Mark Latham, Ph.D.
The Corporate Monitoring Project
10 Miller Place #1701
San Francisco, CA 94108, USA
Phone: (415) 391-7198
Fax: (415) 680-1521
January 10, 2000
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Shareowner Proposal of Mark Latham to Citigroup
Ladies and Gentlemen:
I am writing in response to the December 22, 1999 letter and supporting material (the "Citigroup Submission") submitted to the Commission by Citigroup Inc. ("Citigroup" or the "Company"), which expresses the Company’s intention to omit from its proxy statement for the 2000 annual meeting a shareowner proposal (the "Proposal") submitted by me. The Proposal (attached) asks the shareowners to request the Company to hire for one year a proxy advisory firm to be chosen by the shareowners.
The Citigroup Submission cites Rules 14a-8(i)(7) (‘ordinary business’), 14a-8(i)(4) (‘personal interest’) and 14a-8(i)(3) (‘false and misleading’) as bases for its request for relief from enforcement action. I suggest below some revisions to the Proposal, primarily to maintain consistently precatory language. (The resulting "Revised Proposal" is attached.) For the reasons given below, I believe the Revised Proposal may not be properly omitted under Rule 14a-8. Most of these reasons would apply equally well to the (original) Proposal.
Suggested revisions to the Proposal
1. The Proposal is intended to be precatory. In order to clarify this, I suggest changing its wording to maintain consistently precatory language by:
(a) replacing "RESOLVED that the Company hire" with "RESOLVED that Citigroup shareowners request the Board of Directors to hire";
(b) consequently simplifying the next sentence by replacing "Citigroup shareowners request the Board of Directors to take" with "Shareowners request the Board to take"; and
(c) in the subsequent part of the resolution (before the supporting statement), replace "can" with "could", and replace "is" with "would be" (see attached Revised Proposal for exact wording), thus indicating that it is all conditional on the Board’s decisions.
2. I recently heard from the editor of the journal Gouvernance that my article entitled "The Internet Will Drive Corporate Monitoring" will not be in their Winter 2000 issue as had been planned, but is slated for their Spring 2000 issue instead. Since references to future publications can not be considered guaranteed, I suggest deleting the reference to Gouvernance, as in the attached Revised Proposal.
Rule 14a-8(i)(7) -- ‘ordinary business’
1. The Revised Proposal is designed to improve corporate governance, which is not an ordinary business matter.
2. The Revised Proposal asks for the hiring of a proxy advisory firm, but would not restrict the Company from hiring any other external consultants. So it would not interfere with the Company’s ordinary business operations.
3. Choosing a proxy advisory firm is well within the capabilities of shareowners. It is easier than voting intelligently on compensation plans, director candidates, and most other proposals. On these more complex matters, shareowners will be better able to vote with the benefit of independent advice if the Revised Proposal is implemented.
4. Unlike Johnson Controls, Inc. (October 26, 1999) and Bob Evans Farms, Inc. (June 23, 1997), the Revised Proposal would relate exclusively to shareowner voting, and thus not to ordinary business matters.
This is a corporate governance proposal. While the Company may hire consultants as part of its ordinary business, the Revised Proposal would in effect enable shareowners to hire consultants (a proxy advisory firm). The Revised Proposal would not prevent the Company from hiring consultants, so it does not interfere with the Company’s ordinary business operations. The Citigroup Submission thus makes an overly broad interpretation of Rule 14a-8(i)(7).
Rule 14a-8(i) is part of a tradeoff between enabling shareowners to have a voice in appropriate ways on the one hand, and excluding counterproductive uses of the proposal mechanism on the other. Rule 14a-8(i)(7), the ‘ordinary business’ exclusion, is more specifically about the tradeoff between shareowner voice and excess micro-management of decisions better left to management. The problem of optimizing this tradeoff is exactly what the Revised Proposal is designed to solve. Choosing a proxy advisory firm will be an easier decision for shareowners than other matters they are asked to vote on, including compensation plans, directors, and most proposals. Once a proxy advisor has been hired, shareholders are likely to be better informed and better prepared to vote on other proxy issues.
