NOTICE: This is an unofficial transcript of the Security Holder Director Nominations Roundtable that was held at the Commission on March 10, 2004. This unofficial transcript has not been edited, may contain typographical or other errors or omissions, and is presented for convenience only. In particular, please note that, while the unofficial transcript indicates that this event was a Commission hearing, it was not; it was held in a roundtable format. An archive of the webcast of the roundtable can be found at www.sec.gov/spotlight/dir-nominations.htm. ------------------------------------------------------------------------ 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 In the Matter of: ) 4 ) File No. 57-19-03 5 SEC ROUNDTABLE ON PROPOSED ) 6 SECURITY HOLDER DIRECTOR ) 7 NOMINATIONS RULES ) 8 PAGES: 1 through 290 9 PLACE: Securities and Exchange Commission 10 450 Fifth Street, N.W., Room 1C30 11 Washington, D.C. 12 DATE: Wednesday, March 10, 2004 13 14 The above-entitled matter came on for hearing, pursuant 15 to notice, at 9:05 a.m. 16 17 BEFORE: 18 WILLIAM C. DONALDSON, Chairman 19 ROEL C. CAMPOS, Commissioner 20 PAUL S. ATKINS, Commissioner 21 CYNTHIA A. GLASSMAN, Commissioner 22 HARVEY J. GOLDSCHMID, Commissioner 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 1 C O N T E N T S 2 PAGE 3 OPENING REMARKS - Chairman Donaldson 6 4 INTRODUCTION OF ISSUES - Alan L. Beller 5 and Martin P. Dunn, Division of Corporation 6 Finance 12 7 8 PANEL ONE - What problems in the proxy process 9 need to be addressed? 14 10 MODERATORS - Alan L. Beller and Martin P. Dunn, 11 Division of Corporation Finance 12 PARTICIPANTS: 13 LUCIAN ARYE BEBCHUK, Harvard Law School 14 RANDALL S. KROSZNER, Graduate School of 15 Business, University of Chicago 16 MARTIN LIPTON, Wachtell, Lipton, Rosen 17 & Katz 18 NELL MINOW, The Corporate Library 19 RICHARD H. MOORE, State of North Carolina 20 STEVE ODLAND, AutoZone, Inc. 21 ERIC ROITER, Fidelity Management & 22 Research Company 23 DAMON SILVERS, AFL-CIO 24 25 1 PANEL TWO - Is the proposal a reasonable solution? 74 2 MODERATORS - Alan L. Beller and Martin P. Dunn, 3 Division of Corporation Finance 4 PARTICIPANTS: 5 RICHARD C. BREEDEN, Richard C. Breeden & Co. 6 PETER C. CLAPMAN, TIAA-CREF 7 THOMAS J. DONOHUE, U.S. Chamber of Commerce 8 CHARLES M. ELSON, University of Delaware 9 JOSEPH A. GRUNDFEST, Stanford Law School 10 IRA M. MILLSTEIN, Weil, Gotshal & Manges 11 PETER J. WALLISON, American Enterprise Institute 12 RALPH V. WHITWORTH, Relations Investors, LLC; 13 Apria Healthcares Group, Inc. 14 15 PANEL THREE - The application of the proposal 131 16 of companies and investors. 17 MODERATORS - Alan L. Beller and Martin P. Dunn, 18 Division of Corporation Finance 19 PARTICIPANTS: 20 WARREN L. BATTS, National Association of 21 Corporate Directors 22 J. CARTER BEESE, JR., Allied Capital 23 Corporation 24 FRANKLIN D. RAINES, Fannie Mae 25 DAVID S. RUDER, Northwestern School of Law 1 JEFFREY A. SONNENFELD, Yale University School of 2 Management 3 TED WHITE, California Public Employees' Retirement 4 System 5 SUSAN ELLEN WOLF, Schering-Plough Corporation 6 ANN YERGER, Council of Institutional Investors 7 8 PANEL FOUR - Impact of the proposal on retail and 195 9 other investors. 10 MODERATOR - Martin P. Dunn, Division of 11 Corporation Finance 12 PARTICIPANTS: 13 EVELYN Y. DAVIS, Highlights & Lowlights 14 LES GREENBERG, Commitee of Concerned 15 Shareholders 16 LANCE E. LINDBLOM, The Nathan Cummings 17 Foundation 18 DENISE L. NAPPIER, State of Connecticut 19 PAUL M. NEUHAUSER, University of Iowa College 20 of Law (retired) 21 22 PANEL FIVE - Legal Issues 220 23 MODERATORS - Alan L. Beller, Division of Corporation 24 Finance and Giovanni P. Prezioso, Office of 25 General Counsel 1 PARTICIPANTS: 2 JOHN C. COFFEE, JR., Columbia University Law 3 School 4 JILL E. FISCH, Fordham University School of Law 5 DAVID A. KATZ, Wachtell, Lipton, Rosen & Katz 6 ROBERT TODD LANG, Weil, Gotshal & Manges 7 DONALD C. LANGEVOORT, Georgetown University Law 8 Center 9 E. NORMAN VEASEY, Supreme Court of Delaware 10 11 PANEL SIX - Impact of the proposal on proxy voting 258 12 mechanics 13 MODERATOR - Elizabeth Murphy, Division of 14 Corporation Finance 15 PARTICIPANTS: 16 RICHARD J. DALY, Automatic Data Processing, 17 Inc. 18 JAMES E. HEARD, Institutional Shareholder 19 Services 20 GREGORY P. TAXIN, Galss, Lewis & Co. 21 JOHN C. WILCOX, Georgeson Shareholder 22 Communications, Inc. 23 24 CONCLUSION 287 25 1 P R O C E E D I N G S 2 CHAIRMAN DONALDSON: Good morning, everyone. 3 Welcome to the Securities and Exchange Commission's 4 Roundtable to discuss our proposed rules regarding proxy 5 disclosure of security holder director nominations. 6 The proposal has evoked a considerable amount of 7 interest and some strongly held views. Since we published 8 the proposed rule for comment in October, we have received 9 literally thousands of comments, both form letters as well as 10 many detailed, extremely thoughtful, critical, and 11 constructive letters. 12 It is in this latter vein that we welcome an 13 extraordinary roster of experts to participate as panelists 14 in today's roundtable. 15 I want to take this moment to express the 16 Commission's great appreciation to all of the panelists who 17 will give us the benefit of their expertise and judgment 18 throughout the day. 19 We are grateful that you have agreed to help us 20 wrestle with the complexities of this issue and to try and 21 anticipate the consequences of any final rule adoption. 22 We all know that the Commission has on several 23 previous occasions considered proposals regarding the proxy 24 process and the role of shareholder director nominations. 25 But today's roundtable is different. It is set against the 1 backdrop of a remarkable decade in which corporate governance 2 in many instances was grossly inadequate or failed 3 completely. 4 The more notorious breakdowns produced truly 5 record-setting corporate frauds. The discovery of those 6 frauds, in turn, produced the Sarbanes-Oxley Act and other 7 important changes, including new listing standards, which 8 together have forced a reassessment of the role of a board of 9 directors. 10 These changes mandated that the responsibility of 11 directors be partially redefined, redefined with the 12 objective that directors should finally emerge from the long 13 shadow of "the imperial CEO" of the '90s and should assert 14 their oversight authority and corporate decision-making. 15 So the question of how directors are elected to 16 this refocused and reenergized board and how the proxy 17 process works becomes critical. 18 In a pre-Sarbanes-Oxley world, overly compliant 19 boards of directors often allowed management almost 20 unfettered control over many critical governance issues, 21 including over the proxy process related to the nomination 22 and election of directors. 23 As a result, some company boards and managements 24 completely ignored dissatisfied shareholders in a proxy 25 process. 1 Immediately after the annual meeting, shareholder 2 resolutions passed by a large plurality, or in some cases a 3 majority of votes cast, were just disregarded and never 4 implemented. And when significant numbers of company 5 shareholders expressed their disapproval of management 6 director nominees by withholding their votes, management and 7 the incumbent board ignored the withheld votes, too. 8 Management and boards refused to respond in any 9 demonstrable way to a clear expression of dissatisfaction of 10 large numbers of shareholders. 11 So in addition to implementing the provisions of 12 Sarbanes-Oxley, the Commission took the first step to address 13 this issue head on last fall. We adopted new standards to 14 address the breakdown in shareholder communications by 15 improving corporate disclosure in two areas. 16 First, improved disclosure regarding the nominating 17 committee process, the process by which committees consider 18 director candidates, including those recommended by 19 shareholders. 20 And, second, improved disclosure about the process 21 by which security holders could communicate directly with 22 members of the board. 23 It is our hope that the transparency created by 24 these standards, which, by the way, are effective for the 25 current proxy season, will help produce more communication 1 among management, directors, and shareholders generally, but 2 especially with respect to the nomination of candidates for 3 boards of directors. 4 Today we consider a second step the Commission 5 could take to address the issue. All of our roundtable's 6 participants are by now familiar with the Commission's 7 proposed rule. The rule would require the inclusion of 8 shareholder nominees in the company's proxy materials under 9 limited circumstances, and only upon the occurrence of 10 certain triggering events. 11 But irrespective of the details of the proposal, I 12 want us to consider for a minute one of the key purposes 13 behind this proposal, which is to address the breakdown in 14 shareholder communications that I just outlined. 15 Consider the situation faced by a sizeable group of 16 shareholders who are committed to the long-term prospects for 17 a certain company, but who confront a company management that 18 refuses to respond to or even communicate about the 19 shareholder group's concern. 20 The dilemma is that the shareholders have really 21 only two practical choices. First, they can choose to cease 22 being committed to the long-term health of the company. In 23 other words, they can sell their stock. Under this choice, 24 they would be forced to give up their belief that with some 25 modest changes in company direction, the company could be 1 more successful in its markets and could therefore be an 2 extremely productive investment over the long time. 3 Their second, and really only other choice is to 4 wage an extremely expensive proxy fight. This contest could 5 be for the entire board of directors or for only some seats o 6 the board, the so-called short slate. 7 In either case, the proxy fight takes on the 8 trappings of a contest for control. Under this choice, too, 9 the shareholders would be forced to give up their belief that 10 modest changes of company direction could produce the long- 11 term benefits they seek as long-term investors. 12 Instead, they are forced to divert the company's 13 resources away from the business they're building to the 14 proxy fight they're waging, the last thing the shareholders 15 really want for the company's future. 16 The proposal up for discussion today is an attempt 17 to find a middleground between the extreme choices of forcing 18 shareholders to give up their long-term interest in the 19 company and sell their stock, on the one hand, and forcing 20 them to wage a wasteful proxy fight, on the other. 21 It is an attempt to find a middleground that would, 22 under certain circumstances, limitations, and restrictions, 23 provide shareholders who have a true interest in the long- 24 term health of their company with a more effective proxy 25 process that gives them a better voice in the nomination and 1 election of the board of directors. 2 In essence, it is an attempt to find a middleground 3 that would encourage management and long-term shareholders to 4 communicate more effectively with each other about the 5 company's future. 6 In my view, this attempt to find middleground is 7 the central purpose of the proposal before us today. 8 The question then is whether the Commission's 9 proposed rule, as drafted, is the best way to achieve this 10 purpose. We are here to discuss, for example, how would the 11 proposal likely work? What consequences, intended or 12 unintended, might the proposal have? Are the specific 13 details of the proposal appropriately crafted? Are some 14 elements unnecessary to achieve the proposal's purpose? 15 And throughout every part of the discussion, we 16 want to hear about alternative solutions, other, perhaps 17 better, ways to achieve the same purpose. 18 With these objectives in mind, I very much look 19 forward to our discussion today and the follow-on comments we 20 will receive as a result of the day's roundtable. 21 Let's begin now, really begin now, by calling on 22 Alan Beller and Marty Dunn, Director and Deputy Director of 23 our Division of Corporate Finance. 24 That division has the responsibility, as you all 25 know, of administering our proxy rules. We have had the 1 laboring war in the effort to develop a rule proposal we are 2 discussing today. I thank them and the many members of the 3 staff across divisions who have worked on this proposal. 4 They has been exceptional and tireless. 5 Alan and Marty are going to be our moderators for 6 most of the day. Of course, they've organized the questions 7 that I just posed in a much more systematic and methodical 8 program, one that examines whether there is a problem that 9 needs addressing, or the proposal is a reasonable solution to 10 the problem and how it would apply to companies and 11 shareholders. 12 So I think I will thank once again all of our 13 panelists for being here, for devoting your time. I hand it 14 over to Alan and Marty to introduce the program. 15 Thank you very much. 16 MR. BELLER: Thank you, Chairman Donaldson. We 17 have a full day today, a total of six panels discussing a 18 variety of the issues raised by the Commission's proposal, 19 and perhaps in a couple of cases raised as conditions 20 precedent to the Commission's proposal. 21 We have two panels this morning. The first one is 22 going to address what, if any, problem there is in the proxy 23 process area that needs to be addressed. 24 And the second panel will address the question of 25 whether the Commission's proposal is a reasonable solution to 1 whatever problem is out there. 2 I want to just summarize a few of the ground rules 3 and what we're trying to achieve today. The intent of this 4 roundtable is to try to have an interactive, spirited, and 5 informative discussion among the panelists on each of the 6 panels. 7 Marty Dunn, my deputy, is going to moderate with 8 me, and we're going to take the lead on various of the panels 9 this morning and generally throughout the day. We have a 10 couple of our colleagues who will be joining us for a couple 11 of the afternoon panels. 12 We certainly are looking forward to and would 13 encourage interaction among the panelists. We anticipate a 14 number of questions from the members of the Commission who 15 are readied at the ends of the tables. 16 We have -- as we indicated in our earlier 17 correspondence with the panelists, we are not looking for 18 opening statements today as part of the discussion. As we've 19 indicated before, we would welcome statements of the 20 panelists' positions in addition to supplementary -- 21 complementary to comment letters. 22 In the cases of those who have submitted comment 23 letters, we will put anything that is submitted to us up on 24 the Website so that the public will be able to see it. But 25 we have a full agenda, and a day to cover it, and opening 1 statements seem to us less important than the kind of 2 discussion we're hoping to achieve. 3 Finally, I guess, I would ask your indulgence in 4 one respect. That is, to follow what I think is a pretty 5 good European custom for being recognized. Anyone on the 6 panel, and also, please, the Commissioners, if you would like 7 one of the moderators to recognize you -- and we'll keep 8 track and try to do this in order -- if you would just turn 9 your tent card up on end, that is a pretty effective way of 10 getting our attention, and we'd ask you to do that throughout 11 the day. 12 I'm now going to turn this over to Marty to begin 13 the discussion on the first panel. 14 MR. DUNN: I was afraid you were all going to turn 15 your tent cards over at exactly the same time when Alan said 16 that. 17 Good morning, everybody. I mainly want to say good 18 morning because I mean it very much. Thank you all for 19 coming. I also want to say it because it might the last two 20 real words I get in here in the next hour and 15 minutes. 21 The purpose of our first panel is to assess what 22 problems, if any, there are in the proxy process as related 23 to election and nomination of directors. 24 Not too much needs to be said that hasn't been said 25 in that regard, so I'm just going to dive in. The first 1 question I wanted to ask -- we're going to get to all the 2 points in the briefing paper, but I want to take one step 3 back before that and look at the broader question and give 4 some perspective. And I'd like to start with Nell Minow, if 5 that's okay. 6 In Mr. Lipton's article, he says that those who 7 support the Commission's proposal believe that -- and this is 8 a quote -- "the goal of corporate governance is to conform 9 managerial action to shareholder wishes." 10 Is that true? And, if not, what is the goal? 11 MS. MINOW: The goal of corporate governance is to 12 achieve a series of checks and balances to establish 13 credibility for the capitalist system. So shareholders don't 14 want to run companies. Shareholders aren't interested in 15 rearranging the leaves on the trees. But shareholders do 16 play a role in the forest, and the most important forest 17 decision is who is on the board of directors. 18 We've had a lot of reforms in the post-Enron era 19 and a lot of the emphasis has been on independence. And yet 20 there's never been an academic study linking the number of 21 independent directors to any benefit whatsoever to 22 shareholders. 23 The reason for that is not that independence is not 24 important. The reason is that our markers for independence, 25 with all deference to the SEC and its disclosure 1 requirements, is just riddled with loopholes. 2 And even if you could find any possible connection, 3 the CEO and the board member went to summer camp together or 4 whatever, it really doesn't matter. Independence has to do 5 with who the person is, and there's no way to determine that, 6 but this is a way to determine who invites them on the board. 7 It's a natural human impulse to dance with the one who brung 8 you to the party. 9 And I think Warren Buffet, who is a pretty 10 independent-minded guy, has documented in his own reports 11 that he was not a very good director on the companies where 12 he was invited on by the CEO, that he agreed to outrageous 13 compensation. But when he came in on his own at Salomon, he 14 said what every board should say to every CEO: If you lose 15 money, we'll be forgiving. If you lose reputation, we will 16 be ruthless. 17 That's because of how he got on the board. And you 18 will not have any genuine independence on the board unless 19 you have some mechanism for shareholders to play a role. 20 And, ultimately, I am really horrified that the 21 bastions of the capitalist system from the corporate 22 community refuse to put their director candidates to a market 23 test. 24 MR. DUNN: What do you think of that, Mr. Lipton? 25 What do you think the goals are? 1 MR. LIPTON: Well, let me start with saying that 2 the fundamental goal of the corporate system is to produce 3 goods and services. It's not to be a paragon of corporate 4 governance. And corporate governance plays a significant 5 role in the proper functioning of business corporations, but 6 the real fundamental purpose of the business corporation is 7 to run a successful business corporation and produce goods 8 and services. 9 It's too easy after a situation like what we 10 experienced here with Enron and WorldCom and the other 11 companies that were involved in the millennium bubble 12 scandals to say, well, we need to fix this, we need to fix 13 that, we need to fix everything. 14 I think we've fixed it. I think that the New York 15 Stock Exchange, corporate governance reforms, the Sarbanes- 16 Oxley Act, and the rules promulgated by the Securities and 17 Exchange Commission create a whole new regime of corporate 18 governance that needs to be given a chance to function 19 without piling on more and more requirements. 20 I think it's not true that corporations ignore the 21 wishes of shareholders, and it's not true that are 14(a)(8) 22 proxy resolutions that received majority votes are ignored or 23 that the withhold campaigns against certain directors are 24 ignored. 25 My experience is that in most of the cases, 1 significant changes take place either to negotiate the 2 withdrawal of the 14(a)(8) resolution or to negotiate the 3 withdrawal of the withhold the vote campaign. 4 So I think there are examples of 14(a)(8) 5 resolutions that have been passed by a majority of the votes 6 cast and have been ignored by the corporation. But I don't 7 think that, on an overall basis, boards of directors of 8 corporations are ignoring the wishes of shareholders. Just 9 the opposite. 10 The various organizations that advise shareholders 11 -- ISS, Council of Institutional Investors, and so on, have 12 over the years developed a very effective means of 13 communication with institutional shareholders and are having 14 a major impact the attitude of corporations and corporate 15 boards. 16 There's an example that I think is worth thinking 17 about. In 1720 the South Sea bubble burst in England, and 18 relatively it had a greater impact on the economy of Great 19 Britain at that time than the millennium bubble's bursting 20 had on the U.S. economy in 2000 and 2001. 21 For 110 years thereafter it was virtually 22 impossible to form a joint stock company because of the 23 reaction to the South Sea bubble. 24 I think what we're experiencing today is an extreme 25 overreaction to Enron and WorldCom. It isn't necessary to go 1 where we're going. We shouldn't do it. We should give the 2 reforms that I mentioned before a chance to work, and if 3 they're not working three to five years from now, we can 4 reexamine it. But I think it's a very serious mistake to 5 take this step at this time. 6 MR. DUNN: Mr. Bebchuk? I'm paying attention to 7 the whole card thing. 8 MR. BEBCHUK: A brief reaction to what Marty said. 9 One is I want to agree that corporate governance, 10 or good corporate governance is not an end in itself, but, 11 rather, it's an instrument, and it's an instrument for 12 achieving higher long-term shareholder values. 13 So that's what we all want to accomplish. 14 But given that directors are human beings, the way 15 to assure long-term shareholder value is to hold them at 16 least somewhat accountable, so to have some sort of an 17 outside check. 