Company Name: USG Corp.
Public Availability Date: January 28, 2004Document Sections:
INQUIRY LETTER
APPENDIX 1
APPENDIX 2
INQUIRY LETTER
INQUIRY LETTER
STAFF REPLY LETTER [INQUIRY LETTER]
January 9, 2003 U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Counsel
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Rule 14a-8: Omission of Stockholder Proposal Submitted by Mark Latham from
the 2004 Proxy Statement of USG Corporation Ladies and Gentlemen:
We are writing on behalf of our client, USG Corporation, a Delaware corporation
("USG" or the "Company"), and hereby request that the staff of the Division of
Corporation Finance (the "Staff") of the Securities and Exchange Commission (the
"SEC") confirm that it will not recommend action if, in reliance on certain
provisions of Rule 14a-8 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company excludes a proposal (the "Proposal") submitted
by Mark Latham (the "Proponent" or "Mr. Latham") from the Company's proxy
materials that will be distributed in connection with the Company's 2004 Annual
Meeting of Stockholders (the "Proxy Materials").
Pursuant to Rule 14a-8(j) under the Exchange Act, we are furnishing you with six
copies of (1) this letter which outlines the Company's reasons for excluding the
Proposal from its Proxy Materials and (2) the Proponent's letter, dated November
26, 2003, setting forth the Proposal, including the attachment thereto regarding
Mr. Latham's ownership of USG common stock. We also are sending a copy of this
letter to the Proponent as notice of the Company's intention to omit the
Proposal from its Proxy Materials. USG plans to file its definitive Proxy
Materials with the SEC on or after March 31, 2004. We respectfully request that
you advise the Company with respect to the Proposal at your earliest
convenience. The Proposal The Proposal seeks to have the Company's independent auditor selected annually
by a shareholder vote. The Proposal is identical to proposals that Mr. Latham
has previously submitted to SONICblue Inc. and Fleetwood Enterprises, Inc.,
which the Staff has already considered and in both instances granted the
respective company's request for no-action. See Fleetwood Enterprises, Inc.
(April 24, 2002) and SONICblue Inc. (March 23, 2001). The Proposal is similar in
subject matter to a proposal that Mr. Latham previously submitted to USG,which
the Staff concluded could be omitted from the Company's proxy materials. See USG
Corporation (March 5, 2003). USG believes that the Proposal may be omitted from its Proxy Materials based on
the following reasons, as more fully discussed below: 1. Rule 14a-8(i)(7) (Management Functions), because the Proposal, to the extent
that it is deemed to relate to the Company's business, deals with matters
relating to USG's ordinary business operations; 2. Rule 14a-8(i)(1) (State Law), because the Proposal concerns a subject upon
which stockholders may not properly take action under the laws of the State of
Delaware, the Company's state of incorporation; 3. Rule 14a-8(i)(2) (Violation of Law), because the Proposal, if implemented,
would effectively prevent the Company's audit committee from complying with its
obligations under the Exchange Act and rules promulgated thereunder.
4. Rule 14a-8(i)(3) (Violation of Proxy Rules), because the Proposal is so vague
and indefinite as to be materially false and misleading under Rule 14a-9; and
5. Rule 14a-8(i)(3) (Violation of Proxy Rules), because the Proposal refers to a
website that incorporates irrelevant information and may be misleading under
Rule 14a-9. Reasons for Omission of the Proposal
1. The Proposal concerns a matter dealing with the Company's ordinary business
operations, and, therefore, may be excluded under Rule 14a-8(i)(7).
Rule 14a-8(i)(7) provides that a stockholder proposal may be excluded if it
deals with a matter relating to a company's ordinary business operations. The
Staff has consistently affirmed that stockholder proposals relating to the
qualifications and selection of a company's independent auditors may be excluded
as relating to matters reserved for the board of directors and management of a
company. See, e.g., USG Corporation; Fleetwood; American Financial Group, Inc.
(April 4, 2002); Refac (March 27, 2002); SONICblue; Community Bancshares, Inc.
(March 15, 1999); Excalibur Technologies Corporation (May 4, 1998); Occidental
Petroleum Corporation (December 11, 1997); Rentrak Corporation (June 9, 1997);
Transamerica Corporation (March 8, 1996); LTV Corporation (December 30, 1996);
Occidental Petroleum Corporation (December 28, 1995); LTV Corporation (November
22, 1995); Texaco Inc. (August 23, 1993); Pacific Gas & Electric Company
(January 26, 1993); and Monsanto Company (January 17, 1989).
