Teachers Insurance and Annuity Association of America
College Retirement and Equities Fund
730 Third Avenue
New York, NY 10017-3206
212 490-9000 800 842-2733
Peter C. Clapman|
Senior Vice President & Chief Counsel,
December 17, 2003
Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Dear Mr. Katz:
Re: Proposed Rule on Security Holder Nominations (File No. S7-19-03)
The College Retirement Equities Fund ("CREF"), together with its companion organization Teachers Insurance and Annuity Association of America (collectively, "TIAA-CREF"), is pleased to submit comments on the proposal by the Securities and Exchange Commission to, under certain circumstances, require companies to include in their proxy materials security holder nominees for election as director.
We support the Commission's efforts to provide security holders with direct access to the company proxy under certain circumstances for two main reasons. First, we believe that the proposed rule would provide security holders with the ability to play a more direct and effective role in nominating and electing directors following the occurrence of reasonable triggering events. Next, we believe that the proposed rule would improve the responsiveness of management to their shareholders even in the absence of a shareholder nomination. While we acknowledge that there are potential costs associated with opening up the nomination process, we believe that, on balance, the potential improvements to corporate governance practices outweigh those costs.
TIAA-CREF appreciates that the current proposal is the product of considerable analysis and focused attention of the SEC Commissioners and staff. The SEC also has received comments and suggestions from virtually all of the affected constituencies and has had the opportunity to assess all of these views even before publishing this proposal for comment. The broad policy issues raised by the concept of shareholder access into the nomination process have been well argued and debated in a large number of conferences and forums examining the issues.
We also appreciate that the proposal enters an area in which the practical effects of implementation cannot be forecast precisely. Accordingly, some commentators have argued that the improbability of accurate forecast is a reason to abandon the entire concept. Others have advocated different triggering events, ranging from those that, in our estimation, could render shareholder access nearly impossible to achieve to those that could enable the rule to be imposed on companies excessively.
TIAA-CREF's conclusion is quite different. We urge the SEC to adopt a rule, reasonably close to the proposed rule, which has the virtue of clear understanding and concern for the potential it would present. The current proposal is balanced and based on confidence that shareholders are capable of understanding their best interests. We view it important to begin the shareholder access process on the basis of the SEC's proposal as soon as practical. We also expect the SEC to examine over time whether the adopted rule serves the intended purpose, or is utilized too often or too rarely. The Commission will then have the opportunity to make any changes necessary to ensure that the rule serves its underlying purpose - to improve corporate governance.
Introduction and Background
CREF is registered with the SEC as an investment company. Its companion organization, TIAA, is a stock life insurance company. Together, TIAA-CREF comprises the principal retirement system for the nation's education and research communities. TIAA-CREF serves over 3.2 million people at over 15,000 United States institutions and jointly manages approximately $300 billion in assets. In addition to offering fixed and variable annuities, we offer a series of retail and institutional mutual funds that are also registered with the SEC as investment companies.
TIAA-CREF is widely recognized for its leadership in corporate governance and as a strong voice for shareholder rights. As one of the world's largest institutional investors, we are committed to promoting sound governance practices.
Our corporate governance program includes dialogue with senior management and boards of corporations. Most of our discussions are constructive, and many lead to improved corporate governance and enhanced shareholder communication. There are, however, occasions when corporate management is unresponsive to our concerns. At such times, the proxy process can provide shareholders with valuable corrective recourse and potential to produce appropriate responsiveness.
TIAA-CREF, therefore, supports the proposed rule both for the direct effect it will have on the ability of security holders to nominate and elect directors, and for the indirect effect it may have on the relationship between company boards and shareholders, even in the absence of a shareholder nomination. We believe the proposed rule is in keeping with our corporate governance philosophy, and we urge you to make its adoption a top priority. While we do not choose to comment on the many details of the proposed rule, we ask you to consider the following:
A. Triggering Events
Currently, shareholders seeking to change the composition of a public company board generally must bear the expense of a proxy contest. Proposed Rule 14a-10 would, upon the occurrence of a triggering event, provide shareholders with substantial holdings a means for putting forth their own nominees, albeit not in a number sufficient to constitute a majority of the subject company's board. By making it more practical for shareholders to nominate individuals of their own choosing who may better represent their financial interests, the proposed rule would provide shareholders with a more direct role in the governance process. Ultimately, however, such shareholder nominees would have to obtain the majority of all votes cast to be actually elected. Such an event would indicate that the substantial shareholders who nominated the directors so elected had a better sense of the governance needs of the company than the nominating committee, at least as understood by the total shareholder constituency.
