December 4,2000

 

Securities and Exchange Commission

Judiciary Plaza

Washington, D.C. 20549

 

Subject: Stockholder Proposal of Donald S. Parry

 

Ladies and Gentlemen:

 

Pursuant to Rule 14a-8(j) under the Securities Exchange Act of 1934, I am enclosing six copies of this letter together with a proposal and statement in support thereof (the "Proposal"), attached as Exhibit A hereto, which Proposal was submitted by Donald S. Parry (the "Proponent"), which Proponent is Acting on behalf of himself and other co-filers[1] to the International Business Machines Corporation (the "Company" or "IBM").

 

The Proposal requests three separate but interrelated items in connection with the Company's accounting and disclosure of pension-related gains and losses under Statement of Financial Accounting Standard 87 ("SFAS 87") and 132 ("SFAS 132"). The first part of the Proposal seeks for the Company to determine future executive incentive compensation "by profit from real company operations not including accounting rule profit from pension fund surplus." The second part of the Proposal states that "IBM will provide transparent financial reporting of profit from real company operations." In addition to these two items, which are set forth within the "Resolved" section of the Proposal, the Proponent goes on, in the last two paragraphs of the submission, to suggest that "IBM could be using pension fund surplus as intended by the trust--to provide for retirees..." and that "part of [the] pension fund surplus is better used to adjust retiree pay for inflation..."

 

IBM believes that the entire Proposal may properly be omitted from IBM's proxy materials being prepared for our 2001 annual meeting of stockholders (the "2001 Annual Meeting") for the reasons discussed below. To the extent that the reasons for omission stated in this letter are based on matters of law, these reasons are the opinion of the undersigned as an attorney licensed and admitted to practice in the State of New York.

 

I.                THE PROPOSAL SHOULD BE OMITTED UNDER RULE 14a-8(i)(7) AS RELATING TO THE COMPANY'S ORDINARY BUSINESS OPERATIONS

 

Rule 14a-8(i)(7) allows a company to omit shareholder proposals from its proxy materials "if the proposal deals with a matter relating to the company's ordinary business operations." At its heart, the Proposal was drafted to incent the Company to increase payouts to its Company retirees.                       By expressing dissatisfaction with an existing accounting rule promulgated by the Financial Accounting Standards Board ("FASB"), known as SFAS 87, the Company's reporting of pension plan profits thereunder, and the manner in which the Company's executive incentive compensation is calculated, the Proponent ultimately hopes to have IBM "using pension fund surplus as intended by the trust--to provide for retirees." The Proponent expects for the Company to be better able to do so by: (i) determining future executive incentive compensation by reference to profit calculated by excluding pension plan surplus; (ii) providing what the Proponent describes as "transparent financial reporting" of profit from company operations; and (iii) using the pension plan surplus to increase Company retirement benefits for inflation. Aside from any of the other deficiencies and inaccuracies set forth in the Proposal, as outlined below, and irrespective of any other legal or factual shortcomings associated therewith, the Proposal should be omitted in its entirety because it relates to the ordinary business operations of the Company.

 

A.    THE DISCLOSURE BY THE COMPANY OF FINANCIAL INFORMATION IN ITS PERIODIC REPORTS, AND THE COMPLIANCE BY THE COMPANY WITH APPLICABLE FINANCIAL ACCOUNTING STANDARDS IN EFFECTING SUCH DISCLOSURE, BOTH FALL WITHIN THE COMPANY’S ORDINARY BUSINESS OPERATIONS UNDER RULE 14a-8(i)(7).

 

Rule 14a-8(i)(7) provides that a Company may omit a stockholder proposal from its proxy materials if the proposal "deals with a matter relating to the company's ordinary business operations." The Commission has expressed two central considerations underlying the ordinary business exclusion. See Release 34-40018 (63 Federal Register No 102, May 28, i998 at p 29,106). The first underlying consideration expressed by the Commission is that "[c]ertain tasks are so fundamental to management's ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to shareholder oversight." (id. at 29,108) "The second consideration involves the degree to which the proposal seeks to micro-manage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment." The Company believes that the instant Proposal implicates both of the underlying concerns of the ordinary business rule and is thus excludable. In particular, the Company believes the instant Proposal may be omitted from the Company's 2001 Proxy Materials pursuant to Rule 14a-8(i)(7) because the portion of the Proposal seeking "transparent financial reporting of profit from real company operations" can, to the extent it is understood[2], be read to require the Company to effectuate disclosures which differ from the disclosures required by existing laws, regulations and applicable financial accounting standards. To the extent the Proposal seeks for the Company to provide "transparent financial reporting of profit from real company operations" and takes issue with the Company's compliance with SFAS 87, the omission of the instant Proposal under current Rule 14a-8(i)(7) is both warranted and fully consistent with the Staff’s well-established position, as expressed in a variety of recent no-action letters which have permitted registrants to omit similar proposals seeking additional or variant disclosure of information, both in the registrants' periodic reports and elsewhere.

