Company Name: General Electric Co.
Public Availability Date: January 13, 2006
Document Sections:
INQUIRY LETTER
INQUIRY LETTER
APPENDIX
INQUIRY LETTER
STAFF REPLY LETTER
[INQUIRY LETTER]
December 9, 2005
Direct Dial
(202) 955-8671
Fax No.
(202) 530-9569
Client No.
C 32016-00092
VIA HAND DELIVERY
Office of Chief Counsel
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: General Electric Company; Shareowner Proposal of the IUE-CWA Employees
Pension Fund Securities Exchange Act of 1934Rule 14a-8
Dear Ladies and Gentlemen:
This letter is to inform you that it is the intention of our client, General
Electric Company ("GE") to omit from its proxy statement and form of proxy for
its 2006 Annual Meeting of Shareowners (collectively, the "2006 Proxy
Materials") a shareowner proposal (the "Proposal") and statements in support
thereof received from the IUE-CWA Employees Pension Fund (the "Proponent"). The
Proposal requests that GE's Board of Directors establish an independent
committee to prepare a report evaluating the risk of damage to GE's brand name
and reputation in the United States as a result of the growing tendency to send
manufacturing and service work to other countries. The Proposal and related
correspondence are attached hereto as Exhibit A.
On behalf of our client, we hereby notify the Division of Corporation Finance of
GE's intention to exclude the Proposal from its 2006 Proxy Materials, and we
respectfully request that the staff of the Division of Corporation Finance (the
"Staff") concur in our view that the Proposal is excludable pursuant to Rule
14a-8(i)(7) because the Proposal pertains to GE's ordinary business operations.
THE PROPOSAL
The Proposal states:
Resolved: The Stockholders request that the Board of Directors establish an
independent committee to: 1) prepare a report evaluating the risk of damage to
GE's brand name and reputation in the United States as a result of the growing
tendency to send manufacturing and service work to other countries (outsourcing
and offshoring) and 2) make copies available to shareholders upon request.
ANALYSIS
The Proposal May Be Excluded under Rule 14a-8(i)(7)
Because the Proposal Pertains to GE's Ordinary Business Operations.
Rule 14a-8(i)(7) permits the omission of a shareowner proposal dealing with
matters relating to a company's "ordinary business" operations. According to the
Securities and Exchange Commission's ("Commission") release accompanying the
1998 amendments to Rule 14a-8, the underlying policy of the ordinary business
exclusion is "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." Release No. 34-40018 (May 21, 1998) (the "1998 Release"). In Staff
Legal Bulletin No. 14C (June 28, 2005) ("SLB 14C"), the Staff stated that, "In
determining whether the focus of these proposals is a significant social policy
issue, we consider both the proposal and the supporting statement as a whole."
While that statement was made specifically with respect to proposals that
address environmental or public health issues, we understand that the statement
reflects the standard generally applied by the Staff in evaluating whether
proposals may be excluded under Rule 14a-8(i)(7).
In the 1998 Release, the Commission described the two "central considerations"
for the ordinary business exclusion. The first was that certain tasks were "so
fundamental to management's ability to run a company on a day to day basis" that
they could not be subject to direct shareowner oversight. Examples of such tasks
cited by the Commission were "management of the workforce, such as the hiring,
promotion, and termination of employees, decisions on production quality and
quantity, and the retention of suppliers." The second consideration related to
"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."
The Staff has also stated that a proposal requesting the dissemination of a
report may be excludable under Rule 14a-8(i)(7) if the substance of the report
is within the ordinary business of the issuer. See Release No. 34-20091 (Aug.
16, 1983). In addition, the Staff has indicated, "[where] the subject matter of
the additional disclosure sought in a particular proposal involves a matter of
ordinary business ... it may be excluded under rule 14a-8(i)(7)." Johnson Controls, Inc. (avail. Oct. 26, 1999).
For the reasons addressed below, the Proposal relates to GE's ordinary business
operations for two reasons: (a) the Proposal and supporting statement request
that GE engage in an internal assessment of the risks or liabilities that the
company faces as a result of its operations, and (b) the Proposal seeks a report
on management of the workforce. In wellestablished precedent, the Staff has
concurred that each of the foregoing two aspects of similar proposals have
implicated ordinary business matters, and therefore that the proposals have been
excludable under Rule 14a-8(i)(7).
A. The Proposal and Supporting Statement Focus on GE Engaging in an Internal
Assessment of the Risks or Liabilities That GE Faces as a Result of Its
Operations.
The Proposal requests the Board of Directors to prepare a report evaluating "the
risk of damage to GE's brand name and reputation" as a result of decisions to
"send manufacturing and service work to other countries," and refers to GE's
name and reputation as "its most important asset." In other words, the Proposal
is seeking an assessment of the financial risks arising from GE's workforce and
employment decisions, which are fundamental tasks in management's obligation to
run GE on a day-to-day basis.
