December 22, 2003
Mr. Jonathan G. Katz
Re: File No. S7-19-03, Security Holder Director Nominations
Dear Mr. Katz:
Microsoft Corporation appreciates the opportunity to comment on the Commission's proposed rules regarding Security Holder Director Nominations.
Microsoft believes that recent reforms under the Sarbanes-Oxley Act of 2002, SEC rules, and the amended Nasdaq and NYSE corporate governance rules will help foster improved corporate governance. The reforms adopted in the last two years include:
We support these efforts and believe they will help instill investor confidence in corporate accounting, increase transparency and corporate accountability, and have significant effects on the relationship between shareholders and the companies in which they invest and the directors of those companies. The proposed rules represent an additional, significant extension of federal regulation of corporate governance. We believe the Commission should allow the existing reforms to be fully implemented and their effectiveness assessed before the Commission adopts, for the first time, rules requiring companies to include shareholder nominees in the company's proxy statement. The proposed rules could create distracting, disruptive proxy contests at every public company, regardless of the quality of governance at the company. Moreover, the proposed rules would create an opportunity for a small minority of shareholders to advance narrow interests that are unrelated to governance of the company, improved economic performance by the company or maximizing shareholder value. We believe the potential harm that could be caused by these adverse consequences outweighs any benefit that would result from the proposed rules.
Further, the proposing release reflects an absence of direct data from which to fully evaluate the potential effects of the rules (e.g., the release solicits responses to several hundred questions and acknowledges that the withhold vote analysis was not made on a candidate-by-candidate basis). Given heightened shareholder activism evident in 2003 and anticipated for 2004, we believe it would be appropriate for the Commission's evaluation to include information from both of these proxy periods before proceeding.
If the inclusion of shareholder nominees in company proxy materials is to be required, we agree with the Commission that this requirement should only be triggered by objective criteria indicating that shareholders have not had adequate access to an effective proxy process by limiting use of the rules to situations where there is objective evidence the proxy process has "failed to permit security holder views to be adequately taken into account." We are concerned that the proposed rules run counter to this goal because the triggers for access would not be effective measures of the proxy process or company responsiveness to shareholders.
Direct Access Proposal Trigger. The proposing release states that security holders could aggregate their shares to reach the 1% threshold to submit a direct access proposal where "those security holders feel that the proxy process has been ineffective." In practice, the proposals may be made by a shareholder or group of shareholders that has no issue with the company's proxy process, but instead seeks to nominate a candidate that is sympathetic to the proponent's view on a particular issue or set of issues, unrelated to dissatisfaction with governance at the company or economic performance of the company. We believe the threshold should reflect a broader level of shareholder dissatisfaction by shareholders who have clearly demonstrated they are long term company investors. Accordingly, we would recommend this trigger match the thresholds for a nominating security holder or security holder group (5% beneficial ownership and continuous ownership for two years).
Withhold Vote Trigger. A company's board and its nominating committee should have an opportunity to respond to shareholder concerns about a director before the company's proxy process is deemed ineffective. The access trigger based on a director's receipt of more than 35 percent "withhold" votes would not allow for this to occur. In addition, paradoxically this trigger could apply to companies where there is not significant dissatisfaction with the company's proxy process, yet not apply to companies where there is evidence of broader dissatisfaction. For example, a company that had one director receive 35% "withhold" votes cast at an annual meeting and all of its other directors receive less than 5% "withhold" votes would be subject to the rules, while a company that had all of its directors receive significant "withhold" votes that fall below the threshold would not. The proposed system thus could encourage a shareholder or shareholder group to target an individual director and personalize the director election process solely for the purpose of achieving the 35% threshold so that the nominating shareholder or group can submit its own nominee.
Majority Vote Shareholder Proposal Trigger. The suggested access trigger that would be based on a majority-vote shareholder proposal would apply to any company, not just those companies that have failed to respond to shareholder concerns. A company's failure to implement a shareholder proposal that received a majority vote does not necessarily demonstrate the ineffectiveness of the proxy process or that a board is unresponsive. When shareholders approve a proposal, the board is obliged to exercise its judgment to determine whether implementing the proposal is in the best interests of the company. A decision not to implement does not alone indicate either an ineffective proxy process or an unresponsive board. The proposing release aptly notes that the link between this trigger and the effectiveness of the proxy process is more indirect. Finally, there would be significant subjectivity inherent in the application of such a trigger, and it would introduce a new and additional set of issues related to how and by whom a company's determination of sufficient implementation would be evaluated.
Question B.2. seeks input about whether there are steps a company could take to prevent application of the rules, such as agreeing not to exclude Rule 14a-8 shareholder proposals. We believe that there should be no implication that a company that excludes a shareholder proposal from its proxy statement (which in practice only happens upon receipt of a "no action" letter from the Staff of the Commission) is less responsive to security holder concerns. A shareholder can have a proposal included in a company's proxy statement (at the company's, and, therefore, all shareholders' expense) if the proposal complies with Rule 14a-8. If the proposal does not satisfy the requirements of Rule 14a-8 (because, for example, implementation of the proposal would cause a violation of law, the proposal contains material misstatements or omissions, or relates to a personal grievance), the Commission's rules provide that the proposal may be excluded from the company's proxy statement. These exclusions exist for good reasons. A decision to exclude a shareholder proposal simply is not indicative of whether a company is responsive to its shareholders.
We understand the Commission's difficulty in attempting to establish objective criteria that demonstrate a company's responsiveness (or lack of responsiveness) to shareholder concerns. In view of this difficulty, we urge the Commission to allow the recent corporate governance reforms adopted by Congress, the Commission and the securities markets to take effect and to more fully consider its proposal before adopting the proposed rules. With the increased independence of boards of directors, the strengthened role and independence of nominating committees and the enhancement of shareholder-director communications, we believe that the issues that led to calls for shareholder access will be addressed. If the Commission nevertheless concludes that changes in the director election process are necessary, then we believe it is necessary to substantially revise the proposed rules to better target them to non-responsive companies.
If you have any questions regarding these comments, please do not hesitate to contact me at (425) 882-8080.
John A. Seethoff