18 And a critical element of our corporate structure, 19 to quote Chancellor Allen in a very famous Delaware case, is 20 that the shareholder power to replace directors is the 21 foundation of the rule of the directors. 22 And that's an important safety valve that ensures 23 the directors will be attentive to achieving higher long-term 24 share value. 25 Now, Marty said that the directors do the right 1 thing most of the time, and I think that most of us will 2 agree with this. But most of the time is not always. That's 3 why we need a safety valve. The safety valve is not expected 4 to be used all the time, but it's expected to be there. 5 And the last observation -- and I'm sure that this 6 will be an issue that we'll be coming back to -- relates to 7 the growing independence of directors. And the question 8 isn't what Marty and others in the community have been 9 stressing. That might be enough. 10 But if we reflect on this quote from Chancellor 11 Allen, he was not saying the director independence is 12 sufficient foundation for the rule of directors. He was 13 saying that we need something else. We need at least in some 14 rare occasions to have shareholders be in possession of the 15 power to replace the directors because mere independence is 16 not sufficient to ensure the directors will be well selected 17 and will have the right incentives. 18 So we need something else, and that something is 19 lacking right now. 20 MR. DUNN: We'll go to Mr. Kroszner. 21 MR. KROSZNER: I just want to agree that the -- I 22 think the main goal of any sort of reforms -- and when I was 23 working in the administration and thinking about the response 24 to Enron and the other scandals, as well as working on 25 Sarbanes-Oxley, was to try to think about how do we enhance 1 shareholder value? That's ultimately what we want to do. 2 Now, I think, exactly as Nell Minow had said, part 3 of that is making sure that the corporation is credible, and 4 the reason that that's an important part of maximizing 5 shareholder values, if the corporation is credible, it will 6 be able to raise capital at a lower rate. 7 There's less information outstanding. If the board 8 is not seen as taking appropriate actions, the cost of 9 capital is lower. 10 We've seen examples of this when certain owners of 11 firms have suddenly passed away unexpectedly, and the value 12 of the firm suddenly pops up. Because they had significant 13 ownership, they were not maximizing shareholder value, they 14 were doing things for their own personal benefit, and then 15 when they suddenly are removed from the scene, the stock 16 price goes up. 17 And so it's sort of a clear manifestation of how a 18 change in corporate governance -- and you can think of that 19 as -- economists talk about an exogenous change, someone 20 suddenly passes away, is manifest in the change in the value 21 of the -- the cost of capital, the value of the equity as 22 well as potentially the debt that's outstanding. 23 So we have to think about, well, how do we gain 24 credibility to enhance shareholder value? And certainly that 25 can be done in a variety of ways. We've talked a little bit 1 about independent directors, and actually some -- I think 2 there is a little bit of research that suggests that in some 3 cases independent directors can have a positive influence. 4 But I think the data are quite mixed on that. 5 But I'm not sure that the focus of the proposal 6 that the SEC has put out is one that's really going to help 7 that much on this margin. I think the spirit behind it, to 8 be able to have more -- be able to exercise more control by 9 significant shareholders, that significant shareholders have 10 more of a voice is a very good one, and that's an instrument 11 to getting towards the goal of enhancing shareholder value 12 and building credibility for the corporation. 13 But I'm not sure that focusing on the proxy 14 process, with a fairly complex set of triggers and other 15 approaches, is really the best way to go at the moment. 16 One, we certainly have had a lot of changes 17 recently, and so I have some sympathy with what Marty Lipton 18 had said, that we maybe should allow some of these things to 19 work out. 20 But something that wasn't really focused on in what 21 I would call phase one of the responses, which is Sarbanes- 22 Oxley, the administration's response and the first set of 23 responses by the Commission, are the role of the 24 institutional investor. And that's why I think this is sort 25 of a good thing to focus on for phase two. 1 And what we need to do, I think, is, instead of 2 proposing a complex new set of rules, think about, well, are 3 there rules existing that are interfering with the ability of 4 institutional investors to be able to exercise some voice at 5 the corporations. 6 And part of that may come from -- there are 7 problems -- potential concerns about antitrust, that if large 8 institutions were to work together, there could be some 9 concerns there. 10 There's the so-called short swing rule, 16(b) rule, 11 that if there are different institutions that seem to be 12 working in concert, their different trading rules may -- or 13 trading activity may be taken as a whole rather than taken as 14 independent actions. And that could be potentially 15 problematic. 16 And so there are also a number of regulations far 17 beyond what the SEC has power over -- coming from ERISA, 18 coming from other -- from state insurance regulation -- that 19 make it more difficult for certain institutional investors to 20 either take a large stake or have an active role. 21 The Investment Company Act of '40 the SEC has some 22 control over, that may be putting some blockages in the way 23 of some institutional investors becoming more active. 24 So I think focusing on the existing restrictions 25 that are there were potential discouragements, either 1 statutory, regulatory, or even just fear of litigation, of 2 becoming involved and then getting a lawsuit if the 3 suggestions don't work out ex post, are things that are 4 really first order. 5 And I think the focus on the proxy contest is much 6 more second order for both building credibility as well as 7 for trying to get the institutional investors to be -- have a 8 more active and beneficial role. 9 MR. BELLER: Mr. Kroszner, can I just ask a follow- 10 up on that? Because what you said a few minutes ago, that 11 shareholder involvement of the sort that you alluded to is an 12 element of shareholder value. 13 That maybe what the Commission has proposed is, 14 (a), and what you said, sort of second order and maybe ought 15 to be put off, but also is complicated and sort of operates 16 on the margins. 17 Would you be a supporter of, in effect, a more far- 18 reaching proposal that would give shareholders the ability to 19 get director nominees more effectively in front of 20 shareholders, sort of not encumbered by the triggers and all 21 these percentages and all the bells and whistles that are 22 attached to the current proposal. 23 I mean, in a sense, are you saying the proposal 24 doesn't go far enough, and, therefore, that's one of its 25 problems? Or are you saying it ought to be put off in any 1 event to deal with what you alluded to as the first order 2 issues? 3 MR. KROSZNER: I think it certainly goes too far, 4 and in other ways, it doesn't go far enough. And so I think 5 that what I would like to do is focus on the restrictions 6 that exist now in various guises. And not all under SEC 7 control, but that make it more difficult for institutional 8 investors to become more active. 9 I don't see the particular focus in the proxy 10 process is sort of the key for doing that. I think one of 11 the things that would be valuable is thinking about 12 difficulties -- and again, this may be outside of the SEC's 13 purview, because it may be more at the state level -- of 14 making it difficult for takeovers to occur. I think most 15 institutional investors don't want to actually run the 16 company, the ones that I've talked with, Jack Brennan and 17 others. That's not what they're about. And they don't seem 18 to think that actually having a director on the board is 19 really the key thing, or using this kind of mechanism. But 20 if someone is willing to do a -- in fact, an outside 21 consulting job, trying to say, "Well, I think the corporation 22 should be run a different way, and I'd like to try to gather 23 shares to try to take over the corporation and run it 24 differently," then we'd like to be able to support that and 25 support that more easily. 1 So I think working on those kinds of margins were 2 the ones with the bigger pay-offs. Here, I just find that 3 the proposal is raising so many questions and so many 4 uncertainties that it doesn't seem to be going exactly in the 5 right direction, with the broad spirit of getting more -- 6 thinking about how to get the institutional investors more 7 active, I think, is one that I very much share with the 8 Commission. 9 MR. DUNN: In self-preservation, I tend to have the 10 Commissioner first rule. So Commissioner Glassman, I haven't 11 lost track of you guys. Don't worry. I'm paying attention. 12 COMMISSIONER GLASSMAN: I like that rule. That's a 13 good rule. 14 Just listening to those of you who have already 15 spoken, there seems to be an implicit assumption that 16 institutional investors always have the best interest of all 17 investors in mind. And so my question is assuming that the 18 ultimate goal of our proposal is more than just getting a 19 nominee on the proxy, but it's for some purpose, and that, in 20 my mind, would be to max my shareholder value, are there 21 cases where the interests of institutional investors might 22 diverge from some or all other shareholders, and not 23 ultimately lead to maximizing shareholder value? 24 MR. DUNN: Anybody. You get to pick, Commissioner. 25 COMMISSIONER GLASSMAN: Oh, whoever wants to 1 answer, that's fine. 2 MR. DUNN: We'll start with -- Damon hasn't had a 3 chance to talk yet. Oh, I blew Mr. Moore off. Sorry. We'll 4 go with Mr. Moore. You go ahead. Sorry. 5 MR. MOORE: No, I can't think of a single instance. 6 And I appreciate you asking that question. I'm Richard 7 Moore. I'm the treasurer of the State of North Carolina. I 8 run the ninth largest public pension plan in the country. 9 I'm the sole trustee of almost 700,000 North Carolinians who 10 are looking to me to grow their retirement: teachers, 11 firefighters, sanitation workers, law enforcement officers. 12 I can't imagine a more representative group of average 13 Americans, small investors, who both have investments in 14 their traditional defined benefit pension with me, but in 15 many instances, also have a stand-aside, very small 401-K 16 account, of which I am also the trustee of what those 17 investment options are. 18 I can't think of any instance where our interest in 19 looking after the long-term value of a company -- and by 20 definition, those of us who are in the defined benefit 21 business are looking at 30-year -- at least 30-year -- time 22 horizons, that by definition, what is in our interest is also 23 in the interest of both the overall market place and the 24 small investor. 25 And I would also say that I think that we are the 1 only people that you will hear from in this discussion who 2 have absolutely no conflicting financial motives whatsoever. 3 And you, as representatives of the people on this Commission, 4 I hope you bear in mind the motives of why people are here 5 today and what they're saying. And we -- our fiduciary duty 6 is pure. We make no short-term profit no matter what 7 happens. 8 Now, that being said, I would like to illustrate 9 why I think this is exactly the right issue, the right 10 pressure point. This is a totally separate discussion in 11 Sarbanes-Oxley, the wonderful new listing standards, the New 12 York Stock Exchange. This is a separate discussion. This is 13 about the preservation of majority rights. 14 And the reason we need this particular avenue is 15 because in most instances, we have done something that the 16 people who started these companies and the body of law that 17 grew around them never thought that we would need. And that 18 is the total loss of an inside check, a situation where it's 19 totally a group of people spending other people's money. In 20 many instances, it's a lot like government in large, 21 publicly-traded companies. We need this outside check. This 22 is an appropriate outside check. 23 One last point that I want to make on this topic. 24 I'm often told by my friends who are directors of large 25 companies, "Well, Mr. Treasurer, why don't you just vote with 1 your feet?" And I think this point has been made. We no 2 longer can vote with our feet. And I want to give you just 3 some very quick statistics, because I do think they bear on 4 what you're trying to get done. 5 Twenty-five years ago, the State of North Carolina 6 had a $433 million equity portfolio. We had two managers. 7 They were both actively-managed accounts. The managers could 8 vote with their feet. 9 Today, we have a $35 billion domestic equity 10 portfolio. But here's the interesting part of it. Only 22 11 percent of it is actively managed. And I think these are 12 representative statistics of all public pension funds. 13 So in 78 percent of the time, we cannot vote with 14 our feet. We're in an index or an enhanced index product 15 where it embodies the long-term growth of the market, and we 16 need an effective way to get directly into board rooms. And 17 as a matter of fact, we have in our formal presentation of 18 formal materials, we'd like to strengthen this role, make it 19 stronger than it is now. Thank you. 20 MR. DUNN: Thank you. Thank you all for respecting 21 me. I'm keeping track of who's here. Damon, if you could 22 address what's come up so far, and also Mr. Lipton's earlier 23 point about 14(a)8 and how effective that is and the 24 negotiations of that, I'd appreciate it. 25 MR. SILVERS: That's a big agenda. 1 MR. DUNN: I know. And you've got eight minutes. 2 Go. 3 MR. SILVERS: I wanted, actually, to begin -- and I 4 think some of the things that I'm going to say are very much 5 related to what Mr. Moore just said. I want to begin with 6 the question of the purpose. Because I actually agree with 7 Marty on the purpose of corporate governance. And I think a 8 number of people have talked about the purpose being to 9 maximize shareholder value. 10 The board of directors in most states has a legal 11 duty to the long-term well-being of the corporation and its 12 shareholders. And that's not quite the same thing as 13 maximizing shareholder value. It may, obviously, encompass 14 it, but it's not identical. 15 Both of those things, in my opinion, exist to serve 16 a higher purpose, which is the creation of wealth in our 17 society, the goods and services Marty mentioned, the jobs 18 that, frankly, my organization and I think most Americans 19 have some great concern for. And I will stip to the fact 20 that there are multiple interests at this table. And the 21 interest I represent is working people for whom corporate 22 America not only produces profits and share appreciation, but 23 jobs, goods, services, and the good things in life. 24 The purpose of corporate governance is to forward 25 all of these things, and to insure most fundamentally that 1 the corporation is not converted into a vehicle for very few 2 individuals to enrich themselves at the expense of all of 3 those who are depending on the corporation to provide the 4 good things in life. 5 Now, what does all that have to do with the rule 6 before the Commission? And here I come, I think, to 7 Commissioner Glassman's question about our institutional 8 investors necessarily have the broader interests of the 9 corporation in mind. 10 The set of facts that Treasurer Moore just went 11 through describe a trend that is leading to the stock of our 12 large publicly-traded corporations to be increasingly held by 13 funds with long-term investment objectives who are in 14 everything. They really have no choice. Some might 15 criticize the public pension fund community for holding 16 indexed funds, and say, "Well, why aren't you more active?" 17 The reality is that when you're 40, 50, $100 18 billion, you have to own everything. You can't buy and sell, 19 and indexing is the cheapest way to hold everything. 20 That type of investor, with that fully-diversified 21 portfolio locked in over decades, looks a lot like the 22 corporation and its shareholders, that legal touchstone of 23 our corporation law. 24 And this proposal, with its emphasis on voice, on 25 holding for a long time, on large holdings, is designed to 1 put the ability to be on the proxy, and thus the greater 2 likelihood of being able to get into the board room, in the 3 hands of precisely those shareholders whose interests look 4 most like that term of art in Delaware law, the interest of 5 the corporation and its shareholders. And that is, to my 6 mind, the critical syllogism here, the critical logic of this 7 proposal, and why we support it so strongly. 8 Marty, you asked me to talk about 14(a)8. I will, 9 for the moment. 10 The current system we have does have the two 11 choices that a long-term investor has that the chairman 12 addressed in his opening comments, the choice of running an 13 expensive and divisive control contest, which my colleague to 14 my right appears to feel is the best way to get things done, 15 and the choice of walking away. 16 For the long-term investor, neither of those 17 choices -- for the large institutional long-term investor, 18 neither of those choices are very palatable. The costs, from 19 a fiduciary perspective of running that contest, are very 20 high. The idea of encouraging corporate takeovers and 21 raiders to solve your problems is not very helpful if you own 22 everything. 23 Bernie Ebbers was a wonderful user of the corporate 24 control market. He bought up a lot of "undervalued assets." 25 It's not clear that that was wonderful for those of us whose 1 retirement funds lost billions of dollars when those assets 2 were all sort of vaporized. 3 The other alternative that the system has is the 4 current shareholder proposal rule and its interface with 5 state law. And that shareholder proposal rule, the 14(a)8 6 rule, allows for a variety of proposals. In most instances, 7 they're predicatory. They're advisory. 8 It is true that increasingly, as Marty said, that 9 management of corporate America is responsive in various ways 10 to those proposals. But I think as a general matter, the 11 more -- shall we say the more -- the less these proposals go 12 to the harder things, the more responsive they are. 13 And there's been an astounding correlation between 14 the degree of seriousness with which the Commission is taking 15 the proxy access proposal and the degree of responsiveness 16 from which we're hearing from corporate America. In fact, it 17 appears that with each passing week, each passing day, the 18 level of responsiveness is increasing. In fact, I suspect 19 that tomorrow will be truly a very responsive day. And I'm 20 somewhat concerned about what would happen were, ultimately, 21 the Commission to either back away or in any real manner 22 weaken this proposal on that level of responsiveness. 23 MR. DUNN: Thanks. One note in this. If you're 24 going to address the Commissioner's question also, the mutual 25 funds have been kind of not the leading voice in this whole 1 debate. So you get a chance to be the voice of more than 2 just you here. 3 MR. ROITER: Thank you. And everybody can consider 4 my motives. 5 Well, let me first start -- and I will answer your 6 questions by making the observation that Winston Churchill 7 once made of a political rival when he observed that his 8 rival was a very modest person, and he had much to be modest 9 about. 10 I don't mean it in a perjurative way, but this 11 proposal of the SEC is a very modest proposal. But I 12 actually mean it in a complimentary way. I think it can add 13 to the overall improvement in corporate governance in this 14 country. 15 But let me add that we view corporate governance, 16 as others have mentioned, as a means to an end, and we can 17 all come up with our verbal formulations of what that end 18 should be. I don't think there is too much difference 19 between the long-term interest of shareholders and the long- 20 term interest of the corporation, but I will accept that 21 there may be a subtle distinction. 22 But let me stress that it is only one means, and we 23 should not lose sight of other means. And what is called the 24 Wall Street Rule is often denigrated. But if you step back 25 to think of what the Wall Street Rule itself rests upon, I 1 think you may take a more balanced view. 2 When one focuses simply on corporate governance, 3 there's a tendency to see the vast dispersion of equity 4 ownership in this country and the problems of collective 5 action and the active and deep trading of publicly-reported 6 company securities in the secondary market as somehow the 7 Achilles' heel of corporate governance as some fundamental 8 weakness in the way our capitalist structure operates. 9 Well, perhaps there are some disadvantages to wide 10 equity dispersion and the problems associated with collective 11 action, and perhaps some investors trade too frequently. But 12 the great strength of our capitalist structure, the great 13 strength of our capital markets -- indeed, the envy -- to the 14 rest of the world is the very depth and liquidity of our 15 secondary markets. 16 And if we didn't have investors who were sending 17 their own message and, in fact, voting every day by going to 18 the secondary markets and buying and selling publicly- 19 reported stock at the price they think those companies are 20 worth, then we would have, I think, a much bigger problem on 21 our hands. And so I would urge a broader view of corporate 22 governance as a means, but not an exclusive means, to enhance 23 your owner value. 24 I would say in response to Commissioner Glassman's 25 point that before we get to matters of public location, I 1 would observe as a matter of law, at least current law, that, 2 speaking as the general counsel of an investment management 3 company, we owe our fiduciary duties to our fund 4 shareholders, and solely to our fund shareholders. That 5 doesn't mean that we're out to do harm to others in the 6 market place, but it is to say that we owe a singular 7 unqualified, unstinting fiduciary duty solely to our fund 8 shareholders. We make wise decisions. We make decisions 9 that, in hindsight, prove not to be particularly enlightened, 10 but that's a different point. 