Mr. Jonathan G. Katz
Attention: File No. S7-19-03
Re: Proposed Rule Granting Direct Shareholder Access to U.S. Companies' Proxy Materials to Nominate Directors Based on Triggering Events That May Occur in 2004
Dear Mr. Katz:
The Financial Services Roundtable (the "Roundtable") represents 100 of the largest integrated financial services companies providing banking, insurance, and investment products and services to the American consumer. Roundtable member companies provide fuel for America's economic engine accounting directly for $18.3 trillion in managed assets, $678 billion in revenue, and 2.1 million jobs. The Roundtable appreciates the opportunity to comment on the proposed rule of the Securities and Exchange Commission ("SEC") entitled, "Security Holder Director Nominations."
According to the SEC, the proposed rule is intended to improve disclosure to security holders in order to enhance their ability to participate meaningfully in the proxy process for the nomination and election of directors.
The member companies of the Roundtable support the goal of a fair and impartial process for the election of a board of directors. We believe that shareholders should have that right to nominate candidates for the board to the extent permitted by state law. We also agree with the current process in which most companies provide a mechanism for shareholders to make suggestions to the nominating committee, a committee that under the new listing requirements of the New York Stock Exchange Rules and NASDAQ must be comprised entirely of independent directors.
The Roundtable, however, disagrees with the proposed process in which a company must include in its proxy statement nominees for its board who are selected outside the company's nominating process and who are running against the board's own nominees.
The Proposed Rule
Under the proposed rule, upon the occurrence of certain triggering events, shareholders would be given access to a company's proxy materials to nominate at least one and up to three directors, depending on the size of the company's board. The following triggering events, according to the SEC, provide an indication of dissatisfaction with the company's proxy process, and would trigger a shareholder nominating procedure:
In addition, the SEC seeks comment on a third triggering event relating to a company's failure to implement a proposal on any other matter by a security holder (or group) meeting the above criteria and that was approved by more than 50 percent of the votes cast on that proposal at the meeting. This procedure would remain operative for shareholder meetings held from the time of the triggering event until the annual meeting held during the second calendar year following the calendar year in which the triggering event occurred.
Once a nomination procedure triggering event has occurred, in order to be eligible to submit a nomination under the proposed procedure, a security holder or group of security holders would be required to beneficially own more than 5 percent of the company's securities that are eligible to vote for directors at the next annual meeting. The securities must have been held continuously for at least two years as of the date of the nomination and the security holder or group of security holders must intend to continue to hold the securities through the date of the meeting.
Furthermore, the person nominated by a security holder or group of security holders must meet certain requirements. In addition to being "independent" under applicable NYSE or NASDAQ rules, the nominee must meet the standards of independence outlined in the proposed rule.
The Roundtable Opposes the Proposed Rule
The Roundtable opposes the proposed rule for several reasons. First, we believe that the proposed rule is too broad and the triggering events do not limit shareholder access to companies "where evidence suggests that the issuer has been unresponsive to security holder concerns as they relate to the proxy process." We understand the SEC's desire to allow significant shareholders a voice in the proxy process for the election of directors. However, we believe that the proposed requirement that shareholders own more than 5 percent of a company's securities is too low. The impact will be even greater at smaller companies who have fewer shareholders, making it easier to reach the 5 percent threshold and nominate directors. We are also concerned that the 35 percent of votes withheld on a director as a trigger is not adequate evidence of dissatisfaction by shareholders to effect as drastic a change as opening up the nomination process. Finally, we feel that the length of time that the process would be in place, two years, is too long. It should be in effect for a single proxy season.
The Roundtable believes that the result of these rules would be a wave of shareholder nominations that that are not limited to companies with an ineffective proxy process. If so, the resulting disruption and diversion of resources would be significant and destructive. The Roundtable recommends that the SEC, at the very least, increase the 5 percent threshold or the two year holding period currently required under the proposed rule. Additionally, in order to truly reflect the view of all shareholders, the 35 percent "withhold vote" and the 50 percent vote on a shareholder access proposal should be calculated on shares outstanding rather than on votes cast, as currently proposed.
Second, we are concerned that the proposed rule would give special interest groups the ability to nominate directors who may not be acting in the best interest of the company. While diversity is good for a company and its board, the election of special interest directors is not. Electing directors who view themselves as representing the shareholder activists, unions, or other special interest groups, would segregate boards and disrupt company operations. A company's board should be unified and act in the best interest of the company. When a board is balkanized, there is greater reluctance for a director to dissent. Directors may be less apt to take risks and extend the company's resources in this environment. Directors also may not want to run for election in a politicized process.
In determining the nominees for election to the board, members of a public company's nominating committee and board are subject to fiduciary duties to act in good faith in what they believe to be in the company's best interest. Shareholders are not subject to the same duties in proposing director nominees. It would be more appropriate to have shareholders propose nominees to the company's nominating committee. The nominating committee, which consists solely of independent directors, can then consider these proposed nominees in the context of what is best for the company, consistent with their fiduciary duties.
Third, shareholders already have a process to provide meaningful input into the nominating and election process and their rights are protected under the current rules. SEC rules now allow shareholders to run a "short slate" election contest through their own proxy statement. Having to vote for each nominee individually is time consuming and could be confusing for stockholders. In addition, recent corporate governance reforms ensure that public company nominating committees will be comprised entirely of "independent directors". Furthermore, rules recently adopted by the SEC will ensure transparency of nominating committee practices with respect to the election of directors and the consideration of shareholder nominees.
Fourth, shareholder protection may be enhanced more easily through additional disclosure. Current SEC rules recognize that shareholders should be given full and detailed disclosure about director candidates as well as the parties that are proposing and soliciting proxies for those candidates. These rules do not preclude shareholders from nominating and soliciting proxies for director candidates. If the goal is to protect shareholders, the SEC should focus more on improving disclosure under the current process rather than creating a new avenue for shareholders to nominate and elect directors.
Fifth, the SEC has requested comment on a third triggering event that may occur. The Roundtable opposes this proposed third triggering event for failure to adopt a proposal for many of the same reasons stated above. Again, this trigger would allow improper shareholder intervention in the election process. In addition, this rule may be difficult to interpret. For example, there may be a number of reasons why a board of directors does or does not adopt a proposal. It would cause the directors to violate their fiduciary duty to the company, it would cause the company to violate state or Federal law, etc. There may also be significant disagreement on what the term "implemented" means under this proposed rule. For example, what if management "implements" a proposal to the degree possible within the law, but not strictly according to the proposal as written - has it failed to "implement" the proposal? While the proposed rule indicates that a procedure for the Board to make a determination that the proposal had been implemented would be necessary, there is every reason to believe that this could lead to conflict and perhaps litigation.
The Roundtable appreciates the SEC's efforts to protecting shareholder's rights in the board election process. However, we believe that the proposed rule would do more harm than good. By creating triggering events that are easily obtained, the rules would give certain shareholders a disproportionate voice in the election process. This would allow special interest groups and outsiders who do not have a fiduciary duty to the company to place members on the board. The end result would be a segregated board that will not be able to adequately manage the company. Despite the SEC's stated purpose of providing shareholder access at companies with an ineffective proxy process, we believe that these proposals would also be applied to companies with very good corporate governance practices.
We believe the best way to protect investors is to strengthen the current nomination process and increase transparency as much as possible. The SEC has already taken positive steps in this regard by approving new corporate governance standards such as requiring that nominating committee members be independent and by mandating increased disclosure with respect to the director nomination process and shareholder communications with directors.
If you have any further questions or comments on this matter, please do not hesitate to contact me or John Beccia at (202) 289-4322.