Comment Letter to Justice E. Norman Veasey

Re: "Discussion Paper on Voting by Shareholders for the Election of Directors" Published by the Committee on Corporate Laws of the Section of Business Law of the ABA

August 15, 2005

Justice E. Norman Veasey
Chair, Committee on Corporate Laws
1201 N. Market Street, Suite 1402
Wilmington, DE 19801

Dear Justice Veasey:

The Society of Corporate Secretaries & Governance Professionals is pleased to offer comments on the "Discussion Paper on Voting By Shareholders for the Election of Directors" published by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association ("Committee"). This is a topic of great interest to our members, some of whom participated in the Committee and others of whom are involved in other forums focusing on this issue. The Society commends the Committee's thorough analysis of this important subject.

The Society of Corporate Secretaries & Governance Professionals (formerly The American Society of Corporate Secretaries) is a professional association, founded in 1946, with over 4,000 members who serve more than 3,000 issuers. Responsibilities of our members include supporting the work of corporate boards of directors, their committees and executive management regarding corporate governance and disclosure, as well as coordinating activities with shareholders such as proxy voting for the annual meeting of shareholders and shareholder proposals. Our members assure issuer compliance with the securities laws and regulations, corporate law, stock exchange listing requirements and the accounting rules, and have been on the front-line in implementing the structural changes necessitated by the Sarbanes-Oxley Act of 2002 and the resulting rules of the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the exchanges. The majority of Society members are attorneys.

This comment letter is based on the experience of the members of The Society, who are managing corporate governance and counseling boards of directors and corporate executives at public companies, small and large, on a daily basis. The Society, after considering the Committee's Discussion Paper, offers these comments:

1. We recommend that the Committee not endorse any amendment to the Model Business Corporation Act relating to voting for directors,
2. Boards of directors are in the best position to determine the most appropriate standard for election of directors at their companies, and
3. Potential administrative matters should also be considered.

Each of these conclusions is discussed more fully in the remainder of this letter.

1. We recommend that the Committee not endorse any amendment to the Model Business Corporation Act relating to voting for directors.

The Society believes the plurality vote, which is the generally accepted standard for electing directors of public corporations across America, has provided an effective process of electing strong, independent boards committed to protecting shareholder interests.

The Model Act and current state laws provide companies the flexibility to adopt a majority vote standard if they believe it is appropriate for their company. Over a dozen companies currently have a majority vote standard for electing directors. Those companies include Abbott Laboratories, Accenture, Best Buy Co., Inc., Engelhard Corp., Ford Motor Company, Frontier Airlines, Lockheed Martin Corp., Potlatch, Raymond James Financial Inc., Rohm and Hass, Ryder System Inc., Tyson Foods, Inc., and U.S. Bancorp. Several other companies, including Pfizer Inc., Dillard's, Inc. and Office Depot have voluntarily adopted corporate policies or bylaws regarding majority standards for electing directors.

The Boards of many other leading companies that are Society members are currently analyzing this issue as a result of their regular review of governance practices and their ongoing dialogue with their shareholders. A number of these boards may well determine to implement similar policy or charter amendments regarding director election standards. We believe that the energies and funds that would be spent in amending the Model Act and advocating legislative changes in various states to revise the default standard for director elections will not be necessary to effect change.

2. Boards of directors are in the best position to determine the most appropriate standard for election of directors at their companies.

It is the board of directors' responsibility in exercising its fiduciary obligations to act in the best interest of its stockholders. This would include determining the most appropriate director election standard, as well as the most appropriate response if a director does not receive a majority of the votes cast.

Boards of directors across the country are aware that shareholder resolutions calling for corporations to amend their articles of incorporation or bylaws to implement a majority vote standard for director elections gained noticeable momentum and support in the 2005 proxy season. Stockholders can be assured that boards of directors are seriously considering the director election standard most appropriate for their company.

Additionally, the experience of Society members has been that boards generally expect to have at least a majority vote in an uncontested election. The Society believes that if a director does not receive a majority of votes cast then it is incumbent upon the board to analyze the situation and act accordingly in light of all relevant circumstances, regardless of whether the company has a majority or plurality standard.

Boards of directors are also in the best position to evaluate any impact on their ability to attract and retain qualified board members. Regulatory and listing standard changes and litigation in the past few years have made director recruitment more difficult. The use by some institutional shareholders of campaigns to symbolically withhold votes from directors has had a similar impact. The power of such withhold campaigns would increase with a higher vote standard for director elections. Boards may wish to consider the impact of changes to the election standard on director recruitment.

3. Potential administrative matters should also be considered.

There are a number of administrative matters raised in the Committee's Discussion Paper that may impact director election standards.

Certain of the alternative changes involve unnecessary complexity, creating the possibility that technical problems may result. The complexity is evident in the sample language drafted by the Committee for all three alternatives, with the various "provided that," "unless" and "subject to" clauses. Technical problems that could result include handling of holdover directors, impact of failed elections on some corporate agreements such as employment contracts or credit provisions, director vacancies, and boards at least temporarily out of compliance with the independence and qualification requirements set forth by the New York Stock Exchange and NASDAQ.

While these technical problems could no doubt be solved with careful foresight and detailed drafting, they are cause for careful analysis before abandoning a flexible and workable plurality standard that has been widely adopted precisely for such reasons. Furthermore, the plurality vote mechanism ensures the election of a full slate of directors, even in situations of contested elections and multiple candidates. Many advocates of majority vote have realistically suggested establishing a double-standard approach, with majority vote for uncontested elections and plurality in the case of contested elections.

A change in the director election standard may have an impact on the classified board issue. The Society is not for or against classified boards, again believing that a board of directors must consider all relevant circumstances in determining the correct board structure for a company and its shareholders at a given time. However, many activists and institutional shareholders favor declassifying boards. The administrative issues that flow from a majority vote standard for electing directors, as discussed above, can be lessened by the classified board structure, and the need for board stability and planning for smooth board succession may encourage boards to take a fresh look at classified boards.

A change in the director election standard could also make it more difficult, as well as more costly, to conduct director elections if voting rules are changed. The NYSE is currently considering elimination of the discretionary voting authority of brokers

The Society's conclusion, after weighing the issues described above, is that the best approach at this point in time is to maintain the current plurality standard as the default for director elections, while giving all the parties time to analyze the impact of recently enacted disclosure standards and giving boards time to consider and respond to the increased interest on the part of stockholders in these subjects, in increased transparency on director selection and in responses to majority votes on shareholder proposals. The Society hopes these comments will be helpful to the Committee in its work.

Respectfully submitted,

The Society of Corporate Secretaries and Governance Professionals

By: Lydia I. Beebe, Corporate Practices Committee Chairperson

Society of Corporate Secretaries and Governance Professionals
521 Fifth Avenue New York NY 10175
212-681-2000 - Fax 212-681-2005

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