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U.S. Securities and Exchange Commission

Proposed Rule Supplement:
Concurrence of Commissioner Steven M.H. Wallman

The Commission today (Release No. S7-25-97) proposes a "package" of changes to the current shareholder proposal rules. For a number of years now, I have voiced concerns regarding the current process for submitting shareholder proposals. Not only does this process preclude valid shareholder debate on issues of significant importance to the companies in which shareholders invest, it also imposes burdens on corporations and on this Commission, such as requiring the Commission to engage in line-drawing for which it is ill-suited. A year ago I proposed changes to the rules to make them fairer and to eliminate much of that line-drawing. And I have repeatedly called for the reversal of Cracker Barrel -- independent of any other or more comprehensive reform.

I recognize and appreciate how difficult it is to craft a solution to the problems posed by these rules, and I commend the staff and my colleagues for their efforts today. As a practical matter, those who are active participants in the shareholder proposal process are small in number -- especially when compared with the number this Commission regulates or influences in other activities. But 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.

Because I believe so strongly in the benefits that accrue from responsible shareholders acting responsibly, I am concerned by this proposed "package." While I concur in the issuance of this release so that the debate may begin, I believe this proposal may not have sufficient benefits for the shareholder community to outweigh the detriments to that community and, therefore, may not be balanced. Moreover, I remain opposed as a matter of principle to the notion of holding the reversal of Cracker Barrel hostage to the success or failure of an overall reform effort. I urge my colleagues again to consider its immediate reversal.

I understand this is a complicated area involving many players with often divergent interests. Moreover, not all members of the corporate community, or the shareholder community, are affected in the same manner by either the current or the proposed process. Some companies have never received a shareholder proposal, while others receive a multitude on a yearly basis. Likewise, some proponents have no difficulty in placing their resolutions in the company’s proxy statement, while others face a yearly battle to avert exclusion.

Under today’s proposal, if it is adopted, the proponent community will obtain some benefit from the reversal, at least in form, of Cracker Barrel, as well as a lower economic standard under the relevance exclusion, and the availability for the first time of a shareholder override. From a practical perspective though, these benefits will primarily assist those proponents who currently have potential difficulty obtaining access to the proxy statement -- such as social groups sponsoring social policy proposals related to employment. Since most shareholder proposals are not so characterized, this package provides little for all other proponents.

And with regard to social proposals, it remains to be seen whether the proposed changes will result in any increased access to the proxy statement. While Cracker Barrel may be reversed in form if the proposals are adopted, it is unclear from the release whether it will be reversed in substance. Although social policy proposals related to employment will no longer be automatically excludable, neither will they be automatically included. 1 The return to subjective line-drawing by the staff, coupled with the shift to a purely economic test under the relevance exclusion, leaves open the possibility of continued attempts to exclude many social proposals (whether related to employment or not). 2 While theoretically proponents of social proposals could be helped by the availability of a shareholder override, the burdens of the currently proposed override -- a threshold set at the high level of 3% 3 combined with the practical difficulties of soliciting or doing a major publicity campaign 4 -- will constrain its practical effectiveness. 5

As to detriments, all members of the proponent community will be adversely impacted by the increased resubmission thresholds -- thresholds that, as proposed, will rise to the very high level of 30% in the third year -- without any practical benefits being provided in return to a large percentage of the proponents. Likewise, for those members of the proponent community who might use Rule 14a-4 in lieu of Rule 14a-8, the proposed tightening of Rule 14a-4 will be troublesome. And to the extent that any part of the package is changed to decrease the benefits or increase the burdens on the proponent community, the lack of balance may well become intolerable.

Although I have strong reservations about this package as a whole and about specific provisions, 6 I vote today to issue this release to ensure that debate will ensue on this matter. In its current form, I agree that the release can be used to frame the issues and I believe it is in the best interests of all of those involved in the shareholder proposal process for change to be commenced as soon as possible. My hope would be that any changes ultimately adopted will, in fact, properly balance the interests of companies and shareholders. 7

In any event, I must stress my dismay at the failure of this Commission to reverse Cracker Barrel. The continuation of Cracker Barrel over the past four years has been a terrible mistake -- not from a practical perspective but rather from a policy perspective. As I have stated previously, Cracker Barrel has had little practical effect -- most proponents of the types of proposals excludable under Cracker Barrel either succeed in having the companies include their proposals anyway, or otherwise have their concerns addressed and withdraw their proposals voluntarily. Nevertheless, Cracker Barrel is bad public policy because the wrong message is sent as to what the Commission believes is important. I fail to understand why its reversal can only be considered as part of any broader reform -- after all Cracker Barrel was imposed on the proponent community without any reforms for their benefit and has tilted the balance, as a matter of principle, over these last four years in an unacceptable manner.

Finally, stepping back from the issue of whether Cracker Barrel should be reversed only as part of overall reform or on its own, the practical realities are that this reform proposal, with or without Cracker Barrel, likely cannot be adopted in time for the 1998 proxy season. The specter of continuing Cracker Barrel for yet another proxy season should simply be unacceptable. I strongly urge my colleagues to do the right thing -- reverse Cracker Barrel now, in time for the 1998 proxy season.

I respectfully concur in the issuance of this release.


1 The release is unclear on whether new lines will be drawn and where those lines will fall.
2 Since the new proposed economic test under the relevance exclusion focuses solely on historical financial statement components, it also excludes shareholder proposals motivated by far more important possible material liabilities or prospective costs, such as boycotts, negative publicity or lawsuits. The result is that this exclusion could be even more restrictive than Cracker Barrel. As an example, if a company employs slave labor in a small plant in Asia, a proposal relating to that operation would be excludable under this test, notwithstanding the significant potential costs to the company and its shareholders from the company’s pursuing such a policy.
3 Three percent of the outstanding stock of large corporations involves dollar amounts in the billions; it is unclear why the support of such a large financial stake is necessary before a proposal may be placed on the ballot.
4 Moreover, the proposal does not require access to shareholder lists (although Rule 14a-7 theoretically may be useful) -- and may be dependent on adequate relief under Sections 13(d) and 14 of the Securities Exchange Act of 1934.
5 I am also concerned about the specter that the existence of the override -- a concept that I originally proposed, but in a different context, and that I still independently support -- will be used as a rationale for the staff’s engaging in overly broad interpretations of the exclusions under Rule 14a-8 on the grounds that, if shareholders want the resolutions included, they can avail themselves of the override.
6 I also am concerned about the extent of the reliance on the Division’s Questionnaire as a basis for today’s proposals given the failure to use scientific sampling in both its design and its distribution.
7 As an additional goal, it would be worthwhile to reduce as much as possible the staff’s role as line-drawers. One alternative that could accomplish this goal would be to permit all resolutions to be included subject to whatever exclusions the states wished to impose as a matter of internal corporate affairs -- and the release asks questions about this approach. I suspect that both companies and shareholders will find this option to be impracticable. If they do not, I believe the Commission should give it more thought.