Company Name: Int'l. Business Machines Corp.
Public Availability Date: February 2, 2004Document Sections:
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
INQUIRY LETTER [INQUIRY LETTER]
December 18, 2003 Securities and Exchange Commission
Office of Chief Counsel
Division of Corporation Finance
450 Fifth Street, NW, Judiciary Plaza
Washington, D.C. 20549 Subject: Stockholder Proposal of James J. Mangi
Ladies and Gentlemen: Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, I am
enclosing six copies of this letter together with a proposal and statement in
support thereof (the "Proposal"), attached as Exhibit A hereto, which Proposal
was submitted on November 10, 2003 by James J. Mangi, a current IBM employee,
and the "Secretary of Alliance@IBM" 1 (the "Proponent") to International
Business Machines Corporation (the "Company" or "IBM"). The Proposal reads as
follows: "Resolved: the stockholders request:
(1) a special review of IBM's executive compensation policies to determine
whether they create an undue incentive to make short-sighted decisions, by
linking the compensation of senior executives to measures of performance that
include net earnings, cash flow and earnings-per-share; and
(2) a report to the stockholders that summarizes the scope of the review, any
recommendations made, and any action taken." IBM believes that the entire submission (i.e. both the Proposal and the
Supporting Statement) may properly be omitted from IBM's proxy materials being
prepared for our 2004 annual meeting of stockholders (the "2004 Annual Meeting")
for the reasons discussed below. For convenience, the submission shall
hereinafter be referred to collectively as the Proposal. To the extent that the
reasons for omission stated in this letter are based on matters of law, these
reasons are the opinion of the undersigned as an attorney licensed and admitted
to practice in the State of New York. I. THE PROPOSAL SHOULD BE OMITTED UNDER RULE 14a-8(i)(7) AS RELATING TO THE
COMPANY'S ORDINARY BUSINESS OPERATIONS. Rule 14a-8(i)(7) allows a company to omit shareholder proposals from its proxy
materials "if the proposal deals with a matter relating to the company's
ordinary business operations." The Proposalwhich was submitted by the
Proponent, the Secretary of the Alliance@IBM, with the goal of supporting union
organizing efforts in the United States by the Communications Workers of America
("CWA") as well as to preserve local jobs (including the Proponent's) see
Argument II, infradoes nothing more than attempt to second guess IBM's ordinary
business policies and practices with respect to its global resourcing
activities. Although couching the language of the "Resolved" section of the
Proposal in terms of seeking an executive compensation reviewoftentimes a
subject matter not otherwise excludable under Rule 14a-8(i)(7), the true
motivation of the Proponent relates to the issues the Proponent has with our
global resourcing activities. In reality, he does not agree with such activities
and seeks for us to review and report on these. Indeed, in second-guessing IBM
and devoting his entire supporting statement to advance his thesis that the
Company's decisionmaking on global resourcing is "myopically short-sighted," the
Proponent wants both IBM stockholders as well as the Company to focus on this
subject matter, and for IBM to report on such resourcing activities because, in
his view, they have (or should have) a bearing on our executive compensation
policies. In the Proponent's view, the compensation factors provide an "undue incentive
for executives to make short-sighted decisions that may boost short term
earnings, even if the long term consequences may be detrimental to the Company."
While citing "IBM's role in exporting American jobs to get cheaper employees an
ocean away" as "one example" of the need for the instant review, the rest of the
Supporting Statement cites no other examples we should be considering in our
review. Hence, the Proponent is second-guessing our global resourcing
activities. Indeed, as will be described in greater detail below, each of the
remaining paragraphs of the Supporting Statement continue to refer to a variety
of aspects of global resourcing or, what is known more colloquially as "offshoring."
In effect, the Proponent is seeking to have IBM create a report in which we
examine and report upon our global resourcing policies and procedures in
connection with our executive compensation policies. While the Proponent may
believe IBM is being "short-sighted," the issues associated with global
resourcingwhich the Proponent would have us report uponfall at the heart of
IBM's ordinary business operations. The fact that the Proponent has attempted to
couch this as an executive compensation proposal simply cannot carry the day,
because of its inextricable linkage to a variety of ordinary business matters.
Aside from any of the other deficiencies and inaccuracies set forth in the
Proposal, as outlined below, and irrespective of any other legal or factual
shortcomings associated therewith, the Proposal should be omitted in its
entirety because it relates to the ordinary business operations of the Company.
A. REQUESTING A REPORT WHICH INVOLVES THE REVIEW OF ORDINARY BUSINESS MATTERS IS
FULLY EXCLUDABLE UNDER RULE 14a-8(i)(7). In Release 34-20091 (August 16, 1983), the Commission implemented a significant
change in the staff's interpretation of the ordinary business exclusion. Prior
to that time, the staff took the position that proposals requesting issuers to
prepare "reports" on specific aspects of their business, or to form "special
committees" to study a segment of their business, would not be excludable under
the ordinary business exclusion. This interpretation was problematical, and the
Commission recognized it. In Release 34-20091, the Commission found that its
earlier interpretation raised form over substance and rendered the provisions of
the ordinary business exclusion largely a nullity. As a result, the Commission
changed its interpretative position, and following the implementation of Release
34-20091, the Commission now considers whether the subject matter of the special
report or the committee sought by a proponent involves a matter of ordinary
business; where it does, the proposal will be excludable as ordinary business
under Rule 14a-8(i)(7). (emphasis added). The Company submits that the instant submission seeks a report involving the
Company's ordinary business activities. As will be described, infra, multiple
aspects of IBM's global resourcing activities involve garden variety ordinary
business matters. Also, the Proponent's attempt to couch this Proposal as one
related to executive compensation cannot avoid its exclusion because of the
Proposal's inextricable link to these ordinary business matters. In this light,
while the first sentence of the Resolved section speaks in terms of a review of
the company's executive compensation policies, the Proponent has made such
review expressly subject to the eight paragraphs of his Supporting Statement,
which Supporting Statement does no more than question and second-guess the
wisdom of IBM's decision-making on a variety of ordinary business matters
related to global resourcing. Requiring IBM to review and report on a variety of
the Company's ordinary business activities makes the Proposal itself subject to
exclusion under Rule 14a-8(i)(7), as described above in Exchange Act Release
34-20091. These ordinary business activities include our assessments of a variety of the
Company's decision-making relating to the management of our workforce and
related personnel practices and may include, without limitation: (i) reviewing
and reporting upon Company determinations as to who should best be performing
the Company's day-to-day work assignments in the ordinary course of our
business; (ii) reviewing and reporting upon Company determinations as to which
work assignments should best be performed in the United States and/or which work
assignments should best be performed elsewhere (i.e., "offshore") and/or
combinations thereof; (iii) reviewing and reporting upon associated Company
determinations as to the hiring, promotion, relocation and termination of
Company employees and other personnel practices relating to the general
workforce; (iv) reviewing and reporting upon Company determinations as to
whether, when and where to best employ the services of various third party
vendors, contractors and suppliers to perform various day-to-day work functions,
and (v) reviewing and reporting upon Company determinations as to a host of
financial (i.e. cost) and non-financial issues associated with all of the
foregoing. As such, notwithstanding that the text of the first paragraph of the
"Resolved" paragraph of the Proposal purports to relate to executive
compensation by requesting a review of IBM's executive compensation policies,
the only issue actually pointed to by the Proponent, and noted specifically by
him as the "example of the need for a special review of compensation policies"
relates to a variety of the Company's human resources (i.e., personnel)
practices and decisionmaking for the general workforce, which personnel
practices and decisionmaking the Company undertakes as part of its ordinary
business operations. As such, the entire Proposal should be excluded outright
under Rule 14a-8(i)(7). B. COMPANY DECISION MAKING ON THE MANAGEMENT OF THE WORKFORCE, INCLUDING
DETERMINATIONS AS TO THE STAFFING OF PARTICULAR JOB TASKS, AND THE HIRING,
PROMOTION, RELOCATION AND TERMINATION OF COMPANY EMPLOYEES AND SUPPLIERS, ALL
FALL WITHIN THE COMPANY'S ORDINARY BUSINESS OPERATIONS UNDER RULE 14a-8(i)(7).
