December 23, 1997 Jonathan G. Katz Secretary U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re File No. S7-25-97 Dear Mr. Katz: I am writing to comment on the proposed changes in the Commission's Shareholder Proposal Rule. I have had more than 20 years of experience involving application of Rule 14a-8, having served as Deputy Executive Director of the Investor Responsibility Research Center, Executive Director of the United Shareholders Association, and President of Institutional Shareholder Services. I submit these comments as my own, however, and not on behalf of any client. The Commission's Shareholder Proposal Rule, and its administration of the rule, have been instrumental in providing shareholders an opportunity to use effectively the corporate franchise that Congress has directed the Commission to preserve and protect. Rule 14a-8 has produced enormous benefit, at minimal cost. (The minimal nature of 14a-8 costs to issuers is documented in the Commission's release and in the results of the Commission's recent 14a-8 survey of shareholders and issuers.) Since the 1960s, shareholders concerned about the societal impact of corporate activities have relied heavily on Rule 14a-8 to bring their concerns to the attention of senior corporate management and other shareholders. The rule has not only given shareholders a way to force companies to consider their concerns, but it has helped to alert many companies to social, ethical and environmental issues that can have, and have had, major impacts on their businesses. More recently, institutional and individual investors have relied on Rule 14a-8 in their efforts to improve corporate governance. As a result of 14a-8 proposals, hundreds of companies have adopted confidential voting, declassified their boards, agreed to seek shareholder approval for poison pills, and restructured executive and director compensation plans. Rule 14a-8 proposals regarding corporate governance have fostered greater accountability, which in turn has improved investor confidence. The Commission's administration of Rule 14a-8 (with notable exceptions such as Cracker Barrel) has been wise and fair. And though it has been the target of criticism from all sides, the Commission's staff is widely acknowledged to have performed in a highly professional and competent manner in its interpretation and application of the rule. The overwhelming response of participants in the Commission's recent survey of shareholders and issuers was that the Commission should continue to interpret and administer Rule 14a-8 more or less in its current form. In short, existing Rule 14a-8 works very well. There is no need to make major changes in the rule. Indeed, if the Commission did nothing more than overrule its Cracker Barrel decision, it would have made a wise decision, and the shareholder proposal process would continue to work very well. This is not to say that there is no merit in some of the Commission's proposals. Some of the proposed changes would improve the process and should be adopted. A number of them, however, are seriously flawed, and if adopted, will undermine shareholders' ability to exercise their corporate franchise rights. Comments on specific provisions follow, in the order in which they are presented in the Commission's release. A. Plain-English, Question and Answer Format This is a useful format and should be especially helpful to non-lawyers. My endorsement here is directed solely to format, and not to content, regarding the proposed changes. B. Personal Claim or Grievance Exclusion: Rule 14a- 8(c)(4) This change is entirely unnecessary and will be used unfairly by issuers to exclude a large number of shareholder proposals that otherwise meet the requirements of Rule 14a- 8. Historically, the Commission's staff has done an excellent job in reviewing proposals which, on their face, involve a personal grievance or special interest. However, the staff has wisely declined to support the exclusion of proposals that are neutral on their face but are submitted by individuals or organizations that may have multiple objectives_a proposal to provide for annual election of all directors, for example, sponsored by a labor union group or a religious organization which may have concerns about company policy unrelated to the proposal. Determining motive in such cases is extremely difficult, and is best left to shareholders, assuming the subject matter of a shareholder proposal is otherwise proper. My experience has been that shareholders can, and do, make their own determinations regarding sponsors' motives when they vote. The fact that a labor union may be seeking to organize a company's workers, or that a church group is questioning a company's employment practices, is something that shareholders can consider when they vote on a matter such as a shareholder proposal to elect all directors annually. Some will support the proposal no matter who the sponsor and no matter what the motives; others will look beyond the words of the proposal and will carefully weigh a sponsor's apparent motives. It doesn't take a genius to know what will happen if the Commission changes its policy