Valero Energy Corporation
One Valero Place
San Antonio, TX 78212
September 15, 2003
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549-0609
Re: File No. S7-14-03
Dear Mr. Katz:
The purpose of this letter is to provide comments in response to the Commission's Proposed Rule: Disclosure Regarding Nominating Committee Functions and Communications between Security Holders and Boards of Directors as set forth in Release No. 34-48301, File No. S7-14-03 (the "Proposed Rule").
In general, we believe that the Proposed Rule will not provide shareholders with an enhanced or more transparent view into a company's processes for selecting nominees to serve on its board of directors. The areas cited for new disclosures by the Proposed Rule are already subject to disclosure under existing rules of the Commission or proposed listing standards of NYSE and Nasdaq. Please consider the unnecessary administrative burden of satisfying multiple disclosure requirements for the same subject matter when assessing whether the disclosures in the Proposed Rule are appropriate.
In addition, should the Commission decide to move forward, the Proposed Rule should not be finalized and implemented until the effects of the adoption of the proposed listing standards of NYSE and Nasdaq and other reforms under the Sarbanes-Oxley Act have been assessed. A primary focus of the reforms adopted over the past year is the continued improvement of public company governance and the operation of public company boards. The Sarbanes-Oxley Act and the proposed NYSE and Nasdaq rules strengthen the standards of independence for directors, require a majority of the board to consist of independent directors, require the existence of key committees - audit, nominating/corporate governance and compensation - and require these committees to consist entirely of independent directors, and impose even stricter standards for members of the audit committee. They also mandate expanded powers and responsibilities for the members of these committees, such as the requirement that the audit committee set the terms and compensation of the company's auditors or the requirement that the nominating/corporate governance committee have sole authority to retain, terminate and determine the compensation of any search firm to be used to identify director candidates. In addition, the new rules require companies to adopt and publicly disclose codes of conduct and ethics governing directors, officers and other employees, as well as committee charters and corporate governance guidelines. They require the independent directors to hold executive sessions on a regular basis. They mandate internal mechanisms for reporting and responding to evidence of wrong-doing. And, they require companies to disclose means by which shareholders may communicate with the independent directors.
The new regulatory framework will undoubtedly ensure that every public company is keenly focused on corporate governance issues and board processes and procedures and increase boards of directors' sensitivities and responsiveness to shareholder input. There is no question that the Sarbanes-Oxley Act and the proposed stock exchange rules have had, and will continue to have, a significant impact on how public companies are run. Before adopting further substantial changes to our corporate governance system regarding shareholder access to the director nomination process, we encourage the Commission to take the time to assess the impact and effectiveness of the sweeping reforms already underway.
Responses to specific questions posed by the Commission in its release of the Proposed Rule are included in the attachment.
We appreciate the opportunity to express our views and would be pleased to discuss our comments or answer any questions that the staff may have. Please do not hesitate to contact me regarding our submission.
Very truly yours,
/s/ Jay D. Browning
Vice President, Secretary and
Managing Attorney, Corporate Law
Valero Energy Corporation
Question: Would increased disclosure related to the nominating committee and its policies and criteria for considering nominees be an effective means to increase security holder understanding of the nominating process, board accountability, board responsiveness, and corporate governance policies?
Response: For the reasons stated below, we do not feel that the proposed disclosures will increase security holder understanding in the areas cited primarily because the proposed disclosures are either duplicative to existing disclosure requirements or have the potential to produce meaningless boilerplate disclosures. Practically all of the disclosures sought by the Proposed Rule are already required to be made in companies' proxy statements under Item 7(d) of Schedule 14A.
Question: Do the proposed specific disclosure standards, including those in each of the following areas, provide security holders with useful information that provides an understanding of a company's nominating process:
- the existence of a nominating committee
Response: The disclosure requirement does not provide security holders with useful, additional information. Companies must already disclose whether they have a nominating committee. Item 7(d)(1) of Schedule 14A requires annual disclosure of the following:
(d)(1) State whether or not the registrant has standing audit, nominating and compensation committees of the Board of Directors, or committees performing similar functions. If the registrant has such committees, however designated, identify each committee member, state the number of committee meetings held by each such committee during the last fiscal year and describe briefly the functions performed by such committees.
- the nominating committee charter, if any
Response: The disclosure requirement will not provide security holders with useful, additional information. For companies listed on the New York Stock Exchange, the charters for their nominating committees (required per proposed section 303A(4) of the Exchange's Listed Company Manual) will be disclosed on the companies' websites per proposed section 303A(9) of the Manual.
- the process for identifying and evaluating candidates;
Response: The proposed disclosure will not provide security holders with useful, additional information. For companies listed on the New York Stock Exchange, their compliance with proposed sections 303A(4) (nominating/governance committee and charter) and 303A(9) (corporate governance guidelines) of the Manual will provide this information, which will be disclosed on the companies' websites per proposed section 303A(9).
- the qualifications and standards for director nominees;
Response: The proposed disclosure will not provide security holders with useful, additional information. Proposed section 303A(9) of the NYSE Listed Company Manual will require listed companies to set forth "director qualification standards" and "director responsibilities" within their corporate governance guidelines, which will be disclosed on the companies' websites per proposed section 303A(9).
- the source of candidates other than those standing for re-election;
Response: The Proposed Rule seems to err in its implicit assumption that there is but a single source for a candidate's nomination. In practice, the process of nominating individuals to stand for election is generally a collaborative one that involves the nominating/governance committee and may involve several persons both inside and outside the company, and may or may not involve a search firm. Aside from proxy contests and the like, at some point in a nomination process, a candidate becomes a candidate "of the board" and not of any one person or group. It could be potentially misleading to security holders to claim that a candidate had but one sponsor.
