Company Name: General Electric Co.
Public Availability Date: February 3, 2004Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
December 18, 2003 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549 Re: Omission of Share Owner Proposal by the IUE-CWA Employee's Pension Plan
Gentlemen and Ladies: This letter is to inform you, pursuant to Rule 14a-8(j) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), that General Electric
Company ("GE" or the "Company") intends to omit from its proxy materials for its
2004 Annual Meeting the following resolution and its supporting statement (the
"Proposal"), which it received from the IUE-CWA Employee's Pension Plan("IUE-CWA"
or the "Proponent"): Resolved: The Stockholders request that the Board of Directors establish an
independent committee to: 1) prepare a report evaluating the risk of damage to
GE's brand name and reputation in the United States as a result of outsourcing
and offshoring of both manufacturing and service work to other countries and 2)
make copies available to shareholders upon request. A copy of the Proposal is enclosed as Exhibit A. It is GE's opinion that the
Proposal is excludable pursuant to: (i) Rule 14a-8(i)(4) under the Exchange Act
because it relates to a personal grievance or special interest of the Proponent;
(ii) Rule 14a-8(i)(7) under the Exchange Act because it relates to the ordinary
business operations of the Company; and (iii) Rules 14a-8(i)(3) and 14a-8(i)(6)
under the Exchange Act because the Proposal is so vague that share owners and
the Board of Directors of the Company would be unable to determine what further
action would be taken if the Proposal were approved by share owners and
implemented by the Company. I. The Proposal Relates to a Personal Grievance or Special Interest.
Rule 14a-8(i)(4) permits the Company to omit from its proxy materials proposals
that relate to the redress of a personal claim or grievance against the Company,
or are designed to result in a benefit to the proponent or further a personal
interest, which is not shared by other share owners at large. The Commission has
stated that it adopted the exclusion to ensure "that the security holder process
would not be abused by proponents attempting to achieve personal ends that are
not necessarily in the common interest of the issuer's shareholders generally."
Securities Exchange Act Release No. 20091 (Aug. 16, 1983).
Here, the Proponent is the pension plan for a labor union that has engaged in
negotiations with the Companymost recently, this past summerover the very same
issue that is the subject of the Proposal: GE's relocation, or "outsourcing," of
work from U.S. locations to "offshore" countries. Because the Proposal is
designed to further the special interest of the Proponent in dissuading the
Company from undertaking any further such relocations, it may be excluded from
the Company's proxy materials under Rule 14a-8(i)(4). The Proponent represents approximately 12,500 of GE's employees, and it has a
national contract with GE that was re-negotiated in the summer of 2003. On
numerous occasions, including last summer's negotiations, the Proponent has
identified its concern over what it terms as "outsourcing" or "offshoring" as a
key negotiating issue. In the Proposal, the Proponent defines those terms as a
practice in which "GE sends manufacturing and service work abroad.... [and] uses
foreign contractors." That the issue is an important one for the Proponent in its relationship with GE
is amply demonstrated by its own public statements, which demonstrate the
Proponent's opposition to outsourcing and offshoring. For example, in an April
28, 2003 news item posted on the Proponent's website, a copy of which is
enclosed as Exhibit B, IUE-CWA President Ed Fire is quoted as saying that "GE
wants to wipe us off the face of the earth. It is difficult to keep winning
better contracts as our plants close and our jobs are sent overseas." A
September 15, 2003 article published on the Proponent's website for GE Workers
United, a copy of which is enclosed as Exhibit C, recounts a strike by an
IUE-CWA local at a GE facility in Jonesboro, Arkansas where the local identified
the movement of jobs to China as a key basis for the strike. Finally, in an
interview with Mr. Fire published in the July/August 2001 issue of International
Monitor, a copy of which is enclosed as Exhibit D, Mr. Fire speaks extensively
about GE's relocation of work to other countries and his union's opposition to
such relocations. This is a straightforward application of Rule 14a-8(i)(4) because the
Proponent's special interest is the very subject of the Proposal. In such
instances, the Commission has recognized that the Proposal clearly may be
omitted without the need for further analysis. See Exchange Act Release No.
