(Links added to proponent response below.)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL FOR THE REASONS SET FORTH BELOW.
The Board of Directors is committed to providing Gillette's stockholders with useful voting recommendations and information on which to make voting decisions. The Board bases its recommendations on its knowledge of Gillette, its strategic plans for the business and input from management and outside advisers. We do not believe adding[1] the advice of unsupervised[2] firms at our expense would be in the interests of our stockholders.
This proposal calls for us to hire a proxy advisory firm without screening, input or review by our Board or management of the quality of the firm or its work product.[3] Even our independent auditors are selected and supervised by the Board.[4] Further, the proposal calls for the firm to be paid without regard to the reasonableness of this compensation for the work performed.[5] While the proposal purports to cap the fees paid to the elected proxy advisory firms, we believe the actual costs of the proposal will be greater.[6] We do not believe it is a good idea for us to abdicate our responsibilities[7] to evaluate the engagement, services and compensation of outside advisers, and do not believe we should provide an open forum in our proxy materials[8] for an unknown and unsupervised firm. In addition, our counsel has advised us that implementation of this proposal would violate Delaware law.[9]
We do not believe that adoption of the proposal is in the best interests of Gillette or its stockholders.[10]
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST THIS PROPOSAL, WHICH IS DESIGNATED AS PROPOSAL NO. 6 ON THE ENCLOSED PROXY.
PROPONENT'S RESPONSE TO THE ABOVE:
1. As the Board mentions here, the independent advisor's recommendation would add to, rather than replace, the Board's recommendation on which way to vote. So Gillette shareowners could benefit from both sources of advice.
2. & 3. We agree with the Board's implication that the quality of the advisory firm is crucial, but not with the implication that supervision by the Board is necessary to assure that quality. Gillette shareowners would vote to choose the advisory firm based on its reputation in their eyes. Advisors would compete to build reputations for giving advice that benefits shareowners. Those reputations would be assessed and discussed by the financial community in much the same way that personal computer makers' reputations are determined in the technology community, so that even a non-expert could make an informed choice by reading, for example, the Wall Street Journal.
4. We agree with the Board that the selection of independent auditors is a good parallel to this proposal for selecting a voting advisor. It is difficult to assure auditor independence when the Board chooses the auditor. See our Auditor Independence Proposal, especially this quote from The Economist, October 28, 2000:
"There is plenty of evidence that financial statements often fail to come up to scratch. The number of companies restating their accounts—never in ways that make them appear healthier—has been rising so fast as to have become almost commonplace. Well-known firms whose audited profits shrunk in a restatement include Waste Management, Sunbeam and CUC International, during its merger with Cendant. Investors have lost billions of dollars, and much of their faith in auditors."
It is likewise important for voting advice to be independent of the Board. The reason why we have shareowner voting at all is that there would be conflicts of interest inherent in leaving all decisions to the Board.
5. In fact, the proposal calls for the firm to be paid while taking into account the reasonableness of this compensation. As stated in the proposal, each candidate advisory firm would declare the price for its services. So when Gillette shareowners then vote to choose the advisor, they would take the price into account.
6. Regarding the cost of the proposal, note that two leading proxy advisory firms already analyze and provide proxy voting advice on Gillette every year, for institutional shareowners who subscribe to their services. They are Proxy Monitor (http://www.proxymonitor.com) and Institutional Shareholder Services (http://iss.cda.com). They would incur little or no additional cost to provide their advice to Gillette for inclusion in the proxy, so that all shareowners could benefit from it and vote more intelligently. The proposal would also encourage more direct competition on price and quality.
7. This would be an assignment of responsibilities to the shareowners, not an abdication. As described in points 2 & 3 above, shareowners would be quite capable of choosing advisors based on reputation.
8. We agree that Gillette's proxy should not be an open forum. That is why the proposal calls for an entry fee, which can be adjusted to deter all but the serious candidates.
9. The SEC examined the Gillette counsel's argument that implementation of this proposal would violate Delaware law, and that the proposal should therefore be excluded from Gillette's proxy. The reason why the proposal is now in Gillette's proxy is that the SEC did not concur with that argument. This is another illustration of the difficulty of assuring independence when the Board chooses an advisor.
10. We believe that adoption of this proposal is in the best interests of all of us Gillette shareowners.
Response written by Mark Latham on behalf of the proponent; March 11, 2001.