It is well established that shareowner proposals seeking detailed information on
a company's assessment of the financial implications of aspects of its business
operations do not raise significant policy issues and instead delve into the
minutiae and details of the ordinary conduct of business. For example, in The
Dow Chemical Company (avail. Feb. 23, 2005), the Staff concurred that the
company could exclude a shareowner proposal requesting a report describing the
reputational and financial impact of the company's response to pending
litigation under Rule 14a-8(i)(7) because it related to the company's ordinary
business operations (i.e., evaluation of risks and liabilities). Similarly, in
Newmont Mining Corp. (avail. Feb. 4, 2004), the Staff concurred that the company
could exclude a proposal requesting that the company's board of directors
publish a report on the risk to the company's "operations, profitability and
reputation" arising from its social and environmental liabilities, where the
company argued that an assessment of financial risks of its operations
implicated the company's ordinary business operations. In its response, the
Staff noted that the proposal was excludable under Rule 14a-8(i)(7) on the basis
that it pertained to the "evaluation of risk."
Similarly, in American International Group, Inc. (avail. Feb. 19, 2004), the
Staff concurred that the company could exclude a proposal that requested the
board of directors to report on "the economic effects of HIV/AIDS, tuberculosis
and malaria pandemics on the company's business strategy," because it called for
an evaluation of risks and benefits. See also The Dow Chemical Company (avail.
Feb. 13, 2004) (concurring that the company could exclude under Rule 14a-8(i)(7)
a proposal requesting a report related to certain toxic substances, including
"the reasonable range of projected costs of remediation or liability," because
it related to an evaluation of risks and liabilities); Xcel Energy Inc. (avail.
Apr. 1, 2003) and Cinergy Corp. (avail. Feb. 5, 2003) (concurring with the
exclusion of proposals requesting a report disclosing "the economic risks
associated with the Company's past, present and future emissions" of various
greenhouse gases, and "the economic benefits of committing to a substantial
reduction of those emissions related to its current business activities");
Willamette Industries, Inc. (avail. Mar. 20, 2001) (excluding a proposal related
to a request for a report on environmental problems, including an estimate of
"worst case financial exposure due to environmental issues for the next ten
years"); The Mead Corporation (avail. Jan. 31, 2001) (excluding a proposal
related to a request for an economic or financial report of the company's
environmental risks).
The Staff has confirmed its position on this type of proposal in SLB 14C. There,
the Staff stated "[t]o the extent that a proposal and supporting statement focus
on the company engaging in an internal assessment of the risks or liabilities
that the company faces as a result of its operations ..., we concur with the
company's view that there is a basis for it to exclude the proposal under rule
14a-8(i)(7) as relating to an evaluation of risk."
As with the letters addressed in SLB 14C and the no-action letters cited above,
in requesting a report "evaluating the risk of damage to GE's brand name and
reputation," the Proposal focuses on "an internal assessment of the risks or
liabilities" that GE faces as part of its day-to-day operating decisions. Thus,
the Proposal addresses GE's ordinary business operations, and is excludable
under Rule 14a-8(i)(7).
B. The Proposal Involves Ordinary Business Matters Because It Relates to
Employment Decisions and Employee Relations.
The Proposal's request for a report evaluating risks "as a result of the growing
tendency to send manufacturing and service work to other countries (outsourcing
and offshoring)," to the extent it encompasses those practices at GE, addresses
precisely the type of "management of the workforce, such as the hiring,
promotion, and termination of employees" that the Commission identified in the
1998 Release as relating to ordinary business operations. Decisions regarding
the location of employees and sourcing of goods implicate the type of
fundamental and complex matters that are not proper for shareowner proposals
because they involve tasks that are fundamental to management's ability to run
GE on a day-to-day basis and delve too deeply into the complex operations of GE.
Accordingly, as discussed further below, the Staff has issued no-action relief
under Rule 14a-8(i)(7) concurring that proposals addressing management of the
workforceincluding outsourcingconstitute ordinary business matters.
Most recently, the Staff concurred that seven identical proposals could be
excluded on Rule 14a-8(i)(7) grounds, where the proposals related to the
companies' management of their workforce. See Boeing Co. (avail. Feb. 25, 2005);
Citigroup Inc. (avail. Feb. 4, 2005); Mattel, Inc. (avail. Feb. 4, 2005); SBC
Communications Inc. (avail. Feb. 4, 2005); Capital One Financial Corp. (avail.
Feb. 3, 2005); Fluor Corp. (avail. Feb. 3, 2005); General Electric Co. (avail.
Feb. 3, 2005). Those proposals requested that the companies issue a "Job Loss
and Dislocation Impact Statement" concerning the elimination of jobs and
relocation of jobs to foreign countries. Similarly, in International Business
Machines Corporation (avail. Feb. 3, 2004; recon. denied Mar. 8, 2004), a
proposal requested that the company's board of directors "establish a policy
that IBM employees will not lose their jobs as a result of IBM transferring work
to lower wage countries." The Staff concurred with the exclusion of the proposal
under Rule 14a-8(i)(7), on the grounds that it related to "employment decisions
and employee relations." The Staff has in other circumstances concurred that
decisions relating to the selection of employees to fill positions implicates a
company's ordinary business. See, e.g., Merck & Co. Inc. (avail. Mar. 7, 2002)
(proposal requesting the appointment of a council to review disputes regarding
filling research and development positions, inventorship, scientific priorities
and ethical conduct was excludable as relating to management of the workforce);
Intel Corp. (avail. Mar. 18, 1999) (proposal recommending that the board
implement an "Employee Bill of Rights" was excludable as relating to management
of the workforce).
