December 23, 1997
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. S7-25-97 -- Amendments to Rules on Shareholder Proposals
Dear Mr. Katz,
On behalf of Calvert Group, Ltd. 1 ("Calvert"), we are writing to comment on the rules proposed by the Securities and Exchange Commission (the "Commission") governing shareholder proposals. We want to first acknowledge the Staff’s hard work at reviewing and considering the many responses to the questionnaire distributed earlier this year, and to express our appreciation of the Commission’s endeavoring to reconcile the varied and often conflicting interests of shareholders and corporate management.
In the Proposed Rules, Request for Comments, the Commission states "(w)e believe that the purpose of the rule is to ensure proper disclosure and enhance investor confidence in the securities markets by promoting proposals raising significant issues that are relevant to the company and its business." 2 (emphasis added).
Calvert supports the above belief that improving shareholder access by allowing shareholders to be informed of and have an open dialogue on social issues goes to the intrinsic value of a company. Therefore, we feel that the proposed rules, only to the extent they create an open and honest expression by the Commission to recognize shareholder democracy, are a step in the right direction.
Meaningful rules can be developed and implemented which would allow a corporation to continue to be managed in an efficient manner, yet be accountable to its shareholders through the corporate democratic process and enhanced corporate disclosure. It is with this desire for reform of the current system that we view the proposed amendments, endeavoring to find a revised shareholder proposal process which creates a system that is sustainable of both interests, returning shareholder rights to the forefront while addressing the business concerns of corporate management.
Unfortunately, based on the proposed amendments, we are forced to question whether the Commission has truly embraced the enlightened view of shareholder democracy. With this concern, we provide the following comments and recommendations:
• Revised Rule 14a-8(c)(4) -- Personal Claim or Grievance
The Commission seeks to streamline the exclusion of proposals that are found to further personal grievances or special interests. Thus, when a proposal is "neutral" on its face, the Commission would express "no view" with respect to a no-action request. It would then be up to the company (based upon the company’s own fact finding) to determine whether the proposal could be excluded.
We realize that determining whether a neutral proposal can be excluded is a difficult responsibility for the Commission; however, we are concerned that a company would interpret a "no view" as a concurrence that it can omit the proposal in the absence of being able to clearly demonstrate that the proposal is personal in nature. Moreover, as former Commissioner Steven M.H. Wallman has argued in the past, the exclusion of personal claims or grievances should not be a ground for the omission of an otherwise proper shareholder proposal. Thus, Calvert believes that this exclusion should be viewed extremely narrowly and only applied when the proponent clearly is abusing the proxy rules.
If, arguendo, the Commission proceeds to interpret Rule 14a-8(c)(4) more broadly, we believe that the Commission should not exclude itself from the discussion regarding neutral proposals, but should serve as the arbiter between the proponent (who ostensibly will argue that the proposal is not of a personal nature) and the company (whose main motive may be to exclude the proposal regardless of the non-personal nature of the proposal). In this light, we expect that a good faith standard would be applied to the fact finding element to ensure that the company is objectively considering the facts in deciding to exclude the proposal as a personal claim or grievance. Further, when a company seeks to exercise its ability to exclude a proposal under this rule, the company should be required to respond in writing to the proponent explaining in detail why the proposal is being excluded. At the same time, a copy of this response should be forwarded to the Commission for its records. In addition, it should be clear that the company would bear a heavy burden of proof in any subsequent litigation on the issue.
• Revised Rule 14a-8(c)(5) -- Relevance
The proposed rules would streamline the exclusion of matters considered irrelevant to corporate business to permit a company to exclude proposals that relate to economically insignificant portions (from the company’s viewpoint) of its business. Recognizing that some matters may not be quantifiable or may relate to a small percentage of a company’s business, we are alarmed to see that the Commission has crafted the proposed amendment to only address quantifiable matters that represent at least either $10 million in the company’s gross revenues or total costs, or 3% of gross revenues or total assets. By default, this provision would allow for the blanket exclusion of those smaller operations and unquantifiable practices of a company.
It is understandable why a relevance standard should be applied under this rule in order to filter out those frivolous proposals which do not apply to the operations of a company. However, in determining what is relevant to a company, we cannot be so narrow-minded as to believe that a company’s "insignificant" practice has no effect upon the surrounding community or upon the bottom-line of the company no matter how unquantifiable the revenue may be.