19135 (Oct. 14, 1982) (noting that a more difficult "subjective analysis" by the
Staff need be applied only when the substance of the proposal is not directly
related to the special interest). For example, in General Electric Co. (Jan. 29,
1997), the proponent was a union organizer, and the proposal requested that the
board change various policies that the proponent perceived as discouraging union
activities. The Staff concurred that the Company could exclude the proposal
because it related to redressing a personal claim or grievance. See also, e.g.,
General Electric Co. (Jan. 20, 1995) (concurring in the exclusion of a proposal
that directly related to a lawuit to which the proponent was a party involving
the transfer of the proponent and other employees to another location);
Schlumberger Ltd. (Aug. 27, 1999) (concurring in the exclusion of a proposal
that followed the conclusion of litigation on the same subject as the proposal);
and Unocal Corp. (Mar. 15, 1999) (same). The Proponent tries to "dress up" the instant Proposal as a matter of concern to
other share owners by claiming that "offshoring" has a negative impact on the
Company's "reputation" and "brand name." As the substance of the Proposal bears
directly on an issue that the IUE-CWA considers an important one in its ongoing
negotiations with GE, the Proponent's effort to put additional "spin" on the
Proposal by raising a concern about the Company's "brand name" should have no
bearing on the analysis under Rule 14a-8(i)(4). Despite the Proponent's efforts, this is not a situation where a proponent has
submitted a proposal unrelated to its grievance or special interest, requiring
the Company to submit other evidence of the proponent's true motive from outside
the four corners of the proposal. In contrast, for example, are the facts in Dow
Jones & Co. (Jan. 24, 1994), in which the proponent labor union member submitted
an executive compensation proposal that was not directly related to the
proponent's underlying special interest to pressure the company to comply with
union demands. Even in that case, however, the Staff relied on other information
supplied by the company to demonstrate the union's true motive for submitting
the proposal in concurring that the proposal could be omitted. See also, e.g.,
Crown Central Petroleum Corporation (Mar. 4, 1999) (proposal by union member
share owner to study the company's relationship with certain members of
management and their family was excludable even though it was not directly
related to proponent's true motive to put pressure on the company's management
on union issues); Sigma-Aldrich Corp. (Mar. 4, 1995) (executive compensation
proposal excludable, even though the proposal on its face was unrelated to the
proponent's grievance over, among other things, the company's decision not to
renominate him to its board of directors); and Core Industries, Inc. (Nov. 23,
1982) (permitting the company to omit a share owner proposal to issue a report
on equal employment opportunity matters where the proponent was using the
proposal as one of many tactics to pressure the company in connection with his
attempts to organize a union at one of the company's facilities). Thus, in light
of the background of the Proposal, including the third-party materials enclosed
with this letter, even if the Proposal were unrelated to the Proponent's
underlying special interest in negotiating with GE over the relocation of jobs
abroad, it would be excludable under Rule 14a-8(i)(4). For the foregoing reasons, the Company requests that the Staff concur that it
may omit the Proposal from its 2004 proxy materials on the basis of Rule
14a-8(i)(4). II. The Proposal Relates to the Ordinary Business Operations of GE.
Rule 14a-8(i)(7) states that a company may omit a share owner proposal if it
"deals with a matter relating to the company's ordinary business operations." As
discussed below, the Staff has consistently concurred that proposals addressing
the fundamental, day-to-day functions of a company relate to such company's
ordinary business operations and may, therefore, be omitted under Rule
14a-8(i)(7). The Proposal requests that an independent board committee prepare a report on
what the Proponent calls "outsourcing" and "offshoring." Despite the Proponent's
terminology, those terms refer to a traditional, day-to-day management
functiondeciding how and where to manufacture a product. In the Proponent's own
words, out-sourcing is a practice in which "GE sends manufacturing and service
work abroad.... [and] uses foreign contractors." The decision of how and where
to manufacture a product may involve relocating production from one facility to
another, or it may involve a determination that it is in the best interests of
the company and its share owners to contract with a third party for the
manufacture of that product. In all events, it is the type of day-to-day
management decision that management is in the best position to make, and for
which it is responsible under New York law. GE is a New York company. In the absence of a specific provision giving the
power directly to the share owners, a New York company's business and affairs
are managed under the direction of the board of directors. See Section 701 of
the New York Business Corporation Law. This authority includes the power to make
decisions about the Company's manufacturing and suppliers, including decisions
on whether and when to use third-party suppliers, and the choice of such
suppliers. While the Proponent attempts to "spin" the proposal as addressing a broader
concern about the Company's "brand name and reputation," as noted in Section I
above, the potential impact of "outsourcing" on the IUE-CWA membership is an
ongoing issue with the Proponent in its contract negotiations with GE. Thus, we
do not believe that the Proponent raised the Proposal because of its concern
about the Company's "brand name," but rather because of its concern about the
potential impact on its members. The Staff has consistently viewed management's strategic decisions about its
suppliers, including the outsourcing of manufacturing to suppliers, as matters
of ordinary business. In Chrysler Corporation (Jan. 16, 1996), the Staff
permitted the company to exclude a proposal to request that the company cease
the outsourcing of its automotive parts needs (e.g., the manufacture of engines)
to foreign suppliers. The Staff concurred that the proposal could be omitted as
"ordinary business" because it related to "decisions related to product choices
and sourcing of components." See also, e.g., Seaboard Corporation (Mar. 3, 2003)
(proposal to report on hog suppliers' use of antibiotics excludable as ordinary
business); Hormel Foods Corporation (Nov. 19, 2002) (proposal to review meat
suppliers' standards related to the use of antibiotics and report on the same to
share owners excludable as ordinary business); Nike, Inc. (July 10, 1997)
(proposal requesting review of wage adjustments for contract manufacturers and
addressing their compliance with Nike's code of conduct excludable as ordinary
business matter). The Commission approved the Staff's interpretation on proposals involving the
use of third-party suppliers in 1998, when it cited the "retention of suppliers"
as an example of a fundamental ordinary business matter. The Commission stated:
Certain tasks are so fundamental to management's ability to run a company on a
day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight. Examples include the management of the workforce,
such as the hiring, promotion, and termination of employees, decisions on
production quantity and quality, and the retention of suppliers.
SEC Release No. 40018 (May 21, 1998) (emphasis added). Indeed, insofar as other
facets of "outsourcing" decisions include decisions relating to the management
of the workforce, the hiring, promotion, and termination of employees, and
decisions on production quantity and quality, each of these elements was also
cited in the passage above as a fundamental matter of ordinary business.
Along the same lines, the Staff has consistently taken the view that a company's
decisions about its manufacturing and other facilitiestheir location,
relocation, and terminationare matters of ordinary business. See, e.g.,
Minnesota Corn Processors (Apr. 3, 2002) (location of corn processing plant);
The Allstate Corporation (Feb. 19, 2002) (cessation of operations in
Mississippi); MCI Worldcom (Apr. 20, 2000) (economic analyses of relocation of
office and operating facilities); McDonald's Corporation (Mar. 3, 1997)
(location of new restaurants); Exxon Corporation (Feb. 28, 1992) (plant
location); Sears Roebuck & Co. (Mar. 6, 1980) (replacement of urban stores with
suburban stores); Anheuser-Busch Companies (Jan. 30, 1998) (sale of subsidiary);
Pinnacle West Capital Corporation (Mar. 28, 1990) (separation of assets not
directly related to electric power utility); Allegheny Power System, Inc. (Mar.
