[Office Depot logo]
Chairman and CEO
December 22, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 20549-0609
Re: Proposed Rule: Security Holder Director Nominations
SEC File No. S7-19-03
VIA E-MAIL: email@example.com
Dear Mr. Katz:
I am the Chairman and Chief Executive Officer of Office Depot, Inc. Office Depot is headquartered in Delray Beach, Florida. Office Depot, one of the largest sellers of office products and services in the world, has annual sales of nearly $13 billion and employs nearly 50,000 employees worldwide.
Office Depot, consistent with its long-time support of transparency and good governance practices, embraces the reforms of Sarbanes-Oxley, the Commission´s recently-adopted rule on disclosure regarding communications between shareholders and directors (Final Rule), and the new New York Stock Exchange listing standards. The new listing standards include a mandated nominating and corporate governance committee, composed entirely of independent directors, with duties regarding the consideration of any director candidates recommended by shareholders, the procedures to be followed by shareholders in submitting such recommendations, and establishing a process for identifying and evaluating nominees recommended by shareholders.
We fully expect that the workings of the Final Rule and the nominating and corporate governance committee will further enhance the independence and quality of nominees. These listing standards reforms, effective January 1, 2004, mandate that independent director have the dominant role across the most important board committees. I am proud to say that our Corporate Governance & Nominating Committee has consisted entirely of independent directors for many years, and will of course continue to do so.
Notwithstanding our outstanding record of commitment to good governance, Office Depot wishes to go on record as strongly encouraging the Commission to table the Commission´s pending proposed rule that would require a public company to grant, at the company's expense, shareholder access to the company's proxy statement for the purpose of election of directors. We request that the Commission revisit whether rulemaking in this area is necessary after it reassesses improvements in shareholder responsiveness and corporate accountability flowing from the recent statutory and listing standards reforms and the Final Rule. Contrary to the suggestion made in the proposed rule, these measures do involve the role of shareholders in the nomination procedure. 68 Fed. Reg.at 60,786. Adding to these worthy reforms at this time is neither necessary nor advisable.
Instead of focusing attention and resources on making the broad spectrum of new reforms work, the proposed rule would divert attention and resources by mandating nominations of shareholders in company proxy materials who can be expected to promote their own agendas rather than the overall good of the company´s stakeholders. The proposed rule has the potential to turn every director election into an election contest, with attendant diversion of executive and director time, increased contention in shareholder communications, distraction from regular duties, and increased legal and proxy solicitation fees.
We fear that the proposed rule, rather than opening up the director nomination process to all shareholders would instead open it up to the few special interest groups who have always been active in promoting shareholder proposals for consideration at annual meetings. While some of those proposals have been commendable (and we had such a proposal adopted by shareholders at our most recent annual meeting), others are clearly intended to promote special interests or a narrow political or social cause. It would be singularly unwise to add to the burden of promotion of special interests to now add to the arsenal of such groups open access to the nomination process.
In addition, the Commission appears to underestimate the burden that will result from the 1% threshold to activate the security holder nominating procedure. The Commission´s estimate appears to be based on an assumption that only individual shareholders with a stake of 1% or more will file such direct access proposals, 68 Fed. Reg. at 60,809 n.187, when, in fact, the proposed rule provides that a group of shareholders with a combined 1% stake can also file a direct access proposal. 68 Fed. Reg. at 60,790. As shown by the survey conducted by the Business Roundtable,
. . . given the almost infinite number of combination of shareholders holding even 1/4 of a company's outstanding shares, there would be a significantly greater number of 1% shareholder entities submitting direct access proposals than is accounted for by the Commission, whose analysis takes account of only individual shareholders with a stake of 1% or more.
Comments of The Business Roundtable to Office of Management and Budget on S7-19-03 at 6, filed Nov. 21, 2003.
