From: Hildebrand, Chuck CORP [CHUCK.HILDEBRAND@UTC.COM] Sent: Wednesday, March 31, 2004 5:52 PM To: 'rule-comments@sec.gov' Subject: comments of Debra A. Valentine United Technologies Corporation 1 Financial Plaza Hartford, CT 06103 VIA E-MAIL: rule-comments@sec.gov March 31, 2004 Mr. Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW Washington, DC 20549-0609 Re: Proposed Rule Relating to Security Holder Director Nominations (File No.S7-19-03) Dear Mr. Katz: We are writing to provide our views with respect to Release Nos. 34-4826, IC-26206 (the "Proposing Release") in which the Securities and Exchange Commission (the "Commission") solicited comments on a proposed rule that will, under certain circumstances, require companies to include in their proxy materials shareholder nominees for election as director. As summarized below, we have serious reservations about the proposal as a means to address corporate governance issues. Accordingly, we support the withdrawal of the proposal subject to future reconsideration at a time when the Commission can evaluate the experiences of companies under the numerous new corporate governance practices adopted in the past few years. We believe the proposed rule is a blunt instrument that will adversely impact companies that may have none of the issues the Commission is seeking to address. We note that the Commission, in the Proposing Release, has stated that the proposal is meant to apply to companies where there is evidence regarding the ineffectiveness of, or shareholder dissatisfaction with, the proxy process. We think the criteria set forth in the Proposing Release for triggering the nomination process are overly broad and do not accomplish the Commission's stated aim. In our view, the first proposed trigger - that one director receive "withhold votes" from as few as 35% of the votes cast - does not indicate a failure of a company's proxy process. As an initial matter, we do not think that it is appropriate to use a standard that looks to less than a majority of the shareholders, and that disregards the votes of up to 65% of them, as an appropriate measure of shareholder sentiment on any issue. We also do not think that focusing on the "withhold vote" totals with respect to a single director, rather than a majority of the board, provides any indication of company-wide issues. Furthermore, we note that most "withhold vote" campaigns are waged over issues, such as corporate governance matters (e.g., independence of directors), individual misconduct or other matters, that are unrelated to any indication of ineffectiveness of, or shareholder dissatisfaction with, the proxy process. As such, we think this trigger fails to meet the Commission's standard of being "tied closely" to evidence of proxy process failures. Similarly, we do not believe that the second proposed trigger - a majority shareholder vote in favor of a proposal to subject the company to the nomination process - is a good indicator of a problem with a company's proxy process. We believe that the fact that powerful proxy advisers such as ISS, as well as many institutional holders, have turned to policy-driven voting rather than voting on the basis of case-by-case analysis, explains much of the success behind many majority vote proposals. We expect that many shareholders, as well as proxy advisers, will be tempted automatically to support proposals to enact the nomination process in order to preserve an "option" (which many shareholder activists have already publicly stated will be used as leverage in negotiating other, unrelated matters with companies) for the next two proxy seasons. Because of such incentives, we think that a precatory vote in favor of adopting the nomination process is poor evidence of a failure of the company's proxy process. We also strongly oppose triggering the nomination process based on a company's failure to implement a shareholder proposal that has achieved majority shareholder support. We do not think there is any connection between a board's decision on whether to implement a precatory proposal on any number of possible topics and the effectiveness of a company's director nomination and election process. Moreover, under state law, directors have a fiduciary duty to act in the best interest of the company and all its shareholders, and therefore may not reflexively adopt precatory proposals simply because of majority shareholder support. In addition to our reservations about the substance of the proposal, we think the proposal is being made at the wrong time for several reasons. First, we believe most companies and directors favor a practice of engaging in discussion with significant long-term shareholders who raise concerns or have suggestions about company business or governance practices. Companies and, we believe, shareholders share the view that discussion is more productive than adversarial processes. In our view, most large companies engage in discussion when significant long-term shareholders raise issues. In addition, Congress, the Commission and the stock exchanges have recently adopted the most comprehensive changes to the corporate governance regime during the past seventy years. Significantly, these changes have included reforms in the area of director nominations. The new stock exchange rules require that all the members of the nominating committee be independent (under an enhanced definition of independence). In addition, new nominating committee disclosure rules require companies to disclose any company policy by which shareholders may recommend nominees; whether the nominating committee will consider such nominees; the process for identifying and evaluating candidates of the board; whether there are any differences in the manner of consideration of candidates recommended by shareholders; any specific minimum qualifications for nominees; the name of any candidate submitted by a shareholder or group of shareholders owning more than 5% of the company's voting stock; and whether the company chose to include the candidate in the company proxy. Both the stock exchanges and the Commission have also added new rules to provide shareholders with a means to communicate with board members and to require disclosure of procedures for shareholder communications. We believe the corporate governance reforms voluntarily adopted by many companies, those embodied in the Sarbanes-Oxley Act and the new stock exchange rules, and in particular the specific rules relating to director nominations and shareholder communications, have already significantly changed companies' corporate governance practices and shareholder relations initiatives. Companies have adopted new governance practices in advance of requirements, and in many cases are going well beyond the minimum legal requirements. We strongly feel that the Commission ought to evaluate the performance of corporate boards based on the new governance practices before deciding on the need for the proposed nomination rule. We believe the current rule proposal would foster adversarial confrontation and the pursuit of special interests not shared by all shareholders. We think that the proposed rule is of such magnitude and effect that it cannot and should not be seriously considered, much less approved, in the absence of the best available evidence as to whether the problems that have been identified as justifying the need for the rule in fact continue to exist. Thank you for considering our views. If you have any questions regarding these comments, please do not hesitate to contact me at (860) 728-7869. Very truly yours, /s/ Debra A. Valentine Debra A. Valentine Vice President, Secretary and Associate General Counsel