The following comment on Letter Type T,
Letter Type T:
Mr. Jonathan G. Katz, Secretary
Dear Mr. Katz:
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.
Yet, 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. That's like getting permission to install an alarm in your house after it has been burgled.
The Securities Exchange Act of 1934 was enacted protect the investing public from improper acts by boards of directors and corporate managers, not to protect directors and CEOs from shareholders. The SEC should listen to shareholders, not the Business Roundtable, which represents CEOs. Please consider the following amendments to the proposed regulations:
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:
* Restatement of earnings
* Share value declines by 25% over any one year period
* Fines or penalties by government agencies total $250,000 in any one year period
Limit on Shareholder Nominees
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 proposal 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.
No trigger should be required. A two tier structure should apply to nominating shareholders.
* 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 websites and e-mail.
* 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.
Independence of Nominees
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.
While the SEC's 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. My recommendations would allow that by giving us the tools to monitor and democratically govern the corporations we own. The result would be more efficient, effective and responsive corporations.