Letters to Regulators
Security Holder Director Nominations
December 22, 2003
Jonathan G. Katz
Re: File No. S7-19-03; Security Holder Director Nominations
Dear Mr. Katz:
The Independent Community Bankers of America (ICBA) appreciates the opportunity to offer the following comments to the SEC on proposals to require companies to include shareholder nominees for director in company proxy materials under certain circumstances.
The proposed rules would require companies to include shareholder nominees for director in company proxy statements if one of two triggering events occur: more than thirty-five percent of shares voted at a special or annual meeting are "withhold" votes for a director, or a proposal made by a more than one percent shareholder to activate shareholder access receives a majority vote. If one of these events occurs, any group comprised of the holders of more than five percent of the company's stock would be able to place up to three director nominees (depending on the size of the board) in the company's proxy statement for two years.
ICBA opposes these proposed rules for a number of reasons. First, banks are still in the process of complying with all the SEC regulations issued under the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley) and the new listing requirements recently issued by the stock exchanges. They are still drafting committee charters and reconfiguring their boards and committees to meet the independence requirements. These new additional proposed requirements will only add to the substantial regulatory burden that public companies are currently experiencing. The SEC should defer action on these proposals until companies have had a chance comply with the new listing standards and the rules under Sarbanes-Oxley.
Secondly, we question whether it is good corporate governance to require companies to include shareholder nominees in their proxy materials. Directors have a fiduciary interest to serve the shareholders and therefore should have free access to the proxy statement to nominate persons that they believe will serve the best interests of all shareholders. There are procedures already in place for shareholder groups to nominate candidates and wage contests for election. Allowing shareholders access to the proxy statement only encourages contests between directors and shareholder groups and will result in boards that are not accountable to all shareholders.
Thirdly, since the enactment of Sarbanes-Oxley, it has become increasingly difficult for many public companies, particularly community banks and bank holding companies, to attract qualified directors. These proposed rules will make it even more difficult. Directors nominated by the company will become less interested in serving in that capacity if their boards become more adversarial and elections will become more contested.
Fourthly, the institutional shareholders most likely to use these new proposed election contest rules will be the labor unions and public pension funds that have interests and agendas that often are different from the company's. Directors who are nominated by these special interest groups will end up politicizing the board and impeding the board's proper function.
Finally, we agree that those companies that are not "accelerated filers" (generally, those with an aggregate market value of less than $75 million) should be exempted from these proposed rules. As the SEC noted, more than 90% of the companies involved in shareholder proposals filed with the Commission during the 2002-2003 proxy season were accelerated filers. If the focus of the proposed rules is on companies that have an ineffective proxy process, then the rules should apply exclusively to the larger accelerated filers. Furthermore, these proposed rules will have a disproportionate impact on smaller companies with smaller boards and fewer shareholders. Managements of smaller companies would have a more difficult time coping with the legal complexity of these regulations and the expenses that would be associated with an election contest.
In conclusion, we urge the SEC at a minimum to postpone consideration of these proposals until public companies have had the chance to digest the numerous regulations and listing standards that have been issued under Sarbanes-Oxley and by the stock exchanges. ICBA also urges the SEC to reconsider the proposal since public companies and in particular, community banks and bank holding companies, will have a harder time attracting qualified directors. Election contests at annual meetings will become more common resulting in boards that are more politicized and less able to function properly. Furthermore, we agree that companies that are not accelerated filers should be exempted from the proposed rules. If you have questions or need any additional information, please contact Chris Cole, ICBA's regulatory counsel at 202-659-8111 or Chris.Cole@icba.org.
1 ICBA is the primary voice for the nation's community banks, representing 5,000 institutions at more than 17,000 locations nationwide. Community banks are independently owned and operated and are characterized by attention to customer service, lower fees and small business, agricultural and consumer lending. ICBA's members hold more than $511 billion in insured deposits, $624 billion in assets and more than $391 billion in loans for consumers, small businesses and farms. They employ nearly 231,000 citizens in the communities they serve.