ARCO Legal 515 South Flower Street Mailing Address: Box 2679 - T.A. Los Angeles, CA 90051 Telephone 213 486 2808 Diane A. Ward Senior Counsel - Securities & Finance November 24, 1997 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Attn.: Jonathan G. Katz, Secretary Re: Atlantic Richfield Company ("ARCO") Release No. 34-39093 ("the Release") File No. S7-25-97 Shareholder Proposal Reform Amendments Ladies and Gentlemen: On behalf of Atlantic Richfield Company ("ARCO" or the "Company"), set forth below are comments on the proposed changes to the shareholder proposal rule. We believe it is important that the Commission understand the corporate viewpoint and give it due consideration in its rulemaking process. We appreciate the time and attention you will be giving to our comments and observations. 1. Purpose of the Shareholder Proposal Rule The first issue to address is the purpose of the rule. In the Release the Commission states 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." The Commission requests registrants to consider "whether this is the proper purpose of the rule, and if so, what types of proposals are the most relevant and important." While we agree with the stated purpose of the rule, we believe that the best way to achieve this purpose is to limit the subject matter of the proposals. In our view that means to limit proposals to those that are directly relevant to the oversight of the company's business operations, the creation of shareholder wealth and the compensation of the directors and the five most highly compensated officers of the company. Our experience with our own shareholders has demonstrated that informal discussions are much more likely to foster communication and understanding of diverse points of view about complex social policy issues than receipt of ten identical shareholder proposals that are often poor copies and often incomplete. For example, two years ago ARCO received a proposal calling for the adoption of a Board policy regarding the sale of tobacco to minors. Our first response was to call up the proponent and offer to send management representatives to the proponent's office so that we could explain our existing policies. Once we were able to demonstrate that we in fact had policies in place that complied with the applicable laws having safeguards the proponent deemed sufficient, the proponent agreed to withdraw the proposal. This anecdote illustrates several points. For one thing, registrants are already subject to a myriad of Federal, state and local laws, many of which require public reporting. Another point is that a great deal of staff and management time is necessary to discharge our obligations under this rule. While inside counsel directs the proposal review process, the review process requires the input of a number of staff and management employees, including the five most highly compensated officers and the non-employee directors. For these reasons, we do not believe that management's proxy is the appropriate forum for public debate about significant social policy issues about which thoughtful women and men hold a wide range of viewpoints. As the Commission points out in the Release, "Rule 14a-8 is not the only avenue for communication, since a shareholder may undertake an independent proxy solicitation or may seek informal discussions with management or other shareholders outside the proxy process." To the extent the amended rules require registrants to include proposals that are economically insignificant to them, these rules will promote inefficiencies in the proxy process and increase costs for registrants. Accordingly, we urge the SEC to focus its efforts on encouraging meaningful shareholder proposals rather than fostering social and political debate in what we believe is an inappropriate forum. 2. Relevance Exclusion [Proposed Rule 14a- 8(c)(5)] We agree that the subjectivity of the "otherwise significantly related" test has not provided clear guidance to registrants or to proponents, and therefore should be eliminated. However, we strongly disagree with the purely economic standard as proposed. A single $10 million threshold applicable to all registrants, regardless of their total revenues, net income or market capitalization, seems to us to fly in the face of Commission's materiality test that forms the basis for most of its disclosure rules. We fear that this threshold would require Fortune 500 companies to include almost any proposal received, because these companies likely are involved in numerous insignificant and immaterial activities that nevertheless would be caught by this $10 million threshold. Forthreshold.For this reason we advocate retention of the 5% economic test currently contained in the rule. 3. Shareholder override [Proposed Rule 14a- 8(c)(5) and (c)(7)] We strongly urge the Commission to omit this proposed amendment altogether. Because we do not believe management's proxy is the appropriate forum for debating many social policy issues, it follows that shareholders should not have a back door through which they may be permitted to force registrants to include a proposal that was barred at the front door. This proposal would provide for an extraordinary and untested device about which we have very serious reservations. In the event the Commission determines to retain the override concept, we believe the appropriate threshold should be 5%, i.e., it should be consistent with the threshold for public reporting by a shareholder of its ownership of the registrant's stock. Under no circumstances do we believe a safe harbor should be added to Section 13(d), because we see a potential for abuse by shareholders. Adoption of a 5% test would obviate altogether any perceived need for such a safe harbor. In addition, if the Commission determines to retain the override concept at any percentage, it is essential that evidence of the necessary level of support be submitted with the proposal. Because of the staff and management time that must be spent in responding to each proposal, the registrant should have this information in determining its initial response to the proponent. In addition, each shareholder sponsoring an override endorsement should be required to hold a significant stake in theinthe company as a threshold requirement, such as an ownership level of $100,000 worth of stock and should be limited to one endorsement per proxy season. . 