 

The calculation and disclosure of company pension plan profits and losses are expressly governed by SFAS 87. SFAS 87, entitled "Employers' Accounting for Pensions," is a highly detailed (11,742 word) standard, promulgated by the Financial Accounting Standards Board ("FASB") in 1985. SFAS 87 requires a uniform method of accounting for pensions that companies with defined benefit pension plans, like IBM, must follow. SFAS 132, entitled "Employers' Disclosures About Pensions and Other Postretirement Benefits,"

 

amended and superseded the disclosure requirements of SFAS 87 for financial statements issued after December 15, 1997. IBM necessarily follows these financial accounting standards in preparing its periodic disclosures. Aside from the fact that the portion of the Proposal seeking "transparent reporting of profit from real company operations" is vague and subject to a variety of interpretations under Rule 14a-8(i)(3) and 14a-9 (see discussion in Point II, infra), the Company already accounts for its pension plan and makes appropriate disclosures about its profits in a manner consistent with SFAS 87, as amended by SFAS 132, in our periodic reports; in particular, the applicable disclosures are set forth both in our Annual and Quarterly reports on file with the Securities and Exchange Commission. See, for example the 1999 IBM Annual Report at Footnote W, entitled Retirement Plans, at pp. 86-88, the Company's Form 10-Q for the quarter ended June 30, 2000 at p. 16, and the Company's Form 10-Q for the quarter ended September 30, 2000 at p. 16. These disclosures are all effected as a part of the Company's ordinary business operations.

 

In Johnson Controls, Inc. (Oct. 26, 1999) ("Johnson Controls"), the SEC concurred with the exclusion of a proposal seeking for the registrant to ensure that it disclosed in its financial statements "goodwill-net" and identified the so-called "true value" of shareholders' equity so long as goodwill was high relative to shareholders' equity. There, the registrant argued that its accounting for "goodwill" was in full compliance with US GAAP, that their financial statements were audited by PricewaterhouseCoopers, and that such firm's opinion stated that its financial statements presented fairly its financial position in conformity with GAAP. The staff, in addressing the issue of whether proposals requesting additional disclosures in Commission-prescribed documents should be excluded under Rule 14a-8(i)(7), framed the question as whether the subject matter of the additional disclosure involves a matter of ordinary business; when it does, the proposal may be excluded under Rule 14a-8(i)(7).

 

More importantly, this year, the very question of whether pension plan disclosures subject to SFAS 87 is a matter of ordinary business was specifically ruled upon by the staff in The Boeing Company (March 6, 2000). There, the staff, following the Johnson Controls analysis, determined that the registrant could exclude, as ordinary business under Rule 14a-8(i)(7), a very similar proposal that sought for that company to "take the necessary steps to ensure complete and clear disclosure of the inclusion, listing and use of employee pension fund trust assets and/or surplus in all current and future earnings statements and in past earnings statements since January 1, 1990." As with the instant Proponent, the stockholder in Boeing was also dissatisfied with the disclosure made by Boeing on its earnings, and he claimed that Boeing was using pension fund assets to hide shortfalls in operating income. The stockholder in Boeing also took specific issue with the financial accounting disclosure requirements under SFAS 87, and, like the instant Proposal, which seeks "transparent financial reporting of profit," sought "complete and clear disclosure" of assets and/or the pension plan surplus. In Boeing, the registrant argued, inter alia, that the company effected its own pension plan disclosures in accordance with SFAS 87, and that its compliance with SFAS 87 was a matter of ordinary business. The staff concurred with the company's position in Boeing that the proposal could be excluded because it related to Boeing's ordinary business operations (i.e. choice of accounting methods). The same result should apply here.

 

As in Boeing, that portion of the instant Proposal relating to IBM's adherence to applicable accounting standards (SFAS 87 and SFAS 132) should be similarly viewed here as the Company's use of a specific accounting method and the associated disclosures required by this Company's utilization of such standard financial accounting method--a matter falling within the Company's ordinary business operations. IBM accounts for its defined benefit pension plan strictly in accordance with the applicable financial accounting standards (i.e. SFAS 87 and SFAS 132), and this accounting is fully in compliance with US GAAP. Furthermore, and contrary to the Proponent's misleading suggestions, there is nothing questionable about our accounting practices nor the disclosures we make. Furthermore, the Audit Committee of our Board of Directors specifically oversees and monitors the participation of our Company's management and the auditors in the financial reporting process. Each of the four members of our Board's Audit Committee are outside directors, who are neither officers nor employees of IBM, and are free of any relationship that would interfere with their exercise of independent judgment as members of this committee. This information is all described in our Company's proxy materials.

