From: Bruce.G.Wilson@exeloncorp.com
Sent: Monday, December 22, 2003 1:17 PM
To: rule-comments@sec.gov
Subject: File No. S7-19-03
Importance: High
  <<...OLE_Obj...>> 
 
 
 
 Exelon Corporation	www.exeloncorp.com
 P.O. Box 805379
 Chicago, IL 60680-5379
 
 
 
 December 22, 2003
 
 Mr. Jonathan G. Katz
 Secretary
 Securities and Exchange Commission
 450 Fifth Street N.W.
 Washington, D.C. 20549-0609
 
 Re:  Security Holder Director Nominations
        Release No. 34-48626; IC-26206; File No. S7-19-03
 
 Dear Mr. Katz:
 
 This letter is submitted on behalf of the Board of Directors of Exelon
 Corporation to express opposition to adoption by the SEC of the proposed
 rules relating to security holder director nominations.  Our board of
 directors consists of 13 individuals who, collectively, currently serve as
 directors on the boards of 32 different publicly held companies.  For the
 reasons set forth below, we are opposed to the adoption of the proposed
 rules.
 
 The rules will detract from, rather than improve, democratic principles in
 corporate governance.
 
 We support the application of democratic principles to corporate
 governance.  However, we are concerned that the proposed rules, if made
 effective, would undermine, rather than advance, democratic principles in
 corporate governance.  Today, a majority of the directors of a listed
 public company must be independent.  A board is required to have a
 nominating (or equivalent) committee consisting entirely of independent
 directors.  The SEC and the stock exchanges have carefully defined the
 requisites for a director to be "independent."  Many directors hold equity
 interests in the companies on whose boards they serve.  As a consequence,
 we believe a majority of the directors on most boards have interests that
 are already aligned with the interests of shareholders.  In this sense,
 the interests of shareholders are already adequately represented on most
 corporate boards, and there is no need for special provisions enabling
 particular shareholder groups to seek the election of their
 representatives.
 
 This alignment of the interests of directors with those of shareholders is
 a relatively recent development driven by a sharper legislative,
 regulatory and market focus on corporate governance over the past two
 years.  We believe the measures already adopted have had, and will
 continue to have, the effect of improving the independence of directors
 and corporate governance in general.  These measures should be given time
 to demonstrate their effectiveness before other measures, such as the
 proposed rules, are put into effect.
 
 Shareholders who believe their interests are not adequately served by a
 board of directors already have adequate means to nominate and elect
 directors and protect their interests in other ways.
 
 We acknowledge that there have been, and there may still be, a few boards
 whose interests are not adequately aligned with the interests of
 shareholders.  However, with increased disclosure requirements already in
 place, and an increased investor focus on corporate governance issues,
 these exceptions to the general rule will be more easily identified by
 shareholders and prospective investors.  We believe that shareholders and
 prospective investors, armed with knowledge about a particular company's
 corporate governance, already have adequate means to protect themselves.
 
 Shareholders already have rights to nominate any number of directors they
 choose and solicit proxies for the election of those nominees.   However,
 shareholders do not often exercise this right.  Those who support the
 proposed rules cite the infrequent exercise of this right as evidence of
 the need for expanded rights for shareholders.  Those who oppose the
 proposed rules can cite the same statistic as evidence of the infrequency
 with which shareholders have found it appropriate to initiate change in a
 board of directors.  In any event, the existence of this right is a
 significant tool that investors can use, or merely threaten to use, as a
 means to improve the performance of a board of directors.  
 
 It is also important to note that, in addition to their rights to nominate
 candidates for election as directors and solicit proxies in contested
 elections, shareholders and prospective investors establish the market for
 the stock.    Today, corporate governance has become a market force, and
 companies who practice good corporate governance enjoy an advantage in the
 market.  The system of disclosures already in place is designed to enhance
 the effectiveness of this market.  In our view the performance of a stock
 in a market affected by such pressures is the best mechanism to assure the
 effectiveness of directors.  We think this mechanism is already working
 effectively.  In our experience, this is demonstrated by the ease and
 frequency with which shareholders make their views known to the companies
 in which they invest-and the careful attention directors give to those
 communications.
 
 The rules will not be the best way to select qualified directors.
 
 The mechanism established by the proposed rules will not be the best way
 to identify and elect qualified board members.  As noted earlier, a
 majority of the directors of a listed company must be independent; the
 entire nominating committee is required to be independent.  The interests
 of these people are already aligned with the interests of investors.  We
 believe that these people can be trusted to identify and seek the election
 of directors who will be independent and serve the interests of all
 shareholders.  
 