Although a company may consider one of its practices to be insignificant in the context of its company-wide operations, this same practice may have an overwhelming impact on the surrounding community. For example, a company’s release of an effluent into the local water system from an operation not meeting the quantifiable benchmark, but which may reflect company-wide environmental policies, could have a grave impact upon the environment and specifically, upon the members of the community in which it is released. Thus, allowing for the exclusion of "insignificant" practices from shareholder proposals prevents shareholders from creating a dialogue with other concerned shareholders and with corporate management over what they may view as having a significant impact on their communities. Such a discourse, in turn, could provide shareholders with a better understanding of the policy behind the company’s practices as well as enlighten corporate management about the social impact of their practices.
Moreover, the Commission may recall that at the height of the anti-apartheid movement, although a company’s operations in South Africa typically were not significant financial endeavors, these companies realized that, in principle, their small, often minute operations in South Africa were tacitly supporting the structure of apartheid. On principle, the American corporations began to divest, recognizing that despite the insignificance of each company’s South African operations in contrast to their entire business operations, each individual company’s activities in South Africa had a significant impact upon the South African community.
Therefore, under the relevance standard, the Commission must recognize that an "insignificant" corporate practice is extremely relevant to those who are impacted by the practice, and it should craft this rule accordingly, looking beyond the financial parameters of a company’s operations.
• Rule 14a-8(c)(7) -- Ordinary Business - Reversal of Cracker Barrel
Cracker Barrel
The Commission proposes to reverse the policy of Cracker Barrel which has effectively disenfranchised shareholders, rendering them without a voice to express their "social" concerns to management regarding certain employment issues. With a reversal, the Commission would reinstitute a substantive review of the issues sought to be excluded by corporate management. Each no-action letter would be reviewed on its own merits. Calvert supports the reversal of Cracker Barrel. 3
Nonetheless, we are concerned that despite the substantive, case-by-case analysis being re-employed when addressing possible issues of ordinary business, the policy underlying Cracker Barrel will remain intact. In fact, the Commission has stated that reversal of Cracker Barrel would not affect the Staff’s analysis of any other category of proposals under the exclusion, such as proposals on general business operations. 4
Proposed continuation of this policy is further demonstrated by the Commission’s cite to a prior no-action position underwhich a proposal requesting information on affirmative action and minority representation at the company was subjected to the ordinary business exclusion. 5 The Commission found the proposal to involve a request for detailed information on the composition of the company’s work force, employment practices, and selection of program content to be ordinary business. The Commission’s bright-line test of the "ordinary business exclusion" which has prohibited such issues from being included in a company’s proxy materials in the past will be continued into the future. Thus, it appears the only change to be expected under the reversal of Cracker Barrel is that each no-action letter request will be individually reviewed; but nonetheless, ultimately will be granted. The Commission should not delude the public by claiming to reverse Cracker Barrel, but in reality not changing its substantive position.
Along with the reversal, the Commission’s 1976 Interpretative Release should be re-implemented. The amended rules should allow "whether a company may exclude a proposal may not depend on whether the proposal could be characterized as involving some day-to-day business matter. Rather the proposal may be excluded only after the proposal is also found to raise no substantial policy considerations." 6
At a minimum, the Commission should consider the specific facts of each shareholder proposal, not rendering the claim mute based upon a predisposition favoring the autonomy of corporate management nor upon management’s wish to not disclose its employment practices. Although the proposed rules have done away with shareholder proposals addressing employment-related issues being prima facie eliminated from shareholder consideration, the focus should be on the nature of the proposal and whether it has effects that raise social policy concerns, rightly to be discussed by shareholders.
We ask that the Commission realize the damage that will be done by continuing the Cracker Barrel policy interpretation. This interpretation must be revised to reflect a true concern for shareholder democracy by allowing inclusion of employment-related proposals in a proxy statement when the issue is found to raise substantial policy considerations beyond the ordinary business of a company.
Definition of a Shareholder "Proposal"
The proposed rules purport to define a "proposal" as "a request that the company or its board of directors take an action." Thus, the Commission is proposing excluding from the shareholder process a proposal which "merely purport(s) to express shareholders' views." 7 We would argue that requests for additional information are just as vital to the shareholder proposal process. Shareholder interaction surrounding the request for disclosure serves as another avenue for communication and facilitates increased disclosure of information about which the shareholders have an interest.
