/otherdocketionics051801.pdf, http://www.shareholdersonline.org/pdf/othercasesionicscomplaint.pdf, and http://www.shareholdersonline.org/pdf/othercasesionicscourtorder040201.pdf.
Under these conflict-laden circumstances, do the Commissioners or their staff really believe that State Street shareholders can expect the standing Nominating Committee to conduct a good faith review of shareholder-initiated director nominees? In my opinion, the Commission's time would be far better spent in repealing 17 CFR §240.14a-8(i)(8), thus permitting shareholders to use Exchange Act Rule 14a-8 as a means to advance their own nominees. After all, we are a democratic, free market society. In the absence of competition, incumbent board members have an artificial, SEC-sanctioned monopoly on the nominating process that is more befitting of Communism than of representative democracy.
With respect to Item 7(d)(2)(ii)(A) and Item 7(d)(2)(ii)(B), I am of the opinion that most investors don't really care very much whether or not a registrant has a "nominating committee charter" that may or may not be available on its website. Registrants that already engage in conscientious and open nomination processes would embody such best practices in their charters; those registrants that engage in self-serving, opaque nomination processes would tailor their charters accordingly.
Again, the concrete example offered by State Street Corporation is instructive. In its 2003 Proxy Statement, filed with the Commission on March 10, 2003, the Corporation stated as follows:
On May 14, 2003, a State Street stockholder sent a written request for these documents: http://www.shareholdersonline.org/pdf/051403bateman.pdf. On May 16, 2003, the Corporation's General Counsel responded that these materials would be made available at an unspecified later date: http://www.shareholdersonline.org/pdf/051603frombateman.pdf. To date, it does not appear that the Corporation has either published these materials on its own website, or mailed them to the stockholder who requested them. One might surmise that Mr. Casner and the other Ropes & Gray attorneys are busily determining the bare minimum that the proposed NYSE rules would require of State Street's directors - and charging undisclosed legal fees to State Street's shareholders for doing so - if one were cynical about such things. Instead of taking a position of leadership on the corporate governance issue by adopting corporate governance documents that meet or surpass the proposed NYSE requirements, these actors appear to be adopting a "wait and see" approach, perhaps to tailor the corporate governance documents to bare minimum standards. After all, nothing is stopping them from acting now; they can tweak the corporate governance documents to meet any new regulatory requirements that appear in the final rules.
With respect to Item 7(d)(2)(ii)(C) and Item 7(d)(2)(ii)(D), I am of the opinion that the Commission should promulgate a uniform definition of director independence that: (1) is meaningful; (2) is tough; (3) reflects the fiduciary duties owed by corporate directors to shareholders; and (4) is mandatory. When a shareholder reads a proxy statement, he or she should not have to ascertain which definition of "independence" applies to that particular registrant, based upon its listing status with a particular stock exchange; rather, a uniform definition should apply to all registrants. As drafted, (ii)(C) and (ii)(D) perpetuate a system where director "independence" is robbed of all meaning, in my opinion.
The definition I prefer is that offered by the Council of Institutional Investors, which begins: "An independent director is someone whose only nontrivial professional, familial or financial connection to the corporation, its chairman, CEO or any other executive officer is his or her directorship." The full definition may be found at: http://www.cii.org/independent_director.asp.
Again, State Street illustrates my point. In 2000, I provided timely written notice, pursuant to Article I, §7 of the Corporation's By-laws, of my intent to present a proposal at the 2000 Annual Meeting, seeking to end the self-dealing relationship with Ropes & Gray. No checkboxes were included on the Board's form of proxy for my proposal4 notwithstanding the requirements of Section 41 of Chapter 156B of the Massachusetts General Laws ("Stockholders' Voting Rights; Proxy Regulations"), which reads in relevant part: "Stockholders may vote in person or by proxy." Instead, the Board exercised its "discretionary authority" to vote the proxies it had solicited "against" my proposal, apparently in reliance upon 17 CFR §240.14a-4 (even though federal proxy regulations are not supposed to obviate or pre-empt the requirements of state law). Thus, only actual attendees of the meeting received a copy of the text of my proposal, and only such actual attendees were offered the ballots necessary to cast their votes in favor of it. Significantly, Mr. Casner was a nominee for re-election on the very form of proxy from which my proposal to end his self-dealing relationship was excluded. Significantly, the Corporation's Chairman and CEO, Mr. Marshall N. Carter, refused to allow me to speak at the meeting, and the microphone was turned off when I tried to do so; he resigned unexpectedly one month later. It has been suggested that he was forced out over his heavy-handed treatment of me at the meeting.