In both Fleetwood and SONICblue, Mr. Latham made proposals requesting that the
board of directors have the stockholders select the company's auditor. In each
case, the Staff stated that it would not recommend enforcement action if the
proposal was omitted from the companyproxy materials on the basis that the
proposal related to the company's ordinary business operations. The current
Proposal is identical to the proposals in Fleetwood and SONICblue and, like such
proposals, may be omitted from the Proxy Materials because it relates to
company's ordinary business operations. Mr. Latham has previously made a precatory proposal requesting that USG conduct
an annual poll of auditor reputation. See USG Corporation. Like Mr. Latham's
previous proposal, the Proposal relates to the qualifications and selection of
independent auditors and may be omitted from the Proxy Materials because it
concerns the Company's ordinary business operations. See also LTV Corporation
(November 25, 1998) (proposal to require disclosure of certain information
regarding the company's auditor's ability to pay claims may be omitted because
it relates to the selection of independent auditors; the company no-action
request letter discusses prior similar proposals from the same proponent that
were excluded for the same reason). The current Proposal is distinct from proposals to prohibit a company's auditing
firm from providing non-audit services. The Staff explained in The Walt Disney
Company (December 18, 2001) that a proposal that the company not engage its
auditor to provide non-audit services (the "Non-Audit Services Proposal") could
not be omitted in light 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 Proposal is clearly
distinguishable from the Non-Audit Services Proposal. The Proposal requests the
Board to have the Company's independent auditor selected annually by a
shareholder vote. In contrast, the Non-Audit Services Proposal did not seek to
select the independent auditor, but rather dealt with the discrete issue of the
impact of non-audit services on auditor independence. This distinction was
expressly acknowledged by the United Association S&P 500 Index Fund (the
"Fund"), the proponent of the Non-Audit Services Proposal, in its November 8,
2001 response letter. In that letter, the Fund stated that "[t]o put it plainly,
the Fund's proposal does not seek, nor does it care, who the Company selects to
be its independent accountant. All that the Fund's proposal seeks is protection
that the independent accountant's objectivity is not compromised by receiving
payment for other services of the Company." Thus, the issue presented by the
Non-Audit Services Proposal is not presented by the Proposal.
The procedural and managerial aspects of auditor selection further support the
view (and, as discussed above, the Staff's consistent position) that the
selection of auditors relates to ordinary business operations and is not a
proper matter for stockholder proposals. In evaluating, recommending and
selecting an auditor, an audit committee and board of directors must consider a
number of factors. Such factors include, without limitation, the auditor's
experience, industry expertise, breadth and depth of resources (including the
quality of individuals engaged in the audit), reliability, costs and
responsiveness, as well as the company's particular characteristics and
requirements. Consequently, the evaluation and selection of auditors for a
particular company is a complex task involving numerous factors with respect to
which stockholders are not in a position to make an informed judgment.
Accordingly, the Staff's no-action letters haverecognized that auditor
evaluation and selection is a responsibility that is properly allocated to the
company as part of its ordinary business operations. In addition, USG's common stock is listed on the New York Stock Exchange (the
"NYSE"). The Commission has approved rules adopted by the NYSE in accordance
with the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Exchange Act that
require the audit committee of each listed issuer to be directly responsible for
the appointment, retention and oversight of the company's independent auditor.
See Securities and Exchange Commission Release No. 34-48745 (November 4, 2003).
The NYSE rules recognize that the selection of independent auditors is a
business matter which is properly allocated to the audit committee designated by
the Board. For all of the above reasons, the Proposal must be omitted under Rule
14a-8(i)(7) as the evaluation and selection of the Company's independent
auditors is within the Company's ordinary business operations.
2. The Proposal concerns a matter that under Delaware law is not a proper
subject for stockholder action, and, therefore, may be excluded under Rule
14a-8(i)(1). Rule 14a-8(i)(1) provides that a company may exclude a stockholder proposal if
the proposal concerns a subject that is not a proper subject for stockholder
action under the laws of company's state of incorporation. Traditionally, the
Staff has taken the view that under the law of most states the board has
exclusive discretion in corporate matters unless a specific provision in a
state's corporate code or in the corporation's charter or bylaws states
otherwise. See Securities and Exchange Act Release No. 34-12999 (November 22,
1976); see also, Pay Less Drug Stores (April 11, 1975) (proposal may be omitted
where California Corporations Code does not specifically provide for stockholder
decisions regarding selection of the company's independent auditors).
USG is a Delaware corporation. Section 141(a) of the Delaware General
Corporation Law (the "DGCL") provides that, except as may be otherwise provided
in the DGCL or the corporation's certificate of incorporation, the business and
affairs of the corporation shall be managed by or under the direction of its
board of directors, subject to delegation of the Board's authority to a
committee in accordance with Section 141(c). See also Grimes v. Donald, Del.
