ISIS Asset Management Plc

 15 December 2002

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609

Re: File No. S7-19-03

Dear Mr Katz:


I am writing on behalf of ISIS Asset Management, a top 10 UK-based active asset manager with over $108 billion under management worldwide.1 Our approach towards corporate governance seeks to balance core corporate governance principles with local pragmatism. While our corporate governance policy is informed by UK best practice, such as the Combined Code, we are aware of cultural and legal differences in the USA.

We are co-signing a joint letter from many UK investing institutions on this matter but are sending this additional letter to point to the factors that we consider the most pressing.

The three-year wave of corporate scandals highlights significant distortion in the USA capital market framework. As an investor and provider of capital to the financial markets, we have a fiduciary duty to act in the best interests of the funds that we manage. As a long-term investor, our duties include enhancement and protection of our global investments. We believe that proper proxy access is a basic corporate governance mechanism, which is fundamental to the responsible exercise of ISIS' ownership rights and duties.

ISIS therefore welcomes the Commission's initiative in proposing Exchange Act Rule 14a-8 (the "proposal") to open up companies' proxy materials to shareholders. This has the potential to redress serious problems in USA capital market.

1. Core corporate governance principles

We consider proper access to the proxy a basic ownership right and tenet of good corporate governance.

In the event that management consistently under-performs or is involved in value destructive or inappropriate practices, this right enables ISIS to act in a responsible and timely way.

Our view is based on international norms; proper access is a basic ownership right not only in the UK, but also in Australia, France, Germany, India, Ireland, New Zealand, South Africa, Sweden and many other jurisdictions.

If this basic right continues to be frustrated in the USA market, poor management at significant and large USA companies will continue to be artificially protected from accountability.

The recent case of HealthSouth Corp's indicates the grave implications of lack of corporate accountability for shareholders. In spite of having been indicted of 85 counts of fraud that inflated the company's earnings by$2.7 billion, with 14 former executives having pleaded guilty to criminal offences, the ex-CEO has refused to stand down from the board.

2. Triggering Events

ISIS believes that as crafted, the Commission's proposed "triggering events" risk undermining effective change in the USA.

These create unnecessary and unwarranted hurdles to the use of proxy access. We are unclear as to the public interest of such restrictions and the justification for regulatory intervention.

The proposal takes insufficient account of the experience of markets outside the USA, which give shareholders the authority to appoint and remove directors with comparative ease.

For example, in the UK, basic ownership rights enable shareholders to:

  • A binding vote for or against the election of a director at the first Annual General Meeting ("AGM") following his/her appointment (simple majority required).

  • A binding vote for or against the re-election of a director when his/her term of office is up for renewal (simple majority required).

  • The right, under Section 376 of the UK's Companies Act 1985, to include a binding resolution at an AGM for the appointment of a director (simple majority required). The only trigger is that the requisitionists must either:

      (i) include 100 shareholders with an average amount paid up of at least £100 (UK Sterling) per shareholder.

      (ii) or represent in excess of low voting rights threshold.

  • The right to requisition an Extraordinary General Meeting ("EGM") where they can put forward binding resolutions to appoint and/or remove directors (again a simple majority required). The only trigger is that the shareholders calling such a meeting must represent a higher proportion of the voting share capital than for an AGM resolution.

3. Voting Thresholds

We understand that the voting thresholds need to be set at levels that recognise the USA market context of fragmentation.

In the UK they are 5% (AGM resolution) 10% (EGM requisition), due to the high degree of ownership concentration that exists. Given the different local context in the USA, 3% and 6% thresholds are more appropriate.

4. Stability of Boards

Concerns regarding unstable boards merely reflect vested interest; these amount to a shortsighted request for protectionism by certain companies.

The plentiful evidence available in markets where executives are properly accountable to shareholders simply does not support their arguments. Frivolous requisitions are unlikely to arise, given that the support of a majority of shareholders is required. The availability of this right is indeed more likely to result in stability; there will be a reduction in time-consuming, disruptive and expensive proxy battles. We envision a shift towards more serious, collaborative and constructive dialogue, based on accountability.

5. Timeframes

We believe the timeframes outlined in the proposal are unnecessary and risk distorting behaviour.

Delaying access beyond the next annual meeting is likely to maintain and even exacerbate situations that undermine the business and shareholder value. Limiting the time period for an application to two years risks forcing the hand of shareholders to nominate candidates; we would prefer to seek to work for constructive change and resolution first.

6. ISIS Proposal

ISIS urges the Commission to seriously reconsider the proposal and to remove artificial measures that will hinder our ability to respond to significant problems in the companies that we own.

However, in the event that the Commission is compelled to adopt a proposal that includes the trigger mechanism, we urge you to:

  • Include a potential, additional trigger; where a company fails to implement a shareholder proposal submitted in accordance with U.S. Securities Exchange Act of 1934, which received support from the majority of votes cast;

  • Adopt a trigger; that the company become subject to a shareholder proposal under the shareholder nomination rule solely on the basis that it received support from the majority of votes cast (original sponsorship is irrelevant); and

  • Adjust the trigger, where a company receives a certain level of withhold votes on at least one of the company's nominees for board of directors, to set the level at 20% not 35%.

We thank you in advance for the opportunity to comment and look forward to the development of the proposal.

Yours sincerely

Richard Singleton
Director, Corporate Governance
ISIS Asset Management Plc

1 As of 30 October 2003.