In 2002 and again in 2003, another shareholder has submitted a proposal under Rule 14a-8 that would: (1) mandate the repeal of State Street's staggered board structure, and (2) once again permit shareholders to remove directors with or without cause.5In his supporting statement, the proponent stated his opinion that the current board structure "lends itself to interlocking board relationships, lack of [true] independence, lack of appropriate oversight over the Corporation's executive management, lack of disclosure to the shareholders, and lucrative self-dealing transactions among the directors." As authority, the shareholder proponent cited to a passage from Southgate & Glazer, the treatise authored by Mr. Casner's colleagues at the law firm of Ropes & Gray, which states that under the current board structure: "...the number of directors may be fixed only by the board, directors may be removed by stockholders only for cause, and any vacancies resulting from an increase in the number of directors or otherwise may be filled only by directors then in office".
In opposition to this proposal, the Board included a statement in its 2003 Proxy Statement that makes much of the fact that all but two of its members are "non-employee directors".
However, as demonstrated above, the Chairmen of both the Executive Committee and the Nominating Committee (which, according to the 2003 Proxy Statement, is expected to assume Corporate Governance functions) have self-dealing conflicts of interest. Seemingly, neither chairman would pass muster under the Council of Institutional Investors' definition of director independence. (Neither would many of the other State Street directors who have served during the years in which I have been a shareholder.) However, in the absence of a uniform, meaningful regulatory definition of director "independence", State Street included language in its 2003 Proxy Statement that gives the impression that these two gentlemen are "independent", simply by dint of the fact that they are "non-employee directors". With the NYSE definition of director "independence" currently in flux, it is unclear how the Corporation's Board of Directors might tap dance around this issue next year, in the event that the proponent's staggered board proposal is re-submitted for consideration for 2004.
In my opinion, Item 7(d)(2)(ii)(E), (F), and (G) are harmful, because they perpetuate the aforementioned practical reality that - barring an expensive proxy fight - shareholders must go to incumbent directors as beggars and supplicants, hat in hand, to "recommend" nominations, rather than being empowered to compete head-to-head with nominees of their own choosing, in the free marketplace of ideas.
In the strongest possible terms, I urge the Commission to use its rulemaking powers to give shareholders real access to the corporate proxy statement and form of proxy (which shareholders pay for, after all). As it stands now, incumbent directors and their handpicked nominees obtain a free ride - at shareholder expense - on the corporate proxy statement and form of proxy, while insurgent candidates must bear all of the expenses of their own candidacies. This does not amount to a "level playing field", by any reasonable or equitable definition of that term.
Insofar as (ii)(E), (F), and (G) give a tacit nod and wink to perpetuating the current system, each runs the very real risk of undermining respect for the Commission itself, and of fostering investor cynicism. After all, State Street Corporation already provides each of the disclosures that (ii)(E), (F), and (G) would mandate - but this does not affect, in the least, the practical reality that shareholder-initiated nominations will not have access to the "Corporation's proxy statement and form of proxy" unless its conflict-laden Nominating Committee concurs with the recommendation. It seems to me that a Chinese citizen has about an equal chance of being nominated to the ruling Politburo as a State Street shareholder has of seeing his or her nominee placed on the Corporation's form of proxy.
Yet it bears repeating and emphasizing: State Street Corporation already makes all of the disclosures that would be mandated by (ii)(E), (F), and (G). In my opinion, this speaks volumes about the milquetoast nature of (ii)(E), (F), and (G) - they offer nothing practical to investors, the constituency that the Commission is supposed to have uppermost in mind at all times.