11 Now, to the question of whether there can ever be a 12 departure or deviation between the interests of the funds 13 that we manage and other institutional investors and other 14 shareholders in underlying portfolio companies, I would say 15 again, as a matter of law, that one minority shareholder owes 16 no duty to any other minority shareholder. 17 There are negative duties. You cannot deceive. 18 You can't manipulate the markets. You cannot engage in 19 fraud. But those are negative duties. There are no 20 affirmative obligations that one minority shareholder in an 21 underlying company owes to another. Perhaps people want to 22 rethink those standards, but I think they've served us 23 exceedingly well throughout the course of our economic 24 history. 25 I will give an example. And you may think that 1 it's an unenlightened way to act, and that all investment 2 managers ought to accept the dogma that all assets should be 3 managed passively. We happen to take a different approach, 4 and we hold out our business model to investors, and they 5 make an informed choice in whether they would like their 6 assets actively managed or not. In fact, Fidelity has index 7 funds. But we believe in active management. And our fund 8 managers -- trust me on this -- are not monolithic in their 9 outlook. Some are more patient than others. 10 But I think it's true of all of our equity fund 11 managers that when they look at their portfolio securities, 12 they ask themselves not an absolute question -- "Do I like 13 this company or not?" -- but a relative question -- "Do I 14 like this company in my portfolio compared to other companies 15 I could own?" 16 They also ask themselves, and they ask the 17 investment analysts that work at Fidelity, "What really is 18 the value of this company?" I need to know that. Because 19 when I hold every stock, I am betting that I'm better 20 investing in that stock than in other stock. I need to know 21 if this stock is under-valued or it's over-valued. 22 Now, let's assume a company has its shareholders' 23 meeting on June 15th, and the fund manager is asking that 24 question of a company to his or her analyst within Fidelity 25 on October 15th. So more than half a year away is the 1 shareholders' meeting. And the analyst comes back to say, 2 "You know, I think this company's stock is over-valued." 3 And the analyst then explains why, and you'll get a 4 combination of reasons. One reason may be that the board is 5 hidebound, that there is a founder who has become lethargic 6 or complacent, a board that is too compliant. 7 But you also may hear other reasons. You may hear 8 that -- well, let's just make up some facts. This is a high- 9 tech company. It came up with a great product in the 10 computer field, but it was based on closed architecture. It 11 didn't want others creating competing products that it could 12 sell or have to compete against. 13 The analyst might say, "You know, that's great." 14 But the time is running out. They're losing market share. 15 And they're going to have to switch to an open architecture 16 business model. 17 Same kinds of analogies can be applied to drug 18 companies. Patents are running out. We believe that stocks 19 are over-valued or under-valued, and it's our job to find 20 those out. 21 So on October 15th, the fund manager decides, "This 22 stock is over-valued. I could wait eight or nine months, and 23 I might have the possibility of nominating one director who 24 would be, by definition, in the minority to a board that's 25 hidebound in a company that is lagging its competitors in 1 innovation and product development. And if I perhaps did 2 that, perhaps that would rebound to the benefit of all the 3 shareholders of this company. But am I being true to my 4 fiduciary duty to the shareholders in my fund?" 5 I think the answer is certainly a debatable one. 6 In my view, it's if you think that stock is over-valued, and 7 you can find a stock that has a more reasonable value in the 8 market, you should be selling the over-valued stock and 9 buying the under-valued one. And that may have unfortunate 10 consequences for the company and for the other shareholders 11 as the market price of that stock goes down. 12 But I would just return to my original point. The 13 market itself is a great discipline of corporate management. 14 And that message is sent every day when shareholders vote by 15 buying and selling securities. 16 MR. DUNN: Mr. Odland, if you can bring to a close 17 your answer to Commissioner Glassman, we'll return to the 18 chairman. But go ahead. 19 MR. ODLAND: Well, as a CEO representative of the 20 business roundtable, it has been interesting over the past 21 few years to learn all the potential negative adjectives that 22 can come in front of the word "CEO." It must be a great 23 relief to the attorneys in the room to get off of late-night 24 television and have the CEOs get on. 25 MR. ROITER: Don't leave out politicians. 1 MR. ODLAND: You know, I think that the business 2 roundtable has been appalled by the scandals that have come 3 out in the last few years. I personally have been appalled 4 by it. And I think that the objective that has been 5 outlined, which is to try to make boards more responsive to 6 shareholders, is a real positive objective. 7 I think, though, that the rules that have been 8 proposed don't quite match the objectives. If you think 9 about it as, you know, one neighboring country having an 10 issue with another neighboring country, rather than using 11 diplomacy, you invade with troops and try to force your will 12 on another country, and after taking them over, then you'll 13 talk about it, I think that if we want responsiveness, then 14 the first sign, you don't try to, you know, recompose the 15 board. 16 And I'm struck by a comment that was made earlier 17 that we've got to get -- we need to get a way into corporate 18 board rooms. And that strikes me as interesting. I didn't 19 hear that we need to have corporations become more responsive 20 or listen to the shareholders, and that is concerning. 21 I think the rules are intended to target a few, but 22 in reality, hit everybody. And I don't think that any 23 individual shareholder necessarily has the same objectives. 24 As another shareholder, and I think by definition, there are 25 individuals or the groups that are all different. And so by 1 definition, you can't possibly represent other shareholders. 2 I think that if you look at what we're attempting 3 to do here, we're looking -- you'll forgive me, as CEO of 4 AutoZone -- I think we're trying to drive the car by looking 5 in the rearview mirror a bit, rather than looking through the 6 windshield. And I feel a little bit like we're trying to 7 solve the sins of past generations, rather than deal and look 8 at the realities of today. 9 I look at my own situation. I joined AutoZone 10 three years ago. Didn't know anybody on the board. We have 11 a very independent board of directors led by Charles Elson, 12 who will speak later as the head of our independent 13 nominating committee. Three directors have joined our 14 company since then. I didn't know any of them. They all 15 came in through the independent nominating committee. 16 I think if you look at the facts from the business 17 roundtable companies, 80 percent of our companies have boards 18 that are 80 percent or more independent, 86 percent of 19 nominating committees have criteria for directors. They have 20 a process -- 87 percent have a process to correspond and 21 communicate with shareholders. These are all nascent changes 22 that didn't exist. 23 And I think if you look at what exists five years 24 ago and what existed today, we have entirely different 25 situations. I think we have situations today where boards 1 are independent, where there are independent nominating 2 committees, where there are communication procedures, where 3 there are director reviews. I think there's been a "C" 4 change in the corporate governance world. 5 You know, when we wrote our very first set of 6 corporate governance guidelines three years ago, in our 7 company, there were none to copy at that point, and nobody 8 had every heard of corporate governance. I've been trying to 9 talk to shareholders about corporate governance for years. 10 I've been very proud that we have been ranked number five in 11 the ISS surveys. I can't get any of our investors or the 12 funds to focus on it, however. They say, "Yeah, yeah. Let's 13 talk about your performance, and let's talk about the 14 shareholder returns." They don't want to talk about 15 corporate governance. It's been very interesting to me. 16 I think that an issue here is that those people who 17 are those proxy rating services will become more powerful in 18 this process. They're unregulated private entities. They 19 are businesses unto themselves, actually, trying to make a 20 profit. It's interesting when you get a rating, you have to 21 buy their services to understand their rating and correct 22 some of the assumptions made in them. 23 I think that a very small number of shareholders 24 can make a huge impact on companies, and they have that 25 ability today. And I think that a very small number of 1 shareholders would like to impose their will on the majority. 2 And we're talking about very small thresholds in this thing. 3 It just seems to me that we should let independent 4 boards, which are very, very new to corporate America, and 5 let independent directors and independent nominating 6 committees do their work. The way that we ought to have this 7 done is for the independent nominating committees to respond 8 to shareholders for proposals. 9 If you went to AutoZone's web site today, it would 10 instruct you exactly how you could become a shareholder -- I 11 mean a nominee to our board of directors. I think that the 12 independent nominating committees are the way to respond to 13 shareholders, and I think that the "C" change of corporate 14 governance in the last couple years has put that into place 15 today. 16 MR. DUNN: We have three or four folks who want to 17 respond. 18 CHAIRMAN DONALDSON: Yeah, I'd like to direct my 19 question to Marty Lipton in terms of your statement. 20 Basically -- and the reason I'm addressing it to you is you 21 touch upon one of the -- as we've looked at the letters 22 coming in, you touch upon one of the oft repeated reasons for 23 not doing anything now in terms of the timing of this 24 proposal. And that reason is broadly stated. Give Sarbanes- 25 Oxley a chance to work. Give the new listing standards a 1 chance to work. 2 As Nell Minow indicates, the definition of 3 independence has been written down on paper. But the true 4 performance of an independent director, I think, is the 5 market test. Not whether they went to school with somebody, 6 or whether they have connections or whatever, but it's what 7 they do. 8 And so my question is in terms of the timing here, 9 if we had a board that had totally independent directors, 10 according to the rules that are written, and yet at the next 11 meeting of that board, there was a 35 percent or a 50 percent 12 withhold vote, that to me is the market place of judgment as 13 to whether shareholders think the board is acting in an 14 independent way. So my question is why wait to get that 15 feel? 16 MR. LIPTON: I agree completely. But if you have a 17 majority of the outstanding shares that are in favor of a 18 particular action or a particular person, that's something 19 that should be accorded great deference. But I don't agree 20 that 35 percent should overrule 65 percent. I think that, 21 you know, in looking at it and saying that, you know, if 22 there's a 10 to 35 or a 10 to 49 percent withhold, that means 23 that director should no longer serve. I think you have to 24 look at it the other way and say somewhere between 90 and 51 25 percent of the shares think that that director should 1 continue to serve. 2 CHAIRMAN DONALDSON: But if you -- excuse me for 3 interrupting. But if you -- you're arguing about the level 4 of withhold, you know, which is an open thing that we'd like 5 to hear a discussion on. But I think you're saying that 6 there's no reason to delay the market test of the 7 independence of the board in terms of the timing of this 8 proposal. That's a question, not a -- 9 MR. LIPTON: No, I don't agree with that, Mr. 10 Chairman. I think that this proposal is a serious mistake at 11 this time, and that it should not be adopted by the 12 Commission. I think that what we're involved in at the 13 moment is a reaction, both in government and in the board 14 room, to the scandals of the late '90s. And government has 15 taken very significant action to deal with them, and we 16 haven't had an opportunity to test whether that action is 17 going to be effective. And to keep adding further 18 obligations and restraints on boards, I believe to be a 19 mistake. 20 It is clear already that it is getting more and 21 more difficult to attract people to serve on boards. It's 22 not because they fear liability or fear lawsuits and so on. 23 They just don't want to be involved in a contentious 24 situation. 25 What they want to do is act collegially to do what 1 they believe to be in the best interest of the corporation, 2 and they don't want to be involved in a situation where they 3 are facing a proxy contest, where they're facing campaigns 4 that disparage their independence or disparage their 5 performance. And therefore, they say, "I'd rather not serve 6 under these circumstances." I think that's a factor that the 7 proposal fails to take into account. 8 We have a very, very difficult problem today to 9 attract independent, competent people to serve on corporate 10 boards. Not people who will not express their views, not 11 people who are in some way beholden to the management of the 12 corporation; just independent, competent people who are 13 willing to serve. And I think that in the long run, that's a 14 far more significant problem than the problem of the 15 corporations that some investors feel are not fully 16 responsive to their desires. 17 You know, on a day-to-day basis when proxy 18 resolutions are presented to a corporation, or a substantial 19 shareholder has instituted a withhold campaign, the first 20 thing that, you know, a corporation does is sort of get in 21 touch with the Council of Institutional Investors, get in 22 touch with ISS, go to Boston to meet with Fidelity, which is 23 usually the largest shareholder of the company. There's an 24 immediate seeking out of the views of the shareholders to 25 find out just what the major shareholders think that the 1 corporation ought to do. I think it's working. I think it's 2 working just fine. There's no question that you can point to 3 occasional situations where resolutions are ignored. But I 4 don't think that's a reason for sort of this major change in 5 the whole process. 6 MR. DUNN: Commissioner Goldschmid? 7 COMMISSIONER GOLDSCHMID: Common ground, I think, 8 if I hear the panel, is that this whole idea ought to be 9 about efficiency and productivity and profitability of the 10 major corporation. And I guess I have two questions. 11 Marty, assume a dead company and a compliant board 12 and excessive compensation, and I've invested in this 13 company, and the shares have fallen from 40 to 20. So Eric's 14 Wall Street Rule won't work quite so well. If I pull away, 15 I'm going to lose, and the company may lose more. What do we 16 do about that in the present situation? 17 And Mr. Odland, a question for you. You were 18 talking about narrow shareholder groups taking advantage. 19 How are they going to take advantage in a process where you 20 need two majority votes, and the 35 percent withhold is 21 roughly a majority vote, but you need a second majority vote 22 before you can elect one minority director or two? How is a 23 minority group going to take advantage? 24 MR. LIPTON: Do you want me to try and answer the 25 first question, and have Steve answer the second question? 1 If it's worth doing, I would say that there ought 2 to be a full-fledged proxy fight to change the board, a new 3 group take over and do whatever is necessary. 4 COMMISSIONER GOLDSCHMID: And Marty, you know the 5 rule -- 6 MR. LIPTON: And if it isn't worth doing, you're 7 much better off getting $20 and not staying with something 8 that's going to go to five. 9 COMMISSIONER GOLDSCHMID: Marty, how many proxy 10 fights have you been involved in or do you know about for 11 companies with over 200 million market cap that are of real 12 size in the United States? 13 MR. LIPTON: I don't think that's the issue, 14 Harvey. 15 COMMISSIONER GOLDSCHMID: Even if the issue, 16 doesn't it indicate this system isn't working? 17 MS. MINOW: Yes. 18 (Laughter.) 19 MR. LIPTON: I think it's working just fine. I 20 think that when a company is a bargain out there, somebody 21 comes along and makes a -- the real question, or the real 22 answer, is I'm only aware of two or three companies that have 23 remained independent in the face of a significant premium 24 takeover proposal. 25 COMMISSIONER GOLDSCHMID: Even with your poison 1 pill? 2 MR. LIPTON: Even with my poison pill. 3 COMMISSIONER GOLDSCHMID: I mean, poison pill 4 basically serves to enable a board of directors to do what it 5 thinks is in the best interest of the shareholders. If the 6 best interest of the shareholders is to remain independent, 7 it enables the board to do that. 8 But as you're aware, since 1989, most companies 9 that have poison pills, including most companies with poison 10 pills and staggered boards that have become the target of a 11 significant premium tender offer by a bidder who is prepared 12 to conduct a proxy fight have, in fact, ended up doing a 13 transaction, either with the original bidder or with someone 14 who's offered a better price. 15 MR. DUNN: Mr. Odland? 16 MR. ODLAND: I think it's a good question. Thirty- 17 five percent is not -- 18 COMMISSIONER GOLDSCHMID: Well, you need a 50 19 percent in the second year before you get a minority 20 director. 21 MR. ODLAND: Yeah. But I think the issue here is, 22 you know, are we trying to fix the problems of a few years 23 ago versus the problems that we do or don't have today? And 24 I would argue that, you know, sitting in a board room today 25 with all, except me, independent directors is an interesting 1 process. And it's got to be an entirely different process 2 than what I'm hearing described of years ago, where, you 3 know, the CEO nominally controlled the board. I mean, that 4 just doesn't describe today's reality. 5 There's so much debate. We have independent 6 directors that agonize over every decision that's going on in 7 the company -- the capital allocations -- and these kind of 8 debates are really important for companies. But, you know, 9 if you toss in the middle of that a director that is 10 advocating a point of view, whether it's an environmentalist 11 point of view, a religious point of view, or -- 12 COMMISSIONER GOLDSCHMID: How about an efficiency 13 point of view? 14 MR. ODLAND: Well, listen. I think that the 15 definition of long-term well-being of a corporation is a very 16 interesting one. It's interesting to me as a board member 17 and as a member of management today to try to guide a company 18 for the long term when there are so many pressures for short- 19 term issues today. And, you know, the idea of a shareholder, 20 I think, has evaporated. These aren't shareholders. These 21 are, a large part, traders. And I know we've got holders 22 represented up here. 23 But if you deal with the realities of today's 24 traders, they're flipping shares, the turnover is constant. 25 They're dealing with what they want today. And perhaps there 1 are some very good shareholders here who would advocate very 2 good change. There are also a lot of people who are trying 3 to have short-term benefits created. And you can destroy a 4 company, as you know, very quickly with these things. 5 I think if you look in the past three months, there 6 have been 20 shareholders who have withdrawn proposals after 7 discussions with companies resolve their concerns. There's a 8 whole long list of responsive companies and examples that I 9 could throw out. 10 I don't mean to do that, but I think that boards 11 are listening today. I think boards are listening more not 12 because of anything that's happened in this city, but because 13 they are appalled at what's happened with the corporate 14 scandals, and they're afraid of what can happen. 15 If you watched what happened to Enron, the collapse 16 of an enormous corporation, the destruction of jobs. I'm 17 struck by Mr. Silver's remarks about jobs. And here we are 18 sitting with the presidential campaign that is talking all 19 about jobs, and we fear jobs in America today. I think we 20 have to allow boards and management to try to create the jobs 21 today without a divisive atmosphere. Boards should be 22 collegial, independent people who debate and do the right 23 thing for the well-being of all their constituents. 24 I think that's what the rules have set up. And 25 listen. All the rules haven't even gone into effect yet, and 1 I think you see changes already. I'm very heartened by that. 2 COMMISSIONER GOLDSCHMID: Yeah. But you wouldn't 3 deny that there are dead companies out there, would you? 4 MR. ODLAND: Well, I think by definition, companies 5 have come and gone. But, you know, there are efficiencies in 6 the system. And I know that sounds bad. But we are a 7 capitalist society with the ability of companies to come and 8 to go, and with the abilities of companies to succeed and 9 fail. We don't like the scandals. That's terrible. But, 10 you know, I don't think we should take away our capitalist 11 system or deny what has built the greatest economy in the 12 world. 13 COMMISSIONER GOLDSCHMID: You do that by giving the 14 owners the right to influence the company a bit? 15 MR. ODLAND: I think if you start destroying the 16 ability of boards to work, and take management and boards' 17 focus off of the long-term well-being of a company, and 18 having to deal with all these kinds of situations, unintended 19 consequences of small shareholders trying to hijack the 20 process for whatever purpose, I think you could take and set 21 the economy on its ear, quite frankly. 