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 James McRitchie & Myra Young to Pfizer
Ladies and Gentlemen:
On behalf of Mr. James McRitchie and Ms. Myra Young (collectively, the "Proponent"), I am writing in response to the December 21, 1999 letter (the "Pfizer Letter") submitted to the Commission by Pfizer, Inc. ("Pfizer" 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 the Proponent. The Proposal (attached hereto with a letter authorizing me to represent the Proponent) asks the shareowners to request the Company to hire for one year a proxy advisory firm to be chosen by the shareowners.
The Pfizer Letter cites Rules 14a-8(i)(7) (‘ordinary business’), 14a-8(i)(8) (‘relates to board election’), 14a-8(i)(3) (‘false and misleading’), 14a-8(i)(6) (‘beyond company’s power’), and 14a-8(i)(1) (‘improper under state law’) as bases for its request for relief from enforcement action. I suggest below some revisions to the Proposal designed to alleviate some of the concerns expressed in the Pfizer Letter. (The resulting "Revised Proposal" is attached.) In addition, reasons are given why I believe the Revised Proposal may not be properly omitted under Rule 14a-8. Some of these reasons would apply equally well to the (original) Proposal, while others gain force because of the suggested revisions.
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 Pfizer hire" with "RESOLVED that Pfizer shareowners request the Board of Directors to hire";
(b) consequently simplifying the next sentence by replacing "Pfizer 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. For reasons given below in the section on Rule 14a-8(i)(8), I suggest deleting the phrase "nominate board members" from the supporting statement.
3. 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), the subject matter of the additional disclosure resulting from 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 Pfizer Letter 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 no more difficult a 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. This is practical because there is a manageable number of advisory firms. 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.
Responses to other points in the Pfizer Letter:
Regarding the last paragraph on page 3, the timeframe for implementing the Revised Proposal allows plenty of time for the SEC to clarify these points. It would make sense for a company not to be responsible for the independent proxy voting advice envisioned in the Revised Proposal. In that case the additional costs referred to here would not be necessary.
Regarding the first paragraph on page 4, while the Nalco Chemical and Montana Power proposals dealt with shareholder communications, they would not have materially affected corporate governance. The Revised Proposal here is a corporate governance proposal, and therefore not an ordinary business matter. It is not just about shareholder communication techniques, but would add importantly to the content of those communications. The Sonat finding likewise was not in a corporate governance matter.
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.
Regarding Part B, hiring an independent firm to advise stockholders is not part of Pfizer’s day-to-day management, nor would it interfere with management’s ability to run the company. The advisory firm would advise shareowners on how to vote their stock. Shareowner voting, however informed, does not undermine these director responsibilities.
Regarding Part C, all the additional information to be included in the proxy materials because of the Revised Proposal, relates to shareowner voting, and thus to the Company’s corporate governance, not its ordinary business.
Regarding Part D, these practical considerations, while significant, can certainly be determined appropriately by the Board, in cooperation with the proxy advisory firm and the SEC, if necessary. Attempting to specify such details in the Revised Proposal would be micro-management.
Rule 14a-8(i)(8) -- ‘relates to board election’
The Revised Proposal makes no attempt to substitute for or subvert the separate process for election contests (e.g. Rule 14a-12 relating to election contests). It would simply give all shareowners access to information which is available now only to some shareowners. For example, in contrast to Amoco Corp. (February 14, 1990), which involved a proposal to enable owners of $100,000 worth of shares to include their board nominees in the company’s proxy materials, the Revised Proposal would not change the director nomination or election process. The Pfizer Letter’s argument thus relies on an overly broad interpretation of Rule 14a-8(i)(8).
In order to clarify this issue, I suggest deleting the phrase "nominate board members" from the supporting statement. The Revised Proposal reflects this change.
Rules 14a-8(i)(3) (‘false and misleading’) and 14a-8(i)(6) (‘beyond company’s power’)
The Revised Proposal names three leading proxy advisory firms, gives their website locations, and refers to Wall Street Journal articles that describe their reputations and services. Further depth of information about the advisory business and how it would work in conjunction with the Revised Proposal can be found through the other websites mentioned. Thus plenty of information on these matters is available to Pfizer shareowners.
The Revised Proposal emphasizes competition among advisory firms who build reputations for serving shareowner interests. This competitive force will work better in a flexible framework, rather than if we are overly specific in advance about the form and content of advice.
The Revised Proposal specifies a sequence of actions, schedule, and price guidelines sufficient for shareowners to understand what is envisioned. The practical details raised here in the Pfizer Letter are significant, but can be decided in an appropriate manner by the Pfizer Board. Especially given the rapid pace of evolution of telecommunications, it would not be desirable for the Revised Proposal to specify, to the point of micro-management, the details of how voting analysis should be distributed. An appropriate balance can be determined between the need for brevity in the proxy statement and the desire of some shareowners for more detail. Both these goals can be served by such means as printing summaries in the proxy materials, with references to more detailed information on the internet.
