Response of Deborah Pastor, CEO of eRaider.com Inc. to
Security Holder Nominations
[Release No. 34-48626, File No. S7-19-03]
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
Washington, D.C. 20549-0609
Re: File No. S7-19-03 Corporate Board Nomination Reforms
Dear Mr. Katz:
I wish to commend the SEC for proposing some measure of shareholder access to the proxy ballot. I recognize that this is a giant step forward toward ensuring meaningful corporate democracy. I also wish to reiterate the objections I made in the first round of comments to the watering down of shareholder rights by instituting a set of triggers, by limiting the number of directors that shareholders can place on the proxy ballot, by allowing broker non-voting, by ignoring abuses in distributing instructions to beneficial owners and other concerns. Many of the objections have been noted by fellow activists. I feel that one more letter detailing these complaints will have little benefit, so instead I choose to devote our comment letter to a reminder of the importance and benefits of democracy - and relating the lessons taught by our Founding Fathers over 200 years ago and their applicability to the issues facing shareholders today.
The writers of the U.S. Constitution were concerned not just with liberty, but with property rights, which makes their thoughts on democracy very relevant to the governance of corporations. The Founders were influenced by English philosopher John Locke who believed those governing derived their power solely from the consent of the governed and whose purpose it was to protect every citizen's inherent right to property, life and liberty. Shareholders, by virtue of their capital contribution, are the owners of the corporation and are entitled to the same protection. Just as the nation cannot be governed by referendums, so the company cannot be run by shareholder meetings. The role of management is to run the corporation for the benefit of the shareholders. On the heels of that solution comes the classic "agency" issue, that is, how to make sure that management (or government) runs the company (country) for the benefit of the owners (citizens) rather than for themselves. As Hamilton and Madison point out in #51 of the Federalist Papers: "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself."
For both governments and corporations the solution was to have a democratically elected body of officials who would exercise oversight or corporate governance. The result for our political government is that voters usually have the choice of at least two candidates listed on the ballot for each elected position. Election contests are viewed as the positive outcome of a functioning democracy - one that allows the voters to hear all of the issues and choose their candidate accordingly. Another perceived benefit is that anyone with a modicum of support can run for office, as long as they are U.S. citizens. In order to win elections, candidates appeal to relevant voters, usually by promising to represent their particular interests. Americans are so convinced of our system's moral and economic superiority to other types of government, that we encourage other countries to adopt democracy; indeed, that was one of the justifications for invading Iraq. Would that President Bush promote democracy as enthusiastically for American shareholders as he does for the Iraqi populace.
Theoretically, shareholders elect a board of directors whose primary fiduciary duty is to ensure that the company is run for the benefit of the shareholders. In the wake of the recent corporate scandals there has been much lip service that good corporate governance forms the cornerstone of investor confidence and recent studies show that stock prices and foreign direct and portfolio investment are all positively correlated with good corporate governance. But the reality of democracy for shareholders falls far short of that for U.S. citizens. The current corporate voting setup has been compared with the old Soviet system that made a mockery of democracy by allowing only one candidate per office, each one handpicked by the incumbent party. The economic failure of Soviet Communism has been blamed as much on the lack of democracy as on the nature of Communism itself. Indeed, many economists have claimed that capitalism fully thrives only in democratic societies. I agree with that and also claim that corporations themselves would be more productive if they were governed by a democratically elected board of directors, instead of the current "mock democratic" system.
The SEC has made clear throughout this proposal that shareholders have no intrinsic right to ballot access; rather access is a last-resort measure grudgingly doled out in situations of corporate unresponsiveness with a fearful eye on the potential for such supposedly negative scenarios as shareholder-nominees becoming the majority of the board or having a relationship to the nominating shareholders. Why shouldn't the nominee have a relationship with the nominators? Hasn't the SEC confused director independence from MANAGEMENT with director independence from shareholders? Indeed, it is their very independence (read, indifference) from shareholders that allows directors to rubberstamp management decisions.
Once again, every virtue of our political democracy has become an object of fear for the SEC concerning corporate democracy. Contested elections and the resulting expression of dissenting opinions are deemed failures of the system rather than signs of its fundamental strength. The SEC and those opposed to the proposal relentlessly warn of shareholder "special interests", whose potential but as yet unseen danger is seen to far eclipse the numerous documented abuses from unchecked management self-interest. The Founding Fathers heard similar complaints and successfully argued that, in fact, the public good would ultimately emerge from the clash of many different private interests. "This policy of supplying, by opposite and rival interests, the defect of better motives, might be traced through the whole system of human affairs, private as well as public. We see it particularly displayed in all the subordinate distributions of power, where the constant aim is to divide and arrange the several offices in such a manner as that each may be a check on the other that the private interest of every individual may be a sentinel over the public rights." Federalist Papers #51
In colonial times, many Tories criticized the Continental Congress and its faith in democracy. They claimed that a democracy would lead to instability, clashing private interests and the election of people unfit to govern. Their concerns sound strikingly similar to those voiced by present day corporate management and the legal community that services them. Hamilton, in the introduction to the Federalist Papers, characterized the colonial naysayers as follows: "Among the most formidable of the obstacles which the new Constitution will have to encounter may readily be distinguished the obvious interest of a certain class of men in every State to resist all changes which may hazard a diminution of the power, emolument, and consequence of the offices they hold under the State establishments." The fact that virtually all opponents to ballot access are either corporate management, directors or the lawyers who service them should inform the SEC that these people have their own interests at heart rather than those of the shareholders.
In summary, the voting franchise should be the underpinning on which directorial power is based. There is a compelling need to protect the integrity of the nominating and election process by requiring corporations to adopt the fundamental tenet of free ballot access. We can think of no reason why shareholder nominees should not be able to run for each seat on the board. As Thomas Jefferson replied to allegations that democracy would lead to inadequate governance: "I know no safe depositary of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them, but to inform their discretion by education. This is the true corrective of abuses of constitutional power."