From: Morrison, Richard [Richard_Morrison@nstaronline.com] Sent: Thursday, December 18, 2003 12:22 PM To: 'rule-comments@sec.gov' Subject: File No. S7-19-03: Security Holder Director Nominations <<...OLE_Obj...>> 800 Boylston Street Boston, Massachusetts 02199 December 18, 2003 U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Attn: Jonathan K. Katz, Secretary Re: File No. S7-19-03 Comments Dear Mr. Katz: I am Senior Vice President, Secretary and General Counsel of NSTAR, a shareholder-owned electric and gas utility located in Massachusetts. I am filing these comments on behalf of our Company and its Board of Trustees. NSTAR prides itself on its corporate governance program and its record of excellence in compliance and corporate governance matters. We strongly support the Sarbanes-Oxley Act of 2002 and the steps that Congress, the SEC and the listing exchanges have taken to instill better corporate governance practices in public companies and restore investor confidence. We also fully support the principle that shareholders, as owners of the Company, should be represented by competent and qualified directors representing the interests of the shareholder owners. However, we believe that the proposals in this rulemaking are not in the best interests of shareholders and are not aligned with the principles of good corporate governance practices for the following reasons: We believe that the proposed rules are inconsistent with the principles of director independence that have been put into place following our nation's accounting practices crises. Shareholder nominees will, in many cases, represent the special interest agendas of the shareholders that nominated them, rather than the interests of all shareholders. Their concentration will be on the faction that nominated them, not on the broader constituencies within the Company. A new form of director dependency will result that will not be in the interest of the Company, its shareholders as a whole or its employees. We also believe that contested elections are not the best way to select qualified board members. An independent governance committee is best suited to select qualified directors with the unique mix of skills and experience needed to oversee each company. The SEC's recently enacted regulations increasing the disclosure to be made by nominating committees will make for better nominating procedures and decisions, such that board members will better possess the skills needed for their particular industry and company. NSTAR is a good example of how this process works. In making a determination as to which of three highly qualified candidates would be nominated for the vacancy caused by a director retirement in 2002, the NSTAR Board Governance and Nominating Committee determined that experience in guiding a Massachusetts-based corporation through the course of deregulation was of the greatest importance to the Company at that time, and as a result a CEO from a highly regulated health care entity was nominated to our Board. In short, we feel the system not only works, but is also critical to ensuring capable boards are elected that meet the needs and requirements of each particular company. . We believe that, in response to the SEC's recently approved final rule requiring companies to disclose their policies for consideration of director candidates nominating by shareholders, many, if not most, companies covered by the rule will actually adopt and implement policies and procedures designed to allow shareholders to submit director nominees for consideration by a company's nominating committee or board. We believe that the SEC should provide adequate time to assess whether the rules already adopted by the SEC will provide shareholders with an appropriate opportunity to participate in the director nomination process without the negative consequences associated with the mandatory access rule. The recent governance reforms initiated by the NYSE, NASDAQ and SEC are being put into effect for the first time during this year's proxy season. We believe, as stated above, that these reforms will serve to make boards more accountable to shareholders and will provide shareholders with a meaningful opportunity to participate in the director nomination process. To help ensure that result, we believe the SEC should allow time for those reforms, especially new disclosure requirements, to work before imposing additional unproven requirements on public companies. The imposition of the proposed rules for 2004 will place a wild card into the director election process, and to the extent that issues arise this proxy season, it will be difficult to assess what role the shareholder election rules played in helping or inhibiting the SEC's and listing exchanges' recent reforms. NSTAR believes that proposed director withhold vote thresholds for triggering a shareholder nomination are too low. Large institutional shareholders could easily trigger this threshold, regardless of how the company was performing. Many new governance rating agencies have been formed following the adoption of the Sarbanes-Oxley Act. These governance rating agencies advise their institutional clients how to vote, and at times, to withhold votes for director nominees. Some of the governance standards established by these newly formed rating agencies are inconsistent with one another, and with the independence standards adopted by the New York Stock Exchange and NASDAQ. As a result, a company that complies with the independence or other governance standards of the NYSE or NASDAQ, and receives high governance ratings from some of these governance rating agencies, could receive negative governance ratings from another organization, possibly resulting in withhold votes, possibly resulting in a sufficient number of withhold votes to trigger the mandatory access rule. This could result in frequent contested elections even where there is, in fact, no real evidence that either a company has a poor governance structure or that shareholders as a whole do not have meaningful participation in the director nomination process. We believe that something so critical to the interests of all shareholders should require the majority vote of shares outstanding and entitled to vote withhold votes for a director nominee before the mandatory access rules are triggered. To do otherwise would result in a "super minority" vote, in direct contrast to the positions taken by corporate critics and supporters of the proposed rule, who take great exception to corporate by-law supermajority provisions. We also believe that there is no real evidence that shareholders have not had the opportunity to date to participate in a meaningful way in the director nomination process. Many companies, including NSTAR, have an advance notification process for shareholders who wish to nominate a candidate as a director at the annual meeting. We believe that, in the first instance, any shareholder who desires to nominate a director candidate would first recommend that candidate to the company before considering utilizing the advance notification process. There is no evidence that shareholders have either taken advantage of that opportunity or been rebuffed after having done so. The shareholder access proposal is designed to remedy a perceived problem when no evidence supports that such problem in fact exists. We also express concern over the timing of the implementation of the proposed rules. Proxy season is for all intents and purposes before us now. Public companies will continue to devote considerable time, both by management and directors, in ensuring that both the spirit and the letter of the new laws, regulations and listing standards are adhered to. It can and should be an exciting and progressive year. However, introducing the shareholder nomination rule without giving companies a reasonable amount of time to anticipate and prepare for actions and events that may ultimately qualify as a triggering event for shareholder access may result in huge, unintended and negative consequences for all involved, except, of course, the special interest shareholder groups. Therefore, we suggest that shareholder action or voting results during the 2004 proxy season should not qualify as a trigger for shareholder access under the proposed rule. Finally, companies may need to add even more governance staff, counsel or other experts, who are already fully engaged in carrying out the mandate of Sarbanes-Oxley, to assist in dealing with proposals that may ultimately qualify as triggering events. This may force some companies to divert resources from the important task of compliance with the vast array of new and important regulations that have already been adopted and become effective. At a minimum, we feel that shareholder votes (or withhold votes) should not be a triggering event, at least until the 2005 proxy season.. For these reasons, we feel that the Commission should refrain from adopting the proposed rule. NSTAR appreciates the opportunity to comment on this important issue. Sincerely, Douglas S. Horan Senior Vice President, General Counsel and Secretary ********************************************************************** This email and any files transmitted with it are confidential and intended solely for the use of the individual or entity to whom they are addressed. If you have received this email in error please notify the system manager. **********************************************************************