Rule 14a-8(i)(1) -- ‘improper under state law’
The Revised Proposal is clearly precatory. As such, it removes no authority from Pfizer’s Board of Directors. The subject of the Revised Proposal is a request for action by the Board, not for action by shareholders. The fact that implementation by the Board would later permit certain shareholder action, does not change the Revised Proposal’s fundamental precatory nature.
The Revised Proposal does not prevent Pfizer’s directors from continuing to make determinations and recommendations on behalf of the Company. The Revised Proposal simply provides a mechanism for all shareowners to get proxy voting advice which many shareowners are already getting now. That would result in more informed voting, to the benefit all shareowners. The existing system of proxy voting advice is not contrary to Delaware law, so there is no reason why the proposed system would be contrary to Delaware law, since it is more equitable in the distribution of and payment for information, as well as beneficial to investors.
It is within the power of Pfizer’s Board and shareowners to amend Pfizer’s bylaws and certificate of incorporation. This could be done if necessary to allow implementation of the measures requested in the Revised Proposal, without contravening Section 141(a) of the Delaware General Corporation Law. So the Revised Proposal does not request anything that is improper under Delaware state law.
With reference to the followup SEC no-action letter on the revised Pennzoil proposal (March 22, 1993) and the Radiation Care no-action letter (December 22, 1994), the Revised Proposal here does not call for and would not require "a by-law provision that specifies that it may be amended only by shareholders", so would not contravene Delaware law in that respect either.
Rule 14a-8(d), re omitting reference to web sites
In section V., Pfizer argues inclusion of the Corporate Monitoring internet address "subverts the intent of the 500-word limit of Rule 14a-8(d)" and that it is "misleading because the data incorporated by reference has not been furnished by either Pfizer or the Proponent." Pfizer cites the Templeton Dragon Fund (Templeton) no-action letter as precedent.
In the case of Templeton, three objections were made: (1) 500 word limit exceeded, (2) data not furnished to SEC, and (3) misleading because data Newgate claimed was on its internet site was, in fact, not available. The SEC’s no-action letter on Templeton left unclear whether staff agreed with all, or only one of the arguments. Our assumption is the SEC agreed only with argument 3, since the other arguments make little sense in light of the historical development of the 500 word limit and the SEC’s recent initiatives to encourage direct dialogue among shareholders.
With regard to the 500 word limit: In its 1976 amendments to Rule 14a-8 that, for the first time, imposed length restrictions on the shareholder’s resolution itself, as well as on the supporting statement, the SEC noted that extremely long resolutions not only "constitute an unreasonable exercise of the right to submit proposals at the expense of other shareholders but also tend to obscure other materials matters in the proxy statements of issuers, thereby reducing the effectiveness of such documents." From this, it is clear the intent of the 500-word limit is to keep costs reasonable and to keep from obscuring other important matters. Including the address of an internet site in the proxy statement of Pfizer is consistent with both objectives.
Regarding the issue of prior review: In 1992 the SEC adopted major amendments to its proxy rules in order to eliminate much of the SEC’s previous role as censor. At that time, the SEC indicated that "parties should be free to reply to the statements in a timely and cost-effective manner, challenging the basis for the claims and countering with their own views on the subject matter through the dissemination of additional soliciting material." Prior review by the SEC is not required. Surely Pfizer is fully capable of reviewing the material on the Corporate Monitoring internet site and responding to it by either including material with the proxy statement or by posting their responses on their own internet site. This is made especially feasible by such free internet services as "Mind-It" at www.netmind.com, which sends automatic e-mail notification when a specified web page changes its content.
In order to ensure that shareholders are fully informed, James McRitchie has included hyperlinks to the Pfizer site within the text of the resolution which is posted at www.corpgov.net/news/resolutions/pfizer.html. The Corporate Monitoring site has also included hyperlinks to the Pfizer site when the Pfizer resolution is referenced at www.corpmon.com. We would hope that Pfizer would include similar hyperlinks back to either or both of these sites in the text of any reference to the resolution on their own site.
The SEC has the option to allow a proposal to be included if the proponent makes specified revisions. We would willingly remove the address of the Corporate Monitoring site if such action is required by the SEC in order to have the proposal included with the proxy materials. However, we hope the SEC will not require any such change.
References to quotations cited above can be found in Howard Friedman’s "Commentary on a Rare Luddite Victory - The Templeton Dragon Fund Shareholder Proposal No-Action Letter," published in the Winter 1999 Villanova Journal of Law and Investment Management. That paper also provides an excellent discussion of further issues first raised by the Templeton no-action letter.
Based on the foregoing, I respectfully request that the Commission staff find that Pfizer lacks sufficient grounds for excluding the Revised Proposal from its proxy statement. Please call me at (415) 391-7198, or e-mail me at firstname.lastname@example.org, 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. Margaret M. Foran
VP Corporate Governance & Assistant Secretary
235 East 42nd St.
New York, NY 10017-5755
Mr. James McRitchie & Ms. Myra Young
2461 Second Avenue
Sacramento, CA 95818