 Selection of effective directors is much more than a matter of
 independence and length of resume.  The board and its nominating committee
 are in the best position to identify qualified candidates with the
 particular mix of experience, skills and personal character needed to make
 the entire board function more effectively.  Service as a director is
 time-consuming and difficult work, and nominees for director are screened
 for their ability and desire to apply the skills and devote the time
 necessary to be effective.   Being an effective director is a very
 difficult job in which knowledge, experience, personal character and
 performance are of critical importance.
 
 Those who support the proposed rules will argue, in response, that the
 nominees proposed by the incumbent directors will be elected by the
 shareholders if they really are better candidates than a nominee proposed
 by a shareholder.  While differences in the resumes of nominees can be
 communicated in a proxy statement, the differences that make one person a
 more effective director than another are usually subjective and subtle
 matters of character that cannot be effectively communicated in a proxy
 statement.  Any attempt to convey that information in the proxy statement
 would, under the proposed rules, open the proxy statement to a 500 word
 essay on behalf of each nominee proposed by shareholders.  In our view
 (and for reasons that will be discussed below), the proposed rules, if
 made effective, will create a simple mechanism for shareholder groups to
 "knock out" nominees proposed by the directors, regardless of the superior
 qualifications and personal abilities of those nominees.
 
 Directors nominated by shareholders will inevitably tend to represent the
 special interests of the nominating shareholders. 
 
 We believe it is inevitable that the nominee of a shareholder, once
 elected, will tend to be a representative of the special interests of that
 shareholder rather than the interests of the enterprise as a whole.  The
 provisions of the proposed rules that require the shareholder's nominee to
 be independent of the shareholder will not eliminate that tendency.
 Presumably, the shareholder will select a nominee who, although
 "independent" under the rules, will be expected to act as a director in
 ways that will advance the agenda of the nominating shareholder.  We can
 easily imagine the tendency for a sitting director, who was nominated by a
 shareholder, to communicate with that shareholder on a regular basis about
 matters that come before the board.  While open communication between a
 board of directors and shareholders is normally good corporate governance,
 this sort of "one-off" communication is contrary to good corporate
 governance.  We fail to see how it would be in the interest of all
 shareholders for a director or nominee for director who is selected by
 independent directors on the basis of his or her independence, knowledge,
 experience, personal character and performance, to be replaced by the
 nominee of a particular shareholder who has not been subjected to the same
 selection criteria but, instead, has been nominated because the
 shareholder understands that the nominee will vote and otherwise act as a
 director consistent with the desires of the nominating shareholder.
 
 The rules will impose costs on companies with no real benefit for
 investors.
 
 We believe the proposed rules, if made effective, will be distracting and
 costly to companies, without any real benefit for investors.  It is
 becoming increasingly difficult to recruit qualified directors to
 corporate boards.  The prospect of facing a contested election each year
 is not a pleasant thought for qualified candidates who often have other
 opportunities to serve.   Under the proposed rules, additional time and
 attention will need to be devoted to elections and shareholder proposals
 that may ultimately qualify as triggering events in subsequent years.  In
 our experience, companies naturally attempt to fill the board of directors
 with the most-qualified candidates willing to serve, considering all
 factors relevant to effective service as a director.  The proposed rules
 will detract from this process.
 
 The American Society of Corporate Secretaries conducted a survey of the
 costs companies expected to incur as a result of the proposed rules.  The
 survey indicates that the average cost to deal with a shareholder proposal
 to trigger access or a withhold vote campaign will be approximately
 $280,000, and the average cost to deal with a contested election will be
 approximately $570,000.  Although these costs are difficult to predict,
 these estimates are not significantly different from our own predictions.
 
 The rules will have significant unintended consequences.
 
 The proposed rules, if made effective, could have other significant
 unintended consequences.    We are already hearing of plans by
 institutional investors and their advisors to mount a campaign to withhold
 a vote for each nominee named first on the proxy cards at this year's
 annual meetings, in order to create a triggering event that could be used
 if and when the proposed rules become effective.  Apparently, some people
 who support the proposed rules are already planning ways to "game the
 system" and "stuff the ballot box" in order to obtain election results
 that favor their own objectives without regard to the merits of the
 various nominees on which shareholders are asked to vote.   In our view,
 this expected irresponsible behavior in 2004 elections is a stark
 predictor of tactics to expect in all future elections and raises a
 serious question about the wisdom of the proposed rules as a whole.   We
 believe the rules and the resulting gamesmanship in election contests will
 frequently result in the arbitrary loss of the most independent,
 experienced, and dedicated candidates--and the election of other
 candidates whose loyalties will tend to favor the particular shareholder
 who nominated them.
 
