December 5, 2003
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-19-03 Release Nos. 34-48626; IC-26206
Dear Mr. Katz:
Christian Brothers Investment Services, Inc. (CBIS), a registered investment adviser under the Investment Advisers Act of 1940, would like to submit comments pursuant to the Commission's October 14, 2003 " Proposed Rule: Security Holder Director Nominations" (File No. S7-19-03 Release Nos. 34-48626; IC-26206).
CBIS manages approximately $3 billion for Catholic organizations seeking to combine faith and finance through the responsible stewardship of Catholic assets. CBIS is an active shareholder, working with companies on a number of issues we believe are critical to the long-term value of the investments we make on behalf of our clients.
We believe that access to the proxy provides us with a critical way to communicate the views and opinions of the shareholders we represent on a very wide range of issues that affect the long-term interests of all corporate shareholders and corporate stakeholders.
We commend the Commission for its efforts to allow shareholders to nominate directors to the board. Properly developed, such a rule would increase the accountability of boards to shareholders and help to ensure improved corporate governance.
In order to achieve this goal, the process for shareholder nominees must follow some basic principles:
- Shareholders should have the right to nominate candidates to the board. The rule should balance the need to prevent frivolous nominees and the requirement to offer a reasonable chance for shareholder nominees to appear on a ballot.
- The nomination process should remain the primary responsibility of the nominating committee of the board. The potential for shareholder nominees should encourage all companies to adopt a nomination procedure that is open and accountable to shareholders.
- The process must be broadly inclusive. Since management should be accountable to all shareholders, this process should be open to smaller shareholders.
We are concerned that the current proposal creates obstacles to shareholder nominees that would exempt most companies from shareholder nominees, create an unreasonably long timeframe for replacing underperforming directors, and exclude all but the largest shareholders from the process. We question, therefore, whether this proposal represents a meaningful improvement of shareholder rights or an effective mechanism of board accountability.
Our specific concerns are as follows:
- We are concerned that the triggering events, as proposed, present an excessively difficult obstacle for shareholder nominees. They would create a minimum timeframe of two years to replace a board member; we believe that some companies facing serious corporate governance concerns may require more timely action.
- According to the proposal, nominations would be accepted at companies where 35% of shareholders withheld director support. The proposal indicates that no more than 1.1% of companies would be eligible to receive nominees under this trigger. We believe that shareholder participation should not be so severely limited and should apply to a broader array of companies.
- We also believe that the "Direct Access Proposal" trigger is too restrictive and narrow. Owners, or groups of owners, would be eligible to file such a resolution only if they hold at least 1% of a company's shares. This process should be open to all long-term shareholders. The eligibility of shareholder nominees should be judged by their support among owners, not the status of the filer. Moreover, we are concerned that only the direct access proposal serves as a trigger. The failure of boards to respond to shareholder proposals that receive majority support is a serious governance problem. In those circumstances, any proposal should serve as a trigger.
- We are especially concerned about the exclusion of all but the largest shareholders from the process. According to figures provided by the Commission, the majority of companies would have no more than one or two shareholders that could meet the 5% holding threshold without aggregating the holdings of more than two investors. Given the proposal's restrictions on soliciting group members, it appears likely that most shareholders would not be able to reach the 5% threshold for any company, even as part of a group.
- Finally, we are concerned that the proposal does not specify the means by which disputes over the eligibility of nominees will be resolved. The proposal seems to indicate that the company would have control over the decision to omit or allow a nominee. Our experience filing resolutions outside the U.S. suggests that an independent third party is indispensable for protecting shareholder rights. In countries where these arbiters do not exist, companies routinely exclude proposals on any available grounds.
While this proposal aims to empower shareholders, most will have no more rights as the result of this rule. Moreover, the proposal creates classes of shareholders, offering more rights to large than to small shareholders. We are concerned that companies may feel a sense of accountability to the largest shareholders that they do not feel to others. The result of the proposal is a minimal and uneven expansion of shareholder rights, and a mechanism for corporate accountability that most companies could safely disregard.
We offer the following concrete suggestions to address our concerns:
The process for challenging and omitting nominees and "direct access" proposals should follow the model of rule 14a-8 for other shareholder proposals.
- We believe that shareholder director nominations should be possible without "triggers." If they are to be used at all, triggers should expand the pool of shareholders eligible to nominate a director, for example, by lowering the ownership threshold.
- The threshold for nominating directors should be lowered to 1%, bringing it in line with the holdings necessary to file a "direct access" proposal. Doing so would expand the ability of smaller shareholders to participate and ensure that more companies would be practically eligible to receive a shareholder nominee.
- The limitation on the size of security holder groups should be expanded or eliminated to facilitate the participation of small shareholders. Nominees with a broad base of support should be encouraged, not excluded.
- We believe that any mandatory shareholder resolution that passes should qualify as a "trigger," regardless of how the trigger is used. The proposed rule intends to be "tied closely to evidence of ineffectiveness or security holder dissatisfaction with a company's proxy process." We believe the refusal to act on the will of a majority of shareholders is clear evidence of an unresponsive board.
- The trigger should apply to any proposal, without an ownership threshold for the filer. We believe that companies should act on majority votes, regardless of the status of the filer.
- We believe that the SEC should apply a standard similar to its "Substantially Implemented" standard (rule 14a-8 subparagraph 10) in determining whether the company has complied, or taken reasonable steps towards compliance, with the terms of a shareholder resolution that received majority support.
We appreciate the work of the Commission in all its efforts to protect and promote shareholder rights, and thank you for the opportunity to submit these comments. Please contact me with any questions.
John K.S. Wilson
Assistant Director - Socially Responsible Investing