As with each of the precedents cited above, the Proposal and its supporting
statement address exactly the same issue: workforce management decisions.
Although the Proposal does not directly refer to the "loss of jobs" in the
United States, the supporting statement asserts that outsourcing jobs to China
"has `a cannibalizing effect on American manufacturing.' [Detroit Free Press,
10/12/2005]" and states that "[t]wo in three Americans think that job losses to
China are a `serious issue,' [Greenberg Quinlan Rosner Research, 2003]." The
supporting statement also asserts that "Offshoring and outsourcing also affect
the morale of employees who remain in U.S. operations.... GE's U.S. workers are
now in direct competition with its workers in China and other countries...." As
discussed above, in SLB 14C the Staff confirmed that, "In determining whether
the focus of these proposals is a significant social policy issue, we consider
both the proposal and the supporting statement as a whole." The foregoing quotes
from the Proposal's supporting statement make clear that, taken as a whole, the
Proposal and the supporting statement are focused on the issue of job loss,
employment decisions and employee relations. Thus, following the precedents
cited above, we believe that the Proposal properly may be excluded from the 2006
Proxy Materials under Rule 14a-8(i)(7), and request that the Staff concur in our
conclusion.
C. Regardless of Whether the Proposal Touches Upon Significant Social Policy
Issues, the Entire Proposal is Excludable Due to the Fact That It Distinctly
Addresses Ordinary Business Matters.
We believe that the well-established precedent set forth above supports our
conclusion that the Proposal addresses ordinary business matters and therefore
is excludable under Rule 14a-(i)(7). We recognize that the Staff has concluded
that certain employment-related proposals may focus on sufficiently significant
social policy issues so as to preclude exclusion in certain circumstances.
Nevertheless, the Staff has also consistently concurred that a proposal may be
excluded in its entirety when it addresses both ordinary and non-ordinary
business matters. For example, in General Electric Company (avail. Feb. 10,
2000), the Staff concurred that GE could exclude a proposal requesting that it (i)
discontinue an accounting technique, (ii) not use funds from the GE Pension
Trust to determine executive compensation, and (iii) use funds from the trust as
intended. The Staff concurred that the entire proposal was excludable under Rule
14a-8(i)(7) because a portion of the proposal related to ordinary business
mattersi.e., the choice of accounting methods. Similarly, in Medallion
Financial Corp. (avail. May 11, 2004), in reviewing a proposal requesting that
the company engage an investment bank to evaluate alternatives to enhance
shareowner value, the Staff stated, "[w]e note that the proposal appears to
relate to both extraordinary transactions and non-extraordinary transactions.
Accordingly, we will not recommend enforcement action to the Commission if
Medallion omits the proposal from its proxy materials in reliance on
14a-8(i)(7)." See also Wal-Mart Stores, Inc. (avail. Mar. 15, 1999) (proposal
requesting a report to ensure that the company did not purchase goods from
suppliers using, among other things, forced labor, convict labor and child labor
was excludable in its entirety because the proposal also requested that the
report address ordinary business matters).
Therefore, while we are aware that the Staff has, in some instances, determined
that proposals addressing the offshore relocation of jobs are not excludable
under Rule 14a-8(i)(7), see General Electric Company (avail. Feb. 3, 2004) and
Sprint Corp. (avail. Dec. 29, 2003), we do not believe that it is necessary to
consider whether the Proposal may also touch upon significant policy issues,
since the Proposal here addresses ordinary business issues: an internal
assessment of the risks or liabilities that GE faces as a result of its
operations, and job loss and employee relations issues that arise as a result of
management of the workforce. Thus, regardless of whether aspects of the Proposal
are considered to implicate a significant policy issue, under well-established
precedent, the entire Proposal may be excluded because it also addresses
ordinary business matters within the scope of Rule 14a-8(i)(7). In this respect,
the recent IBM letter again is directly on point. As noted above, in
International Business Machines Corporation (avail. Feb. 3, 2004; recon. denied
Mar. 8, 2004), a proposal addressing both job loss and the possible transfer of
work to "lower wage countries" was deemed excludable because the issue of job
loss relates to ordinary business matters within the scope of Rule 14a-8(i)(7).
Accordingly, based on the precedent described above and the Proposal's emphasis
on ordinary business matters regarding assessments of risks and workforce
management decisions, the Proposal may be excluded in its entirety under Rule
14a-8(i)(7).
CONCLUSION
Based on the foregoing, we hereby respectfully request that the Staff not
recommend any enforcement action if the Proposal is excluded from GE's 2006
Proxy Materials. Pursuant to Rule 14a-8(j), enclosed herewith are six copies of
this letter and its attachments. Pursuant to Rule 14a-8(j), this letter is being
filed with the Securities and Exchange Commission (the "Commission") no later
than 80 calendar days before GE files its definitive 2006 Proxy Materials with
the Commission. On behalf of GE, we hereby agree to promptly forward to the
Proponent any Staff response to this no-action request that the Staff transmits
by facsimile to us only.