22 MR. DUNN: We have 15 minutes and seven people, so 23 I'm going to go fairly quickly. You're next. You've been 24 waiting to burst out of your chair for -- 25 MS. MINOW: Yes, absolutely. Okay. Well, I'm 1 going to talk really fast and respond to several of the 2 points. 3 First of all, 35 percent does not overrule anyone. 4 It just gives you the chance to make your case to the 5 majority. 6 My firm rates boards of directors. And by the way, 7 you can't buy a subscription to find out how it works. You 8 just get that for free from us. But we rate boards of 9 directors. And a director who got a bad grade called up and 10 complained about it. And I said, among the various things I 11 talked to him about, for free, was -- I said, "You know, you 12 had three shareholder resolutions that have got over a 13 majority that the board has not responded to, and one of them 14 got 60 percent." He said, "Nell, I'm glad you brought that 15 up. The corporate secretary explained to me those are fringe 16 shareholders." I said, "Sixty percent. You're the fringe." 17 (Laughter.) 18 MS. MINOW: I said, "If you had 60 percent of your 19 customers rejecting some of your product, you would not say, 20 'Oh, they're the fringe.' You would not marginalize them. 21 You have to respond." 22 I think that when you have critical mass, when you 23 have a majority of the shareholders, no individual 24 shareholder is going to be right all the time, or is going to 25 be looking into the long-term best interest all the time. 1 But all together, they are. That's the basic fundamental 2 principle of our entire system, and our economic system and 3 our political system. 4 And if you can get Eric and Damon and Richard all 5 to support your candidate, and all of the various other kinds 6 of funds and approaches, then you probably are right. And if 7 you're wrong, hey, that's exactly the market Steve was 8 talking about. 9 The best speech I ever read about the board of 10 directors of independence and integrity was delivered by Ken 11 Lay at the Houston Conference on Ethics. And we have had 12 independent directors for a long time. We've had independent 13 directors -- let the record show I'm making quote marks here 14 -- "independent directors" -- for a long time. We need 15 genuinely independent directors, and that means that they're 16 put to a genuine market test. 17 When my business partner, Bob Monks, decided to run 18 for one seat in a very Quixotic adventure on the board of 19 Sears, Mr. Lipton -- this is how I met him -- filed a lawsuit 20 against us because we had the temerity to ask for a 21 shareholder list. He said we wanted it for an improper 22 purpose. It seems to me that running for the board is the 23 actual purpose for which this list was intended. 24 But nevertheless, we didn't have the money to fight 25 him. We didn't have Sears's bank account. Sears used our 1 money to fight us, but we couldn't use Sears's money to fight 2 us. It's just a very, very, very bad system. 3 As for attracting people to be on boards, you know 4 what? We've been attracting the wrong people. Boards always 5 ask for consensus builders, and they're lovely people to 6 have. I don't happen to be one, but they are wonderful 7 people to have. 8 (Laughter.) 9 MS. MINOW: And the problem is you get kind of a 10 lowest common denominator dynamic operating. We need people 11 who are willing to be more independent, more outspoken. 12 Capitalism is not for sissies. And let's put these boards to 13 a real market test. And if this be shareholder treason, make 14 the most of it. 15 (Laughter.) 16 MR. DUNN: Mr. Silvers, then Commissioner Campos. 17 MR. SILVERS: The real question, I think, the 18 Commission faces is embodied in -- the question of this 19 panel, is there a problem? It's been asserted that the 20 problem is yesterday's problem. 21 I don't know what newspapers everybody's reading 22 here. The ones I read have front page stories pretty much 23 every day about something new, all right? About some new 24 company. Now, some of them, you know, Hollinger and Shell 25 and so forth, it's merely our money, not our corporate 1 governance system. But the problems are very much the 2 problems of the day. 3 Others -- and I'm not going to get into all the 4 names -- I'd use up all my time -- are problems of companies 5 that operate completely and are a corporate governance 6 system. Every day, there are new ones. 7 So is there a problem in the broadest sense? 8 Absolutely. And it keeps going and going and going. You 9 know, it's like the Energizer bunny. There's always a new 10 one. 11 The question the Commission faces here, given that 12 that is the case -- and I think we all know that that is the 13 case. The question the Commission faces is is there going to 14 be some system of accountability for directors that is in the 15 middle between taking your money and going home and taking 16 your loss and putting up the millions of dollars it takes to 17 effectively conduct a proxy contest? 18 The response from the corporate community since 19 Enron occurred has been deeply disappointing to me, because I 20 have said -- and Marty Lipton has been in the room on many 21 occasions -- I have said on behalf of the AFL-CIO that 22 Sarbanes-Oxley and its attendant new regulatory system is 23 designed to deal in large part -- it uses bright-line rules 24 to deal with outlier problems. Very important outlier 25 problems that must be dealt with. But that's what it does. 1 And it's sub-optimal for dealing with the fundamental issues 2 of how to run a business, and whether or not boards are 3 really functioning, and it's in our interest as investors, 4 having a more flexible governance-oriented system. 5 The corporate community's response -- and I think 6 you've heard it in spades this morning -- has been, "Oh, our 7 shareholders are all short-termers. We don't want to be 8 accountable to them." And then when it's pointed out, of 9 course, that this proposal doesn't actually give the short- 10 termers any powers at all, those people aren't short-termers. 11 They're all special interests of some kind with sinister 12 hidden agendas. 13 And, in fact, what's left is the nolle say. 14 There's no one -- no one -- who is really worthy to hold the 15 CEO accountable. Their answer, three years after Enron, is 16 no one. No accountability. Nothing. And that answer just 17 doesn't pass the laugh test. 18 The Commission has crafted a proposal that, in the 19 opinion of many of us in the worker shareholder community, is 20 not strong enough, but it does have the -- it is conceptually 21 correct. It has the right approach to the question of who? 22 Who holds them accountable? Because the answer "no one" just 23 doesn't work. And that, I think, is the -- that is the issue 24 on the table. And it is connected to this question of 25 collegiality. 1 Because the other question the Commission faces is 2 is collegiality at all costs? Is collegiality over 3 accountability? Is collegiality over responsibility? Is 4 collegiality over the interests of the corporation and its 5 shareholders? Should that really be the public policy of the 6 United States in the board room today, after Enron and 7 WorldCom, and on and on and on and on? Is that really what 8 our policy should be? And again, I just don't think that 9 proposition passes the laugh test. 10 And finally, with respect to Enron and jobs, I 11 cannot resist saying that I personally have known hundreds of 12 Enron employees, employee shareholders, who lost everything, 13 and whom the American labor movement fought with the money of 14 our members to try to help get pennies on the dollar back. 15 And I know that those people feel that the entire system of 16 corporate governance in the United States failed them and 17 ruined their families' lives. And I could tell you 18 individual story after individual story. 19 This proposal does not give and would not give 20 those individual investors much power. And some people will 21 be here this afternoon to complain about it. But what it 22 does give is it gives people just like them and their 23 fiduciaries some ability to make sure that doesn't happen 24 again. 25 And since all of our time is running out, on behalf 1 of my members, I'd like to commend the Commission for its 2 courage and responsibility in bringing that proposal forward. 3 MR. DUNN: I'm going to turn it over to one of the 4 Commissioners, Commissioner Campos. 5 COMMISSIONER CAMPOS: Thank you. Well, it seems 6 clear to me that in terms of addressing whether there's a 7 problem, if one lines up the numbers of letters we've 8 received and the commentary, there was a clear majority that 9 say there is a problem. And things end up, it seems to me, 10 in terms of investor organizations, whether they're 11 institutional or individual, retail or otherwise, and there 12 is a clear overwhelming response that the Commission has to 13 deal with that there is a problem. 14 And the problem, as I think has been very well 15 stated and articulated -- and I'll go over that again -- ends 16 up being a function of accountability to shareholders. And 17 while some academics have posited that maybe the ownership 18 model in America is no longer valid, that maybe, you know, 19 ownership of capital shouldn't necessarily control decision- 20 making for the long term, our laws still do. And owners are 21 owners. And we're faced, it seems to me, with that reality. 22 And so from a very pragmatic standpoint, this 23 particular proposal, as it would say very clearly, is modest 24 because it is modest. And so as I'm listening here, I'm 25 trying to understand why it's so terrible for the corporate 1 community to deal with this. 2 Number one, it's not a takeover item. There's no 3 way, you know, under this particular proposal that management 4 can be replaced under this particular proposal. 5 Secondly, a nominating shareholder, if you get to 6 that particular position, cannot propose someone who 7 represents its interest. It can only propose an independent 8 member of the board. So in other words, to enhance the board 9 from an independence perspective. 10 So why do you do this? I've asked myself over and 11 over. This is a modest, modest proposal. Who would go and 12 undertake the effort, you know, to gather support, to 13 undertake this whole effort unless you've got a very real 14 problem? Unless fundamentally, the board is so bad that, 15 given the obligations that the shareholders have, whether 16 it's through fiduciary or institutional or otherwise, 17 something needs to be done. 18 So that's the first item that strikes me. And I've 19 been listening carefully. I've been trying to find empirical 20 evidence, discreet evidence about the problems, because I am 21 concerned about the corporate world. And I've been on 22 boards, and I've been, you know, on the CEO side, and I 23 understand those kinds of pressures. But I understand 24 accountability. 25 And as far as the issues that I've heard, 1 distraction. I'm looking for evidence of companies being 2 distracted, you know, by this. I can't think of anything 3 more important than being responsive to shareholders. If a 4 shareholder is successful and an independent director goes on 5 the board, why is that going to be divisive? Why is that 6 going to necessarily mess up congeniality, if that's even a 7 reasonable goal? You know, that particular director is going 8 to have fiduciary duties as well, as far as I see the law. 9 And if they're going to have special interests or something 10 that is not to the benefit of shareholders and the discharge 11 of fiduciary duties, that particular director would have 12 problems. 13 So I guess the other idea is somehow that there's a 14 hijacking or a special interest situation here that would 15 somehow create a subversive or some sort of a disruptive 16 situation of the board. 17 Now, again, I remind everyone that this particular 18 nominee, if it gets past the first triggering point, has to 19 be elected by a majority. And then if that particular 20 director isn't discharging his or her responsibilities, 21 they're legal remedies for that particular situation. 22 And again, in most companies, you have very large 23 shareholder holdings, and so interests are very difficult to 24 be narrowly focused, and have that be the overwhelming 25 desire. And I would submit that most shareholders simply 1 want long-term value, and know that the management has some 2 plan that is moving toward there. 3 So, you know, my basic proposition is a very 4 practical one. Even if somehow it's not needed, because 5 today's generation of directors and today's CEOs are now 6 going to be responsive, what's the harm? What is so bad in 7 having an access, a limited access situation like it is? And 8 there's very good arguments that that issue be much more. 9 It's a little bit like William Douglas said about 10 the SEC in general, you know? Our rules and our laws are 11 like a well-oiled shotgun in the corner, that's also either 12 loaded or the ammunition is nearby, that is rarely used. You 13 know, I wonder how often this would be used. 14 So I don't know who wants to address that, but I'd 15 like to hear direct evidence about the danger or the harm, 16 and why there isn't a problem. 17 MR. DUNN: Well, I will jump in. We have four 18 folks who have been waiting for a second bite at the apple 19 that we'll run a few minutes over and go with. You were 20 first. And then I think we'll finish with you at the risk of 21 letting an economist go last, which I know can be -- 22 (Laughter.) 23 MR. MOORE: I understand. And I promise I will 24 keep my comments very brief. 25 Commissioner Campos, I'd also like to make one 1 further point along what you just said, that we can never 2 forget how tough a hurdle this is. This is majority vote, 3 majority vote, majority vote. I hope you all keep that in 4 mind all day long today. 5 But who ultimately bears the responsibility if 6 we're wrong? Well, we do, the long-term shareholders of the 7 company. And I think that's a point that cannot be 8 overlooked, not only -- and I neglected to say I'm here today 9 not just on behalf of North Carolina, but the National 10 Coalition for Corporate Reform. And we have somewhere around 11 a trillion dollars worth of assets in the market that have 12 signed on to some access to the proxy, and it's approximately 13 20 percent of publicly-traded companies. And I don't think 14 we're a fringe element. 15 But if you consider who is ultimately responsible 16 if we are wrong, I hope that gives us even more of a voice at 17 the table. And do not forget that this will only be achieved 18 when you have an instance where you have very diverse long- 19 term shareholders who all get together. I submit to you that 20 that instance will only happen where there is a history of 21 long-term poor performance, coupled with severe indifference 22 on the part of the existing board and management. 23 MR. DUNN: Mr. Bebchuk. 24 MR. BEBCHUK: Commissioner Campos raised the issue 25 of empirical evidence, so I thought what I should do is 1 highlight three pieces of empirical evidence which I think 2 are relevant to what people have been saying. 3 First of all, assuming that we are bound to have 4 some "dead" or under-performing companies, what is going to 5 happen with them? Randy and Marty talked about the 6 possibility of a takeover. Two colleagues and I have an 7 empirical -- which we looked at all the takeover bids in the 8 second half of the '90s. And what we find is that for 9 companies for targets with staggered boards, which are about 10 half of the targets, the likelihood of remaining independent 11 three years down the road is about 60 percent, and those 12 target shareholders lose an average risk adjusted more than 13 20 percent. 14 The reason why we have permitted this elaborate 15 structure of takeover defenses is because people have been 16 saying the corporation is representing a democracy. If you 17 are dissatisfied with what is happening, you should not 18 facilitate a takeover, but rather, you should replace the 19 directors. So we go and look at what is happening in that. 20 And in the written materials I submitted, I put 21 forward our evidence about the incidence of proxy contest. 22 And what we see is that in the seven-year period from '96 to 23 2002, out of about 10,000 public companies, we have proxy 24 contests in only about 10 companies a year. And out of 25 those, only about two are companies with a market 1 capitalization that is greater than 200 million. 2 Now, one possible inference is that all the other 3 10,000 companies in the country that are the business 4 roundtable -- seems to believe that all the other 10,000 5 companies, their shareholders are quite satisfied and 6 content, and that's why we don't have a proxy contest. It 7 seems to me that an even more plausible interpretation is 8 that almost non-existent incidence of proxy contest is at 9 least in part due to the impediments that the current 10 arrangements produce. 11 And the last piece around empirical evidence is 12 that there is substantial work by financial economists that 13 looks at the facts of corporate governance provisions that 14 insulate boards from shareholders -- like staggered boards, 15 limits to shareholder power -- to amend by-laws and so forth. 16 And the conclusion of those -- which I survey in 17 the written materials I submitted, is that when you have 18 those arrangements, when you have more insulation, market 19 values lower, stockholder returns during the '90s were lower, 20 operating performance is worse, and executive compensation 21 goes higher and less sensitive to performance. 22 So this evidence suggests that at least on the 23 margin having less insulation of boards from shareholders 24 would be a good thing for shareholder value. And therefore, 25 I commend the Commission for considering this step to avoid 1 reducing, to some extent, board insulation. 2 MR. DUNN: Thank you. I'm going to let you guys 3 split five minutes. And I realize we're kind of steamrolling 4 downhill and not giving Steve a chance to answer us. Maybe 5 60 seconds at the end, we'll throw, okay? So be prepared. 6 All right? Go ahead, Eric. 7 MR. ROITER: Thank you. I'll try to be brief. But 8 I thought it would be useful if I just took two minutes and 9 told you what my preliminary thinking is about how we would 10 actually live with this rule if it were adopted in 11 essentially the form it's proposed. 12 First, I think it would be a by-product. We 13 wouldn't probably deliberately plan to be a five percent 14 shareholder. But we would inevitably be a five percent or 15 greater shareholder in a great number of companies. 16 One thing is we'll have to change our systems, 17 because I don't believe we currently try to track day by day 18 by day whether we are at five percent or not. And therefore, 19 there's now some more work to be done to make sure that we -- 20 as I understand the Commission's rule, you have to continue 21 to be at least a five percent holder in every day for that 22 two-year period. 23 Again, I would start by the proposition that we are 24 a fiduciary to our fund shareholders. And if we're given -- 25 forgive me for using this word -- a privilege -- but I think 1 it is an entitlement -- to do something that otherwise was 2 not available to us, then we would have a serious fiduciary 3 duty to examine how and when we would use this new 4 entitlement. 5 Last year, to give you a rough sense of our size, 6 we voted proxies at the annual meetings of over 3600 U.S. 7 companies. If you count foreign companies, it gets to about 8 6,000. I'm not sure we can get into the headhunting business 9 and come up with a roster for all of those companies, or even 10 for a significant fraction of those. 11 We do have, I think, a duty to examine what we can 12 do, if that opportunity were available to us. One approach I 13 think we would give serious thought to would be to step back 14 -- and I'm echoing now what has been said by a number of 15 participants here this morning -- look at what kind of 16 qualifications, what kind of characteristics are important 17 for independent directors. In a sense, independent directors 18 are really a misnomer. What we really want to find are 19 directors that are dependent, but dependent on shareholders, 20 and responsive to shareholders. 21 And we, I think, can come up with factors, filters, 22 both positive and negative ones, that would look to such 23 things. Are there reciprocal relationships where somebody is 24 the CEO of one company, on the board of a second company, and 25 the CEO of that second company is on the board of that first 1 company? I think serious thought needs to be given, 2 generally speaking -- and these things can't be dispositive - 3 - but looking to see how many boards any individual serves 4 on, especially if that individual is a full-time officer of 5 another company. There may be a preference to at least have 6 people that aren't engaged full-time in a day job. 7 So those are some of the practical factors that we 8 think we would bring to bear. It may turn out that we 9 develop those, publish them, give them to companies, invite 10 them to speak with us -- and, in fact, we're getting 11 invitations now to speak with management in the wake of the 12 Commission's other rule regarding the role of the nominating 13 committee -- and invite nominated committees to come back to 14 us to say we found some potential candidates. Hopefully, 15 they'll be more than the number of nominations we could make, 16 so we would have some kind of choice, and we could give some 17 kind of feedback about which one we think would be 18 preferable. It may come to the point where some companies 19 really are in extremis that we would actually offer up a 20 particular individual. So I see a combination there. 21 And I would tell people who are thinking of using 22 the Commission's rule to look at our proxy voting guidelines, 23 which are on our web and filed with the SEC, and other large 24 institutional investors have them as well. There are certain 25 conditions under which we tell people we are going to 1 withhold votes on board members the next time around if 2 certain actions are taken, including adopting a poison pill 3 plan without putting that poison pill plan to a shareholder 4 vote. 5 So one way to maximize, perhaps, the use of this 6 new rule if it's adopted is to look to see the conditions 7 under which institutional investors currently are saying they 8 will withhold votes for directors. 