In being an investment management firm which advocates "socially responsible investing," 8 Calvert often seeks informal discussions with management outside of the proxy process. However, despite the fact that Calvert infrequently resorts to the proxy process, 9 the existence of the current rules shows support for shareholder democracy and serves as a check on corporate management. The resulting dialogue that typically follows Calvert’s information gathering inquiries serves to inform Calvert of what possible issues might exist at the company, as well as to enhance the lines of communication between us as a shareholder and the company.
The Commission’s view would thwart even the benign information gathering process. Defining the proposal process to prima facie exclude information gathering requests effectively serves to lessen the voice of the shareholder who only seeks additional disclosure to gain a better understanding of the company’s practices, a purpose towards which the Commission claims to be striving. It would also be inconsistent with the current purpose of the proxy rules, which is "to provide and regulate a channel of communication among shareholders and public companies." 10 The gathering of relevant information, which is the cornerstone of the investment process, should be supported as an endeavor which expands the standard channels of communication (i.e., shareholder resolutions).
A rule crafted to allow shareholder access to corporate management creates the impetus for a company to disclose important matters to its shareholders. Further, without rules promoting the protection of shareholder interests, shareholders are effectively silenced from establishing a dialogue with other shareholders and corporate management about issues which may have a far greater magnitude beyond the corporate board room, extending into the community. Accordingly, the Commission should not discount the value and contribution that shareholder requests for additional disclosure add to the discussion, but rather, must recognize the value of such inquiries and the resultant disclosure.
• Revised Rule 14a-8(c)(10) -- Mootness
On its face, the proposed amendments to this exclusion appear to be well based, but are still susceptible to abuse. Exclusion of a proposal which addresses an issue that has already been "substantially implemented" by the company seems reasonable; however, the Commission must be careful that in interpreting "substantially implemented," a company not be allowed to rely solely upon its past actions. Rather, it should objectively consider whether the current corporate environment no longer benefits from these past actions.must objectively determine whether the action taken years before still impacts the current corporate environment. As social issues are process driven, if the effects of the implemented action are no longer evident and new concerns have arisen, we would argue that the proposal should not be excluded.
• Revised Rule 14a-8(c)(12) -- Re-submission Thresholds
The proposed rules seek to increase the minimal requirements for a shareholder to re-submit a proposal based upon the amount of support received for its prior submission. This action appears to be fair on its face, but in practice, this change creates a higher barrier for shareholders to surmount in order to present their concerns to corporate management.
Historically, a social issue develops over several years with the public slow to develop a full understanding of the issue. For example, divestment in South Africa had been demanded for several years before the public finally understood the travesties done under the apartheid regime and divested from companies stillpressured (through divestment) nonprogressive companies from doing business there. Therefore, in increasing re-submission thresholds, we question the Commission’s intent in offering shareholders this mechanism. As stated above, the nature of some important shareholder proposals was that they began as a grassroots effort. In increasing the re-submission requirements, the Commission would thwart these efforts.
Accordingly, we recommend that the Commission not increase the re-submission thresholds, but leave them at their current levels. In addition, the Commission should revise the rules so that the threshold is based upon the percentage of support received from actual votes received (excluding non-votes and those voted at management’s discretion). Thereby, the universe on which the percentage is based would recognize the actual votes of shareholders and therein, provide a "cleaner" number by which to analyze prior support of a proposal.
• New Rule -- Override Mechanism
Calvert approves of the proposed creation of a mechanism whereby a proposal (previously excluded under either the Relevance or Ordinary Business exclusions) would be included in the proxy if the proponent attains 3% shareholder support. In light of the Commission’s hesitance to show stronger support for shareholder democracy, it is good to see that at least the proponent of a proposal can override a company’s decision to exclude the proposal by garnering shareholder support.
However, we would posit that such an effort may be difficult on shareholders. Thus, at a minimum, a listing of the company’s existing shareholders should be provided by the company to the proponent from which to solicit the necessary support. Moreover, the 3% requirement must be lowered to make it more realistically attainable by shareholders (i.e., the average mid-size company has 96.5 million shares, 11 translating into a shareholder having to attain support from other shareholders owning no less than 2.9 million shares of such company; quite a daunting requirement for the average investor/shareholder).