24, 1993) (sale of property); and McDonald's Corporation (Mar. 15, 1991) (same).
Finally, the Staff has also taken the position that share owner proposals that
are concerned with a company's employment policies and practices for the general
workforce, including its labor relations, are excludable under Rule 14a-8(i)(7).
See, e.g., Labor Ready, Inc. (Apr. 1, 2003) (concurring in the exclusion of a
proposal related to general compensation matters and employee relations); The
Boeing Company (Jan. 22, 1997) (concurring in the exclusion of a proposal
related to hiring practices); and Merck & Co., Inc. (Mar. 7, 2002) (concurring
on the exclusion of a proposal related to management of the workforce).
For the foregoing reasons, the Company requests the Staff's concurrence that the
Proposal may be omitted from its proxy materials under Rule 14a-8(i)(7).
III. The Proposal Is So Inherently Vague That the Share Owners and the Board of
Directors Would be Unable to Determine What Action to Take.
The Company furthermore believes that it may omit the entire Proposal from the
Company's 2004 proxy materials pursuant to Rules 14a-8(i)(3) and 14a-8(i)(6).
A share owner proposal that is materially false or misleading may be omitted
from a company's proxy materials under Rule 14a-8(i)(3). Rule 14a-8(i)(6)
provides that a company may omit a proposal if the company would lack the power
or authority to implement the proposal. The Staff has consistently taken the position that a company may exclude a
proposal under Rule 14a-8(i)(3) where the proposal is so vague and indefinite as
to be potentially misleading. See, e.g., Philadelphia Electric Company (July 30,
1992) (in granting relief, the Staff stated that "neither the stockholders
voting on the proposal, nor the company implementing the proposal (if adopted),
would be able to determine with reasonable certainty exactly what actions or
measures the proposal requires.") See also, e.g., Alcoa, Inc. (Dec. 24, 2002)
(proposal excludable where it requested a commitment to the "full
implementation" of a set of human rights standards); McDonald's Corporation
(Mar. 13, 2001) (same); and U.S. Industries, Inc. (Feb. 17, 1983). Such
proposals are misleading because any action that the board takes to implement
the proposal could be very different from what the share owners had envisioned
at the time they voted. See Wendy's International, Inc. (Feb. 6, 1990).
If the Proposal were adopted, share owners would not be able to determine with
any certainty what the Company would be required to do. The Proposal contains no
guidelines as to how the Company would evaluate any supposed risk of damage to
the Company's brand name and reputation as a result of outsourcing and
offshoring work as contemplated by its business plan. The Staff has indicated
that, where a proposal contains insufficient information to share owners, it is
excludable under 14a-8(i)(3). See Johnson & Johnson (Feb. 7, 2003) (in a
proposal requesting the company's progress concerning the Glass Ceiling
Commission's business recommendation, the Staff found that the proposal lacked
any description of the substantive provisions of that report); Smithfield Foods,
Inc. (July 18, 2003); and Kohl's Corporation (Mar. 13, 2001).
If share owners were to approve the Proposal, the Board of Directors would not
know what action to take to fulfill the request. The Proposal fails to provide
any meaningful guidance with respect to the assumptions to be made in evaluating
and quantifying the perceived risk of damage to GE's brand name and reputation.
Furthermore, there is no date by which the report required by the Proposal must
be completed. The Proposal cannot be implemented without substantial
interpretation by the Board of Directors. Indeed, any action taken by the Board
in implementing this action might significantly differ from the actions
envisioned by the share owners who voted on the Proposal. In addition, Rule 14a-8(i)(6) provides that a company may omit a proposal if the
company would lack the power or authority to implement the proposal. In
International Business Machines Corp. (Jan. 14, 1992), the Staff permitted a
proposal to be excluded pursuant to Rule 14a-(i)(6), stating that "a matter may
be considered beyond a registrant's power to effectuate where a proposal is so
vague and indefinite that a registrant would be unable to determine what action
should be taken." For the foregoing reasons, GE respectfully requests the concurrence of the Staff
in GE's determination to omit the Proposal from GE's 2004 proxy materials
pursuant to Rules 14a-8(i)(3) and 14a-8(i)(6). * * *
Five additional copies of this letter and the enclosures are enclosed pursuant
to Rule 14a-8(j) under the Exchange Act. By copy of this letter, the IUE-CWA is
being notified that GE does not intend to include the Proposal in its 2004 proxy
materials. We expect to file GE's definitive proxy materials with the Commission on or
about March 9, 2004, the date on which GE currently expects to begin mailing the
proxy materials to its share owners. In order to meet printing and distribution
requirements, GE intends to start printing the proxy materials on or about
February 20, 2004. GE's 2004 Annual Meeting is scheduled to be held on April 28,
2004. If you have any questions, please feel free to call me at (203) 373-2243.
Very truly yours, /s/
Robert E. Healing Enclosures
cc: Special CounselRule 14a-8No-Action Letters
Office of Chief Counsel Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549 The IUE-CWA Employee's Pension Plan
1275 K Street, N.W.
Suite 600
Washington, D.C. 20005-4064 [APPENDIX]
Exhibit Sharcholder Proposal Resolved: The Stockholders request that the Board of Directors establish an
independent committee to: 1) prepare a report evaluating the risk of damage to
GE's brand name and reputation in the United States as a result of the
outsourcing and offshoring of both manufacturing and service work to other
countries and 2) make copies available to shareholders upon request.