9 MR. DUNN: Thank you. Mr. Kroszner. 10 MR. KROSZNER: Thanks. I think the best way to 11 summarize a response to the Commissioner's question is that I 12 think it's -- the proposal is the wrong answer to the right 13 question. Because I think the right question is thinking 14 about what are the role of shareholders in particular, large 15 shareholders? Because small, dispersed shareholders don't 16 have enough expertise or enough time to be able to 17 effectively monitor, but large shareholders may be more able 18 to. Although as we just heard, holding 3600 companies in the 19 U.S., even for a very large institution like Fidelity, 20 doesn't make things very easy to monitor all those companies. 21 And that's why I think not focusing on this type of 22 proposal of sort of trying to get some extra directors on 23 under certain circumstances, but doing things like -- and I 24 think Lucian would also agree with this -- maybe facilitating 25 the takeover process, allowing for an outsider to be able to 1 more easily gather the votes necessary to run a successful 2 takeover. 3 So the outside entrepreneur comes in and visits 4 Fidelity, visits Van Guard, visits just a small number of 5 others -- Barclay's Global, State Street, our large trustees. 6 So if you look at, like, the Dow Jones 30 7 industrials, the top five institutions, on average, own 20 8 percent. The top 10 institutions own 30 percent. So if they 9 could just easily go to a small number of these people and 10 feel that they would have a decent chance of being able to 11 run a takeover contest, that seems to be the effective means, 12 or more effective means, rather than these other approaches. 13 Things that may be obstacles to that are, as I had 14 mentioned before, concerns about short swing rules, if this 15 is seen as acting as a group; the Williams Act disclosure, 16 because, of course, the entrepreneur has to be able to 17 develop enough of a holding in his or herself to make it 18 worthwhile to undertake this. And so thinking about those 19 kinds of rules, I think, is really an important way to go. 20 In particular, some of the concerns, I think, that 21 people would have with this proposal is that a lot of the 22 trigger levels are fairly arbitrary. They're not really 23 based on good systematic evidence. Commissioner Goldschmid 24 reminded me of one of the election commissioners in Florida. 25 Thirty-five percent is, well, close to majority. And I 1 think -- 2 COMMISSIONER GOLDSCHMID: Randy, you need a second 3 vote. 4 MR. KROSZNER: Oh, yes. 5 COMMISSIONER GOLDSCHMID: And brokers can vote on 6 the 35 percent, which means it is close to a majority in 7 itself. 8 MR. KROSZNER: For sure. But you had said two 9 majority votes in one of your earlier comments. So I just 10 was making -- 11 COMMISSIONER GOLDSCHMID: There's a second problem 12 to this that requires majority twice, an access proposal. 13 MR. KROSZNER: And I think -- so it's open to 14 potential tinkering and such, and not really based on 15 something systematic. So it allows to change down the line. 16 There's a bit of a camel's nose under the test that I think 17 creates uncertainty, and I can understand that. But also, it 18 changes the threat point of sort of outside groups maybe 19 trying to put pressure on firms, even if this isn't actually 20 used very much. 21 It's the same thing with the takeovers. Even if 22 they're not actually used very much, it's the threat of 23 takeover that is really the key. You don't actually have to 24 see very many of them for them to be effective. And I think 25 the same thing can be here. And I think there's a concern 1 not that you're actually going to get a particularly special 2 interest person on the board. But it makes it more easy to 3 try to extract some concessions from a board or from a 4 corporation that might not be consistent with shareholder 5 value, even if they actually can't get someone onto the 6 board. 7 So my bottom line is that I really applaud the 8 Commission for moving to phase 2, for thinking about the role 9 of large investors, significant shareholders, and what they 10 can be doing. But I think it's the wrong focus. Take away 11 the existing restrictions rather than put on a complex new 12 set of rules. 13 MR. DUNN: Thank you. Steve, you get to close. 14 MR. ODLAND: Well, I think that the business 15 roundtable agrees that companies need to be shareholder 16 responsive, shareholders of all size. I think that the 17 Commission -- and in many of the comments, I think that the 18 intentions here are targeted towards relatively few 19 companies. Unfortunately, there are a few, but it is a 20 relatively few that are unresponsive. 21 I think companies today are reading out to 22 shareholders. I'll use our own company just as one little 23 example. But our largest shareholder himself sits on our 24 board. We've reached out. Our independent nominating 25 committee did reach out and took a nomination from that 1 largest shareholder and put that person on the board. Our 2 independent nominating committee has reached out to Fidelity 3 and a number of our other shareholders and asked for 4 nominations. 5 This is going on today far differently than what 6 was happening, I think, a few years ago. The business 7 roundtable believes this is a matter for state law, and state 8 law does say that every individual board member has a 9 fiduciary responsibility to all shareholders. And that means 10 that perhaps not every shareholder is going to always be 11 happy with every decision, because the fiduciary 12 responsibility is to the whole. 13 I think the way the rules are set up here, I think 14 it does not address the objective. I think you've 15 established here one percent triggers, and I think, you know, 16 many comments have been made that this isn't going to happen 17 very often. I disagree. I think it's going to happen a lot. 18 Because I think that one percent shareholders are going to 19 try to trigger proxy access, because it's only in effect the 20 next year and so forth, just in case. And I think you're 21 going to see these triggers broadly used across, and it's 22 going to distract from management. And I think management 23 and boards need to -- it's going to distract from both. 24 Management and boards need to be focused on their 25 shareholders and creation of shareholder value over the long 1 term. 2 I think that we should let the newly independent 3 governance and nomination committees do their jobs. I know 4 that the comment has been made that there have been 5 independent directors around for a long time. There have not 6 been independent boards around for a long time in most of 7 these companies. This is a new phenomenon. A lot of these 8 rules haven't even taken effect yet. And there's incredible 9 -- there are incredible statistics out there that companies 10 have changed dramatically just in the past year. I think we 11 need to let -- this whole thing was set up to have 12 independent nominating committees assess and be reactive to 13 shareholders, and responsive to shareholders. And we need to 14 let this process work, because I think it is and will work 15 for the future. 16 MR. DUNN: Thank you all very, very much. You've 17 been incredibly responsive and helpful. I'm sure these are 18 themes that we'll be addressing as the day goes on. I'll 19 turn it over to Alan to close. 20 MR. BELLER: Again, thank you all on this panel for 21 your contributions. We're running a little late. I'd like 22 to convene the second panel promptly at 10:55, so we'll take 23 a break for about nine minutes. 24 (A brief recess was taken.) 25 MR. BELLER: If we could all take our seats, 1 please. Thank you. Okay. We're now going to address the -- 2 the second panel of our -- of our day's agenda, which focuses 3 around the question of whether the Commission's proposal is a 4 reasonable solution. I think I will, for the benefit of the 5 audience, including the -- the Net audience, at least go 6 around the table and identify our participants on the second 7 panel. 8 From my left, Peter Wallison of the American 9 Enterprise Institute, Ira Millstein of Weil, Gotshal & 10 Manges, Ralph Whitworth of Relational Investors, Charles 11 Elson from the University of Delaware, Richard Breeden of 12 Breeden & Company, and the only formers we're identifying is 13 former members of the Commission, and Richard is a former 14 chairman of the SEC. Next to him Joe Grundfest, a former 15 commissioner, now at Stanford Law School, Thomas Donohue at 16 the U.S. Chamber of Commerce, and finally Peter Clapman here 17 representing TIAA-CREF. 18 I think I'd like to start. This panel is about is 19 the proposal a -- a reasonable solution. The first panel 20 addressed whether there was a problem, and what it was, and 21 there were a couple of sides of that issue. So I assume this 22 panel without necessarily claiming unanimity on the first 23 panel, that there -- that there is as problem, or being able 24 to identify it. In light of that debate, certainly a number 25 of participants in the debate on the Commission's proposal 1 have agreed that there is a problem involving unresponsive 2 board and/or sub-standard performance at some companies. And 3 also a lack of effective means of shareholders to address 4 those issues. 5 One approach to that, that has long been advocated 6 by some, including some shareholders, is greater shareholder 7 ability to play a role in the process of nominating and 8 electing directors. The Commission's proposal before us 9 today follows that approach in one particular respect, 10 involving a change in the proxy process to permit significant 11 shareholders, or groups of shareholders to require that 12 nominees be included in company proxy materials. 13 The requirement would be triggered by one of two or 14 three other proxy-related events, suggesting that a 15 substantial percentage of shareholders were dissatisfied 16 either with the way the proxy process was working, or with 17 director nominees put forward by companies. It would also be 18 subject to other conditions. And we're not going to talk 19 about the details of that proposal very much, I hope, on this 20 panel, because we're going to leave much of that for the next 21 panel. 22 Obviously, we will -- there are no clear lines, and 23 I think the discussions will overlap. But I guess I'd like 24 to start with a question for Mr. Breeden. Among your current 25 activities is, you're acting as the corporate monitor of 1 WorldCom MCI. And in connection with that, you recommended 2 in your report on improvements in corporate governance a 3 procedure not unlike the Commission's proposal for a 4 particular company that had been involved in gross wrongdoing 5 and had shown I guess what I'd describe as appalling 6 weaknesses in governance and controls. And the question I'd 7 like to start with is, is the Commission's approach an 8 appropriate one to address the -- the broader but less 9 extreme problems among public companies generally, or among 10 that sub-set that the -- that the proposal would attempt to 11 identify? 12 MR. BREEDEN: Well thank you, Alan. First of all, 13 it's a great pleasure to be back here, and I'd like to just 14 compliment the -- the Commissioners and the staff for holding 15 this roundtable, and -- and for soliciting the kind of 16 dialogue and public discussion of what is a very important 17 proposal. And I think this an example of the Commission at 18 its best, trying to put forward a balanced solution to a 19 national problem. To get all the best thinking that it can, 20 and ultimately make the decision that you will have to make 21 going forward. So, this is a very, very healthy process, and 22 -- and I'm glad to see it. 23 I'm struck by the -- the words of the immortal Yogi 24 Berra that it's deja vu all over again. We tried to 25 restructure the proxy rules in -- from 1990 to 1992, when I 1 served as chairman. And at the time, we were trying to 2 achieve three things, which we did change the rules to do. 3 One to permit greater communications among major shareholder 4 groups, two to establish the short slate -- the ability to 5 have a proxy contest for less than all of the board, and 6 three to improve disclosure regarding compensation, and 7 particularly equity instruments. 8 And I can remember Jack Welch in my office upstairs 9 telling me that options had no value, and therefore it would 10 create chaos if we were to require disclosure concerning 11 options grants. The same arguments were raised against the 12 proposals then. They're premature, they were unnecessary, 13 they were interfering unduly with the role of the states, 14 they were an over-reaction, they were going to be costly. 15 The world would end if we adopted them. And we did adopt 16 them, and last time I checked, the world is still here. 17 If anything, many people who said we didn't go far 18 enough perhaps were correct in hindsight -- 20/20 hindsight. 19 But I think the arguments for the status quo will always be 20 raised, but one of the greatest virtues of capitalism as an 21 institution is its ability to evolve to meet the challenges 22 of the times. And this is an example of the SEC, I think, 23 trying to solve a problem that we have in our system -- not 24 to destroy the system or harm it, but to make it better. 25 At MCI, we faced the case, as Alan mentioned, where 1 a serious problem of -- of governance dysfunction -- anytime 2 that eight of your most senior corporate officers get 3 indicted, I think it's a fair -- fair conclusion that you 4 have a dysfunctional governance system. And admittedly, the 5 WorldCom problem is an extreme example, at one end of the 6 system. Its misbehavior that virtually all public companies 7 do not have. It's a limited case, and it's an extreme case. 8 But like Enron, it did happen. And -- and I think 9 the Commission can't stand back and ignore the fact that when 10 Fortune 100 companies implode and cause losses to investors 11 measured not in billion, but in tens of billions or hundreds 12 of billions, that we have a problem with our system that we 13 can't be so complacent as to say we won't even try to make 14 improvements. And so, in the MCI situation, we decided that 15 mere disclosure was not an adequate solution to problems, and 16 that there had to be some ability, if shareholders believed 17 the board was not adequately representing shareholder 18 interest, for the shareholders to put forward candidates who 19 they thought would do a better job. 20 Now, in our system at MCI, there are no triggers. 21 Every year, when there is a vacancy, there is a process under 22 which the nominating committee does as it would do in any 23 company -- select who they believe to be a list of some of 24 the best candidates. And unlike other companies, they are 25 then required to sit down with their larger shareholders, 1 share their list, discuss with the shareholders are these the 2 best candidates we can find, take in put if the shareholders 3 think those candidates are not as -- the best that could be 4 found, and if, hopefully, as in the shareholder resolution 5 process, in most years, they'll reach an agreement. 6 If they don't, then the shareholders have the right 7 to nominate someone to have a contested election for that 8 seat. And horrors of horrors. We might actually have a 9 contested election, just like every town and state and 10 national office in America, just like every major university, 11 just like most other institutions that practice democracy. 12 And it isn't something that we would expect will happen every 13 year. If the company is well run, does a good job, has good 14 performance, there's no reason to think shareholders will try 15 and force changes in the board. 16 But if the company is on a path, as WorldCom was in 17 the past, rather than waiting for the criminal process to 18 take over, and the immense collateral damage that can occur 19 to shareholders and employees, and customers and others, it's 20 an attempt to have a process that would operate sooner. In 21 terms of whether the Commission has done the right job in 22 coming up with a rule for all companies, rather than 23 companies who have had the WorldCom history, I think you've 24 done an excellent job. 25 And my one message that I would hope would be heard 1 here is, don't let the perfect be the enemy of the good. You 2 have a good proposal. It's balanced -- it's not perfect. I 3 personally, were I doing it, would have thresholds that were 4 a bit lower. I think your thresholds are a little bit high. 5 There's a risk of a lot of litigation, because some of them 6 are complex. You have a risk that the process is going to 7 work slowly. 8 But, I wouldn't hold back from passing the rule, 9 which is an excellent rule, and does focus on -- on a real 10 problem in our corporate sector. I think the complexity is 11 there because the Commission has done what it always does. 12 It's tried to be balanced and responsive, it's tried to 13 listen to the objections and craft a reasonable middle 14 ground. I don't think the Commission should ever be at the 15 extreme. It is a body that looks for the middle ground, and 16 while this rule isn't perfect, it's a very, very good rule, 17 and I think you should adopt it. 18 MR. BELLER: Thank you. Mr. Donohue, I know that 19 the U.S. Chamber of Commerce's comment letter asserts that 20 there's been, and I'll quote "There's been no compelling 21 objective showing of need for the new rules." I guess I'd 22 start by asking you, do you recognize some need for 23 shareholders to play a larger role in the process of 24 nominating and electing directors, and if so, as an 25 alternative to the Commission's rule since the letter clearly 1 indicates that the Commission's proposal doesn't work -- are 2 there any suggestions as to what approach would be 3 appropriate? 4 MR. DONOHUE: Well thank you, Alan. First of all, 5 the thesis of our argument is based on the fact that we have, 6 in recent time, gone through some of the most substantive 7 adjustments in how boards of directors are required to 8 operate, both under Sarbanes-Oxley, under the new rules from 9 the New York Stock Exchange concurred in by the SEC, from the 10 new rules under the NASDAQ concurred in the by the SEC, and 11 from a whole series of practices that are developing not only 12 because of the rules, but because of the realities of the 13 market place, and the realities of the legal place. 14 Everything that happens in our companies is now 15 affected by what happens with either the securities lawyers 16 or the class action lawyers, and we spend an extraordinary 17 amount of time in boards talking about that. 18 I think that while the former chairman and a very 19 talented man points out that everybody else runs for office 20 in a democracy, I -- my own view is that corporate directors 21 -- the ones you really want to get -- are not very good local 22 politicians. And I would not like to see on the boards of 23 corporations on a regular basis the whole running-for-office 24 for one overriding reason. And that is that some of the best 25 of people that we want on those boards won't run. 1 Second, I ask a series of questions that I hope the 2 Commission will consider. And that is, who's behind all of 3 this? And now, I'm not talking about the lawyers and the 4 academics and the -- and the former commissioners and others 5 who are considering these matters. But who's really behind 6 it? Who's really driving this issue, and who sees an 7 opportunity in this -- in this new milieu to -- to advance 8 their other issues? 9 It's very clear to those that have carefully looked 10 at the matter, that unions that have been unable to deal with 11 corporations on a whole series of issues see this as a great 12 opportunity to leverage the corporations. They don't even 13 believe that it'll happen that often, but they think they'll 14 have the sword to hold over their heads. I suppose there are 15 other interest groups, as well, that might do the same thing. 16 Now, when we began to look at this, we didn't just 17 dismiss it out of hand. You remember in our comments, we had 18 about 30 suggestions that we looked at that might make it 19 better. For example, the whole question of deciding how you 20 get to your percentage. I mean, does everybody -- is it 21 everybody that has a share, or the people that decide to 22 vote? Because some of your most thoughtful, mature and 23 skilled investors may not vote for a lot of reasons that 24 they've long established. And that puts you at more risk. 25 We went through these 30 objectives of improvement, 1 and at the end of it, we looked at it, and we said, you know, 2 even with all of those 30 issues, for two reasons, we would 3 oppose it. One reason, that's what we believe in terms of 4 having to deal with all of the new things that are in place, 5 and that are being put in place, that it would be best not to 6 do this now. And the second reason is, we think with all of 7 the enthusiasm that has been gendered up on this issue, maybe 8 by us saying absolutely not, we can get a little bit of more 9 detail thought about it. 10 As a matter of fact, there are those amongst my 11 colleagues who believe that the Commission doesn't have the 12 authority to do this under the law, and we may well be in a 13 position, if this were to be passed, particularly as it's 14 written, to go to the court to test that. Now, make sure you 15 understand one thing. The chamber is not acting in an 16 irresponsible way at all. We understand there are 17,000 17 public companies. We understand that there are some 18 companies whose behavior, and executives whose behavior, and 19 boards whose behavior is totally unacceptable, and we ought 20 to get those people out of our business. 21 What we are concerned about is that this great 22 American miracle that generates all of the capital and the 23 inventions and the leadership -- the economic leadership in 24 the world -- is not so strangled with new rules, new 25 regulations, new approaches, new leverages, that they don't 1 tend to their business. I think -- I think what we really 2 want here, is we -- we don't want special interests 3 masquerading as shareholder interests. We want a system 4 where shareholders can have their voice, and where boards 5 will be responsive to that voice. 