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Legal Office November 10, 1997
Jonathan G. Katz
Re: Amendments to Rules on Shareholder Proposals Dear Mr. Katz: On behalf of the Board of Administration of the California Public Employeesí Retirement System ("CalPERS"), I am pleased to submit this letter in response to the Commissionís request for comments on proposed amendments ("the Amendments") to the rules related to shareholder proposals. The Amendments are set forth in Release No. 34-39093 (September 18, 1997) ("the Release"). CalPERS is the largest public pension system in the country, with assets currently valued in excess of $122 billion. These assets, which provide retirement benefits to over 1 million of California's government employees and their families, are invested heavily in the U.S. equity market. The average holding period for our common stock is over 10 years. CalPERS is both a substantial and long-term investor in the equity market. Pursuant to the California Constitution, in making and managing investments CalPERS' Board must meet a "prudent expert" fiduciary standard that is comparable to that imposed upon trustees of private pension plans governed by the Employee Retirement Income Security Act of 1974. This standard governs both our investment decisions and the exercise of our voting rights for equity securities. Generally, we consider these voting rights to include not only the execution of proxies solicited from us, but also our rights under Rule 14a-8 to sponsor shareholder proposals. In other words, the right to present shareholder proposals to our fellow shareholders is, we believe, subject to the same fiduciary responsibilities as our other plan assets. This conviction has led CalPERS to be an active participant in what has been characterized as the "corporate governance movement" for over 10 years. With this background, it is clear that CalPERS has a strong interest in the way in which Rule 14a-8 and related rules are structured, and the way in which they balance the interests of corporate management and corporate owners. CalPERS generally commends the Commission's stated goals of making "it easier for shareholders to include a broader range of proposals in companies' proxy materials", while also providing "companies with clearer ground rules and more flexibility to exclude proposals" that fail to attract significant shareholder support. However, we are concerned that the "package" presented in these Amendments does not strike a fair balance between these two competing interests, but instead weighs too heavily on the side of excluding what are under the existing rules permissible proposals. Through our comments, we recommend revisions to the Amendments which will, we believe, provide greater equity. I. Question and Answer Format We find that the new format makes the rule easier to understand, thereby improving its usefulness for small and individual shareholders. Rule 14a-8 should be accessible to all shareholders, regardless of their ability to retain legal counsel. We applaud the Commission's staff for this innovation. II. Grounds for Exclusion A. Personal Claim or Grievance CalPERS agrees with the Release's statement that current Rule 14a-8(c)(4) is inappropriately subjective, requiring Commission staff to "make determinations essentially involving the motivation of the proponent." The Amendments, however, propose to eliminate placing the staff in this awkward position through abdication. By revising the way the Commission applies the rule, rather than the rule itself, the Amendments fail to focus on what is a much more fundamental issue. Should Rule 14a-8(c)(4) prohibit shareholders from considering proposals concerning an otherwise legitimate topic, simply because the proponent and issuer have an unrelated dispute between themselves? In our view, the motivation of the proponent is completely irrelevant to the question of whether the company's shareholders should have the right to consider and vote upon an issue that is, on its face, unrelated to the "personal grievance." CalPERS therefore recommends that the Amendments be revised so that only those proposals which, on their face, relate to the redress of a personal claim or grievance are excludable; the motivation of the proponent would not constitute grounds for exclusion. B. The Relevance Exclusion As we read the proposed amendment to Rule 14a-8(c)(5), this exclusion would apply if BOTH of the following exist: (1) the proposal, on its face, concerns the purchase or sale of services or products; AND (2) those services/products do not meet the stated gross revenue or cost thresholds ($10 million for large companies, with lesser amounts for smaller companies). However, in reading preliminary comments from other shareholders, it appears that there is some uncertainty as to whether BOTH of these factors must exist before the exclusion can be relied upon by an issuer. If we are correct in our interpretation, we recommend that the Amendments be revised to clarify that the proposal "on its face" must concern the purchase or sale of service or products (i.e., the current language - "proposal relates to a matter involving ... - may be ambiguous). If we are incorrect in our interpretation, CalPERS would oppose this Amendment. To introduce a "relevance" threshold unrelated to the specific purchase/sale of goods/services would represent a significant expansion of Rule 14a-8(c)(5)'s exclusion that could potentially impact many of the corporate governance proposals that CalPERS currently sponsors (e.g., de-staggering board terms, separating the positions of chair and chief executive officer). Since, however, the Release states that the goal of this particular revision is to "narrow" the exception, we trust that the former rather than latter interpretation was intended. C. The Ordinary Business Exclusion (newly described as "Management Functions") - Cracker Barrel CalPERS strongly supports the reversal of the Commission's Cracker Barrel decision, and believes that reversal should occur immediately regardless of whether the rest of the Amendments are adopted. (In this regard, CalPERS is in accord with Commissioner Wallman's statements of concurrence, published as a supplement to the Release.) In our view, the heated and consistent division of opinion about the Cracker Barrel decision has significantly harmed the corporate-shareholder dialogue during the past five years. With published reports that even the Commissioners themselves, past and present, are divided on the appropriateness of that decision, shareholder confidence in the Rule 14a-8 process has been shaken. Quick reversal is the surest way to quickly move beyond this contentious period. Although CalPERS remains