The Commission has expressed two central considerations underlying the ordinary
business exclusion. See Amendments to Rules on Shareholder Proposals, Release
34-40018 (63 Federal Register No 102, May 28, 1998 at p 29,106). The first
underlying consideration expressed by the Commission is that "[c]ertain 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 shareholder
oversight. Examples include the management of the workforce, such as the hiring,
promotion and termination of employees, decisions on production quality and
quantity and the retention of suppliers." (id. at 29,108) (emphasis added) "The
second consideration involves the degree to which the proposal seeks to
micro-manage the company by probing too deeply into matters of a complex nature
upon which shareholders, as a group, would not be in a position to make an
informed judgment." Id. The Commission had earlier explained in 1976 that
shareholders, as a group, are not qualified to make an informed judgment on
ordinary business matters due to their lack of business expertise and their lack
of intimate knowledge of the issuer's business. See Adoption of Amendments
Relating to Proposals by Security Holders, Exchange Act Release No. 12999
(November 22, 1976). The Commission has also noted that the policy motivating the Commission in
adopting the ordinary business exclusion was basically the same as the
underlying policy of most state corporation laws. That is, to confine the
solution of ordinary business problems to the board of directors and place such
problems beyond the competence and direction of the shareholders. The basic
reason for this policy is that it is manifestly impractical in most cases for
stockholders to decide management problems at corporate meetings. See Proposed
Amendments to Rule 14a-8 under the Securities Exchange Act of 1934 relating to
Proposals by Security Holders, Exchange Act Release No. 19135 (October 14,
1982), at note 47. In applying these concepts to the instant Proposal, it is
clearly subject to omission under Rule 14a-8(i)(7). C. DECISIONS AS TO HOW AND WHERE A COMPANY SHOULD DEPLOY ITS EMPLOYEES TO
PERFORM WORK IS AN ORDINARY BUSINESS MATTER. It is well established that the establishment, location and relocation of
Company operations have all long been considered ordinary business matters, and
the staff has often determined that stockholder proposals seeking to regulate
where and how a company should perform its work are properly excludable under
Rule 14a-8(i)(7) and its predecessor, Rule 14a-8(c)(7). The Proponent, as the Secretary of Alliance@IBM, is particularly focused on
advancing union efforts to keep local IBMers employed. By focusing his attention
on the possibility that IBM may be sending work overseas, he is second-guessing
management's decisionmaking on how and where we source our labor. Numerous
references in the "Supporting Statement" suggest that the Proponent thinks IBM
is being "short-sighted" to the extent we may decide, in the ordinary course of
our business, to source certain work overseas. In the Proponent's words, "One
example of the need for a special review of compensation policies is IBM's role
in exporting American jobs `to get cheaper employees an ocean away'" (see
Paragraph 2 of the Supporting Statement). In addition to the fact that this
statement clearly serves to second guess the Company's decision-making as to
where we elect to source our labor, the Proponent has requested that we review
this matter and report on it to our stockholders. This is clearly an ordinary
business matter. The issue of how and where a company elects to source its labor or deploy its
work force (either directly or through contractors) are routine matters of
ordinary business, and numerous letters of the staff have so ruled. A recent
staff letter, Labor Ready, Inc. (April 1, 2003), is instructive. There, the
company, a contract provider of temporary labor, sought to exclude a proposal
from a stockholder who wanted the company to resolve various disputes with the
Building & Construction Trades Division of the AFL-CIO. In seeking to have that
company's stockholders vote on providing guidance to the company on where its
workforce should and should not be deployed, the stockholder proposed, among
other things, that the "board should instruct management to initiate a corporate
moratorium on providing labor to job-action work sites." The proponent evidently
thought that it would be best for the company to avoid friction with the union
by not providing temporary labor at work sites where there were job-actions. In
its no-action letter request to the SEC, the company argued that the stockholder
proposal should be excluded under Rule 14a-8(i)(7), as it raised a matter of
ordinary business. In particular, the company maintained that the selection of work sites (whether
a job-action work site or not) and the timing of such selection were fully
within the purview of the company's management, and therefore the proposal
"improperly impose[d] on the ordinary business functions of management by
attempting to dictate where and when the Company's work force will be used." The
staff concurred with the company's request to exclude the proposal as ordinary
business, noting that employee relations issues fell within Rule 14a-8(i)(7).
The same result is applicable to the Proponent, and his own belief that IBM
should not be sourcing work overseas. Similarly, in J.C. Penney Co., Inc. (March 7, 1991), another proponent,
concerned over the company's policies and its decision-making regarding the
closing of company store locations, wanted the company to continue to adhere to
seven basic principles that its founder had established in 1913. In so doing,
the proponent proposed that the company maintain catalog stores in locations
where the company's retail stores were to be closed, and, at the same time,
permit the affected company store managers who would otherwise lose their jobs
to retain their employment by continuing to work as managers of the catalog
operations which would remain at such locations. The proponent listed a variety
of benefits which would accrue, both to the company as well as to the locales
where the affected stores and managers were located. In its no-action letter
request to the SEC, the company argued that store locations and sizing issues
were among the key factors in determining the success of its business
operations, and that the proposal impeded the company's ability to manage its
own business. The staff agreed. In granting no-action relief, the staff noted
that questions involving the operation of store and catalog facilities, as well
as personnel and compensation decisions relating thereto, were matters that
related to the company's ordinary business operations. The proposal was excluded
from Penney's proxy materials. The same result should apply here with the
instant Proposal. As in both Labor Ready and Penney, the instant Proposal second-guesses this
Company's decision making as to where job tasks are to be performed and who
should be performing such tasks. The Proponent, believing that the company's
decisionmaking is short-sighted, wants IBM to review all of its basic
decision-making on the subject of "offshoring" and report back to shareholders
as to whether our executive compensation policies create an undue incentive to
make short-sighted decisions. By interjecting his position that the Company's
decisionmaking on these matters are "myopically short-sighted," and seeking for
IBM to perform this special review and report on it to stockholders, the
Proponent is second-guessing IBM management on ordinary business matters. In
particular, in paragraphs 2 and 3 of the Supporting Statement, the Proponent
extrapolates snippets from various news sources to support his conclusions that
the "huge difference in wage rates has created an enormous temptation for
executives to export jobs, whether or not it may make sense in the long run,"
and "the criteria that are used to determine the bonus awards and incentive pay
.... give executives a personal incentive to export jobs because higher earnings
within one to three year `performance periods' may mean higher executive pay."
Aside from the false and misleading aspects of the Proponent's position,
employee relations matters are an integral part of the day-to-day conduct of
IBM's ordinary business operations, and the terms and conditions associated with
the Company's employment relationships with its general workforce involve a
balancing of a variety of complex business issues. Contrary to the opinion of
the Proponent, cost is only one of a number of different factors that go into
the Company's business decisionmaking. The ability for this Company to
successfully manage these issues, the productivity and efficiency of our
workforce, the work product delivered by our employees and vendors to our
customers, and ultimately, the success of our business, all necessarily involve
making a variety of complex and interrelated decisions, all in the ordinary
course of business. Global resourcing activities involve the understanding and management of a host
of ordinary business matters. Global resourcing, or what has been recently
dubbed colloquially as "offshoring," is a term used to describe relocating
mainly labor-intensive activities to "developing countries" to take advantage of
two things: deep, technically proficient workforces in nations that have made
massive investments in their educational systems; and well-documented wage
differentials in many of those nations. For IBM, we have been following a
business model we've been practicing and refining for decades. Simply put, IBM
invests locally, hires locally, sources talent wherever it resides in the world,
and continuously remixes its portfolio of businesses and its skills to better
compete, and better serve the evolving needs of our customers, all in the
ordinary course of business. Moreover, the Proponent's effort to describe "offshoring" in terms of work that
somehow belongs in America versus the rest of the world simply doesn't mesh with
the global nature of IBM's business, which in large part has been conducted
"offshore" for many years. IBM employs the world's largest professional
workforce, with more than 315,000 people in more than 160 countries. In addition
to the fact that the majority of our workforce is already situated outside the
United States, since 1979, the majority of IBM's revenues have also come from
our global, or non-US operations. Hence, when IBM identifies work that can be
performed competitively in an "offshore" market, we examine that as an option,
all in the ordinary course of business, and, if the Company determines the work
can be done to the standards we expect and our customers demand, we will
properly consider making that shift; again, all in the ordinary course of our
business. In this case, having IBM provide a review of the variety of factors underlying
our business decisionmaking in this area in a report to IBM stockholders would
be both unwarranted and unwise. Any report, if issued, could provide valuable
business information on IBM's decisionmaking to our competitors. Inasmuch as the
proper administration of our day-to-day business in these situations should not
be subject to stockholder review and oversight, the report requested by the
Proponent is unwarranted, and the Proposal should be excluded under Rule
14a-8(i)(7). In sum, the knowledge, expertise, and judgment of the Company's
management in dealing with specific, fundamental day-to-day business
decision-making is not something that stockholders should have the power to seek
reporting on.2 D. THE DETERMINATION OF COMPANY POLICIES AND PROCEDURES RELATING TO THE
SELECTION OF SUPPLIERS IS ANOTHER ORDINARY BUSINESS MATTER.
