Company Name: Nat'l. Semiconductor Corp. (Recon.)
Public Availability Date: December 6, 2002Document Sections: INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
July 31, 2002 Mr. Alan Beller Director Division of Corporation Finance Securities and Exchange Commission 450 Fifth St. N.W. Washington, D.C. 20549 Re: Request for Submission of the Staff No-Action Letter to National
Semiconductor (July 19, 2002) to the Full Commission for Review Dear Mr. Beller: On July 19, 2002, the Division of Corporation Finance staff ("Staff") issued a
no-action letter ("No-Action Letter") to National Semiconductor Corporation
("Company") advising that the Staff would not recommend enforcement action to
the Securities and Exchange Commission ("Commission") if the Company omits from
its proxy statement for its 2002 annual meeting a shareholder proposal
("Proposal") submitted by the United Brotherhood of Carpenters Pension Fund
("Fund") pursuant to Rule 14a-8 under the Securities and Exchange Act of 1934,
as amended ("Exchange Act"). We respectfully request that the Division of
Corporation Finance submit the Staff decision to the full Commission for review.
Basis of the Request for Commission Review Pursuant to Section 202.1(d) of the SEC Rules of Practice, the Commission may
review issues "which involve matters of substantial importance and where the
issues are novel or highly complex." We believe that the issuance of the
No-Action Letter, which allows exclusion of the stock option expensing issue on
ordinary business grounds, involves a matter of substantial importance to all
shareholders and meets the standard for Commission review. The issue of stock
option expensing is at the core of the current investor crisis of confidence in
the integrity of corporate financial reporting. While many see the failure to
expense stock options as one of the root causes of today's market crisis,
distorting executive performance incentives and encouraging deceptive accounting
practices, others see a move to stock option expensing as a critical component
of the effort to restore the integrity of the financial reporting system damaged
by management malfeasance and accounting fraud. Regardless of whether the issue of expensing stock options may once have been
portrayed as a mundane matter that reflects no more than a choice of accounting
methods, such is most definitely not the case today. See, e.g., Intel (February
27, 2001); BellSouth Corp. (January 22, 2001); and General Electric Co.
(December 22, 2000). On July 30, 2002, the President of the United States signed
into law the Sarbanes-Oxley Act of 2002. See www.whitehouse.gov, "President Bush
Signs Corporate Corruption Bill." In his comments the President characterized
this new law as an "historic occasion" and stated: This new law sends very clear messages that all concerned must heed. This law
says to every dishonest corporate leader: you will be exposed and punished; the
era of low standards and false profits is over; no boardroom in America is above
or beyond the law. This law says to honest corporate leaders: your integrity will be recognized and
rewarded, because the shadow of suspicion will be lifted from good companies
that respect the rules. This law says to corporate accountants: the high standards of your profession
will be enforced without exception; the auditors will be audited; the
accountants will be held to account. This law says to shareholders that the financial information you receive from a
company will be true and reliable, for those who deliberately sign their names
to deception will be punished. This law says to workers: we will not tolerate reckless practices that
artificially drive up stock prices and eventually destroy the companies, and the
pensions, and your jobs. And this law says to every American: there will not be a different ethical
standard for corporate America than the standard that applies to everyone else.
The honesty you expect in your small businesses, or in your workplaces, in your
community or in your home, will be expected and enforced in every corporate
suite in this country. Key to restoring investor confidence is ensuring that corporate financial
statements are accurate. In this spirit, this past proxy season the United
Brotherhood of Carpenters Pension Fund and several other Building Trades'
pension funds successfully sponsored shareholder proposals at numerous companies
banning their external auditors from providing consulting services, a clear
conflict of interest. The current effort by our Fund along with several other
Building Trades' funds seeks to address a major source of investor mistrust:
incomplete and misleading income statements. It has been estimated that
corporate earnings are being overstated across the board by estimates ranging
from twenty to thirty percent. The failure to account for the cost of stock
options is a major contributor to the inflated earnings being reported to
shareholders. The integrity of which the President spoke, the "true and
reliable" financial statements on which he told the investing public it could
depend, the end to "reckless practices that artificially drive up stock prices
and eventually destroy the companies" all depend on shareholders' rights to
express to management their insistence that corporate income statements must be
complete and accurate. An unparalleled array of prominent voices are speaking out publicly in favor of
option expensing, including former Federal Reserve Chairman Paul Volcker,
current Fed Chairman Alan Greenspan, former SEC Chairman Arthur Levitt,
investors such as Warren Buffet, Vanguard founder John Bogle, corporate
governance authorities such as Robert A.G. Monks, numerous United States
Senators including John McCain, Carl Levin, and Jon Corzine, and the
International Accounting Standards Board. Indeed, the Washington Post recently
reported on Securities and Exchange Commission Chairman Harvey Pitt's recent
appearance at the National Press Club: Securities and Exchange Commission Chairman Harvey L. Pitt said yesterday that
it is inevitable that publicly traded companies will have to treat stock options
as an expense. Pitt, who has said he does not favor counting options as an expense, hasn't
altered his view, an SEC spokesman said after Pitt's statement. But Pitt
believes that given the current political and economic environment, the change
in accounting is certain to come.