Statement of Support In the 2002 Annual Report, GE announced targets of $5 billion in revenue from
China and the outsourcing of $5 billion in contracts to Chinese vendors by 2005.
China is a country where employees are persecuted for seeking to exercise
internationally recognized human rights, such as freedom of association and the
right to collective bargaining. GE is also attempting to outsource 70 percent of business processes (IT work,
engincering, design, accountancy, legal services, call center work and bill
paying), send 70 percent of outsourced processes offshore and give 70 percent of
offshore outsourced processes to India. [Hindu Business Line, 6/18/03,
reproduced on GE Capital India web site] India has been cited for
non-enforcement of labor rights, including freedom of association and the right
to collective bargaining. [ICFTU, "Report for the WTO," 2002]
The outsourcing and offshoring of manufacturing and service work may be
profitable in the short term, but could have significant long-term consequences.
[Reuters, 10/31/03] The shift of production to low-wage countries in general and
to China in particular has generated negative press stories in the U.S. [Knight
Ridder, 11/10/03; Union Leader, 10/26/03] Two in three Americans think that job
losses to China are a "serious issue." [Greenberg Quinlan Rosner Research, 2003]
Americans are also sensitive to the exodus of jobs to India and other countries
[Time Magazine, 8/4/03] Observers predict a backlash against the outsourcing of
white-collar jobs. [USA Today, 8/5/03; Business Week, 2/3/03]
GE is vulnerable to consumer disaffection in the U.S., which is the source of 60
percent of total company revenues. A backlash against outsourcing and offshoring
could jeopardize political support for globalization, one of GE's five "elements
of growth." Offshoring and outsourcing also affect the morale of employees who remain in
U.S. operations. [CIO Magazine, 9/1/03] Morale problems extend to the countries
where GE is sending work. A recent poll reported that GE Capital call center
employees in India were dissatisfied with pressures to perform and insufficient
time off [India Business Insight, 9/30/03] GE's brand name may be its most important asset. For Harris Interactive, "the
value of a company's reputation may be as much as 40% of its total market
value." [http://www.harrisinteractive.com/pop up/rg/benefits.asp] Company
reputations affect consumer purchases. And "reputation, once lost, is extremcly
difficult to reclaim." [Wall Street Joumal, 2/7/01] GE sends manufacturing and service work abroad. It uses foreign contractors. Its
foreign operations are becoming vendors to other companies. We believe the Board
should help shareholders evaluate the long-term risk and policy implications of
the offshoring and outsourcing strategies. [INQUIRY LETTER]
January 14, 2004 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Request of General Electric Company for a No-Action Letter With Respect to
the Shareholder Proposal of the IUE-CWA Employee's Pension Plan
Ladies and Gentlemen: I. Introduction
This letter is submitted in response to the claim of the General Electric
Company ("GE") that it may exclude the shareholder proposal of the IUE-CWA
Employee's Pension Plan from its 2004 proxy materials. The Pension Plan was the
beneficial owner of 92,400 shares of GE Common Stock at the time the Proposal
was submitted. The Proposal asks the Board of Directors to establish an independent committee,
which would "prepare a report evaluating the risk of damage to GE's brand name
and reputation in the United States as a result of outsourcing and offshoring of
both manufacturing and service work to other countries." The Proposal also asks
the Board to make copies of the report available to shareholders upon request.
Under Rule 14a-8(g), "the burden is on the company to demonstrate that it is
entitled to exclude a proposal." (emphasis added). We submit that GE has failed
to meet this burden, because all of its claims are without merit.
II. GE Has Failed to Demonstrate the Existence of a Personal Grievance or
Special Interest Within the Meaning of Rule 14a-8(i)(4). There is no merit to GE's contention that the Proposal relates to a personal
grievance or a special interest within the meaning of Rule 14a-8(i) (4). The
entire argument is based on the mistaken and unfounded assumption that the
Proponent is a labor union that "represents approximately 12,500 of GE's
employees" in collective bargaining negotiations (See p. 2).
The Proponent is in fact the IUE-CWA Employee's Pension Plan, a multi-employer
pension plan that has no GE employees or retirees as participants, because GE
and its employees are participants in an entirely different pension plan. Under
these circumstances, GE has failed to show that there are any participants in
the IUE-CWA Pension Plan who could possibly benefit, or be aggrieved, as a
result of any collective bargaining negotiations between GE and the labor union.
The IUE-CWA Employee's Pension Plan and the labor union are plainly distinct
entities that have different interests and different obligations under the law.
However, while GE appears to acknowledge this fact at the beginning of paragraph
two of its argument, every subsequent reference to the Proponent in the course
of that argument is based on the mistaken assumption that the union is the
Proponent. As a pension plan with no GE employees or retirees, the Proponent does not in
fact have "a national contract with GE" as GE has alleged (p. 2). It did not
participate in "last summer's negotiations" concerning that contract (p. 2). It
did not identify outsourcing and offshoring "as a key negotiating issue" in the
course of those negotiations (p. 2). It did not make any of the "public
statements" that counsel has cited on page 2, and attached as exhibits to his
request for a no-action letter. It is not engaged in any "ongoing negotiations
with GE" (p. 3). And it plainly does not have any "special interest in
negotiating with GE over the relocation of jobs abroad" (p. 4). All of these
representations by counsel for the company are inaccurate and mistaken.