Consistent with the provisions of Rule 14a-8(j), we are concurrently providing
copies of this correspondence to the Proponent. We recognize that the Staff has
not interpreted Rule 14a-8 to require proponents to provide GE and its counsel a
copy of any correspondence that the proponent submits to the Staff. Therefore,
in the interest of a fair and balanced process, we request that the Staff notify
the undersigned if it receives any correspondence on the Proposal from the
Proponent or other persons, unless that correspondence has specifically
confirmed to the Staff that GE or its undersigned counsel have timely been
provided with a copy of the correspondence. If we can provide additional
correspondence to address any questions that the Staff may have with respect to
this no-action request, please do not hesitate to call me at (202) 955-8671 or
Thomas J. Kim, GE's Corporate and Securities Counsel, at (203) 373-2663.
Sincerely,
/s/
Ronald O. Mueller
ROM/wjr
Enclosures
cc: Thomas J. Kim, General Electric Company
Tony Daley, CWA Research Department
[INQUIRY LETTER]
VIA Fax & Mail
November 3, 2005
Mr. Benjamin W. Heineman, Jr.
Corporate Secretary
General Electric Company
3135 Easton Turnpike
Fairfield, CT 06431
Dear Mr. Heineman:
Re: Submission of Shareholder Proposal
On behalf of the IUE-CWA Employees Pension Fund ("Fund"), we hereby submit the
enclosed Shareholder Proposal ("Proposal") for inclusion in the General Electric
Company ("Company") proxy statement to be circulated to Company shareholders in
conjunction with the next annual meeting of shareholders in 2006. The Proposal
is submitted under Rule 14(a)-8 of the U.S. Securities and Exchange Commission's
proxy regulations.
The Fund is a beneficial holder of General Electric common stock with market
value in excess of $2,000 held continuously for more than a year prior to this
date of submission.
The Fund intends to continue to own General Electric common stock through the
date of the Company's 2006 annual meeting. Either the undersigned or a
designated representative will present the Proposal for consideration at the
annual meeting of stockholders. Please direct all communications regarding this
matter to Mr. Tony Daley, CWA Research Department, at 202-434-9515.
Sincerely,
/s/
Jim Clark
President
Enclosures
[APPENDIX]
Shareholder Proposal
Resolved: The Stockholders request that the Board of Directors establish an
independent committee to: 1) prepare a report evaluating the risk of damage to
GE's brand name and reputation in the United States as a result of the growing
tendency to send manufacturing and service work to other countries (outsourcing
and offshoring) and 2) make copies available to shareholders upon request.
Statement of Support
According to its 2003 "Letter to Stakeholders," GE "must set high standards for
behavior everywhere." Yet, GE continues to aggressively pursue business with
Chinaa noted violator of basic human rightsas a major strategic initiative.
GE China has 12,000 employees, $1.5 billion in investment, nearly $5 billion in
revenues as well as vendor contracts. Key GE productsappliances, light bulbs,
electrical goods, medical instruments, aircraft engine partsgoods by which the
Company has developed its global reputation for decades, are increasingly
manufactured or serviced in China.
Yet, China is a country where employees are persecuted for seeking to exercise
internationally recognized human rights, such as freedom of association and the
right to collective bargaining. This repression has contributed to artificially
low prices of Chinese goods in global markets, and American producers of goods
and services increasingly have to match this "China price" to keep their
customers. According to the economist Thomas Palley, this China price has "a
cannibalizing effect on American manufacturing." [Detroit Free Press,
10/12/2005] It is forcing down compensation for American workers, widening the
income divide in the U.S., and destroying communities. [See U.S.-China Economic
and Security Review Commission, 1/11/2005]
The outsourcing and offshoring of manufacturing and service work may be
profitable in the short term, but in our view may have significant long-term
consequences. The shift of production to low-wage countries in general, and to
China in particular, has generated negative press stories in the U.S. [Knight
Ridder news service, 11/10/03; Union Leader, 10/26/03] Two in three Americans
think that job losses to China are a "serious issue," [Greenberg Quinlan Rosner
Research, 2003]
GE appears to be increasing vulnerable to consumer disaffection in the U.S.
[Financial Times, 11/29/2004] A backlash against outsourcing and offshoring
could jeopardize political support for globalization, one of GE's five "elements
of growth."
GE's brand name may be its most important asset. For Harris Interactive, "the
value of a company's reputation may be as much as 40% of its total market
value." [http://www.harrisinteractive.com/pop up/rq/benefits.asp] Company
reputations affect consumer purchases. And "reputation, once lost, is extremely
difficult to reclaim." [Wall Street Journal, 2/7/01]
Offshoring and outsourcing also affect the morale of employees who remain in
U.S. operations. [CIO Magazine, 9/1/03] GE's U.S. workers are now in direct
competition with its workers in China and other countries where the exercise of
labor rights is discouraged.
