Comments on Proposed Rule
The subject of this proposed rule is very important and deserves the best solution possible. The results of improper governance of corporations are quite evident and are injurious to the owners of the corporations and to those who do business with the corporations. I encourage the SEC to develop rules that will give the owners of public corporations the rightful ability to make changes in their Board of Directors when needed.
As a small investor I am personally aware of the ineffectiveness of the current procedure to elect Directors; it currently is a rubber stamp, unless a well-funded group tries to take over the Board. As an employee of a Fortune 10 company, I have also seen the dominance of the Board by the senior management of the corporation. Often the Board is indebted to the senior management for their nomination. As shareholder with voting rights in several US corporations, I want the Board to represent the owners of the corporation, not the employees.
First, the rules and discussion of the rules should replace the vague term "security holder" with the term "owner" or "shareholder." The fundamental design of public corporations is that only shareholders are owners of the corporation. Shares in the corporation are sold to individuals and other legal persons that give the shareholders the right to elect the corporation's Board of Directors and to enjoy the benefits of ownership of the corporation. Unfortunately often the senior management and Directors usurp these ownership rights and use the corporation's assets to benefit themselves rather than the owners. The final rules should clearly state that the owners (i.e. shareholders with voting rights) are the ones who should control the selection of the Board of Directors. Bondholders and preferred stockholders are not owners of the corporations, even though both can be considered "security holders." The vague term "security holder" should be dropped from the final rule and the preamble.
Below are responses to some of the questions posed in the preamble to the proposed rules.
Q. A.1 Yes, the SEC should adopt revisions to the proxy rules to require companies to place shareholder (i.e. owner) nominees in the company's proxy materials. No, the means that currently are available to shareholders to address a company's perceived unresponsiveness to shareholder concerns are inadequate and ineffective.
Q. A.3 Yes, I suspect corporations would propose to revise how Directors are elected if the proxy rules are changed. A desirable change would be multi-year terms for Directors, rather than annual Director terms. Multi-year terms (e.g. 3 years) would provide continuity on the Board and reduce the cost and attention for annual elections. Another direct effect should be that the owners of the corporation would have more control over the management of the corporation. Under the current system and practice, shareholders have little influence on the selection of Directors, who have relatively little influence on senior management. Owners should have the ability to elect Directors proportional to the percentage of the company they own, i.e. percent of outstanding common shares with voting rights.
Q. B.1 I believe the new rules should apply to all corporations regardless of the value of their outstanding common stock with voting rights. The rules would not, of course, apply to corporations that do not have voting stock, also called common shares. If a company has few outstanding shares, then the cost of the election of Directors should be proportionally small. All companies with a large number of outstanding shares with voting rights should be subject to these new rules, regardless of the current market value of these shares. When the market value of these shares has declined substantially could be an excellent time for a change in the Directors of the corporation.
Q. B.2 No. Companies should not be able to avoid the nomination of Directors by the shareholders as required by these new rules. See ,my answer to question C.1 below.
Q. B.4 No. I think it is a fundamental right of the holders of shares with voting rights to be able to nominate Directors as allowed by these new rules. If state law prohibits such nominations, then shareholders may seek changes by the state. Federal rules should not preempt state laws, but they should not be limited by state laws.
Q. B.5 As long as all shareholders with voting rights are adequately notified of the pending election of Directors, including a list of all the nominees and as long as the voting procedures are readily accessible to all these shareholders, then selection of Directors by a plurality is acceptable for federal rules. If a state requires a majority vote, then the corporations incorporated in these states would also have to follow the state rules. Federal rules should not unnecessarily preempt state rules, but should not be unnecessarily constrained by them. Therefore, the new federal rules do not need to address plurality vs. majority voting. If a nominee obtained a majority of all votes, he/she would also satisfy a plurality vote. All nominees should run at large, i.e. if there are eight nominees for six open Director positions, then the six nominees with the largest votes should be elected to the open positions.
However, the SEC rules should require corporations to report to the SEC and to their shareholders when less than 50% of all outstanding shares with voting rights are cast in any election of Directors. This report should be completed within 30 days after the end of the voting period. The SEC rules should require this corporation to file a plan to increase voting in the next election of Directors such that 50% or more of all outstanding shares with voting rights are cast in this election. If this goal is not reached, the SEC should conduct an independent investigation of the voting procedures of the corporation and recommend changes to reach the 50%+ goal. If the corporation does not reach this goal in the election subsequent to these recommendation, the SEC should begin escalating financial penalties on the corporation until the goal is reached.
C.1 No, the proposed triggering events for allowing the nomination of Directors by shareholders is inappropriate. The proposed requirements unduly complicate the nomination process and disenfranchise the rights of shareholders with voting rights. Any shareholder with voting rights that owns for at least 12 months one percent or more of the average number of such outstanding shares during the previous corporate fiscal year should have the right to nominate a Director for inclusion in the list of nominees for the next election of Directors. The new rules should specify that a shareholder with voting rights who wishes to nominate a person as a Director should submit the following information to the company's Secretary not later than 6 months before the next scheduled election of Directors:
If a shareholder wants to nominate another person as a Director, he/she would have to show an additional ownership of one percent of outstanding shares as above. For example, if a shareholder wanted to nominate two persons as Directors, he/she would have to document ownership for the previous corporate fiscal year at least two percent of all outstanding shares with voting rights. A shareholder may nominate only one person for each Director position up for election.