 

Further, as in Johnson Controls, supra, our Company's annual financial statements are audited by PricewaterhouseCoopers LLP, and that firm's opinion states that IBM's financial statements present fairly its financial position in conformity with GAAP. Therefore, we believe it is clear that the Proposal may be omitted pursuant to Rule 14a-8(i)(7) because it relates to the conduct of our ordinary business operations. See also Traveler's Group, Inc. (Mar. 13, 1998) (proposal requesting the company's board to adopt certain rules for accounting for derivatives was excludable as a matter of ordinary business); LTV Corp. (Nov. 25, 1998) (proposal requiring a new disclosure in a note to the financial statements excluded as ordinary business). The instant Proposal questioning IBM's pension plan disclosure relates to the same type of ordinary business matters as the proposals in Boeing, Johnson Controls, Traveler's and LTV Corp. - the choice of accounting standards by a registrant and the disclosures required through the utilization of such standards. Moreover, since the subject matter of the instant Proposal--our accounting for pensions under the applicable FASB standards--was specifically found earlier this year to involve a matter of ordinary business, and was therefore excluded in Boeing, it should similarly be so found and omitted here under Rule 14a-S(i)(7).

 

In addition to the staff’s ruling in Boeing, the instant Proposal is also functionally identical to another one which was excluded earlier this year as "ordinary business" under Rule 14a-8(i)(7) by the General Electric Company ("GE"). There, a stockholder challenged both the company's pension plan accounting and the executive compensation calculations made by the registrant with respect to the income generated from the pension plan. See General Electric Company (February 10, 2000). Specifically, the stockholder asked that GE (i) discontinue an accounting technique[3], (ii) not use funds from the General Electric Pension Trust to determine executive compensation, and (iii) use the funds from the trust as intended and voted on by prior shareholders.          In its no-action letter request, the registrant specifically argued that the proposal expressly related to the accounting principle used by GE for reporting the financial effect of the Company's principal pension plans on operations. Following the Johnson Controls analysis, GE went on to note that such effect was reported in its annual report; that its independent auditor expressed its opinion that this accounting was in conformity with generally accepted accounting principles; and that its financial statements presented fairly, in all material respects, the financial position and results of operations of GE. The instant Proposal seeks virtually the same relief as the one filed with, and excluded by, GE this year. Since there is no substantive difference between the GE and IBM proposals, the result here should be the same. In GE, the staff concurred with the company's request to exclude such earlier proposal as a matter falling within the ordinary business operations of the company under Rule 14a-8(i)(7). In so ruling, the staff noted "in particular that a portion of the proposal relates to ordinary business operations (i.e., choice of accounting methods)." It is therefore axiomatic, given the recent staff ruling in GE, that the same result should apply here to exclude the instant Proposal.

 

Moreover, these recent staff rulings in Boeing and GE involving SFAS 87 are also wholly consistent with other recent staff determinations that stockholder proposals dealing with accounting methods and the presentation of financial statements in reports to stockholders could rightfully be omitted from a company's proxy materials because they involve ordinary business matters. See Household International, Inc. (March 13, 2000)(proposal requesting establishment of a committee of outside directors to develop and enforce policies to ensure "that accounting methods and financial statements adequately reflect the risks of subprime lending and ... employees do not engage in predatory lending practices" and report to shareholders excluded under rule 14a-8(i)(7), as relating its ordinary business practices (i.e., accounting methods and the presentation of financial statements in reports to shareholders))." Moreover, the Commission has also concurred in the exclusion of proposals seeking additional disclosures or other issues associated with a registrant's pension fund.[4]

 

In sum, since employers' accounting for pensions under these applicable FASB standards has already been determined to be a matter of ordinary business under Boeing and General Electric, and since a portion of the instant Proposal deals directly with the same disclosures associated with our own Company's pension fund under the applicable FASB standards, the Proposal necessarily relates to a matter of ordinary business, and should be omitted pursuant to 14a-8(i)(7).

