November 19, 1997
Mr. Jonathan Katz
Securities & Exchange Commission
450 5th St., NW
Washington, D.C. 20549
Dear Mr. Katz:
The purpose of this letter is to comment on File Number S7-25-97, a proposed rule to Amend Rules on Shareholder Proposals.
For 22 years United States Trust Company has been successfully serving clients who seek to combine their financial goals with their belief that corporations have certain responsibilities to society. Our success has not only been in making money for our clients, but also in prodding corporations toward greater social responsibility. Indeed our belief that the interests of shareholders and those of society generally often coincide is a critical impetus for our activism. The shareholder resolution process has been a key tool in our advocacy with corporations.
Like most social investors, we do not take the shareholder resolution process lightly. Rather we view it as a final resort when other attempts at dialogue and compromise have failed. We have often experienced situations where corporate managers who have been completely unresponsive to our questions, have engaged in a mutually beneficial discussion once a shareholder resolution has been filed. In these cases we have been happy to withdraw the resolution and work cooperatively with companies to improve their corporate social performance.
For example, in 1992 as prudent investors we were concerned about several race and gender discrimination suits filed against Albertsons. Our requests for information regarding their Equal Employment Opportunity profile were repeatedly denied. With little other recourse, we filed a shareholder resolution with Albertsons. Upon receipt of the resolution, Albertsons changed their position and proposed a dialogue in which their officials would visit us in Boston and we would send representatives to visit with their staff in Boise. These series of meetings led to a compromise agreement in which Albertsons would not initially release their EEO-1 data publicly as we had requested. Instead they agreed to release their data privately and confidentially to us in year one, with a commitment to increased disclosure in future years as their corporate diversity programs began to show results. Albertsons has gradually improved its record on EEO issues over time. We believe the shareholder resolution has hastened this process, making Albertsons a better place to work, and a less risky security for all investors.
If the SEC implements its proposed changes of allowing companies broad powers to exclude resolutions on the basis of ordinary business or personal interest, you will remove an important tool for investors to provoke corporate responsiveness and investor risk-reduction. We believe if Albertsons had been able to ignore our initial resolution they would have. "Business as usual" is almost always an easier path than change. Albertsons would have been worse off for not addressing their EEO challenges and todays investors might be holding securities that faced significant financial exposure from class action discrimination suits.
We have also been involved in many issues over the years where the shareholder resolution process has played an important role educating investors about issues of financial importance that were not previously considered. As with any educational process, these new resolutions take time to build investor interest. For instance, when the first CERES resolutions called upon companies to improve their environmental disclosure, affirmative votes of 3-5% were common. Today, CERES resolutions are frequently withdrawn as corporations have come to understand that environmental reporting is something that is expected by many shareholders and other stakeholders. Furthermore, a growing number of companies have credited their environmental management and reporting practices with strengthening both their competitive position and their bottom line. Today where companies remain recalcitrant and CERES resolutions go to a vote, support in the mid-to-upper teens is common, indicating a growing number of shareholders believe this type of information is important.
If the SECs proposal to raise thresholds required for resubmission is enacted, many important issues such as those raised by CERES will not get beyond the first years ballot. Shareholders will be denied the opportunity to learn about and consider new ways in which corporate social responsibility is congruent with financial returns. Corporations will be denied the opportunity to consider important ways to improve the efficiency of their businesses by considering factors they have not previously deemed important.
The systematic divestment campaign initiated by U.S. social investors has been widely credited with being a significant force in ending apartheid in South Africa. While this campaign had significant and broad support by 1990, this was not always the case. Early calls for corporate divestment were supported by small numbers of investors, few of whom were large institutional shareholders. In the case of the South African divestment campaign, as with many issues of corporate social responsibility, institutional shareholders added their important voice after smaller shareholders had raised the issue and significant momentum had developed.