More importantly, we are concerned that requiring companies to identify by name the source of director nominees will have a "chilling" effect upon the director nomination process and actually reduce the number of qualified candidates that may be put forward for consideration.
- the involvement of third parties receiving compensation for identifying and evaluating candidates
Response: It is unclear to us how this information would be "useful" to security holders. Third party search firms can be quite useful in identifying nominees with particular skills or experience that a company seeks. That fact doesn't seem to be remarkable, revelatory, insightful or particularly useful disclosure information.
Question: Do the proposed specific disclosure standards, including those in each of the following areas, provide security holders with useful information that provides an understanding of the ability of security holders to participate in the nominating process:
- policies for consideration of security holder candidates;
Response: A corporation will either consider - or not consider - a particular candidate or candidates recommended by security holders. To the extent that a corporation will not consider recommendations from security holders, then it would seem incongruous that the corporation would have a policy regarding that practice. To the extent the corporation does consider recommendations by security holders, then all information that a shareholder may find useful would be contained in the "procedures for submission of security holder candidates" (discussed below).
- procedures for submission of security holder candidates;
Response: The proposed disclosure will not provide security holders with useful, additional information. Companies must already disclose whether their nominating/corporate governance committees will consider nominees from security holders, and the procedures to be followed in submitting such recommendations. Item 7(d)(2) of Schedule 14A requires annual disclosure of the following:
(d)(2) . . . state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting such recommendations.
Question: We propose to require disclosure of the material terms of the nominating committee charter. Instead of requiring companies to disclose the material terms of the charter, should we require that the company attach the nominating committee charter to the proxy statement? If so, should companies be required to attach it every year? Should we require that the charter be filed with the Commission? Should we require disclosure of any (or only material) amendments to the charter? Does website disclosure provide sufficient access to investors? Should companies be required to provide investors a copy of the charter upon request?
Response: This is not necessary. Website disclosure provides sufficient access to investors, and will be required per proposed section 303A(9) of the NYSE Listed Company Manual.
Question: Where security holders have the ability to recommend a nominee for a company's board of directors, meaningful participation by security holders should be facilitated by disclosure of information regarding the process for security holder nominations. As such, we have proposed to require disclosure of the procedures for submitting recommendations. Should we require disclosure during the year of any changes made to the procedure, for example in the next Form 10-Q or Form 10-QSB or on Form 8-K?
Response: Disclosure of such changes in a Form 10-Q or Form 8-K does not seem warranted. Unlike time-sensitive market information, the nomination process is generally a slower, calendar-year process, culminating in the annual meeting of security holders. Disclosure of recommendation procedures once-per-year in the proxy statement seems to afford a suitable frequency of disclosure.
Question: We propose to require disclosure regarding candidates that were recommended by certain security holders and rejected by the nominating committee. Would this type of disclosure raise privacy issues for rejected candidates, even if the candidates were not specifically named in the company's disclosure? Would it raise privacy issues for the recommending security holders? The proposed disclosure requirements with regard to rejected security holder-recommended candidates would not preclude a company from naming the candidates, though such disclosure would not be required under the proposed rule. Should the rule specify that companies should not disclose the names of rejected candidates? Should the rule specify that companies must include the name of any rejected candidate who consents to being so identified in the company's proxy statement?
Response: This type of disclosure could appear to be an embarrassing spotlight to legitimate candidates, on the one hand, and would merely serve as much-sought-after publicity for so-called "activist" candidates, on the other hand. The disclosure seems fraught with the potential for manipulation.
Question: Would increased disclosure relating to security holder communications with board members be an effective means to improve board accountability, board responsiveness, and corporate governance policies? Would this disclosure be useful to security holders?
Response: The question implies that there is no means for shareholders to communicate with or influence companies in which they own an interest and that this has necessarily lead to poor board accountability, board responsiveness, and corporate governance policies. For the reasons outlined in the introduction of this letter, we do not share that view; moreover, significant reforms in this area have already been implemented or proposed and the effects of those new rules should be assessed before further regulations are implemented.
Question: Do the proposed specific disclosure standards, including those in each of the following areas, provide security holders with important information that provides an understanding of a company's process for communications with the board:
- the existence of such a process;
- a description of the manner in which security holders can communicate with the board;
- identification of board members to whom communications can be sent;
Response: The proposed disclosure will not provide security holders of an NYSE listed company with useful, additional information. Proposed section 303A(3) of the NYSE Listed Company Manual will require listed companies to disclose a method for interested parties to communicate with non-management directors.
- a description of material actions taken as a result of security holder communications with the board
Response: We are concerned that the proposal would divert the focus and energy of the board away from its oversight responsibilities to an unfruitful communications-with-security-holders efforts.
Question: We have proposed requiring disclosure regarding any material actions taken in response to security holder communications. Are there any categories of communications or actions that should be excluded from coverage of the rule? For example, should the rule only apply to formal petitions to the entire board? Should this rule address specifically security holder proposals under Exchange Act Rule 14a-8? For example, should the rule make clear that disclosure is not required with regard to communications relating to proposals under Exchange Act Rule 14a-8? Alternatively, should those communications be included specifically within the disclosure requirement?
Response: We agree that the rule should make clear that disclosure is not required with regard to communications relating to proposals under Exchange Act Rule 14a-8.
We have no further comments.