Day-to-day work for a company is not always performed by its own full-time
regular employees. In many instances, work is outsourced to third party
contractors, vendors, agents and suppliers. Outsourcing decisions are made and
effected as part of a company's ordinary business operations. In this light, we
also see the instant Proponent as second-guessing IBM's decisionmaking regarding
outsourcing decisions. Since the Proponent would also have us review and report
upon these activities, such review could also necessarily cover the Company's
decision-making over whether, when and how IBM uses third parties, as opposed to
Company employees, to accomplish our day-to-day work. This is clearly another
ordinary business matter. In this connection, the SEC has viewed company
decision making about its suppliers, including related outsourcing decisions, as
falling within a company's ordinary business operations. See, e.g., Chrysler
Corporation (January 16, 1996), where a proposal requesting that the company
cease outsourcing its automotive parts needs to foreign suppliers was excluded
because it related to decisions related to product choices and the company's
sourcing of components. See also Seaboard Corporation (March 3, 2003) (proposal
seeking company report on suppliers' use of antibiotics excludable under Rule
14a-8(i)(7); Hormel Foods Corporation (November 19, 2002) (to same effect);
Nike, Inc. (July 10, 1997) (proposal requesting review of wage adjustments for
independent contractors and addressing contract compliance with company's code
of conduct excluded as ordinary business). The same result should apply here. As
noted earlier, the Commission has specifically noted that the retention of
suppliers is one of the tasks "so fundamental to management's ability to run a
company on a day-to-day basis that [it] could not, as a practical matter, be
subject to direct shareholder oversight." See Amendments to Rules on Shareholder
Proposals, Release 34-40018 (63 Federal Register No 102), May 28, 1998 at p
29,108. Therefore, having IBM review and report on this matter runs afoul of
Rule 14a-8(i)(7). As a result, the Proposal should be excluded from our proxy
materials. E. THE DETERMINATION OF COMPANY POLICIES AND PROCEDURES RELATING TO REDUCTIONS
IN FORCE IS ALSO AN ORDINARY BUSINESS MATTER. For many years, stockholders have also attempted to second guess layoffs and
related personnel policies through the filing of stockholder proposals. Indeed,
a review of the staff's no-action file reveals that employees and former
employees often have ideas on how their companies can be better run. Yet, such
ideas, which are often based upon the personal knowledge and history of such
proponents, in many instances, are not matters which are properly the subject of
stockholder proposals. Thus, proposals addressing issues similar to this one
have been rejected under the ordinary business exclusion. For example, in Mobil
Corporation (January 26, 1993), a former employee whose job had recently been
eliminated as a result of consolidation resulting from "Mobil's need to improve
efficiency and to respond to continued competitive conditions in the oil
industry," filed a proposal requesting that the company adopt various policies
with respect to its downsizing activities. After referring to a Fortune magazine
article highlighting that Mobil was the largest loser of employees during the
1981-1991 period, the proponent urged the company to "make every effort to
retain as many employees as possible, using attrition, hiring freezes and work
sharing." The company argued, and the staff concurred, that the proposal could
be omitted under the ordinary business exclusion, inasmuch as it related to the
management of the workplace. The instant Proposal, second-guessing IBM's
management of the workplace and seeking for us to report on it in connection
with the review of our executive compensation policies," is similarly subject to
exclusion under Rule 14a-8(i)(7). Another proposal was filed by a Ford stockholder, unhappy over the way that
company was being run, and requesting, among other things, that when company
layoffs were deemed to be warranted, such layoffs would "not be exclusive to the
lower echelon." That stockholder, recognizing the ongoing nature of that
company's layoffs, also sought to have such layoffs apply to Ford's managerial
and supervisory personnel. In seeking exclusion of the proposal, the company
argued that it related to the company's personnel policies, which policies fell
within the company's ordinary business operations. The staff concurred. In
granting no-action relief, the staff wrote that "[t]he formulation of definitive
guidelines for the hiring, layoff and retirement of Company employees, in the
opinion of this Division, necessarily relates to the Company's ordinary business
operations." Ford Motor Company (March 5, 1975). It is noteworthy that the proponents in Mobil and Ford both recognized the
realities associated with the need for their company to be able to manage the
workforce, and each proponent, in their own way, sought to minimize the effects
of such layoffs. Yet, this was still insufficient to avoid exclusion of such
proposals. Like Mobil and Ford, we view the instant Proponent as second-guessing
our Company on a variety of ordinary business issues and impermissibly
substituting his own judgment for that of the Company's management on a variety
of decisions regarding management of our workforce, including the retention and
termination of our employees as well as our suppliers. See Amendments to Rules
on Shareholder Proposals, Release 34-40018 (63 Federal Register No 102), May 28,
1998 at p 29,108. By second-guessing IBM's global resourcing decisionmaking, and inextricably
linking these activities to his proposed review of our executive compensation
policies and the business decisions underlying the measures of performance that
determine bonus awards and incentive pay, the Proponent is attempting to use the
stockholder proposal process to have the Company revisit and change a variety of
its decision making relating to the management of its day-to-day business
operations for the general employee workforce, which basic decision making is
required for the ultimate success of our Company. This is precisely what the
ordinary business exception is designed to prevent. Every day, decisions have to be made about what the Company should be doing, and
where, how and with whom we should be doing it. These decisions aren't new and
have been effected in the ordinary course of our business ever since IBM was
established in 1911. Moreover, as will be described in Section I(G) infra, the
Proponent's linking of this subject matter to executive compensation issues
cannot save the day, because if any portion of a proposal (including items in a
supporting statement) relates to ordinary business, the entire submission must
be excluded. F. THE PROPOSAL ALSO DOES NOT FOCUS ON ANY SIGNIFICANT SOCIAL POLICY ISSUE WHICH
WOULD TRANSCEND THE DAY TO DAY BUSINESS MATTERS RAISED IN THE SUBMISSION.
We acknowledge the Commission's position that certain employment-related
proposals that focus on sufficiently significant social policy issues are
generally not considered to be excludable, because those proposals would
transcend the day-to-day business matters and raise policy issues so significant
that it would be appropriate for a shareholder vote. However, this is NOT such a
proposal. Although the instant Proposal is couched as one requesting an
executive compensation review, the true focus of the Proposal is to have the
Company revisit our decision-making process on the question of "offshoring"
i.e., what the Proponent describes as a "decision-making process that may prove
to by myopically short-sighted." As noted earlier, the Company's decision-making as to whether to expand,
contract, or relocate existing business operations and the associated workforce
is a complex one, involving the consideration of many factors, including,
without limitation, assessing the type of work that is being performed and how
and where it can best be performed; optimizing the match of the skill sets of
company personnel to perform the work (both current and expected); whether and
how to consider various employment alternatives (i.e., use of contractors and
agents to perform certain tasks); optimizing the costs associated with training
and retooling to perform both present and projected work; balancing
considerations relating to the ultimate delivery of products, services and
solutions, both internally as well as to our customers; legal and regulatory
compliance; projected profitability; demographics; and the overall effects of
such actions on the Company's work force and the respective locations where the
Company's business operations are situated. At its heart, the instant Proposal
represents no more than a defective submission seeking to force a stockholder
review of IBM's employee relations activities, which activities fall within our
ordinary business operations. Moreover, the submission, as drafted, is clearly
devoid of any significant social policy issues which might avoid its exclusion
under Rule 14a-8(i)(7). In reaching our conclusion that the Proposal is fully excludable under Rule
14a-8(i)(7), we are cognizant of the position of the staff in the Pacific
Telesis Group (February 2, 1989) letter relating to plant closings, but that
letter is readily distinguishable. There, a proponent requested that the
registrant study the impact on communities of the closing or consolidation of
company facilities, including alternatives that could be developed by the
company to help mitigate company decisions to close or consolidate company
facilities. In denying no-action relief under the ordinary business exclusion,
the staff acknowledged that in the past, it had permitted registrants to omit
from their proxy materials shareholder proposals dealing with plant closings,
including proposals dealing with specific decisions regarding the closing or
relocation of particular plant facilities, or proposals raising questions as to
how companies intended to deal generally with the broad social and economic
impact of plant closings or relocations, or both. In such cases, the staff had
concurred in registrants' arguments that proposals could be omitted as ordinary
business in reliance upon former Rule 14a-8(c)(7). In announcing its change of
position, the staff noted that certain proposals, including the one then at
issue, involved substantial corporate policy considerations that went beyond the
conduct of the Company's ordinary business operations. The staff also stated
that its new position would not apply to proposals concerning specific decisions
regarding the closing or relocation of particular plant facilities, noting that
its position with respect to those proposals would remain unchanged and would
continue to be excludable pursuant to former Rule 14a-8(c)(7). In addition, the
staff expressed its view that former Rule 14a-8(c)(7) also would be available to
exclude a proposal that refers to the closing or relocation of a particular
facility; even if such proposal deals generally with the broad social and
economic implications of plant closings and relocations. The instant Proposal is readily distinguishable from Pacific Telesis and similar
letters. Unlike the proposal in Pacific Telesis, which required the registrant
to "study the impact on communities of the closing or consolidation" of company
facilities and that "alternatives be developed that help mitigate" decisions to
close or consolidate company facilities, the instant Proponent requests none of
this. The instant Proponent is interested in advancing the ends of Alliance@IBM,
of which he is Secretary, and having IBM keep jobs (including his own) locally.