`The question isn't whether stock options should be expensed,' Pitt said during
an appearance at the National Press Club. `The question is when and how.' "Pitt Calls Expensing of Options Inevitable," Washington Post, "July 20, 2002.
Further evidence of the impact of this widespread debate is that in recent weeks
the Coco-Cola Co., the Washington Post, Bank One and several other companies
have announced that they will begin expensing stock options. When one considers the widespread public debate over the issue of expensing
stock options and the luminaries that have lined up in support, it is difficult
to understand the Staff's decision to prevent shareholders from voting on a
precatory proposal requesting that its Company reflect the expense of stock
options on its income statement. It is imperative that investors be given a
voice in the debate over the expensing of stock options. Investors demand full
and complete financial reporting, and as the party that stands to lose the most
when corporations and markets fail, their voice should be heard. In the past the
Staff has recognized that widespread public debate transformed proposals
addressed at the issue of plant closings, director and executive compensation,
golden parachutes, repricing stock options, and barring auditors from providing
consulting services from matters of ordinary business to significant policy
issues on which shareholders had a right to be heard. Just as earlier this year the Staff rejected companies' arguments that banning
auditors from providing consulting services was an ordinary business matter, it
should have rejected National Semiconductor's argument. We respectfully submit
that the Staff has failed to act consistently with its long line of precedent
and recognize that the widespread public debate over the issue of expensing
stock options has transformed the issue into one that transcends ordinary
business. The Commission's review of this issue of substantial importance that
is center stage in the highly complex effort to address the issues of financial
reporting accuracy and integrity in the context of a faltering market is
absolutely necessary. The Staff's No-Action Letter Position on Option Expensing is Contrary to
Commission Policy and Previous Staff No-Action Positions The Staff's No-Action Letter position that the stock option expensing issue may
be omitted under Rule 14a-8(i)(7) as "relating to ordinary business matters,
(i.e., choice of accounting methods)" is contrary to the long line of Commission
pronouncements and Staff no-action decisions in which "ordinary business"
objections have been rejected when an issue is a "significant policy issue" and
the subject of "widespread debate." Since at least 1976 the Commission has
stated that shareholder proposals concerning matters with "significant policy,
economic or other implications" should not be excluded as ordinary business.
Adoption of Amendments Relating to Proposals by Security Holders, Release No.
12999 (Nov. 22, 1976). This policy is consistent with logic and the underlying
purpose of Rule 14a-8(i)(7), which is to allow companies that satisfy their
burden of persuasion to exclude proposals relating to "business matters that are
mundane in nature and do not involve any substantive policy or other
considerations." Id. In Pacific Telesis Group (February 2, 1989) the Company sought no-action relief
to exclude a proposal that the Company study the impact on communities of the
closing or consolidation of Company facilities. The Staff rejected the Company's
request, recognizing that its previous practice of allowing plant closing
shareholder proposals to be omitted was no longer justified in light of
developments. The Staff stated: In light of recent developments, including heightened state and federal interest
in the social and economic implications of plant closing and relocation
decisions, the staff has reconsidered its position with respect to the
applicability of Rule 14a-8(c)(7) to proposals dealing generally with the broad
social and economic impact of plant closings or relocations. It is the
Division's view that such proposals, including the one that is the subject of
the Company's letter, involve substantial corporate policy considerations that
go beyond the conduct of the Company's ordinary business operations. In essence, the Staff recognized that it could no longer allow companies to
prevent shareholders from expressing their thoughts on an issue that had broad
social and economic impact and was attracting both state and federal attention.
In TransAmerica Corp. (January 10, 1990), the Company requested no-action relief
to exclude a proposal that the board of directors adopt a policy prohibiting the
Company from making compensation payments to its directors, officers or
employees contingent on a merger or acquisition (golden parachute payments). The
Staff acknowledged that its existing position at that time was that golden
parachute payments were a matter relating to the conduct of a registrant's
ordinary business operations and excludable under Rule 14a-8(c)(7). It then
noted that it was reversing its position to reflect the increasing significance
of the issue: At the same time, public debate concerning potential anti-takeover, tax and
legal implications of golden parachute arrangements reflects that such
contingent arrangements increasingly are seen as raising significant policy
issues. In light of the foregoing developments, the staff believes that the
proposal at issue is directed primarily to such payments instead of to ordinary
compensation arrangements. Accordingly, the staff does not believe that the
company may rely on rule 14a-8(c)(7) to omit the proposal from its proxy
materials. The Staff's willingness to limit companies' ability to use Rule 14a-8(c)(7) to
exclude matters raising significant policy issues was demonstrated again in
Aetna Life and Casualty Company (February 13, 1992). The proposal at issue in
Aetna sought to modify director fees based on their attendance at board
meetings. As it had in the past, in Aetna the Staff acknowledged that widespread
public debate on the topic was leading it to limit further a company's ability
to omit a shareholder proposal as relating to ordinary business. The Staff
stated: Compensation of directors would appear particularly within the prerogative of
shareholders to oversee. Moreover, in view of the widespread public debate
concerning executive and director compensation policies and practices, and the
increasing recognition that these issues raise significant policy issues, it is
the Division's view that proposals relating to director compensation no longer
can be considered matters relating to a registrant's ordinary business.
