U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at Harvard University, Kennedy School of Government


Commissioner Roel C. Campos

U.S. Securities and Exchange Commission

Cambridge, Massachussetts
May 9, 2006

I. Introduction.

Good afternoon everyone, and thank you, Dean Ellwood for that kind introduction. I also wish to thank the Kennedy School of Government and Professors Cary Coglianese and Michael Michael for the invitation to be here. It's absolutely great to be back here at Harvard and to meet with such an impressive and diverse group. Obviously, we at the Commission are extremely interested in the subject of corporate governance and the relationships among company management, the board of directors and shareholders, and so I know I'll find today's discussion interesting.

But before I start, I must issue the standard SEC disclaimer that this speech expresses my personal views, and does not necessarily reflect those of the Commission, other Commissioners or members of the Staff. With that said, let's move on to business.

I thought that I would focus today on a few topics that concern the relationships among the various constituents of a company, although, given the shortness of time, I can't go into great depth in many of these areas,. These topics are: (i) the new corporate relationships imposed or fostered by the Sarbanes-Oxley Act of 2002; (ii) the new shareholder activism; (iii) shareholder access to company proxy materials for the purpose of nominating director candidates; and (iv) executive compensation disclosure, which includes what the Commission is doing on this front and what shareholders are doing directly.

Of course, I understand that there will be time for questions, and at that point perhaps we can discuss items such as our hedge fund registration rules, internal controls under Section 404 of the Sarbanes-Oxley Act, or any other topic that you may be interested in.

Before I jump into these topics, let me tell you a story I recently heard: A man is in a hospital, awaiting a heart transplant. Before the surgery, he speaks to his doctor, who informs him that he actually has two choices. The doctor says, "Well, you have a couple of different hearts to select from here, although I think the best choice is pretty clear. The first option is a heart that belonged to a 22-year-old competitive swimmer. Needless to say, the swimmer was in great shape, but tragically, she died young of complications that were completely unrelated to her heart. The second option is a heart that belonged to a 55-year-old attorney at the Securities and Exchange Commission. He was somewhat overweight, didn't exercise much, and smoked all of his life. As I said, the choice seems clear to me, but it's your call." The patient thought for a moment and said, "Thanks for giving me the option. I think I'll take the heart that belonged to the SEC attorney." After getting over her initial shock, the doctor responded, "Why on earth would you pick that heart? It's been through a lifetime of hard living." To which the patient responded, "Well, I've been in the securities business my entire life. Everybody knows that SEC attorneys never use their hearts."

II. New Relationships in Light of the Sarbanes-Oxley Act of 2002.

A. The Independent Audit Committee.

Probably the most significant change imposed by the Sarbanes-Oxley Act relating to the board/management structure was found in Section 301, which amended the Exchange Act and explicitly mandated that the audit committee - which must be comprised solely of independent directors - be in charge of the relationship with the outside auditor. It removed the prior problematic relationship in which the outside auditor was hired by management and the CFO, which also meant that the auditor essentially worked for and reported to management, despite its legal duties to the board and the corporate entity. In addition, Section 301 provided that the audit committee must have the authority to hire independent counsel or other advisers, separate from the auditors, and it required the audit committee to have a grievance procedure in place to resolve any concerns about questionable accounting or auditing matters. Further, Section 407 of SOX requires disclosure regarding whether the audit committee has at least one member who qualifies as an audit committee financial expert. Finally, the audit committee is also responsible for assessing the independence of the auditor and for ensuring that the auditor does not perform work for the company that jeopardizes the auditor's independence.

In short, the audit committee, and therefore the overall board, is now required to maintain the integrity of the audit process, which of course ultimately leads to the preparation of the financial statements upon which investors rely. It is hard to overstate the significance of the audit committee process under Section 301 and the other sections of the Sarbanes-Oxley Act. SOX has significantly and permanently changed the dynamics of the relationship between the board (especially the audit committee) and management, and it has resolved many potential conflicts with management. To my knowledge, based on anecdotal evidence, this relationship seems to be working well.

