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 Jerome Gabig to Washington Mutual, Inc.
Ladies and Gentlemen:
On behalf of Mr. Jerome Gabig ("Mr. Gabig" or the "Proponent"), I am writing in response to the December 15, 1999 letter (the "WM Letter") of Heller Ehrman White & McAuliffe submitted to the Commission on behalf of Washington Mutual, Inc. ("Washington Mutual" 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 Mr. Gabig. The Proposal, attached hereto with Mr. Gabig’s November 14, 1999 cover letter, asks the shareowners to request the Company to hire for one year a proxy advisory firm to be chosen by the shareowners.
The WM Letter cites Rules 14a-8(i)(7) (‘ordinary business’) 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 WM 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 the Company hire" with "RESOLVED that Washington Mutual shareowners request the Board of Directors to hire";
(b) consequently simplifying the next sentence by replacing "Washington Mutual 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 WM 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 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.
As with assessing director quality, analyzing a stock-option compensation plan is very complex for the typical individual investor, yet they are often asked to vote on such plans. 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)(1) -- ‘improper under state law’
Because it is precatory, the Revised Proposal removes no authority from Washington Mutual’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 leaves open to Washington Mutual’s Board several courses of action, none of which would contravene Washington state law:
1. Do nothing.
2. To the extent permissible under Washington state law and Washington Mutual’s bylaws and certificate of incorporation, implement the Board’s interpretation of the shareowners’ request.
3. Amend Washington Mutual’s bylaws and certificate of incorporation, if necessary with the approval of shareowners, to permit implementation of the Revised Proposal.
Based on the foregoing, I respectfully request that the Commission staff find that Washington Mutual 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: Mr. William L. Lynch
Washington Mutual, Inc.
1201 Third Avenue, Suite 1706
Seattle, WA 98101
Mr. David Wilson
Heller Ehrman White & McAuliffe
6100 Columbia Center
701 Fifth Avenue
Seattle, WA 98104-7098
Mr. Jerome Gabig
1100 Oakmont Drive #1
Walnut Creek, CA 94595