(emphasis added) Thus, Aetna demonstrated once again the Staff's willingness to recognize that
matters once considered ordinary business in fact raised significant policy
issues on which all shareholders should have the right to express their thoughts
by voting on shareholder proposals addressing these matters. In Reebok (March 16, 1992) the Staff further limited Rule 14a-8(c)(7) when it
denied Reebok's request for no-action relief to exclude a proposal asking the
company to establish an independent Compensation Committee. The Staff stated:
The Division is unable to concur in your view that the proposal may be excluded
under Rule 14a-8(c)(7). That provision permits the omission of a proposal that
`deals with a matter relating to the conduct of the ordinary business operations
of the registrant.' In view of the widespread public debate concerning executive
and director compensation policies and practices, and the increasing recognition
that these issues raise significant policy issues, it is the Division's view
that proposals relating to senior executive compensation no longer can be
considered matters relating to a registrant's ordinary business. These no-action decisions reflect the Staff's recognition that widespread public
debate over an issue, as well as state and federal interest in certain issues,
make these issues appropriate for shareholder consideration via the shareholder
proposal process, regardless of prior no-action decisions that these issues
might have once been considered matters of ordinary business. In 1998 the Commission issued the "Final Rule: Amendments to Rules on
Shareholder Proposals," 17 CRF Part 240, Release No. 34-40018, which reversed
the Cracker Barrel no-action letter concerning the Division's approach to
employment-related shareholder proposals raising social policy issues. The
Commission stated: In applying the `ordinary business' exclusion to proposals that raise social
policy issues, the Division seeks to use the most well-reasoned and consistent
standards possible, given the inherent complexity of the task. From time to
time, in light of experience dealing with proposals in specific subject areas,
and reflecting changing societal views, the Division adjusts its view with
respect to "social policy" proposals involving ordinary business. Over the
years, the Division has reversed its position on the excludability of a number
of types of proposals, including plant closings,[] the manufacture of tobacco
products,[] executive compensation,[] and golden parachutes.[] We believe that reversal of the Division's Cracker Barrel no-action letter,
which the Commission had subsequently affirmed,[] is warranted. Since 1992, the
relative importance of certain social issues relating to employment matters has
reemerged as a consistent topic of widespread public debate.[] In addition, as a
result of the extensive policy discussions that the Cracker Barrel position
engendered, and through the rulemaking notice and comment process, we have
gained a better understanding of the depth of interest among shareholders in
having an opportunity to express their views to company management on
employment-related proposals that raise sufficiently significant social policy
issues. (footnotes omitted) (emphasis added) In the Final Rule on shareholder proposals one sees the full Commission
recognizing that shareholders should have the right to express themselves on
significant policy issues, whether they be matters of social policy or such
significant issues as plant closings, executive compensation, or golden
parachutes. Continuing on since the Cracker Barrel reversal, the Staff's consistent
willingness to recognize that once "ordinary business matters" over time become
significant policy issues generating widespread public debatethus making
14a-8(i)(7) no-action relief inappropriatehas continued without intenuption
until the Staff's recent failure to recognize that the issue of expensing stock
options granted to executives was no longerif if it ever actually wasa matter
of ordinary business, but rather raised significant policy issues. See, e.g.,
General DataComm Industries, Inc. (December 9, 1998) ("In view of the widespread
public debate concerning option repricing and the increasing recognition that
this issue raises significant policy issues, it is our view that proposals
relating to option repricing no longer can be considered matters relating to a
registrant's ordinary business."); International Business Machines Corp.