6 There are a whole series of things, from -- from -- 7 as I mentioned, what will happen on the follow-on to these 8 actions? Short sellers, questions of legal issues, the 9 ability to attract good board members, who's going to vote. 10 It's just so that we can put a stake at the other end of the 11 issue. This is not a timely matter. I -- Mr. Breeden 12 indicated that Jack Welch didn't think so, even though Jack 13 Welch had a little problem with his compensation. He created 14 one of the greatest companies in the history of the world. 15 What we want to do is put a stake in the ground and 16 say look, can we be a little more reflective about this? Can 17 we understand that there's more new stuff in a board room, 18 and that 60 percent of our time is spent doing things that 19 have been put on our plate, not on leading our companies? 20 And we need a careful thought about who's behind it, why it's 21 there, and what are you going to pass. And we want to be 22 very -- very reasonable about this, and I thank you for the 23 opportunity to offer our points. 24 MR. BELLER: I guess I turn to Mr. Clapman, if I 25 could, to maybe respond to some of what we've heard so far. 1 MR. CLAPMAN: First, TIAA-CREF, with a sense 2 similar to what Richard Breeden just said, strongly supports 3 the proposal as it has been proposed, and urges adoption of 4 it. We think it's a very -- to use the word just employed -- 5 reflective -- it's a product of a very reflective process at 6 the Commission itself. We believe that it really -- if you 7 start to run the numbers and see the spectrum of shareholders 8 in the United States, it can only produce effects if whatever 9 develops out of this is broadly supported by a large, full 10 spectrum of shareholders in the United States. 11 What we try to at TIAA-CREF is engage in a 12 corporate governance program that depends in its first 13 instance on quiet diplomacy. And a point that I would make, 14 just as a starting point, here, is that the very fact that 15 the Commission has been considering such a rule starting with 16 the staff report, has, in our view, substantially affected 17 the dynamics of discussions we are currently having with 18 companies. 19 And a concern that I would express, recognizing 20 that there are some honest views that believe that this is a 21 mistake, is if this were ever pulled by the Commission, I 22 think it would adversely affect the ability of shareholders 23 to have positive results with their quiet diplomacy with -- 24 with companies. So I really urge that as -- as a -- as a 25 consideration. 1 I also believe that this rule is complementary, not 2 in challenge to the reforms of the Stock Exchange and 3 Sarbanes-Oxley. Those rules and provisions, and listing 4 requirements really don't get at the heart of how 5 shareholders in limited circumstances, with a limited number 6 of companies -- and that's really where I believe it would 7 fall -- can have an effective voice in corporate governance. 8 So, although I applaud those reforms, that is not a rationale 9 not to take this step, because I don't think, again, whether 10 you think it's a reasonable proposal, depends on whether you 11 think there's a problem. 12 The problems in corporate governance in the United 13 States have not yet been fixed. This is an extremely modest 14 -- as it was pointed out in the earlier session -- attempt to 15 address those issues, and give the right shareholders a 16 potential voice here, and to depend ultimately on 17 shareholders understanding what their best interest is. And 18 I have great faith that shareholders who are fiduciaries for 19 the people that they manage the money for will operate in 20 that way. 21 The notion that we should give now time for the 22 reforms that have just been adopted, to see how those reforms 23 -- whether they work or whatever, I think is a polite way of 24 saying we shouldn't have such a rule. Because, by the time 25 you could get a reasonable enough time to make any 1 determination, probably people will have forgotten why we 2 engaged in this effort in the first place. And then you'd 3 have the same level of dispute and challenges to whether it 4 really didn't work, it did work, or what have you. So, I 5 reject that as a notion to not have this rule adopted. 6 Finally, if I could just -- just close on -- on 7 this note. I think any conjecture as to how often this would 8 be used is -- is nothing more than conjecture. We can all 9 make a good guess. I think the SEC has, in the spirit of 10 reflecting on this issue, probably reflected long and harder 11 on -- on it than anybody could have reasonably expected. And 12 I think good things would occur with adoption of the rule, 13 where organizations such as TIAA-CREF, which was not an 14 original proponent of this rule, would use it for positive 15 purposes, I think to benefit all shareholders. 16 So, I urge it on that basis, I believe it's as good 17 a starting point for seeing how a needed reform would work in 18 practice with -- with real triggers and real rules, and I 19 think it would work extremely well. And people, upon 20 reflecting where we were, sometime in the future will wonder 21 what the fuss was about it in the first place. 22 MR. BELLER: Thank you. I'd like to turn to Mr. 23 Whitworth, and Relational Investors' comment letter, which -- 24 which does support the proposal, states in particular, and 25 again, I'll quote. "The rules if adopted will inject an 1 increased level of accountability into the director selection 2 process." I guess I'd ask you to evaluate that thought 3 against the concern that we've heard expressed, I think, on 4 the first panel, and also by Mr. Donohue, that the 5 Commission's proposal would allow the director selection 6 process to be taken over in some circumstances by people with 7 special interests masquerading as -- as shareholders. 8 MR. WHITWORTH: Okay. I wanted to start off, as 9 others have, complimenting the Commission and its staff, not 10 just on this roundtable, but on all the work they've done 11 over the past few years in this area. And this, I think, of 12 all the initiatives that have been put forward, whether it be 13 by the Commission or other bodies, is the most critical, and 14 potentially the most powerful in addressing what I think were 15 the causes of -- of many of the scandals that we -- that we 16 have all experienced over the past number of years. 17 In all of those, even though there were different 18 circumstances that gave rise to each of those scandals, and 19 in some cases quite divergent circumstances, the common 20 denominator in all of them was poor board room dynamics. And 21 so, I think this rule, alone, gets at that issue. 22 Mr. Donohue mentioned, as you suggested, that I 23 might address, the -- the -- sort of the disruptive impact 24 that this might have, or the empowerment of special 25 interests. And I would suggest that those special interests 1 -- their leverage would only be as strong as the 2 vulnerability that the company left itself in. And the way 3 that they can address that vulnerability, is by having a 4 board, and having a nominating process that was vigorous, and 5 that put forth a board of directors, and put forth a image of 6 its -- of their board dynamics such that the other 7 shareholders wouldn't support changes. 8 And so therefore, this voice of a -- of a potential 9 special interest would be a rather muted on in that 10 circumstance. And I think that that dynamic is the most 11 powerful aspect of this rule. 12 The -- the rule would spur nominating committees 13 and boards to be even more introspective, and even be more 14 concerned about how the shareholders are ultimately going to 15 feel about their board. The people that are representing 16 them. And it would also cause them to think more about, 17 rather than just the resumes of the people on the -- on the 18 board. Because if you look at WorldCom, or you look at 19 Enron, or you look at any of these situations, I don't think 20 anyone would argue that we didn't have highly, highly 21 qualified people. Maybe not to the person, but -- but 22 certainly 'way over majority in all of these situations, were 23 the kind of people that you'd like to see on corporate 24 boards. But what was missing is the dynamic. 25 So, the only other point I would make, and then 1 we'll let you move onto the other panelists, is that -- that 2 the triggering mechanisms, despite what's been said about 3 them, I actually think that -- that they are going to cause 4 more of this distraction and disruption than if you just had 5 a straightforward five percent, because they have lower 6 thresholds, and they will sort of embolden, or stir up some 7 of these interests to maybe try to qualify for future status, 8 rather than causing them in the first instance to muster five 9 percent, or some percentage, then put the -- put the nominee 10 forward. 11 And what we did at Apria, where we have a access 12 rule that, I think, many of you have may be heard about or -- 13 or potentially studied in detail -- what we did was, we put 14 it on the flip side, or the back side, where we said that if 15 the nominee -- not the nominator, but if the nominee didn't 16 receive 25 percent of the vote, then they couldn't be re- 17 nominated for -- I believe it's three years. So that was 18 where we tried to temper it. And so, anyway -- I know that 19 the next panel is going to start to talk more about the 20 details, but I think that's an important thing that we should 21 think about. 22 MR. BELLER: Thank you very much. Mr. Wallison, 23 you've got -- 24 MR. WALLISON: Thanks very much, Alan. In 25 listening to the first panel, I think that the problem, if 1 there was a problem, was arrayed as a problem of 2 accountability. And this panel is supposed to deal with the 3 question of whether this rule addresses the problems of the 4 first panel. And I'd like to really talk about that. We 5 have a problem of accountability, it is said. But in the 6 first panel, there was much disparagement, I think, or at 7 least not enough attention paid to the simple question of 8 shareholders selling their shares. I mean, that is the way, 9 and a very powerful way, for shareholders to make their views 10 known about how they think their companies are being 11 operated. 12 Now, it is true that some shareholders may not be 13 able to sell the shares, indexation, and so forth, would be 14 one -- at least one cited reason. But of course, you buy an 15 index fund in part for the diversification. You take the 16 good with the bad. The purpose is to spread your investment 17 over the entire economy. And so, in the index, there are 18 going to be companies with which you don't necessarily agree. 19 So, from my point of view, we have a -- the real 20 question here is, should we have a rule that deals with what 21 I think are the very few cases -- the anecdotal cases that we 22 heard cited here -- of the very few cases where companies are 23 actually not responsive. In my experience, companies hire 24 vast numbers of people, shareholder or investor, liaisons, 25 representatives, to make sure their shareholders are getting 1 a response. And the reason for that is that they do not want 2 to risk the possibility that there will be wholesale 3 disposition sale of their shares, which will cause their 4 capital costs to rise. 5 So, should we have a rule that deals with these few 6 cases where the shareholders can't sell? And my answer to 7 that is no. But then we get to the question, well, should we 8 have this rule, even assuming the answer you at the SEC come 9 up with is yes, we should have a rule, then my -- my next 10 question would be should we have this rule? And again, I 11 think the answer to that is no. 12 The reason I think so, is that the way the rule is 13 structured ignores what I think everyone agrees is the 14 purpose that we expect shareholders to be interested in, and 15 that is the improvement in shareholder value. The rule 16 actually is phrased in terms of shareholder dissatisfaction. 17 Dissatisfaction is a good deal broader than shareholder 18 value. And if you think about it, that's one of the reason 19 why so many people -- listening to Mr. Donohue is a perfect 20 example -- so many people are concerned that this rule 21 creates a vehicle for special interests to have their way in 22 dealing with, or influencing boards either directly through 23 getting a -- a director on the board, or forcing companies to 24 negotiate with them. And we've understood that that is 25 actually something that is happening now. Companies feel 1 they have to negotiate, because of the existence of this 2 rule. 3 Those are -- those are issues that we needn't have 4 gotten into. and this rule needn't have focused on, if it had 5 focused on what the shareholders really should be interested 6 in, what we believe -- but I think everyone here believes 7 they're interested in, and that is the improvement in 8 shareholder value. 9 So, if I were working on this rule, and thinking 10 about amending it, I would focus on the things that would 11 create a definition of a troubled company, not shareholder 12 dissatisfaction as -- as the result of the kinds of things 13 you have in here as triggering mechanisms, but the failure of 14 the company to match its peers, for example, in -- in 15 profitability. Or things of that nature. That way, if you 16 were going to have a rule, you at least have one that was 17 specifically narrow enough to deal with a question that 18 shareholders ought to be worried about. 19 Now, okay. So, if you have such a rule -- if you 20 have the existing rule, what would be so wrong with putting a 21 couple of shareholders on -- or a couple of shareholder 22 nominees on the board? And the answer to that is, that if 23 you are starting with a standard that is shareholder 24 satisfaction, you could have a good deal of difficulty 25 arising out of that. For example, if the CEO of the company 1 is very active in religious or political activities, it could 2 well be that shareholders are dissatisfied about that. Those 3 are not, however, reasons why shareholders ought to be given 4 an opportunity to vote. 5 So, I think what we should be looking at here is a 6 much more narrowly structured rule, if we need a rule at all. 7 Thank you. 8 MR. BELLER: Thank you. I'd actually like to 9 follow up on -- on that a little bit. In your presentation 10 yesterday, the AEI had a -- was it yesterday or day before? 11 MR. WALLISON: Day before. 12 MR. BELLER: Day before. The AEI had a program 13 addressing the Commission's rule, and one of the things you 14 said, which I think directly relates to what you just said, 15 is that it's not possible to debate the efficacy of the 16 Commission's proposal unless -- without coming to a 17 conclusion on the fundamental question of what are the 18 legitimate interests of shareholders. And I think you've 19 just articulated what you -- what you believe the legitimate 20 interests of shareholders are -- 21 MR. WALLISON: That's right. 22 MR. BELLER: -- which is the maximization of -- of 23 value. I guess the -- if you would grant me that long term, 24 at least, there isn't always, or isn't often a monolithic 25 view of how one gets to maximization of value. Is it a -- is 1 it a -- is it a virtue or a vice of the Commission's proposal 2 that it leaves -- it, in effect leaves to shareholders -- 3 ultimately, majorities of shareholders, although it can be 4 triggered by smaller percentages -- but it ultimately leaves 5 to majorities of shareholders to determine through their 6 voting what they believe their legitimate interests are. 7 MR. WALLISON: That's how they do express it, 8 through the election of a board of directors, or through the 9 sale of the shares. If they believe that the company is not 10 pursuing the right policies in order to be profitable, having 11 read the financial statements and all the disclosures that 12 are required by the SEC, they have an opportunity to sell the 13 shares. 14 There are -- if there are a million shareholders, 15 there are probably 500,000 different views of how the company 16 should be operated. And if one thinks that by voting for a 17 single member of the -- of the board of directors, you can 18 actually change the way the company is -- is operated for the 19 good in the view of all those shareholders, I think that's a 20 highly doubtful proposition. 21 MR. BELLER: Our chief economist, Larry Harris. 22 MR. HARRIS: Clearly, to be well-informed about how 23 assets are being used by existing management is very 24 expensive. And when a fund or a shareholder discovers to 25 their satisfaction that the assets are not being well used, 1 they need to take some action. As we think of the various 2 alternatives, I want to ask about the rewards to the -- to 3 the potential actions. 4 So for instance, it's been suggested that 5 shareholders can always vote with their feet, by selling 6 their securities. In what sense does a shareholder get 7 rewarded for doing the research necessary to value the firm, 8 when they then leave the firm? They avoid the potential cost 9 of future ownership of that firm, but in what sense do they - 10 - do they obtain the rewards for having identified the fact 11 that the firm is poorly managed? 12 MR. WALLISON: Is that addressed to me? 13 MR. HARRIS: Yes. 14 MR. WALLISON: The way the shareholder benefits 15 from that is that he or she puts the investment into a 16 company that would be better managed. If the shareholder 17 finds that the company is poorly managed and believes as a 18 result of this poor management, and this is another question 19 entirely, whether there is such a cause and effect 20 relationship, but assuming the shareholder believes that poor 21 management of the company will result in a decline in the 22 share values, then the shareholder benefits having done the 23 work to see if that decline is going to occur, the 24 shareholder then moves the investment to another company 25 which is better managed, and presumably, at least by that 1 shareholder's rights, benefits from that change. 2 MR. HARRIS: Leaving behind the firm that 3 presumably is still poorly managed, how does that benefit the 4 economy? 5 MR. WALLISON: I think if companies that are poorly 6 managed have much higher capital costs, two things happen. 7 Either they go out of business because they can't compete 8 because of their very high capital costs, or the companies 9 change their methods of management, so that they conform to 10 what shareholders believe is the right way for them to be 11 managed. 12 MR. HARRIS: So, the beneficiaries, assuming that 13 either process takes place, then are people different from 14 the people who identified the problem in the first place. 15 How does that mismatch promote efficiency? 16 Normally, efficiency is promoted when somebody is 17 rewarded for doing good. 18 MR. WALLISON: I don't think I necessarily 19 understand what your question is. 20 MR. HARRIS: The price is depressed by someone who 21 has done their research and decided they had no hope of re- 22 establishing control of people who aren't performing well, so 23 they are just going to move and go elsewhere to avoid 24 continued losses. 25 They are selling the firm at possibly a loss to 1 them. It makes the firm cheap and creates an environment in 2 which change will take place. 3 The change may take place through take over, 4 because the firm is now cheap, or through the pressures of 5 the capital markets as you described, which by the way, only 6 works if the firm has to return to the capital markets, but 7 when the change finally does take place, the beneficiaries of 8 the change are the then existing shareholders, the person 9 doing the take over, and not the person who originally 10 identified the problem and acted upon it. 11 There is a mismatch of incentives. 12 MR. WALLISON: That's excellent, because that gives 13 people an incentive to look for these companies that are weak 14 because of bad corporate governance, if you believe that 15 makes a difference, and buy those companies in the hope that 16 they will go up when there has been a take over or some other 17 change in management. 18 What is very clear to me is that putting one or two 19 directors on the board of a company that is say a dead 20 company, as was mentioned in the first panel, it would not do 21 anything to improve the management of a company that is a 22 dead company. 23 I have grave doubts about whether any of these 24 ideas would really work. 25 MR. BELLER: A lot of cards just went up. I am 1 going to go to Peter Clapman, who has been waiting patiently, 2 and then Commissioner Goldschmid has a question. Peter? 3 MR. CLAPMAN: I'm going to go to the heart of why 4 we have a corporate governance program at TIAA-CREF in the 5 first place. It is the belief that -- I really would 6 challenge the point that has just been made -- if you have an 7 active investment program, which TIAA-CREF has to some 8 degree, that if we don't like a particular company's 9 corporate governance, we can just sell the stock. 10 We do believe that constructive engagement is a 11 legitimate part of what we have a corporate governance 12 program for, to produce value for our constituents, and 13 therefore, it is not just the indexers that should be the 14 ones engaging. 15 I think it's a responsible position for us to take, 16 and I think it has produced long term value for TIAA-CREF and 17 for other shareholders, and we are willing to accept the free 18 rider issue because we are concerned if it produces value for 19 TIAA-CREF as such and benefits other shareholders as well, 20 that is fine. 21 Another point is this notion that the leverage that 22 this potential rule would give would get into the wrong 23 aspect of negotiation with companies. We negotiate with 24 companies all the time, and the issues we identify are 25 excessive executive compensation, board independence, and 1 other issues that are legitimate shareholder concerns, and 2 that is where we are getting a change occur in part because 3 of the impetus of a possible rule to this effect. 4 I think there is no real risk that issues will be 5 pressed on managements that would be contrary to legitimate 6 shareholder interests. That is where we will do our focus 7 and others that have that kind of focus and shareholder 8 power. 9 MR. BELLER: Commissioner Goldschmid? 10 COMMISSIONER GOLDSCHMID: Peter, let me take you 11 back to my dead company. What good is the Wall Street rule? 12 That's really what Larry Harris was asking. 