Most institutional investors are aware of the reputations of proxy advisory firms, but most individual investors are not. However, individuals will quickly and easily learn those reputations if the Revised Proposal is implemented. That will happen in much the same way that consumers have learned how to buy personal computers (PCs). Before PCs became a mass-market product, most consumers knew little about them or their manufacturers’ reputations. But when many people became interested in buying them, they did not have to be electrical engineers to be able to choose good quality PCs. Reviews in the media assessed and compared PC brand reputations. Availability of this information and competition among brands have brought great responsiveness to customer needs.
This evolution of media coverage will happen much faster for proxy advisory firm reputations than it did for PC makers, because the advisory business is already well established, and advisor reputations are well known among institutional investors. They need only be communicated to individuals by the media.
A key factor here is the number of major PC brands. If there were hundreds, it would not be practical for consumers to learn all their reputations. Likewise for proxy advisory firms: this system will work because there are not too many of them. By contrast, director elections rarely provide an effective voice for shareowners, because potential director candidates nationwide for board seats at companies in a typical investor’s portfolio number in the hundreds. SEC Release 34-40018 (May 21, 1998) states that the ‘ordinary business’ rule is designed to exclude proposals "probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment". It is easier to make an informed judgment about proxy advisory firms than about directors. Since shareholders are expected to vote on directors, they must be in an even better position to vote on advisory firms.
Similarly, analyzing a stock-option plan is complex for the typical individual investor. Like many institutional investors, they will benefit from an independent analysis to aid their voting. Thus the Revised Proposal would give shareowners much more informed and effective voice.
In Johnson Controls, Inc. (October 26, 1999), Commission staff "determined that proposals requesting additional disclosures in Commission-prescribed documents should not be omitted under the ‘ordinary business’ exclusion solely because they relate to the preparation and content of documents filed with or submitted to the Commission. …we therefore will consider whether the subject matter of the additional disclosure sought in a particular proposal involves a matter of ordinary business; where it does, we believe it may be excluded under rule 14a-8(i)(7)." The Revised Proposal would involve including information in proxy materials that relates only to shareowner voting. Matters of ordinary business are not put to shareowner vote. Thus the subject matter of the additional disclosure will not be ordinary business, so is not grounds for exclusion.
In Bob Evans Farms, Inc. (June 23, 1997), a shareowner proposed that the company hire a consulting firm to advise the board and management how to improve the company’s financial performance. In contrast, the Revised Proposal here seeks advice for shareowners on voting. Again, matters of ordinary business are not put to shareowner vote, so this advice would not relate to ordinary business.
Rule 14a-8(i)(4) -- ‘personal interest’
The Revised Proposal raises issues of conflict of interest, so it’s only fair that my own potential conflicts should also be scrutinized.
The entire design of the Revised Proposal is for the benefit of Citigroup shareowners. Any potential benefit to me is incidental. Therefore the Revised Proposal is not designed to result in a benefit, nor designed to further a personal interest, not shared by the other shareholders at large.
The Revised Proposal is neutral not only on its face, but also in design and substance. Its design is based on economic analysis of the agency relationship between shareowners and managers. That analysis is presented in several articles published in leading journals specialized in corporate governance and investment management, including Financial Analysts Journal and Corporate Governance: An International Review. A complete listing with full references to the articles (and downloadable text for many) is on the web at http://www.corpmon.com/publications.htm . The article entitled "Collective Action for Dispersed Shareowners" in Corporate Governance International is probably the most directly relevant here.
The Revised Proposal is aimed squarely at solving the "free-rider problem", which reduces the incentive of any one shareowner to monitor management (by intelligent voting), even though shareowners as a group would benefit substantially if they all undertook such monitoring. Acting as a group to hire a voting advisor would avoid much of the free-rider problem, as explained in more detail in the Revised Proposal and articles mentioned above.
References in the Revised Proposal to websites and published articles show shareowners where to find further relevant information than can be conveyed within the 500-word limit.