• Revised Rule 14a-8(e) -- Staff Review of Company’s Statement
Currently, Rule 14a-8(e) allows shareholders to submit for Staff review a company's statement in its proxy materials issued in opposition to a shareholder proposal. Although the Commission states that not many shareholders utilize this review opportunity, we disagree that the review mechanism should be eliminated. As it is important for a shareholder resolution to be included in a company’s proxy materials, it is just as important for the proposal to be presented fairly in those materials. Shareholders need to have a disinterested party to whom it can take the company’s statement if it appears to contain false or misleading statements within the meaning of Rule 14a-9.
The availability of the Staff’s review of the company’s statement in the proxy materials is a necessary safeguard in the process. The admission that the Staff has found several companies’ statements to be faulty is reason enough why this review is necessary and should not be eliminated from the process.
• Suggested Additional Provisions
Although not directly falling under any existing or proposed rule, a counterpart to an effective shareholder proposal process should be to require companies to disclose in their proxy materials a listing of those shareholder proposals that have been omitted from the proxy for any reason. This listing would serve to inform shareholders of those issues which other shareholders have raised, and provides disclosure which should enable shareholders to better understand the practices and positions of the management of the company. Such listing could simply describe the proposal, the proponent, and the basis and rationale for the omission. In addition, a company seeking a no-action position from the Staff should be required to make an affirmative argument on the materiality of the imposition submitting the proposal would have on the company’s operations and what other items the company is putting on the proxy (such as compensation issues, etc.).
It is our understanding that some of the proposed amendments to the rules evolved in response to companies feeling that they were becoming overburdened by the amount of proposals they were receiving. We do not believe that "Corporate America" has become overburdened by shareholder proposals or is micro-managed by their shareholders. Neither do we buy into the argument that the cost of incorporating shareholder proposals into the proxy is financially onerous. Of the thousands of publicly-traded companies issuing voting securities in this country, only 184 companies received shareholder resolutions on "social" issues so far for 1997, 163 resolutions were received in 1996 and 154 in 1995. 12 Thus, it does not appear that shareholder proposals have been burdensome upon Corporate America. Further, it is hard to commiserate with these companies that at the same time, find adequate money and time to include those issues brought by management (i.e., compensation, benefits) in the proxy.
* * * *
Again, we applaud the Commission for its efforts, but we respectfully remind the Commission of its duty to protect the interests of shareholders and to realize that the current interpretation of ordinary business, as well as some of the other proposed rules, are not supportive of, but rather are stifling to shareholder democracy. The Commission has seized the opportunity to take thea first step towards making inroads in correctingto correct the shareholder proposal process. to address the needs of shareholders,However, it would be a missed opportunity if in re-crafting the rules, the Commission fails to recognize the demands of shareholder democracy at a point in time where the shareholder has begun to loudly voice its concerns about the management of its companies, thus seeking a dialogue with nd to fully support enhanced disclosure and creation of a dialogue between companies and their shareholders.
management only to be told by the company (and seconded by the Commission) that its voice does not matter.
As a mutual fund manager which seeks to dialogue with the management of its portfolio holdings for the betterment of its own shareholders, and for those in the community impacted by its operations, Calvert believes that the Commission must, as it has stated, "make a company's managers more responsive to the shareholders. That, in turn, could better align the interests of the company's management with that of shareholders, possibly resulting in an improvement in the company's operations and the market price for its shares." 13 We further agree with the Commission when it states the proxy rules should "provide(s) an avenue for communication between shareholders and companies, and among shareholders themselves." 14
Please feel free to contact either of us at (301) 951-4881 to discuss Calvert’s continuing concerns and recommendations for addressing these concerns.
Sincerely,
/s/ William M. Tartikoff /s/ Ivy Wafford Duke
William M. Tartikoff Ivy Wafford Duke
Senior Vice President and Assistant Counsel
General Counsel
bcc: Commissioner Laura Unger
Brian Lane (Division of Corporation Finance)
Former Commissioner Steven M.H. Wallman
Mitchel Foyer (Representative to Senator Sarbanes)
Andrew Lowenthal (Representative to Senator Dodd)
Helena Grannis (Representative to Senator D’Amato)
Michael Schroeder (The Wall Street Journal)