Ch., C.A. No. 13358, slip op. at 16, Allen C. (Jan. 11, 1995) ("[a] fundamental
precept of Delaware corporate law is that it is the board of directors, and
neither shareholders nor managers, that has the ultimate responsibility for the
management of the enterprise"), aff'd, Del. Supr.,
673 A.2d 1207 (1996).
Furthermore, Section 122(5) of the DGCL provides the corporation with the power
to "appoint such officers and agents as the business of the corporation
requires." The Company's bylaws provide that the audit committee shall select
and employ on behalf of the Company, subject to ratification by stockholders,
the independent auditor for the Company. The Staff has previously affirmed the position that, where a state's corporate
code: (i) vests the company with the power to choose corporate agents and (ii)
provides that the board shall, subject to the company's articles or bylaws, have
the corporate power to control thecompany's business and affairsa company may
omit stockholder proposals dealing with the method of selecting its independent
auditors as an encroachment on the board's authority. See Pay Less Drug Stores
(April 11, 1975) (citing from the California Corporations Code). In a no-action
letter issued to Pay Less Drug Stores, the Staff stated that it would not
recommend enforcement action if the company excluded a stockholder proposal that
provided for an individual stockholder to nominate the company's auditors. The
Staff took the position that there was some basis for excluding the proposal in
Pay Less Drug Stores as not a proper subject for stockholder action under the
California Corporations Code. The DGCL utilizes analogous language to those provisions of the California
Corporation Code cited in Pay Less Drug Stores which empower the board with the
authority to select corporate agents. As discussed above, Section 141 of the
DGCL provides for management of a corporation by its board of directors, except
as may be otherwise provided in the DGCL or the corporation's certificate of
incorporation, subject to the ability of the Board to delegate its authority to
a committee. No provision in the Company's bylaws, its certificate of
incorporation or the DGCL provides that the stockholders shall select the
Company's independent auditors from a ballot consisting of audit firms that have
placed themselves on the ballot, as called for by the Proposal. Accordingly, the
Proposal, if implemented, would violate Section 141 of the DGCL.
The Company's stockholders have elected the Board and, thereby, have empowered
it with the authority and responsibility to manage the Company's business and
affairs, including, though delegation to the audit committee, the selection of
the Company's independent auditors. We respectfully submit that, under the DGCL
and USG's certificate of incorporation and bylaws, the Company's audit committee
holds the exclusive authority and responsibility, subject to ratification by
USG's stockholders, with respect to the selection of the Company's independent
auditor. Therefore, the Proposal should be omitted from the Proxy Materials
under Rule 14a-8(i)(1). 3. The Proposal would, if implemented, cause the Company to violate federal law,
and, therefore, may be excluded under Rule 14a-8(i)(2). Section 202 of the Sarbanes-Oxley Act of 2002 amended Section 10A of the
Exchange Act to require that audit committees pre-approve auditing services.
Similarly, Rule 2-01(c)(7) of Regulation S-X requires that, before an accountant
is engaged by an issuer to render audit services as an independent auditor, the
engagement must be approved by the issuer's audit committee. If implemented, the
Proposal would enable auditors to put themselves on a ballot and provide that
shareholders select the Company's independent auditor. Thus, if implemented, the
Proposal would effectively deny USG's audit committee the ability to approve or
disapprove the engagement of the Company's independent auditor and, therefore,
would conflict with federal law. Unlike USG's existing approach of audit
committee selection of the Company's independent auditor, subject to
ratification by stockholders, the Proposal, if implemented, would apparently
exclude USG's audit committee entirely from the independent auditor approval
process. The Proposal is properly excludable under Rule 14A-8(i)(2).
4. The Proposal is so vague and indefinite as to be materially false and
misleading under Rule 14a-9 and, therefore, may be excluded under Rule
14a-8(i)(3). Pursuant to Rule 14a-9, the Staff has consistently taken the position that a
company may exclude a proposal pursuant to Rule 14a-8(i)(3) if the proposal is
"vague, indefinite and, therefore, potentially misleading." Commonwealth Energy
System (February 27, 1989). A proposal may be excluded where the meaning and
application of terms or standards under the proposal may be "subject to
differing interpretations." Fuqua Industries Incorporated (March 12, 1991); see,
also, IDACORP, Inc. (September 10, 2001); and CBRL Group, Inc. (September 6,
2001). The Staff has historically found that a proposal may be excluded where
"neither the shareholders voting on the proposal, nor the company implementing
the proposal, if adopted, would be able to determine with any reasonable
certainty exactly what actions would be taken under the proposal." Fuqua
Industries Incorporated (March 12, 1991); see, also, A.H. Belo Corporation
(January 29, 1998); Gannett Co., Inc. (February 24, 1998); Corning Incorporated
(February 18, 1997); and Occidental Petroleum Corporation (February 11, 1991).