 

B.    SEEKING AN INCREASE IN THE PENSIONS OF IBM RETIREES RELATES TO THE COMPANY’S ORDINARY BUSINESS OPERATIONS.

 

The third part of the Proposal also raises a matter of "ordinary business." This part of the Proposal looks to the current surplus in the IBM pension fund, and seeks to have the Company use the surplus to increase pension payouts to IBM retirees (including among others, the Proponent and many of his co-filers). In addition to being a separate issue for the Proponent and other putatively affected retiree co-filers under Rule 14a-8(i)(4), the Proposal is clearly excludable as to all filers under Rule 14a-8(i)(7). The third part of the instant Proposal can be found specifically in the last two paragraphs of the submission. This part of the Proposal provides that: "IBM could he using pension fund surplus as intended by the trust--to provide for retirees. Inflation has eaten over 33% of retirement pay since the last adjustment in 1990..." [and] "part of pension fund surplus is better used to adjust retiree pay for inflation instead of being hoarded to boost the report of profit based on FAS 87 and to boost executive compensation." Aside from the host of factual inaccuracies described in connection with this portion of the Proposal relating to the pension plan and the Company's reporting of profits, the Proposal's suggestion that the Company utilize the pension plan surplus "to adjust retiree pay for inflation" clearly implicates no more than an excludable ordinary business matter under Rule 14a-8(i)(7). The Commission has long recognized that proposals concerning payouts for a company's retirees relate to its ordinary business operations, and the Commission staff has consistently concurred in the omission--both under Rule 14a-8(i)(7), and its predecessor, Rule 14a-8(c)(7)--of a variety of proposals regarding employee retirement, health, medical and other welfare benefits. See International Business Machines Corporation (December 30, 1999)(proposal to adjust defined benefit pension plan to mitigate the impact of cost of living for retired employees); Bell Atlantic Corporation (October 18, 1999) (proposal to increase retirement benefits for retired management employees); Burlington Industries, Inc. (October i8, 1999)(proposal to adopt new retiree health insurance plan offering HMOs and covering retirees that were forced out and to reinstate dental benefits for certain retirees); Lucent Technologies, Inc. (October 4, 1999)(proposal to increase "vested pension" benefits); See also General Electric Company (January 28, 1997)(proposal to adjust the pension of retirees to reflect increase in inflation); Cincinatti Financial Corporation (February 20, 1996)(proposal to amend retirement plan to permit certain participants to roll out funds into investment instrument of their own choosing); International Business Machines Corporation (December 28, 1995)(proposal to amend IBM's Tax Deferred Savings Plan and Retirement Plan to ensure that certain employees within a specified service window were treated similarly to other employees); Allied Signal Inc. (November 22, 1995)(retirement benefits); American Telephone and Telegraph Company (December 15, 1992)(pension and medical benefits). Since this third portion of the instant Proposal directly addresses the Company's ordinary business operations, the entire Proposal should be excluded under Rule 14a-8(i)(7). See General Electric Company (February 10, 2000), supra.

 

C.    WHERE PART OF A PROPOSAL IMPLICATES ORDINARY BUSINESS MATTERS, THE ENTIRE PROPOSAL MUST BE OMITTED UNDER RULE 14a-8(i)(7).

 

The fact that one portion of this Proposal addresses executive incentive compensation calculations simply cannot carry the day and avoid the exclusion of the entire Proposal under Rule 14a-8(i)(7). See, e.g. General Electric Company (February 10, 2000) supra. The GE ruling, which was already noted above in connection with its SFAS 87 "ordinary business" component, also raised the very same "executive compensation" matters as the instant Proposal. The exclusion of the GE proposal was based upon long-standing staff precedent that when any portion of a proposal implicates ordinary business matters, the entire proposal must be omitted under Rule 14a-8(i)(7).            The staff has regularly and expressly permitted the exclusion of a variety of proposals implicating both corporate governance as well as social or other substantial policy issues, where only a portion of the relief sought addressed ordinary business matters. In Wal-Mart Stores, Inc. (March 15, 1999), for example, a proposal sought for a report to be prepared on the company's actions to ensure it did not purchase from suppliers who manufactured items using forced labor, convict labor, child labor or who failed to comply with laws protecting their employees' wages, benefits, working conditions, freedom of association and other rights. The staff noted that a paragraph of the proposal related to the registrant's policies to implement wage adjustments to ensure adequate purchasing power and a sustainable living wage. Given this, the staff determined that the entire proposal could be excluded under Rule 14a-8(i)(7), reiterating the Division's practice not to permit revisions of a proposal under Rule 14a-8(i)(7). See also The Warnaco Group, Inc. (March 21, 1999)(to same effect); Kmart Corporation (March 12, 1999)(to same effect); Z-Seven Fund, Inc. (November 3, 1999) (proposal containing corporate governance recommendations as well as ordinary business recommendations was permitted to be excluded in its entirety, with the staff reiterating its position that it is not their practice to permit revisions to shareholder proposals under the ordinary business exception); M&F Worldwide Corp. (March 29, 2000) (proposal to implement actions designed to enhance shareholder value, including but not limited to repurchase of shares, cash dividends, sale of assets and curtailment of nonoperating activities was properly determined by the staff to be excludable in its entirety under Rule 14a-8(i)(7), since the proposal related in part to non-extraordinary transactions).