Item 7(d)(2)(ii)(H) is rendered wholly ineffective, in my opinion, by the inclusion of the loophole word "any" in three key instances. Item 7(d)(2)(ii)(H) would be greatly strengthened by striking each occurrence of the word "any" contained therein. Notice how different the meaning of Item (ii)(H) becomes when each instance of the word "any" is bracketed below for emphasis:
If I were a corporate attorney, I would advise my corporate clients to comply with the terms of Item (ii)(H) by not formally adopting "any" of the listed criteria, in order to preserve continued maximum flexibility to nominate cronies, lemmings, and rubber stamps. For public (or shareholder) consumption, I would advise the registrant to state that the nominating committee believes that a wide array of backgrounds often give rise to effective directors, and that the adoption of "any" such formalistic guidelines might have a chilling effect on the nominating committee's ability to consider otherwise qualified nominees. Indeed, Ropes & Gray's "SEC Alert" on this proposed rule summarizes (ii)(H) in such a way as to make clear that a registrant would be required only to disclose "any" such specific guidelines.
Just as registrants with transparent, open nominating processes will embody such best practices in their nominating committee charters, so too will such registrants craft conscientious, good faith guidelines in response to Item (ii)(H), in my opinion. Just as registrants who engage in closed, opaque nominating processes will craft self-serving nominating committee charters, so too will such registrants address (ii)(H) with equal bad faith, in my view.
In its 2003 Proxy Statement, the Board of Directors included the following statement in its response to the aforementioned shareholder proposal to repeal the staggered board structure: "The Board's Nominating Committee has been diligent in recruiting director-nominees who represent diversity and substantial achievement in their personal and professional backgrounds ... The Board believes that the organization of the Board under [its current structure] is consistent with promoting the continuity of leadership, a focus on long-term strategic goals and the alignment of the Board's interests with those of stockholders that has benefited State Street and its stockholders."
"Any memo like this should be marked CONFIDENTIAL so as to avoid discovery. Destroy any record of this memo."
So reads Mr. Nicholas A. Lopardo's handwritten instruction to a former State Street compliance officer. Mr. Lopardo, a State Street Vice Chairman, was appointed to the State Street Board on May 18, 2000, and served until August 1, 2001. No doubt, he is the very embodiment of the kind of accomplished and qualified director-nominee that "the Board's Nominating Committee has been diligent in recruiting". No doubt, his 14.5-month tenure on the Board of Directors promoted "continuity of leadership". No doubt, his order to conceal and destroy unflattering corporate records aligned "the Board's interests with those of the stockholders".
The memo in question detailed improper licensing of certain personnel working in the Corporation's asset management division (now "State Street Global Advisors", or "SSgA"). This memo is available at: http://www.shareholdersonline.org/pdf/destructionofevidencememo.pdf. Mr. Lopardo's scrawl is in the upper right-hand margin of the first page.
In my opinion, it was very minimum standards, indeed, that led to this particular director-initiated nomination, and in my opinion, this incident reveals just how malleable and ineffective (ii)(H) will turn out to be.
Item 7(d)(2)(ii)(I) runs the very real risk of fostering investor cynicism, and of undermining respect for the Commission itself. No matter what "official" evaluation processes are described pursuant to this item, realistic investors in the post-Enron era would likely look upon them with a jaundiced, cynical eye, as well they should, in my opinion.
For example, in its 2001 Proxy Statement, State Street's Board of Directors stated as follows: "The Nominating Committee recommends nominees for directors of State Street and the Bank. In carrying out its responsibility of finding the best qualified directors, the Committee will consider proposals from a number of sources, including recommendations for nominees submitted upon timely written notice to the Secretary of State Street by stockholders." [emphasis added] Ironically, this is the same proxy statement that announced that Mr. Lopardo had been selected to join the Board of Directors.
State Street's Nominating Committee and full Board of Directors selected Mr. Lopardo to join the Board in spite of having previously received a copy of the so-called "destruction of evidence memo". On May 16, 1999, a full year before Mr. Lopardo was appointed to the Board, a State Street stockholder sent a letter to each Board member, and enclosed a copy of the "destruction of evidence memo" for their review. On July 15, 1999, the Board of Directors responded through the Corporation's General Counsel: "The Audit Committee of the Board of Directors has considered your letter of May 16 and has recommended to the Board that it is not in the best interests of the Corporation to initiate litigation concerning the matters referred to in your letter. The Board has unanimously adopted that recommendation."
