Sent: Wednesday, December 17, 2003 1:20 AM To: rule-comments@sec.gov Subject: S7-19-03, Security Holder Director December 17, 2003 Mr. Jonathan G. Katz, Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Re: S7-19-03, Security Holder Director Dear Mr. Katz: Last month the SEC proposed a rule to address the issue of directors nominated by shareholders. I agree with the position of James McRitchie, Editor CorpGov.Net in the points below this paragraph. There is one point that should be changed as the topic of thresholds comes up here. This concerns the $2000 stock ownership threshold to submit a rule 14a-8 proposal. The corporate fiascoes referenced below serve as a reminder of the free-pass this $2000 rule gives grossly mismanaged companies. The remedy is to rule that once a shareholder meets the $2000 ownership threshold and still owns those same shares, the shareholder can qualify in any subsequent year to submit a rule 14a-8 proposal. For instance if in 2003 a shareholder qualified with $2000 of stock in a company and that stock declined to $100, the shareholder would still be qualifed to submit a 2004 shareholder proposal. The SEC should not be giving free-passes on corporate govenance accountability to companies whose stock drops drastically. Instead of equal access, the SEC is proposing to allow shareholders to nominate a token board member or two at an estimated 0.3% of companies - and the nominating process may take two years. That1s like getting permission to install an alarm in your house after it has been burgled. Three-years of corporate scandals and continuing excesses in CEO pay highlight the major flaw in current corporate governance - allowing CEOs and incumbent boards to not only hand-pick director candidates, but to also exclude all other candidates from the ballot that gets mailed to all shareholders. But "governance by embarrassment" is not enough and "just-in-time-governance" is likely to be too late. Shareholders want their directors to be proactive; this proposal throws up too many barriers for that to happen. The purpose of the Securities Act of 1933 and the Securities Exchange Act of 1934 is to protect the investing public from the improper acts of boards of directors and corporate managers. The Commission1s purpose is not to protect directors and CEOs from shareholders. The Commission should work on behalf of shareholders, not the Business Roundtable, which represents CEOs. Below is a summary of the SEC1s proposal and how it can be fixed. Triggers As proposed, the SEC would allow shareholders to place their own nominees for director seats in corporate proxies during the subsequent two years if one of the following two "trigger" events occurs after 1/1/2004: a.. A demand for proxy access is made by a shareholder, or group of shareholders, owning at least 1% of voting shares outstanding for at least a year, and shareholders or 50% of the votes cast favor such access. b.. When 35% or more of votes cast on one or more director nominees are "withhold" votes. Recommended: Triggering requirements should be eliminated. Requiring such events simply adds a one-year delay to needed action by shareholders. The corporation may bleed to death before shareholders can place their nominees on the board. If the SEC is compelled to require triggering events, they should be broadly expanded to include a demand for proxy access by any shareholder owning at least $2,000 of company stock for at least a year or if any of the following events occur: a.. Bankruptcy b.. Restatement of earnings c.. Share value declines by 25% over any one year period d.. Fines or penalties by government agencies total $250,000 in any one year period. Limit on Shareholder Nominees As proposed by the SEC, the number of shareholder nominees a company would have to place in the corporate proxy would be limited to 1 for a board with 8 or fewer directors (<50% of existing boards); 2 for a board with 9-19 directors (>50% of existing boards); and 3 for a board with 20 or more directors (a very few existing boards). Recommended: The number of shareholder nominees should only be limited to 1 less than half the board seats in any given election cycle. In close to half of all companies listed, the SEC would limit shareholder nominees to one single candidate. One member would likely be a voice in the wilderness, easily ignored. Even in the majority of firms, where two shareholder nominees would be allowed, those directors could easily be isolated. Allowing shareholders to replace one less than half of the board protects against short-term speculators, but it would also ensures that shareholders will see light at the end of the tunnel. Nominating Shareholders As proposed by the SEC, if a trigger is tripped, the company would have to open its proxy to a shareholder nominee only if the nominating shareholder or group of shareholders has owned more than 5% of the outstanding shares for two or more years and intends to hold its stake through the next annual meeting. Nominating security holder groups would be limited to 30 members. Recommended: No trigger should be required. A two tier structure should apply to nominating shareholders. a.. Any shareholder owning at least $2,000 of company stock for at least two years who intends to continue to hold for at least a year after the next annual meeting should be able to nominate. If