Securities and Exchange Commission
On behalf of Co-op America, we submit these comments regarding the Securities and Exchange Commission’s (SEC) proposed amendments to the rules governing the shareholder proposal process, File No. S7-25-98.
Co-op America is a national nonprofit consumer education organization providing Americans with information to shape a better future through their purchasing and investing power. We also help businesses become more socially and environmentally responsible, while increasing their profitability and competitiveness in the global economy. Over 50,000 individuals and 2,000 businesses belong to our organization.
Co-op America has been the leading public educator on socially responsible investing for 15 years. Social investing is one of the key tools for advancing the interrelated goals of corporate responsibility and profitability. Our primer, The Handbook for Socially Responsible Investors, introduces individual investors to social investing including the shareholder resolution process, and has helped over 500,000 Americans become involved in social investing. Our detailed educational reports for institutional investors have increased the participation of large investors in socially responsible investing. It is from our experience in the social investment community that Co-op America comments on the SEC’s proposed amendments to the rules governing the shareholder proposal process.
After a careful review of the SEC’s proposed amendments, Co-op America strongly urges the SEC to issue an adopting release that would:
(1) Reverse Cracker Barrel fully without any language or footnotes that narrow the reversal.
(2) Include an override provision.
(3) Reject the remaining package of proposed rules and allow the existing rules to continue governing the shareholder resolution process.
Co-op America’s bottom line is that shareholders’ access to the process should be improved, not seriously undermined, as would happen if the proposed rules were implemented. We urge the SEC to ensure all changes improve shareholder access and protect shareholders’ rights. Congress asked for greater access for shareholders in the National Securities Markets Improvement Act of 1996. The SEC’s overall mission also mandates a protective course. Most important, the SEC has a well-deserved reputation for protecting the rights and interests of all shareholders. The investment community recognizes this important role -- Chairman Levitt recently won the prestigious Equities Achiever award in recognition of his leadership on behalf of investor rights. Co-op America simply asks that the SEC not go forward with this package of proposed rules that would destroy its good reputation; we ask that the SEC uphold its mandate, mission and reputation on behalf of all investors.
Although Co-op America represents socially responsible investors and businesses, we are not alone in our views on this issue. We are attaching a piece from Business Week and a column from the Boston Globe to give a sense of the broad base of concern over the proposed rules.
Before proceeding with our detailed comments, we want to thank the Commission, its staff and advisers for their willingness to listen carefully to the concerns raised by Co-op America and others.
In addition, we have read with interest the December 23, 1997 comment letter jointly submitted by Harvey Goldschmid and Ira Millstein. We agree with the recommendations that they have made except for the exclusion of the override. We would enthusiastically support their recommendations if the override were included. We would also like to thank them for their thoughtful approach to producing this letter.
What follows are Co-op America’s comments on the SEC’s rules as proposed in S7-25-97. We have organized our comments into three sections: (I) Importance of the Shareholder Process; (II) Visionaries and Gadflies: Cost/Benefit Balance of the Shareholder Process, and
(III) Co-op America’s Concerns and Recommendations.
"There seems to be a growing recognition that environmental and many other workplace issues are really converging with traditional business issues. Companies that manage their environmental obligations well, are more than likely managing other obligations well and are operating with greater efficiency and, therefore, are better financial performers and have a much brighter future in terms of sustaining those desired levels of growth." [ "Environmental Innovators," Morning Edition , National Public Radio. December 19, 1997.] -- Linda Descano, Vice President Salomon Smith Barney Investment FirmThe SEC’s proposed rules would destroy the shareholder process by severely limiting the number of first-time resolutions and by drastically reducing the number of resolutions that could be resubmitted.
As stockholders and owners of America’s corporations, shareholders have both a right and a responsibility to take an interest in performance, policies and practices. The shareholder resolution process provides the formal channel of communication between shareholders and management on such important corporate matters.
This section explores the importance of the shareholder resolution process: (A) the financial stake; (B) the process’ healthy climate of dialogue; and (C) the impressive results of the existing process.
(A) Owners’ Financial Stake in the Shareholder Process
Shareholder resolutions are important tools for protecting shareholders' financial interests in a company. The shareholder process is also an important marketplace mechanism for promoting corporate accountability and corporate responsibility.
These financial, accountability and responsibility goals are linked – shareholders suffer when corporations fail to address their social, environmental or corporate governance problems. For example, the failure of Texaco’s management to deal with workplace discrimination cost shareholder-owners over $150 million to settle the resulting lawsuit. Companies such as Home Depot, Shoneys, and Denny’s recently have been forced to pay hundreds of millions of dollars in response to lawsuits over discrimination and employment. Ten years after the Valdez accident, Exxon and its shareholders continue to pay for the company’s environmental negligence.