At the time of the State Street Audit Committee's "investigation" of the "destruction of evidence memo", its Chairman was Mr. John Kucharski. Mr. Kucharski was the Chairman and CEO of EG&G, Inc., which subsequently merged with PerkinElmer, Inc. At the time of the "investigation", Mr. Lopardo was a member of Mr. Kucharski's Board of Directors at EG&G, and remains a director at PerkinElmer to this day. In short, State Street's Board of Directors unanimously turned a blind eye to the "destruction of evidence memo", on the recommendation of an Audit Committee led by a chairman with an interlocking director relationship with the subject of the "investigation". Please see: http://www.shareholdersonline.org/pdf/SEC12400.pdf, http://www.shareholdersonline.org/pdf/a-j.pdf, http://www.shareholdersonline.org/pdf/k-s.pdf, and http://www.shareholdersonline.org/pdf/t-z.pdf.
That the Board saw no irony in the implication that Mr. Lopardo was "the best qualified" nominee, after being presented with the "destruction of evidence memo" in his own handwriting, does not bode well for (ii)(I), in my opinion. At the 2001 Annual Meeting, I offered both Mr. Lopardo and the Chairman and CEO, Mr. Spina, the opportunity to comment on the infamous "destruction of evidence" memo. Both declined to do so. However, Mr. Lopardo retired shortly after the 2001 Annual Meeting, before the expiration of the term of his directorship (albeit with a payout that was obscene, and which should be the subject of a disgorgement proceeding, following appropriate investigation, in my opinion). It has been suggested that my actions at the 2001 Annual Meeting helped to precipitate Mr. Lopardo's untimely resignation.
Item 7(d)(2)(ii)(J) has the potential to become beneficial down the road, assuming that the Commission adopts rules later this year to require shareholder access to a registrant's proxy statement and form of proxy for director nominations. If a shareholder considers a particular director, individual, or entity (e.g., the California Public Employees' Retirement System, or Warren Buffett) to be an especially good judge of director timber, it would obviously matter to that shareholder if a director nominee has been placed on the ballot by that favored director, individual, or entity. Conversely, if a shareholder considers a particular incumbent director to be conflicted, or a bad corporate manager, he or she might disfavor that director's nominee.
As drafted, however, (ii)(J) would not require the disclosure of the sponsorship of nominees who are "executive officers" of the registrant. I would give my eye teeth to know the name(s) of the State Street director(s) who had the unmitigated gall to nominate Mr. Lopardo, who was (very briefly) an inside director. Accordingly, I recommend that the Commission strike the words "executive officers or" from (ii)(J), so that the sponsors of insider nominees would have to be identified as well.
Item 7(d)(2)(ii)(K) should be amended, in my opinion, to include a requirement that the amount of fees paid to such a third party be disclosed. As drafted, (ii)(K) would only require the registrant to disclose the "function performed" by the third party, potentially leaving shareholders in the dark about the fees paid.
If one were cynical about such matters, one could imagine certain corporate law firms advising clients like State Street Corporation to pay $1 to a nominal third party director-nominee "evaluator", for the sole purpose of "disclosing" to the client's shareholders that the Board of Directors sought outside "expert" advice in identifying and/or evaluating director candidates. Such an obvious ruse would be rendered transparent if the Commission amended (ii)(K) to require that the fee paid be disclosed, as well as the function performed. Conversely, exorbitant fees paid to such a third party evaluator would be of interest to shareholders as well, and would likely come in for closer scrutiny. In all events, it is my view that the fee paid to such a third party evaluator should be disclosed in the proxy statement, in the interests of transparency.
Also, the Commission may wish to consider whether it is advisable to make clear that no affiliate of a registrant's "independent auditors" be allowed to perform these functions.