In contrast, as the beneficial owner of 92,400 shares of GE common stock, the
Proponent clearly has a significant and substantial interest in GE as one of its
larger stockholders. It has the same interest as any other stockholder in
protecting the value of its investment. And that is why the Proposal is
addressed to the risk of damage to GE's brand name and reputation, and to the
value of GE stock, that could result from outsourcing and offshoring.
In any event, we submit that the Rule does not apply to entities such as the
Proponent, because an organization cannot harbor a personal grievance within the
meaning of the Rule. Any standard dictionary will confirm that the plain meaning
of a "personal grievance" is the "indignation or resentment" of "a living human
being" that stems from "a feeling of having been wronged" (emphasis added) See
e.g. The American Heritage Dictionary (Second College Ed., 1985). Since an
organization does not have any feelings or emotions, it cannot properly be held
subject to the Rule. This interpretation is confirmed by the text of the Rule. The word "personal,"
which is used as an adjective on three occasions, denotes "a particular
individual and his intimate affairs, interests, or activities" Id. The Rule also
confirms that its scope is limited to individual human persons when it speaks of
a "a benefit to you" (emphasis added). An organization is not capable of
reading. Under these circumstances, GE has failed to meet its burden of demonstrating
that Rule 14a-8(i)(4) is applicable. There is no merit whatsoever to its
argument. III. GE Has Failed to Demonstrate That the Proposal Involves Ordinary Business
Operations Within the Meaning of Rule 14a-8(i)(7). The Commission has determined that a shareholder proposal may not be excluded
from a company's proxy statement in reliance on Rule 14a-8(i)(7), if it presents
or raises "significant social policy issues." Securities Exchange Act Release
No. 34-40018 (May 21, 1998); Securities Exchange Act Release No. 12999 (Nov. 22,
1976). As the Commission declared in adopting the 1998 Amendments to Rule 14a-8,
a proposal that presents a "sufficiently significant social policy issue" is
deemed to "transcend the day-to-day business matters," and is therefore
considered to "be appropriate for a shareholder vote." Securities Exchange Act
Release No. 34-40018 (May 21, 1998). Under these circumstances, it is not sufficient for GE to demonstrate that the
Proposal relates in some way to ordinary business operations. The Company must
also demonstrate that there is no significant issue of social policy that may be
deemed to "transcend" or go beyond any business operations involved.
A. The Proposal is Focused on a Fundamental Business Strategy and Long-Term
Goals of the Company Since 1992, the Commission has taken the position that proposals concerning
"'fundamental business strategy, long-term goals and economic orientation ...
would not be considered ordinary business subject to the exclusion'" under both
former Rule 14a-8(c)(7) and its successor, the current Rule 14a-8(i) (7). A.
Goodman and J. Olson eds., SEC Proxy and Compensation Rules, Section 15.7[1] at
p. 15-26 (Third edition, 2004 Supplement). The standard is quoted from the
Commission's amicus curiae brief (No. 91-5087, p. 31) in Roosevelt v. E. I.
DuPont de Nemours & Company, 958 F. 2d 416 (D.C. Cir. 1992).
In the wake of the DuPont brief, the staff has recognized that "strategic
business proposals ... [are] beyond a company's ordinary business operations."
SEC Proxy and Compensation Rules, supra, Section 15.7[1] at p.15-27. Denials of
no-action letters under this standard include Union Camp Corporation (Feb. 12,
1996, proposal for a phaseout of organochlorines), and Eli Lily and Company
(Feb. 25, 2001, proposal for a policy of restraint in the pricing of drugs).
The staff has applied the same standard in denying the issuance of no-action
letters when shareholder proposals have called for special reports. SEC Proxy
and Compensation Rules, supra, Section 15.7[1] at p.15-46 In the words of
Goodman and Olson, it has "precluded the exclusion of proposals calling for
special reports on the grounds of ordinary business where they raise important
policy issues." Id. Examples include General Motors Corporation (Mar. 4, 1996,
proposal for a report on the company's involvement in ballistic missile
defense), and General Electric Company (Jan. 19, 2000, proposal for a report on
certain risks arising from GE's globalization growth initiative).
In this context, the staff's denial of a no-action letter in General Electric
Company (Jan. 19, 2000) is of particular significance. The 2000 proposal for a
report on the risks of "GE's globalization initiative" is similar to the
Proposal that is at issue here. In fact, the two proposals are virtually
identical insofar as they call for "a report evaluating the risk of damage to
GE's brand name and reputation in the United States" and for making copies of
the report "available to shareholders upon request."
Moreover, it is evident that each of the proposals is addressed to the same
fundamental business strategy that GE has been implementing over a period of
years. The Supporting Statement for the earlier proposal refers to "GE's
strategy of shifting production from the United States" to other nations, and
notes that GE had already "cut more than 100,000 manufacturing jobs" in the
United States "while opening up new operations in Mexico, Hungary and the Far
East." It adds that "'GE is rapidly developing Mexico as a low-cost source of
materials, parts, and services for its domestic units ....'"
The instant Proposal is addressed to GE's continuing implementation of the same
strategy of shifting jobs from the United States to other nations through "the
outsourcing and offshoring of manufacturing and service work to other
countries." In addition, the current Statement of Support provides further
evidence that the two proposals are addressed to the same fundamental business
strategy. For example, the Statement of Support cites the 2002 Annual Report for the
proposition that GE has a target for outsourcing "$5 billion in contracts to
Chinese vendors by 2005." It adds that "GE is also attempting to outsource 70
percent of business processes," while sending "70 percent of outsourced
processes offshore and giv[ing] 70 percent of offshore outsourced processes to
India." Significantly, GE does not dispute the accuracy of any part of this
Statement of Support. In the alternative, we submit that the Proposal's focus on "the risk of damage
to GE's brand name and reputation in the United States" is sufficient, in and of
itself, to raise a business strategy issue that is appropriate for a shareholder
vote under the reasoning of the Commission's amicus curiae brief in Roosevelt v.