Conversely, forward-looking companies that find innovative solutions to social, environmental and corporate governance problems are gaining competitive advantages. A recent ICF Kaiser study found that excellent environmental management added 5% to shareholder value over companies that failed to innovate. [ Feldman, Stanley J., Peter A. Soyka, and Paul Ameer. "Does Improving a Firm’s Environmental Management System and Environmental Performance Result in A Higher Stock Price?" ICF Kaiser International, Inc., 1996.] Three factors contributed to this value-added for shareholders. First, the innovative companies improved profitability by avoiding environmental risks, improving efficiency and reducing waste. Second, the innovative companies found greater market acceptance for their products. Third, the environmental innovators learned new management techniques that translated into better management in other business areas.Clearly, shareholders have an enormous financial stake in avoiding the consequences of poorly managed social, environmental and corporate governance problems – and in reaping the rewards of managing these issues well. Co-op America asks the SEC to recognize the financial benefits of the shareholder resolution process. We urge the SEC to protect and enhance, not weaken, shareholder rights and access. (B) Climate of Dialogue
(1) Resubmission Thresholds (c)(12): The proposal would more than double the votes needed to resubmit shareholder proposals, from the current 3% after the first year, 6% after the second year, and 10% after the third year, to levels of 6%, 15% and 30%, respectively.
In the Social Investment Forum Foundation’s analysis of the resubmission thresholds, which was co-authored by Co-op America, we found that these proposed resubmission thresholds alone would virtually destroy the shareholder process. [ Ibid. pp.1-2.] This study backtested what would have happened had the proposed resubmission thresholds been in place from 1986-1995.
¨ Overall, 80% of all shareholder resolutions would not have been eligible for resubmission after year three under the new rules, compared to 21% under the current rules. This is a quadrupling of the failure rate for shareholder resubmissions (see figure above).
¨ Of all corporate governance resolutions, 70% would have failed under the proposed resubmission rules after year three, compared to only 12% under current rules. In other words, the failure rate for corporate governance resolutions would have increased six-fold under the SEC’s proposed rules.
¨ Corporate social responsibility resolutions would have been totally destroyed; 99% would have failed after year three, compared to 41% under current rules. After year two, 91% would have failed, compared to 28% under the current rules.
Co-op America recommends that the SEC maintain the existing resubmission thresholds of 3%, 6% and 10%.
(2) Personal Grievance (c)(4): The proposal would withdraw from enforcing its shareholder proposal rule if companies claim a shareholder proponent has a personal grievance. Shareholders would be forced to bear the cost and delay of litigation as the price of proxy access. Co-op America recommends that the SEC keep the existing (c)(4) provisions and continue enforcing shareholders’ rights and access to the proxy.
(3) The Relevance Test (c)(5): The proposal would eliminate the significant policy issue portion of the relevance test that allows issues like child labor and business practices in Northern Ireland to be raised through shareholder resolutions. Co-op America recommends that the SEC continue its current two-pronged relevance test, allowing the test for significant relevance.
(4) Reversal of Cracker Barrel (c)(7): Though the SEC claims it is reversing its controversial 1992 Cracker Barrel decision, the footnotes and explanatory language in the proposed rule appear to radically narrow the reversal. Co-op America recommends that Cracker Barrel be fully reversed, with no countervailing footnotes or language.
(5) Override (c)(5) and (c)(7): The proposal would allow any resolutions submitted with the support of 3% of a company’s shareholders to appear on the proxy. While the 3% level is too high in large cap companies, the principle of an override is vital to improving shareholder access to the proxy process. This is the only provision in the SEC’s proposed rules that would improve access to the process, as mandated by Congress. Co-op America recommends that the Adopting Release include an override.
(6) Shareholder-Funded Proposals (Rule 14(a)(4)): The proposal would allow management to seek proxies without giving shareholders the opportunity to vote for proposals that are being brought in a solicitation paid for by other shareholders. Co-op America recommends that the SEC continue requiring persons soliciting proxies to give all shareholders the opportunity to vote for or against all items that will be raised at the annual meeting.
(7) Review of Company Statements (Rule 14(a)(8)(e)): Under the proposal, the SEC would no longer review management statements in opposition to shareholder proposals for false and misleading content. This independent oversight by the SEC is important and virtually cost-free. Co-op America recommends that it be maintained.
¨ Restore shareholder rights by completely and unambiguously reversing Cracker Barrel;
¨ Protect shareholder rights by rejecting the proposed provisions that weaken the shareholder resolution process, and;
¨ Improve shareholder access by approving an override.