942 South Shady Grove Road
Memphis, Tennessee 38120
December 19, 2003
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proposed Rule: Security Holder Director Nominations (Release No. 34-48626)
File No. S7-19-03
Dear Mr. Katz:
On October 14, 2003, the SEC proposed new rules that would require companies to include shareholder nominees for director in company proxy materials under specified circumstances. FedEx Corporation respectfully submits the following responses to certain questions raised by the SEC in the rule proposal.
Question A.1 Should the Commission adopt revisions to the proxy rules to require companies to place security holder nominees in the company's proxy materials?
No. FedEx strongly supports the recently approved New York Stock Exchange corporate governance listing standards. We believe that as a result of such rules and other recent corporate governance reforms:
- high quality corporate governance will become the norm;
- shareholders will better understand the operations and policies of boards of directors; and
- management and boards of directors will be highly responsive to shareholder concerns.
Allowing shareholders to use company proxy materials for contested director elections will not improve corporate governance and will harm companies, boards of directors and shareholders by:
- Significantly Disrupting Company and Board Operations. If the SEC adopts the proposed rules, contested director elections could become routine. Divisive proxy contests would regularly and substantially disrupt company affairs and the effective functioning of the board of directors. Companies will be compelled to devote significant financial resources in support of board-nominated candidates. In addition, management and directors will be required to divert their time from managing and overseeing company business to supporting board director nominees.
- Balkanizing Boards of Directors. The election of shareholder-nominated candidates could create factions on the board, leading to dissension and delay and thereby precluding the board's ability to function effectively. A politicized board of directors cannot effectively serve the best interests of all shareholders.
- Enhancing the Ability of Special Interest Groups to Elect Directors. Adoption of the proposed rules would facilitate the nomination and election of special interest directors who further the particular agendas of the shareholders who nominated them, rather than the interests of all shareholders and the company's long-term business goals.
- Discouraging Highly Qualified Director Candidates from Serving. The prospect of routinely standing for election in a contested situation will deter highly qualified individuals from board service. Such prospect also may cause incumbent directors to become excessively risk averse, thereby stifling the innovation that is the sine qua non of United States business.
Moreover, allowing shareholders to place board nominees in company proxy materials is wholly inconsistent with, and will undermine, the new NYSE listing standards and recently adopted SEC rules requiring disclosure of nominating committee functions. The NYSE standards have strengthened the role and independence of board nominating committees. The new SEC rules requiring disclosure of nominating committee functions will allow shareholders to better understand the nominating committee's process and policies for identifying and evaluating director nominees. These rules also will facilitate increased shareholder input and appropriate participation in the director nomination process, as well as compel nominating committees to seriously consider bona fide director candidates nominated by shareholders.
The most effective means for shareholders to participate in the director nomination process is through the board nominating committee. The members of the nominating committee and the board have a fiduciary duty to act in good faith for the best interests of the company and its shareholders. The nominating committee and the board of directors are best situated to assess the director expertise and qualifications required by the board. In so doing, the nominating committee and the board can achieve an optimal balance of directors that will best serve the company and the interests of stockholders. Allowing shareholders to nominate directors in the company proxy statement would seriously undercut the role of the board and the nominating committee in the most crucial element of corporate governance, the election of directors.
The proposed shareholder access rules (1) will not improve corporate governance, (2) will significantly disrupt board and company operations and (3) will significantly diminish board accountability to shareholders. Accordingly, we strongly oppose, and urge you not to adopt, the proposed rules. Moreover, the SEC needs to allow the extensive corporate governance reforms, particularly the new NYSE corporate governance listing standards, to be fully implemented before proceeding with additional regulation. We agree with the SEC that the new listing standards represent "a significant strengthening of the nomination process."1 With the increased independence of boards of directors, the strengthened role and independence of nominating committees and the enhancement of shareholder-director communications, boards will be more accountable to shareholders and responsive to their concerns. These corporate governance reforms will best achieve the goals the SEC tries to address in the proposed shareholder access rules. If implemented, the proposed rules would simply negate many of the significant benefits that shareholders will otherwise reap from these reforms.
As discussed above, we believe that it would be injudicious for the SEC to adopt the proposed shareholder access rules. If the SEC nevertheless proceeds with consideration of the proposed election contest rules, it will need to substantially revise the proposed rules to better accord with the SEC's stated intent of targeting the small number of companies that have been unresponsive to the concerns of long-term shareholders. The remainder of this letter responds to some of the SEC's questions regarding specific aspects of the proposed rules and provides suggestions to ensure that the mechanism is triggered only in the appropriate circumstances.
Question C.3 As proposed, the nomination procedure could be triggered by withhold votes for one or more directors of more than 35% of the votes cast. Is 35% the correct percentage?
No, a threshold of 35% of the votes cast for a minimum of one director is too low.
This proposed trigger does not take into account the realities of the proxy process, particularly the considerable influence of the proxy voting guidelines of Institutional Shareholder Services (ISS). ISS has its own criteria to determine the independence of board members, which are often substantially narrower than the NYSE's new independence requirements. For example, a non-employee director is classified by ISS as an "affiliated outside director" if he or she has ever served as an executive officer of the company. ISS's standards do not include a look-back period after which a director will be considered fully independent. ISS recommends that stockholders withhold votes from any affiliated outside director who serves on the audit, compensation or nominating committee.2
Based on such standards, ISS recommends that stockholders withhold votes from an outside director serving on the audit committee who was an executive officer of the company twenty-five years prior, although the full board has affirmatively determined that the director is independent. Many large institutional investors follow ISS's recommendation and will, therefore, withhold votes from the director although he or she is, in fact, fully independent and is an invaluable contributor to the company's success based on his or her prior experience with the company.