E.I. DuPont de Nemours & Company, supra. In this regard, the Statement of
Support states that "GE's brand name may be its most important asset," because
it has been estimated that "'the value of a company's reputation may be as much
as 40% if its total market value.'" With more than 10 billion shares of common
stock, and a market price of about $32 per share as this is written, that
estimate would mean that GE's reputation is a corporate asset that could be
worth as much as $128 billion. The preservation of a $128 billion asset is clearly a matter of strategic
importance. Accordingly, when the Statement of Support points out that "GE is
vulnerable to consumer disaffection in the U.S. because the U.S. "is the source
of 60 percent of total company revenues," notes that "Americans are ...
sensitive to the exodus of jobs," and cites predictions that there will be "a
backlash against the outsourcing of white-collar jobs," it should be evident
that the Proposal is addressed to the "'fundamental business strategy, long-term
goals and economic orientation" of the Company. In addition to the staff's denial of a no-action letter in General Electric
Company (Jan. 19, 2000), there are at least two precedents for denying a
no-action letter with respect to a proposed report on the risk of damage to a
company's reputation. In each of those cases, the staff's response reflects that
the proposal called for a report on the impact of certain business strategies
"on the environment, human rights and risk to the company's reputation"
(emphasis added) Morgan Stanley Dean Witter & Co. (Jan. 11, 1999), Merrill Lynch
& Co. (Feb. 25, 2000). The staff found, in each case, that "the proposal raises
significant policy issues that are beyond the ordinary business operations" of
the companies involved. Under these circumstances, we submit that GE has failed to demonstrate that it
is "entitled to exclude" the Proposal from its proxy materials. Instead, we
submit that GE's business strategy of shifting jobs from the United States to
other countries, and the associated risk of damage to its brand name and
reputation, are each sufficient to demonstrate the existence of a significant
issue of policy that transcends day-to-day business operations.
B. The Proposal Relates to the Impact of Outsourcing and Offshoring on
Communities and the Nation The staff employs an alternative approach for determining the existence of a
significant issue of social policy issue, which appears to have originated in
its refusal to grant a no-action letter to Pacific Telesis (Feb. 2, 1989). This
approach focuses on the impact of corporate business strategies.
According to the staff's decision, Pacific Telesis concerned "a proposal that
the Company study the impact on communities of the closing or consolidation of
Company facilities." (emphasis added) Id. The Division of Corporation Finance
took the position that "such proposals ... involve substantial corporate policy
considerations that go beyond the conduct of the Company's ordinary business
operations." Id. A more recent application of this analysis is evident in the
denial of a no-action letter to E.I. DuPont de Nemours & Company (Mar. 6, 2000).
In this context, it is apparent that outsourcing and offshoring are business
practices that are having, and will continue to have, a significant "impact on
communities" throughout the United States. Forrester Research Inc. has predicted
that American corporations will shift at least 3.3 million white-collar jobs
from the United States to other low-cost nations by 2015. The Atlanta
Journal-Constitution (Aug. 27, 2003). In the same vein, Gartner Inc., another
research firm, has estimated that half a million IT jobs, "roughly 1 in 20will
go abroad in the next 18 months" The Christian Science Monitor (July 29, 2003).
While it would be difficult to evaluate the extent to which outsourcing and
offshoring may be related to the closing or relocation of particular facilities,
it is evident that these practices are having a "broad social and economic
impact" in aggregate terms that is comparable in kind, but greater in magnitude,
than the business practices that were at issue in Pacific Telesis. Moreover, we
submit that the relevant "community" for evaluating the significance of
outsourcing and offshoring is the nation as a whole, and not merely a few
discrete municipalities. In this context, Lou Dobbs Tonight has been presenting an ongoing series of
special reports, for at least eight months, that is called "Exporting America."
As host Lou Dobbs declared during one of those reports, corporations "are
sending American jobs overseas at such a rapid rate that this country's economy
is facing a crisis of historic proportions." (Lou Dobbs Tonight, Sept. 22, 2003;
transcripts are available at CNN.com). According to Bob Herbert, writing in the New York Times, "there is no disputing
the direction of the trend, or the fact that it is accelerating" (Dec. 29,
2003). He adds that, if the exportation of American jobs continues unchecked, it
"will eventually mean economic suicide for hundreds of thousands, if not
millions, of American families" Id. Mr. Herbert reported that "nearly nine million Americans are officially
unemployed" Id. In addition, it appears certain that outsourcing and offshoring
are having a significant negative impact on the ability of the economy to
generate net growth in the number of American jobs. The New York Times reported, on January 10, 2004, that the United States economy
had a net gain of just 1,000 new jobs in December, instead of the 150,000 new
jobs that most forecasters had expected. While the growth in productivity is
also seen as a factor, "total job creation ... in the five months that the
economy has been adding jobs" is just 278,000. Id. According to the New York Times article, economists estimate "that job growth
must proceed at a pace of at least 150,000 a month, on average, to absorb
everyone who wants to work." Under these circumstances, the rapid acceleration
in the exportation of American jobs is undoubtedly a significant and substantial
factor in limiting job growth within the United States. As to the impact on the national economy, the Chicago Tribune has reported that
the December employment report had "caused alarm." (Jan. 10, 2004) The Tribune
story explains "the fear ... that if an economy juiced up by the Bush
administration's historic package of tax cuts and low interest rates can't
produce [growth in the number of] jobs, it may stall when the effect of that
stimulus wears off later this year." More importantly, the short term impacts of outsourcing and offshoring on growth
in employment pale in comparison to the long term implications of these
practices. A recent study at the University of California-Berkeley has estimated
that "as many as 14 million jobs are at risk" of being exported, a figure that
translates to "11 percent of the [entire] U.S. work force." (Lou Dobbs Tonight,
Oct. 30, 2003). Andrea Bierce, the managing director of A.T. Kearney, a
consulting firm, has similarly concluded that "any function that does not
require face-to-face contact is now perceived as a candidate for offshore
relocation." Fortune (June 23, 2003). In this context, C-Span broadcast a Brookings Institution debate concerning U.S.
