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
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.