From: Walter T Gangl [WTGangl@armstrong.com] Sent: Friday, December 19, 2003 12:15 PM To: rule-comments@sec.gov Subject: File No. S7-19-03 Nominating and Governance Committee Armstrong Holdings, Inc. c/o Walter T. Gangl, Deputy General Counsel, Corporate, Governance & Assistant Secretary 2500 Columbia Avenue Lancaster, PA 17603 December 12, 2003 Jonathan G. Katz, Secretary (via e-mail to rule-comments@sec.gov) U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549-0609 Re: File No. S7-19-03; Proposed Rule re Shareholder Proxy Access for Director Nominations Dear Secretary Katz: This letter is submitted on behalf of the Nominating and Governance Committee of Armstrong Holdings, Inc. As background, we point out that Armstrong's business was founded in 1861, and our companies sell flooring, ceiling and other building products around the world. Our global business has approximately 15,700 employees, and annual sales in excess of $3 billion. For many years, all but one of our parent company directors has been an independent outsider. We started director evaluations over a decade ago, and have vital board committees, each comprised solely of independent outside directors. Since its founding, the Company has had a strong culture of integrity, which was embodied in the Armstrong Operating Principles (in abbreviated form: Respect, Integrity, Courtesy & Service) adopted in 1961. The SEC's objective in proposing this proxy access rule, and the rule itself, have considerable merit. However, there are several threshold issues that need to be addressed, which other parties in the corporate community are ably bringing to the attention of the Commission. We are mindful that the SEC's objective is to promote boards comprised of diligent, independent, knowledgeable people working efficiently together, and focused on shareholders' best interests. We urge the Commission to carefully assess the rules that ultimately result from this process, to be sure that they truly serve that objective. We have three particular recommendations to make the Commission's proposal more effective, meaningful and targeted to the problems it is trying to address: 1. Require that shareholder nominees be submitted to the nominating committee for consideration before the nominee can appear in the proxy, and require disclosure of how the nominee measures up to the company's own pre-existing independence standards and director criteria. 2. Do not count social or political issues among the triggering issues. It is poor public policy to promote the use of such proposals in a forum where they do not belong. 3. Stop (and ultimately reverse) the erosion of broker voting authority that disenfranchises shareholders and makes it difficult for companies to gain quorums. Most public companies already accept for consideration director candidates suggested by shareholders. Unfortunately, few participants in that process are satisfied with it. From companies' perspectives, most of the candidates proposed have not had appropriate experience. The proponents are unhappy because few have had any success through that route, and see it as a waste of time. Fortunately, the new stock exchange rules to strengthen nominating committees and the disclosures required under the SEC's new rule about explaining nominating committee functions should bring about improvements in this process. The Commission's proxy access rule should be tailored to reinforce this positive change, not undercut it. If serious candidates are constructively suggested by shareholders, let the nominating committee do its job before forcing parties into the costs and counter-productive contention that come with a contested election. The nominating committee's involvement will enhance the process and promote candid dialog between companies and their shareholders. The committee should have the opportunity to learn more about shareholder candidates, assess whether they meet stricter independence standards and general qualifications (such as age limits) their company may have adopted, and how candidates fit relative to any skills or other criteria the Committee may have established for incoming board members. (For example, if a nominating committee is focused on recruiting a replacement for a retiring audit committee chair, they will want to know what qualifications in that area the shareholder candidate brings to the table.) If a contested election does result, where a company has previously announced its own independence standards and director qualifications in compliance with the Commission's new rule, a shareholder nominee should be obliged to disclose how he or she measures up. To the second point noted above, there is a risk of special interest groups' abuse of the nomination process outlined in the Commission's proposal to pursue agendas that have nothing to do with corporate governance. That would not serve the interests of shareholders, companies or our nation's economy. To reduce this risk, social and political issues should not be the basis for triggering shareholder nomination rights. These issues do not concern corporate governance, and allowing them as triggers under the proposed rule would politicize shareholder forums. That would allow abuses that will undermine the Commission's corporate governance objective. Finally, meaningful operation of the SEC's proposal is predicated on the assumption that "shareholder democracy" is otherwise a functional reality. It is not. Many shares are not voted, and the numbers of unvoted shares are increasing. Most shares are held in street name through brokers or banks. Their customers, the beneficial holders, have been comfortable with letting their broker or bank vote for them. That process should not be eroded any further by restricting "broker" votes for directors. In fact, broker votes for all shareholder meeting agenda items should be allowed. It is no less legitimate than letting mutual funds vote on behalf of their customers or pension funds vote on behalf of their beneficiaries. In fact, it is more legitimate because beneficial holders can easily take matters in their own hands when they do not want to leave the vote to their broker. The ultimate owners of shares held in mutual funds and pension plans have no such means to make their voices heard on corporate governance or any other shareholder issues. Currently, brokers are not allowed to vote on most important issues, so the outcome can rest in the hands of a minority of the shareholders. To make the SEC's proposal work without giving undue weight to one segment of the shareholders and pointlessly handicapping companies trying to assemble quorums, as many shares as possible should be able to be represented. As long as beneficial shareholders have the ability to direct their vote as they see fit, they should also be free to delegate that function to their broker when they prefer. Regulators should get out of the business of dictating voting authorities in such private relationships. Yours truly, Armstrong Holdings, Inc. Nominating and Governance Committee: Judith R. Haberkorn, Chair John A. Krol, Member Ruth M. Owades, Member Jerre L. Stead, Member By: Walter T. Gangl, Deputy General Counsel cc: Michael D. Lockhart, Chairman and Chief Executive Officer John N. Rigas, General Counsel