 

Thus, even assuming, arguendo, that the first part of the instant Proposal--seeking to have the Company alter the way in which it calculates executive incentive compensation--falls outside the ambit of the ordinary business exception, this makes absolutely no difference in the legal analysis of the entire Proposal's excludability under Rule 14a-S(i)(7). The Proposal must be excluded under the ordinary business exception because each of the other inextricably interwoven parts of the Proposal noted herein--including both the Proponent's "transparent financial reporting" request in connection with Company's utilization of SFAS 87 and 132, and the Proponent's second suggestion that part of the Company's pension fund surplus be used to adjust retiree pay for inflation--both implicate well-established ordinary business matters. See General Electric Co., supra.

 

Other recent letters have reached the same conclusion on proposals addressing executive compensation and other matters. In this connection, it is also noteworthy that the staff, in Associated Estates Realty Corporation (March 23, 2000), recently concluded that a proposal which made recommendations concerning the compensation of the chief executive officer and the institution of a business plan which would include disposition of non-core businesses and assets could also be excluded in its entirety because it related in part to ordinary business operations. Similarly, in E*Trade Group, Inc. (October 31, 2000), the staff very recently concurred in the omission of a proposal under the ordinary business exclusion which recommended a number of potential mechanisms for increasing shareholder value, including: (a) the sale of the company; (b) changes to the executive compensation plan to more accurately reflect company performance and tie compensation to that performance; (c) reduction of staff to improve earnings performance and (d) dismissal and replacement of executive officers. The staff concluded that since two out of four of the mechanisms suggested by the proponent implicated ordinary business matters, the entire proposal should be omitted. The staff again reiterated in E*Trade Group, Inc. that it was not the Division's practice to permit revisions under rule 14a-8(i)(7). The same conclusion should be reached here.

 

In the instant case, at least two of the three portions of the Proposal directly address ordinary business matters. As has already been illustrated above, providing "transparent financial reporting of profit from real company operations" addresses an ordinary business matter. In addition, using the pension plan surplus to adjust retiree pay for inflation is also a matter of ordinary business. Hence, even if the staff were to view a portion of the instant Proposal as raising a matter outside the scope of ordinary business, since these other items sought specifically under the Proposal relate to ordinary business matters, the entire proposal should be excluded under Rule 14a-8(i)(7). For all of these reasons, the Company hereby reasserts that the Proposal relates to the conduct of the Company's ordinary business operations, and should be excluded in its entirety from the Company's 2001 proxy materials pursuant to Rule 14a-8(i)(7). We therefore respectfully request that no enforcement action be recommended to the Commission if the Proposal is so excluded under Rule i4a-8(i)(7).

 

II.            THE PROPOSAL SHOULD BE OMITTED FROM THE COMPANY'S PROXY MATERIAIS UNDER RULES 14a-S(i)(3) AND 14a-9, AS VAGUE AND INDEFINITE AS WELL AS FALSE AND MISLEADING TO THE COMPANY'S SHAREHOLDERS AS WELL AS THE COMPANY.

 

The Company firmly believes, as a matter of law, that Rule 14a-8(i)(7) provides a fully adequate basis for the exclusion of the entire Proposal. In addition, however, Rule 14a-8(i)(3) provides another equally adequate basis for its exclusion in this case. Rule 14a-8(i)(3) permits the omission of proposals and associated supporting statements that are contrary to the Commission's proxy rules, including Rule 14a-9, which in turn, prohibits false or misleading statements in proxy materials. Rule 14a-9(a) provides that no proxy solicitation shall be made containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading. Note (b) to Rule 14a-9 goes on to provide that material which directly or indirectly impugns character, integrity or personal reputation, or directly or indirectly makes charges concerning improper, illegal or immoral conduct or associations, without factual foundation, may also be misleading within the meaning of such Rule.

 

Following our review of the Proposal, the Company believes that the instant Proposal should be omitted pursuant to Rules 14a-9 and 14a-8(i)(3) because portions of such Proposal are false and misleading, and others are so inherently vague and indefinite as to be subject to a host of varying interpretations by both shareholders and the Company.

 

The instant Proposal starts out by seeking first that the executive incentive compensation be determined by profit from real company operations. What does profit from "real company" operations mean? What is real? This term is not defined, nor is it in any way clear. Would income from patent licensing qualify as real? How about income from litigation settlements, or income from sales of equity investments or other assets? Why should the Company be made to guess what "real" operations means? If the Company finds this confusing, certainly IBM stockholders at large should not have to interpret this term.