(February 16, 2000) ("In view of the widespread public debate concerning the
conversion from traditional defined benefit pension plans to cash-balance plans
and the increasing recognition that this issue raises significant social and
corporate policy issues, it is our view that proposals relating to the
conversion from traditional defined benefit pension plans to cash-balance plans
cannot be considered matters relating to a registrant's ordinary business
operations."). Ironically, on July 12, 2002, the Staff issued Legal Bulletin No. 14A, which
stated in part: The Commission has previously taken the position that proposals relating to
ordinary business matters `but focusing on sufficiently significant social
policy issues ... generally would not be considered to be excludable, because
the proposals would transcend the day-to-day business matters and raise policy
issues so significant that it would be appropriate for a shareholder vote.'[]
The Division has noted many times that the presence of widespread public debate
regarding an issue is among the factors to be considered in determining whether
proposals concerning that issue `transcend the day-to-day business matters.'[]
We believe that the public debate regarding shareholder approval of equity
compensation plans has become significant in recent months. Consequently, in
view of the widespread public debate regarding shareholder approval of equity
compensation plans and consistent with our historical analysis of the `ordinary
business' exclusion, we are modifying our treatment of proposals relating to
this topic.... (footnotes omitted) We respectfully submit that at least an equal, and probably greater, public
debate has been raging over the issue of whether to reflect the cost of stock
options granted to executives as an expense on the company's income statement as
opposed to the issue of shareholder approval of equity compensation plans. As we
demonstrate below, shareholders' rights to see an income statement that
accurately and completely reflects the cost of stock options granted to
executives is certainly a significant policy issue that transcends day-to-day
business matters. The Option Expensing Issue Raises Significant Policy Issues that Transcend the
Scope of "Ordinary Business" We contend that option expensing proposals raise a "significant policy issue"
that places the matter outside the scope of the Rule 14a-8(i)(7) ordinary
business basis for exclusion. In making a determination of whether an issue
falls outside the scope of the ordinary business rule, it is appropriate to
consider the following factors: the legislative and regulatory activity
surrounding the issue (see, e.g., TransAmerica Corp. (January 10, 1990)); media
coverage of the issue (see, e.g., The Coca-Cola Company (February 7, 2000)), and
the public debate surrounding the issue raised by a shareholder proposal (see,
e.g., E.l. du Pont de Nemours and Company (March 6, 2000)). Since late 2001,
public, regulatory, legislative, and legal debates have erupted in response to a
continuing series of corporate accounting scandals that have devastated
investors, employees, and communities, while undermining investor confidence in
the integrity of corporate financial reporting. Within the broad public debate
over how best to address the lack of integrity and accuracy in corporate
financial reporting, the stock option issue has emerged as "a consistent topic
of widespread public debate." Stock options are the central component of most corporate executive compensation
programs, and as stock option use has increased, so has the intensity of the
debate about whether or not to expense options. Although the debate has
intensified dramatically in recent months, it is a longstanding debate. In 1995,
the Financial Accounting Standards Board ("FASB"), after what it called an
"extraordinarily controversial" debate, issued Statement of Financial Accounting
Standards No. 123 ("SFAS 123"). FASB, in its "Basis for Conclusions" with the
release of SFAS 123 stated: The Board chose a disclosure-based solution for stock-based employee
compensation to bring closure to the divisive debate on this issuenot because
it believes that the solution is the best way to improve financial accounting
and reporting. FASB's statement is early evidence of an intense debate that included
Congressional challenges to the existence of FASB by the opponents of stock
option expensing. The SFAS 123 compromise may well have reflected high-profile
power politics trumping sound accounting policies and practices. "The assault on
the Financial Accounting Standards Board when it took up this issue a few years
back was dazzling in its ferocity-so much so that the FASB abandoned its own
convictions and backed down." See, "Fed Chairman Stays Firm on Idea That Options
Should be Expensed," The Wall Street Journal, April 9, 2002. Given the constant
and passionate public debate on this issue since the issuance of SFAS 123, one
should not accept the characterization of a proposal addressing the option
expensing issue as a mere "choice of accounting method." Many prominent voices are advancing the expensing of options as one important
remedy to today's market crisis given the widespread use of stock options in
executive compensation. See, "How Stock Options Lead to Scandal," The New York
Times, July 12, 2002; "Too Soft on Stock Options," The Washington Post, July 15,
2002; "Stock Options Come Under Fire in the Wake of Enron's Collapse," The Wall
Street Journal, March 26, 2002. Stock option expensing is seen as the
centerpiece of a comprehensive plan of reform designed to improve the accuracy
of financial reporting and reign in the escalating use of stock options in
executive compensation. See, "Stock-Option Accounting Hides in the Shadows of
the Financials," The Wall Street Journal, March 21, 2002; "Measures Not Likely
to End Abuses," The Washington Post, July 10, 2002; "The Free Market Needs New
Rules," by Senator John McCain, The New York Times, July 8, 2002; "Corporate
Integrity Talk is Heard in Street and Suite," The New York Times, July 10, 2002;
"Fed Chairman Stays Firm on Idea That Options Should be Expensed," The Wall
Street Journal, April 9, 2002; "Let the Reforms Begin," BusinessWeek, July 22,
2002; "Bush Should Take Three Steps for Cause of Corporate Ethics," The Wall
Street Journal, July 9, 2002. And Congress once again is engaged in a heated
debate on the issue. See, "Stock-Options Reforms Face Long Odds With Lawmakers,"
The Wall Street Journal, July 10, 2002; "The Campaign to Keep Options Off the
Ledger," BusinessWeek, July 15, 2002; "McCain Accounting Proposal Scuttled," The
Washington Post, July 12, 2002. If the stock option expensing issue ever was an
"ordinary business matter," it clearly is not today. Today the issue is in the
middle of a broad public debate that is critical to the interests of all
investors and citizens. The total costs in lost investment value related to specific company scandals
and the broader investor retreat from the market is impossible to precisely
quantify, but there is no question that investors have lost tens of billions, if
not hundreds of billions, of dollars. There are various factors at work that
have created the current crisis of confidence in the market, including
fraudulent corporate reporting produced by a system that does not demand the
independence of audit firms from corporate clients, corporate management
malfeasance, compliant corporate boards, and, in the minds of many, the increase
in the use of stock options. Many in fact consider the tremendous increase in stock option issuance and the
non-expensing of options as core causes: Stock options are crucial to both the misrepresentation and the enrichment that
have caused a crisis of confidence in business and financial markets, Options
are doled out as free money to executives and are the force behind the
increasingly lucrative compensation packages at American companies. Because they
are tied to the company's performance, they can be powerful incentive for
executives to make their results look better than they actually are. See, "Bush Failed to Stress Need to Rein in Stock Options," The New York Times,
July 11, 2002. An examination of the role of stock options in executive and employee
compensation programs highlights the significance of the option expensing issue.