The reason for these requirements is to limit the shareholders with nominating rights to those who have had a substantial and relatively long-term ownership in the corporation. It might be disadvantageous to the shareholders at large for a person to acquire nomination rights by the sudden purchase of at least one percent of the outstanding shares with voting rights. On the other hand, requiring a substantial longer period of ownership or substantially larger percent of all outstanding shares would unduly limit the rights of owners to propose changes in their Board of Directors.
Companies and/or individuals holding shares for the benefit of others, e.g. brokers and trustees of trust with specific beneficiaries, should not count these shares towards their qualification to nominate a Director unless the beneficiaries has given them written consent. However, mutual funds and other investment companies who do not allow their investors to specify shares to be held or not held may count shares with voting rights in their qualification to nominate a Director.
This proposal is considerably less complicated than the one proposed in the October 23, 2003 Federal Register. A less complicated procedure is preferable to a complicated one. If the SEC deems this proposal substantially different than the one proposed in the Federal Register, the proposed rules should be revised and republished for public comment. The procedures proposed here should NOT be rejected by the SEC just because they are substantially different from the ones originally proposed.
Q. C.2 Since the proposed triggering events should not be enacted, there is no need to specify the length of the time for qualifying for nominating Directors. Per my answer to question C.1, any shareholder with nomination rights could nominate Director if the shareholder met the nominating requirements specified in this answer.
Q. C.3 Under the proposed nomination procedure above this triggering rule would not be needed. If it is retained, the percentage of withhold votes should be much less tha 35%, say 10%. If 10% of the proxy votes are withheld, there is serious discontent among the shareholders regarding the nominees to the Board.
Q. C.4 This is similar to the procedure proposed above, but the triggering proposal is more complex. This complexity is not needed. Any shareholder or group of shareholders meeting the criteria above should be able to nominate Directors for the proxy ballot.
Q C.5 See answer to C.1 above.
Q. C.6 No, this is not the proper standard; it is too high of a hurdle. See proposal in response to Q. C.1.
Q. C.7 No. The SEC proposal is too complex. See response to Q. C.1 for a simple but effective procedure.
Q. C.8 I agree that the new procedure so become effective as soon as practicable. Making it effective on 1/1/2004 satisfies this criterion.
Q. C.9 The proposed triggering process is too complicated and subject to gaming by corporation who do not want shareholders to offer nominations for Directors. The procedure should be such that corporations cannot game the process.
Q. E.1 See response to Q. C.1 for a simple but effective procedure.
Q. E.2 Yes, the percentage of share held for a person to qualify to nominate a Director should be lower. I believe it should be one percent of all outstanding shares with voting rights. See response to Q. C.1 for a simple but effective procedure.
Q. E.3 Yes, persons who want to qualify to nominate Directors should be required to hold a required number of shares for at least during the previous fiscal year of the corporation. These persons should be long-term owners in the corporation. See response to Q. C.1 for a better procedure.
Q. E.4 Yes, the person wanting to nominate Directors should indicate in writing that he/she intends to retain the qualifying percentage of shares. They would also have to demonstrate that they own the required shares on the date of their nominations. See response to Q. C.1 for a description of such a procedure.
Q. E.5 No, persons planning to nominate Directors should not have to file with the SEC. This should be a corporate matter. The SEC should establish minimum rules and feedback mechanisms to ensure such rules are working, but not get into the election process for every corporation. It is inefficient and a waste of taxpayers' dollars. See response to Q. C.1 for a description of such a procedure.
Q. E.6 No, a person should not be barred from future eligibility. If they meet the criteria in the response to C.1, they should be able to nominate Directors.
Q. E.7 Yes, a group of shareholders should be able to aggregate their holdings to meet the criteria in the response to C.1. However, the group must document that they are acting as a unit and are bound to act as a unit during the election process that considers their nominee.
I do not agree that Board members with financial interests in the company should be prohibited from being nominated to the Board. In fact, the people with the largest stake in the company should be on the Board; they have the largest self-interest to see that the company succeeds. Of course, an owner of a large number of shares in the company may want to nominate another person to the Board to represent his/her interests, i.e. the Board nominee need not own a large number of shares him/herself, but may represent someone who does. On the other hand, all Board members should have a fiduciary responsibility to all the owners of the company. A Board member who is using her/his position to undermine the company, should be legally responsible for his/her actions.
In conclusion, the current SEC rules allow company employees, e.g. CEO's, to become despots. For example, the Wall Street Journal reported on the first page of its 12/5/03 edition how a Board member of Walt Disney Co. asked the CEO to appoint a person to the Board; the CEO refused. The CEO should not have any say in who is appointed to the Board of Directors. The Board is supposed to represent the owners of the company, not just be "advisors" or helpers to the hired management of the company. Allowing the CEO or other company employees on the Board is like putting the fox in charge of the hen house. The fox gets fat and the hen house suffers. If the CEO, the Board or any other company executive wants a group of advisors, they can organize one. The Board of Directors has much more important fiduciary responsibilities than just advising the company's management. Allowing the CEO (or company management) to have such power of the appointment of Board members is like the adage, "absolute power corrupts absolutely."