B. Majority Board Independence; Independent Compensation and Nominating Committees.

A second area of change that has occurred in the wake of the Sarbanes-Oxley Act is the increased role of independent directors generally. In this regard, SOX dealt only with the independence of the directors on the audit committee. However, in response to pressure from the Commission and in light of the changed regulatory climate, the self-regulatory organizations (NYSE and Nasdaq) produced listing standards that ultimately required: (i) an issuer to have a board comprised of a majority of independent directors, and (ii) that two vital committees - the nominating committee and the compensation committee - be comprised solely of independent directors (with limited exceptions). The SROs defined "independent" primarily by listing specific instances in which directors would not be considered independent, and these are principally related to whether directors (or certain family members) had received compensation through a financial relationship with the issuer. Of course, the goal of having independent directors is to allow directors to function essentially free of financial conflicts and overdependence on management.

What is clear, however, is that meeting the definition of "independent" does not mean that directors will not be beholden to management in some way. Obviously, a lifelong friend of the CEO could meet the technical definition of "independent." Public company boards continue, it seems to me, to be a very exclusive club to which directors are essentially invited to join. It is basic human nature to be grateful for the invitation, and the desire not to be viewed as a troublemaker is quite strong. Certainly, management and especially the CEO continue to have a large role in selecting or at least approving board members. Separately, it must be said that, to date, compensation committees have not been successful in stopping the runaway compensation paid to CEOs. More on this later.

The relationship between directors and shareholders is increasingly important. It used to be said that directors met and communicated with all parties except shareholders. Now, however, SEC rules have encouraged better communications between directors and shareholders, including specifying how shareholders can present nominees to the nominating committee. Some companies have started using websites and email and/or have an on-call system to answer questions. Other good practices include meeting in executive sessions without management, and having an independent chairman of the board or lead outside director. The challenge to both directors and management is how to have a relationship of trust and support without being adversarial, but at the same time ensuring that directors raise tough questions with management and critically assess the worthiness of business plans. For example, I do not believe, as many have argued, that the new relationships and dynamics will stifle appropriate business risk taking and creativity.

C. Director and Officer Liability.

A third effect of the Sarbanes-Oxley Act, at least with respect to the relationships among constituents at public companies, is that it created a sense of greater liability for directors and certainly for management. In particular, the greater civil and criminal penalties have certainly been noticed by the public. With respect to directors, however, there has really been no direct imposition either by statute or case law of additional liability. The recent Disney case, in spite of stinging criticism by the Delaware Chancellor, essentially held that it was within the business judgment of Disney's directors to determine not to fire Ovitz for cause and to pay him over one hundred million dollars as severance.

Still, the environment feels more dangerous, and directors certainly are concerned about being dragged into lawsuits and spending their valuable time and resources to defend themselves, even if they are ultimately found not to be culpable. The SEC has not brought any cases after the Sarbanes-Oxley Act against directors or issued any guidance that might alter the business judgment rule. In other words, a decision by the board that is not otherwise against the law does not have to be the best or even a good one, so long as it is based upon promoting the best interests of the corporation and complies with the states' formulation of the business judgment rule. Many commenters also favor legislation to curb, in some way, plaintiffs' lawsuits against public companies and their officers and directors. That said, my checking indicates that directors and officers liability insurance rates seem to have stabilized.

D. Relationship with the SEC and Other Regulators.

A defining moment for a board and issuer is when the SEC or another law enforcement or regulatory agency commences an investigation. The relationship with authorities will be vital. Self reporting (if a problem is first discovered by the company), cooperation, independent investigation by the board, waiver of the attorney-client privilege, whether or not to provide legal support to officers and employees, termination of culpable officers and employees, and communication to the shareholder base are all areas of huge consequence to the final resolution of the problem.

