Social Investment Forum
1612 K Street NW, Suite 650, Washington, DC 20006
Re: File No. S7-14-03
September 11, 2003
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609
Dear Secretary Katz,
The Social Investment Forum, Ltd. (the Forum), a membership association representing more than 500 investment advisors, research firms, mutual fund companies, proxy voting specialists, and other institutional investors involved in socially responsible investing, submits the following comments in response to the Securities and Exchange Commission's solicitation of views (SEC-proposed rule S7-14-03) regarding Nominating Committee policies and disclosures for Board nominations, and greater vehicles for security holders to communicate directly with Board members.
For over 18 years, the Forum's members have worked for more responsible corporate behavior on a range of issues, including: diverse and independent boards; excessive executive compensation; shareholder rights; improved investor and stakeholder engagement; and disclosure of social and environmental risks. Our members also file scores of shareholder resolutions each year, and consider themselves actively engaged shareowners.
The Forum would like to submit the following comments, answers, and suggestions regarding issues related to Board reform and communication strategies.
The Forum realizes the issue of corporate Board elections and nominations is extremely complex, and wrought with political and legal hurdles. We congratulate the Commission in its diligence on the issue, and its sincerity in wanting to achieve a workable compromise between investors and the companies they own. As you know, investor-proposed nominees are rarely given due consideration by management during the nominations process. Shareowners, when they can afford it, rely on expensive and time-consuming proxy contests to bring attention to their candidates, who often lose in contested elections because management spends shareholder assets to oppose such nominees. While greater disclosure of the criteria and processes for nominating Board candidates will be quite meaningful to investors, the SEC should also not mistake responses to this proposed rule as a sign that shareholder access to the proxy for Board nominations is not needed by shareowners, for it is a crucial missing piece in the template for Board accountability.
The Staff authors of the proposed rule highlight our lingering concerns with the current regulations:
"It does not appear that the existing disclosure requirements have affected significant change in the transparency of, or increased security holder understanding of, the nominating process. In particular, commenters indicated that the existing disclosure requirements have resulted in mere boilerplate disclosure and, as such, have not provided investors with the information necessary to understand the nominating process at the companies in which they invest."
This is a sentiment our members share. And while the NYSE and Nasdaq have proposed revised listing standards that would require companies to have independent nominating committees, such independence requirements in no way resolves the issue of shareholder nominees being given appropriate consideration by the Nominating Committee. Therefore, the arguments by corporate counsels and several other comments earlier this summer, discussing the need for current regulations to take affect before new regulations are put into place, do not seem sincere. These are the same arguments used by companies 30 years ago when opposing greater shareholder proxy access and Board election reform. As corporate counsels warn that new disclosures and changes should wait until existing regulatory efforts play out, and their impacts be measured, they suggest that access is not worth pursuing. We disagree. Since that time, investors have witnessed an escalation in widespread corporate scandals and Boards becoming less and less accountable to investors and stakeholders. Clearly new policies, transparency, and oversight are needed.
Nominating Committee Disclosures
The Forum fully supports disclosure of policies regarding Nominating Committee consideration of shareholder-proposed candidates for the Board, and believe that Directors refusing to consider an investor nominee shows inadequacy on the part of the committee, as well as a fundamental lack of due diligence in examining the broadest possible slate of appropriate Board candidates.
It would be extremely helpful to investors for Nominating Committees (in their publicly available charters) to disclose the procedures for shareholders to submit candidates for the Board, as well as the policies for receiving and considering such candidates by the Nominating Committee. A description of specific, minimum qualifications for nominees is paramount, as are the qualities or skills the Committee believes are necessary for directors to possess. The Committee should also clearly spell out any specific standards for the overall composition and structure of the board.
The Forum additionally supports the recommendations that Nominating Committees disclose when they receive nominations from security holders, as well as if the Committee uses different criteria in evaluating investor nominees and Board nominees.
We also strongly recommend additional disclosures regarding how the Nominating Committee takes the issue of Board diversity into account when considering candidates for the proxy ballot. A number of companies already disclose their commitment to Board diversity in their nominating charters, and diverse shareholder representation is a factor highlighted by TIAA-CREF in its guidelines on Corporate Governance. According to Richard C. Breedon's recent report on governance reforms at MCI, Restoring Trust -- Corporate Governance for the Future of MCI, Inc.: "While not thought of as a traditional concern of corporate governance, the issues relating to diversity are part of what should be considered good governance. . .Indeed, since diversity is an essential part of who is being governed, it should not be seen as something that can be overlooked when creating a structure of excellence in governance."
In addition, a description of how each candidate meets independence requirements outlined by the stock exchange listing reforms should also be an expected disclosure, regardless of whether that company lists on the exchanges. Such disclosure is part of setting best practices for the company, and should not be overlooked.
The Forum further supports transparency of the nominators behind candidates that are listed on the proxy statement, including those proposed by management, Directors, shareholders, and Board search firms (third parties). This information is quite useful to investors in determining conflicts of interest and the measure of independence Board candidates have from management, other Directors, and the company itself. We feel Directors standing for re-election, as well as executives, should not be exempt from this obligation. Shareholders should also be provided with fee disclosures related to third parties that identify or assist the company in evaluating potential nominees.