In Connecticut Natural Gas Corporation (November 29, 1993), the Staff granted
the company's request for no-action advice where a stockholder proposal failed
to address or set any standards for the selection of auditors for inclusion in
the proposed item to be voted on by stockholders and also failed to provide
rules for the voting process. Similar to the proposal in Connecticut Natural
Gas, the Proposal does not describe the criteria to be used in the selection of
the auditors or provide for the manner in which auditors might appear on the
ballot. The Proponent merely states that any "qualified" accounting firm could
place itself on the ballot. The Proposal does not explain what accounting firms
would be considered to be "qualified," nor does it state whether each auditing
firm that put itself on the ballot would be required to set forth details
regarding its proposed scope of audit, audit fees or other information relevant
to making an informed decision regarding the firm that should serve as USG's
independent auditor. It is not clear whether, if the Proposal were implemented,
the audit committee or only shareholders would have the power to remove the
independent auditor, though the audit committee's ability to remove an
independent auditor would in any event effectively be limited by the audit
committee's inability to engage a new independent auditor as a replacement.
In addition, the Proposal fails to describe the voting process for selecting the
independent auditors - particularly what would happen in the event that three or
more accounting firms have placed themselves on the ballot. Under Section 216 of
the DGCL and in conjunction with the Company's Certificate of Incorporation and
Bylaws, stockholder action, other than the election of directors, generally
requires an affirmative vote of a majority of the shares present or represented
at the meeting and entitled to vote on the subject matter. If there are three or
more accounting firms on the ballot and no firm receives a majority of such
votes, then any such selection would be invalid and would not constitute action
by the stockholders. Thus, absent any other voting procedures, the Proposal
could leave USG without any independent auditors. The Proposal is, ultimately, vague and indefinite in many material respects and,
therefore, is potentially misleading. Consequently, the Company believes it may
properly exclude the Proposal from its Proxy Materials under Rule 14a-8(i)(3).
5. The Proposal includes reference to the Proponent's website as a source of
additional information on the Proposal, but the website incorporates irrelevant
information and may be misleading under Rule 14a-9 and, therefore, reference to
the website may be excluded under Rule 14a-8(i)(3). The Proponent includes his website address, www.corpmon.com, in the supporting
statement to the Proposal as a source for additional information. The Staff has
indicated that a website which is referenced in a proposal or supporting
statement may be excluded under Rule 14a-8(i)(3) if it refers readers to
information that may be materially false or misleading, irrelevant to the
subject matter of the proposal or otherwise in contravention of the proxy rules.
See Staff Legal Bulletin No. 14, Questions and Answers C.2.b. and F.1. (July 13,
2001). The Proponent's website includes information that is entirely irrelevant to the
Proposal and that impermissibly expands on its scope. A substantial portion of
the Proponent's website, as of January 6, 2003, addresses proposals regarding
the use of proxy advisory firms and shareholder "voting leverage." In this
regard, the Proponent discusses stockholder voting alternatives, voting system
reforms and the use of proxy advisory firms in connection therewith. In
addition, among other things, the Proponent's website provides information
relating to pre-IPO companies and links that ultimately lead to items such as
his resume, commercial interests and publications. We believe that it is inappropriate for USG's Proxy Materials to be used to
direct investor attention to this website. Much of the additional information
provided through the Proponent's website and its links is simply not relevant to
the subject matter of the Proposal. In addition, the quality of certain
information provided though the various links (much of which information is
created by persons other than the Proponent) is uncertain. Finally, because the
Proponent's website is subject to change at his whim, the information provided
at the website could be altered in the future to present additional and
different information while his Proposal is under consideration by the Company's
stockholders, thus enabling the Proponent to further expand the scope of the
Proposal and its supporting statement. We respectfully submit that because the Proponent's website refers readers to
information that is irrelevant to the subject matter of the Proposal, may be
confusing to stockholders and is subject to change by the Proponent, reference
to it in the Proposal is contrary to Rule 14a-9's prohibition against false and
misleading statements in proxy soliciting materials. Conclusion
For each of the aforementioned reasons, we respectfully request that the Staff
confirm that it will not recommend enforcement action if the Proposal is omitted
from USG's 2004 Proxy Materials. Should you disagree with the conclusions set
forth herein, we would appreciate theopportunity to confer with you before the
issuance of your response. If you have any questions regarding this request or
require additional information, please contact the undersigned at (312)
861-2267. Very Truly Yours, /s/
John M. Jennings cc: Eric Schaal, USG Corporation
Mark Latham
Michael G. Timmers, P.C. [APPENDIX 1]
AUDITOR INDEPENDENCE BY SHAREOWNER VOTE WHEREAS auditor independence of Company management helps guarantee the integrity
of financial statements; WHEREAS auditor selection by Company management may compromise auditor
independence of Company management; THEREFORE USG Corporation shareowners request the Board of Directors to have the
auditor selected annually by shareowner vote. To insulate auditor selection from
influence by Company management, any qualified auditing firm could put itself on
the ballot. Shareowners request the Board to take all necessary steps to enact
this resolution in time to hold the first such vote at the year-2005 shareowner
meeting. Supporting Statement: Wall Street Journal, January 15, 2002:
"The accounting industry is in urgent need of reform.