III. Shareholder Activism and the Response of Directors.

A. Generally.

The subject of shareholder activism (and in particular, hedge fund activism), and what it means with respect to the management of companies, has become a topic for the water cooler. It's difficult to go a week without reading about efforts by hedge funds to change the management, operations or business plans of a company in which a hedge fund owns a stake.

In some respects, shareholder activism is a new phenomenon, for it has been only recently that hedge funds have achieved the size and the focus to significantly affect the management of companies. In other respects, however, hedge-fund activism is merely evolutionary, reflecting just another - but perhaps more widespread - variant on shareholder activism that first became prevalent in the 1980s when corporate raiders were all the rage.

The debate over the benefits of shareholder activism - be it from corporate raiders, hedge funds, pension or mutual funds, or even law school professors (such as your colleagues at the Law School) who submit proxy proposals to companies - generally focuses in large part on one's beliefs about the principal-agent relationship that defines how corporations are run. (I will put to the side an extreme view that challenges the shareholder ownership model by claiming that shareholders are simply free riders who can walk away by selling their shares and that it is only management that creates value.)

On one side of the debate, the shareholder activists argue that it is the shareholders who own the company, and therefore they should have a more active role in running it. Those on this side of the debate generally don't advocate that shareholders get involved in the ordinary business operations of a company, but they do contend that shareholders should have a significant voice in some of the more important or high-profile decisions, such as executive pay, acquisitions, sales of significant assets, and the payment of dividends. The shareholder activists often point to, among other things, numerous examples of directors and management enriching themselves at the expense of the true owners of the company. They maintain that excessive executive compensation is essentially raiding the corporate till.

On the other side of the debate, many business groups and others argue that the director-centric view of corporations has been ingrained in corporation law for a century and has proven to work extremely well. Those on this side of the debate point out that directors have a legal duty to act in the best interests of shareholders and to oversee the business and affairs of corporations, and that they are more informed and better able to look after the long-term interests of a corporation than are the shareholders. Directors, it is argued, can better deal with all of the corporate constituencies - creditors, employees, the government, as well as shareholders. Indeed, this group argues that shareholders are often quite heterogeneous, with some shareholders focused on short-term gain and others focused on long-term performance.

Of course, this is not an "either-or" proposition. One can generally take the view that a more director-centric version of corporate governance should prevail, while still admitting that certain measures designed to give shareholders more power can be positive. On the other hand, those who are more shareholder-centric in nature will often still admit that generally speaking, it is the directors who are best tasked with running the corporation.

In recent years, however, it does appear that the pendulum has been swinging to the side of increased shareholder activism, which is likely due in part to the high-profile scandals of a few years back and also to the ascendance of hedge funds. The Commission has proposed and adopted a number of rules seeking to give shareholders greater access, which I personally think is a generally good thing (and which I'll discuss later in my remarks here).

But beyond one's beliefs about the theory of shareholder activism, corporate boards must often deal with this in reality. This raises the question of whether a board, when faced with a direct challenge by shareholders, should view such a challenge with hostility or with open arms. Obviously, this is often a very case-specific inquiry that cannot be answered with generalities and will of course depend on the context in which the company and the hedge fund interact. But let me give you my thoughts on how directors might respond to increased activism.

B. How Should Directors React?

Obviously, a director's response to shareholder activism will vary on a case-by-case basis. If a director believes that the company has a cogent long-term strategy, it is certainly his or her right to react negatively to what he or she believes is an effort to merely pump up the stock in the short run.

But it seems prudent for directors to have an open mind when confronted by large shareholders. After all, they do own part of the company. At a minimum, the activist hedge fund may be offering "free consulting." (Just kidding.) However, being open to negotiation and, at a minimum, listening to what they have to say, makes sense. Often times, hedge funds have pushed companies to think about the nature of the business and to consider whether the current course is the proper course. It may be that a short-term reform, despite an immediate disruption, will prove beneficial in the long run. Many of the large hedge funds have done extensive research, albeit perhaps in the interest of making a tidy return, and therefore might be mostly correct in their recommendations.

