From: Carl T. Hagberg []
Sent: December 22, 2003
Subject: File No. S7-19-03

Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549

Re: File No. S7-19-03 Release No. 34-48626 Security Holder Director Nominations

Ladies and Gentlemen:

In response to the Commission's request for comment on the proposed rules regarding shareholder access to the director nomination process, I wish to offer comments on behalf of my firm, and on my own behalf - both as an investor, and, as someone who has participated in and provided services and advice in connection with annual and special meetings of shareholders for 40 years.

It is deeply disappointing to observe that the rules, as currently proposed - and in particular, the requirement that there be a "triggering event" before shareholders can gain access to the company-produced and company-mailed ballot - frustrate, needlessly complicate and needlessly delay the improvements in corporate governance that thoughtful proponents of shareholder access to the director nominating process were and are trying to make.

Somehow, the basic arguments for shareholder access to the nominating and election processes, which we will revisit and reargue below, seem to have gotten completely lost in the rule-writing process.

Further, and of immediate concern given the rapidly approaching 2004 proxy season, we are absolutely convinced that the proposed "triggers" will generate many more disruptive and expensive election contests in 2004 and beyond, as disaffected investors try to guarantee that triggers have been pulled - than there would be if properly qualified shareholders were allowed to nominate candidates directly, as we once again urge you to allow, beginning in 2005.

We believe - unlike a lot of the corporate officers who have commented, it seems - that instances where sitting directors warrant replacement are extremely rare.

We also believe that such instances are likely to be even more rare in the future, given a realistic potential to force the replacement of such directors to a vote. The mere threat of having investors being able to nominate candidates of their own will force boards to pay closer attention to the nominating process, and to the qualities and qualifications of the people they nominate.

It is especially important to note that today, even without such rules - when companies are first approached by serious minded and actively engaged investors about potential shareholder proposals - most companies listen carefully - and very often a mutually satisfactory accommodation or agreement is reached without the need for a protracted proxy contest.

It is also worth noting that so far at least, with the deadlines for submitting proposals for the Spring annual meeting season fast approaching, there has NOT been a rush to submit "binding access proposals."

Thus, there is every reason to believe that with reasonable share-ownership thresholds for submitting director candidates, actively engaged investors will submit candidates of their own only when board behaviors are perceived to be egregiously bad AND where such boards are egregiously intractable in their response.

Accordingly, we believe that shareholders - or shareholder groups with 5% of the outstanding shares in the aggregate - that have been held for two years, on average - should be allowed to place director candidates in nomination if their proposed nominees - and their "nominees" for the board nominees they seek to replace - have been rejected by the company's nominating committee; with the proviso that such nominees must constitute a minority of the nominees up for election.

We believe that the SEC's current and proposed disclosure rules surrounding such nominating groups and their nominees - coupled with an ownership threshold that will be difficult for those with "private agendas" to meet, but relatively easy for investors with "broad and well-reasoned agendas" to meet, are more than sufficient to prevent "special interest groups" or those with "hidden agendas" from stealthily "taking over" a company, or its board.

We believe that it is especially important to note in this context - and with respect to our prediction that proposed "triggers" will lead to far more proxy campaigns than if properly qualified shareholders are allowed to nominate candidates - that it's easier, "safer" and cheaper by far for activist investors to mount a campaign to withhold votes from one or more nominees than it is to identify director candidates who are ready, willing and able to run against a board-designated candidate and to make the necessary disclosures.

Given the high hurdles for share ownership and for disclosure that have been advanced in the proposing release - and given our belief that there are very few companies with directors who would warrant replacement, and whose replacement would be deemed warranted once the required disclosures on both sides were made - we are at a loss to understand the fears that have been expressed about direct access to the corporate electoral process.

Somehow, as mentioned earlier, it appears to us that the basic arguments in favor of shareholder access to the nominating and election processes have been lost in the rule-writing process. We urge you to go back to the beginning, and to revisit the five problems with the current "electoral system" that led up to the proxy-access proposal:

  1. Over the past two years - and even at this writing, sad to say - investors have witnessed an unprecedented series of scandals that have justly shaken our confidence in the way some public companies are governed; scandals which have, in many cases, ended in financial disaster for investors. In every single one of these cases it soon became clear that there was a lack of proper oversight by "outside directors." Outside directors at companies like Adelphia, Enron, HealthSouth, Tyco, WorldCom and other companies too numerous to mention were overly complacent and inattentive at best - or incompetent, improperly conflicted and sometimes even in collusion with management directors at worst.
  2. It quickly became apparent to investors that they too were "asleep at the switch" in many of these instances, and that investors - and especially "professional investors" with the skills and resources to do so - should be scrutinizing directors with much more care…and that boards needed to be much more willing to listen to their concerns.
  3. It also became apparent that our current system for nominating and electing directors has many attributes of a meaningless sham: Investors receive their proxy cards every year, and are urged to vote, but there is no meaningful way to effectively register opposition or to submit alternative candidates -short of mounting a prohibitively expensive proxy fight, where dissatisfied investors would have to print materials and make their own mailings to shareholders.
  4. The proxy system's lack of appropriateness with respect to director "elections" - and its basic lack of fairness - is underscored by the fact that under our current system other proponents regularly seek and obtain free-access to and a "free-ride" on corporate election materials - based on a mere $2,000 investment - as long as their proposals are not considered to pertain to the "ordinary business" of the company or "relating to an election." To allow $2,000 investors access to the company proxy card (with proposals that have often failed to garner even 25% of the vote after three tries) while denying it to people with millions of dollars invested, and who have truly serious concerns about company leadership, utterly defies logic.
  5. As a result, there was and is a considerable degree of anger with the current system where "actively engaged investors" are concerned, even while the "average investor" has become increasingly apathetic, as demonstrated by the annually declining numbers of such investors who take the trouble to cast their votes. (It is also worth noting that some companies have repeatedly ignored shareholder proposals that achieved majority votes. We hasten to note, however, that this has not been a major factor behind the drive for access to the nominating process, as the SEC staff seems to think; rather, it is an example of the kinds of behaviors boards can adopt with impunity, absent an effective way to replace, or at least to threaten to replace directors who ignore a majority of their shareholders.)

With all this as background, we believe that actively engaged investors can identify and should identify companies where corporate boards are not performing as effectively as they need to be. In many cases - and certainly in those cases where investors should be most concerned - the "triggering" insight or event is poor financial performance, which, for some reason, the proposed rules seem to consider not important enough to be an appropriate "trigger."

We believe that actively engaged investors can indeed identify strong and highly qualified director candidates to take the place of relatively "weak" or overextended or unduly conflicted candidates that may be advanced by the sitting nominating committee.

We believe, along with John Bogle, that large investors - who have the knowledge, the skills and the clout to make a difference with respect to badly governed companies - have been derelict in their duty to customers and fellow investors in failing to advance strong candidates when management slates, or individual candidates seem weak, overly extended or unduly conflicted.

Against this background, the idea that we must have "triggering events"- that would delay remedial action for a year, when overall corporate governance is perceived by serious investors to be egregiously bad - is very hard for investors who believe that good governance can make a difference to understand, much less accept.

Accordingly, we urge you to revert to the original idea behind the current release: to let investors play a meaningful role, albeit an appropriately modest one, in helping to "govern" the companies they legally own…when holders of 5% or more of the company's voting stock decide that company-directed governance has fallen short.

Respectfully submitted,
Carl T. Hagberg