We further disagree with granting shareholder access to the proxy ballot whenever votes are withheld for one or more directors of more than 35% of the votes cast. We do not believe this threshold meets the criteria that the Commission used to issue the proposed rule, namely only "in those instances where the evidence suggests that the company has been unresponsive to security holder concerns as they relate to the proxy process." 68 Fed. Reg. at 60,784. For example, where all but one of the board candidates for whom a company solicited proxies enjoyed the overwhelming support of 98% of the votes cast and only one director received 64% of the votes cast, that, in our view, is not evidence that a company is not responsive to its shareholders. Yet direct access would be triggered under the proposed rule if this were to occur. We also submit that where 65% of the votes cast support the entire board-nominated slate, that is not "evidence" of being unresponsive to shareholder concerns, particularly where the minority vote is generated by "withhold authority" campaigns can be based on political and policy reasons that have little to do with the company's business and economic performance.
Currently, shareholders who are dissatisfied with the leadership of a company may undertake a proxy contest, along with its related expenses, to put nominees before the shareholders for a vote. This often involves the challengers filing their own proxy statements with the Commission and soliciting proxies directly from shareholders. We have reviewed information suggesting that, in recent years, many election contests resulted in either the successful election of the shareholder nominees or a negotiated settlement with the company. See Comments of Wachtell, Lipton, Rosen & Katz on S7-10-03, filed June 11, 2003, at 3, (Comments of Wachtell). Given the wherewithal of the nominees under the proposed rule - - a 5% or greater shareholder - - the arguments in favor of taxing the company and the rest of the shareholders to sponsor that entity's nomination on the company's proxy statement are unsubstantiated in the absence of a clear empirical demonstration that the existing rules are inadequate to test management via a proxy contest.
State corporate law generally vests with the board of directors the authority to manage the business affairs of the company, including the process of considering and nominating directors. We question whether the SEC has the authority to require companies to allow shareholders to seek directorships via access to the company's proxy statement and tax corporate funds to cover the expense of doing so.
In Business Roundtable v. SEC, the District of Columbia Circuit invalidated the SEC's one-share, one-vote rule, holding that the SEC's authority under the Securities Exchange Act does not extend to regulation of an issue that is "far beyond matters of disclosure" and is "concededly a part of corporate governance traditionally left to the states." 905 F.2d 406 (D.C. Cir. 1990). As one commentator has noted, while advocates
. . .of allowing shareholders to run an election contest through the corporate proxy machinery may portray the SEC's proposed rule as a procedural´ proxy rule, there is no question that such a rule would fundamentally and substantively change the nature of director elections, a matter at the core of corporate governance. These election context proposals would create a substantive requirement under which a company, in effect, must solicit proxies for nominees opposed to the company's own slate.
Comments of Wachtell at 4.
The Commission, in the proposed rule, relies on state law allowance for shareholder nominations as a permissible basis under the Exchange Act to compel shareholder access to management's proxy statement. It does this by describing the proposed rule as providing shareholders with improved disclosure about shareholder nominations in the company's proxy materials. However, the "carve out" from the rule where state law prohibits shareholder nominations does not address the fundamental issue of whether the SEC has the power to furnish a shareholder with the substantive right of access to the company's proxy statement. While state law may dictate that shareholders have the right to nominate shareholders for the board of directors, the right to nominate an alternative slate of directors and wage a campaign for election has not been extended to a right to use the company's own proxy machinery to promote the insurgents' candidacies. The company´s obligation to furnish such use appears to go well beyond a "disclosure" requirement under the Exchange Act.
As stated above, we believe the Commission should table the proposed rule until after it makes an assessment of whether the concerns that led to proposals for shareholder access are remedied by the Sarbanes-Oxley reforms, the new rule on enhancing shareholder-director communications, and the new NYSE listing standards, with fully independent nominating and corporate governance committees.
We thank the Commission for considering these comments.
Original Signed/Conformed Copy
M. Bruce Nelson
Chairman & Chief Executive Officer
Office Depot, Inc.