While the main point of this rebuttal is that the Revised Proposal’s design is entirely to benefit Citigroup shareowners, here is some further evidence that I have no commercial interest in the Revised Proposal that deviates from Citigroup shareowners’ interests:
1. I have no commercial tie to any proxy advisory firm.
2. There is no paid advertising on the Corporate Monitoring website.
3. My commercial interests are disclosed at http://www.corpmon.com/Commercial.htm , including the sentence: "If the idea is successful, I expect to have opportunities for consulting or full-time employment at businesses involved in corporate monitoring, at regulatory agencies like the SEC, and for research at institutes or universities." Such opportunities would only arise if the Revised Proposal is successful in helping shareowners, thus enhancing my professional reputation. This is much like the situation where doing a good job at the SEC enhances your professional reputation, which in turn may help your subsequent career. That possibility does not imply that you are slanting your decisions now to improve your subsequent career. Any successful undertaking, especially if public-spirited, can enhance one’s reputation and career.
But speaking of interests that are not shared by Citigroup shareholders at large, consider management’s interest in maintaining their influence over the votes of individual investors. The reason why we have shareowner voting at all is that there are conflicts inherent in leaving all decisions to management.
Rule 14a-8(i)(3) -- ‘false and misleading’
(For this section, it is simpler and clearer to refer to the Proposal rather than the Revised Proposal, because of references to the Citigroup Submission. But all the arguments are equally applicable to both versions.)
The Proposal’s first clause refers to a well known and pervasive problem, confirmed again and again in my conversations with investors and proxy voting industry specialists. The wording is carefully qualified so as not to be overly sweeping, thus substantially understating the case: many shareowners [not all, not even claiming most] lack the time…to make the best voting decisions [though they may be able to make good decisions], prefer not to always follow [allows that they might be happy to follow 99% of the time, although I doubt it], management’s possible conflicts [not claiming management necessarily even has conflicts, although they clearly do, for example in determining their compensation]. References in the Proposal to websites and published articles give interested shareowners convenient access to evidence supporting this and all other statements in the Proposal.
The Proposal’s second clause does not suggest, as claimed in the Citigroup Submission, that "every candidate willing…has established a reputation…" It is obvious to anyone that merely paying an entry fee and offering services does not mean that an advisor has an established reputation. Criteria for determining the reputation of professional service providers are too complex to present as part of a 500-word proposal, but all shareowners have some familiarity with how such reputations are determined in general. Everyone reading business newspapers or magazines learns about the reputations of companies and people in many fields. One need not infer that both individual and institutional investors share the same interests. Proxy advisory firms could in fact make different recommendations to different types of investors. Furthermore, note that Citigroup management routinely makes the same recommendations on how Citigroup shareowners should vote their stock to both individual and institutional investors.
The supporting statement’s introductory clause, "This proposal can be expected to…", provides an important qualification to the rest of that paragraph, including the four bullet points. All that is being claimed is that some observers may expect these outcomes. My own belief is actually stronger than that: I think these expectations are very reasonable.
If the proxy advisory firm pays printing and mailing costs, such costs would be built into its fee for providing advisory services, so in effect the Company (and thus shareowners) would be paying them anyway. So that is not an important distinction when considering the overall merit of the Proposal. There are of course many such practical details that would need to be determined in the course of implementing the Proposal. Competition among advisory firms to build reputations for benefiting shareowners, will be a pervasive force providing reasonable answers to such questions as how frequently communications to shareowners should be made.
The Citigroup Submission describes as misleading this section of the Proposal’s supporting statement: "The Proposal can be expected to improve the return of Citigroup stock by: enhancing management accountability to shareowners by making professionally researched advice available to all; effectively enfranchising individual investors for the first time, ensuring that a majority of shares can be voted independently of management’s recommendations; and encouraging greater competition among advisory firms to serve shareowner interests." These statements are reasonable, and well supported in the articles referenced in the Proposal’s last paragraph.
If the Commission staff nonetheless considers any part of the Proposal or Supporting Statement to be false or misleading, I would be willing to delete such part.
Based on the foregoing, I respectfully request that the Commission staff find that Citigroup lacks sufficient grounds for excluding the Revised Proposal from its proxy statement. Please call me at (415) 391-7198, or e-mail me at email@example.com, with any questions about this submission.
Please acknowledge receipt of this submission by date-stamping and returning the enclosed photocopy of this letter to me in the enclosed stamped, self-addressed envelope.
Very truly yours,
cc: Ms. Stephanie B. Mudick
General Counsel, Corporate Law
153 East 53rd Street
New York, NY 10043