 

This first part of the Proposal also goes on to state that the Company not include accounting rule profit from pension plan surplus. How would the Proponent have this concept implemented in years where there was no pension plan surplus; or in years where there was a deficit? Would the Company be able to deduct losses from pension plan deficits in years in which the plan suffered a deficit? Certainly, stockholders would properly like to know such information up front. Indeed, this first part of the Proposal raises far more questions than it answers, and the subsequent discussion provides absolutely nothing to explain either the intent or the proper application of this part of the Proposal.

 

Confusion continues in the Proponent's second request for IBM to provide "transparent" financial reporting from real company operations. What does "transparent" mean? Is the Proponent suggesting we flout or otherwise abandon compliance with SFAS 87 and SFAS 132, detailed financial accounting standards, in favor of something which is wholly undefined? What may be "transparent" to one person may not be to another. This is particularly so when dealing with complex matters of pension plan accounting. Indeed, the very purpose of following detailed Statements of Financial Accounting Standards promulgated by the Financial Accounting Standards Board is to adhere to a standard system of reporting. Certainly compliance with these established standards should not be jettisoned in favor of a proposal, devoid of explanation, seeking transparency. The Proposal addresses none of these questions. Rule 14a-9 and Rule 14a-8(i)(3) make clear that stockholders should not have to ponder these and other questions in reviewing any proxy proposal.

 

In Joseph Schlitz Brewing Company (March 21, 1977), the staff was asked to examine a resolution seeking for the registrant to adopt a corporate policy that the registrant not allow its advertisements to appear in television programs containing excessive and gratuitous violence. The staff concurred that the proposal could be excluded under former Rule 14a-8(c)(3). After recognizing that the determination of what constitutes "excessive and gratuitous violence" is a highly subjective matter, the staff wrote that

 

such a determination, and any resultant action by the Company would have to be made without guidance from the proposal, and consequently, in possible contravention of the intentions of the shareholders who voted on the proposal. That is, the action requested by the proposal is so inherently vague and indefinite that the shareholders voting on the proposal would not be able to determine with any reasonable certainty exactly what actions or measures the Company would take in the event the proposal was implemented. Consequently, we believe that the proposal may be misleading, in that any action ultimately taken by the Company upon the implementation of the proposal could be quite different from the type of action envisioned by the shareholders at the time their votes were cast.

 

The Schlitz ruling rings particularly true here. Confusion also abounds throughout the Proponent's description of SFAS 87. The entire second paragraph following the Resolved section of the Proposal is false and misleading and should be omitted. The Proponent starts off with a statement falsely intimating that IBM has the discretion to manipulate its profits under SFAS 87. What the Proponent is perhaps unaware of, or otherwise intentionally forgets to mention in connection with the proper application of SFAS 87 and SFAS 132, is that such standard also requires IBM to expense losses in value of these same pension assets, and those expenses also flow down to the same bottom line. By stating that IBM "boosted its 1999 profit" with SFAS 87, the Proponent is intimating, falsely, that IBM is acting in a manipulative manner. Nothing can be further from the truth. IBM is not "boosting" anything. IBM is complying with the terms of a well established financial accounting and reporting standard. IBM is not acting in derogation of any such standard. It is an elementary principle of basic bookkeeping that to the extent that profits are realized, they must be properly and timely reported, and that is what IBM does. Moreover, the use of the term "vapor profit" in the Proposal is also vague, indefinite and inflammatory, and should be omitted. We reject the Proponent's attempt to use this term to factually characterize pension plan profits, as such term appears nowhere in any accepted accounting literature.

 

Furthermore, the Proponent's quote from Business Week (4/24/00), stating that "IBM was 'padding the profits'" in the third paragraph following the items in the "Resolved" section, is clearly misleading on its face and should be omitted. The article in question dealt with corporate pension plan profits and their effect on income, but nowhere in the text of the article was IBM singularly called out for any wrongdoing, as suggested here. In fact, IBM was found only in one place--in a table listing l0 corporations with pension plan income. Moreover, it is ironic that the information from this table was likely gleaned by the author from a reading of each corporation's financial statements, which were prepared in accordance with SFAS 87, SFAS 132, and GAAP, which the Proponent otherwise complains about.

 

The Proponent goes on to misquote a snippet from a New York Times article (6/4/00) in a manner which is false and misleading. In addition to the fact that the text of the snippet was selectively misquoted by the Proponent, the actual quote was attributable not to the New York Times, as stated by the Proponent, but rather to a consultant. Hence, the entire snippet should be omitted as both false and misleading.