and directs the staff to take no position when issuers decide to exclude for motive: there will be a tidal wave of such exclusions, and shareholders will be shut out of the proxy, unless they have the resources to sue. The Commission should stick with its current interpretation of the personal grievance section of Rule 14a-8. C. Rule 14a-8(c)(5): The Relevance Exclusion There is no question that Rule 14a-8(c)(5) has been difficult to administer. Perhaps the heart of the difficulty has been the Commission's effort to quantify something that is often highly qualitative. The proposed changes are only the latest effort to quantify the "significantly related" concept. Yet even this attempt to reformulate the rule makes exceptions for proposals that are significantly related to a company's business but do not pass the quantitative screens. I have no idea whether the proposed attempt to define relevance will work better than the existing rule. I am quite certain, however, that no matter what the definition, the Commission and its staff will continue to be faced with tough decisions that require artful exercise of judgment to determine whether proposals should be included in, or omitted from, proxy statements on grounds of relevance. In addition to whatever quantitative formula it adopts, I think it would be helpful for the revised rule to provide Question & Answer guidance about the kinds of proposals that are significantly related to a company's business even if the proposals do not meet a quantitative test. D. The Interpretation of Rule 14a-8(c)(7): The "Ordinary Business" Exclusion The Commission proposes here to reverse its position on employment-related matters, in effect repudiating its Cracker Barrel decision. In that instance, the staff, and the Commission, took the position that all employment- related matters are, by definition, ordinary business. Cracker Barrel not only reversed the Commission's previous position of analyzing employment-related proposals on a case- by-case basis to determine whether they raised ordinary business or broad policy questions, but it raised questions in the minds of many shareholder proponents about the Commission's policy toward social policy issues generally. After decades of support, was the Commission turning its back on shareholders' efforts to use the proxy process to require companies to consider social, ethical, and environmental issues? If the Commission does nothing else as a result of this review, it should reverse the Cracker Barrel decision. The Commission has never been able to articulate a coherent, much less a persuasive, justification for the Cracker Barrel decision. The decision was and is so plainly wrong, and such an abrupt departure from past action, that it has stirred widespread apprehension about the Commission's continued commitment to the shareholder proposal process. The Commission says in its release that the reversal of Cracker Barrel "is warranted in light of the broader package of reforms proposed today." In my opinion, this is the wrong reason to reverse the Cracker Barrel decision: it should be discarded simply because it was, and remains, a bad decision. Former Commissioner Wallman is correct to argue that Cracker Barrel's reversal is justified on its merits, and should not be held hostage to any other provision of the proposals now before the Commission. The Commission's release articulates principles that the Commission believes should guide its interpretation and application of the ordinary business provision of Rule 14a- 8. Absent from this discussion, however, is any clear articulation of the Commission's view of social policy issues. Given the questions raised by the Commission's obdurate adherence to the Cracker Barrel test, the Commission needs to state clearly in the revised rule that it believes that social, economic, environmental and ethical issues are relevant matters for shareholder consideration under Rule 14a-8. In this regard, the Commission needs to make clear in the revisions to Rule 14a-8 that the Commission will not support interpretations of Rule 14a- 8(c)(7) that seek to use ordinary business as a ground to exclude consideration of such issues. The Commission should note in its guidance regarding social policy issues that more than half the states have now adopted provisions in their corporate statutes that permit boards of directors to consider the interests of employees, suppliers, consumers and others in addition to shareholders' interests, in overseeing the affairs of the corporation. Moreover, hundreds of companies have issued policy statements that emphasize the link between fair treatment of nonshareholder constituencies and long-term profitability. Such guidance will underscore to everyone that the Commission will oppose efforts to use the ordinary business provision of Rule 14a-8 to exclude social policy issues from proxy statement. (This guidance should also make clear that social policy concerns may be significantly related to a company's business even if such concerns are difficult to quantify_see comments above regarding relevance.) E. Rule 14a-8(c)(12): The Resubmission Thresholds The