Jonathan G. Katz, Esq.
Re: File No. S7-19-03, Security Holder Director Nominations
Dear Mr. Katz:
Thank you for the opportunity to comment on the proposal by the Securities and Exchange Commission relating to procedures for nominating directors. Capital Guardian Trust Company generally supports the proposal to give long-term shareholders with a substantial financial stake in a company the ability to nominate directors under certain circumstances. The ability of shareholders to do so may, in the long term, improve accountability of directors to investors.
Capital Guardian Trust Company is a California-chartered trust company and federally registered investment adviser. We provide investment management services to large and middle market corporate and public employee pension plans, endowments, foundations, and high net-worth individuals. Assets under management currently exceed $125 billion.
As a large institutional investor, Capital Guardian appreciates the Commission's efforts to enhance shareholder accessibility to the director nomination process. Currently, there is no effective way for shareholders to nominate their own candidates to the board. We believe a potential remedy should be available to shareholders for boards that are unresponsive to investors but whose companies still represent an attractive investment opportunity.
On the other hand, Capital Guardian is sensitive to the possibility of unintended consequences and potential disruption to companies that may arise in accommodating greater participation by shareholders in this process. Increased access should provide a remedy for shareholders that outweighs the burden to the company. Therefore, the Commission and investors must carefully consider the requirements that should be met before this increased participation is granted.
The Commission has identified two events that would trigger shareholders' ability to nominate a director. We concur that a withhold vote of 35% of votes cast for a nominee represents substantial dissatisfaction with a candidate and/or the nomination process and seems a reasonable event to trigger investor access to the process.
The second trigger is initiated when a shareholder or group of shareholders owning 1% of the company's outstanding shares for at least one year submits a proposal subjecting the company to the proposed rule. This is a relatively low threshold that would allow a substantial number of small shareholders the opportunity to initiate the trigger. But it is balanced by the requirement that the proposal receive 50% of the votes cast, which would provide indication of broader investor dissatisfaction with the company's responsiveness. We believe this to be a generally appropriate trigger of increased access.
We have concerns, however, regarding whether the ownership threshold of 5% of a company's outstanding shares to nominate a director is appropriate. The nominating shareholder(s) should have a financial interest in the company substantial enough to justify the potential disruption to the company and use of its funds in nominating a candidate. We believe a more appropriate ownership threshold would be 10% of the outstanding shares.
In addition, the interests of investors as a whole may be better served if the shareholder nominee has a reasonably broad level of support. This could be encouraged by requiring a number of shareholders to work together to select and nominate a candidate. Therefore, we recommend that a group of at least two investors owning 10% of the outstanding shares in the aggregate be required to nominate a candidate.
The Commission also requested comment on whether other events should be considered as a trigger for the process. We do not believe that additional triggers are necessary since the second triggering event - submission and passage by 50% of a proposal to subject the company to the rule - provides opportunity to address other events that the Commission contemplates.
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In summary, Capital Guardian supports granting substantial, long-term shareholders the ability to participate in the nomination of directors as long as the right of shareholders to nominate directors is appropriately balanced against the costs and disruption to the company. We therefore suggest revising the ownership threshold required to nominate a director to 10% of the outstanding shares, aggregated among a group of at least two shareholders. As revised, this right could be an important way to encourage boards to be more accountable to investors in the long term.
/s/ Eugene P. Stein
Eugene P. Stein