Communications Workers of America, AFL-CIO
October 27, 2003
Mr. Jonathan G. Katz, Secretary
Dear Mr. Katz:
Re: NASD Rules 4200 and 4350 on Director and Board Independence Listing Standards; SEC Release No. 34-47516; File No. SR-NASD-2002-141
I am writing on behalf of the Communications Workers of America, AFL-CIO, which represents 750,000 participants and beneficiaries of pension funds with assets in excess of $500 billion that are invested in companies listed on our national exchanges. I am writing today to comment on the board independence listing standards proposed by the National Association of Securities Dealers (the "NASD") as described in SEC Release No. 34-47516. In particular, I am writing to express concern about a particular provision of the proposed amendments to NASD Rule 4350 regarding the independent nomination of directors which grants exemption to the proposed rules significant enough in my view to undermine the spirit and intent of the proposed reforms.
Independent director nomination is central to good corporate governance and current reforms. Equal access to the proxy is a current example of a major reform the Securities and Exchange Commission (the "SEC") has undertaken in this area. A nominating committee comprised solely of independent directors is consistent with the view of many institutional investors and other corporate governance advocates including the Council of Institutional Investors, Institutional Shareholder Services, CalPERS, TIAA-CREF, the Conference Board, and the NACD Blue Ribbon Commission on Director Professionalism.
The NASD's rationale for enhancing the independent director oversight of director nominations is that "Independent director oversight of nominations enhances investor confidence in the selection of well-qualified director nominees, as well as independent nominees as required by the Rules." The proposed enhancements are contained in NASD Rule 4350(c)(4)(A) relating to the independent approval of director nominations. If adopted, the nomination of company directors must be determined either by: (I) a majority of the independent directors, or (II) a nominations committee comprised solely of independent directors. However, proposed Rule 4350(c)(4)(C) creates a significantly large exemption to this requirement. It would permit a person who had 20 percent economic or voting interest in the company to serve on the Nominating Committee even if they failed the independence tests.
Directors who control more than 20 percent of total voting power already have significant influence over director elections and need not exert undue influence over the nomination process. In these situations, an independent nominating committee is even more crucial to protecting the interests of the "outside" public shareholders.
The proposed New York Stock Exchange (the "NYSE") listing standards do not contain a similar exemption. Both the proposed NASD and NYSE rules exempt "controlled corporations," i.e., a company where one person or entity has 50 percent or more economic or voting power, from independence rules. However, the NASD proposal creates a greater exemption to the rules by lowering the threshold to 20 percent of voting power for independent nomination.
The NASD standard should maintain parity with the NYSE on this important standard as the SEC has attempted to achieve in the definition of independence between the exchanges. A stock exchange should not seek to gain a competitive advantage over another on the basis of less stringent corporate governance listing standards. At minimum, if the exemption should remain in the standards, it should be applied to directors who own more than 20 percent of the total outstanding equity interest, not total outstanding voting power.
Shareholders of several large, highly capitalized public companies may be deprived of an independent nominating process if the rules are adopted as proposed. The Investor Responsibility Research Center found 12 percent of the 2000 companies in their research universe had dual-class stocks with unequal voting rights. Several widely held large-cap companies have controlling families that retain a voting power greater than their economic ownership in the company. Comcast Corp., Tyson Foods Inc., Washington Post Co., Dillard's Inc., Adolph Coors Co., Estée Lauder Inc., and Dow Jones & Co., all have dual-class stock with unequal voting rights.
Dual-class stock with unequal voting rights undermine the "one-share one-vote" principle and are opposed by institutional investors and corporate governance advocates. Shareholders recently approved proposals to eliminate dual-class stock at Reader's Digest Association, and Fairchild Semiconductor International.
We are concerned that the exemption contained in the proposed rules would send a wrong signal to issuer companies and may have the adverse effect of encouraging them to maintain or establish dual-class stock as a means to control both the director nomination and election process. Comcast Corp., for example, has already indicated their willingness to rely on the exemption contained in the proposed NASD rules to ensure that company CEO Brian Roberts retains his undue influence over the nomination process as Chairman of the Nominating Committee; that job is guaranteed to him under the terms of the merger agreement with AT&T Broadband. Attached is a letter from the law firm of Davis Polk & Wardell to that effect.
With a market capitalization in excess of $70 billion, Comcast (a NASDAQ company) may be the largest and most widely-owned public company with dual-class stock. Mr. Roberts controls a non-diluteable one-third of the total voting power despite holding less than 2.2 percent of Comcast's total market capitalization. Mr. Roberts' views on director nominations are already well protected by his disproportionate voting power. In this instance, an independent nominating committee is particularly crucial to protect the interests of outside investors in light of the many anti-shareholder provisions adopted by Comcast as part of its merger with AT&T Broadband. In addition to its dual-class structure, Comcast adopted a poison pill provision and supermajority Board requirements to amend the charter or remove the Chairman and CEO. Under Comcast's charter, shareholders do not have the right to call special meetings or act by written consent.
The SEC has taken a number of steps to advance the interest of participants in our public capital markets. We urge that the SEC not approve NASD Rule 4350 with the exemption that deprives an independent director nomination process for majority investors by allowing minority interests to hold the process captive. Please contact Sumanta Ray at (202) 434-1185 or by email at firstname.lastname@example.org should you, or the SEC staff, have any questions regarding this matter.