In addition to being a matter excludable under Rule 14a-8(i)(4), see Argument
II, infra, the Proposal is focused on ordinary business matters, not on
employment policies affecting all IBMers generally (which would also generally
be excludible as ordinary business), and certainly not on any significant social
policy issues which, in other circumstances not present here, might make it
appropriate for stockholder consideration. See Exchange Act Release 40018 (May
28, 1998); 63 F.R. 29,106 at p.29,108. As noted earlier, the instant Proposal
does not attempt to have the IBM Board of Directors review and report on any
significant social policy issues, focusing instead on having the company review
executive compensation policies in light of the variety of ordinary business
issues we have highlighted earlier in this paper relating to our global
resourcing activities, which the Proponent second-guesses. The instant
submission, raising these ordinary business matters, is therefore fully
excludable under Rule 14a-8(i)(7). Moreover, we categorically reject the Proponent's attempt to refer to media
articles on "offshoring" in order to create a significant corporate or other
social policy issue. In this light, issues relating to job security and related
employee benefits have long been the subject of multiple proposals over the
years, both before and after the Pacific Telesis decision. In particular, a host
of stockholder proposals were submitted to a large number of aerospace and other
industrial companieswhich companies were then subject to widespread layoffs due
to the cyclical nature of those industries, and the downsizing of various
governmental projects. In an attempt to address the growing problems associated
with ongoing layoffs, dozens of stockholder proposals were filed over the years
to a number of such companies, urging the creation of an inter-industry
committee to provide skilled professionals with such items as portable pensions,
accrued vacation rights and other benefits. In a consistent series of no-action
letters over these years, the SEC staff uniformly and correctly ruled that all
of these proposals should be excluded under former Rule 14a-8(c)(7), as relating
to the companies' ordinary business operations. See, e.g., Rohr Industries,
Incorporated (September 10, 1991 and October 19, 1989); The Boeing Company
(November 28, 1990, January 16, 1990, January 10, 1989, November 30, 1987,
November 6, 1986, November 21, 1985 and November 15, 1984); Lockheed Corporation
(March 12, 1990, February 9, 1989, January 9, 1987 and February 19, 1986);
McDonnell Douglas Corporation (February 4, 1991, October 13, 1989, January 30,
1989, January 25, 1988, January 3, 1986, January 28, 1985 and January 17, 1984);
General Motors Corporation (March 13, 1990, March 10, 1989 and March 31, 1988);
Northrop Corporation (February 21, 1991, December 27, 1989, December 27, 1988,
January 25, 1988, November 28, 1986, January 6, 1986 and January 4, 1985);
Rockwell International (November 24, 1989, November 5, 1985, November 14, 1984
and November 18, 1983); General Dynamics Corporation (October 20, 1989, January
10, 1989, January 29, 1988, February 27, 1987, January 9, 1986 and January 28,
1985); GenCorp (January 25, 1988, January 7, 1987 and December 12, 1985).
Furthermore, news articles and general media attention have not in the past,
been the mechanism for creating substantial policy issues, and certainly should
not be in the instant case. In this light, we view the staff's position in the
above-referenced stockholder proposals as instructive. Indeed, looking back on
the aerospace and other heavy industries receiving governmental contracts during
the 1980's and 1990's, one may remember the large-scale unemployment and the
disruption of many thousands of workers' lives across the country associated
with military downsizing, the resultant industry consolidation and the overall
cyclical nature of the work in these industries. Indeed, the employees' desire
for portable pensions, vacation rights and other employee benefits were
referenced in each instance, both in the proposals and in the supporting
materials submitted by the respective stockholder proponents. Moreover, at that
time, the human element associated with downsizing activities was noted. The
press also highlighted the plight of workers and it was also the subject of
legislative activity both at the state and federal levels. At one point, the Los
Angeles Times reported that Congress was considering a variety of legislation to
help defense-industry workers who were laid off because of cost-cutting in
Congress and the defense industry, as further described in the footnote below.3
In that article, it was also reported that tens of thousands of local aerospace
workers would already have lost their jobs by the time any of such proposed
legislation would take effect. Yet, notwithstanding the host of press on the subject matter, as well as a
variety of federal and state legislative efforts to provide relief for these
industry workers, the SEC staff members uniformly and correctly concluded that
these stockholder proposals could properly be excluded from registrants' proxy
statements as "ordinary business." The staff employed the same facts and
circumstances test under former Rule 14a-8(c)(7) as existed prior to the
now-famous Cracker Barrel decision. See Cracker Barrel Old Country Store Inc.
(October 13, 1992 and January 15, 1993). None of the proposals lodged during
those years on those subjects were viewed by any of the staff reviewers at the
SEC as raising any significant social, economic or other important policy issues
sufficient to take such proposals outside the scope of the ordinary business
exclusion. The same result should apply to the instant Proposal. The staff
should reject any attempt by the Proponent to try and create a substantial
policy issue using this process. When we employ the same facts and circumstances
test under current Rule 14a-8(i)(7) to the instant Proposal, it follows that the
very same result should apply to the instant Proposal as the above-referenced
letters, and the instant Proposal should also be excluded outright as an
ordinary business matter. Further, as described below, the Proponent's attempt to couch this Proposal as
an executive compensation matter to try and avoid exclusion simply cannot pass
muster, as he has inextricably linked his reporting request to a variety of
ordinary business items. Since the instant Proponent is truly focused on IBM
keeping jobs (including his own) locally, it is clear that the instant Proposal
does not focus on any significant social policy issues which would transcend
ordinary business matters. G. WHERE PART OF A PROPOSAL IMPLICATES ORDINARY BUSINESS MATTERS, THE ENTIRE
PROPOSAL MUST BE OMITTED UNDER RULE 14a-8(i)(7). The Company firmly believes that the submission is excludable as ordinary
business. In this light, the Proponent's attempt to couch the Proposal as one
relating to a review of our executive compensation policies cannot be separated
from the many global resourcing matters he has taken issue with and
second-guessed in the Supporting Statement, which he also would have IBM
consider and report upon. In this connection, if any portion of a submission
includes ordinary business matters, the staff has ruled that the entire
submission may be excluded. Hence, the Proponent's drafting of the Resolved
portion of the Proposal as relating to executive compensation simply cannot not
carry the day here in order to avoid exclusion of the entire Proposal under Rule
14a-8(i)(7). See, e.g. International Business Machines Corporation (January 9,
2001, reconsideration denied February 14, 2001) and General Electric Company
(February 10, 2000). The IBM and GE rulings were based upon long-standing staff
precedent that when any portion of a proposal implicates ordinary business
matters, the entire proposal must be omitted under Rule 14a-8(i)(7).
In this light, we view the instant Proposal as substantially similar to
International Business Machines Corporation (January 9, 2001, reconsideration
denied February 14, 2001). There, a former IBM employee filed a proposal
requesting that the board adopt a policy that future executive incentive
compensation be determined from real company operations not including accounting
rule profit from pension fund surplus and that IBM provide transparent financial
reporting of profit from real company operations. The staff concluded that IBM
could exclude the entire proposal under Rule 14a-8(i)(7), noting "in particular
that a portion of the proposal relates to ordinary business operations (i.e.,
the presentation of financial statements in reports to shareholders)." The same
result should apply here. The fact that the proposal in IBM also related to
executive compensation, ordinarily not excludable under Rule 14a-8(i)(7), did
not matter, since the stockholder also sought disclosure of information which
related to our ordinary business operations. That is also the situation here. As
a result, the same result should apply to the instant Proposal.
Moreover, it also does not matter where the ordinary business information
resides within the stockholder's submission. A proposal can be excluded as
ordinary business even where the "ordinary business" portion resides only in the
Supporting Statement. If the submission, taken as a whole, relates in any way to
ordinary business, the entire submission can be excluded. In this connection,
the staff has regularly and expressly permitted the exclusion of a variety of
other proposals implicating both corporate governance as well as social or other
substantial policy issues, where only a portion of the relief sought addressed
ordinary business matters. For example, in Wal-Mart Stores, Inc. (March 15,
1999), a proposal sought for a report to be prepared on the company's actions to
ensure it did not purchase from suppliers who manufactured items using forced
labor, convict labor, child labor or who failed to comply with laws protecting
their employees' wages, benefits, working conditions, freedom of association and
other rights. The staff noted that a paragraph of the submission related to the
registrant's policies to implement wage adjustments to ensure adequate
purchasing power and a sustainable living wage. Given that this last paragraph
implicated ordinary business matters, the staff determined that the entire
proposal could be excluded under Rule 14a-8(i)(7), reiterating the Division's
practice not to permit revisions of a proposal under Rule 14a-8(i)(7). See also
The Warnaco Group, Inc. (March 21, 1999)(to same effect); Kmart Corporation
(March 12, 1999)(to same effect); Z-Seven Fund, Inc. (November 3, 1999)
(proposal containing corporate governance recommendations as well as ordinary
business recommendations was permitted to be excluded in its entirety, with the
staff reiterating its position that it is not their practice to permit revisions
to shareholder proposals under the ordinary business exception); M&F Worldwide
Corp. (March 29, 2000) (proposal to implement actions designed to enhance
shareholder value, including but not limited to repurchase of shares, cash
dividends, sale of assets and curtailment of nonoperating activities was
properly determined by the staff to be excludable in its entirety under Rule
14a-8(i)(7), since the proposal related in part to non-extraordinary
transactions). Thus, notwithstanding that the Resolved section of the Proposal seeks for the
company to conduct a review of our executive compensation policies, this does
not mean the Proposal falls outside the ordinary business exclusion. Given the
multiple references in the Supporting Statement to ordinary business matters
which the Proponent second-guesses and would have us consider and report upon,
the entire Proposal is defective. In sum, the instant Proposal must be excluded
under the ordinary business exception because substantial portions of the review
the Proponent seeks to have the Company report uponrelating to our global
resourcing activitiesimplicate well-established ordinary business matters. See
IBM and General Electric Co., supra. In this connection, other recent letters have reached the same conclusion on
proposals addressing both executive compensation (a subject matter generally
outside of the ordinary business exclusion) and other matters. It is also
noteworthy that the staff, in Associated Estates Realty Corporation (March 23,
2000), concluded that a proposal which made recommendations concerning the
compensation of the chief executive officer and the institution of a business
plan which would include disposition of non-core businesses and assets could
also be excluded in its entirety because it related in part to ordinary business
operations. Similarly, in E*Trade Group, Inc. (October 31, 2000), the staff
recently concurred in the omission of a proposal under the ordinary business
exclusion which recommended a number of potential mechanisms for increasing
shareholder value, including: (a) the sale of the company; (b) changes to the
executive compensation plan to more accurately reflect company performance and
tie compensation to that performance; (c) reduction of staff to improve earnings
performance and (d) dismissal and replacement of executive officers. The staff
concluded that since two out of four of the mechanisms suggested by the
proponent implicated ordinary business matters, the entire proposal should be
omitted. The staff again reiterated in E*Trade Group, Inc. that it was not the
Division's practice to permit revisions under rule 14a-8(i)(7). The same
conclusion should be reached here. Consistent with past staff precedent, no revisions to this Proposal, excludable
under Rule 14a-8(i)(7), should be permitted. Moreover, to the extent any
portions of the submission implicate ordinary business matters, the entire
Proposal should be excluded. For all of these reasons, the Company hereby
reasserts that the Proposal relates to the conduct of the Company's ordinary
business operations, and should be excluded in its entirety from the Company's
2004 proxy materials pursuant to Rule 14a-8(i)(7). We therefore respectfully
request that no enforcement action be recommended to the Commission if the
Proposal is so excluded under Rule 14a-8(i)(7). II. THE PROPOSAL SHOULD BE OMITTED UNDER RULE 14a-8(i)(4) AS IT RELATES TO THE
REDRESS OF A PERSONAL CLAIM OR GRIEVANCE OF THE PROPONENT AND ALLIANCE@IBM,
DESIGNED TO FURTHER A PERSONAL INTEREST OF THE PROPONENT WHICH IS NOT SHARED BY
IBM STOCKHOLDERS AT LARGE. Rule 14a-8(i)(4) permits exclusion of a proposal that relates to the redress of
a personal claim or grievance against the company and is designed to result in a
benefit to the Proponent or to further a personal interest, which is not shared
with other stockholders at large. While the instant Proposal is also fully excludable under Rule 14a-8(i)(7), as
it relates to the Corporation's ordinary business operations, see Argument I,
supra, this Proposal is also excludable here under Rule 14a-8(i)(4). The
Proponent, the Secretary of Alliance@IBM, has lodged the instant Proposal as one
of many tactics he and the Alliance believe will gain attention and recognition
for Alliance@IBM and its union organizing efforts, as well as the instant
matter, which is one of the Alliance's key focus items. Therefore, this
stockholder proposal should also be omitted under 14a-8(i)(4) as it relates to
the advancement of a personal claim or grievance against the Company which is
clearly designed to further the Proponent's personal interest, which interest is
not shared with IBM stockholders at large. In this light, we see this situation as providing an even stronger case for the
application of Rule 14a-8(i)(4) than in Dow Jones & Co. (January 24, 1994).