 

The entire next paragraph, beginning with the confusing and meaningless term "vapor profit" should also be omitted. In that paragraph, the Proponent also baldly asserts, without any foundation whatsoever, that the Company was involved in "other manipulations" in order to reach a profit target. Not only is this allegation wholly unsubstantiated, it borders on the libelous. See Note (b) to Rule 14a-9, supra. As we noted earlier, the Company assiduously complies with all applicable accounting standards in the preparation of its financial statements, such financial statements are reviewed by our Board's independent Audit Committee, and are audited annually by PricewaterhouseCoopers LLP, our Company's independent auditors. In this connection, proponent is falsely implying some sort of illicit activity in suggesting that the company's five top executives "took $15 million cash plus $8 million in stock-equivalent as incentive pay." In addition to the fact that the Proponent does not explain the source of these figures, our executives lawfully earned the compensation reported in the proxy statement. For these reasons, this entire paragraph should be omitted under Rule 14a-8(i)(3) and Rule 14a-9.

 

The next paragraph suffers from the same infirmities and irresponsible hyperbole. It is wholly false and misleading to suggest that the top executives are spending time on "self-serving manipulations." The Proponent erroneously asserts that the top executives both have a hand in manipulating the pension plan investments (which would give rise to income), and that such same executives determine the basis for their own incentive compensation arrangements. In fact, both of these statements are utterly false and misleading. Pension fund investments are effected on a daily basis by independent investment managers, who act as fiduciaries strictly in accordance with the terms of the Employment Retirement Income Security Act of 1974 (ERISA). Further, compensation for the Company's senior executives is determined by the Executive Compensation and Management Resources Committee of the Board of Directors. In this connection, the Company clearly provides in its proxy statement that: "[t]he Executive Compensation and Management Resources Committee has responsibility for administering and approving all elements of compensation for elected corporate officers and certain other senior management positions..... Members of this committee are outside directors who are not officers or employees of IBM or its subsidiaries and are not eligible to participate in any of the plans or programs that the committee administers. In the opinion of the Board, these directors are independent of management and free of any relationship that would interfere with their exercise of independent judgment as members of this committee." (IBM 2000 Proxy Statement at page 9) Given all of the foregoing, the Proponent's entire paragraph should be omitted.

 

For the same reasons, the Proposal's penultimate paragraph is also defective on its face. It states falsely that "IBM executives have a self-serving purpose contrary to the interest of retirees, stockholders and the IBM company." In addition to being untrue, there is no basis for the Proponent to suggest, again, that the Company's top executives are guilty of manipulating the pension plan to their own advantage. As explained above, these executives do not determine the specific investments made by the pension plan nor do they set the terms of their own incentive compensation. The paragraph should therefore be omitted in its entirety.

 

The final paragraph, which restates the three interrelated pieces of the Proposal, is itself false and misleading to the extent it again falsely suggests untoward actions by the Company's executives to "boost" profit under SFAS 87, as well as their own compensation. Given all of its multiple infirmities, the Company submits, after having studied the instant Proposal and each of its component pieces carefully, that it is both vague and indefinite as well as woefully false and misleading. Clearly, neither the IBM stockholders nor the Company should have to wonder how this Proposal ought to be interpreted, let alone implemented. Over the years, there have been many situations in which the staff has granted no-action relief to registrants with proposals which were similarly infirm. In this connection, the Commission has found that proposals may be excluded where they are

 

so inherently vague and indefinite that neither the shareholders voting on the proposal, nor the Company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires. See no-action letter re Philadelphia Electric Company (July 30, 1992).

 

The staff’ s response above applies with full force to the instant Proposal. In Wendy's International, Incorporated (February 6, 1990), the staff excluded under former Rule 14a-8(c)(3) a proposal seeking to "eliminate all anti-takeover measures previously adopted and refrain from adopting any in the future." The staff noted that the proposal, if implemented, would require the Company to determine what constitutes an anti-takeover measure, and that such a determination would have to be made without guidance from the proposal, and would be subject to differing interpretations by shareholders voting on the proposal and the Company if the proposal were implemented. The staff therefore determined that the Proposal could be misleading because any action ultimately taken by the company upon implementation could be significantly different from the actions envisioned by shareholders voting on the Proposal. See also Comshare Incorporated (August 23, 2000)(second proposal asking for Comshare not to "discriminat[e] among directors based upon when or how they were elected" and "try to avoid defining change of control based upon officers or directors as of some fixed date," properly excluded by registrant

as vague and indefinite).

 

The courts have supported such a view, quoting the Commission's rationale:

 

it appears to us that the proposal, as drafted and submitted to the company, is so vague and indefinite as to make it impossible for either the board of directors or the stockholders at large to comprehend precisely what the proposal would entail. Dyer v. Securities and Exchange Commission, 287 F. 2d 773, 781 (8th Cir. 1961).