Many respected commentators, market and investment analysts, and academics argue
that the non-expensing of options has created "cost-free compensation" and
spurred the tremendous growth in the number of stock options issued. Several key
measures of stock option use, including the percentage of stock options relative
to overall executive compensation, stock dilution or "overhang," and the
corporate income impact of stock option expensing, reveal the explosive growth
in the use of corporate stock options. The size of executive grants has grown
dramatically over the past decade, with options representing an increasingly
large percentage of overall executive compensation. In 1992 the median value of options granted to chief executive officers at S&P
1,500 firms was approximately 16% of their total compensation. By 1998, the
figure had grown to 35% of total compensation. See, Table 2 in Perry and Zenner
(2000). Stock option "overhang," defined as stock options granted, plus those
remaining to be granted, as a percentage of the total shares outstanding at a
given company, has grown dramatically over the past decade because of larger
executive option grants and increased option eligibility. At a typical finn,
stock option overhang has grown to an average of 13% from approximately 5.4% in
1990. See, Watson Wyatt Worldwide, "Stock Option Overhang: Shareholder Boon or
Shareholder Burden," (The 2001 Study). Studies on the level of corporate earnings underreporting due to the
non-expensing of options indicate that the estimated after-tax stock
compensation expense for 2001 was nearly $47 billion for the S&P 500 firms, an
increase of 30% from 2000. See, The Analyst's Accounting Observer, Volume 11,
No. 9 & 10, "2001 Stock Compensation: 500 The Hard Way." A recent New York Times
article stated: "In all, according to our study, corporate America appears to be
overstating its earnings by at least 20 percent. About half of the exaggeration
reflects the lack of any recorded expense for options; the other half,
manipulated operating earnings." "How Stock Options Lead to Scandal," The New
York Times, July 12, 2002. And Sanford C. Bernstein & Company, a respected Wall
Street investment firm, estimates that if the nation's 500 largest companies had
deducted the cost of options from their revenues, their annual profit growth
from 1995 to 2000 would have been 6% instead of the 9% reported. "Bush Failed to
Stress Need to Rein in Stock Options," The New York Times, July 11, 2002. CONCLUSION As demonstrated above, the issue of expensing options satisfies the requirements
of Section 202.1(d) of the SEC Rules of Practice, which states that the
Commission may review issues "which involve matters of substantial importance
and where the issues are novel or highly complex." Today a profound and powerful
debate is being held over the issue of expensing stock options. Many of the
country's most respected political, academic, and corporate leaders have come
down on the side of expensing options. We respectfully submit that the Staff has
failed to recognize that this issue can no longer be considered a matter of
ordinary business on which shareholders have no right to be heard. Shareholders
have the right to demand accurate income statements that reflect a company's
expenses related to stock options. We respectfully request that the Division of
Corporation Finance submit the Staff decision to the full Commission for review.
Sincerely, /s/ Edward Durkin Cc: Mr. John M. Clark III [INQUIRY LETTER]
August 13, 2002 BY E-MAIL AND OVERNIGHT COURIER Securities and Exchange Commission Division of Corporation Finance Office of Chief Counsel 450 Fifth Street, N.W. Washington, DC 20549 Re: National Semiconductor Corporation Request of United Brotherhood of Carpenters Pension Fund for Submission of
No-Action Letter to Full Commission for Review Ladies and Gentlemen: On June 3, 2002, we notified you of the intention of National Semiconductor
Corporation, a Delaware corporation (the "Company"), to omit from the proxy
statement and form of proxy for the Company's 2002 Annual Meeting of
Stockholders (together, the "Proxy Materials") the proposal (the "Proposal")
submitted on behalf of the United Brotherhood of Carpenters Pension Fund (the
"Fund") and received by the Company on May 23, 2002. In our letter to you of
June 3, 2002 (the "Request Letter"), we requested the concurrence of the staff
of the Division of Corporation Finance (the "Staff") that it would not recommend
enforcement action if the Company omitted the Proposal from the Proxy Materials.