If shareholders spend the time and energy to provide an appropriate candidate for the Board, the Nominating Committee should disclose such information to investors--especially if the Committee chose not to recommend that candidate. The disclosures should include the name of the nominee, the investor or group of shareholders that recommended that nominee, and the reasons the Committee decided to not include the proposed name on the proxy ballot. This action should not be limited to those investors or groups of investors with three percent or more shares in the company. Any thoughtful nominee should be given due consideration. Investors have a fundamental right to know when the Committee does not consider additional, legitimate candidates for the proxy.
The Nominating Committee charter also should be summarized in the corporate proxy statement, but available in its entirety on the company's web site, or in hardcopy upon request (since very few investors would utilize this method). If changes are made to the company's charter, such changes should be made on the web site, in appropriate shareholder disclosure mailings, and brought to the attention of investors in next year's proxy statement.
Shareholder Communications with Board Members
In our experience, Board members rarely respond to communications from shareowners. Calls, letters and emails are often routed through Investor Relations or corporate executives, who often decide to filter such correspondence, or ignore it altogether. Our experiences were paralleled in a recent Wall Street Journal article highlighting company performance regarding communications with investors.1
The methods of communication between security holders and Boards should be quite clear and easily accessible to all investors though multiple channels. Just as the revised NYSE listing standards proposed direct channels for communicating with Audit Committees, investors and other stakeholders should have direct access -- via emails, phone hotlines, faxes, and addresses -- to Board members, to discuss issues appropriate for Board attention. In the absence of full disclosure of Board members' emails and phone numbers, perhaps the SEC can suggest a Shareholder/Stakeholder Committee, comprised of three to four independent directors, that serve as a liaison between investors, stakeholders, and the Board-at-large. Such a committee has been suggested by shareholders in the past, in the form of shareholder resolutions dating back a decade or more.
The Forum further supports Boards reporting back to investors a summary of shareholder-Director communications, actions taken in response to shareholder concerns, and if the Board did not respond to particular communications, which executives did and why. Another example of best practices would be for Boards to report on the criteria for meeting with a shareholder or group of shareholders wanting to discuss company concerns relevant to Board-level examination.
There should not be a question of whether or not a company has a process for shareholders to communicate with Directors. Directors are shareholder and stakeholder representatives at each company, and for Directors to have no channels of communication with these parties makes it difficult for them to fulfill their core function. Obviously, Boards have limited time to deal with various shareholder and stakeholder concerns, but those issues rising on the list as critical of Board consideration should have a clear path for reaching Directors. Therefore, companies, in the proxy statement or other investor filings, and the web site, should describe:
- the manner in which shareowners can send communications to the Board
- which Directors would receive those communications
- which Board members are responsible for communicating with stakeholders in the company (communities, employees, unions, public interest organizations, etc.)
- description of which communications will be considered by Board members
- description of which communications will be forwarded to corporate executives, and identifying those executives or departments
- summary in annual proxy statement of the number of communications shareholders and stakeholders have with Boards or individual Board members or committees, plus the responses and/or actions related to those communications
- disclosure of whether and how management serves as a filter for shareholder and third party communications with Boards
- disclosure of policies for how individual/small shareholders can communicate with Boards, if that policy differs from institutional investor communication policies (though small shareholders should be treated equally with larger investors when legitimate concerns are brought before Directors).
Such information is quite useful for investors to evaluate the quality and quantity of Board communications and responsiveness to investors and third parties. Such improvements in the ability of investors and others to communicate with Boards will clearly improve the corporate responsibility of Boards, and their understanding of needed governance changes, and could flag looming liabilities that necessitate a strategic response by the company. Such policies would also improve Board accountability to shareholders in the short- and long-term.
We also recommend a summary report in the proxy statement of Director attendance at annual meetings, to know which Board members are forgoing their duty of representing shareholders and addressing their questions at such events.
Recommendations under proposed rule S7-14-03 should also apply to small companies (considering alternatives under the Regulatory Flexibility Act) and investment companies, as enhanced disclosure would be of great value to all types of investors around these processes.
But the proposed disclosures and process clarifications, while providing critical improvements to the transparency of corporate elections, will not significantly boost Board accountability in U.S. equity markets without greater investor access to the proxy for Board nominations. Proxy access is critical to improving Board integrity, as Directors would learn not to automatically expect a Board seat. Rather, Board members will learn over time that they have to earn it.
Fran Teplitz, Managing Director
Social Investment Forum, Ltd.
Comments also submitted on behalf of:
Timothy H. Smith, President
Social Investment Forum, Ltd.
Alisa Gravitz, Vice President
Social Investment Forum, Ltd.
|1 ||"A Shareholder's Guide to Grilling Companies: We Query Nine Corporations from Altria to Verizon; Coke's Secret Email Address," by Peter Meyers, Wall Street Journal, September 2, 2003, Section D, page 1.