From: Donald McHenry [dfmch@att.net]
Sent: Monday, December 22, 2003 2:50 PM
To: rule-comments@sec.gov
Subject: Subject: File No. S7-19-03 Security Holder Director Nominations 


22 December 2003

To: Mr. Katz

From: Donald F. McHenry

Re: File No. S7-19-03

I am writing in response to the SEC's request for comments on its proposed 
rule affording shareholders, under certain circumstances, the right to nominate 
director candidates whose names would appear in a company's proxy statement, 
and who would effectively be running against the slate of directors recommended 
for election by the company's board through its nominating or corporate governance 
committee. I am presently a professor of diplomacy at Georgetown University's 
School of Foreign Service, a position that I assumed after a career in public 
service. More importantly for this purpose, I have served for many years on 
the board of directors of several public companies, including AT&T, Coca-Cola 
Company, FleetBoston Financial Corporation, GlaxoSmithKline Company and 
International Paper Company. I am currently the chair of the Corporate 
Governance Committee at International Paper, chair of the Board Governance and 
Nominating Committee at FleetBoston, and chair of the Governance and Nominating 
Committee at AT&T. 

I believe that many of the changes effected in corporate governance by the 
Sarbanes-Oxley Act, the SEC's implementing regulations and the revised stock 
exchange listing standards have been beneficial. Indeed, as an independent 
director, I have seen first hand that there has been a quantum change in the role 
of the board, and particularly the independent directors, in governance questions 
generally. I expect these changes to continue, and perhaps accelerate, as the new 
stock exchange rule on the composition and responsibilities of the corporate 
governance committee becomes effective and the Commission's very recent rule on 
the transparency of the director nominating process is widely implemented. In 
short, I believe the process is working, better than it ever has in my experience, 
and that the resultant change in the governance of public corporations will be 
permanent. 

Specifically regarding the subject of this proposed rule, I believe that the 
changes already effected will predispose corporate governance committees, now 
comprised entirely of independent directors, to cast a wider net in the search 
for director candidates, and to be even more attentive to any views expressed by 
shareholders with a significant financial stake in the company. At the same time, 
I have to say that it has been my experience up to now that those significant 
shareholders, even when they have expressed concern or anger about the direction 
of the company, have focused on urging the existing board to change the company's 
direction or leadership,  rather than proposing alternative candidates for election 
to the board.
       
The intent of the proposed rule would appear to be to change that, and to facilitate 
and promote election contests in which an individual is put up for election whose 
experience and qualifications may not fit at all with what the corporate governance 
committee feels is most needed to complement the composition of the board. In those 
instances of which I am aware where a dissident shareholder (typically in a contest 
for control) has successfully proposed and elected an alternative slate of directors 
on a classified board, the effective functioning of the board has been severely 
hampered. While no one can predict the future, it is at least possible that an 
individual who was nominated by an aggregate of special interest groups and 
successfully elected in a given year would not be renominated by the corporate 
governance committee, leading to a second election contest in the following year. 
It is hard to imagine that such a system would promote the cohesiveness, mutual 
trust and continuity, which are so important to the functioning of effective boards.

Finally, I firmly believe that the Commission's overriding objective should be to 
encourage qualified and experienced directors to stand for election to the boards 
of those companies where they are most needed. In the more than two decades during 
which I have served on corporate boards, nearly every company on whose board I have 
sat has been, at one time or another and to a greater or lesser extent, in a state 
of turmoil, whether caused by financial reverses, failure of CEO leadership, labor 
relations, environmental problems or a whole host of other factors. It is when they 
are in a state of turmoil that companies most need the best directors they can find, 
but the people who fit that description nearly always have a choice as to which 
corporate board to join. What the Commission is proposing would add to the existing 
concerns about litigation, D&O coverage, and bankruptcy a whole new level of 
apprehension that the individual director, for reasons totally unrelated to his or 
her performance but rather because of the problems the company was facing, would 
become the target of a "withhold" campaign or, even worse, be forced into an 
election contest.  In short, an unintended consequence of the commission's proposal 
could be the chilling effect it will have on the willingness of potential directors 
to stand for election to the boards of companies in crisis.
      
I would urge that the Commission take no action at this time on the proposal it has 
made, and instead carefully monitor over the next year or two the effect of the 
forthcoming changes in the stock exchange listing standards, as well as the required 
disclosures regarding nominating committee functions, on the openness and 
responsiveness of corporate governance committees of publicly-held companies.  It is 
my judgment that these forthcoming changes will render the Commission's proposed rule, 
which could have many foreseen and unforeseen adverse effects, entirely unnecessary.