From: Bruce.G.Wilson@exeloncorp.com Sent: Monday, December 22, 2003 1:17 PM To: rule-comments@sec.gov Subject: File No. S7-19-03 Importance: High <<...OLE_Obj...>> Exelon Corporation www.exeloncorp.com P.O. Box 805379 Chicago, IL 60680-5379 December 22, 2003 Mr. Jonathan G. Katz Secretary Securities and Exchange Commission 450 Fifth Street N.W. Washington, D.C. 20549-0609 Re: Security Holder Director Nominations Release No. 34-48626; IC-26206; File No. S7-19-03 Dear Mr. Katz: This letter is submitted on behalf of the Board of Directors of Exelon Corporation to express opposition to adoption by the SEC of the proposed rules relating to security holder director nominations. Our board of directors consists of 13 individuals who, collectively, currently serve as directors on the boards of 32 different publicly held companies. For the reasons set forth below, we are opposed to the adoption of the proposed rules. The rules will detract from, rather than improve, democratic principles in corporate governance. We support the application of democratic principles to corporate governance. However, we are concerned that the proposed rules, if made effective, would undermine, rather than advance, democratic principles in corporate governance. Today, a majority of the directors of a listed public company must be independent. A board is required to have a nominating (or equivalent) committee consisting entirely of independent directors. The SEC and the stock exchanges have carefully defined the requisites for a director to be "independent." Many directors hold equity interests in the companies on whose boards they serve. As a consequence, we believe a majority of the directors on most boards have interests that are already aligned with the interests of shareholders. In this sense, the interests of shareholders are already adequately represented on most corporate boards, and there is no need for special provisions enabling particular shareholder groups to seek the election of their representatives. This alignment of the interests of directors with those of shareholders is a relatively recent development driven by a sharper legislative, regulatory and market focus on corporate governance over the past two years. We believe the measures already adopted have had, and will continue to have, the effect of improving the independence of directors and corporate governance in general. These measures should be given time to demonstrate their effectiveness before other measures, such as the proposed rules, are put into effect. Shareholders who believe their interests are not adequately served by a board of directors already have adequate means to nominate and elect directors and protect their interests in other ways. We acknowledge that there have been, and there may still be, a few boards whose interests are not adequately aligned with the interests of shareholders. However, with increased disclosure requirements already in place, and an increased investor focus on corporate governance issues, these exceptions to the general rule will be more easily identified by shareholders and prospective investors. We believe that shareholders and prospective investors, armed with knowledge about a particular company's corporate governance, already have adequate means to protect themselves. Shareholders already have rights to nominate any number of directors they choose and solicit proxies for the election of those nominees. However, shareholders do not often exercise this right. Those who support the proposed rules cite the infrequent exercise of this right as evidence of the need for expanded rights for shareholders. Those who oppose the proposed rules can cite the same statistic as evidence of the infrequency with which shareholders have found it appropriate to initiate change in a board of directors. In any event, the existence of this right is a significant tool that investors can use, or merely threaten to use, as a means to improve the performance of a board of directors. It is also important to note that, in addition to their rights to nominate candidates for election as directors and solicit proxies in contested elections, shareholders and prospective investors establish the market for the stock. Today, corporate governance has become a market force, and companies who practice good corporate governance enjoy an advantage in the market. The system of disclosures already in place is designed to enhance the effectiveness of this market. In our view the performance of a stock in a market affected by such pressures is the best mechanism to assure the effectiveness of directors. We think this mechanism is already working effectively. In our experience, this is demonstrated by the ease and frequency with which shareholders make their views known to the companies in which they invest-and the careful attention directors give to those communications. The rules will not be the best way to select qualified directors. The mechanism established by the proposed rules will not be the best way to identify and elect qualified board members. As noted earlier, a majority of the directors of a listed company must be independent; the entire nominating committee is required to be independent. The interests of these people are already aligned with the interests of investors. We believe that these people can be trusted to identify and seek the election of directors who will be independent and serve the interests of all shareholders. Selection of effective directors is much more than a matter of independence and length of resume. The board and its nominating committee are in the best position to identify qualified candidates with the particular mix of experience, skills and personal character needed to make the entire board function more effectively. Service as a director is time-consuming and difficult work, and nominees for director are screened for their ability and desire to apply the skills and devote the time necessary to be effective. Being an effective director is a very difficult job in which knowledge, experience, personal character and performance are of critical importance. Those who support the proposed rules will argue, in