NATIONAL TAFT-HARTLEY DIVISION
November 25, 1997
Mr. 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 Amendments to Rules on Shareholder Proposals under File No. S7-25-97.
I am Director of the National Taft-Hartley Division of The Proxy Monitor, Inc. The Proxy Monitor, Inc. provides research, advisory services, and proxy voting agency services to institutional investors around the country. The Taft-Hartley Division focuses on the representation of Taft-Hartley benefit funds. While we recognize that the SEC's intent in this rulemaking is to improve the process by which shareholders propose resolutions to companies, we are concerned that the revisions to the shareholder proposal process contemplated by the SEC may diminish investors' rights and result in a decline in corporate governance that may harm all investors.
As participants in the proxy voting process for many years, we have observed firsthand the benefits that have accrued from shareholder proposals. In general, we find that the package of revisions the SEC proposes evinces a bias towards reducing the number and type of shareholder proposals that would appear on proxy ballots. This would be a disservice to all investors. The expense to corporations of placing shareholder proposals on its proxy ballot is negligible; the value to investors enormous.
In our experience, shareholder proposals represent a practical and affordable means for investors to communicate with management. These proposals enhance management accountability and assist investors in monitoring and protecting their investments. We respectfully urge you to consider reforms that serve to expand the shareholder proposal process, not minimize it. Our specific comments follow:
Rule 14a-8(c)(4): "Personal Grievance Exception"
The SEC proposes to modify its administration of this rule to express "no view" if a company chooses to exclude a proposal on the grounds that it relates to a "personal grievance" or "special interest." This revision could provide companies a pretext for excluding many of the most fundamental corporate governance proposals without any practical recourse for proponents and their fellow investors.
Many improvements in the conduct of corporate affairs find their genesis in proposals filed by shareholders affiliated with Taft-Hartley benefit funds, as well as socially responsible and other concerned investors. Taft-Hartley funds have submitted shareholder proposals to repeal classified boards, eliminate the provision of pensions to non-employee directors, establish confidential voting, increase the percentage of independent directors on boards, and require shareholder votes on or repeal poison pills and golden parachutes. Investors have widely supported these proposals and significant enhancements benefiting all shareholders have occurred. The SEC should not revise its administration of this rule to eliminate such proposals from consideration by investors. Rather, such activity should be encouraged and facilitated.
One might note in this regard that Taft-Hartley funds have taken the lead in complying with their obligations as shareholders. For example, consider the language of Interpretive Bulletin 94-2, issued by the Pension and Welfare Benefits Administration of the U.S. Department of Labor in 1994. This document summarized the rights and responsibilities of employee benefit plan fiduciaries to vote proxies appurtenant to shares of corporate stock held by their plans. Its conclusions regarding "Shareholder Activism" support the argument that this revision to c-4 is detrimental to shareholders' interests. I quote in pertinent part:
An investment policy that contemplates activities intended to monitor or influence the management of corporations in which the plan owns stock is consistent with a fiduciary's obligations under ERISA where the responsible fiduciary concludes that there is a reasonable expectation that such monitoring or communication with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan's investment in the corporation, after taking into account the costs involved. Such a reasonable expectation may exist in various circumstances, for example, where plan investments in corporate stock are held as long-term investments or where a plan may not be able to easily dispose such an investment. Active monitoring and communication activities would generally concern such issues as the independence and expertise of candidates for the corporation's board of directors and assuring that the board has sufficient information to carry out its responsibility to monitor manaagement. Other issues may include such matters as consideration of the appropriateness of executive compensation, the corporation's policy regarding mergers and acquisitions, the nature of long-term business plans, the corporation's investment in training to develop its work force, other workplace practices and financial and non-financial measures of corporate performance. Active monitoring and communication may be carried out through a variety of methods including by means of correspondence and meetings with corporate management as well as by exercising the legal rights of a shareholder.
Taft-Hartley benefit funds are long-term investors that act to protect the investments of the participants and beneficiaries of their funds. The proposals they file often relate to the most fundamental governance issues affecting all investors.
As you note in the proposed rule, "In practice, the Division has infrequently concurred in the exclusion of a `neutral' proposal under rule 14a-8(c)(4)." That these proposals are characterized as "neutral" negates the argument that they may be properly excluded as a "personal grievance." Many investors recognize that the proposals sponsored by Taft-Hartley funds are filed to advance shareholder interests - that is why they often receive such high levels of support.