Item 7(d)(2)(ii)(L) is the most promising and redeeming of the proposed changes, in my view. The terms of (ii)(L) would require that certain disclosures be triggered when an incumbent Board of Directors rejects an outside director nominee who has the support of three percent of the registrant's voting shares. Serious and attentive investors would likely pay special attention to registrants' proxy statements for this particular disclosure. Investors would also be able to communicate directly with a rejected candidate's sponsor(s) to learn more about the facts and circumstances surrounding the rejected nominee's candidacy.
To further facilitate such direct shareholder communication with a rejected nominee's sponsor(s), I would suggest that (ii)(L)(1) be amended to read: "State the name(s) and address(es) of the security holder(s) who recommended the candidate;". This amendment would be analogous to the requirement that registrants disclose the names and addresses of proponents of Rule 14a-8 shareholder proposals - see 17 CFR §240.14a-8.
To further serve the interests of investors, and to facilitate direct shareholder communication with a rejected nominee, I would suggest that (ii)(L) be amended to include a requirement that the registrant disclose the name and address of the rejected nominee, in addition to the name(s) and address(es) of the nominee's sponsor(s). This is consistent with my viewpoint that incumbent directors should be required to disclose their home addresses on the Forms 3, 4, and 5 that they routinely file with the Commission. Accordingly, I recommend that the SEC delete the instruction to paragraph (d)(2) that excuses registrants from identifying a rejected candidate by name. It is my position that investors would find the disclosure of the names and addresses of both the rejected nominee and his or her sponsor(s) to be useful. For illustrative purposes and by way of example, I would react very differently to a registrant's rejection of the candidacy of Warren E. Buffett (nominated by TIAA-CREF or CalPERS), than I would to a registrant's rejection of the candidacy of Nicholas A. Lopardo (nominated by Lyndon LaRouche).
No doubt, corporate law firms like Ropes & Gray will advise clients like State Street to urge the Commission to forego the requirement to disclose the names and addresses of rejected nominees, ostensibly out of consideration for their "privacy". However, it is a decided point of law that public actors have a diminished expectation of privacy. It is my viewpoint that upon holding oneself out as a potential candidate for a directorship of a publicly traded company, one has become such a public actor. It is my further belief that most rejected nominees would welcome the opportunity to receive communications from a registrant's shareholders inquiring about their rejected candidacies.
I feel that the three percent aggregate ownership threshold set forth in (ii)(L) is reasonable, with one modification. I suggest amending (ii)(L) to require three percent aggregate ownership of the shares that were actually reported as voted at the last annual meeting, rather than requiring three percent aggregate ownership of the total "voting common stock" outstanding.
As State Street illustrates, the difference in the two thresholds can be quite substantial. In the 2003 Proxy Statement6 State Street claims that "325,194,120 shares of Common Stock of State Street are outstanding and entitled to be voted at the" 2003 Annual Meeting. However, in the quarterly Form 10-Q filed with the SEC on May 9, 20037 State Street reports that only 289,215,516 votes were actually cast on each item at the 2003 Annual Meeting (this figure includes votes "for", "withheld", "against", "abstentions/not voting", and "broker non-votes").
The difference between the outstanding shares (as reported in the 2003 Proxy Statement) and those actually reported as voted at the meeting (as reported in the "Submission of Matters to a Vote of Security Holders" section of the May 9th Form 10-Q) is a whopping 35,978,604 "unaccounted for" shares. Using the shares actually reported as voted at the meeting as the basis for calculating the three percent aggregate ownership threshold under (ii)(L) would, in this particular instance, reduce the required ownership threshold from 9,755,824 whole shares to 8,676,466 whole shares, a significant difference of 1,079,358 whole shares.
Using the shares reported as actually voted at the last annual meeting as the basis for calculating the 3% threshold under (ii)(L) would give registrants added incentive to "get out the vote", and to properly account for the vote totals for each meeting. This methodology also has the potential to make it easier for smaller shareholder groups to meet the 3% threshold.
The proposed rule would also make certain revisions to Item 22 ("Information Required in Investment Company Proxy Statement"). These revisions seek to apply the proposed new disclosures to the proxy statements of investment companies ("funds"). These revisions would also seek to require disclosure as to whether or not a fund's nominating committee members are "interested persons" of the fund as defined in Section 2(a)(19) of the Investment Company Act.