response, that the nominees proposed by the incumbent directors will be elected by the shareholders if they really are better candidates than a nominee proposed by a shareholder. While differences in the resumes of nominees can be communicated in a proxy statement, the differences that make one person a more effective director than another are usually subjective and subtle matters of character that cannot be effectively communicated in a proxy statement. Any attempt to convey that information in the proxy statement would, under the proposed rules, open the proxy statement to a 500 word essay on behalf of each nominee proposed by shareholders. In our view (and for reasons that will be discussed below), the proposed rules, if made effective, will create a simple mechanism for shareholder groups to "knock out" nominees proposed by the directors, regardless of the superior qualifications and personal abilities of those nominees. Directors nominated by shareholders will inevitably tend to represent the special interests of the nominating shareholders. We believe it is inevitable that the nominee of a shareholder, once elected, will tend to be a representative of the special interests of that shareholder rather than the interests of the enterprise as a whole. The provisions of the proposed rules that require the shareholder's nominee to be independent of the shareholder will not eliminate that tendency. Presumably, the shareholder will select a nominee who, although "independent" under the rules, will be expected to act as a director in ways that will advance the agenda of the nominating shareholder. We can easily imagine the tendency for a sitting director, who was nominated by a shareholder, to communicate with that shareholder on a regular basis about matters that come before the board. While open communication between a board of directors and shareholders is normally good corporate governance, this sort of "one-off" communication is contrary to good corporate governance. We fail to see how it would be in the interest of all shareholders for a director or nominee for director who is selected by independent directors on the basis of his or her independence, knowledge, experience, personal character and performance, to be replaced by the nominee of a particular shareholder who has not been subjected to the same selection criteria but, instead, has been nominated because the shareholder understands that the nominee will vote and otherwise act as a director consistent with the desires of the nominating shareholder. The rules will impose costs on companies with no real benefit for investors. We believe the proposed rules, if made effective, will be distracting and costly to companies, without any real benefit for investors. It is becoming increasingly difficult to recruit qualified directors to corporate boards. The prospect of facing a contested election each year is not a pleasant thought for qualified candidates who often have other opportunities to serve. Under the proposed rules, additional time and attention will need to be devoted to elections and shareholder proposals that may ultimately qualify as triggering events in subsequent years. In our experience, companies naturally attempt to fill the board of directors with the most-qualified candidates willing to serve, considering all factors relevant to effective service as a director. The proposed rules will detract from this process. The American Society of Corporate Secretaries conducted a survey of the costs companies expected to incur as a result of the proposed rules. The survey indicates that the average cost to deal with a shareholder proposal to trigger access or a withhold vote campaign will be approximately $280,000, and the average cost to deal with a contested election will be approximately $570,000. Although these costs are difficult to predict, these estimates are not significantly different from our own predictions. The rules will have significant unintended consequences. The proposed rules, if made effective, could have other significant unintended consequences. We are already hearing of plans by institutional investors and their advisors to mount a campaign to withhold a vote for each nominee named first on the proxy cards at this year's annual meetings, in order to create a triggering event that could be used if and when the proposed rules become effective. Apparently, some people who support the proposed rules are already planning ways to "game the system" and "stuff the ballot box" in order to obtain election results that favor their own objectives without regard to the merits of the various nominees on which shareholders are asked to vote. In our view, this expected irresponsible behavior in 2004 elections is a stark predictor of tactics to expect in all future elections and raises a serious question about the wisdom of the proposed rules as a whole. We believe the rules and the resulting gamesmanship in election contests will frequently result in the arbitrary loss of the most independent, experienced, and dedicated candidates--and the election of other candidates whose loyalties will tend to favor the particular shareholder who nominated them. Today, the outcome of shareholder voting depends more and more on the recommendations of organizations who purport to give independent advice about voting. While these organizations can perform a valuable service, they typically have no investment at risk in their voting recommendations, and their fee-paying clients are institutional shareholders and other significant investors-the shareholder groups most likely to take advantage of the proposed rules. If the proposed rules become effective, organizations that advise institutions about voting will naturally seek to rationalize their endorsements of the candidates nominated by their clients, without due regard for the merits of the candidates placed on the ballot by the independent directors. This will enhance shareholders' efforts to "game the system" and accelerate the tendency of the proposed rules to inject "special interest politics" into the election of directors. In our view, this will not be in the interest of shareholders