The Enron fiasco is only the latest in a string of episodes involving Big 5
accounting firms in which outside auditors repeatedly blessed questionable
financial maneuversuntil companies' fortunes collapsed under mountains of
previously undisclosed debt and phony profits." The Economist, October 28, 2000:
"There is plenty of evidence that financial statements often fail to come up to
scratch. The number of companies restating their accountsnever in ways that
make them appear healthierhas been rising so fast as to have become almost
commonplace. Well-known firtns whose audited profits shrunk in a restatement
include Waste Management, Sunbeam and CUC International, during its merger with
Cendant Investors have lost billions of dollars, and much of their faith in
auditors." In the current system, management chooses the auditor, and shareowners merely
rubber-stamp that choice. Under this proposal however, shareowners would choose
(by vote) among several auditing firms competing for the position. This would
encourage auditors to build their reputations in the eyes of investors rather
than in the eyes of management, creating new pressure for higher standards.
Investors could decide how important auditor independence is to them, and how it
should be assessed. The average investor may seem ill-equipped to make such assessments on her own.
But she would not make them on her own. She would benefit from
consensus-building discussion by the entire investment community, including
proxy advisory firms. It is much easier to assess reputations of auditors than
of board members, because there are only a handful of auditing firms, versus
hundreds of board candidates for a diversified portfolio of stocks over the
years. As with other voting matters, management would presumably make a recommendation
on which auditor to choose. Even if the management-recommended auditor is never
voted out, a rising percentage of opposition votes would provide a healthy early
warning to the auditor, that its reputation is slipping and corrective action is
required. This is not to imply that there are accounting biases at USG Corporation in
particular, but no one knows when and where problems may occur. This proposal
would create a competitive market for auditor reputation. Investors would gain
the power and flexibility to determine standards of auditing services that best
meet their needs. Further information on this proposal is on the worldwide web at www.corpmon.com.
[APPENDIX 2]
EXHIBIT 1 November 26, 2003 BY FEDEX AND FAX TO:
Company Secretary
USG Corporation
125 South Franklin Street
Chicago, IL 60606
USA
Phone (312) 606-4000
Fax (312) 606-4208 Dear Sir:
Enclosed is a shareowner proposal with supporting statement, which 1 hereby
submit for inclusion in the USG Corporation year-2004 statement.
As confirmed in the enclosed letter from my broker, I have owned 1500 shares of
USG Corporation stock for at least one year through today. I intend to maintain
this ownership through the date of the next annual shareowners' meeting. The
stock price has been above $3 for the past year, so this easily exceeds the
$2000 minimum requirement for submitting a shareowner proposal.
For timely receipt because I may be traveling, please contact me by fax or email
with any correspondence regarding this proposal. Thank you. For your records
however, my postal address is 177 Telegraph Road #302, Bellingham, WA 98226.
Sincerely, /s/
Mark Latham [INQUIRY LETTER]
January 12, 2004 Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Shareowner Proposal of Mark Latham to USG Corporation
Ladies and Gentlemen: I am writing in response to the January 9, 2004 [erroneously dated 2003] letter
(the "USG Letter") submitted to the Commission by Mr. John M. Jennings on behalf
of the management of USG Corporation ("USG" or the "Company"), which expresses
the Company's intention to omit from its proxy statement for the 2004 annual
meeting a shareowner proposal (the "Proposal") submitted by me. The Proposal
would request the Company's Board to have the auditor selected annually by
shareowner vote. The USG Letter cites Rules 14a-8(i)(7) (`ordinary business'), 14a-8(i)(1)
(`improper under state law'), 14a-8(i)(2) (`violation of law') and 14a-8(i)(3)
(`vague, indefinite, irrelevant') as bases for its request for relief from
enforcement action. Reasons are given below why I believe the Proposal may not
be properly omitted under Rule 14a-8. Rule 14a-8(i)(7)`ordinary business'
As the USG Letter points out, the Proposal is essentially the same as those I
submitted to SONICblue and Fleetwood in recent years. While I am sensitive to
the cost of time for all those involved in this proposal review process, I would
like to request that the SEC staff reconsider this question based on fundamental
principles rather than simply following precedents. Those fundamental principles are articulated in SEC Release No. 34-40018 (May
21, 1998), from which I quote these three passages: 1. "The general underlying policy of this exclusion is consistent with the
policy of most state corporate laws: to confine the resolution of ordinary
business problems to management and the board of directors, since it is
impracticable for shareholders to decide how to solve such problems at an annual
shareholders meeting." 2. "Certain tasks are so fundamental to management's ability to run a company on
a day-to-day basis that they could not, as a practical matter, be subject to
direct shareholder oversight. Examples include the management of the workforce,
such as the hiring, promotion, andtermination of employees, decisions on
production quality and quantity, and the retention of suppliers."