There, a stockholder, a member of a labor union, also submitted an executive
compensation proposal. However, that proposal was not directly related to the
personal interest; i.e., to have the registrant take a course of action
favorable to the union. In granting no-action relief, the staff was able to
discern the true motive for the proposal, and concurred to omit it under the
predecessor to Rule 14a-8(i)(4). The same result should apply here.
As the Secretary of Alliance@IBM, it is clear that the Proponent is raising this
issue not only as an employee, but also as the Secretary of Alliance@IBM.
Moreover, the issues he is advancing now in the Proposal are the very same ones
as are being advanced by Alliance@IBM as part of its union organizing efforts. A
cursory review of the allianceibm.org website shows that this is just another
way for Alliance@IBM to air its issues. (See Exhibit B). The home page of the
allianceibm.org website has as its headline banner: "SOS"
(Stop Off Shoring) together with a number of hyperlinks to articles and other information about
this subject. The top hyperlink specifically states "Alliance@IBM urges IBM
workers to fight plan to move jobs offshore." This statement links to an article
in which the President of Alliance@IBM is specifically quoted as saying:
"We are working with our members to organize to fight this any way we can."
Indeed, the filing of the instant Proposal by Mr. Mangi, the Secretary of
Alliance@IBM, is just another one of the ways the Alliance is using to advance
its own interests on this topic. To this end, separate pages on the Alliance@IBM
website provide additional information and materials on offshoring which show
the same objective. See, e.g. http://www.allianceibm.org/offshore/letters.htm (sample form letters
created by the Alliance to send out). A further perusal of the website reveals that the Proponent and the Alliance
share the same interests. These interests, however, are not shared by IBM
stockholders at large. We view the Proponent's use of the shareholder proposal
process here as an improper way to advance his own personal objectives, as well
as those of Alliance@IBM. The fact that he and the Alliance may be against
offshoring does not mean that such interests are shared by IBM stockholders at
large. In this connection, the Commission long ago established that the purpose
of the stockholder proposal process is "to place stockholders in a position to
bring before their fellow stockholders matters of concern to them as
stockholders in such corporation." Release 34-3638 (January 3, 1945). The
purpose of current Rule 14a-8(i)(4) is to allow companies to exclude proposals
that involve disputes that are not of interest to stockholders in general. The
provision was developed "because the Commission does not believe that an
issuer's proxy materials are a proper forum for airing personal claims or
grievances." Release 34-12999 (November 22, 1976). In this connection, the
Commission has consistently taken the position, see Proposed Amendments to Rule
14a-8 Under the Securities Exchange Act of 1934 Relating to Proposals by
Security Holders, Exchange Act Release No. 34-19135 (October 14, 1982), that
Rule 14a-8(i)(4) is intended to provide a means for shareholders to communicate
on matters of interest to them as shareholders. In discussing the predecessor
Rule [Rule 14a-8(c)(4)], the Commission stated: It is not intended to provide a means for a person to air or remedy some
personal claim or grievance or to further some personal interest. Such use of
the security holder proposal procedures is an abuse of the security holder
proposal process, and the cost and time involved in dealing with these
situations do a disservice to the interests of the issuer and its security
holders at large. See Exchange Act Release No. 19135 (October 14, 1982).
IBM stockholders at large are interested in having IBM manage its business
effectively. Proposals like the instant one advancing special interests should
not be included in a company's proxy materials. With this in mind, the staff has
often utilized the personal grievance exclusion to omit proposals in cases where
the stockholders were using proposals as a tactic to redress a personal
grievance against the Company notwithstanding that the proposals were drafted in
such a manner that they could be read to relate to matters of general interest
to all shareholders. See Southern Company (February 12, 1999); Pyramid
Technology Corporation (November 4, 1994)("the proposal, while drafted to
address a specific consideration, appears to be one in a series of steps
relating to the long-standing grievance against the company by the proponent);
Texaco, Inc. (February 15, 1994 and March 18, 1993); Sigma-Aldrich Corporation
(March 4, 1994); McDonald's Corporation (March 23, 1992); The Standard Oil
Company (February 17, 1983); American Telephone & Telegraph Company (January 2,
1980). Since the shareholder proposal process is not intended to be used to air
or advance personal grievances like the instant one, we continue to believe Rule
14a-8(i)(4) provides a fully adequate basis in this case for omitting the
instant Proposal from the proxy materials for the Company's 2004 Annual Meeting.
Since the instant Proponent is misusing the shareholder proposal process to
further address his own issues and those of Alliance@IBM, the Company
respectfully requests that no enforcement action be recommended if it excludes
the Proposal pursuant to Rule 14a-8(i)(4). See CSX Corporation (February 5,
1998)(proposal from terminated employee seeking to institute a system-wide
formal grievance procedure excluded because it related to the redress of a
personal claim or grievance); Tri-Continental Corporation (February 24,
1993)(Former Rule 14a-8(c)(4) utilized by staff to exclude proposal seeking
registrant to assist the Proponent in a lawsuit against former employer);
International Business Machines Corporation (January 6, 1995)(proposal to
reinstate health benefits properly excluded by staff under former Rule
14a-8(c)(4)); Lockheed Corporation (April 25, 1994 and March 10, 1994)(proposal
to reinstate sick leave benefits properly excluded under former Rule
14a-8(c)(4)); International Business Machines Corporation (January 25,
1994)(proposal to increase retirement plan benefits properly excluded under
former Rule 14a-8(c)(4)); and General Electric Company (January 25,
1994)(proposal to increase pension benefits properly excluded under former Rule
14a-8(c)(4)). See also Caterpillar Tractor Company (December 16, 1983)(former
employee's proposal for a disability pension properly excluded as personal
grievance). As such, the Company believes that the Proposal may be omitted from
the Company's proxy materials pursuant to Rule 14a-8(i)(4), and requests that no
enforcement action be recommended if it excludes the Proposal on the basis of
Rule 14a-8(i)(4). III. THE PROPOSAL SHOULD BE OMITTED FROM THE COMPANY'S PROXY MATERIALS UNDER
RULES 14a-8(i)(3) AND 14a-9, AS VAGUE AND INDEFINITE AS WELL AS FALSE AND
MISLEADING TO THE COMPANY'S SHAREHOLDERS AS WELL AS THE COMPANY. AS A RESULT THE
PROPOSAL IS ALSO BEYOND THE POWER OF THE COMPANY TO IMPLEMENT UNDER RULE
14a-8(i)(6). The Company firmly believes, as a matter of law, that Rules 14a-8(i)(7) and
(i)(4) each provide a fully adequate basis for the exclusion of the entire
Proposal. In addition, however, Rule 14a-8(i)(3) provides another equally
adequate basis for its exclusion in this case. Rule 14a-8(i)(3) permits the
omission of proposals and associated supporting statements that are contrary to
the Commission's proxy rules, including Rule 14a-9, which in turn, prohibits
false or misleading statements in proxy materials. Rule 14a-9(a) provides that
no proxy solicitation shall be made containing any statement which, at the time
and in the light of the circumstances under which it is made, is false or
misleading with respect to any material fact, or which omits to state any
material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier communication
with respect to the solicitation of a proxy for the same meeting or subject
matter which has become false or misleading. Note (b) to Rule 14a-9 also
provides that material which directly or indirectly impugns character, integrity
or personal reputation, or directly or indirectly makes charges concerning
improper, illegal or immoral conduct or associations, without factual
foundation, may also be misleading within the meaning of such Rule.