The resolution portion of the Proposal states: "Resolved, that the shareholders
of National Semiconductor Corporation ("Company") hereby request that the
Company's Board of Directors establish a policy and practice of expensing in the
Company's annual income statement the costs of all future stock options issued
to Company executives." As we explained in detail in the Request Letter, one of
the reasons that the Company believes that the it may omit the Proposal is
because the Proposal deals with a matter relating to the Company's ordinary
business operationsits choice of accounting methodsand therefore is excludable
pursuant to Rule 14a-8(i)(7). On July 19, 2002, the Staff issued a no-action letter (the "No-Action Letter")
to the Company granting no-action relief with regard to the Proposal, noting
that "[t]here appears to be some basis for your view that National Semiconductor
may exclude the proposal under rule 14a-8(i)(7) as relating to ordinary basis
matters (i.e., choice of accounting methods)." We are in receipt of a letter from Edward Durkin of the United Brotherhood of
Carpenters and Joiners of America to the Staff dated as of July 31, 2002 (the
"Appeal"), requesting that the Staff submit its decision in the No-Action Letter
to the full Securities and Exchange Commission (the "Commission") for review.
Pursuant to Section 202.1(d) of the SEC Rules of Practice, the Commission may
review issues that "involve matters of substantial importance and where the
issues are novel or highly complex." In this case, however, the Company does not
think that this is necessary or appropriate. As a preliminary matter, the issue
presented in this case is neither "novel" nor "highly complex." Turning to the
merits of the Staff's decision in the No-Action Letter, moreover, the Company
believes that the decision is in accord with the Staff's long-standing position
on shareholder proposals relating to choice of accounting methods, and is
consistent with the underlying public policy concerns behind Rule 14a-8(i)(7) as
described by the Commission in its published releases. I. Review of the No-Action Letter By the Commission is Not Warranted Section 202.1(d) of the SEC Rules of Practice indicates that the Commission may
reviews issues that are "novel" or "highly complex." The Proposal, however, does
not raise any issues that fall into either of these categories. A. The Proposal Is Not "Novel": In Fact, Essentially Identical Proposals Have
Been Presented Many Times in the Past (And Have Always Been Found Excludable)
The Staff has previously considered proposals essentially identical to the
Proposal submitted by the Fund on many occasions. In Intel Corp. (Feb. 27,
2001), the registrant sought to exclude a proposal requesting the registrant to
record the annual cost of stock options on its income statements and alter the
presentation of certain portions of its balance sheets. The crux of the
registrant's Rule 14a-8(i)(7) argument was that the subject matter of the
proposal dealt with the registrant's decision to utilize the "intrinsic value"
method of valuation instead of the "fair value" method of valuation of options.
See id. at *3. This is identical to the issue presented by the Proposal in our
case. The Staff recognized that the proposal presented to Intel related to the
company's "ordinary business operations (i.e., choice of accounting methods),"
and permitted the exclusion of the proposal pursuant to Rule 14a-8(i)(7). The
Staff considered substantially identical proposals submitted to many other
registrants and came to the same conclusion every time, finding that the
proposals related to the company's "choice of accounting methods" and were
therefore excludable on Rule 14a-8(i)(7) grounds. See, e.g., BellSouth Corp.
(Jan. 22, 2001); AT&T Corp. (Jan. 8, 2001); General Electric Co. (Dec. 22,
2000); Pfizer, Inc. (Dec. 13, 2000); General Electric Co. (Jan. 25, 1997). In this case, the Proposal is not novel: it seeks essentially the same action as
that proposed in the Intel, BellSouth, AT&T Corp, Pfizer, and General Electric
no-action letters, namely, a specific election between two acceptable accounting
policies. Similarly, the question of whether such proposals are excludable
pursuant to Rule 14a-8(i)(7) is not a new one: it is now well-established that
they are excludable. B. The Proposal Is Not "Highly Complex": It Does Not Add Any New Complexity To
Proposals Previously Considered by the Staff The Proposal requests that the Company "expense" stock options on its income
statement. Implementation of the Proposal would require the Company to adopt a
change in accounting principles so that stock options would be accounted for as
provided under the so-called "fair value-based method" described in Statement of
Financial Accounting Standards 123 ("SFAS 123"). SFAS 123 permits a company to account for stock-based compensation plans under
either the "fair value" method or the "intrinsic value" method, which is
provided for under APB Opinion No. 25. The "fair value" method typically
measures compensation cost at the grant date based on the fair value of the
award and recognizes it as an expense in the income statement, usually over the
vesting period. The "intrinsic value" method typically measures compensation
cost as the excess of the market price of the stock at the grant date over the
exercise price. The Proposal, therefore, is in essence a straightforward request
that the Company switch from one accepted valuation methodology for options (the
"intrinsic value" method) to another accepted valuation methodology (the "fair
value" method) for options. As we have described in Section I.A of this letter,
the Staff has considered substantially identical proposals relating to this
particular choice of accounting methods, all posing the same change from one
valuation methodology to another, many times in the past and has always found
such proposals excludable pursuant to Rule 14a-8(i)(7). II. The No-Action Letter Is Consistent With Long-Standing Precedent and the
Commission's Guidance on the Application of Rule 14a-8(i)(7) The Company believes that the guiding policy considerations behind the ordinary
business exclusion and the "social issues" exception to the exclusion, as
illustrated by the Staff in both releases and no-action letters, support the
conclusion that proposals relating to the accounting treatment of stock options
are not an appropriate subject for shareholder action and may be excluded under
Rule 14a-8(i)(7). The Commission stated in "Final Rule: Amendments to Rules on Shareholder
Proposals," 17 CFR Part 240, Rel. No. 34-40018 (May 21, 1998) that the policy
underlying the ordinary business exclusion rested on "two central
considerations": the "subject matter" of the proposal, and the extent to which
the proposal seeks to "micro-manage" the company. Numerous no-action letters
issued both before and after this release have established that the subject
matter of the Proposal in this casechoice of accounting methodis one that
falls within the ordinary business exclusion. An analysis of the issue also
indicates that the Proposal in this case seeks to micro-manage the presentation
of the Company's financial results, and suggests therefore that the Proposal is
excludable. A. The "Subject Matter" of the Proposal: It Is Well Established That Proposals
Relating to Choices of Accounting Method Are Excludable, Regardless Of Whether
They Are The Subject of Public Debate Contrary to the assertions in the Appeal, the Staff's decision in the No-Action
Letter is consistent with a long line of precedents that squarely address the
question of whether proposals relating to choices of accounting policies are
excludable, and that all conclude that such proposals are excludable pursuant to
Rule 14a-8(i)(7). Indeed, the Appeal itself cities several letters in which this
precedent has been followed (Intel (February 27, 2001), BellSouth Corp. (January
22, 2001) and General Electric Co. (December 2, 2000)). The Staff has
consistently reached this conclusion notwithstanding the fact that the
accounting policies at issue in the proposals were the subject of public debate.
