The following report is copied with permission from Corporate Governance Highlights, a private weekly newsletter for clients of Investor Responsibility Research Center ("IRRC"), the leading not-for-profit research organization for institutional investor interests in corporate governance and proxy voting issues.

Corporate Governance Highlights

Vol. 13, No. 42  October 25, 2002

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SEC SAYS BOARD INDEPENDENCE PROPOSAL IS BEYOND COMPANY’S POWER TO IMPLEMENT. The SEC granted Farmer Brothers permission to exclude a board independence proposal from its proxy statement because the commission agreed with the company that it lacked to power to implement the resolution. The proposal, which was submitted to the company by Mitchell Partners, a California-based fund manager, sought to amend Farmer Brothers’ bylaws to create a procedure to have a majority of the board be ‘independent,’ to form committees comprised entirely of independent directors and to allow for cumulative voting in board elections. In its request for no-action relief, the company argued that it could not implement the proposal because its board could not guarantee either the election of ‘independent’ directors or that a sufficient number of independent directors will be elected to staff the committees addressed in the committee proposal. “Because a board cannot ensure or require certain types of persons to be elected as directors, these types of proposals have consistently been excluded as beyond a company’s power to implement,” the company said. It also pointed out such proposals are beyond the power of boards to effectuate “because shareholders, rather than the board, elect directors.” The company cites previous SEC decisions on similar board independence proposals submitted to Marriott International, Boeing and PG&E in which the commission allowed exclusion.

            The proposed New York Stock Exchange listing rules currently being reviewed by the SEC require that within two years companies ensure that their boards are comprised of a majority of independent directors and that their audit, compensation and nominating committees are comprised entirely of independent directors. In its no-action ruling at Farmer Brothers, the SEC did not address how companies will be able to implement these requirements, if approved by the commission.

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