Trade Policy on January 6, 2004, which focused on the unprecedented and growing
volume of outsourcing and offshoring. Each of the panelists agreed that these
practices have ominous implications for the long-term future of the United
States. Paul Craig Roberts, was the most explicit of the C-Span panelists. He declared
that the outsourcing and offshoring of American jobs will cause a fall in
average wages in the United States, a collapse of the "ladder of upward
mobility," and a reduction in the American standard of living. He concluded, "I
expect the United States to become a third world nation in twenty years."
Under these circumstances, we submit that the instant Proposal raises
significant issues of policy that transcend ordinary business operations. It
necessarily involves the adverse impacts of outsourcing and offshoring on
cities, villages and towns across the nation, because anger and dismay over the
adverse impacts within those communities may increase "the risk of damage to
GE's brand name and reputation in the United States." This analysis would bring
the instant Proposal squarely within the rationale of the staff's decision in
Pacific Telesis. In the alternative, the staff could recognize that the relevant community for
analyzing the impact of outsourcing and offshoring is the nation as a whole, and
all of the people within it. Under either application of the Pacific Telesis
rationale, we submit that the instant Proposal raises significant issues of
policy that transcend the ordinary business operations of the Company.
C. The Proposal Concerns an Issue That is the Subject of Widespead Public Debate
and an Increasing Recognition That Significant Policy Issues Are Involved
A third method for determining the existence of a significant policy issue that
transcends ordinary business operations is to ask whether the proposal deals
with an issue that is the subject of widespread public debate. The staff has
repeatedly employed this analysis in denying company requests for no-action
letters. In 2003, for example, the staff denied requests for no action letters with
respect to proposals that concerned the impact of non-audit services on auditor
independence. See e.g. ExxonMobil Corporation (Mar. 11, 2003) and Verizon
Communications Inc. (Jan. 23, 2003). In each of the cited cases, the staff
denied requests for no action letters "in view of the widespread public debate
concerning the impact of non-audit services on auditor independence and the
increasing recognition that this issue raises significant policy issues...."
The staff has also employed this test in a number of other contexts in denying
company requests for no-action letters. These include the proposal dealing with
the conversion of traditional defined benefit pension plans to cash-balance
pension plans in International Business Machines Corporation (Feb. 16, 2000),
the proposals concerning analyst independence that were at issue in J.P. Morgan
Chase & Co. (Jan. 21, 2002) and The Goldman Sachs Group, Inc. (Jan. 15, 2002),
and a proposal concerning option repricing that was the subject of General
DataComm Industries, Inc. (Dec. 9, 1998). In this context, the Supporting Statement and the foregoing arguments have cited
a substantial number of articles, studies and media reports that deal with the
implications of outsourcing and offshoring. A search for articles and reports on
these practices on Google or in the LexisNexis database would identify thousands
of additional sources that may be relevant. Under these circumstances, we submit that there is substantial evidence that
outsourcing and offshoring are the subject of "widespread public debate" in both
the electronic and print media. In addition, we submit that these articles and
media reports demonstrate an "increasing recognition" that outsourcing and
offshoring have raised significant issues of policy that transcend ordinary
business operations. Further evidence of "increasing recognition" is provided by Stephen S. Roach,
the Managing Director and Chief Economist of Morgan Stanley, who has concluded
that "offshore outsourcing is a huge deal.... Something new is going on." The
New York Times (Dec. 7, 2003). He added, during a roundtable debate in New York,
that: "the relationship between aggregate demand and employment growth ... has broken
down. That breakdown reflects not just the rapid growth ... of outsourcing
platforms in places like China and India, but also the accelerated pace by which
these platforms can now be connected to the developed world through the
Internet." In addition, a recent interview of U.S. Senator Charles Schumer on Lou Dobbs
Tonight, which was broadcast on December 9, 2003, provides further evidence of
the "increasing recognition" that outsourcing and offshoring have raised
significant policy issues: "DOBBS: nearly everyone watching and listening to us right now, understands
[that] U.S. multinationals ... are the ones who have chosen to outsource high
value jobs in the United States and put them in other countries.
SCHUMER: Yes, you bet. DOBBS: China, India...
SCHUMER: Right. Exactly. I think this is the hidden issue of the 2004 election.
The areas where it has particular resonance are the middle-West, all those swing
states, Pennsylvania, Ohio, Michigan, and the Southeast, where all those Senate
seats are up. And its huge in those areas." In this context, Lou Dobbs Tonight has been presenting a nightly list of
American companies to publicize the fact that they are sending "jobs overseas or
choosing to employ cheap foreign labor, instead of employing U.S. workers."
(Dec. 10, 2003). In introducing the segment on December 10, 2003, Mr. Dobbs
indicated that he was asking viewers to continue to "help to identify" and
publicize the companies that are engaged in "the exportation of American jobs to
cheap foreign labor markets." Mr. Dobbs' coverage of this issue, and the viewer response to Mr. Dobbs'
requests for help, are also reflective of the "growing recognition" that this
issue is important. "We've received thousand[s] of e-mail[s]," Dobbs said. "Its
going to be taking us ... weeks and weeks to confirm these notifications" (Dec.
