TAM Weighs in on Director Nominations(A)
In a move to help restore investor confidence in corporate management, the Securities and Exchange Commission recently reopened for public comment the question of whether shareholders should be allowed input into the board nomination process. According to corporate governance activist James McRitchie, this is only the third time since 1942 that the SEC has considered changes to the current system, which limits nominations to subcommittees appointed by the board directors themselves. Some have compared today’s corporate board elections to the Soviet style, wherein one candidate is run for each open position.
Letters to the SEC have overwhelmingly supported increased shareholder access to the nomination process. Trillilum Asset Management sent the following letter.
June 12, 2003
Jonathan G. KatzSecretarySecurities & Exchange Commission450 Fifth Street, N.W.Washington, DC 20549-0609
RE: S7-10-03 and Release No. 34-47778
Dear Mr. Katz:
Trillium Asset Management is a Boston-based investment firm that specializes exclusively in socially responsible asset management. Since our founding in 1982, we have grown to manage $600 million in assets for individual and institutional shareholders.
In addition to screening stocks for our clients according to social and environmental criteria, Trillium Asset Management actively and regularly engages in dialogue with our portfolio companies and files shareholder proposals to advance corporate social responsibility. We are also the original founder of the CERES environmental coalition and the Social Investment Forum. Drawing from our experience as engaged investors and the collective experience of the communities in which we work, we know that shareholder engagement can strengthen a corporation’s management, with beneficial impact on the bottom line. We pay careful attention to corporate governance, and have exercised our voice as shareholders on corporate governance matters through our proxy vote and the sponsorship of several proposals concerning executive compensation in recent years.
We welcome the Commission’s effort to gather public input into the question of the board director nomination process. It is time for the Commission to end the fixed, one-candidate-per-slot “elections” that make “corporate democracy” an oxymoron. The consequences of allowing boards to function in this manner have become disastrously clear in the last two years.
At present, entrance barriers to non-management nominees are prohibitive. As the Commission, Congress and the stock exchanges seek to restore trust in corporations and market mechanisms, opening up access to board nominations is one of the most important and fundamental changes that could be made to effect this goal. Fuller participation of shareholders in the nomination and elections processes will lead to greater accountability, improved governance and greater focus on long-term value. The closed and self-perpetuating clubhouse culture from which the vast majority of board directors are currently selected must be replaced with a system in which candidates from a greater diversity of perspectives, background and experience can run for directorships.
Trillium Asset Management believes that the board elections process should be improved in a manner that will:
· Enable shareholders to nominate candidates;
· Eliminate or reduce entirely the prohibitive financial barriers to outside candidates running for a board seat;
· Increase board accountability;
· Balance the aim of providing greater input to a wide group of shareholders with the need to impose qualifying criteria that ensures that proxy ballots do not become over-cluttered with board nominations; and,
· Enact safeguards so that board elections cannot be used as takeover devices.
· Balance power between the owners of the corporations, management and the Board.
More specific recommendations follow.
The obvious forum for shareholder nominees exists already in the proxy ballot. Shareholders could use the proxy ballot to nominate directors, with some differences in qualifying criteria from the shareholder proposal process. This would mean eliminating section (i)(8) of Rule 240.14(a)(8), which excludes shareholder proposals relating to board elections.
Some reasonable formulae might include variations on the following. An ownership threshold could be set at a relatively modest level to cast a wide net — for example 1% of shares outstanding (held by one long-term owner/nominator or in the aggregate by multiple long-term shareholders). Alternatively, nominations might be restricted to a certain minimum number of investors (e.g., 100), who meet the current shareholder proposal qualifying criteria of having owned at least $2,000 worth of company stock for a minimum of one year.
To prevent the abuse of the nomination process as a takeover device, investors (singly or cumulatively) should be limited to nominating less than a majority of available board positions. If more than half of the nominees are put forward by shareholders, those candidates with the largest aggregate share support should be granted ballot access.
We support the annual election of directors so that shareholders may signal their support or disapproval of board performance on an annual basis.
Proxy statements should contain the following information on candidates, within a 500-word limit:
· Biographical information and photograph
· Identification as an independent or non-independent candidate
· Eligibility under Sarbanes-Oxley to serve on audit committees
· Board meeting attendance records (for incumbent candidates)
· Disclosure of all of the candidate’s material familial, professional and financial relationships to the company and its executives
Proxy statements should also disclose how many people were nominated for the board, and what percentage of nominees were contacted and interviewed.
Solicitation of Proxies
· We support a complete ban on broker votes or uninstructed share voting, including uninstructed voting by Trustees of the Corporation for employee-owned shares. As Business Week noted last October, “Brokers usually vote with management to keep on a potential customer’s good side.”
· So shareholders can more clearly indicate their voting intentions, we support replacing the For or Withhold options on the proxy card with For, Against and Abstain, for each director candidate.
· In the proxy statement, the company should present all candidates information in the same consistent manner, length, font, style, etc. so as not to segregate its list of nominees from shareholders’ nominees. Management should not segregate its nominees from investor nominees, but should identify clearly that they are board-nominated.
· Communication among shareholders holding more than 5% of shares should be exempted from current requirements under Regulation 13-D if pertains to director nominations, solicitations of votes for directors, organizing aggregate votes for nominations and the elections process.
· To cover the cost of elections (legal fees, shareholder solicitation), a fund could be established that allots equal amounts to all candidates. Management would be prohibited from outspending shareholders to promote its candidates.
Directors should be required to attend shareholder meetings, and as noted above, attendance records of incumbent candidates should be disclosed in the proxy statement.
We support cumulative voting for board elections.
In closing, we again want to applaud the Commission for inviting comment on this critical issue. We strongly support steps to ensure a greater measure of accountability of boards of directors to the owners of public corporations that they serve. Such steps can help restore faith in the market and help prevent the type of abuses that contributed to an historic destruction of shareholder value over the past several years. We also encourage the Commission to solicit comment on additional matters to ensure the effective protection of shareholders, particularly long-term shareholders. In particular, we strongly support enhanced disclosure requirements of non-financial issues that may have a material effect on a company’s long-term valuation, including key environmental and social performance data.
Shelley AlpernAssistant Vice President, Director of Social ResearchTrillium Asset Management Corporation