GE sends manufacturing and service work abroad. It uses foreign contractors. Its
foreign operations are becoming vendors to other companies. We believe the Board
should help shareholders evaluate the long-term risks and policy implications of
the offshoring and outsourcing strategies the Company has chosen to pursue.
[INQUIRY LETTER]
December 23,2005
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Request of General Electric Company for a No-Action Letter With Respect to
the Shareholder Proposal of the IUE-CWA Employee's Pension Fund
Ladies and Gentlemen:
I. Introduction
This letter is submitted in response to the claim of the General Electric
Company ("GE") that it may exclude the shareholder proposal of the IUE-CWA
Employee's Pension Fund from its 2006 proxy materials. The Proposal asks "that
the Board of Directors establish an independent committee to (1) prepare a
report evaluating the risk of damage to GE's brand name and reputation in the
United States as a result of the growing tendency to send manufacturing and
service work to other countries (outsourcing and offshoring) and (2) make copies
available to shareholders upon request."
The staff has recently denied three requests for no-action letters with respect
to shareholder proposals that are substantially identical to the one that GE has
challenged here. General Electric Company (February 3, 2004); Sprint (February
5, 2004); and General Electric Company (January 19, 2000). These precedents
demonstrate that the the instant request should also be denied.
Under Rule 14a-8(g), "the burden is on the company to demonstrate that it is
entitled to exclude a proposal." (emphasis added). However, GE has failed to
demonstrate that the instant Proposal differs in any significant respect from
the three precedents that are cited above.
II. GE Has Failed to Demonstrate That the
Proposal Involves Ordinary Business Operations Within the Meaning of Rule
14a-8(i)(7).
The Commission has determined that a shareholder proposal may not be excluded
from a company's proxy statement in reliance on Rule 14a-8(i)(7), if it presents
or raises "sufficiently significant social policy issues." Securities Exchange
Act Release No. 34-40018 (May 21, 1998); See 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).
A. The Proposal is Focused on a Fundamental Business Strategy and Long-Term
Goals of the Company
In this context, the Commission has taken the position since 1992 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 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 accord with the Commission's position, 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. It has applied the same standard in denying the issuance of no-action
letters when shareholder proposals have called for special reports. SEC Proxy
and Compensation Rules, supra, Section 15.7[1] at p.15-46.
In the words of Goodman and Olson, the Staff 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 as noted above, General Electric Company (Jan.
19, 2000), which involved a proposal for a report on certain risks arising from
GE's globalization growth initiative).
The staff's denial of the requests for no-action letters in General Electric
Company (February 3, 2004) and General Electric Company (Jan. 19, 2000) are
particularly significant in the present context. The two proposals at issue in
those cases, and the current proposal, are virtually identical insofar as they
call for "a report evaluating the risk of damage to GE's brand name and
reputation in the United States" as a result of the fundamental business
strategy, long-term goals and economic orientation that GE has adopted with
respect to outsourcing and offshoring, and for making copies of the report
"available to shareholders upon request." Each is addressed to the same
"`fundamental business strategy'" of outsourcing and offshoring that GE has been
implementing since it embarked upon its "globalization initiative" prior to the
Company's Annual Meeting in 2000.
For example, the Supporting Statement for the year 2000 Proposal refers to "GE's
strategy of shifting production from the United States" to other nations, and
notes that GE had already "cut more than 100,000 manufacturing jobs" in the
United States "while opening up new operations in Mexico, Hungary and the Far
East." It adds that "`GE is rapidly developing Mexico as a low-cost source of
materials, parts, and services for its domestic units ... .'"
The 2004 Proposal was addressed to GE's continuing implementation of the same
fundamental business strategy with respect to "the outsourcing and offshoring of
manufacturing and service work to other countries." The Statement of Support for
that Proposal provides further evidence that the Proposal was addressed to that
same business strategy by noting that GE had a target for outsourcing "$5
billion in contracts to Chinese vendors by 2005." It added that "GE is also
attempting to outsource 70 percent of business processes," while sending "70
percent of outsourced processes offshore and giv[ing] 70 percent of offshore
outsourced processes to India."
The 2006 Proposal is plainly addressed to the same fundamental business strategy
with respect to outsourcing and offshoring. It adds a definition of outsourcing
and offshoring by specifying that these strategic initiatives involve the
"tendency to send manufacturing and service work to other countries." Moreover,
the Statement of Support explicitly declares that the GE Board "should help
shareholders evaluate the long-term risks and policy implications of the
offshoring and outsourcing strategies the Company has chosen to pursue"
(emphasis added).
In this context, the supporting statement points out that "GE continues to
aggressively pursue business with Chinaa noted violator of basic human rights -
as a major strategic initiative" (emphasis added). It adds that "key GE products
... goods by which the Company has developed its global reputation for decades,
are increasingly manufactured or serviced in China."
Under these circumstances, the instant Proposal is plainly focused on matters of
"`fundamental business strategy, long-term goals and economic orientation'" that
are beyond the realm of ordinary business operations. It is squarely and
explicitly addressed, as the Statement of Support makes clear, to "the long-term
risks and policy implications of the offshoring and outsourcing strategies the
Company has chosen to pursue."