Following our review of the Proposal, the Company believes that the instant
Proposal should also be omitted pursuant to Rules 14a-9 and 14a-8(i)(3) because
portions of such Proposal are false and misleading, and others are so inherently
vague and indefinite as to be subject to a host of varying interpretations by
both shareholders and the Company. As a result, the Proposal is also beyond the
power of the Company to effectuate under Rule 14a-8(i)(6).
The Proposal seeks a review of IBM's executive compensation policies to
determine "whether they create an undue incentive to make short-sighted
decisions." Yet, nowhere in the Proposal or the Supporting Statement does the
Proponent set forth any types or examples of decision-making he would view as
proper. Instead, the Proponent, a US based IBM employee and the Secretary of
Alliance@IBM, advocates against global resourcing. He points to a number of news
items relating to the topic of "offshoring" and advances his thesis that our
executive compensation policies must be short-sighted. Other than to focus on
the "offshoring" issue, we think the submissionwhich purports to require IBM to
undertake an executive compensation reviewfails to provide any guidance
whatsoever on the scope of that review, leaving IBM as well as our stockholders
to wonder exactly what else should properly be included within the scope of such
review. This lack of clarity and direction makes the submission vague and
indefinite under Rule 14a-8(i)(3). As noted earlier, the Supporting Statement focuses on global resourcing, an
ordinary business matter. In this connection, paragraphs 2, 3 and 5 of the
Supporting Statement contain fragmentary snippets from news articles. Even if
the words within the Proponent's quotation marks are accurate, these snippets
selectively portray an extremely small portion of the subject matter described
in these articles, and we do not believe the snippets capture the gist of these
articles. Moreover, such references also lend an undue air of credibility to the
Resolved section of the Proposal. Hence, we believe all of these snippets should
be omitted as both vague and indefinite as well as materially false and
misleading. For the same reason, the sixth paragraph of the supporting statement
should be eliminated in its entirety. While it purports to quote from one IBM,
it does so in an extremely selective manner, and in a way which fails to capture
the totality of such person's views on the matter at hand.
Moreover, the fourth paragraph of the Supporting Statement should be omitted
under Rule 14a-9. In this connection, we reject as materially false and
misleading the Proponent's suggestion that "the criteria that are used to
determine the bonus awards and incentive pay .... give executives a personal
incentive to export jobs because higher earnings within one to three year
`performance periods' may mean higher executive pay." IBM executives are
interested in managing the business effectively. The Proponent's attempt to
impugn the character and integrity and reputation of our executives by
suggesting that they would export jobs to receive greater pay is simply not well
taken. As a result, the entire paragraph should be omitted.
Finally, as mentioned earlier, we fail to see how a Proposal, purportedly
interested in IBM's executive compensation policies, would utilize the
overwhelming portion of the Supporting Statement to second-guess IBM's global
resourcing activities, while at the same time, fail to provide stockholders with
any meaningful guidance or explanation either as to the alleged shortcomings he
sees in the existing performance measures, or as to any alternative measures of
performance the Proponent would suggest that the Company utilize. Drafting a
proposal with such vagueness is not a good thing to do. Stockholders need to
understand what it is that a proponent would like a company to do, and they
should not be made to speculate as to what it is they may be voting upon.
In this connection, the Commission has found that proposals or portions thereof
may be excluded where they are so inherently vague and indefinite that neither the shareholders voting on the
proposal, nor the Company in implementing the proposal (if adopted), would be
able to determine with any reasonable certainty exactly what actions or measures
the proposal requires. See Philadelphia Electric Company (July 30, 1992).
The staff's response above applies with full force to the instant Proposal. In
Wendy's International, Incorporated (February 6, 1990), the staff excluded under
former Rule 14a-8(c)(3) a proposal seeking to "eliminate all anti-takeover
measures previously adopted and refrain from adopting any in the future." The
staff noted that the proposal, if implemented, would require the Company to
determine what constitutes an anti-takeover measure, and that such a
determination would have to be made without guidance from the proposal, and
would be subject to differing interpretations by shareholders voting on the
proposal and the Company if the proposal were implemented. The staff therefore
determined that the Proposal could be misleading because any action ultimately
taken by the company upon implementation could be significantly different from
the actions envisioned by shareholders voting on the Proposal. See also
Comshare, Incorporated (August 23, 2000)(second proposal asking for Comshare not
to "discriminat[e] among directors based upon when or how they were elected" and
"try to avoid defining change of control based upon officers or directors as of
some fixed date," properly excluded by registrant as vague and indefinite).
The courts have supported such a view, quoting the Commission's rationale:
it appears to us that the proposal, as drafted and submitted to the company, is
so vague and indefinite as to make it impossible for either the board of
directors or the stockholders at large to comprehend precisely what the proposal
would entail. Dyer v. Securities and Exchange Commission, 287 F. 2d 773, 781
(8th Cir. 1961). In the case of NYC Employees' Retirement System v. Brunswick Corp., 789 F. Supp.
144, 146 (S.D.N.Y. 1992), the court stated: the Proposal as drafted lacks the clarity required of a proper shareholder
proposal. Shareholders are entitled to know precisely the breadth of the
proposal on which they are asked to vote. Given the fact that the instant Proposal suffers from the very same infirmities
noted in the above staff letters and the cases cited above, the Company hereby
submits that the instant Proposal should also be omitted under Rules
14a-8(i)(3), (i)(6) and 14a-9. The Company therefore respectfully requests that
no enforcement action be recommended to the Commission if the Company excludes
the instant proposal on the basis of Rules 14a-8(i)(3), (i)(6) and 14a-9.
In summary, for the reasons and on the basis of the authorities cited above, IBM
respectfully requests your advice that the Division will not recommend any
enforcement action to the Commission if the Proposal is omitted from IBM's proxy
materials for the 2004 Annual Meeting. We are sending the Proponent a copy of
this submission, thus advising him of our intent to exclude the Proposal from
the proxy materials for the 2004 Annual Meeting. We respectfully request to be
copied on any response that may be made to the Commission. If you have any
questions relating to this submission, please do not hesitate to contact the
undersigned at (914) 499-6148. Thank you for your attention and interest in this
matter. Very truly yours, /s/
Stuart S. Moskowitz
Senior Counsel With a copy to:
Mr. James J. Mangi
21 Rockwell Road
Bethel, CT 06801 -----FOOTNOTES-----
1 Mr. Mangi is currently the Secretary of a group calling itself the
"Alliance@IBM." This group, which has unsuccessfully attempted to organize IBM
employees, is affiliated with the Communications Workers of America (CWA) union.
The Alliance@IBM is neither a certified nor recognized bargaining agent for any
IBM employees. The same day the instant Proposal was submitted by Mr. Mangi, Mr.
Michael Saville, a former IBM employee who had originally acted as a co-filer to
a separate proposal filed by Mr. James Leas, another former IBM employee, and a
current member of the Governing Council of Alliance@IBM, filed another proposal
on "offshoring" which is the subject of a separate no-action letter request.
2 In a related vein, the staff's recent conclusion that the decisionmaking by a
company to cease operations in a particular location is also a matter falling
within its ordinary business operations. In paragraph 5 of the Supporting
Statement, the instant Proponent appears peculiarly focused on the possibility
that executives could "be rewarded for exporting jobs before it becomes apparent
that the move was short-sighted." For support, the Proponent cites an article
noting that some companies have ended up repatriating manufacturing and design
work because they felt they were losing control of core businesses or found them
too hard to coordinate. This is irrelevant to the ordinary business nature of
the decision-making. Every company must assess a variety of factors in
determining whether to do business in a particular location, and if the decision
is made to do business in a particular location, it is also an ordinary business
matter how that company should manage its business at such location. Thus, the
fact that the instant Proponent may disagree with IBM's decisionmaking on this
subject does not take it out of the realm of ordinary business. Allstate
Corporation (February 19, 2002)(excluding a proposal of a stockholder urging
that insurance company to stop doing business in Mississippi because of
"over-the-top jury awards" and other matters for which the stockholder claimed
particular expertise.) 3 Los Angeles Times, Thursday, Home Edition, "LEGISLATION WOULD HELP WORKERS IN
DEFENSE LAYOFFS," July 26, 1990. The article reported that House Bill 3999,
introduced by Rep. Mary Rose Oakar (D-Ohio), would provide about $200 million
for programs including more unemployment benefits for defense workers,
educational grants for retraining, and reimbursement money for job-search and
relocation expenses. The program also sets aside funds for entrepreneurs who
want to market their defense-industry know-how in the private sector. The bill
would create an administrative staff, but not a new bureaucracy, Oakar said at a
public hearing in Paramount on Monday. She said the policy-making committee
would include the heads of already-existing departments, such as the Labor
Department, Defense Department and Small Business Administration.