Commission's proposal to raise the threshold for resubmission to 6 percent after the first submission, 15 percent after the second submission and 30 percent after the third submission is highly questionable. As a longtime observer of Rule 14a-8, I strongly disagree with the Commission's assertion that shareholder resolutions that fail to obtain the higher levels of support that would be required in the Commission's proposal should be ineligible for resubmission. I believe that a proposal that attracts more than 15 percent of the vote has, in fact, generated strong support, whether or not the proposal is ever approved. (Most proposals are precatory, and so even majority support is not binding on the issuer.) Levels of support above 15 percent should signal to top management and the board that significant shareholder concerns exist. I would suggest that the Commission leave the resubmission thresholds at their current levels, or, if it decides to increase the levels, that the thresholds be set at 5 percent (first submission), 10 percent (second submission) and 15 percent (third submission). I also disagree strongly with the other reasons the Commission puts forward to justify this change. The fact that companies are concerned about irrelevant proposals is, quite literally, irrelevant here. Relevance or lack thereof should be tested under subsection (c)(5). Similarly, Cracker Barrel should be reversed because it was a bad decision; what the Commission does or doesn't do with respect to Cracker Barrel should have no bearing on resubmission thresholds. Finally, as discussed below, the override mechanism is totally unnecessary if the resubmission thresholds are kept at a reasonable level. The one portion of the (c)(12) proposal that should be adopted is the definition of "votes cast." Abstentions and broker non-votes should be excluded from the tally in determine votes "for" and "against." Brokers have no right to vote on most shareholder proposals, and shareholders who abstain are making a deliberate statement that they do not wish to register either a "yes" or "no" vote. F. Proposed Override Mechanism This proposal is unnecessary. It is unnecessary because other provisions in the existing rule_including subsections (c)(4), (c)(5), (c)(7) and (c)(12)_already strike a sound balance regarding proper subject matter and resubmission thresholds. The Commission need not disturb this balance, and it need not adopt this proposal to solve a problem that does not now exist. In addition, the proposal promises to be difficult to administer. It is hard to justify devoting the time and effort of the Commission and its staff to such a Rube Goldberg proposal in the absence of any compelling need for change. G. Safe Harbor Under Section 13(d) The only justification for this proposal is to provide a safe harbor for actions related to the above override. If the override proposal is discarded, there is no need for this proposal. H. Rule 14a-4: Discretionary Voting Authority The Commission proposal to quantify the "reasonable time" requirement of Rule 14a-4 is sound and should be adopted. A bright-line test is preferable to the current standard, and the 45-day proposal is fair and reasonable to all parties. I. Other Proposed Modifications Some, but not all, of the proposed modifications outlined in this section of the Commission's release should be adopted. Specifically, the Commission should adopt as proposed the following changes: defining the term "proposal"; increasing the ownership requirement from $1,000 to $2,000 in market value of a company's voting shares; requiring companies to disclose timeliness deadlines for proposals submitted outside the framework of Rule 14a-8; adding the proposed language to Question 8 regarding compliance with state law. The Commission should keep the one-year ownership requirement, which serves a legitimate purpose of requiring shareholders to have a reasonable, continuous connection to a company. As an alternative to the proposed 14-day response period when a company indicates that it intends to omit a proposal from the proxy statement, I would propose a 21-day period. The extra time would be most beneficial to individual investors unversed in the workings of the proxy rules. Providing an additional week to reply would not appear to create a burden for issuers. The Commission should retain the existing mechanism for staff review of a company's statement in opposition to a shareholder proposal. This provision acts as a deterrent to mischaracterizations of shareholder proposals and, it provides a remedy in cases where such misstatements occur. Administration of this provision does not appear to be a burden to the Commission or its staff. In conclusion, I urge the Commission to reconsider whether Rule14a-8 is in need of major overhaul. Existing Rule 14a-8 works well. The Commission should definitely overrule its Cracker Barrel decision and return to its previous policy of looking at all employment-related proposals on a case-by- case basis. Some fine-tuning of the existing rule may also be helpful. More than that will be counterproductive. Respectfully submitted, James E. Heard