To use one example, I see some positives in the fact that General Motors acquiesced to pressure from Kirk Kerkorian and Tracinda Corporation by naming Jerry York, a Tracinda adviser, to the board. On the one hand, I thought it spoke well of GM that it named a frequent critic to its board, which I think evidences its desire to seek the experience and opinions of someone who is truly independent from management. I also thought it spoke well of Tracinda, which publicly stated that York agreed not to share any confidential information with Kerkorian, thereby removing a potentially thorny issue from the mix. Obviously, it's far too early to expect to see definitive results, but again, I took comfort in the fact that GM's board was willing to make real changes, such as halving its dividend and cutting its executive pay by 30%. Moreover, published reports have claimed that York has become a key figure in the boardroom and that outside directors are increasingly looking to him to set the tone and agenda. If this is the case, perhaps York can provide another point of view as GM seeks to rebound from recent troubles.

In the end, I can't really say whether hedge funds or other shareholder activists are enemies or friends of directors and management. It all depends on the circumstance. It is a current fact that more and more hedge funds will be acting like private equity by taking large equity positions in companies and seeking to influence board and corporate behavior. Governance as an investment style is a popular flavor with institutional investors. Whether these funds will be viewed as corporate raiders seeking short-term profits or whether they will employ long-term value strategies remains to be seen. One may well see strange bedfellows in institutional investors aligning with governance-oriented hedge funds.

IV. Shareholder Access.

A. The Commission's Shareholder Access Proposal.

Now that I've talked more generally about shareholder activism, let me turn to a more specific part of shareholder activism. By that, I mean the issue of direct shareholder access to a company's board of directors and management.

In particular, I want to refresh your recollection about a rule that we proposed two-and-a-half years ago regarding shareholder director nominations. While this rule never progressed past the proposing stage, I still think it remains extremely relevant to the ongoing debate about corporate governance. Indeed, I think the topic that it addresses - the ability of shareholders to nominate a candidate for director in certain instances - is an absolutely critical component to enhancing shareholders' ability to influence the affairs of a corporation.

Today, as most of you know, it is very difficult for shareholders to have any meaningful choice with respect to the election of directors. In particular, I'm referring to the fact that unless a shareholder mounts a full-blown proxy fight - which is very expensive and time consuming - shareholders do not have a real option of voting for a director other than one supported by management. Further, in the United States, unlike in the United Kingdom and other jurisdictions around the world, directors are elected by a plurality vote, which means that those directors receiving the most votes are elected to the board, even if those directors do not receive a majority of the votes cast. The only choices are to "vote for" a director or to "withhold" one's vote for a director, and a director will still be elected even if the votes "withheld" exceed the votes "for" a director candidate. Consequently, as a result of the difficulty of nominating alternative candidates for director, coupled with plurality voting, it is - as many have noted - very difficult to remove or replace any of the directors appearing on management's slate.

I may be the only one on the Commission who still feels this way, but I continue to be supportive of the proposals that we introduced in late 2003 which would have, under certain circumstances, required companies to include in their proxy materials a shareholder nominee for election as director. Had they been adopted, these rules would have created a mechanism for a nominee of long-term shareholders with significant holdings to be included in company proxy materials where there are indications that shareholders need such access to further an effective proxy process.

Part of what made this proposal so important in my opinion is that what it proposed to do was very different from that of many of the rules that we at the Commission have recently adopted in the wake of the corporate scandals of a few years ago and after the enactment of the Sarbanes-Oxley Act. Specifically, most of our other recent rules have dealt with our efforts to improve and enhance corporate disclosure. Our proposed rule regarding shareholder director nominations, however, was intended to do something quite different than merely improve disclosure: it was designed to empower shareholders to have a direct say in who is nominated to the board. To be sure, our disclosure-based rules also empower shareholders, but at the end of the day, if a shareholder, armed with all of this new disclosure, doesn't like what he or she sees, the only real alternative is to sell his or her stock in the company. Obviously, this is an unsatisfying choice for investors who believe in a company's products or services, but are less-than-enamored with current management or directors. Moreover, if you're an advisor to an index fund, the option of selling the fund's holdings in an indexed company is not even present.