 

In the case of NYC Employees’ Retirement System v. Brunswick Corp., 789 F. Supp. 144, 146 (S.D.N.Y. 1992), the court stated:

 

the Proposal as drafted lacks the clarity required of a proper shareholder proposal. Shareholders are entitled to know precisely the breadth of the proposal on which they are asked to vote.

 

In Eastman Kodak Company (February 8, 1991), the registrant was also faced with a proposal which, like the instant one, was hopelessly vague and indefinite. There, the proponent urged that the registrant not provide or make available its products, services, or other resources to any government or entity doing business with or in any country which demonstrated its anti-Americanism and threat to U.S. national security by voting in the United Nations more than 80 percent of the time during the last five years against the position of the United States. Upon review of that proposal, the staff concurred that it simply could not stand, noting specifically "the absence of any specificity as to what constitutes the Company making its resources 'available' to a prohibited entity or as to what constitutes an 'entity doing business with' an anti-American company."

 

Given the fact that the instant Proposal suffers from the very same infirmities noted in the above staff letters and the cases cited above, the Company hereby submits that the instant Proposal should also be omitted under Rules 14a-8(i)(3) and 14a-9. The Company therefore respectfully requests that no enforcement action be recommended to the Commission if the Company excludes the instant proposal on the basis of Rules 14a-8(i)(3) and 14a-9.

 

In summary, for the reasons and on the basis of the authorities cited above, IBM respectfully requests your advice that the Division will not recommend any enforcement action to the Commission if the Proposal is omitted from IBM's proxy materials for the 2001 Annual Meeting. We are sending the Proponent and each co-filer a copy of this submission, thus advising them of our intent to exclude the Proposal from the proxy materials for the 2001 Annual Meeting. We respectfully request to be copied on any response that may be made to the Commission. If you have any questions relating to this submission, please do not hesitate to contact the undersigned at (914) 499-6148. Thank You for your attention and interest in this matter.

 

Very truly yours,

Stuart S. Moskowitz

Senior Counsel

 

with copies to: Mr. Donald S. Parry

                1178 Wood Duck Hollow

                Jacksonville, FL 32259-2932

                   and

                all co-filers to the Proposal


[1] Nearly all of the 162 timely co-filers used a third party Internet website to send a standard form e-mail to the Company. The Internet site, sponsored by Alliance@IBM/The Communications Workers of America ("CWA"), can be found at http://www.allianceibm.org/resolution1.htm Erroneous deadline information was posted by the CWA on its website, and 33 additional persons co-filed after the Company's November 13, 2000 deadline. Such additional co-filers are independently excludable as untimely under Rule 14a-8(e). Copies of this letter are being sent to all co-filers.

[2]The Company also believes this portion of the Proposal is false and misleading and independently excludable under Rules 14a-8(i)(3) and 14a-9. See Argument II, infra.

 

[3]The accounting "technique" challenged by the GE proponent, like here, also related to that company's adherence to SFAS 87, the accounting principle used to report the financial effect of GE's principal pension plans on operations. See Note 5 to 1998 GE Annual Report at page 51-52, which is available both on EDGAR as well as on the GE website at http://www.ge.com/investor/annuals.htm

 

[4]See discussion I(B) and I(C), infra. The instant situation is also similar to other pre-Johnson Controls staff letters where proposals were excluded as ordinary business when various proponents sought to have registrants expand upon other specific items of interest to them in their periodic reports. As here, other proposals which also dealt with the format and content of disclosure in the Company's periodic reports, and sought information not required by applicable laws or regulations, have been omitted. In these earlier letters, the staff concurred that the supplemental disclosures requested by the proponents related to the conduct of the ordinary business operations of the registrants and were therefore excluded on such basis. See General Motors Corporation (February 28, 1997)(omission of a proposal asking directors to disclose taxes paid and collected by the registrant in the annual report); WPS Resources Corp. (January 23, 1997) (omission of a proposal requesting supplemental disclosure of the costs of registrant's quality program); E. I. duPont de Nernours and Company (January 31, 1996)(staff concurred in omission of proposal under former rule 14a-8(c)(7) which would have required registrant to disclose in its annual report certain specific costs; including: (1) legal costs, including those relating to product and environmental liability, (2) costs for employee medical benefits, and (3) the costs of compliance with environmental regulations); BankAmerica Corporation (February 8, 1996)(proposal to provide detailed disclosure on an annual and quarterly basis about the bank's "reserve accounts" excluded as part of the registrant's ordinary business operations); American Stores Company (April 7, 1992)(proposal to have registrant provide income and balance sheet information for each of its operating subsidiaries excluded as part of the reciistrant's ordinarv business operations).