The SECs proposal to allow shareholders to override company claims of "ordinary business" or "personal grievance" with letters of support from shareholders representing 3% of outstanding shares would be difficult enough for well-known issues, but virtually impossible for emerging issues that are not well understood. Thus, while South African divestment issues could possibly have garnered a 3% level of support to override company challenges during the later days of the divestment campaign, during the early years of divestment such a level of interest among institutional shareholders would have been unthinkable. Rather than granting shareholders an important new protection against arbitrary corporate power, the override provision virtually assures only issues that are presently well understood will ever see the proxy ballot.
While the proposed rules are full of changes that seek to improve the proxy process by limiting the rights of shareholders, the proposed rules do not address how changes in the rights of corporations might also serve this worthy end. For instance, if the goal of proxy resolution reform is to reduce the amount of reading required by those responsible for voting proxies and reduce the companys financial burden in preparing and mailing proxies, then one logical place to start is limiting a companys statement of opposition to shareholder proposals to the same 500 word limit applied to shareholder proponents. Our experience as investment managers who diligently vote our proxy ballots on behalf of clients is that company statements opposing shareholder initiatives regularly run to 1,000 words or more.
In summary, although we sympathize with the SECs desire to improve the efficiency of the proxy process, we believe that the vibrancy of our market system is dependent upon the ability of corporate owners to act like owners, guiding managements toward better policies. We believe the package of proposed rules would greatly hinder, if not cripple, the process of dialogue between owners and managers that has been of such benefit to society in the past.
Specifically we oppose a number of the proposed rules and urge the SEC to change the final rule accordingly:
1) The resubmission threshold at 6%, 15% and 30% is an unreasonable and unfair increase which would serve only to insulate management from shareholder concerns. There is clear evidence that support for issues grow as shareholders themselves become aware of the issues submitted over time. The current 10% threshold serves to protect shareholders from having to consider nuisance resolutions year after year, while also demonstrating to management a significant level of shareholder concern.
2) The "Override Provision" which purports to give shareholders the ability to assure that resolutions reach the proxy ballot if they can garner support from other shareholders representing 3% of outstanding shares greatly weakens shareholder rights. It will be virtually impossible for most shareholders to garner such a level of support. Knowing this, companies can arbitrarily assert claims of "ordinary business" in a fashion that will frustrate shareholder efforts. In suggesting an "Override Provision" the SEC has abdicated its legal responsibility as arbiter of the proxy process and instead transferred the responsibility to large institutional shareholders.
3) The recasting of the personal grievance rule in such a fashion that the SEC would issue a "no opinion" finding in the face of a corporations assertion that the resolution was based on some hidden motive is an abdication of the SECs responsibility to assure fairness in the proxy resolution process. If the substance of the resolution is of legitimate concern to shareholders, the motive should not matter.
4) Modifying the "relevance test" to exclude "significantly related issues" restricts the scope of shareholder resolutions too narrowly. For instance, resolutions pertaining to South Africa, Northern Ireland and Burma may involve only a small portion of a companys assets or sales in those countries. Yet involvement in these countries has often subjected the company to significantly greater risks such as loss of contracts due to selective purchasing campaigns and the threat of other consumer boycotts.
5) Removal of the shareholders right to review the proposed management response opposing a shareholder resolution eliminates an important safeguard of the current system. Furnishing shareholders with this information has worked well in the past and is virtually cost-free for the corporation.
Taken as a whole, the proposed reforms represent a disturbing erosion of shareholder rights. They also open the possibility of much greater abuses by corporations as the SEC seeks to remove itself as arbiter of the shareholder proposal process. Though we strongly disagree with the SECs original Cracker Barrel decision, we believe historically the SEC has proven a cost-effective and equitable referee of the proxy process.
We urge the SEC to comply with the National Securities Market Improvement Act of 1996 (the enabling legislation that gave rise to this proposed rule) which calls upon the SEC to improve shareholder access to proxy statements. The proposed rules move away from this target. We hope the final rules will restore balance to the shareholder process and seek to meet this worthy goal set forth in the Act.
William Apfel Linda Berkel
Vice President Vice President
Jane A. Chase W. Scott Klinger
Social Research Analyst Investment Officer
Maria McCormack Stephen K. Moody
Assistant Vice President Senior Vice President
Heidi A. Soumerai Robert B. Zevin
Vice President Senior Vice President