Counsel for the Company attempts to circumvent the Commission's long-standing
position that "strategic business proposals ... [are] beyond a company's
ordinary business operations" (See SEC Proxy and Compensation Rules, supra,
Section 15.7[1] at p.15-27) by painting the proposal as one that is instead
focused on "`an internal assessment of the [financial] risks or liabilities'
that GE faces as part of its day-to-day operating decisions." See p. 4. However,
contrary to this unfounded assertion, the Proposal and the Statement of Support
do not call for any such "assessment of financial implications." See p.3. Nor do
they make any reference to an evaluation of potential "liabilities."
In the final analysis, the Proposal is focused on the risks that GE may be
facing as a result of its "`fundamental business strategy, long-term goals and
economic orientation.'" It is not concerned, as counsel suggests, with the
"`risks or liabilities' that GE faces as part of its day-to-day operating
decisions." See p. 4.
Counsel for the Company also attempts to portray the Proposal as one that is
focused on the "day-to-day" decisions that GE makes with respect to "employee
relations" and "`management of the workforce.'" See pp. 4-5. But that portrayal
also is misplaced, because the Proposal has nothing to do with day-to-day
"workforce management decisions." As noted above, it is focused on an aspect of
GE's "`fundamental business strategy, long-term goals and economic
orientation,'" and as such, is beyond the realm of ordinary business matters.
See SEC Proxy and Compensation Rules, supra, Section 15.7[1] at p. 15-26
B. The Proposal is Focused on the Risk of Damage to GE's Brand Name and
Reputation in the U.S.
In the alternative, we submit that the Proposal's focus on "the risk of damage
to GE's brand name and reputation in the United States" is sufficient, in and of
itself, to present a business strategy issue that is appropriate for a
shareholder vote. In this context, the Statement of Support declares that "GE's
brand name may be its most important asset" and adds that "`reputation, once
lost, is extremely difficult to reclaim.'"
It is evident that a serious threat to the Company's "brand name and reputation
in the United States" would, by definition, be a matter that transcends "the
day-to-day business matters." In fact, it has been estimated, as the supporting
statement notes, that "`the value of a company's reputation may be as much as
40% of its total market value.'" With more than 10 billion shares of common
stock, and a market price of about $36 per share as this is written, it appears
that GE's reputation is a corporate asset that is worth as much as $140 billion.
The preservation of a $140 billion asset is clearly a matter of strategic
importance. It is also material, because a reasonable shareholder might consider
the potential impairment of GE's brand name and reputation in the U.S. to be an
important factor in deciding to buy, sell or hold the Company's stock.
In this context, the Statement of Support points out that GE is vulnerable to
consumer disaffection in the U.S. because the U.S. "is the source of 60 percent
of total company revenues." It also notes that "Americans are ... sensitive to
the exodus of jobs," and cites predictions that there will be "a backlash
against the outsourcing of white-collar jobs." Under these circumstances, it
should again be evident that the Proposal is addressed to the "`fundamental
business strategy, long-term goals and economic orientation" of the Company.
In addition to the staff's two prior denials of no-action letters in General
Electric Company (February 3, 2004) and General Electric Company (Jan. 19,
2000), there are at least two precedents for denying no-action letters with
respect to a proposed report on the risk of damage to a company's reputation. In
each of those cases, the staff's response reflects that the proposal called for
a report on the impact of certain business strategies "on the environment, human
rights and risk to the company's reputation" (emphasis added) Morgan Stanley
Dean Witter & Co. (Jan. 11, 1999), Merrill Lynch & Co. (Feb. 25, 2000). The
staff found, in each case, that "the proposal raises significant policy issues
that are beyond the ordinary business operations" of the companies involved.
Under these circumstances, we submit that GE has failed to demonstrate that it
is "entitled to exclude" the Proposal from its proxy materials. Instead, we
submit that GE's business strategy of shifting jobs from the United States to
other countries, and the associated risk of damage to its brand name and
reputation, are sufficient to demonstrate the existence of a significant issue
of policy that transcends day-to-day business operations.
C. The Proposal Concerns an Issue That is the Subject of Widespread Public
Debate and an Increasing Recognition That Significant Policy Issues Are Involved
A third method for determining the existence of a significant policy issue that
transcends ordinary business operations is to ask whether the proposal deals
with an issue that is the subject of widespread public debate. The staff has
repeatedly employed this analysis in denying company requests for no-action
letters.
In 2003, for example, the staff denied requests for no action letters with
respect to proposals that concerned the impact of non-audit services on auditor
independence. See e.g. ExxonMobil Corporation (Mar. 11, 2003) and Verizon
Communications Inc. (Jan. 23, 2003). In each of the cited cases, the staff
denied requests for no action letters "in view of the widespread public debate
concerning the impact of non-audit services on auditor independence and the
increasing recognition that this issue raises significant policy issues ... ."
The staff has also employed this test in a number of other contexts in denying
company requests for no-action letters. These include the proposal dealing with
the conversion of traditional defined benefit pension plans to cash-balance
pension plans in International Business Machines Corporation (Feb. 16, 2000),
the proposals concerning analyst independence that were at issue in J.P. Morgan
Chase & Co. (Jan. 21, 2002) and The Goldman Sachs Group, Inc. (Jan. 15, 2002),
and a proposal concerning option repricing that was the subject of General
DataComm Industries, Inc. (Dec. 9, 1998).