more than one slate is nominated, the slate of the nominator with the largest number of shares should be included on the corporate proxy. Filers under this option would have to agree to severely limit their campaign costs. They would not be allowed to hire a proxy solicitor, place ads or even conduct mass mailings (other than via e-mail). Their candidates would rise or fall largely on the basis of their 500-word statement in the proxy and their websites. If the company does not include a statement either opposing the shareholder nominee or supporting their own nominee, than even the 500 word statement would be omitted from the proxy materials and the shareholder campaign would largely depend on b.. websites and e-mail. a.. Any shareholder or group of shareholders (no limit on numbers) owning at least 3% of company stock for at least two years, who intends to continue to hold such stock for at least a year after the next annual meeting, should be able to nominate candidates without restriction as to campaign expenditures. If more than one slate is nominated, the slate of the nominator with the largest percentage of shares would be included on the corporate proxy. Out of 14,484 public companies filing periodic reports with the SEC, the SEC release estimates the proposed access rule would be triggered at 73 companies and in 45 of these companies a security holder would make a nomination. The SEC is considering further limiting even this small dose of democracy to 3accelerated filers,ý an estimated 3,159 companies. Yet, I believe that far more than 0.3% of companies could benefit from having shareholder nominees and smaller companies would be more likely to benefit, given that they have a lower proportion of independent directors. It took ten huge funds, including CalPERS and CalSTRS, to come up with 1.6% of the shares at Unocal to sign a letter asking them to divest risky investments in Myanmar. Clearly it will be extremely difficult for shareholders to put together and maintain investor groups for something as complex as nominating directors or even creating a triggering event. Under the two-tier approach I recommend, many more companies would face some sort of contest. In the vast majority of cases the costs, in terms of time and money, would be minimal. Only if shareholders were truly dissatisfied with the current board or if the shareholder campaign rang true would there be any contest. However, in those cases shareholders would be able to invigorate the process by forcing debate on the issues and providing real choices. Independence of Nominees As proposed by the SEC, the shareholder nominee would have to be independent from those making the nomination and from the company. Candidates can't be employed by the nominating shareholders or affiliated with them in any way. Recommended: Shareholder nominees must be independent of the company but no such prohibition should apply to the nominating shareholder. The prohibition against candidates employed by or affiliated with nominating shareholders is far too restrictive. Shareholders should be able to nominate activist shareholders such a Ralph Whitworth of Relational Investors or Andrew Shapiro of Lawndale Capital Management. When they spot trouble on the horizon, shareholders will want experienced turnaround experts on the board to communicate with them and to generate the pressure needed to make necessary changes. A major issue would be trust and such individuals have often gained the trust of major institutional investors and shareholder activists through their affiliations with them. For excellent coverage of such funds, see the Corporate Governance Fund Report at http://www.cgfreport.com. Conclusion Will the SEC continue to try to police corporations through expensive box ticking procedures, such as many of those set up by Sarbanes-Oxley, or will it give investors the tools we need to look after our own interests? A shift toward more democratic elections seems to be working for Apria Healthcare. In June, they announced their proxy would include information concerning up to two director nominees submitted by a stockholder or group of stockholders that have owned beneficially at least 5% of the company's common stock for two years or more. According to Board Chairman Ralph V. Whitworth, the change was "based on the proposition that shareholders have both a meaningful role to play in corporate governance and a legal right to participate in such governance." During the last six months, this small change has helped propel Apria's share price about 30%, compared to less than 15% for the S&P 500. A legal right to participate in governance should bring shareholders both more power and higher returns. While the SEC1s proposed rulemaking would set in place a groundbreaking mechanism for shareholder access to the corporate ballot for the purpose of nominating directors, it falls far short of providing shareholders with the power to hold directors accountable. The interests of directors would still be far more aligned with those of management than with shareholders. Shareholders want their directors to be proactive. These recommendations would allow that to happen by giving us the tools we need to monitor and democratically govern the corporations we own. The result would be more efficient, effective and responsive corporations. Sincerely, John Chevedden