TIAA-CREF supports the two triggering events included as part of the proposed rules, and believes that the thresholds and standards contained within these triggers strike an appropriate balance between the objectives of providing greater security holder access to the corporate proxy and ensuring that the security holder nomination procedures are not abused.<
B. Safeguards Against Abuse
We acknowledge that opening up the proxy process could present certain costs and risks to public companies and their shareholders. Under the current rules, the costs of waging a proxy contest have been an effective deterrent to security holder nominations that are frivolous, representative of special interests, or are otherwise not directly related to managing the company in the financial interests of security holders as a group. Some critics of the proposed rule are concerned that by lowering the "price of admission" for security holder nominations, the Commission would be inviting frivolous nominations whose costs would be borne largely by the company.
TIAA-CREF believes that shareholders should have the ability to participate meaningfully in the director nominating process. We assume that the vast majority of investors will participate in a constructive and responsible manner. However, we recognize that any means of participation may give rise to abuse. To strengthen the standards and limitations of the proposed rule and to minimize the risk of abuse, we propose the following:
1. Mandatory Nominee Certification
The Commission has proposed that the nominating security holder or group be required to provide notice to the company of its intent to require that the company include that security holder's nominee on the company's proxy card. The Commission has proposed that such notice include a wide range of information about both the nominating security holder and the nominee. We further recommend that, as part of such notice, the security holder's nominee also be required to certify that, if elected, the nominee will represent the financial interests of all security holders. Such certification would affirm that nominating shareholders and nominees understand and subscribe to the fundamental precepts of board responsibility. Thus, certification would serve as a safeguard against board nominees who might seek to represent a limited group of shareholders or special interests.
2. Right to Challenge Nomination
The commission has proposed a procedure for a company that receives a notice from a nominating security holder or group under proposed Exchange Act Rule 14a-11. The proposal provides several criteria by which a company may determine that it is not required to include a nominee. We recommend that the Commission include additional criteria that would allow a company to challenge a nomination on grounds that it fails to meet the rule's standards of objectivity, independence or qualification.
A company should have an opportunity to challenge a nomination that it believes is frivolous, unqualified or otherwise not solely in the best interests of shareholders. Substantive challenges should be brought to the Commission, and the nominating security holder or group should have an opportunity to counter the challenge. The Commission would make the final determination. This procedure would be similar to the procedure by which a company that receives a shareholder proposal can request a "no action" letter from the Commission's staff.
C. Shareholder Nominations and Election of Directors
We also believe that insufficient attention has been given to the second phase of the proposed rule, namely the actual nomination and election of a director. The proposed rule would require that nominating shareholders own, individually or in the aggregate, more than 5 percent of the company's eligible voting securities for at least two years prior to the date of nomination. In addition, a shareholder nominee would also have to meet certain requirements, including all applicable laws and SRO or Investment Company Act standards on director independence. To meet these requirements - and eventually receive the majority votes of all shareholders necessary to beat the company's designated nominee - will be a formidable task, requiring highly qualified director nominees and a shareholder constituency well beyond the nominating shareholder's base.
Thus, for the rule to have its desired impact, any shareholders that intend to avail themselves of the opportunity afforded will necessarily have to have a plan at the first phase (the trigger stage) as to how the second phase will go if the first is successful. Effective application of the proposed rule will require that nominating shareholders develop clear and thoughtful plans, including a rationale for electing a new director and a rationale for electing a specific individual nominee. Without such a plan, the first stage of the proxy access process will merely create an illusion of shareholder engagement but will not result in any meaningful reform at a company.
We suggest that the Commission make clear in the final rule that shareholder access to the proxy will not, in and of itself, result in reform, change or improvement of a company's board. Shareholders who intend to take advantage of the opportunities provided in Proposed Rule 14a-10 should recognize the need to develop a plan to ensure that exercise of the rule is successful and provides beneficial results for all shareholders.
* * *
We applaud the Commission's commitment to address the direct access issue, knowing it is as important as it is controversial. Our comments are intended to request a final rule that will both strengthen the alignment of interests among shareholders and directors, and result in improved corporate governance and enhanced shareholder value.
We appreciate the opportunity to comment on the proposal. Please do not hesitate to contact me with any questions you may have. I can be reached by letter at the above address, by e-mail at email@example.com or by phone at 212-916-4232.
Thank you for your consideration.
Peter C. Clapman
|Cc:||Hon. William H. Donaldson, Chairman, U.S. Securities and Exchange Commission|
Hon. Paul Atkins, Commissioner
Hon. Roel Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey Goldschmid, Commissioner
Giovanni P. Prezioso, General Counsel
Alan L. Beller, Director, Division of Corporation Finance