January 2, 1998
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
RE: Release No. 34-39093
File No. S7-25-97
On behalf of the Social Investment Forum 1 ("Forum"), we appreciate the opportunity to comment on the Securities and Exchange Commissions ("Commission" or "SEC") proposed amendments to the rules governing shareholder proposals (File No. S7-25-97). The Forum urges the Commission to reject this package of proposed rules. Tilted to big business interests intent on silencing concerned investors, we believe the various provisions of the package would work to dramatically weaken shareholder rights in America. We strongly recommend that the Commission reject the package of proposed rules and instead simply reverse the 1992 Cracker Barrel decision and review employment related resolutions on a case-by-case basis. We also recommend that the Commission take an important step toward improving shareholder accessibility by modifying and including an override provision in the Adopting Release.
Before detailing the Forums opposition to the proposed rules, I want to express our thanks to the Commission, its staff and advisers for their willingness to listen carefully to the concerns raised by the Forum and others. We are particularly appreciative of the open process in which we have been encouraged to express our views, submit empirical data supporting our position, and engage in debate about the effect of the rule proposals. It is our hope that what emerges from this process reflects this Commissions well deserved reputation for protecting the rights and interests of all shareholders.
We have had an opportunity to review the December 23, 1997 comment letter
jointly submitted by Harvey Goldschmidt and Ira Milstein. We agree with the general direction of their comments. We would enthusiastically support their position but for one issue where we disagree: the proposed override. Mr. Goldschmidt and Mr. Milstein suggest that Question 10, which would provide for an override mechanism, be deleted in its entirety. The Social Investment Forum believes that, with modification, the override provision could be an important tool to improve shareholder access as ordered by Congress in the National Securities Markets Improvements Act of 1996. Other than the issue of the override, we agree with the comments submitted by Mr. Goldschmidt and Mr. Milstein and commend them for their efforts.
Shareholder resolutions are the primary channel of communication between a companys stockholders and management. Former SEC Commissioner Steven Wallman explained the importance of the shareholder resolution process for both parties: 2
"... the practical impact of what can be accomplished through shareholders appropriately engaged in their corporations affairs is enormous. Part of what makes our economy strong and our corporations successful is our system of active shareholders engaged in debate over matters of concern. And those matters consistently have included issues relating to corporate governance, workplace practices and social issues."
It is our experience that the shareholder resolution process plays a crucial role in adding value to companies in two important ways. First, it plays a direct role by bringing key issues to the attention of a corporations directors, managers and other stockholders. Second, it plays an indirect, but perhaps more important role, by fostering a healthy climate for dialogue among investors and management. Knowing that shareholders can raise issues through the shareholder resolution process, companies are often more willing to engage in discussion with shareholders, thereby making many resolutions unnecessary. Rendering the resolution process as all but meaningless, as our analysis shows the above referenced proposed rules would do, it is likely that management will be less willing to engage in the kind of dialogue that has created many very positive outcomes over the years.
Recognizing the value of shareholder involvement in the companies which they own, Congress, in the National Securities Markets Improvements Act of 1996, called upon the SEC to improve shareholder access to proxy statements. 3 However, rather than opening up the process, the Commission has proposed a package of rules that move in the opposite direction by linking the Cracker Barrel repeal to broader changes that would choke off shareholder access to the proxy process. Indeed, the SEC staff plan would erode the core notion of "shareholder democracy," which is that people who own shares of a company may bring valid concerns before the corporations directors and fellow shareholders.
If it had been in place over the last two decades, the insidious effects of this package would have made it virtually impossible to sustain critical shareholder advocacy campaigns on issues such as apartheid in South Africa, the sale of tobacco to American youths, environmental degradation and the use of sweatshop labor. In essence, with these proposed rule changes, the SEC staff has cobbled together an obstacle course of impediments that would allow big business to wear down, sidetrack or derail virtually any shareholder resolution.
We should be clear about what types of shareholder resolutions will be adversely impacted by the proposed rules. Although some proponents of the rules have justified them as a surgical approach to restraining corporate social responsibility resolutions, the rules will have an equally devastating effect on corporate governance resolutions.
The Forum has serious concerns that the various provisions of the SEC plan would be exploited in a systematic fashion by corporate managers to shut down shareholder actions. Among our key objections to the proposed rules are the following:
Resubmission thresholds 14a-8(c)(12). The current percentage of votes required for resubmission would be boosted dramatically, going from 3, 6 and 10 percent over three years to 6, 14 and 30 percent over the same time period.