In Travelers Group, Inc. (Feb. 5, 1998), the shareholder's proposal requested
that the Company immediately adopt new rules for accounting for derivative
financial instruments. Both the registrant and the shareholder proponent in that
case recognized that there was, at that time, "intense debate" over the new
accounting standards for derivative financial instruments in both government and
the business community. The Staff found, nevertheless, that the proposal itself
involved the registrant's choice of accounting methods, and was therefore
excludable. This position did not change after the Commission issued the Release No.
34-40018. In Conseco, Inc. (Apr. 18, 2000) the Staff permitted the exclusion of
a proposal requesting the registrant to adopt policies "to ensure ... (1) that
the accounting methods and financial statements of Conseco adequately reflect
the risks of sub-prime lending." The shareholder's proposal noted in detail that
the activities of sub-prime lenders was under substantial public scrutiny at the
time and had been the subject of recent governmental hearings. Nevertheless the
Staff that the proposal was excludable under the ordinary business exclusion
because it dealt with "accounting methods and presentation of financial
statements in reports to shareholders." In The Boeing Co. (Mar. 6, 2000) the shareholder's proposal related to a choice
of accounting method that was generating extensive discussion in the business
community. The shareholder's proposal requested that the company take steps to
clarify in its financial statements the use of pension fund accounts and the
proceeds from those uses, and cited in its supporting statement numerous
newspaper articles and a comprehensive analyst study suggesting that profits
earned from pension fund assets and incorporated into consolidated financial
statements were causing corporate profits to appear larger and mask declines in
operating performance. Notwithstanding the public discussion on the accounting
methods, however, the proposal related to the registrant's choice of accounting
methods and was thus excludable. The Company recognizes that on July 15, 2002, the Staff published Staff Legal
Bulletin 14A ("SLB 14A"), announcing that it had changed its position regarding
the application of Rule 14a-8(i)(7) to shareholder proposals relating to
shareholder approval of equity compensation plans. SLB does not have any bearing
on the application of Rule 14a-8(i)(7) to shareholder proposals involving
choices of accounting method. Indeed, footnote 8 of SLB 14A explicitly states
that the bulletin addresses "only the specific matter of shareholder proposals
relating to shareholder approval of equity compensation plans," and that the
Staff was not "addressing or commenting on any other positions concerning
shareholder proposals relating to equity compensation or cash compensation." We
note, further, that SLB 14A was issued (and that the Fund sent a letter to the
Staff bringing the bulletin to its attention, in which all of the policy
arguments raised in the Appeal were raised) prior to the issuance of the
No-Action Letter. Thus the precedent with the most persuasive authority on this subject remain the
no-action letters in which the Staff considered proposals dealing with the
choice of accounting treatment with regard to options, as discussed in Section
I.A of this letter. In many of those letters the Staff found that they were
excludable pursuant to Rule 14a-8(i)(7) in spite of the fact that there was
public debate about the accounting treatment of options at the time. In Intel
Corp, (Feb. 27, 2001), for example, the Staff reached this conclusion that the
proposal relating to the accounting treatment of options was excludable pursuant
to Rule 14a-8(i)(7) notwithstanding the fact that the accounting treatment of
options was a subject of substantial debate (in the Intel case the proponent
cited multiple newspaper articles criticizing the accounting treatment utilized
by the registrant to account for option grants). B. The Proposal Is Overly Granular and Is Not An Appropriate Subject For
Shareholder Proposals An examination of the other key consideration specified by Release No.