as a whole. The proposed thresholds for triggering nomination rights are too low. For many listed companies, a relatively small number of shareholders would be needed to form a group representing 5% ownership, and many of those shareholders could be holders of an insignificant number of shares. This creates an opportunity for small investors to organize a group to advance the particular agenda of a few people who have relatively little at stake. If the proposed rules are adopted, the 5% threshold should be increased, and a shareholder group should exclude investors who hold less than a specified percentage of shares. We also believe the triggers based on voting results at prior meetings should be increased. Otherwise, we expect that many companies, even those that are performing well with effective boards and sound corporate governance, will face the cost and distraction of frequent election contests. With the activity of a few institutional investors and advisors who make well-publicized voting recommendations, it is common for the outcome of voting to be swayed by the preferences of a few people rather than by a careful analysis of the issues by beneficial owners. The voting triggers should be set at higher levels to assure that the right to nominate a director is predicated on genuine shareholder dissatisfaction rather than voting results created largely by a "herd mentality" driven by a few people. The 2004 proxy season should not be affected by the rules. The rules will have many consequences, both intended and unintended. We firmly believe that the proposed rules, if made effective, should not apply to the 2004 proxy season, and we believe voting results from the 2004 proxy season should not become triggering events in subsequent years. Companies should have a reasonable amount of time to anticipate and prepare for events that may ultimately become triggering events. As already noted, there is already reason to expect that voting results in 2004 will be distorted by the efforts of some people to create a triggering event for 2005 on the assumption that these particular proposed rules will be made effective. If 2004 voting results are potential triggering events in subsequent years, many companies will feel compelled to make disclosures in their 2004 proxy statements about a shareholder access process that has not been finalized, and much confusion will result. The rules will create problems for companies with staggered boards. The proposed rules present a particular problem for companies with staggered boards. If, as we expect will tend to be the result, the elected nominee of a shareholder is not as effective as a director as an alternative nominee selected by the independent directors, a company with a staggered board will not have an opportunity to propose a nominee to run against that director for three years. There are several legitimate reasons for a company to establish a staggered board, and we do not believe the solution to this problem is to abandon the staggered board. Three years is a long time for a company to suffer a board that cannot function at its optimum effectiveness due to the weaknesses of one or a few directors placed on the board as representatives of particular shareholder interests. Those who support the proposed rules may argue that the logic discussed in the prior paragraph applies equally to all directors. In our experience, an incumbent director who is nominated by the independent directors can normally be persuaded to resign if and when the director loses effectiveness. This will rarely, if ever, be the case for directors nominated by shareholders. The proposed rules need to be considered more carefully. The proposed rules will have many predictable effects and will produce many unintended consequences. The comment period should be extended for at least an additional 60 days to allow adequate consideration of the issues and the effects of the rules on companies and investors. In our political economy imbued with principles of democratic representation in government, the idea of enhanced democracy in corporate elections appears, on the surface, to be a good idea that few people would want to argue against and many people will argue for as a matter of intuition. However, we are concerned that, however well-intentioned the proposed rules may be, they will ultimately lead to more mischief than good by introducing special interests into elections for directors and by enabling independent and effective directors to be unseated by nominees whose interests are not aligned with the interests of the enterprise and its investors as a whole. Shareholders' interests are already well-protected and well-represented through existing requirements for director independence and the extensive disclosures that create an effective market-check against ineffective boards. Shareholders already have access to a mechanism that enables them to replace any number of directors or the entire board. In this sense, the proposed rules address a perceived problem that, in reality, does not exist to a degree that justifies a sweeping change in substantive corporate law. We share the concerns and endorse the opinions expressed in comments submitted by the American Society of Corporate Secretaries. We are opposed to the proposed rules and we encourage the SEC to consider them more carefully. Very truly yours, s/ M. Walter D'Alessio M. Walter D'Alessio Chairman Corporate Governance Committee Exelon Corporation ************************************************************************ This e-mail and any of its attachments may contain Exelon Corporation proprietary information, which is privileged, confidential, or subject to copyright belonging to the Exelon Corporation family of Companies. This e-mail is intended solely for the use of the individual or entity to which it is addressed. If you are not the intended recipient of this e-mail, you are hereby notified that any dissemination, distribution, copying, or action taken in relation to the contents of and attachments to this e-mail is strictly prohibited and may be unlawful. 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