 Today, the outcome of shareholder voting depends more and more on the
 recommendations of organizations who purport to give independent advice
 about voting.  While these organizations can perform a valuable service,
 they typically have no investment at risk in their voting recommendations,
 and their fee-paying clients are institutional shareholders and other
 significant investors-the shareholder groups most likely to take advantage
 of the proposed rules.  If the proposed rules become effective,
 organizations that advise institutions about voting will naturally seek to
 rationalize their endorsements of the candidates nominated by their
 clients, without due regard for the merits of the candidates placed on the
 ballot by the independent directors.  This will enhance shareholders'
 efforts to "game the system" and accelerate the tendency of the proposed
 rules to inject "special interest politics" into the election of
 directors.  In our view, this will not be in the interest of shareholders
 as a whole.  
 
 The proposed thresholds for triggering nomination rights are too low.
 
 For many listed companies, a relatively small number of shareholders would
 be needed to form a group representing 5% ownership, and many of those
 shareholders could be holders of an insignificant number of shares.  This
 creates an opportunity for small investors to organize a group to advance
 the particular agenda of a few people who have relatively little at stake.
 If the proposed rules are adopted, the 5% threshold should be increased,
 and a shareholder group should exclude investors who hold less than a
 specified percentage of shares.
 
 We also believe the triggers based on voting results at prior meetings
 should be increased.   Otherwise, we expect that many companies, even
 those that are performing well with effective boards and sound corporate
 governance, will face the cost and distraction of frequent election
 contests.  
 
 With the activity of a few institutional investors and advisors who make
 well-publicized voting recommendations, it is common for the outcome of
 voting to be swayed by the preferences of a few people rather than by a
 careful analysis of the issues by beneficial owners.   The voting triggers
 should be set at higher levels to assure that the right to nominate a
 director is predicated on genuine shareholder dissatisfaction rather than
 voting results created largely by a "herd mentality" driven by a few
 people.  
 
 The 2004 proxy season should not be affected by the rules.
 The rules will have many consequences, both intended and unintended.  We
 firmly believe that the proposed rules, if made effective, should not
 apply to the 2004 proxy season, and we believe voting results from the
 2004 proxy season should not  become triggering events in subsequent
 years.  Companies should have a reasonable amount of time to anticipate
 and prepare for events that may ultimately become triggering events.  As
 already noted, there is already reason to expect that voting results in
 2004 will be distorted by the efforts of some people to create a
 triggering event for 2005 on the assumption that these particular proposed
 rules will be made effective.  If 2004 voting results are potential
 triggering events in subsequent years, many companies will feel compelled
 to make disclosures in their 2004 proxy statements about a shareholder
 access process that has not been finalized, and much confusion will
 result.
 
 The rules will create problems for companies with staggered boards.
 
 The proposed rules present a particular problem for companies with
 staggered boards.  If, as we expect will tend to be the result, the
 elected nominee of a shareholder is not as effective as a director as an
 alternative nominee selected by the independent directors, a company with
 a staggered board will not have an opportunity to propose a nominee to run
 against that director for three years.  There are several legitimate
 reasons for a company to establish a staggered board, and we do not
 believe the solution to this problem is to abandon the staggered board.
 Three years is a long time for a company to suffer a board that cannot
 function at its optimum effectiveness due to the weaknesses of one or a
 few directors placed on the board as representatives of particular
 shareholder interests.  
 
 Those who support the proposed rules may argue that the logic discussed in
 the prior paragraph applies equally to all directors.  In our experience,
 an incumbent director who is nominated by the independent directors can
 normally be persuaded to resign if and when the director loses
 effectiveness.  This will rarely, if ever, be the case for directors
 nominated by shareholders.
 
 The proposed rules need to be considered more carefully.
 
 The proposed rules will have many predictable effects and will produce
 many unintended consequences.   The comment period should be extended for
 at least an additional 60 days to allow adequate consideration of the
 issues and the effects of the rules on companies and investors.
 
 In our political economy imbued with principles of democratic
 representation in government, the idea of enhanced democracy in corporate
 elections appears, on the surface, to be a good idea that few people would
 want to argue against and many people will argue for as a matter of
 intuition.   However, we are concerned that, however well-intentioned the
 proposed rules may be, they will ultimately lead to more mischief than
 good by introducing special interests into elections for directors and by
 enabling independent and effective directors to be unseated by nominees
 whose interests are not aligned with the interests of the enterprise and
 its investors as a whole.  Shareholders' interests are already
 well-protected and well-represented through existing requirements for
 director independence and the extensive disclosures that create an
 effective market-check against ineffective boards.  Shareholders already
 have access to a mechanism that enables them to replace any number of
 directors or the entire board.  In this sense, the proposed rules address
 a perceived problem that, in reality, does not exist to a degree that
 justifies a sweeping change in substantive corporate law.  We share the
 concerns and endorse the opinions expressed in comments submitted by the
 American Society of Corporate Secretaries.  We are opposed to the proposed
 rules and we encourage the SEC to consider them more carefully.
 
 Very truly yours,
 
 s/ M. Walter D'Alessio
 
 M. Walter D'Alessio
 Chairman
 Corporate Governance Committee
 Exelon Corporation
 
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