Personal grievance exclusion 14a-8(c)(4). This proposal would allow shareholder resolutions to be excluded if the corporation claims it advances a personal claim or "grievance." Under current rules, the SEC makes this determination.
Relevance test 14a-8(c)(5). Would eliminate the "otherwise significantly related" portion of the relevance test in favor of a purely economic standard.
In addition to these three key provisions, we are seriously concerned about other sections of the SEC proposal, including the language involving the reversal of the controversial Cracker Barrel decision. Although the Forum strongly supports reversing Cracker Barrel, we are concerned that (1) the footnotes and explanatory language appear to radically narrow the reversal; and (2) that shareholders not be forced to give up other important rights in exchange for the a reversal. If the Commission erred in its Cracker Barrel decision, its reversal should not be held hostage to a package of broader and unacceptable rule changes.
The Forum is highly supportive of the Commissions proposed "override" mechanism, a provision of the proposed rules package which would allow a resolution to be put in front of shareholders if the owners of 3 percent of all outstanding shares agree to support it. While we think there is merit to this automatic override provision, however, a substantially lower threshold for automatic consideration would be necessary to make it more than a theoretical benefit.
In summary, the Social Investment Forum urges the Commission to reject this sweeping package of changes and instead simply to reverse the Cracker Barrel decision now, in time for the 1998 proxy season. We also urge the Commission to develop and institute a practical, workable override mechanism.
THE SHAREHOLDER PROCESS
The notion that shareholders own the companies in which they hold stock is central to the concept of publicly-traded companies in America. As owners of the company, shareholders have both a right and a responsibility to take an interest in the companys performance, policies and practices. Every proxy season, the management of some publicly-traded companies are publicly held accountable by shareholder resolutions that focus on traditional corporate governance and corporate social responsibility questions. Shareholders who exercise their right to use the resolution process typically urge corporate management to choose policies and practices that will enhance the well-being of all the companys stockholders and improve the bottom line and reputation of the company over time. This process provides a formal communication channel from shareholders to management on important matters.
Traditionally, analysts have classified shareholder resolutions into two categories, corporate governance and corporate social responsibility. Corporate governance resolutions address issues such as confidential voting, board of directors qualifications, compensation of directors and executives and board composition. Corporate social responsibility resolutions address issues such as company policies and practices on the environment, health and safety, race and gender, tobacco, sweatshops and other human rights issues.
Many issues never become shareholder proposals because management, knowing that investors have access to the shareholder resolution process, often agrees to discuss issues in order to avoid a resolution. Even when shareholders
decide to file a resolution, they often withdraw it when productive discussions with management commence. Filing a shareholder resolution often sparks a productive dialogue between shareholders and management.
When companies fail to address their social, environmental and corporate governance issues, shareholders often pay the price. For example, the failure of Texacos management to deal with workplace discrimination cost shareholders over $150 million to settle a lawsuit. Likewise, companies such as Home Depot, Shoneys, and Dennys recently have been forced to pay hundreds of millions of dollars in response to lawsuits over discrimination and employment. Ten years later, Exxon and its shareholders still are paying the price for the companys environmental negligence from the Valdez incident.
The bottom-line is that a healthy shareholder process is integral to the democratic free market system. It is a market-based approach preferable to the alternatives of legislation or litigation.
COMMENTS ON SPECIFIC ISSUES RAISED IN THE SEC RELEASE
This section will detail the Forums position on key provisions contained in the SEC Release. Our comments have been organized in the following manner: (A) a discussion of the key rule changes opposed by the Forum; (B) support for an immediate and complete reversal of Cracker Barrel; and (C) inclusion of a modified automatic override provision.
A. Key Rule Changes Opposed by the Forum
Shareholder rights would suffer a fatal blow under the rule proposals that are the subject of this comment letter. The balance of this section will discuss in detail how the major elements of the proposed rules will work to cripple shareholder democracy, including (1) resubmission thresholds; (2) the relevance test; and (3) the personal grievance exclusion.
(1) Resubmission Thresholds 14a-8(c)(12)
A study 4 released on December 10, 1997 by the Social Investment Forum and its Foundation shows just how devastating the proposed rules would be. The study focused on the resubmission threshold because it is the only element of the proposed rules that could be quantitatively tested within the comment period.