House Bill 5327, authored by Barbara Boxer (D-Greenbrae), would return 10% of
defense cuts to the communities affected by the loss of these federal funds. The
secretary of labor would determine which areas would be eligible. Cities could
use the money for job training or other needed programs. Her bill also penalized
contractors that relocate, requiring them to leave behind 20% of their
contracts' value when they move their facilities and leave employees behind.
Boxer also introduced legislation she said will help communities recover from
the closing of military bases, which is another aspect of defense cutbacks. One
bill provided financial incentives to federal employees who accept early
retirement. Another gave military employees first crack at federal jobs when
their base is taken over by another agency. A third bill mandated 60 days'
notice when the government eliminates jobs at a military base. [APPENDIX]
Resolved: the stockholders request: (1) a special review of IBM's executive compensation policies to determine
whether they create an undue incentive to make short-sighted decisions, by
linking the compensation of senior executives to measures of performance that
include net earnings, cash flow and earnings-per-share; and
(2) a report to the stockholders that summarizes the scope of the review, any
recommendations made, and any action taken. Supporting Statement
IBM uses net earnings, cash flow and earnings-per-share as one or more of the
factors that determine bonus awards and incentive pay. In my opinion, this
creates an undue incentive for executives to make short-sighted decisions that
may boost short term earnings, even if the long term consequences may be
detrimental to the Company and its shareholders. One example of the need for a special review of compensation policies is IBM's
role in exporting American jobs "to get cheaper employees an ocean away." USA
Today (Aug. 5, 2003). Time reports that some managers of American companies
"believe they can cut their overall costs 25% to 40%" merely "by taking
advantage of lower wages overseas." (Aug. 4, 2003). This huge difference in wage rates has created an enormous temptation for
executives to export jobs, whether or not it may make sense in the long run. One
business consultant declared that "many, many clients" have delivered "an edict
from the top" that "you will send X amount of dollars or people offshore." Lou
Dobbs Show (Sept. 22, 2003). In the case of IBM, I believe this temptation is greatly exacerbated by the
criteria that are used to determine the bonus awards and incentive pay of senior
executives. These criteria give executives a personal incentive to export jobs
because higher earnings within one to three year "performance periods" may mean
higher executive pay. The problem with this scenario is the possibility that executives will be
rewarded for exporting jobs before it becomes apparent that the move was
short-sighted. For example, Business Week has reported that "many companies
[have] ended up repatriating manufacturing and design work because they felt
they were losing control of core businesses or found them too hard to
coordinate." (Feb. 3, 2003). Other potential costs include reduced employee
morale and the development of foreign competition. In March of 2003, IBM's Director of Global Employee Relations was asked if IBM
was "trying to capture best practices or lessons learned" in exporting jobs. He
responded: "No ... frankly ... the answer is `offshoring - what is the question?' So ...
the approach and strategy here really has to crystallize as we decide what it is
that is going to be moved, and what are the implications..."
In my opinion, this answer reflects a decision-making process that may prove to
be myopically short-sighted. I believe compensation decisions should look beyond reported earnings to
consider both the quality of earnings and the quality of executive
decision-making. The proposed actions would be a step in that direction. [INQUIRY LETTER]
November 10, 2003 Mr. Daniel E. O'Donnell
Office of the Corporate Secretary
International Business Machines Corporation
New Orchard Road
Armonk, New York 10504 Dear Mr. O'Donnell:
Pursuant to my rights under rule 14(a)-8 of the U.S. Securities and Exchange
Commission's proxy regulations, I hereby submit the enclosed shareholder
proposal for inclusion in the International Business Machines Corporation
("IBM") proxy statement for the 2004 annual meeting.
I am the beneficial owner of shares of IBM common stock having a market value in
excess of $2,000 which have been held for over a year from this date. My IBM
stock is held in the Employee Stock Purchase Plan (Acct. No. 11996-79702). I
intend to hold my IBM stock through the date of the 2004 annual meeting of
shareholders. I, or a designated representative, will present the proposal for
consideration at the annual meeting of shareholders. Sincerely,
/s/ James J Mangi
21 Rockwell Rd.
Bethel, CT 06801 Enclosure [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 IBM for a No-Action Letter With Respect to the Shareholder
Proposal of James J. Mangi Ladies and Gentlemen:
I. Introduction This letter is submitted in response to the claim of IBM that it may exclude the
shareholder proposal of James J. Mangi from its 2004 proxy materials. The
Proposal requests: "(1) a special review of IBM's executive compensation policies to determine
whether they create an undue incentive to make short-sighted decisions by
linking the compensation of senior executives to measures of performance that
include net earnings, cash flow and earnings per share; and
(2) a report to the stockholders that summarizes the scope of the review, any
recommendations made, and any action taken." 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 IBM has failed
to meet this burden. All of its claims are without merit. II. IBM Has Failed to Demonstrate That the Proposal Relates to Ordinary Business
Operations A. Rule 14a-8(i)(7) Does Not Apply Because the Proposal Deals with Criteria for
Determining Executive Compensation It has been the position of the Commission, since February of 1992, that
shareholder proposals may not be excluded from a company's proxy materials if
they deal with the compensation of senior executives. See A. Goodman and J.
Olson eds., SEC Proxy and Compensation Rules, Section 15.7[2] at p. 15-30 (Third
edition, 2004 Supplement). In this context, the staff has denied company
requests for no-action letters when proposals "appear to be related to the
criteria for determining executive compensation" (emphasis added) See e.g.
General Electric Company (Feb. 22, 2000). The staff has also denied requests for
no-action letters when a proposal is addressed to the "policies and standards
for setting executive compensation" See e.g. Louisiana-Pacific Corporation (Feb.
29, 1996). Contrary to the repetitive arguments of counsel, the instant Proposal is plainly
addressed to the criteria that IBM uses in determining the compensation of
senior executives. It expressly calls a "review of IBM's executive compensation
policies" (emphasis added). In addition, it is specifically addressed to the
fact that IBM uses "measures of performance that include net earnings, cash flow
and earnings per share" (emphasis added). The Supporting Statement is also addressed to the policies and criteria that IBM
uses in determining executive compensation. It expresses a concern that IBM's
current compensation criteria may create "an undue incentive for [senior]
executives to make short-sighted decisions that may boost short term earnings,
even if the long term consequences may be detrimental to the Company and its
shareholders" (emphasis added). The concluding paragraph confirms this focus, by
expressing the view that "compensation decisions should look beyond reported
earnings to consider both the quality of earnings and the quality of executive
decision-making" (emphasis added). Despite the repeated assertions of IBM counsel, there is nothing in the
Proposal, or in the proposed report to the shareholders, that would require the
"second-guessing" of IBM's decision-making on any particular matter or issue
other than the criteria that it uses in making executive compensation decisions.
The focus is entirely on the compensation criteria, and the related question of
whether it may be appropriate to remove "undue incentives" that may create a
bias in favor of short-term decision-making. In addition, contrary to the claims of IBM counsel, there is nothing in the
Proposal, or in the proposed report, that would require IBM to "revisit" its
"decision-making process on the question of `offshoring'" (see p. 10). Apart
from the fact that the Proposal is entirely precatory, it leaves the proposed
"review of IBM's executive compensation policies" entirely to the discretion of
the Board of Directors. If the Proposal is adopted, the Board would have
complete discretion to decide "the scope of the review, any recommendations
made, and any action taken." Nor is there any merit to the IBM's claim (p.3) that the Proposal is
"inextricably linked" to ordinary business operations. In addition to the fact
that the Board is given complete discretion to design and implement the proposed
review of executive compensation criteria, the Proponent has expressly presented
the discussion of "offshoring" as just "one example of the need" for such a
review (emphasis added). He could also have argued that the same compensation
criteria create an undue bias toward imprudent sales of assets, ill-advised
mergers or acquisitions, or the overfunding of defined benefit pension plans in
a manner that would generate increases in reported earnings from "pension
income." B. To the Extent That Offshoring is Discussed As An Example, the Proposal Raises
Significant Issues of Policy That Transcend Ordinary Business
As argued above, we submit that the instant Proposal "transcends" ordinary
business operations because it deals with criteria for determining executive
compensation. However, if the staff is persuaded that the Proposal cannot be
separated from the discussion of "offshoring," we submit that the Proponent's
use of that example raises significant issues of policy beyond ordinary business
operations. In this context, 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 IBM to demonstrate that the
Proposal relates in some way to ordinary business operations. The Company also
has the burden of demonstrating that there is no significant issue of social
policy that may be deemed to "transcend" or go beyond any business operations
involved. 1. The Offshoring Example is Focused on the Business Strategy and Long-Term
Goals of IBM 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 requests for 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).
To the extent that the Statement of Support discusses IBM's policy of
"offshoring," it is evident that the proposal relates to a fundamental business
strategy that IBM has been implementing over a period of years. In this context,
the Supporting Statement quotes a IBM's Director of Global Employee Relations in
a way that illustrates the strategic importance of this practice:
"frankly ... the answer is `offshoring' ... the approach and the strategy here
really has to crystallize as we decide what it is that is going to be moved, and
what are the implications...." (emphasis added).