Please allow me to make a few observations regarding these proposed rule changes, using the State Street Global Advisors Funds ("SSgA Funds") as the basis of those observations.
First, as recently as October 31, 2000, Mr. Nicholas A. Lopardo (he of the "destruction of evidence memo") signed the Chairman's Letter for the SSgA Funds' Annual Report8
Second, the members of the Board of the SSgA Funds remain virtually unchanged from the time when Mr. Lopardo was Chairman and CEO of SSgA, the asset management division of State Street Corporation.
Third, the SSgA Funds already reveal that the Governance Committee "will not consider nominees recommended by securities holders".
Fourth, the Governance Committee of the SSgA Funds still includes Mr. Lopardo's personal attorney, Mr. Stephen J. Mastrovich, Esquire. According to the records of the Massachusetts Board of Bar Overseers, Mr. Mastrovich received a public reprimand on August 19, 1998: http://db.state.ma.us/obcbbo/bboreg/lookup.asp. The address shown on the Board of Bar Overseers' records matches the address shown for Mr. Mastrovich in the SSgA Fund's latest 485B filing with the Commission, filed August 25, 20039 Notably, Mr. Mastrovich's wife was given a job at State Street during Mr. Lopardo's tenure.
Fifth, Mr. Timothy Harbert, who served as President and Chief Operating Officer of SSgA under Mr. Lopardo (and who succeeded Mr. Lopardo upon his untimely resignation), now sits on the SSgA Funds' Governance Committee, along with Mr. Mastrovich.10Sixth, in considering whether a fund's nominating committee members are "independent" or "interested", the Commission is urged to give due attention to the issue of bundled campaign contributions, which can shed considerable light on the issue of true independence. For example, on the same day, Messrs. Carter, Spina, Harbert, and Mastrovich gave bundled campaign contributions to California Controller Gray Davis, along with a handful of other executives of State Street and/or SSgA. Within a matter of days, Mr. Lopardo also contributed. Similar bundling activities can be observed in the campaign records of H. Carl McCall, former Comptroller of New York, and in the campaign records of a number of other state and municipal treasurers, comptrollers, and controllers - officeholders who usually decide where, and with whom, to invest state and municipal employees' pension funds. While such bundled "pay for play" activity does not, per se, amount to racketeering activity under 18 U.S.C. §1954 ("Offer, Acceptance, or Solicitation to Influence Operations of Employee Benefit Plan"), it does give rise to certain reasonable inferences regarding the true independence of some mutual fund directors.
The Commission may draw its own conclusions from these observations.
Regardless of whether or not the Commission adopts the proposed reporting changes under Item 22, I suggest that it carefully consider rescinding or substantially modifying the broad Investment Company Act reporting exemptions that it has previously granted to RGIP, LLC. This Delaware-based entity was created by the law firm of Ropes & Gray to facilitate the formation of an employees' securities company within the meaning of the Act.11RGIP's filings with the Commission name Mr. Truman S. Casner as one of the "Managing Members" referenced in the application. He is also one of three named trustees of the two Ropes & Gray pension funds, according to the annual reports filed with the Department of Labor July 26, 2002. It is my position that the sweeping reporting exemptions granted to RGIP, LLC are inconsistent with the Commission's current rulemaking initiatives, and it is my further position - as a State Street Corporation shareholder - that retroactively rescinding these reporting exemptions would shed further light on any divided loyalties that Mr. Casner may have.
Additional Rulemaking Efforts. Like many others whose comment letters appear on the SEC website to date, I am heartened by the following statement contained in the Commission's proposed rule: "We also believe that consideration must be given to additional security holder access to the proxy process in connection with the election of directors, as will be discussed further in a proposing release that we expect to publish this fall."
Form 8-K Disclosures. I urge the SEC to add a mandatory requirement that a registrant use Form 8-K to disclose all changes to its nominating processes or its governing documents (e.g., its articles of organization, by-laws, and the like). Shareholders have a right to know when such procedures or governing documents have been altered.