Concerned about the lack of data on the likely impact of the proposals, the Forum "back tested" the rules on 3,716 shareholder resolutions submitted from 1986 to 1995. The key findings were as follows:
The proposed SEC rules would kill four out of five shareholder resolutions of all types by the third year. Far from expanding access to the shareholder process, the pending SEC rules would render it almost meaningless. No fewer than 80% of all shareholder resolutions would be ineligible for resubmission after the third year under the proposed rules, compared to 21% under the current rules.
The proposed SEC rules would wipe out 70% of traditional corporate governance resolutions. This finding was unexpected. Supporters of the SEC proposals have claimed the new rules will have little impact on the consideration of corporate governance resolutions, such as those dealing with executive pay, board independence, and outside financial audits. However, 70% of traditional corporate governance resolutions would be ineligible for resubmission after the third year under the proposed rules, compared to only 12% under the status quo.
The proposed SEC rules would effectively bar all corporate social responsibility resolutions. The Forums analysis reveals that the rules would destroy 99% of corporate social responsibility resolutions, rendering them ineligible for resubmission after the third year, compared to only 41% under the existing rules. After the second year, 91% of corporate social responsibility resolutions would be ineligible for resubmission, compared with only 28% under the current rules.
The proposed SEC rules would have made it impossible for shareholders to be educated on issues such as apartheid in South Africa or the environment. Shareholder resolutions focusing on issues around which a mainstream consensus eventually emerges would be killed in their cradle under the proposed SEC rules. For example, votes for first-year resolutions regarding South Africa divestment averaged 4% in 1982, whereas the average jumped to 13% by 1991. A more current example -- resolutions dealing with the environment -- would be wiped out in every single case (100%), under the Commissions proposed higher threshold for resubmission after the third year.
With the third and often second year "kill" rates on resubmissions so high, the shareholder resolution process would effectively be destroyed, and so would the healthy climate of dialogue which surrounds the process. Companies could easily refuse to dialogue with concerned shareholders, knowing that they need only wait a year or two for issues to disappear.
The Forum recommends deleting the proposed amendment which would raise the existing resubmission thresholds and that the Commission retain the resubmission levels in the existing Rule 14a- 8(c)(12).
(2) Relevance Test 14a-8(c)(5)
Currently, companies can exclude shareholder resolutions if the operations in question account for less than 5% of a companys assets and earnings ... unless the issue at stake is "otherwise significantly related to the company." In proposing to switch to a purely economic standard of $10 million of annual revenue for large companies and 3% of revenues or assets for smaller companies, the SEC staff proposes to create a loophole under which a company could kill shareholder resolutions which cannot be easily quantified in economic terms.
If such a provision had been in effect in recent years, the anti-apartheid divestment movement, opposition to tobacco sales to children, and proposals concerning child labor and fair employment in Northern Ireland almost certainly would have been ruled out, particularly early on before hard economic data were available. Further, the new provision would likely create a perverse incentive to "outsource" corporate misconduct, such as exploiting sweatshop labor. Corporations conceivably could position themselves beyond the reach of shareholder resolutions, so long as they carried out their misconduct through vendors, subcontractors and other supposedly arms-length relationships. As the recent problems at Dennys, Home Depot and Texaco illustrate, even a small amount of corporate misconduct can have enormous ramifications to a companys reputation and the financial bottom line.
The Forum recommends that the proposed text which would narrow the "relevance" exclusion to solely an economic test be deleted. Instead, the Commission should maintain the existing language of current Rule 14a-8(c)(5). The Forum further recommends that the Commission continue to apply the Rule as it now does in cases where an item that otherwise would be excluded by the 5% test is nonetheless included if "otherwise significantly related" to the companys business.
(3) Personal Grievance Exclusion 12a-8(c)(4)
The Forum is deeply concerned about the proposed rule change that would allow resolutions to be excluded if the corporation claims it is intended to advance a personal claim or "grievance." Under current rules, that decision is in the objective hands of the SEC. Under the proposal, the SEC has the option to bounce the most complicated claims back to the company, allowing the company to unilaterally omit the shareholder resolution in question. This dramatic and unwarranted increase in corporate ability to erase shareholder resolutions could function as a death sentence for resolutions submitted by unions, religious groups, socially concerned investor groups and other owners of corporate America. Companies already invoke the existing "grievance" provision in their efforts to block legitimate shareholder resolutions. Under the Commissions proposal, big business would be emboldened to do so more freely. Shareholders would be forced to take their concerns to court and engage in a fight that would involve entirely uneven legal resources.