13 I bought at $40. This dead company over a period 14 of years has gone down to $20. The board is compliant. The 15 compensation is terribly excessive. It's running as 16 inefficiently as anyone could wish. 17 Exactly why do you think the Wall Street rule works 18 here? If I sell out, what I have done? I haven't change 19 governance. Yes, $20 now can circulate, depending on my 20 number of shares. Do you really want to have this system 21 work that we have to wait for bankruptcy before we can cure 22 what could have been cured much earlier? 23 I guess the second part of my question is what's 24 wrong with shareholder dissatisfaction? The shareholders as 25 an aggregate group in a majority of contexts over time 1 believe this company isn't running well, productively, 2 efficiently, why won't you trust them? Don't you believe in 3 the market that much? 4 In terms of whether this is going to have some 5 effect out there, we have had two panels now. We have had 6 Fidelity and the labor groups and TIAA-CREF, everyone that is 7 involved is telling you it's having real effect. 8 What's your empirical evidence that it won't have 9 effect? 10 MR. WALLISON: I guess to your first point, which I 11 think I understood, you have a rule you are proposing here 12 which would put one or two directors on a board. If you 13 start off with a dead company, which has declined from $40 to 14 $20, one or two directors is not going to make the 15 difference. 16 COMMISSIONER GOLDSCHMID: You don't think majority 17 votes publicly and put there by TIAA-CREF isn't going to have 18 an effect? 19 MR. WALLISON: I agree, if I could just continue 20 the point, I agree with Randy Kroszner's view and the view of 21 a number of other people whose views on this I respect, that 22 what we ought to be focusing on is how to change the entire 23 board, not put one or two directors on a board with the 24 possibility that they will simply be harassers of management, 25 but change the entire board. 1 That's not what this rule does. In fact, this rule 2 would not accomplish what I think you hope the rule will 3 accomplish. 4 When you talk about shareholder dissatisfaction, 5 what's wrong with that, I'm not one who wants shareholders to 6 be dissatisfied. I'm not really that kind of person. Not 7 everyone would agree with this, of course. 8 My view is that shareholder dissatisfaction is just 9 too broad a standard. We know what we expect shareholders to 10 be interested in, and that is improving the profitability of 11 the company. 12 If we are going to have a rule, and I'm not for it, 13 but if we did have a rule, that rule should be focused on 14 that question. In fact, the use of this very broad standard, 15 which is shareholder dissatisfaction, makes it very difficult 16 to establish the middle way that the Chairman was talking 17 about in his opening remarks, because it creates in the minds 18 of many people in the corporate community the idea that Mr. 19 Donohue expressed so well in his opening remarks, that this 20 is really going to be a vehicle for a whole lot of things 21 that corporations shouldn't have to deal with, that aren't 22 really the province of the shareholders. 23 COMMISSIONER GOLDSCHMID: Do you think the majority 24 of shareholders are going to vote against their economic self 25 interests twice? Have you ever seen it happen? 1 MR. WALLISON: I don't know whether you'd ever be 2 able to determine whether that has happened, so I can't say 3 that I have. 4 MR. BELLER: I'd like to move this on. Professor 5 Elson, you have been waiting patiently. 6 MR. ELSON: I've got my hackles up a little bit. 7 A couple of quick thoughts. 8 MR. BELLER: I'm glad we gave you time to calm 9 down. 10 MR. ELSON: Lots of water. 11 A couple of points. First of all, vis-a-vis the 12 argument against the rule, on the special interests, I 13 respectfully dissent from that particular approach. Number 14 one, I don't think the idea of having a shareholder access to 15 a proxy or short slate, if you will, would promote the 16 interest of particular groups. 17 Frankly, to get elected, you have to have a 18 majority of the votes. To get a majority of the votes, you 19 have to cross a lot of different issues. It all comes back 20 to economic issues. That's number one. 21 People want folks on boards who represent broad 22 economic decisions, not a particular political issue or 23 another. I've always thought that argument was not a 24 particularly good one. 25 Frankly, the special interests that are typically 1 active in this area typically call for broad-based governance 2 type resolutions that are attractive to a lot of folks, 3 whether they are anti-staggered board, and they attract a 4 substantial majority of the votes. 5 If you are going to attack the proposed rule, I 6 don't think that's the right approach. 7 Number two, the collegiality approach. By putting 8 someone on, you have someone who is not going to be 9 collegial. Having been a disagreeing director, and Ralph has 10 as well, I don't think that necessarily is the case. 11 Frankly, you are certainly not welcomed with open 12 arms when you show up, clearly. However, I think the key is 13 achieving a sense of consensus within the room, within the 14 board room, to effect change. 15 I think where you have seen directors come on 16 through this particular process in a short slate, typically 17 they have produced a very good result, a result that everyone 18 in the end is happy with. I think that's critical. 19 The idea is who you get there. I think anyone who 20 gets elected to a board is probably going to have to be the 21 type of individual who gets a majority of the vote. 22 Let me back up a second. This is the reasonable 23 alternative, this is the reasonable proposal. 24 I agree with every thought behind the proposal 25 itself. I think it makes perfect sense, vis-a-vis having 1 shareholder access, not to the proxy, but shareholder access 2 to the process. I think the short slate is not a bad thing. 3 I think it's a very healthy thing long term. 4 My quibble with the proposal is not the proposal 5 itself and not the reason behind the proposal, but the 6 approach, because I don't think it answers the ultimate 7 question here. 8 I think there is a problem that has to be 9 identified, so I would agree with the conclusion of the first 10 panel. 11 I think the solution is number one, independent 12 nominating committee, that in fact seek out representation 13 from large investors, or all investors for that matter. 14 That's not the ultimate solution. 15 I think you have to have the availability at some 16 point of some kind of access where the system is broken to 17 bringing other nominees into the process. I think the way 18 you do that frankly is not simply by giving someone access to 19 the proxy. That's only half of it. That's only a quarter of 20 it. 21 The real issue is who pays for it. You can get on 22 the proxy, but if you have to mount the campaign out of your 23 own pocket, there is a real disincentive to doing it 24 correctly. 25 I think the ultimate solution has to go back to the 1 state level, interestingly enough, and for a re-thinking of 2 the way that we in fact pay for these contests. In a 3 contest, on a long slate, or a short slate, typically 4 management pays for it. The shareholder does not pay for it, 5 or does in fact pay for it out of their own pocket. The 6 company pays for the company's slate. 7 I think that if you create a system whereby on a 8 state level, or state approved level, the dissident 9 shareholders, dissident slate, are entitled to a 10 reimbursement of their expenses if in fact they are 11 successful in getting someone onto a board on a short slate, 12 I think that's the ultimate solution, or let's say if they 13 don't in fact get a majority but come close, that some sort 14 of proportional reimbursement of their expenses is 15 appropriate. 16 If you simply provide for access to the proxy 17 itself, that's only a little bit of the way. The real issue 18 is who pays for it. I think in a legitimate debate on the 19 board itself, that it should come from the company's 20 treasury, if the shareholders approve it, to have such a 21 campaign. I think ultimately that's going to be the long 22 term solution here. 23 I also have some federalism concerns, frankly, with 24 the proposal as it stands, not on the basis of authority or 25 not, but sort of long term dialectical concerns as to what is 1 the best dialectical system to resolve corporate disputes, 2 which I still think should be at the state level. 3 MR. BELLER: Mr. Breeden, I know you've had your 4 card up. I want to get a reaction to Professor Elson's 5 proposal as an alternative to the Commission's. 6 MR. BREEDEN: I certainly would agree with Charles 7 that the states bring an enormous amount to the party. I 8 don't think we ever under estimate the value, and I've 9 personally participated recently in a rather extensive trial 10 in the State of Delaware over a rather hotly contested 11 government situation. 12 Having a system such as we have in Delaware of 13 courts that are deeply versed in business dynamics and that 14 have the level of experience they have with fiduciary issues 15 is a tremendous asset. 16 I think federalism doesn't mean the Federal 17 Government goes away entirely. It goes to the right balance 18 of actions by Federal and state governments. 19 I think long run here, appropriate action at the 20 Federal level needs to be reflective of what's going on in 21 the states, and there may be better ways to solve some issues 22 or some parts of issues through the state process. 23 I also wanted to just -- I think we have heard from 24 Peter an eloquent articulation of what I call the Marie 25 Antoinette School of Corporate Governance. If you don't like 1 what's going on, sell your shares and buy a house in Beverly 2 Hills. 3 I really don't think that sort of cynical approach 4 of permanent disenfranchisement of shareholders is the way 5 our corporate system ought to evolve. I think the arguments 6 one can make of special interests, goodness gracious, we 7 don't want them to get out of control. 8 Let's remember, Michael Eisner was a special 9 interest, too. He's a different kind of special interest. 10 It is all well and good to say we don't want the 11 corporate system unduly disrupted. That's right. We have to 12 be very careful, and I agree with some of what Tom Donohue 13 has said, we have to be careful that these proposals are 14 balanced, but the idea that accountability should be foreign 15 to the system and access and participation, that we should 16 slam the door on shareholders who are concerned about their 17 property, the operation of their company, it seems to me goes 18 too far. 19 MR. BELLER: I want to put Professor Grundfest and 20 Mr. Millstein at ease. We are going to go to at least 12:15. 21 We didn't start until 12:00. I definitely want to get to 22 both your comments on what has been said so far, and also 23 your proposals, which have been submitted to the Commission 24 as alternatives. 25 I'm going to exercise the Chairman's prerogative to 1 let him ask a question first, and then we will move on. 2 CHAIRMAN DONALDSON: I just wanted to bring the 3 panel back to a central question. If you presume that the 4 prior panel determined there is a problem, and let's just 5 assume for one minute there is a problem, I'm not saying the 6 panel said that, let's assume there is a problem. 7 What do you do about it? You can be against it. 8 You can be for it. If you assume there's a problem, how do 9 you modify what's been put forward here? How do you attack 10 this thing? Or do you just say we can't do anything? Too 11 many people against it, too many people for it. 12 I think that is part of your assignment here. 13 MR. BELLER: Professor Grundfest? 14 MR. GRUNDFEST: Thank you very much, Mr. Chairman, 15 and thank you also, Alan. I'm happy to begin with that 16 assumption, because I think there's a lot of evidence 17 suggesting that the assumption is true. I think the 18 challenge that faces the Commission is extraordinarily 19 important. It's obvious that the issue is quite 20 controversial, and for that reason, I think it's prudent for 21 the agency to take the time to make sure that it gets its 22 response to this issue just right. Several people have 23 observed, if we had a more active market, a less regulated 24 market for corporate control, we might be able to eliminate a 25 large percentage of the issues that currently drive core 1 governance phenomena, and I agree with that entirely. 2 But unfortunately, taking steps to relax some of 3 the restrictions that we currently encounter in that market 4 aren't on the agenda today. Perhaps as part of a broader 5 consideration, we might consider a real market solution to 6 that part, because it would address Commissioner Goldschmid's 7 observation about his dead company. Then we would know how 8 to take it out back and shoot it. Right now, there's a 9 version of gun control in that area that prevents taking that 10 company out back and putting it and its shareholders out of 11 its misery. 12 So, from that perspective, there are simpler ways 13 to solve Commissioner Goldschmid's problem, and I -- I would 14 strongly endorse the agency to look at those. But if one 15 steps back and takes a look at the proposal that's currently 16 pending before the agency, even if one agrees that there is a 17 problem, and the problem needs to be resolved, it's not at 18 all clear that this is necessarily the best possible 19 resolution. 20 In particular, if one wanted to critique the 21 proposal, it would be easy to reach the conclusion that the 22 proposal is slow, it's complicated, it's arbitrary, it's 23 confrontational -- unnecessarily so. It leads to potentially 24 unequal interstate impacts, and it can give rise to a version 25 of the California gubernatorial campaign in which you had 1 lots of followers with no real chance of ever winning 2 participating in a campaign because they have an independent 3 value associated with running for the election. 4 Briefly, it's slow because if there's a problem in 5 a corporation, here you have to have an election to have an 6 election. And in two years, a great deal changes, not only 7 in a corporation, but also in the world. So slowness -- if 8 you really believe there is a problem, slow is bad, fast is 9 good. It's complicated, all right? Simple approach in 10 designing legal systems -- any sort of system -- simple is 11 better, complicated is worse. And here, the rules for these 12 elections for elections -- you have to have five years. It 13 continually has to be a five years. You've got to change all 14 of the internal measuring mechanisms of fidelity to know if 15 you even qualify, all right? 16 If you -- if you look at all of the moving parts, 17 it seems as though Rube Goldberg had visited corporate 18 governance, and had come up with a mechanism a bit like this. 19 There are many arbitrary rules. Why is it five percent here, 20 one percent here, continuous holding -- you could challenge 21 all of these and many of the -- the proposals really go after 22 that. It unnecessarily confrontational. The goal, I think, 23 of the shareholder community -- and I think it's entirely 24 legitimate -- is to force directors to take significant 25 shareholder concerns seriously. All right? 1 There are many different ways to achieve that goal, 2 and putting one director in head-to-head combat with another 3 director isn't necessarily the best way to get from here to 4 there. As a technical matter -- on a later panel we'll 5 address this -- it's a potential inequality in terms of how 6 this rule might operate on a state level if, for example, a 7 state would allow a corporation to adopt a bylaw that says 8 there will be no shareholder direct nominations. Then we 9 have an issue, as I read the rule, as to whether the rule 10 could even apply in that context. And then again, as I've 11 suggested, people may have an incentive to run for the board 12 even if there's no chance that at the end of the day, they 13 might actually prevail. 14 Those observations suggest to me that it might make 15 sense to look at alternatives. Ira Millstein has suggested 16 an alternative, I've got an alternative -- Ira's and mine, 17 independently developed are remarkably quite similar, I 18 think. I'll describe mine very briefly, and I'll ask Ira to 19 describe his, and then I think it would be a great idea if 20 everybody else described theirs, because what the agency 21 should, I think, do, is agree that there is a problem, and 22 then ask itself whether it really has the most effective and 23 efficient approach. 24 Very briefly, how else might you approach this 25 problem? Well, for guidance, you might look to an 1 interesting document that's called the Constitution of the 2 United States of America. And it contains a provision, 3 Article Two, Section Two, that establishes an advice and 4 consent mechanism. When the President of the United States 5 wants to add somebody to his cabinet, appoint somebody to 6 cabinet, the President can't appoint any old croney the 7 President likes. Rather, the Senate has the right to veto. 8 The Senate does not have the right to select who the nominee 9 is, but the Senate can simply say, for whatever reason, we 10 don't find this person acceptable. 11 Now, if you believe in the economic principle of 12 comparative advantage, that makes a lot of sense. The 13 President knows who the best member of his or her team can 14 be, whereas the Senate can have its legitimate reasons for 15 opposing. Is it possible to take the Senatorial advice and 16 consent provision of Article Two, Section Two, and adapt it 17 to the corporate process? Yeah. I think it can be done. 18 And here's how you do it. The board continues to nominate 19 just the way it is today. 20 However, if a majority of the shareholders -- or if 21 the Commission wants to make it some lower percentage, it 22 could, but I've got this thing for majorities -- if the 23 majority of the shareholders withhold under the current proxy 24 rule -- withhold authority for the re-nomination of the 25 director, then a variety of disabilities can attach to the 1 performance of that director at the federal level is still 2 elected under state law. State law isn't adversely affected 3 at all. Some of the possible disabilities might be that we 4 amend the definition of director in the SEC's own rules and 5 regulations, so that a person elected over a majority is -- 6 is not a valid director for any federal securities law 7 purposes. 8 You could change the SRO rules -- The New York 9 Stock Exchange or the NASDAQ rules, and say that any person 10 elected over the opposition of the majority can't qualify as 11 independent. You could get more aggressive if you like, and 12 you could say as a matter of public policy, the SEC will 13 challenge indemnification and insurance in the event of -- of 14 any violation of federal securities laws if such a director 15 serves. 16 So there's -- there's a gradation of potential 17 forms of disability, but in connection with the attaching the 18 disability, I think there also should be a mechanism for a 19 cure, that the corporation can reach out to the shareholders. 20 If you get a sufficient number of shareholders' consent to 21 the withdrawal, all right, of their -- of their withholding 22 of the vote, then under those circumstances, the director can 23 go ahead and serve. The mechanism, then, forces 24 consultation, it forces cooperation, it avoid the kind of 25 confrontation that you otherwise will run into, and it's 1 simpler, faster, and less arbitrary. Ira? 2 MR. BELLER: Mr. Millstein. 3 MR. MILLSTEIN: Well, by the time you get to this 4 stage of the proceedings, everything's been said, but not by 5 everybody, so I'll try to -- I'll try to say something 6 different. 7 I agree with Joe completely. Simplicity here is 8 important, and I -- I address this to the -- my two best 9 friends on the Commission. I -- I believe it was a very good 10 idea to put this on the table, because it has stirred up a 11 lot of thinking about a problem. And the problem is around 12 what is corporate governance really, really? And it's made 13 up of active shareholders -- and they should be active 14 shareholders -- and a very, very good board led by an in 15 dependent chairman. And it seems to me, that's the heart of 16 the whole story. 17 What we're missing in this arrangement, and what 18 we're missing -- I think the point we've all sort of missed 19 is that there's something fundamentally wrong with the way 20 boards are elected. And I think you ought to go back and 21 take a look at the fundamental problem. The fundamental 22 problem is that today, shareholders have no voice in the 23 election of directors. Now, this is absurd, when you think 24 about it. It grew out of an historical arrangement that 25 required -- the state law requires a plurality to vote. That 1 means -- to elect somebody, that means that there are a 2 hundred shareholders, and 99 don't vote, and one says yes, 3 that person is elected. 4 Now, something -- something's odd about that. That 5 doesn't -- that's not a -- that's not a very good system, 6 because it means that there is no real way for the 7 shareholders today to express dissatisfaction other than a 8 withhold vote, which is really precatory. And the board can 9 or cannot do something about it, depending upon how they 10 feel. Now, I personally think precatory votes of 30 and 40 11 percent have a real resonance in the board room. But they're 12 not able to cause anything to happen. All they can do is 13 cause the board to reflect. 14 How can we get into a position where boards -- or, 15 I should say shareholders -- can make something happen? And 16 I think you can do it. It seems to me today, they can't make 17 anything happen, and that's probably the heart of today's 18 problem. That a board, or a shareholder cannot cause 19 anything to happen. It's -- it's vote is essentially 20 meaningless. That -- that can't be a good system. And I 21 would urge you to go back to this problem, which is a real 22 problem, namely that shareholders don't really have a voice, 23 and visit funny election. You put up a slate, and they're 24 elected. Period. Because all you need is one vote to get 25 them elected. That's plurality. There's no way to stop that 1 system from working. That can't be right. 