Electing Boards of Directors Sent: Saturday, September 14, 2002 7:12 PM Subject: Electing Boards of Directors (4-461) Honorable Mr. Harvey Pitt: It is time that to stop allowing public corporations to conduct board of director elections in the same way as has been the case for many years. Reportedly, SEC Rule 14a-(8)(i)(8) specifically allows public corporations to exclude director nominations from shareholders. In essence, most hurdles to engaging in an effective proxy solicitation effort occur because the name of Shareholders' Director-nominees will NOT appear on a corporation's ballot. Under applicable state corporate law, Shareholders can easily nominate a candidate for a corporate Directorship, but, under present SEC Rules, only the names of those persons nominated by the corporation need appear on the corporation's ballot. The assets of all Shareholders are expended by Management to distribute those ballots. To overcome the hurdles, a Shareholder can expect to expend about $250,000 to purchase the expertise to accomplish the task or needs to develop that expertise. Normally, Shareholders must: - locate other potential Director nominees and conduct related due diligence; - draft a charter for a committee; - decide how to finance/allocate the out-of-pocket expenses, e.g., legal document drafting, printing and distribution costs; - obtain a copy of the corporation's Bylaw and Articles of Incorporation; - learn details of state corporate law, federal securities laws and various SEC Rules; - learn how to use the SEC's EDGAR electronic filing system (as there is no paper filing); - deal with the corporation and its transfer agent which stall and request thousands of dollars for a copy of the Shareholders list which costs them little to produce; - be willing to file a legal action in Delaware or other state courts to get the Shareholders list; - be prepared to expend funds and effort in defense of a frivolous legal action by the corporation used to exhaust funds and energies; - deal with the SEC's responses to draft filings; - make sure that the appropriate parties are notified that the election is "contested"; - verify that proxy statements have actually been mailed to "beneficial holders" of the stock and that votes have been counted properly; - locate and attempt to communicate with the Proxy Voter at large Institutional Investors; - learn the rules to be employed at the Annual Meeting without the cooperation of the corporation. The SEC is well aware of the aforesaid hurdles. The Division of Corporation Finance, responded to recent correspondence from Les Greenberg by stating, "[W]e remain sensitive to the importance of this issue to shareholders, particularly in view of the difficulty minority shareholders may have in seeking the election of their nominees to the board of directors." Yet, the SEC has done little to demonstrate any such sensitivity. Some shareholders have discussed hurdles of nominating/electing truly "independent" Directors --- those not beholden to Management or fellow Directors for their selection, nomination and/or the financing of their proxy solicitation efforts. Most public investors were shocked to learn how Directors are selected/elected. The general investing public does not think about such issues. However, when awakened to the issue, investor confidence in corporate governance tends to decline. CONCLUSION The Wall Street Journal (7/16/02), in an article entitled, "Wall Street Rushes Toward Washington, Flees Responsibility," stated, "Ms. Teslik [Council of Institutional Investors] cites how difficult it is for shareholders to elect a director other than those hand-picked by management --- even though the directors, in theory, represent the shareholders. 'Our system allows executives to pick the boards who are supposed to police them,' she says." The Los Angeles Times (7/22/02), in a series entitled, "Crisis In Corporate America," stated, "'The biggest obstacle to a good board is arrogance,' Raber [Roger Raber, president of the National Assn. of Corporate Directors] said. 'With some directors, there is a sense of entitlement. ... "I'm here as long as I want to be."'" TIME Magazine (7/22/02), in an article entitled, "More Reform and Less Hot Air," stated, "Get Rid of Pet-Rock Boards ... [T]oo many corporate boards of directors still serve as little more than puppets of management. ... Companies should be required to give shareholders election materials about rival candidates; as it stands, small investors who want to wage upstart campaigns don't stand a chance." The New York Times (7/30/02), in an article entitled, "Labor to Press for Changes in Corporate Governance," stated, "He [John J. Sweeney, President of the A.F.L.-C.I.O.] will also call for changes to give pension funds more power to choose directors who do not rubber-stamp the decisions of company executives." TIME Magazine (8/5/02), in an article entitled, "Interview - 10 Questions for Ralph Nader," states, "Congress passed a corporate accountability act last week. Was that enough? ... The election of corporate board members is a Kremlin type of election. It's a self-perpetuating system, with shareholders having no real power. That has not been touched." Entrenched Managers and Directors will only improve corporate governance when they can be held personally accountable, e.g. voted out of office and replaced by candidates nominated by Shareholders. We urge the SEC to consider taking the steps to improve "Open Election" procedures as soon as possible. Perhaps appropriate will be a method comparable to the election of the Board of Overseers at Harvard -- or comparable plans wherein there are more qualified candidates than open posts [http://www.news.harvard.edu/gazette/2002/07.18/03- overseers.html]. I understand that there have been viable new rules proposed: http://www.corpgov.net/forums/commentary/SEC%20Petition%20G.html http://www.corpgov.net/forums/commentary/SEC%20Petition%20G.html Respectfully submitted, Charles Golson 1609 W. Evans Drive Phoenix, AZ 85023