3. "The second consideration relates to the degree to which the proposal seeks
to "micromanage" 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." When considering whether auditor selection by shareowner vote is practicable, it
is helpful to compare those matters which are typically decided by shareowner
vote now. These include director elections (occasionally contested), approval of
the board's chosen auditor, approval of management compensation plans, and
approval of mergers. While these are all complex matters for shareowners to
decide, their decision process is made feasible by a combination of disclosure
and professional advice. In particular, the board makes voting recommendations to shareowners, and
independent voting advice is available from such organizations as Institutional
Shareholder Services. If shareowners have a choice of auditors, such systems of
disclosure and advice would support that decision process too. The board would
no doubt recommend the auditor it considers best. Shareowners are already called
upon to consider auditor quality when they vote on ratification of a board's
chosen auditor, so auditor quality assessment by shareowners is demonstrably
practicable. Furthermore, choosing among auditors is more practicable than choosing among
directors, which shareowners must do in our current system, especially in the
occasional contested election. An individual director candidate does not have a
business track record anywhere near as extensive as that of a large auditing
firm. An extensive track record enables the financial community to more
accurately assess the quality of business services provided, thus determining
the auditing firm's brand reputation. The limited number of large auditing firms
also makes it feasible to communicate their brand reputations to voting
shareowners. This is similar to the way personal computer brand reputations are assessed and
communicated, so that the average consumer can buy a good computer without being
a computer expert. There are too many directors in the USA for such a brand
reputation system to help shareowners choose which directors to vote for. As a
result, director elections do not create an effective link between directors'
interests and shareowners' interests. The USG Letter correctly points out that "the evaluation and selection of
auditors for a particular company is a complex task". Likewise, the evaluation
and selection of directors for a particular company is a complex task. Yet
shareowners vote on the selection of directors, and sometimes even have a choice
in director elections. Brand reputation makes comparison of auditor quality much
easier for shareowners than comparison of director quality. Therefore auditor
election by shareowners, with more than one auditor candidate, is practicable.
Of course, just because something is practicable does not necessarily mean it is
desirable. Shareowners may decide they do not want to choose the auditor, and
may thus vote against the Proposal. That is a question of the Proposal's merits,
on which by SEC policy the staff does not give an opinion. But in my view,
auditor selection by shareowners can reasonably be expected to increase
management accountability, thus improving corporate governance and stock
returns. Rule 14a-8(i)(1)`improper under state law'
Delaware law allows the Board to amend USG's bylaws. Thus if USG shareowners
request the Board to let them elect the auditor, the Board can amend USG's
bylaws to permit this. Therefore the Proposal does not request any action
contrary to Delaware law. The USG Letter makes arguments similar to those with which the SEC staff did not
concur in Gillette (February 1, 2001). For example in Gillette management's
letter of December 20, 2000:
`Section 141(a) of the Delaware General Corporation Law (the "DGCL") provides
that "[t]he business and affairs of every corporation organized under this
chapter shall be managed by or under the direction of a board of directors,
except as may be otherwise provided in this chapter or in its certificate of
incorporation." In addition, Section 122(5) of the DGCL empowers the corporation
to "[a]ppoint such officers and agents as the business of the corporation
requires and to pay or otherwise provide them suitable compensation." '
Likewise in the USG Letter:
`Section 141(a) of the Delaware General Corporation Law (the "DGCL") provides
that, except as may be otherwise provided in the DGCL or the corporation's
certificate of incorporation, the business and affairs of the corporation shall
be managed by or under the direction of its board of directors... Furthermore,
Secion 122(5) of the DGCL provides the corporation with the power to "appoint
such officers and agents as the business of the corporation requires." '
For similar reasons as in Gillette, the Proposal is not excludable under rule
14a-8(i)(1). Rule 14a-8(i)(2)`violation of law'
It would be ironic to use Sarbanes-Oxley as a obstacle to improving auditor
independence, but it need be no such obstacle. If board decides to grant the
shareowners' request in the Proposal, the audit committee could pre-approve
auditing services by all qualified auditor candidates on the ballot. Therefore
the Proposal can be implemented without violating federal law, so is not
excludable under rule 14a-8(i)(2). Rule 14a-8(i)(3)`vague, indefinite, irrelevant'
The USG Letter claims that the Proposal is vague and indefinite, comparing it
with a proposal to Connecticut Natural Gas Corporation (November 29, 1993) (the
"CNGC Proposal"). Although the subject matter is similar, in terms of vagueness
these two proposals are as different as night and day. Here is the entire text
of the CNGC Proposal: "I am formally requesting the following proposal be included on the proxy
statement: FROM: Proposal to approve the appointment of Arthur Andersen & Co. as auditors
for the fiscal year... TO: Proposal to approve the appointment of one of the following public
accounting firms (choice of three) as auditors for the fiscal year.