This, of course, is one of the reasons why I'm still in favor of adopting a rule that would provide shareholders with a limited ability to nominate their own candidates for director, instead of having to settle for merely voting "for" or "withholding" votes for management's candidates. In this respect, our proposed rule was not merely incremental, like many of our recent disclosure-related rules, but would actually give shareholders an ability to influence director elections in a manner not now present.

Unfortunately, in my view, this rule has not been adopted, and I can't say that I'm very optimistic that it will be resurrected any time soon. That said, there have been a few interesting developments with respect to shareholder director nominations that bear mentioning.

B. Majority Voting Proposals.

There is a relatively new movement afoot to elect directors to corporate boards by means of a majority vote. By this, I'm referring to the fact that recently, a number of companies have adopted policies that require a director who receives more votes "withheld" than "yes" votes to submit his or her resignation to the company's nominating committee. The nominating committee will then consider the tendered resignation and will recommend to the board whether to accept or reject it.

While the Commission itself is not responsible for the adoption of these policies, I should note that many companies have adopted them at the behest of shareholders, who have submitted proxy proposals in this regard. Of course, many companies have sought to exclude these proposals - much like they have sought to exclude shareholder director nomination proposals - but if properly phrased, the Division of Corporation Finance has generally not allowed them to be excluded. Indeed, one version of such a shareholder proposal takes the form of a binding shareholder resolution that would amend the bylaws to provide that the "directors shall be elected annually by written ballot and by the vote of the majority of the shares voted at a meeting at which a quorum is present . . . ."

I find these developments - both the voluntary "majority voting" guidelines adopted by companies, as well as the binding bylaw amendments requested by shareholders - as indicating that management in some cases is listening and making enlightened decisions. While these new policies still do not permit shareholders to affirmatively nominate a candidate for election to the board, they do allow shareholders to, in effect, vote off board members without having to engage in a full blown proxy contest. Critics, of course, argue that amending bylaws in this respect (or to make it more difficult to have staggered boards or poison pills) deprives the board of its proper role. That said, these proposals are just in their infancy, and it remains to be seen how effective they are. But I view them as a positive step in favor of shareholder democracy.

V. Executive Compensation.

Let me move on now to probably the hottest topic that people are discussing nowadays. By that, I mean executive compensation. By now, the specific stories about excessive CEO pay have made the rounds in virtually every major newspaper in the United States, and I don't think I need to bore you with reciting the gory details. Indeed, many argue that payment for performance has been replaced with payment for pulse. Even the Wall Street Journal has published at least one article commenting negatively on excessive executive pay.

Now, a few moments ago I was trumpeting the benefits of our proposed shareholder access rule on the grounds that it did something more than require disclosure. However, it is certainly not my intent to disparage the incredibly positive effects that clear, extensive and precise disclosure can provide.

Nowhere is this more the case than in the area of executive compensation. I think it is fair to say that now, many of the decisions surrounding executive pay in the public companies in the United States have been made in very dark corners, difficult to discern and understand fully. Further, there is little question that it is extremely difficult to figure out from the current filings and disclosure what executives really earn. It can be extremely arduous to dig through all of a company's disclosures to discover, for example, what type of deferred compensation, change in control payments, retirement arrangements, or other perqs have been negotiated.

Moreover, it is troublesome that such pay arrangements in many cases may not have been known to shareholders, and in some cases, even understood by directors. Further, even when directors are fully informed and knowledgeable about executive compensation, there will always be pressure on compensation committee members to be a part of the club that rewards CEOs with excessive pay. I call this the "real estate appraisal" issue. In determining salaries, compensation consultants present the committee with figures showing average pay, and there will always be pressure on committee members to give their guy what the other guys get, or even slightly more. This is especially true if you have an aggressive CEO who gathers his own compensation data and asks, "why am I being treated differently than my peers?" In addition, many compensation committee members are CEOs or former CEOs themselves, so they're all part of the same club. As a matter of logic, even if a compensation committee thinks it's being conservative by compensating their CEO at the 50th percentile, this has the effect of driving up CEO salaries. Everyone can't be average.