10, 2003). "Tonight," he continued, we're adding to the list of companies....
And bear with us. It's a huge list." Under the circumstances set forth above, we agree with Mr. Herbert that
outsourcing and offshoring, and their implications for the American economy and
standard of living, "should be among the hottest topics of our national
conversation" The New York Times (Dec. 29, 2003). We submit that the evidence
demonstrates: (1) the existence of a "widespread public debate" concerning the
impact of outsourcing and offshoring on individual communities and on the nation
as a whole; and (2) an "increasing recognition" that these practices raise
significant issues of policy that transcend ordinary business operations. For
these reasons, we submit that GE has failed to demonstrate that it is "entitled
to exclude" the instant Proposal from its 2004 proxy materials pursuant to Rule
14a-8(i)(7). IV. GE Has Failed to Demonstrate That the Proposal Is Vague Within the Meaning
of Rules 14a-8(i)(3) And 14a-8(i)(6). Counsel for GE makes a number of conclusory assertions to the effect that the
shareholders "would not be able to determine with any certainty what the Company
would be required to do", and that the directors "would be unable to determine
what action should be taken, if the Proposal is adopted (p. 3). However, as
noted above, the Proposal asks the Board of Directors to "establish an
independent committee to ... prepare a report evaluating the risk of damage to
GE's brand name and reputation in the United States as a result of outsourcing
and offshoring of both manufacturing and service work to other countries."
Both the nature of the action to be taken, and the objective to be achieved, are
stated in a clear and precise manner. The details are left to the discretion of
the Board of Directors, in the exercise of its business judgment, or to the
proposed committee, if the Board should elect to delegate such details to
independent committee. Under these circumstances, we submit that the
shareholders and the Board of Directors are plainly able to evaluate what action
is proposed with a reasonable degree of certainty. Most of GE's argument consists of boilerplate argument that has no evident
connection to the instant Proposal. With the exception of two one-sentence
claims, there is no attempt to substantiate its unfounded assumption that the
proposal is too vague to be implemented (See p. 7). The first of these complaints is a claim that "the proposal fails to specify
"the assumptions to be made in evaluating" the possible "risk of damage to GE's
brand name and reputation." However, in view of the magnitude of the issues
involved, and the degree of expertise necessary to address them, we submit that
it would be improper for the Proposal to specify "the assumptions to be made" in
designing and carrying out the proposed study. To the extent that the proposed report may require "assumptions to be made,"
those assumptions should be made by persons with the necessary expertise in risk
analysis, or by the Board or the members of the independent committee in
reliance upon such experts. As the Commission declared in adopting the 1998
Amendments to Rule 14a-8, the "shareholders, as a group, would not be in a
position to make an informed judgment" as to how the proposed study should be
designed and carried out. Securities Exchange Act Release No. 34-40018 (May 21,
1998). GE's second claim contends that "there is no date by which the report ... must
be completed." However, in view of the complexity of the issues involved, and
the fact that volume of outsourcing and offshoring is accelerating, we believe
that it would be improper for a shareholder proposal to specify a time for
completing the proposed report. An important consideration for any report on
outsourcing and offshoring must be the fact that these practices involve a
moving target, as distinguished from a static set of circumstances. In addition,
the "increasing recognition" that these practices raise significant issues of
social policy could lead to adjustments in the design and implementation of the
proposed study as it is being conducted. Under these circumstances, the
appropriate date for completion of the proposed report is another issue that the
shareholders, as a group, are not are not in a position to determine.
In the final analysis, counsel for GE is advocating a form of
"micro-management." However, as the Commission declared in adopting the 1998
Amendments to Rule 14a-8, such micro-management may be deemed to be improper
when a proposal "seeks to impose specific time-frames or methods for
implementing complex policies." Securities Exchange Act Release No. 34-40018
(May 21, 1998). Under these circumstances, GE has failed to demonstrate that Rules 14a-8(i)(3)
and 14a-8(i)(6) are applicable. Both the shareholders and the Company are able
to determine what action is proposed with a reasonable degree of certainty.
V. Conclusion For the reasons set forth above, we submit that GE has failed to meet its burden
of demonstrating "that it is entitled" to exclude the Proposal from its proxy
materials (See Rule 14a-8(g). The request for a no-action letter should be
denied. Please do not hesitate to contact me if you should have any questions. I have
enclosed six copies of this letter for the staff, and am sending copies to
counsel for the company and the proponent. Sincerely,
/s/ Frederick B. Wade
c. counsel for GE
[STAFF REPLY LETTER]
February 3, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: General Electric Company Incoming letter dated December 18, 2003
The proposal urges the board to establish an independent committee to prepare a
report evaluating the risk of damage to GE's brand name and reputation in the
United States as a result of outsourcing and offshoring of work to other
countries and to make such report available to shareholders upon request.
We are unable to concur in your view that GE may exclude the proposal under rule
14a-8(i)(3). Accordingly, we do not believe that GE may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(3). We are unable to concur in your view that GE may exclude the proposal under rule
14a-8(i)(4). Accordingly, we do not believe that GE may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(4). We are unable to concur in your view that GE may exclude the proposal under rule
14a-8(i)(6). Accordingly, we do not believe that GE may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(6). We are unable to concur in your view that GE may exclude the proposal under rule
14a-8(i)(7). Accordingly, we do not believe that GE may omit the proposal from
its proxy materials in reliance on rule 14a-8(i)(7). Sincerely,
/s/ Keir D. Gumbs
Special Counsel
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