The Forum recommends that the Commission continue to fulfill its role as an arbiter and make determinations as to the propriety of all exclusions. If the Commission believes this to be an overly time consuming task in the context of limited resources, the solution is to err on the side of shareholder access instead of restriction. If in doubt, let the resolution go forward. In this way, shareholder access to the process will increase and, over time, the number of corporate challenges will be reduced as management learns that unless a proposed resolution is clearly inappropriate, it will be allowed onto the ballot.
B. Immediate and Complete Reversal of Cracker Barrel Urged
The Forum strongly agrees with the SEC that Cracker Barrel should be reversed.
The Commissions 1992 Cracker Barrel decision made it difficult for concerned shareholders to advance resolutions on employment issues, such as equal- employment opportunity. Under the pending package of amendments, the SEC
staff proposes to overturn its earlier decision (but only if shareholders agree to accept other onerous restrictions on the filing of proxy resolutions).
In effect, the SEC staff proposes that the Commission reverse itself and do the right thing on Cracker Barrel and then do a number of things to considerably restrict the ability of shareholders to work for higher levels of corporate profitability and responsibility. It has been an open-and-shut case for half a decade now that Cracker Barrel was a serious mistake on the part of the Commission and that it should be reversed. Given that there is no longer any disagreement on Cracker Barrel, it should be reversed immediately.
We have raised serious concerns about the Commissions actual objective with respect to Cracker Barrel because the footnotes and explanatory language are not consistent with a full reversal of the decision. It is our understanding that the Commission does intend to reverse Cracker Barrel. As such, the Adopting Release should clearly indicate that, in general, discrimination and affirmative action proposals will not be considered "ordinary business" and, therefore, will be proper for inclusion in a companys proxy statement. Further, the Adopting Release should clarify that as to other matters in employment and other areas, the Commission would return to a case-by-case approach.
(C) Inclusion and Modification of the "Override" Provision Recommended
While we are intrigued by the concept of an automatic override provision, a substantially lower threshold for automatic consideration would be necessary to make it useful. It would be of little value if the "override" provision under which a resolution could be put in front of shareholders required the support of 3% of all outstanding shares. Even a threshold of just one-quarter of 1 percent (0.25%) would require an average of $80 million to put a resolution on the ballot of a large firm; 3% often would require lining up $1 billion in shares.
The Forum would consider any final rule not including an override provision to be seriously flawed. We urge its inclusion.
As more and more Americans invest for their future, the interests of smaller investors becomes increasingly important. These proposed rules run contrary to the mission of the Commission to protect investors and should be rejected. Surveys now show that almost one in two (43%) Americans own stock directly or
indirectly. For the millions of shareholders-owners of corporate America concerned about bottom-line issues such as excessive CEO compensation, discrimination on the job, unresponsive management shielded by overly cozy boards of directors, and the use of sweatshop labor, this package of proposed rule changes would be crippling. Americans understand instinctively that if corporations dont clean up their acts, it is the shareholders who suffer when the companys stock sags or a multi-billion-dollar lawsuit echoes those already filed against such firms as Dennys, Texaco and Phillip Morris.
In closing, the Social Investment Forum would like to express our sincere appreciation for the open process in which we have been encouraged to share our views with you. We look forward to a revised rule proposal that more closely reflects the Commissions well-deserved reputation as the champion of the individual investor.
Steven J. Schueth
Chair and President, Social Investment Forum
-- The Social Investment Forum is a national non-profit membership organization dedicated to promoting the concept, practice and growth of socially and environmentally responsible investing. The Forumís membership includes over 400 social investment practitioners and institutions, including financial advisors, analysts, portfolio managers, banks, mutual funds, researchers, foundations, community development organizations and public educators.
-- "Report on Shareholder Proposals Under Section 510(b) of the National Securities Markets Improvement Act of 1996," U.S. Securities and Exchange Commission, Concurrence of Commissioner Steven M.H. Wallman, September 18, 1997.
-- See Section 510(b) of the Act which requires the SEC to study "(A) whether shareholder access to proxy statements pursuant to section 14 of the Securities Exchange Act of 1934 has been impaired by recent statutory, judicial, or regulatory changes; and (B) the ability of shareholders to have proposals relating to corporate practices and social issues included as part of proxy statements ..."
-- Social Investment Forum Foundation, "Shareholder Rights Analysis: The Impact of Proposed SEC Rules on the Resubmission of Shareholder Resolutions," December 10, 1997. On December 15, 1997, the Forum requested that the study be made part of the official comment file for this Release.