In this context, the Wall Street Journal reported recently that IBM "has told
its managers to plan on moving the work of as many as 4,730 programmers to
India, China and elsewhere" (Dec. 15, 2003). The article adds that this example
of "offshoring" is part of a "plan" that IBM calls "Global Sourcing."
Under these circumstances, the discussion of "offshoring" is plainly addressed
to IBM's fundamental business strategy of shifting jobs from the United States
to other nations. And this is matter that transcends ordinary business
operations. The Wall Street Journal article also lends support to the Proponent's concern
that the accelerating trend toward implementation of the offshoring strategy may
prove to be "short-sighted" in the long run. It states that "IBM managers still
haven't figured out whether all of the work the [targeted] jobs represent can be
performed just as well abroad." Under these circumstances, there appears to be a legitimate basis for
shareholders to question whether the strategy of offshoring may prove to be
short-sighted in the long run. It may well be a case of putting the cart before
the horse. 2. The Offshoring Example Relates to the Impact of 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 offshoring is a business practice that is
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 20 -
will 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 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 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 on January 13, 2004, the
expansion of offshoring "from manufacturing to the higher-paying technical and
white-collar levels is the latest big threat to employment in the U.S. He also
declared, in an earlier article, that "there is no disputing the direction of
the trend, or the fact that it is accelerating" (Dec. 29, 2003). He added there
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 this context, it appears certain that offshoring is 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 impact of offshoring on growth in employment
pale in comparison to the long term implications of this business strategy. 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 offshoring. Each of the panelists agreed that this practice has
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 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. 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 use of offshoring as an example of the need for
the proposed review of compensation criteria is sufficient to raise significant
issues of policy that transcend the ordinary business operations of the Company.
3. The Offshoring Example Concerns an Issue That is the Subject of Widespead
Public Debate; There is an Increasing Recognition That This Issue Raises
Significant Policy Issues 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 offshoring. A search for articles and reports on offshoring via
Google or in the LexisNexis database would doubtless identify thousands of
additional sources that may be relevant. Under these circumstances, we submit that there is substantial evidence that
offshoring is 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 offshoring has 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 offshoring has 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
offshoring, and its 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 IBM 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) on the ground that the Supporting Statement uses offshoring as an
example of the need for a review of executive compensation policies.
III. IBM Has Failed to Demonstrate the Existence of a Personal Grievance or
Interest Within the Meaning of Rule 14a-8(i)(4). There is no merit to IBM's contention that the Proposal relates to a personal
grievance or interest within the meaning of Rule 14a-8(i)(4). The entire
argument is based on rank speculation that the Proponent has an improper motive
because he is "a current employee, and the Secretary of Alliance@IBM." It is
nothing more than an attempt to employ the tactic of "guilt by association."
In this context, there is no evidence whatsoever to substantiate the claim that
the Proponent has submitted the proposal in his capacity "as the Secretary of
Alliance@IBM" (see p. 16). In addition, there is nothing, other than a
broad-brush assertion that "the Proponent and the Alliance share the same
interests" (p. 16), to support IBM's contention that the Mr. Mangi has an
improper "motive." In fact, IBM fails to cite a single overt act of Mr. Mangi,
or a single expression of fact or opinion that he has made, to support its claim
that he is "misusing the shareholder proposal process" (p. 17).
The right to submit a shareholder proposal is an important incident of stock
ownership. A stockholder should not be disqualified from exercising that
important right on the basis of nothing more than his status as an employee and
activist. In addition, it is evident that the Proponent has the same interest as any other
IBM stockholder in protecting the value of his investment. And, to the extent
that the Proposal is addressed to executive compensation criteria, or may be
found to raise a significant issue of social policy, the stockholders at large
would receive the same benefits from the proposed review of executive
compensation criteria as the Proponent. In any event, insofar as the Proposal qualifies as a "social issue proposal,"
Rule 14a-8(i)(4) does not apply. As the Commission declared in adopting the 1998
Amendments to Rule 14a-8, "social issue proposals are generally not excludable
under paragraph (4)." Securities and Exchange Act Release No. 34-40018 (May 21,
1998). In this context, the Commission pointed out that the Rule does not apply,
without other factors, when a proposal relates "`to an issue in which a
proponent was personally committed or intellectually and emotionally
interested.'" Id. As in the case of the ordinary business exclusion, the
rationale appears to be rooted in the view that the existence of a social policy
issue transcends any personal grievance or interest that might be attributed to
a Proponent. Under these circumstances, we submit that IBM has failed to meet its burden of
demonstrating that Rule 14a-8(i)(4) is applicable. It has failed to demonstrate
that it is "entitled" to exclude the Proposal. IV. IBM Has Failed to Demonstrate That Rules 14a-8(i)(3), 14a-8(i)(6) and 14a-9
Are Applicable As noted above, the Proposal calls for "a special review of IBM's executive
compensation policies to determine whether they create an undue incentive to
make short-sighted decisions by linking the compensation of senior executives to
measures of performance that include net earnings, cash flow and earnings per
share." Both the nature of the action to be taken, and the objective to be
achieved, are stated in a clear and precise manner. Accordingly, there is no
merit to the claim of counsel for that the Proposal is "vague and indefinite"
(p. 18). In addition, there is no merit in the additional claim (p. 18) that the Proposal
"fails to provide any guidance ... on the scope of" the proposed review. In
fact, the Supporting Statement is explicit in contending that the criteria for
making compensation decisions ought to reflect "both the quality of earnings and
the quality of executive decision-making." In this context, the Supporting Statement points out that IBM uses "net
earnings, cash flow and earnings-per-share" as measures of performance "to
determine the bonus awards and incentive pay of senior executives" within
"performance periods" of either one year or three years. Under these
circumstances, we submit that the shareholders and the Board of Directors are
plainly able to evaluate the action that is proposed with a reasonable degree of
certainty. The obvious problem with these criteria and performance periods is the fact that
they do not distinguish between the kinds of earnings that the criteria
represent. They equate earnings from operations with reported income from
defined benefit pension plans, asset sales, changes in accounting treatment and
other items that may serve to make executive performance appear better than it
really is. They also create a structural incentive for executives to take
actions that will have an effect on earnings within the time frames that are
specified. In this context, there is no merit to the additional contention that the
Proposal is "beyond the power of the Company to effectuate under Rule
14a-8(i)(6)." While the Proposal gives the Board of Directors discretion to
design and carry out the proposed review in the exercise of its business
judgment, this is entirely appropriate because "executive compensation policies"
are complex, and the proposed review will require input from persons with
expertise in the field of executive compensation. In fact, we submit that the Proponent has struck the appropriate balance between
specificity and micro-management. As the Commission declared in adopting the
1998 Amendments to Rule 14a-8, a shareholder proposal may be deemed to engage in
micro-management if it "seeks to impose methods for implementing complex
policies." Securities Exchange Act Release No. 34-40018 (May 21, 1998).
As to Rule 14a-9, counsel objects to the use of "fragmentary snippets from news
articles" (pp. 18-19). However, while he says that he does "not believe the
snippets capture the gist of these articles" (emphasis added), he has failed to
provide a single iota of evidence that any of the passages is inaccurate. Nor
has he presented evidence that any of the quotations or references has been
taken out of context in a manner that is misleading in any respect, much less in
a material respect. Finally, there is no merit to the assertion of counsel (p. 19) that the
Proponent has attempted "to impugn the character and integrity and reputation of
our executives by suggesting that they would export jobs to receive greater
pay." This claim is without any basis in fact. There is nothing in the
Proponent's submission that "challenges the integrity ... [or] veracity" of any
IBM executive. See definition if "impugn," The New Lexicon Webster's Dictionary,
1989 Encyclopedic Edition. Contrary to the argument of counsel, the Proposal and the Supporting Statement
are focused entirely on IBM's "executive compensation policies" and certain
criteria that it uses to compensate its senior executives. In the view of the
Proponent, it is the executive compensation policies and compensation criteria
of IBM that have given executives a "personal incentive to export jobs because
higher earnings within one to three year `performance periods' may mean higher
executive pay." As stated by the Proponent, this appears to be an objective and accurate
statement of fact. It does not reflect in any way on "the character and
integrity and reputation" of any IBM's executives for the Proponent to make the
observation that the current compensation system has created an incentive for
executives to export jobs. Under these circumstances, we submit that IBM has failed to demonstrate that
Rules 14a-8(i)(3), 14a-8(i)(6) and 14a-9 are applicable. The claims have no
merit. V. Conclusion For the reasons set forth above, we submit that IBM 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 IBM
[STAFF REPLY LETTER] February 2, 2004
Response of the Office of Chief Counsel Division of Corporation Finance
Re: International Business Machines Corporation. Incoming letter dated December
18, 2003 The proposal requests that IBM conduct a special review of its executive
compensation policies to determine whether they create an undue incentive to
make short-sighted decisions. We are unable to concur in your view that IBM may exclude the entire proposal
under rule 14a-8(i)(3). Accordingly, we do not believe that IBM 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 IBM may exclude the proposal under
rule 14a-8(i)(4). Accordingly, we do not believe that IBM 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 IBM may exclude the proposal under
rule 14a-8(i)(6). Accordingly, we do not believe that IBM 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 IBM may exclude the proposal under
rule 14a-8(i)(7). Accordingly, we do not believe that IBM may omit the proposal
from its proxy materials in reliance on rule 14a-8(i)(7). Sincerely,
/s/ John J. Mahon
Attorney-Advisor
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