In this context, there has been an avalanche of newspaper and magazine articles,
studies by consultants and academics, and media reports that deal with the
implications of "outsourcing" and "offshoring." A recent Google search for the
term, "outsourcing," yielded 73,800,000 results (December 22, 2005). A same day
search for the term, "offshoring," resulted in 3,920,000 hits.
The "public debate" about "outsourcing" and "offshoring" is so widespread and
voluminous that it would be impractical to attempt to identify the persons who
have participated in the debate, and to summarize the views they have expressed,
in this response. However, a few examples should serve to illustrate the
existence of "widespread public debate" on the topics of outsourcing and
offshoring and indicate that there is an increasing recognition that these
topics present significant policy issues, both for American corporations and for
the society in which they exist.
Lou Dobbs Tonight is a television news program that has presented a hard-hitting
series of special reports, over a period of years, 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).
In this context, 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). Gartner Inc., another research firm, has estimated that half a
million IT jobs, "roughly 1 in 20 - will go abroad. The Christian Science
Monitor (July 29, 2003). In addition, a recent study at the University of
California-Berkeley 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).
Last year, C-Span broadcast a Brookings Institution debate concerning U.S. Trade
Policy, which focused on the unprecedented trends toward the outsourcing and
offshoring of American jobs. (January 6, 2004). Each of the panelists agreed
that these trends have implications that are ominous.
Paul Craig Roberts was the most explicit of the C-Span panelists. He declared
that the outsourcing and offshoring of American jobs will cause a fall in
average wages in the United States, a collapse of the "ladder of upward
mobility," and a reduction in the American standard of living. He concluded, "I
expect the United States to become a third world nation in twenty years."
As columnist Bob Herbert put it, writing in the New York Times, "there is no
disputing the direction of the trend, or the fact that it is accelerating" (Dec.
29, 2003). He adds that, if the exportation of American jobs continues
unchecked, it "will eventually mean economic suicide for hundreds of thousands,
if not millions, of American families" Id.
According to Mr. Herbert, outsourcing and offshoring, and the economic and
social implications of these trends, "should be among the hottest topics of our
national conversation" The New York Times (Dec. 29, 2003). And, while the
examples cited above may be brief and anecdotal, we believe that they are
indicative of the "increasing recognition" that the trends toward outsourcing
and offshoring present significant issues of policy that transcend ordinary
business operations.
D. Staff Legal Bulletin No. 14C Does Not Require Omission of the Instant
Proposal
1. Staff Legal Bulletin No. 14C Does Not Apply to the Instant Proposal
Staff Legal Bulletin No. 14C ("SLB 14C') does not purport to change in the
Commission's long-standing policy that proposals that focus on "`fundamental
business strategy, long-term goals and economic orientation'" are permissible,
while those that focus on "day-to-day operations" are not. Accordingly, for the
reasons stated above, the instant Proposal is plainly permissible as one that
transcends "day-to-day business matters."
SLB 14C does state that the Staff will concur with certain company requests for
no-action letters to the extent that a proposal and supporting statement focus
on "an internal assessment of the risks and liabilities that a company faces as
a result of its operations that may adversely affect the environment or the
public's health" (emphasis added). However, the instant Proposal does not
address any operations that may adversely affect the environment or the public's
health" (emphasis added). In addition, contrary to the assertion of Company
counsel (See pp. 3-4), it does not call for the kind of "internal assessment"
that is contemplated by SLB 14C.
On the latter point, the Proposal expressly calls for an evaluation by an
"independent committee." This implies an "external," as distinguished from an
"internal," evaluation of the risks that are specified.
In the case of the Exxon Mobil proposal that SLB 14C cites as an example of a
permissible proposal, the proponent asked that "the independent directors of the
Board prepare" the requested report (emphasis added). In the instant case, the
Proposal calls for a report that could be prepared, not only by directors who
are "external" in the sense of being "independent," but also by other
independent persons who would be even more "external" to the Company than the
"independent directors." In contrast, in the case of the Xcel Energy proposal
that SLB 14C cites as subject to exclusion under Rule 14a-8(i)(7), it appears
that the proposed evaluation was to be "internal," because it was likely that
the entire Board of Directors would delegate the proposed assessment to the same
company personnel who were responsible for day-to-day operations, and who were
already engaging in the kinds of assessments that the proposal sought as part of
their day-to-day activities.
2. SLB 14C Does Not Call for the Exclusion of Proposals Merely Because They May
Refer to an "Evaluation of Risk"
Counsel for the Company appears to argue (p. 4) that SLB 14C requires the
omission of any shareholder proposal that makes reference to an "evaluation of
risk." However, this claim is belied by the Exxon Mobil example that SLB 14C
cites as permissible.