Consequently, a 35% withhold threshold can easily be reached in the complete absence of any factors indicating an ineffective proxy process and although the company's performance has been stellar and shareholder value has been significantly enhanced. Such an event will regularly occur not because a board has been unresponsive to shareholder concerns, but simply because it is the by-product of the proxy process and the voting practices of institutional investors. Furthermore, in such circumstances, shareholder access will be triggered before the board of directors and nominating committee can address any shareholder concerns that may be raised by such voting results.
In addition, shareholder access will be triggered although almost two-thirds of the votes are in favor of the board's slate of directors. Access also will be triggered if a single director receives the required number of withhold votes, while the rest of the board slate receives 100% of the votes cast. Given the high costs and substantial disruption caused by a contested election, a 35% withhold vote for a single director should not be sufficient to trigger shareholder access.
The threshold for this trigger needs to be substantially higher in order to only apply to situations in which there may be evidence of dissatisfaction with the proxy process. At a minimum, the threshold should be that at least a majority of the outstanding shares vote to withhold authority for two consecutive years with respect to three or more board nominees standing for election.
Question C.4 Should the nomination procedure triggering event related to direct access security holder proposals trigger the procedure only where a more than 1% holder or group submits the proposal? If not, what would be a more appropriate threshold, if any? . . . Should the required holding period for the securities used to calculate the security holder's ownership be longer than one year? If so, what is the appropriate holding period?
In the proposed rules, the SEC indicates that the triggering events were formulated in order to "ensur[e] that the process is used by security holders who represent a substantial and long-term interest in the subject company."3 A 1%, one-year ownership requirement does not represent a sufficiently substantial, long-term interest in a company that justifies the significant costs and disruption of regular proxy contests. A 25%, two-year threshold represents a significant, long-term commitment to a company and is, therefore, a more appropriate requirement.
Question C.6 As proposed, a direct access security holder proposal could result in a nomination procedure triggering event if it receives more than 50% of the votes cast with regard to that proposal. Is this the proper standard? Should the standard be higher?
The SEC claims that this triggering event is "tied closely to evidence of ineffectiveness or security holder dissatisfaction with a company's proxy process."4 The triggering event will apply, however, to any company, not merely those where there is a perceived lack of responsiveness to shareholder concerns. ISS will likely revise its proxy voting guidelines to support shareholder access proposals as a matter of course, regardless of a particular company's circumstances. Shareholders at all companies likely will vote in favor of shareholder access, if for no other reason than to make access available in future years in the event the company becomes unresponsive.
Because there is a complete lack of correlativity to the SEC's purported intent, this triggering event is wholly inappropriate.
Question C.11 We have discussed our consideration of and requested public comment on the appropriateness of a triggering event premised upon the company's non-implementation of a security holder proposal that receives more than 50% of the votes cast on the proposal. Should such a triggering event be included in the nomination procedure?
A board of directors' failure to implement an approved shareholder proposal is not necessarily indicative of an ineffective proxy process. The board has a fiduciary obligation to consider whether, in its judgment, implementation of the shareholder proposal is in the best interests of the company and its shareholders. The failure to implement a shareholder proposal is the product of this independent judgment. Directors should not be coerced to automatically implement a shareholder proposal in violation of their fiduciary obligations so as to spare the company a costly proxy contest.
If the triggering event regarding withhold votes remains in the proposal, directors will still feel compelled to automatically implement a majority-approved stockholder proposal. ISS recommends that shareholders withhold votes from any directors who do not implement a shareholder proposal approved by the majority of outstanding shares.5 As a result, directors who, in the exercise of their independent judgment and fiduciary obligations, do not implement a shareholder proposal are likely to receive a high number of withhold votes and otherwise trigger the access process.
Questions E.2 and E.3 Is it appropriate to include a restriction on security holder eligibility that is based on percentage of securities owned? If so, is the more than 5% standard that we have proposed appropriate? . . . Should there be a restriction on security holder eligibility that is based on the length of time securities have been held? If so, is two years the proper standard?
A minimum ownership and holding period requirement for nominating shareholders is absolutely appropriate. Given the significant costs of a proxy contest and the relative ease with which shareholders may aggregate their shares to meet the threshold, however, the minimum ownership percentage should be no less than 25%.
Question E.4 As proposed, a nominating security holder would be required to represent its intent to hold the securities until the date of the election of directors. Is it appropriate to include such a requirement? Would it be appropriate to require the security holder to intend to hold the securities beyond the election of directors?
A nominating shareholder or shareholder group should be required to meet the minimum ownership requirement (which should be at least 25%) so long as its director nominee serves on the board. This requirement will help mitigate the substantial risk that special interest groups will abuse the shareholder access mechanism to further their particular agendas rather than the company's long-term business goals. If nominating shareholders are required to maintain a significant ownership stake so long as their nominees serve on the board, they may be somewhat less inclined to nominate a director who will pursue a special-interest agenda at the expense of company performance and the other stockholders.
We sincerely appreciate your considering our comments to the proposed shareholder access rules. We will be happy to discuss our comments and concerns with you.
/s/ KENNETH R. MASTERSON
Kenneth R. Masterson
Executive Vice President,
General Counsel and Secretary
cc: Frederick W. Smith
|1|| Final Rule: Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors; Release Nos. 33-8340, 34-48825; 68 Fed. Reg. 69204, 69210 (December, 11, 2003).
|2|| ISS U.S. Proxy Voting Manual.
|3|| 68 Fed. Reg. 60784, 60790 (October 23, 2003).
|5|| ISS U.S. Proxy Voting Manual.