One example suffices to demonstrate our point. Several years ago Avondale Industries Inc. faced numerous shareholder proposals designed to improve the corporation's corporate governance and, ultimately, its performance. These proposals were filed by workers who participated in an Employee Stock Ownership Plan (ESOP). The company attempted to avoid facing these proposals by arguing to the SEC that the workers who submitted them were simply pursuing an effort to pressure the company. The SEC correctly rejected that argument. If the revisions you currently propose were in place at that time, it is doubtful that shareholders would have been able to vote upon these proposals.
Avondale Industries' investors were able to vote and shareholders expressed strong support for these proposals. The voting results were as follows:
Clearly, shareholders recognized that these proposals would improve corporate governance and consequently enhance their investments. W. Eric Aiken, the founder of The Proxy Monitor, Inc., eloquently stated our position in a preamble to the research we provided our clients for the 1996 annual meeting at Avondale:
As has been the case the past couple of years, Avondale Industries is on the receiving end of a batch of challenging shareholder resolutions at its 1996 annual meeting. All of these initiatives have been introduced by individuals affiliated in one way or another with the United Brotherhood of Carpenters and Joiners of America - a labor organization engaged in any number of disputes with the company. In the Avondale proxy statement, the folks running the show whine that the proposals at hand are a tactic in an ongoing campaign against Avondale management. Perhaps so, but the implication that members of trade unions at odds with Avondale should not be allowed to submit valid resolutions for consideration by fellow investors (or beneficial owners) strikes us a long step down the road which leads to suppression of dissent. If the powers that be have left themselves open to legitimate criticism on the score of corporate governance, The Proxy Monitor can see no very good reason why a labor dispute entitles tthem to be any less accountable to the company's owners. Accordingly, we note that each of the following proposals should be evaluated on the merits or lack thereof, not on the basis of whether sponsors have other axes to grind.
We respectfully urge the SEC not to revise Rule 14a-8(c)(4) to limit investors' rights.
Rule 14a-8(c)(12): Resubmission Thresholds
The SEC proposes increasing resubmission thresholds from 3%, 6%, and 10% for the first, second, and third submissions, to 6%, 15%, and 30%. Those who have observed the proxy voting process know that these thresholds are exceedingly high. Many corporate governance proposals, and almost all social proposals, would fail to qualify under this new test. Yet, many positive developments can be attributed to the inclusion of proposals that would not qualify. Again, we emphasize the value of these proposals to investors as balanced against the negligible cost to corporations of including proposals.
Given the many obstacles shareholder proposals face, a vote of 15% after several years can be viewed as a significant demonstration of support. Indeed, we believe corporations gain valuable insight into shareholder wishes through these proposals. Consider, for example, the early proposals to require corporations to eliminate the payment of pensions to non-employee directors. In 1994, approximately two-thirds of companies offered these benefits. Through the filing of a few shareholder proposals over a period of years, corporations learned that this practice offended many investors who felt that it could not be justified. Then, the National Association of Corporate Directors advocated the elimination of such perquisites.
The most recent studies we have seen indicate that less than thirty percent of corporations today offer pensions to their independent directors. If the proposed revision to (c)(12) had been in effect, corporations might have elected to "weather the storm" and investors would have suffered. We urge you not to increase the resubmission thresholds.
Cracker Barrel and the Override Provision
Third, we share Commissioner Wallman's concerns that many of these reforms appear to benefit shareholders, but in practice will offer them little. In this regard, we echo his view that Cracker Barrel be reversed independent of this package of reforms.
Further, we agree that the proposed override mechanism will be unavailable to virtually all investors. As Commissioner Wallman noted, "Three percent of the outstanding stock of large corporations involves dollar amounts in the billions; it is unclear why the support of such a large financial stake is necessary before a proposal may be placed on the ballot."
In conclusion, we support the SEC's view that the shareholder proposal process is an important means of communication between shareholders and companies. We urge that the process not be modified in a manner that makes the inclusion of shareholder proposals more difficult. Such modifications could harm all investors.
Sincerely,
Craig M. Rosenberg
Director, National Taft-Hartley Division