34-40018the extent to which the proposal seeks to micro-manage the
registrantfurther strengthens the case for exclusion. As described in more
detail in our Request Letter and Section I.B of this letter, the Proposal in
essence requests the Company to choose the so-called "fair value-based method"
of accounting for stock options with respect to options issued to executives
instead of the "intrinsic value" method. This change reflects only a shift in
the Company's method of presenting financial results to its shareholders from
one accepted method of accounting to another: a decision that is the very core
of ordinary business operations. Indeed, as we noted in the Request Letter, the Company already provides pro
forma footnote disclosures of net income and earnings per share as if the "fair
value" method had been used, in accordance with SFAS 123. Thus, the Company's
financial disclosures already provide the salient information and analysis that
the Proposal seeks to have presented; ultimately, the impact of the Proposal
would be only to shift the location and format of the presentation of this data.
The decision of where and how to present the net income impacts of the
application of different accounting methodologies on stock options in financial
statements is of a sub-stantially different, and more granular, quality than the
proposal subjects identified in the releases and no-action letters cited in the
Appeal (e.g., proposals relating to plant closing policies, the manufacture of
tobacco products, executive compensation programs, anti-discrimination and other
employment policies) and other subjects traditionally found to be outside of the
ordinary business exclusion (e.g. the adoption of global manufacturing
standards, trade with particular foreign countries). The underlying policy concern behind the inquiry into micro-management is that
proxy statements and shareholder meetings are not appropriate places for
discussion on the countless smaller-scale decisions made by a registrant in the
course of running its business. Numerous choices of accounting methodology have
been the source of extensive public debate and governmental action over the
years, such as the use of pooling versus purchase accounting, the use of
non-GAAP presentations of earnings (e.g., "pro forma" results), the use of
various methodologies for revenue recognition, the presentation of "off-balance
sheet" financing, the calculation of reserves for bad credits and customer
bankruptcies, the treatment of derivative financial instruments, and the
emphasis on measures of profitability other than net income (e.g., EBITDA),
among many others. The mere fact that there has been public debate on these
subjects, however, does not mean that they all became appropriate subjects for
shareholder proposals. At their heart they relate to choices of accounting
method and the presentation of particular pieces of financial information in an
integrated set of financial statements and supporting discussion and analysis by
management. This has consistently been found to be in the province of ordinary
business operations. The wisdom of this policy is readily apparent: it is almost
impossible to conceive how the continuity of financial disclosures over time can
be maintained if individual choices of accounting policy is put to annual
shareholder review. * * * * * The Company believes that further review by the Commission of the Proposalis not
necessary or appropriate. The Staff's decision in the No-Action Letter is in
accord with its long-standing position on shareholder proposals relating to
choice of accounting methods and the underlying public policy concerns behind
Rule 14a-8(i)(7). The Proposal is neither novel nor does it present any new
complexity. We would be pleased to discuss further any aspects of this matter
with you: feel free to call the undersigned or Barry A. Bryer, both of this
office, at 212/403-1000 with any questions or comments regarding the foregoing.
Very truly yours, /s/ David M. Silk cc: (by overnight courier) Mr. Douglas J. McCarron Fund Chairman United Brotherhood of Carpenters Pension Fund 101 Constitution Avenue, N.W. Washington D.C. 20001 Mr. Edward J. Durkin United Brotherhood of Carpenters, Carpenters Corporate Governance Project 101 Constitution Avenue, N.W. Washington D.C. 20001 Mr. John M. Clark III Senior Vice President, General Counsel & Secretary National Semiconductor Corporation Legal Department 2900 Semiconductor Drive MS G3-135 Santa Clara, California 95051
[STAFF REPLY LETTER]
December 6, 2002 Douglas J. McCarron General President United Brotherhood of Carpenters and Joiners of America 101 Constitution Avenue, N.W. Washington, DC 20001 Dear Mr. McCarron: This is in response to your letter of July 31, 2002, requesting that the
Division of Corporation Finance submit for Commission review the Division's
position regarding the application of rule 14a-8(i)(7) under the Securities
Exchange Act of 1934 to a proposal submitted to National Semiconductor
Corporation by the United Brotherhood of Carpenters Pension Fund. The proposal
requests that the board establish a policy and practice of expensing in its
annual income statement the cost of stock options issued to company executives.
On July 19, 2002, we issued our response expressing the informal position that
we concurred with National Semiconductor's view that it could exclude the
proposal from its proxy materials for its upcoming annual meeting. As you
requested, the Division submitted its position on this matter to the full
Commission for their consideration. The Commission has directed the Division to
reconsider the matter and has recommended that the Division issue this response.
After further consideration of the issues by the Division, as directed by the
Commission, the Division does not concur in National Semiconductor's view that
the United Brotherhood of Carpenters Pension Fund's proposal relates to ordinary
business matters and, in the future, we will not treat shareholder proposals
requesting the expensing of stock options as relating to ordinary business
matters. The Division notes, however, that National Semiconductor relied in good
faith on the Division's position with respect to the proxy materials in
connection with its 2002 annual meeting of shareholders, which was held on
October 18, 2002. Sincerely, /s/ Martin P. Dunn Deputy Director
|
