January 2, 1998

Jonathan G. Katz, Secretary

Securities and Exchange Commission

450 Fifth Street, NW

Washington, DC 20549

RE: Release No. 34-39093; File No. S7-25-97

Dear Mr. Katz:

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.

(I) Importance of the Shareholder Process

"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 Firmís 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

Created by the Existing Shareholder Process

The existing rules that govern the shareholder process create a healthy environment of dialogue between stockholders and managers in two important ways.

First, the current rules provide a direct channel of communication that allows shareholders to bring key issues to the attention of a corporation’s managers, directors and fellow shareholders. Filing a shareholder resolution often sparks a fruitful, ongoing discussion between shareholder proponents and management.

Second, the existence of the shareholder resolution process provides a powerful incentive for corporate managers to enter dialogues. Many issues never become resolutions because management, knowing that investors have access to this process, often agrees to discuss shareholders’ concerns proactively.

Dialogue benefits all parties. As long as management and shareholders are at the table together, a number of mutually beneficial solutions can be found. The climate of dialogue that the shareholder resolution process fosters is reasonable, responsible and creative – it helps find real solutions to real problems.

If the shareholder resolution process is seriously weakened, our healthy climate of dialogue will be destroyed. Without the incentive to dialogue provided by the shareholder resolution process, negotiations are likely to break down altogether. Co-op America urges the SEC to recognize that the existing rules create a healthy climate of dialogue between management and shareholders. We urge the SEC to preserve and strengthen, not weaken, the existing rules.

(C) Results of the Shareholder Process

Here at Co-op America, we’ve seen the success and power of the shareholder process firsthand. Through resolutions, shareholders, managers, corporations and society accrue a wide variety of significant benefits.

Environmental Accountability: The shareholder process was instrumental in encouraging corporate giants like General Motors to sign the CERES Principles for environmental responsibility. In addition to providing fundamental principles for environmental protection, the CERES commitment requires companies to prepare a public environmental report (similar to a financial report) outlining their environmental performance in quantifiable and comparative terms. This value-added information allows investors to truly understand the potential environmental risks – or rewards – of owning specific shares. This is a constructive market-based approach – rather than legislation or litigation – to solving environmental problems.

Because of their commitment to the CERES Principles, companies have included environmental measures in their employee performance evaluations, taken leadership roles in the debate on global warming, created new community safety procedures, encouraged suppliers to improve their environmental performance, and engaged in innovative research. These are the types of actions that motivate employees, attract consumers, and bring new products to market – creating the value-added dimensions for shareholders that the ICF Kaiser study highlighted.

Improved Workforce Productivity and Better Investor Relations: In the early 1990’s, the United States Trust Company of Boston filed a corporate governance resolution with Bristol Myers-Squibb about an executive compensation issue. The dialogue sparked by this resolution provided benefits for both managers and shareholders. Investors learned that Bristol Myers had created innovative employee benefits policies that could increase productivity and enhance the company’s reputation if they were better emphasized – and management agreed. The process may have begun with an adversarial tone, but through the dialogue sparked by a shareholder resolution, the investors learned more about the strengths of their investment and the management learned more about the value that interested investors can add. The result was improved workforce productivity and better investor relations.

These are only two examples from the long record of success that the shareholder resolution process has achieved. Co-op America encourages the SEC to take pride in the existing shareholder resolution process. We urge the SEC to improve, not weaken, the process.

(II) Visionaries and Gadflies:

Cost/Benefit Balance of the Shareholder Process

As a whole, the shareholder process protects shareholders’ financial interests, creates a healthy climate of dialogue and adds value to companies and society.

At any given moment, however, some might herald the proponents of a specific resolution as visionary, while others might see them as irritating gadflies. Some might view an issue as central to a company’s future; others might see it as tangential. Some issues might be seen as appropriate for the resolution process, while others consider them trivial.

Interestingly, all parties can be right. Sometimes gadflies are merely gadflies. But time often proves that those who were viewed as trouble-makers yesterday are hailed as important visionaries today. Likewise, what seem like tangential issues today can become of paramount importance tomorrow. Without a crystal ball it is difficult to judge the potential relevance of any emerging issue. It is critical, therefore, that the SEC protect the process and the unpredictable future benefits it brings.

Under the existing rules, both the number of resolutions and their cost are reasonable:

¨ Cost: The financial impact of the shareholder resolution process on a sizeable firm is minimal. An SEC study reports that it costs a company $ 36,603, on average, to address a shareholder resolution. [ "Proposed Rule: Amendments to Rules on Shareholder Proposals," U.S. Securities and Exchange commission. Release No. 34-39093; IC-22828; File No. S7-25-97; Section V.]

¨ Use: A small number of companies face shareholder resolutions in any given year. Over the past ten years, of the nation’s 1,500 largest companies, an average of 226 companies per year – only 15% -- faced votes on shareholder proposals. [ Social Investment Forum Foundation, "Shareholder Rights Analysis: The Impact of Proposed SEC Rules on the Resubmission of Shareholder Resolutions," December 10, 1997.]

Finally, under the existing rules, the shareholder process is experiencing little growth. A good way to measure the real growth of the shareholder process is to look at the number of new resolutions faced by companies each year. Over the past ten years (see table below):

¨ Corporate social responsibility resolutions have experienced no growth.

¨ Corporate governance resolutions experienced a period of growth between 1986 and 1989, but grew at less than 6% per year for the period 1989 – 1995.

Number of Resolutions That Come to a First Vote

(1986 – 1995)


Corporate Social Responsibility*




































*Includes virtually all corporate social responsibility resolutions that came to a first vote in this ten year period.

** Includes all corporate governance resolutions that come to a first vote at the nation’s largest 1,500 companies in this ten-year period.

Source: Data from the Investor Responsibility Research Center

It appears that the existing rules have effectively limited the growth of the shareholder resolution process. Fears that the process is growing "out of control" are not supported by the data.

Given the importance of the shareholder process, and given that the existing rules keep the process within reasonable cost, use and growth parameters, Co-op America concludes that there is no reason for the SEC to weaken the process. Co-op America urges the SEC to recognize that the current system is not broken, and that proposals that curtail access to the shareholder resolution process are not necessary.

(III) Co-op America’s Concerns and Recommendations

The SEC’s proposed rules, S7-25-97, create an obstacle course for shareholders that would allow companies to wear down, sidetrack or derail virtually any shareholder resolution. In short, the proposed rules would destroy the shareholder resolution process and must not go forward.

In particular, Co-op America submits the following recommendations on individual items:

(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.


Co-op America urges the SEC to:

¨ 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.

The shareholder resolution process is vital to the financial interests of shareholder-owners. The existing rules create a healthy climate of dialogue and allows important issues to come forward at reasonable cost.

Co-op America calls on the SEC to protect the rights of American shareholders by preserving and increasing access through the shareholder resolution process.

Thank you again for listening to our concerns. We look forward to an Adopting Release that reflects the SEC’s mission and well-deserved reputation as the protector of investors.

In cooperation,

Alisa Gravitz Elizabeth Elliott McGeveran

Executive Director Managing Director