Commission's Special Treatment of the Corporate Bar. The time has come, in my view, for the Commission to stop giving special treatment to the corporate bar. Provisions such as those at 17 CFR §229.404(b)(4) and §205.7 are not in the best interests of investors. Investors' interests should come first at the Commission - not the special interests of law firms like Ropes & Gray.
The SEC is urged to review the correspondence that Ms. Nell Minow, Esquire, exchanged with State Street Corporation in 2000 and 2001. This correspondence may be found at: http://www.thecorporatelibrary.com/proposals/2000/stt/index.html. Ms. Minow is a recognized and highly acclaimed corporate governance expert, and frequently comments on the Commission's rulemaking initiatives. The correspondence shown at the website above was exchanged with the General Counsel of State Street, Ms. Maureen Bateman, Esquire.
Please also see the response that the Council of Institutional Investors received from State Street's General Counsel regarding a Rule 14a-8 proposal that received a majority shareholder vote at the 2002 Annual Meeting: http://www.cii.org/majvote/statestreet02.pdf.12Ms. Bateman states that the "proposal was non-binding, and received support from 38% of State Street's total shares outstanding". Yet, the 2002 Proxy Statement states that: "The affirmative vote of a majority of all shares present in person or represented by proxy at the meeting and entitled to vote is necessary to approve" the shareholder proposal in question. Ms. Bateman seems to downplay that the proposal in question received support from "51% of the shares present and entitled to vote at the meeting" - namely, the required threshold disclosed in the 2002 Proxy Statement. Her use of the "total shares outstanding" as the denominator for her calculation, instead of the shares actually reported as voted at the annual meeting, strikes me as somewhat misleading (please see my discussion of Item 7(d)(2)(ii)(L), supra). As Mark Twain observed: "There are three kinds of lies: lies, damn lies, and statistics."
I appreciate the opportunity to comment on the proposed rules, and look forward to the opportunity to submit further public comments in the future. Until such time, I remain
Mr. David A. Smith13corpgovactivist@hotmail.com
1 For example, Ropes & Gray handled Senator Kennedy's Chappaquiddick defense, is currently defending the Archdiocese of Boston in the priest abuse scandal, and boasts three prominent alumni who were involved in the Saturday Night Massacre at the height of Watergate: Elliot Richardson (the Attorney General who resigned rather than fire the special prosecutor, as Nixon ordered), Archibald Cox (the special prosecutor), and William Patton (Assistant to Robert Bork, the Solicitor General who did Nixon's bidding). Ropes & Gray routinely shows up in lists of the most prominent national law firms.
2 "SEC Alert: SEC Proposes Disclosure Requirements Related to the Director Nomination Process and Shareholder Communications with Directors", http://www.ropesgray.com, visited August 28, 2003.
3 Mr. John D. Donovan, Jr., Esquire, is credited with writing/editing Chapter 15 ("Stockholders' Lawsuits").
4 Please see the Corporation's 2000 Proxy Statement and form of proxy, which omits the text of my proposal, and which fails to provide checkboxes for State Street shareholders to indicate their vote with respect to my proposal: http://www.sec.gov/Archives/edgar/data/93751/0000093751-00-000054-index.html
5 The proposal garnered broad-based support. For a list of investment managers known to have supported the proposal in 2002 and/or 2003, see: http://www.shareholdersonline.org/pdf/InstitutionalSupportRevision2.pdf. For the vote tallies for 2002 and 2003, see: http://www.shareholdersonline.org/pdf/VoteTallies02and03.pdf.
11 Please see: Investment Company Act Rel. No. 23053; 813-160. This notice was published in the Federal Register on March 6, 1998, and is located at Volume 63, Number 44, pages 11320-11324.
12 See also the "LongView Funds Shareholder Proposals: Year-End Final Report", dated June 30, 2002, published at: http://www.amalgamatedbank.com/site/trust_longview_0102.html. The Amalgamated Bank LongView Collective Investment Fund was the sponsor of the shareholder proposal in question, and is well known for its corporate governance activities on behalf of America's labor unions.