Option One or Option Two or
Option Three" As Connecticut Natural Gas Corporation's counsel pointed out: "The Proposal does
not set forth any proposed resolution for adoption by shareholders. It does not
contain any supporting statement, nor does it request that any supporting
statement be included in the Company's proxy materials. It simply requests that
the quoted text be included in the Company's proxy statement distributed in
connection with the 1994 Annual Meeting." By contrast, my Proposal sets forth a proposed resolution for adoption by
shareholders, and contains a supporting statement. Regarding the USG Letter's specific objections to my Proposal: Because it is
precatory, my Proposal allows the Company's Board of Directors discretion in
implementing it. Thus the Board can determine which accounting firms are
qualified, but are requested not to limit shareowner choice beyond that.
The USG Letter is right to point out that the balloting rules are important and
must be determined. The Board is capable of specifying them appropriately. For
example, a well known and effective way of determining a majority winner when
there are multiple candidates is to let each voter rank the candidates,
indicating first, second, third choice and so on. Rule 14a-8(i)(3) (`false and misleading' re website reference)
The USG letter complains that the website referenced in the Proposal's
supporting statement (www.corpmon.com) includes information irrelevant to the
Proposal. However, the supporting statement also references the January 15, 2002
issue of the Wall Street Journal, which also includes information irrelevant to
the Proposal. It is normal for a website and for a newspaper to cover a range of
topics. This is not misleading, because readers know how to identify the
relevant parts. At www.corpmon.com, the relevant parts are clearly identified on
the home page by links labelled "USG Corporation" and "Auditor Independence".
The ability to have a computer search for specific words and phrases makes
finding desired information even easier in this electronic medium.
Any website can change its contents over time; that is the nature of the medium.
But the Commission staff (e.g. in Legal Bulletin No. 14, July 13, 2001) has not
deemed this to be sufficient reason for excluding website references from
shareowner proposals. One way to alleviate some of the concerns expressed in the
USG Letter is to create a link from the referenced website to USG's website,thus
enabling USG's Board to present its side of the debate to readers browsing
through. In fact, I have included such a link to USG's website.
Conclusion Based on the foregoing, I request that the Commission staff not concur with the
views expressed in the USG Letter regarding exclusion of the Proposal from the
USG proxy statement. For timely receipt because I may be traveling, please
contact me by email or fax with any correspondence regarding this submission.
Thank you. For your records however, my postal address is 177 Telegraph Road
#302, Bellingham, WA 98226, USA. (I recently moved from San Francisco.)
Very truly yours, /s/
Mark Latham cc: Mr. John M. Jennings [INQUIRY LETTER]
January 23, 2004 U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of the Chief Counsel
450 Fifth Street, N.W.
Washington, D.C. 20549 Re: Rule 14a-8: Response Letter Submitted by Mark Latham, dated January 12, 2004
Ladies and Gentlemen: We are writing on behalf of our client, USG corporation, a Delaware corporation
("USG" or the "Company"), in response to Mr. Mark Latham's (the "Proponent" or
"Mr. Latham") letter (the "Proponent's Response Letter"), dated January 12,
2004, to the staff of the Division of Corporate Finance (the "Staff") of the
Securities and Exchange Commission (the "Commission") regarding the Company's
request (the "USG Letter"), filed January 9, 2004, that the Staff not recommend
action if, in reliance on certain provisions of Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the Company excludes a
proposal (the "Proposal") submitted by Mr. Latham from the Company's proxy
materials that will be distributed in connection with the Company's 2004 Annual
Meeting of Stockholders (the "Proxy Materials"). While USG believes that the USG
Letter amply supports the exclusion of the Proposal for the reasons stated
therein, USG would like to reiterate its belief that the procedural and
managerial aspects of auditor selection support the view (and the Staff's
consistent position) that a stockholder proposal that deals with auditor
evaluation and selection is properly excludable under Rule 14a-8(i)(7).