In any event, I thought I would split my discussion of executive compensation into two parts. First, I'll discuss what the Commission is doing on this front, and second, I'll discuss what shareholders are doing. I think the latter topic is especially appropriate in light of the topic of today's dialogue.

A. What the Commission Is Doing.

Simply put, our comprehensive executive compensation proposal is designed to set forth a revised disclosure regime for executive compensation. While the proposals are extensive, a number of provisions are worth highlighting. First, the new rules would require that stock options and stock grants be valued in dollar amounts, presumably with the method that is used in expensing the option and stock grants for purposes of a company's financial statements. Second, the revised compensation tables provide for the computation of a total amount of compensation in the summary table of the executive's compensation - one figure that puts all of these compensation elements together. Of course, there will be some elements such as retirement that would principally be in narrative form, but the rules would require that examples be given as to what the executive would earn if normal conditions occur.

It is my hope that our proposals will provide investors with a tool that will enable them to understand the total compensation paid to the company's CEO, CFO and other executive officers, and consequently to assess whether those executives, through compensation arrangements approved by directors, have earned their payments through performance. While, as I mentioned earlier, it is difficult for shareholders to formally oust directors who shareholders believe might not be capable of running their company, I still believe that public pressure, withhold vote campaigns, and behind the scene discussions with management can be used by investors to bring about change in compensation.

Of course, the executive compensation story is not quite finished. As you know, we have not yet voted on the final executive compensation rules, and the comment period has been closed for less than a month. Not surprisingly, we have received literally thousands of letters on our proposed rules, and I know that our Staff is currently sifting through them. It is my hope - as it is in every case in which we publish rules for comment - that we can use the comment process to improve upon our proposals. Let me touch on a few of the comments that I found most interesting (although this is certainly not an exhaustive list):

  • Advisory Vote by Shareholders. A number of commenters have suggested that we require companies to put the compensation report to an advisory shareholder vote, or that we seek an amendment of exchange listing requirements to require such advisory votes. Alternatively, commenters have recommended that we codify a no-action position of the Staff that has allowed shareholders to include in proxies non-binding resolutions that ask for an advisory shareholder vote on the compensation report. As an aside, I'll also note that Congressman Barney Frank has introduced a bill that would, among other things, require shareholder approval of compensation plans.

    These are definitely intriguing suggestions, and, if adopted, no doubt would provide shareholders the clearest and most direct voice in executive remuneration. Apparently, the United Kingdom and Australia have an advisory vote requirement on the compensation report, and there appears to be some evidence that this may have some effect in curbing excessive executive pay. For example, one study in the United Kingdom found that executive pay is declining, and another article noted that the typical British CEO makes only a little more than half of what the typical U.S. CEO makes. In any event, having the shareholders cast an advisory vote on this subject would very likely improve transparency in this area, and for this reason alone, I think it is a topic worthy of additional discussion. Of course, requiring shareholder votes, even advisory ones, is not something that the Commission has done frequently, and so I think that we'll need to look carefully at our powers in this regard.

  • Disclosure of Performance Targets. Another topic that comment letters touched upon is the fact that the proposal does not require the disclosure of specific quantitative or qualitative performance-related factors considered by the compensation committee or by the board in determining executive compensation. Apparently, the argument for not including such a requirement would be to avoid forcing companies to disclose confidential commercial or business information that would have an adverse effect on the company. This is certainly understandable. On the other hand, without disclosure of these performance-related factors, it becomes difficult for shareholders to determine whether the targets are appropriate and whether executives have actually met the targets. Perhaps a middle alternative would be to require disclosure after the fact: that is, maybe it would be effective and appropriate to require companies to disclose the particular quantitative or qualitative performance-related factors after the time period for which the factors apply. Some commenters take the position that this would make the executive compensation process more transparent, yet alleviate concerns about disclosure of confidential information. However, companies might still be concerned that disclosure of specific targets even after the fact raises confidentiality issues that might ultimately harm the company. In any event, given the comment letters on the subject, this is an issue that we at the Commission should consider, and I intend to approach it with an open mind.

