January 11, 2010
Dear Madam Shapiro and members of the Commission
I have roughly 20 years of institutional trading and investment experience. As an investment analyst for an activist hedge fund, I have participated in roughly 23 shareholder actions and proxy contests. While I like the idea of access, the proposed rule will not improve corporate governance. Regulations like SOX, Reg Re, Reg, FD and FASB 100-157 did nothing to stop the financial crisis. However those regulations did increase overhead costs for Corporations and Shareholders and have led to lower returns. Specifically SEC Reg.s' FD and Reg-Re have actually deepened the divide between shareholders and management.
I want shareholder access to proxies but the current rule does nothing to thwart the corporate counter measures that are adopted by boards to subvert shareholders. Classified boards, shareholder rights plans and in rare cases bankruptcies are the mechanisms which are employed by boards to stop the active shareholder from acting like owners. Unless outlawed, this plan will encourage boards to lower Shareholder Rights or Poison Pill thresholds to 1% and I predict even companies with top tier corporate governance will adopt classified boards to subvert the shareholder vote entirely. Moreover, in today's global markets, I think many companies will relocate to foreign countries and list their securities on the exchanges with more forgiving corporate governance.
In my view, the end of corporate governance reform is simple -better returns. Corporations with good governance should have a lower cost of capital and better returns on assets that peers with poor governance in the same business and product life cycle. To that end, boards that foster good governance accept stakeholders, have the ability to enforce good governance and the hold themselves accountable. This rule will serve to undermine accountability therefore returns.
I also think that arbitrary holding limits on investors to submit proxies are unfair. Most shareholder use their own hard earned capital to buy shares whereas boards and c-level management usually acquire shares at zero cost to themselves and yet they have a vote. As an investor (even for one day) my motive is increased stakeholder value and I do not think its the governments role to discriminate among equity investor classes.
Boards also have legitimate concerns regarding the quality and experience of shareholder nominees. In my experience, some nominees presented by shareholders are not qualified to serve. I have conducted background checks and have encountered potential director nominees with DUI's, phony resumes and other credibility gaps. I suspect that some activist investors are not as thorough. I think when employees jobs are in jeopardy and shareholder capital is at stake boards have a legitimate duty to protect shareholder even from themselves.
So I suggest that the commission needs to look at proxies as part of a comprehensive plan to reform regulations and shareholder rights. If Corporations are the patients the financial crisis has diagnosed a severe trauma and a bandaid like proxy reform will not stop the bleeding.
I think proxy reform should include:
1) Rescind the Anti Trust and Rico statutes that prohibit honest dialog between shareholders representing +10% of investors holding +10% of shares.
2) Set the minimum poison pill threshold at 24% of voting shares.
3) Enable 10% or more of all shareholders either acting individually or as a group to submit board slates.
4) License all directors and nominees just as Analysts, Doctors, Lawyers and Taxi Drivers are licensed.
5) Limit the expansion of boards for two years following the election of shareholder nominees except in hostile mergers.
6) Prohibit the ability corporations to take legal actions against the shareholders that submit slates and proposals.
7) Eliminate classified boards in cases where where one class has less than 25% of the equity ownership.
8) Prohibit voting on executive options exercised 90 days or less before a shareholder meeting.
9) Rescind the voting rights on shares which are hedged 90 days or less before a shareholder meeting.
10) Mandate 15 year term limits for directors, excluding the Chairman and CEO positions.
Thanks for your time,
Rich Tullo