As discussed in the USG Letter, in a long line of no-action letters the Staff
has consistently recognized that stockholder proposals relating to the
evaluation and selection of the Company's independent auditors are excludable
under Rule 14a-8(i)(7). The Staff's position on this matter is consistent with
the principles set forth in Commission Release No. 34-40018 (May 21, 1998),
which the Proponent's Response Letter largely concedes when it states, "The USG
Letter correctly points out that `the evaluation and selection of auditors for a
particular company is a complex task.'" The Proponent essentially argues that,
because stockholders may vote on certain matters that are complex, USG should be
required to include the Proposal in its Proxy Materials notwithstanding the
complexity of its subject matter. This argument is in effect a request for the
Staff to abandon the principles set forth in Release No. 34-40018. USGbelieves
that the standards set forth in Release No. 34-40018 and applied in the Staff's
prior no-action letters are sound and should be followed. USG also believes that, while the Proponent's Response Letter concedes that the
evaluation and selection of auditors is a complex task, it does not appear to
fully appreciate the complexity and particularized nature of the task. A general
sense of an audit firm's "brand reputation," on which the Proponent's Response
Letter focuses, is perhaps one of a myriad of criteria that an audit committee
must consider when evaluating and selecting an independent auditor. However, a
firm's general "brand reputation" does not mean that the firm's specific
strengths and weaknesses will match well with a particular industry or a
company's individual needs. In addition, the nature of large independent
auditing firms, with offices located in many cities across the United States and
internationally, dictates that there can be significant variance between a
firm's capabilities in different locations. In evaluating potential auditors for
a company, an audit committee must consider the strength of the audit firm's
personnel that will actually plan and perform the company's audit. The audit
committee needs to assess the experience, education, training, technical
abilities, industry knowledge, reliability and other personal characteristics of
the lead partner and others who will be involved in the engagement. The audit
committee should inquire not only into the expertise available at a firm's
national office but also into the relationship between the firm's national
office and the individuals directly involved in the audit. The audit committee
must make its assessments in the context of the company's particular operations,
systems, financial reporting practices and other specific characteristics and
requirements, in order to assure that the individuals who will perform the audit
are capable of working effectively with the company's personnel and are well
qualified to address the accounting issues that arise in connection with the
company's business. USG's audit committee retained a new independent auditor for the Company in
2002. The evaluation and selection process took approximately three months and
involved three national accounting firms. The process required extensive
face-to-face meetings, presentations, debate and evaluations. The rigor and
commitment of resources associated with the process and the careful nature of
the audit committee's deliberations have reinforced the Company's view that
auditor evaluation and selection is a matter of a complex nature upon which
shareholders, as a group, are not in a position to make an informed judgment.1
The factors that an audit committee must consider in retaining an auditor are
extensive and many of the details that are critical to auditor evaluation and
selection, including the varying needs of each company and the technical
abilities and personal attributes of individuals who would be involved in a
company's audit, do not allow for informed decision making on the basis of
something as generalized as a firm's brand reputation. There is not widespread
public debate over which firm should serve as USG's independent auditor and
whether specific individuals at specific firms who might plan and perform USG's
audit are best suited for the task. The Proposal does not seek to address the
discrete issues of the impact of non-audit services on auditor independence or
the allocation of responsibility for auditor selection as between the
independent audit committee and management, each of which have been the subject
of widespread public debates that have been addressed through legislative and
regulatory changes. As reflected in the Staff's no-action letters, including
recent no-action letters such as USG Corporation (March 5, 2003), Fleetwood
Enterprises, Inc. (April 24, 2002) and Refac (March 27, 2002), the Proposal is
excludable under the standards set forth in Release No. 34-40018 because it
seeks to probe too deeply into a matter of a complex nature upon which
shareholders, as a group, are not in a position to make an informed judgment.
The Staff's long-standing conclusion that a stockholder proposal dealing with
the evaluation and selection of a company's independent auditors is excludable
under Rule 14a-8(i)(7) is a fundamentally sound view that is guided by the
complex realities involved in evaluating and selecting the most appropriate
independent auditor for a company's specific needs. USG believes that the Staff
should not overturn the well-reasoned standards set forth in Release No.
34-40018 or the Staff's consistent position on this matter.
Very Truly Yours, /s/
John M. Jennings cc: Eric Schaal, USG Corporation
Mark Latham
Michael G. Timmers, P.C. -----FOOTNOTES-----
1 In addition, while the Proposal is not clear as to how it would be
implemented, if in connection with implementation of the Proposal the audit
committee diverted Company resources each year to an evaluation process
involving multiple firms, and there was meaningful uncertainty through the date
of each annual meeting of stockholders as to which audit firm would be retained,
it would be disruptive to the Company and cloud the planning and implementation
of audit and review procedures. This would put at risk the Company's ability to
consistently ensure that internal resources are adequately focused on the work
required to prepare the Company's financial statements and that potential
misstatements are detected through a well-planned and orderly-implemented audit
or review process. The task of evaluating and selecting the independent auditor
is fundamental to the oversight of financial reporting, a basic business
obligation that requires diligent efforts over extended periods by the Company
and the independent auditor, which under the principles set forth in Release No.
34-40018 supports the Staff's position that proposals dealing with the task of
evaluating and selecting the independent auditor are excludable under Rule
14a-8(i)(7).
[STAFF REPLY LETTER]
January 28, 2004 Response of the Office of Chief Counsel Division of Corporation Finance
Re: USG Corporation
Incoming letter dated January 9, 2004 The proposal requests that USG select its independent auditor annually by
shareowner vote. There appears to be some basis for your view that USG may exclude the proposal
under rule 14a-8(i)(7), as relating to ordinary business matters (i.e., the
method of selecting independent auditors). Accordingly, we will not recommend
enforcement action to the Commission if USG omits the proposal from its proxy
materials in reliance on rule 14a-8(i)(7). In reaching this position, we have
not found it necessary to address the alternative bases for omission upon which
USG relies. Sincerely, /s/
Grace K. Lee
Special Counsel
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