concerned that a return to a case-by-case analysis (rather than the post-Cracker Barrel "bright line" test) may not produce a substantive change in the Commission's response to employment proposals raising significant social issues, we accept the Release's stated intent and look forward to seeing the analysis applied in specific situations. With the exclusion being described using the proposed new language, we expect that the Commission's staff will have a "clean sheet" on which to draw interpretations in this area. As an additional comment: the new note (to paragraph (i)(7)) includes four examples of the kind of proposals the revised rule would exclude. One of these ("the wages a company pays its non-executive employees") should be revised or dropped from the list. There are instances where wages to non-executive employees conceivably raise questions that are not "normally left to the discretion of management" (e.g., the impact of federal laws on minimum wage, disability, severance and retirement issues). D. Resubmission Thresholds The Amendments' proposed resubmission thresholds are too high. CalPERS accepts that, to balance the issues presented in the Amendments, there may be a reason to raise the current thresholds of 3% for first year submissions, 6% for second year, and 10% for third year. But, considering the still disproportionate power of corporate management to prevail over shareholder proponents - particularly small and individual shareholders who do not have the resources to conduct their own proxy voting campaigns - the proposed levels of 6%, 15% and 30% tip the scale too far. If there is a need to change these thresholds to maintain the balance of the Amendments as a whole, we recommend something closer to 5%, 10%, and 15%. Alternatively, and responding to the Commission's specific request for comment in this regard, a sliding resubmission scale - based upon the size of the company - could also be more equitable than the current proposal. This approach would accommodate the fact that obtaining a certain percentage of support can become more difficult as the size of the shareholder base increases. III. Override Mechanism CalPERS applauds the concept of an override mechanism, which affords shareholders the right to consider and exercise their franchise on certain types of issues that are of concern to a significant segment of the company's owners. Rule 14a-8 should be seen as a vehicle through which shareholders may participate in the governance of the companies that they own, rather than a device for preventing this dialogue. Because an override mechanism is inclusive, rather than exclusive, we support the concept. But, to be an effective opportunity for shareholders, the override threshold must be realistically obtainable for all shareholders. In our view, 3% is only realistic for large, institutional investors. CalPERS strongly believes that both large and small shareholders (meeting the minimum holding and duration requirements) should not be treated disparately. With this large of a threshold (which, for large companies, can represent billions of invested dollars), the override mechanism would effectively be controlled by a few large institutional shareholders. Although CalPERS would likely be such a shareholder, we do not believe that is an appropriate role for our system, nor is it an appropriate public policy to vest such control in investors of this type. We recommend either a significantly lower threshold (e.g., 1.5%) or a sliding scale where the override percentage decreases as the number of outstanding shares increases. IV. Discretionary Voting (Rule 14a-4) CalPERS does not believe that the proposed revisions are necessary. We understand that issuers face some difficult choices when they become aware of non-14a-8 proposals after the company has filed or mailed its proxy statement. But, the right to exercise discretionary voting to vote uninstructed proxies against a proposal is an enormous benefit for company management, and an enormous disadvantage for shareholder proponents. CalPERS does not believe that company management needs this advantage, particularly when the proponent has not chosen to impose upon the company the cost of distributing its proposal through submission under Rule 14a-8. Most companies have the ability to amend their bylaws to require advance notice of matters to be presented from the floor, should they believe this notice is truly necessary. This is an area where Commission action is not necessary. V. Eligibility CalPERS supports increasing the market value eligibility threshold from $1,000 to $2,000. In response to the Commission's comments, we would also support reducing the minimum holding period. Since proponents must hold their stock through the meeting date (usually 150 days after submission), requiring also a holding of one year prior to submission is unnecessarily onerous. CalPERS would support decreasing this period to six months. VI. Review of a Company's Statement in Opposition CalPERS is strongly opposed to eliminating the review by Commission staff of statements in opposition, as requested by objecting proponents. Although it may be true that "only a handful of shareholders make use of the mechanism each year", it is also true that CalPERS - as one proponent - regularly negotiates company amendments to their draft opposition statements. Without the ability to ultimately call upon the Commission for review, these companies would have little incentive to make modifications that we believe are appropriate. To require a proponent to incur the burden of seeking court intervention as the sole recourse is simply unfair. We urge the Commission to reconsider this proposal. VII. Representation at Meetings While CalPERS does not object to the Commission's long-standing interpretation of the personal attendance requirement contained in current Rule 14a-8(a)(2), we suggest that the "question-and-answer" format of the new rule be revised slightly in this regard. Specifically, the rule does not specify what may seem obvious but is frequently a surprise to shareholder proponents - that by failing to attend the meeting, the proposal will not be called for a vote at that meeting. The rule should be clarified so that shareholders are informed that the penalty for failing to attend the meeting will be a loss on the proposal, as well as at the subsequent two meetings. Thank you again for the opportunity to comment upon these significant Amendments. If you or any of the Commission's staff would like to discuss these comments in greater depth, please feel free to contact me. Sincerely,
KAYLA J. GILLAN KJG:cl cc: Members, CalPERS Board of Administration
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