4. Cracker Barrel Reversal [Proposed Rule 14a-8(c)(7)] We strongly urge the Commission to uphold the Cracker Barrel "bright line" test, precisely for the reasons it was adopted in the first place. We believe the potential for shareholder interference in employment- related issues, because a proponent is able to tie them to some sort of social policy considerations, is inappropriate and should clearly be prohibited. In the event the Commission determines to reverse Cracker Barrel, we encourage the Commission to take steps to ensure the continued adherence to the fundamental principle that management is responsible for the conduct of the day to day operations and affairs of the company. We support the Commission's view that shareholder attempts to "micro manage" companies are inappropriate. We fear that a reversal of Cracker Barrel, without more, would send the wrong signal to shareholder activists. For these same reasons we urge that the proposed "plain English" wording of the "ordinary business" rule be adopted. The revised rule should include the words "if it deals with a matter relating to the conduct of the company's ordinary business operation." It should not include any list of examples, because such a list may have the effect of narrowing the scope of the exclusion. It should also include the proposed alternative parenthetical formulation, "(matters that should be left to the discretion of the company's managers because of their complexity, impracticability of shareholder participation or relative insignificance)." 5. Resubmission Thresholds [Proposed Rule 14a-8(i)(12)] We believe that our company, like many others, receives many proposals that are of little or no relevance to our business because they primarily are attempts to enforce a particular social policy rather than attempts to debate broad issues affecting the way the officers and directors manage the company. Accordingly, we believe the 6%, 15% and 30% thresholds proposed would be a significant improvement. However, we would advocate even higher initial thresholds, such as 10%, 20% and 30%. We also believe it would be appropriate and fair to require a "cooling off" period before a proposal could be reintroduced. 6. Discretionary Voting [Proposed Rule 14a- 4(c)] We do agree that the Commission should provide a clearer, more predictable framework for management's ability to exercise discretionary voting authority with respect to proposals submitted outside of the 14a-8 process. However, we find the proposed revision of Rule 14a-4 very troublesome. Our fear is that this amendment might have the unintended effect of creating two distinct regulatory schemes governing shareholder proposals. Moreover, we are concerned that under the proposed amendments proponents would have the flexibility to choose to ignore the restraints provided in Rule 14a-8. The amended provisions do not limit the number of proposals a single proponent may submit, do not impose a minimum share ownership requirement, do not impose a resubmission threshold requirement, and do not provide any limitations on the subject matter that may be presented. Finally, companies would have the burden of providing information to shareholders sufficient for them to make informed voting decisions. This task might prove impossible, depending on the coherence of the communication by the proponent to the company. Because we believe that this proposed amendment of Rule 14a-4 would eventually render meaningless Rule 14a-8, we do not think that this is the right resolution of the uncertainties surrounding the exercise of discretionary voting authority. 7. Other Proposed Modifications (a) Plain English format We applaud the question-and-answer format using Plain English for the new rules. (b) Minimum Ownership Requirement We do not believe the increase in the minimum ownership requirement from $1,000 to $2,000 is meaningful; if there is to be an increase, it should be a significant amount, such as $25,000. (c) Non Rule 14a-8 Proposals For the same reasons we have reservations about the other amendments to Rule 14a-4, we have reservations about including information in the proxy statement about deadlines for submitting non Rule 14a-8 proposals. (d) Elimination of Staff Review We support eliminating the mechanism for proponents to obtain staff review of companies' statements in opposition. (e) Proposed Language in Question 8 of Rule 14a-8 The proposed new language is useful clarification for many shareholders. We appreciate having this opportunity to offer our comments and suggestions concerning the proposed amendments. We would be available to answer any questions you may have about this or other related matters. Respectfully submitted, Diane A. Ward DAW:sd cc: The Honorable Arthur Levitt The Honorable Paul R. Carey The Honorable Isaac C. Hunt The Honorable Norman S. Johnson The Honorable Laura Unger Bruce G. Whitmore, General Counsel Atlantic Richfield Company