I could continue and recite at great length some of the insightful comments that have been submitted to us, but if I were to do so, I would surely eat up the time that has been set aside for questions. Rest assured that our Staff is carefully reviewing the comment letters right now, and all of us on the Commission will pay very close attention to the public's suggestions on this topic.

B. What Shareholders Are Doing.

Now that I've mentioned what the Commission is doing with respect to executive compensation, I thought I would also discuss what directors and shareholders can do (and indeed, are doing) about what they might perceive about excessive pay levels, given that the focus of this conference is on relationships among the various corporate constituencies. Earlier, I observed that the advent of independent compensation committees and the threat of litigation have not seemed to have curbed rising executive pay. So, where does that leave us? The answer, I think, is aggressive shareholder action, perhaps coupled with favorable rules and determinations from the Commission and our Staff.

The most basic level of shareholder action is simply the standard pressure that shareholders, especially large shareholders, can place on a company via letter writing campaigns and effective use of the media. Often, this type of shareholder campaign is stimulated by reports of excessive compensation or general criticism of corporate governance practices by entities that rate such practices, like ISS. This tactic can sometimes be effective, as companies have a strong public relations incentive to take steps to maximize the corporate governance ratings.

At perhaps a second level of activism, there are shareholder campaigns to withhold votes from directors who they believe do not exercise proper oversight over compensation practices. An example of this is UnitedHealth Group, which has been under fire recently for alleged improprieties with respect to potentially backdating option grants to top executives. At UnitedHealth's recent annual meeting, the shareholders (including CalPERS) showed their displeasure by withholding more than 28% of their votes for two compensation committee members. UnitedHealth's CEO has now apparently recommended that the board discontinue or suspend stock awards for certain senior executives.

Yet another level of activism involves submitting shareholder proposals seeking to require shareholder votes on various executive compensation matters. These can take the form of non-binding requests that urge the board to limit or alter certain aspects of executive compensation, or they can be binding proposals that amend a company's bylaws to require shareholder ratification of certain executive compensation arrangements. An example of this is the efforts of Verizon retirees to force Verizon to limit executive compensation and to give shareholders a say in such compensation. In 2003, the retirees took the non-binding route, and won 59% of the shareowner vote with their proposal to limit executive compensation packages and golden parachutes. In 2004, the retirees went the binding route by submitting a proposal that sought to amend the company's bylaws to require shareholder ratification of executive severance agreements in excess of 2.99 times the executive's base salary plus bonus.

Another variant on this heightened level of activism might involve a combination of the above tactics. For example, shareholders might propose a binding bylaw amendment to require shareholder ratification of certain executive pay arrangements, as well as another binding bylaw amendment to require that directors be elected by a majority of the shares voted at a meeting. This would allow shareholders to have a perhaps unprecedented say in executive compensation matters, as well a heightened ability to remove directors who aren't responsive to shareholder concerns. Frankly, I'm not sure that this has been successfully completed, or even attempted, but I think it's at least possible.

* * *

The bottom line, I think, is that today, the relationship among management, boards of directors, compensation committees, shareholders and regulators with respect to executive compensation has changed in a way that allows for more shareholder input on this subject. In addition, our proposed rules, coupled with innovative tactics by large shareholders, may further alter the balance of power in this regard. Whether this is a good thing remains to be seen.

VI. Conclusion.

In summary, I'd just like to say that your views are important. I hope you feel free to contact me about any issue that you feel strongly about that is under our jurisdiction. Thank you for your kind attention, and I think we have some time for questions.


Modified: 05/15/2006