The Staff decided that the Exxon Mobil proposal was permissible, despite the
fact that it called for a report "on the potential environmental damage that
would result from the company drilling for oil and gas in protected areas." The
proposed report necessarily called for an "evaluation" or "assessment" of
potential harm, and counsel for Exxon Mobil argued to the Staff, in a manner
similar to that of the attorney for GE here, that "proposals regarding the
evaluation of risks and benefits are matters of ordinary business."
The Staff was "unable to concur." Exxon Mobil Corp. (Mar. 18, 2005). In denying
Exxon Mobil's request for a noaction letter, the Staff appears to have agreed
with either or both of the following responses on behalf of the proponent: (1)
that the proposal had presented "a significant issue" of social policy with
respect to the impact of Exxon Mobil's operations on biodiversity; and/or (2)
that the proposal requested "a report on the potential environmental damage that
would be caused by operations ... in general," as distinguished from "a review
of the potential environmental damage posed by operations in every single site
mentioned in the Resolved clause." (emphasis in original).
Under these circumstances, it is evident that SLB 14C does not stand for the
proposition that any reference to an "evaluation o f risk" in a proposal or
supporting statement will trump the existence of a significant issue of social
policy. If the Staff is persuaded that the instant Proposal is focused on
"`fundamental business strategy, long-term goals and economic orientation,'" the
Proposal is plainly permissible as one that transcends "day-to-day business
matters" and is therefore "appropriate for a shareholder vote." See Securities
Exchange Act Release No. 34-40018 (May 21, 1998).
3. It Would Elevate Form Over Substance to Hold That the Instant Proposal May be
Excluded
It would elevate form over substance for the Staff to conclude that "a report on
the potential damage to GE's brand name and reputation" would be permissible in
accord with the Exxon Mobil example that is set forth in SLB 14C, but that "a
report evaluating the risk" of such damage is not. Such a substitution of the
language that the Staff found permissible in Exxon Mobil, for the language that
now calls for "a report evaluating the risk of damage to GE's brand name and
reputation in the United States," would not make one iota of change in the
substance of the Proposal.
In this context, it is evident that the word "potential" in the Exxon Mobil
proposal, and the phrase "evaluating the risk" in the present Proposal, have an
identical purpose or function in the contexts they are used. That purpose is to
qualify the meaning of the word "damage," in order to avoid an assertion that
"damage" actually exists, when one purpose of the requested reports would be to
determine whether, and to what extent, such damage may be a reality.
4. SLB 14C Reaffirms the Traditional Standard
In the final analysis, SLB 14C explicitly reaffirms the traditional standard
that the Staff has applied in determining whether a proposal may raise
"sufficiently significant social issues" to place the proposal outside the realm
of "ordinary business matters." Indeed, it explicitly states, "the fact that a
proposal relates [in some way] to ordinary business matters does not
conclusively establish that a company may exclude the proposal from its proxy
materials." SLB 14C concludes that, "as the Commission stated in Exchange Act
Release No. 40018, proposals that relate to ordinary business matters but that
focus on "sufficiently significant social policy issues ... would not be
considered to be excludable, because the proposals would transcend the
day-to-day business matters."
E. The Precedents Cited By GE are Misplaced
Counsel for GE cites a number of no-action letters in which the Staff permitted
the exclusion of shareholder proposals on the ground that they involved an
"evaluation of risks" in one form or another (See pp.3-4), or related to
"workforce management decisions" (See p. 5). However, all of those citations
appear to beg the question of whether the proposals involved presented a
significant issue of social policy that was sufficient to transcend the realm of
ordinary business matters.
Under these circumstances, we submit that GE has failed to address the salient
issue. That issue is the question of whether the Proposal, like its predecessors
which were found permissible in General Electric Company (February 3, 2004) and
General Electric Company (January 19, 2000), has presented a significant issue
of social policy that is sufficient to transcend the realm of "day-to-day
business matters" in accord with the policy that the Commission adopted in
Securities Exchange Act Release No. 34-40018 (May 21, 1998).
III. Conclusion
For the reasons set forth above, GE has failed to meet its burden of
demonstrating "that it is entitled" to exclude the Proposal from its proxy
materials (See Rule 14a-8(g). The request for a no-action letter should be
denied.
Please do not hesitate to contact me if you should have any questions. I have
enclosed six copies of this letter for the staff, and am sending copies to
counsel for the company and the proponent.
Sincerely,
/s/
Frederick B. Wade
c. Ronald O. Mueller
Counsel for GE
[STAFF REPLY LETTER]
January 13, 2006
Response of the Office of Chief Counsel Division of Corporation Finance
Re: General Electric Company
Incoming letter dated December 9, 2005
The proposal requests that the board establish an independent committee to
prepare a report evaluating the risk of damage to GE's brand name and reputation
in the United States as a result of outsourcing and offshoring work to other
countries, and make the report available to shareholders.
There appears to be some basis for your view that
GE may exclude the proposal under rule 14a-8(i)(7), as relating to GE's ordinary
business operations (i.e., evaluation of risk). Accordingly, we will not
recommend enforcement action to the Commission if GE omits the proposal from its
proxy materials in reliance on rule 14a-8(i)(7).
Sincerely,
/s/
Mark F. Vilardo
Special Counsel
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