2 And so, I'm suggesting to you, go back to the 3 beginning, and take a look at how could we begin to give 4 shareholders a voice. Very simply. And the simpler the 5 better. You could have a listing requirement, that says that 6 every director has to be elected by a majority. And that -- 7 in that election, withheld votes count. So that in my 8 example, if 99 withheld, and one voted yes, that director 9 would not be elected. Period. Because he didn't get a 10 majority. 11 Now, I can't conceive of anything wrong with that. 12 What's the matter with that system? A new listing 13 requirement that says you must have a majority to sit, and to 14 be elected. And if you don't have that majority, you are not 15 elected. So you might ask, what happens then? Well, in the 16 proposal we have, the board then has to sit down and have a 17 series of choices to make. They can negotiate with the 18 dissenting shareholders, or the objectors, and talk about a 19 new -- a new director. Or, they can ask the un-elected 20 director to resign, and replace him with somebody else. Or, 21 they can call a new election. 22 The thing I like about this suggestion is, it puts 23 the responsibility back on the board. There's no more 24 regulatory action required. Once that elector is not elected 25 by a majority, the board then has to do something. And any 1 board that didn't do anything in the face of that, would be 2 idiotic. It would change the dynamics of the process 3 completely. 4 Now, it's as simple as all of that. I could go 5 back into history as to why the original plurality was there. 6 It was there because corporations were different in those era 7 -- in that era. I don't think we should do that. I really 8 wish the Commission would just focus on the one issue, namely 9 that today, under these arcane plurality rules, there is no 10 way for a shareholder to have any effect on an election. 11 Change it. Get a listing requirement, require a majority 12 vote to elect, and then turn it over to the board if 13 something goes wrong. I have enough confidence in boards 14 today, because they're really concerned, and they're really 15 coming along, as everybody else has said. They'll do 16 something. 17 And they'll do something appropriate, or have their 18 heads cut off at the next election, because it seems to me, 19 any board that continues to let a director who hasn't 20 received a majority vote sit, is committing suicide. And it 21 seems to me it's a simple solution. I don't know why -- I 22 don't know why we've gone on all these years without changing 23 that rule. It just seems to me to be arcane and nonsensical 24 to continue this process. And, I would suggest to the 25 Commission, what's the matter with that as a first step? 1 Let's see how that works. I think it would work just fine. 2 And if it doesn't, we can always move on to access. But it 3 seems to me, as a first step, let's give the shareholders a 4 voice. A real voice. 5 COMMISSIONER GOLDSCHMID: Ira, quick question on 6 that. Assuming I think it's a good idea, and I do, thought I 7 don't think it necessarily would duplicate ours, or fix 8 ours -- can you get the exchanges to promulgate such a rule? 9 MR. MILLSTEIN: I think so. I think if you were to 10 suggest it, the chairman of the Commission has a way of 11 suggesting things to exchanges that seem to work. 12 (Laughter.) 13 MR. BELLER: Mr. Donohue, you can -- 14 MR. DONOHUE: Thank you. Two very quick comments 15 as our time runs out. Number one, Mr. Chairman, I feel 16 better about this panel than I thought I was going to feel 17 about it. 18 (Laughter.) 19 MR. DONOHUE: No, seriously, I think there have 20 been legitimate arguments raised, not only about the -- the 21 concerns of shareholders, but the best way to package what 22 we're attempting to do. And I would hope that -- that these 23 discussions on all sides would -- would provide a lot of 24 thought for you and your colleagues. I would like to go back 25 to Larry's point, just for the record, however. On your 1 question of does anyone have any recourse? Well, Larry, a 2 quick reading of the "Wall Street Journal" or any other 3 business paper you like, provides you the -- the recourse 4 every day. 5 Today, compared to what would have happened ten or 6 15 years ago, you can lost 40 percent of your market cap 7 overnight. And by the way, that wakes boards up in a big 8 hurry. And you can use it when TIAA-CREF and others take 9 actions to move against a piece of stock -- against a share 10 -- because of the -- the results, because of the proposals, 11 because of the projections. But even more critical than that 12 is to look at the every changing faces of the CEOs. Now, you 13 can respond to me and say some people walk away with big 14 packages and all that -- focus on your question. 15 If a CEO's not cutting it, he doesn't survive. 16 There are clear examples of places where, in this instance or 17 that instance, doesn't happen. But if you watch the papers 18 every day, the people that are not getting the results that 19 the companies want, for the most part, pay a horrific price. 20 And so I would suggest that while the Commission is 21 considering the very thoughtful comments that were made here, 22 in response to your question, they might look at what a., 23 boards have been doing in the past in a productive and 24 aggressive way, b., what might come out of the new rules that 25 have been put in place already, and c., what about some of 1 these other suggestions that were made here that might get to 2 the direction we want to get without some of the negatives 3 issues we'd like to avoid. Thank you very much. 4 MR. BELLER: Mr. Whitworth? 5 MR. WHITWORTH: Yeah, just a few comments. First, 6 I like Ira's idea, and I actually think you should consider 7 that, along with the access proposal. I mean, I've always 8 been disturbed that whether you vote for them, against them, 9 or not at all, you get the slate. 10 Two points that I wanted to respond to. One, we do 11 have a mechanism now, where shareholders can influence the 12 nominating process. In fact, we use that year in and year 13 out, and it's result -- it's the bonafide -- change in the 14 bonafide nominee rule that -- in 1992 that allows us, now, to 15 nominate short slates, as we call them, and has been very 16 effective for our fund and others. And as a result, we have 17 served on eight of our portfolio company boards as a direct 18 result of that. 19 So, anything that you do in this area, as my 20 reading of the rule, it doesn't impact this -- you know, do 21 not change that, because it's a very powerful tool that -- 22 that we and others use. And it's available to all other 23 shareholders, by the way. So, all this rule really does, is 24 takes that concept and says you can actually use that -- that 25 change in the bonafide nominee rule and put it in the proxy, 1 and have a similar dignity of the -- of the management's 2 nominees. 3 The second point was whether one or two directors 4 can make a difference in a board room. And let me tell you, 5 one or two directors can have a -- have a terrific impact in 6 a board room. It's been my own experience. And what we're 7 very proud of -- as I mentioned those eight companies, two of 8 which I've been the chairman of in crisis situations. Today 9 I'm the presiding director at Waste Management, the chairman 10 of the board of Apria Healthcare as the direct result of -- 11 of our investments. In some cases, we had as little as 1 12 percent. 13 But what we're proud of, is that you could go to 14 every board member on every board that we've served on, and 15 the member of the management team, and they would say that 16 "Well, yes, we were a little skeptical at first, or 17 concerned, but this was a -- has been a very constructive 18 phenomena in our board room, and it's been very positive." 19 And the change in the dynamic, if you just think about it -- 20 if you had a large shareholder, or a shareholder that came to 21 the process other than by nomination by the incumbent 22 chairman and nominating committee -- at Enron, when they said 23 "We have just a little change in this transaction. We have 24 to waive our ethics policy," Do you think the dynamic would 25 have been different? 1 How about when Mr. Kozlowski, you know, lavished 2 himself with a corporate culture that, you know, anyone with 3 an independent view that would look at and say "There's some 4 red flags, here. There's some smoke." Or Mr. Ebbers, when 5 he was loaned $400 million to buy the company's stock,and 6 then forgiven. You know, things like that -- that's a change 7 in the dynamic. Those are easy to understand. But it's just 8 the day-to-day involvement of that investor who has a large 9 incentive, and the dynamic that it changes in the board room, 10 whether you're talking about building a heated garage for 11 management, or some very critical strategic issue, the 12 dynamics are different, and we have, you know, very -- a lot 13 of experience with that. 14 And it's been positive, even by the admission of 15 the people -- the directors and managements that we've worked 16 with. So, this is the only thing -- everything else that's 17 been done really sets minimum standards. Sort of like our 18 environmental laws. This rule has the potential, and it's a 19 very unusual situation where government actually has a 20 potential to pass a rule -- a promulgated rule that can 21 actually spur optimal performance rather than just setting 22 the minimum standard. So I would encourage you to push on 23 with it. You're going to get lots of ideas and lots of 24 criticism from all sides. But push on with it, because all 25 the horror stories that you're hearing -- we heard those same 1 horror stories. 2 I wrote the petition for rule making back in 1990 3 that led to the 1992 reforms, and we actually asked for this 4 reform, and the Commission at that time didn't -- didn't move 5 forward with it. But we heard the same sky is going to fall 6 concerns about shareholders just communicating with each 7 other. We're going to have these cabals, there's going to be 8 secret back-room takeovers -- all these things. And it's all 9 been very positive. So, you're on the right track. This is 10 a good rule. Move forward with it. 11 MR. BELLER: We'll do Mr. Clapman and Mr. Breeden, 12 and then I have one question about the listing standard 13 proposal. Mr. Clapman. 14 MR. CLAPMAN: I'll make just a very brief comment 15 on -- on the proposal that we've just heard from Joe 16 Grundfest and Ira Millstein. I think these are interesting 17 ideas, but should not divert the Commission from, I think, 18 adopting hopefully the rule that was proposed. And I think 19 the missing ingredient in that -- in those proposals to what 20 the SEC current proposal does accomplish, is it does not add 21 onto the board a new director coming forward with a kind of, 22 I think, majority shareholder impetus that can have, I think, 23 a positive effect on the dynamics of the board. We heard, I 24 think, anecdotally, and we support the notion that an 25 individual director coming on through that process will be 1 constructive in terms of how a board and how a company 2 operates. And it's really for that reason that I would like 3 to go back to the rules and should post. 4 MR. BELLER: Mr. Breeden? 5 MR. BREEDEN: Yeah, I -- I want to reiterate and 6 support what Ralph said, but also second something Tom 7 Donohue said. I mean, I think you've heard, in the comment 8 process, there are a great many thoughtful ideas. And in 9 corporate governance, I don't believe there is any magic 10 bullet. There is no one right way to do governance. We're 11 talking about a system with 17,000 companies. Little ones, 12 big ones, global ones, domestic ones. And there is no one 13 size fits all. And -- and in any company, you have to look 14 for the right balance of -- of interests to work well, and 15 the Commission in picking a rule has to look for the right 16 overall balance, what the chairman talked about the -- you 17 know, defining the middle way. 18 So, you have heard and will hear many intriguing 19 and thoughtful suggestions. And I don't think they should be 20 ignored. I think you should go forward with this rule, and 21 if you want to, then do another -- go through the process 22 again, start it up again next year, and -- and look at some 23 other things that could be ways of supplementing it, or 24 changing it, fine. There's nothing that stops you from doing 25 that. But the fact that there are different ways of skinning 1 the cat shouldn't lead to freezing the process and 2 immobilizing the Commission. I think the shareholders of 3 this country, and confidence in our markets will benefit from 4 taking the modest steps forward that you've proposed. 5 Secondly, I wanted to -- but it shouldn't foreclose 6 further thought on some of these very excellent ideas. 7 Secondly, the idea that -- that only one or two members in a 8 board won't make a difference is just demonstrably untrue, 9 and Ralph has spoken to it. But I -- I think if Ralph or 10 Charles or Joe walks into a board room in this country, and 11 sits down at the table, that board is changed. It's changed 12 for the better, and will make a big difference. I know the 13 day I walked into the WorldCom board meeting -- board -- that 14 board was certainly changed forever. And so I think one or 15 two people can make an enormous difference, and hopefully, if 16 the intervention comes a bit earlier, we save ourselves the 17 -- the more difficult consequences, when reform is delayed so 18 long that you get into the criminal process, and -- and so 19 on. 20 And lastly, I just wanted to respond to the idea 21 that we can't find good board members in this country. I 22 think some companies have problems finding board members, and 23 it may be because those companies, these days, that are 24 perceived as having unresponsive boards, and boards that 25 aren't doing a good job, may well have trouble finding new 1 members. But at MCI, with all the tough standards and 2 governance that we proposed, we had at least three terrific 3 candidates for each one of the nine vacant board slots. And 4 we did -- we were willing to stop fishing in the same pond 5 that sometimes is a little over-fished of nothing but sitting 6 CEOs to go on boards, and we were willing to look at a 7 broader spectrum of candidates. But I think the country is 8 filled with men and women with terrific background and good 9 judgement, who will make excellent board members. And we 10 shouldn't be deterred from making changes like this by 11 concerns that we'll never find anybody to serve on a board. 12 MR. BELLER: Thank you. I'm tempted to let us stop 13 on that note. I would note that when Mr. Breeden suggested 14 we do another rule making, Marty turned to me and said "Not 15 in CorpFin. 16 (Laughter.) 17 MR. BELLER: But we'll soldier on if that's the -- 18 if that's the answer. I -- I think I'm going to ask my last 19 question, because I think we left one thing hanging in the 20 listing standard proposal. One of the things that has 21 concerned me about it, and that I've heard expressed by 22 others, is that try as you might to be confident that in all 23 cases, you will get a board that subjected to the bad news of 24 majority votes against one or more, or a majority of its -- 25 of its candidates is going to sit down and reason together. 1 There is no -- there's no certain resolution other than to 2 leave it to the board to do the right thing after it's been 3 subjected to a substantial dose of criticism. 4 Is that the ultimate -- I mean, is that -- is that 5 what ultimately results from an advice and consent type 6 solution? You don't get any judges nominated, because the 7 President and the Senate don't agree? Or is there another -- 8 is there -- is there another potential end point that -- that 9 one could look at? 10 MR. BREEDEN: How do you know, Alan, that the other 11 side doesn't have a better solution and that solution isn't 12 going to have unintended consequences? 13 MR. BELLER: I'm not suggesting ours doesn't. I'm 14 just wondering what -- 15 MR. MILLSTEIN: Why don't we just take the 16 proposition that nothing works but some things work better 17 than others? I mean, it seems to me that we don't have a 18 certain solution here on either side. My effort is to avoid 19 a war and I feel very strongly that there is such good-faith 20 arguments on both sides, based mostly on perceptions, not 21 reality, that we ought to try to move forward without having 22 this enormous contest which is being played out in this room 23 and everywhere else. 24 I think that finding a way to force a negotiation, 25 which is what I'm trying to do, is the best way to go. I 1 really believe that this majority vote issue, putting it back 2 to the board, forces a negotiation between the board and 3 others, and that 99 percent of the boards are going to 4 respond well, just as I hope -- I hope the proponents of the 5 rule are right, that 99 cases out of a hundred the right 6 person is going to be put on the board. 7 But you don't know and neither do I. So I would 8 rather go the negotiating route. That's all. 9 MR. GRUNDFEST: I think Ira is absolutely right 10 that as a practical matter very few directors will have the 11 stomach to continue to serve over an overwhelming opposition 12 of the shareholders. There will be pariahs in the boardroom 13 and most people who serve on boards don't want to be placed 14 in that type of position. 15 Just as importantly, as a matter of public policy, 16 if you have a step that you can take that's less intrusive 17 and that might achieve everything you need, and you have a 18 step that's more intrusive and might create additional side 19 effects that are unnecessary, it's smart policy and good 20 medicine to start with a lower dose, all right? 21 There's good reason to believe that the type of 22 approach that Ira and I are talking about can achieve 99 23 percent of the objectives that people are looking for in 24 terms of shareholder access and do it without breaking as 25 much china. 1 MR. BELLER: On that note, I think we're adjourned 2 for lunch. We are a few minutes over. I'd like to have the 3 third panel start at 1:15. 4 Thank you very much. 5 (Whereupon, a lunch recess was taken.) 6 A F T E R N O O N S E S S I O N 7 MR. BELLER: Let's get started again. Thank you 8 all for joining us again. 9 This is the third panel in our roundtable and the 10 title of this panel is the application of the proposal to 11 companies and investors. We will be getting into I think 12 some more of the details of the proposal, some of which were 13 alluded to in our second panel but which I think we're going 14 to get into in a good bit more depth during this panel. 15 I would expect this will run till about 2:45. We 16 are a little late now and we'll push things back, maybe 17 shorten the break a little bit. 18 Before we start, I would like to introduce the 19 panelists again. Starting at my far left, we have Warren 20 Batts of the -- who is here representing the National 21 Association of Corporate Directors, Susan Wolf, corporate 22 secretary of Schering-Plough and also very deeply involved 23 with the American Society of Corporate Secretaries, Franklin 24 Raines who is the chairman and CEO of Fannie Mae and is also 25 the co-chair of the business governance committee of the 1 business roundtable. 2 Next to Mr. Raines is Ann Yerger with the Council 3 of Institutional Investors. Next to Ann, David Ruder, 4 professor and former dean at Northwestern University School 5 of Law. And as we said, the only formers we get to announce 6 today are former commissioners and chairmen and David is a 7 former chairman of the SEC. 8 Next to David is Carter Beese, also a former 9 commissioner with the SEC. Going last to Ted White who is 10 here representing CalPers and next to Ted, Jeff Sonnenfeld 11 who is the associate dean of the Yale School of Management. 12 Let me start this off with Dr. Ruder, if I might. 13 Picking up from the briefing paper that was circulated and is 14 up on our web site, sort of maybe kick this off very 15 generally, would the rule target the appropriate companies 16 the way it's proposed? Would it produce desirable results, 17 better corporate governance, better boards and management 18 more responsive to shareholders, and would it do so at an 19 appropriate cost to companies? 20 MR. RUDER: I think that your proposal to limit the 21 number of companies to the accelerated filers is a good one, 22 to limit the number of companies. I think you're going to 23 find that the result of this rule will be that companies will 24 spend much more time looking at both precatory proposals and 25 other kinds of proposals that are made. 1 I think it will cause the boards of directors to be 2 much more aware of what's going on inside the corporations. 3 I've tended to think that there would be some cases in which 4 corporations will treat some of these precatory proposals the 5 way you and I would treat our third speeding ticket, that is 6 that we will pay a lot more attention to it than we would 7 otherwise, and that may cause expenses and concerns at 8 corporations that are not there now, but that probably is 9 good. 10 Whether or not this is the right proposal at the 11 right time is another question. I have had some 12 conversations with my corporation director friends, many of 13 whom say that there has been a dramatic shift in the way the 14 boards operate since Sarbanes-Oxley, and I think certainly we 15 need to pay attention to that. 16 But I also think I would strive, in part, to the 17 question of whether this is really the right approach towards 18 giving more power, to the group that I think should have more 19 power and that's the institutional investors. We're not 20 really talking about shareholders here. We're talking about 21 institutional investors, and what you have is a rule that is 22 going to empower those institutional investors and I would, 23 if I were reexamining this, pay close attention to the 24 question of how the voting process will take place at the 25 institutional investor level. 1 Certainly, organizations like ISS and others who 2 have the power to make recommendations regarding voting 3 procedures, and this is particularly true for mutual funds 4 these days, will become increasingly powerful and need 5 somehow to be looked at as to whether they are reaching the 6 right results. 7 But all in all, I think this effort to provide more 8 responsibility at the board level is on the right way. It 9 seems, Mr. Chairman, a little bit like a Rube Goldberg 10 proposal and it may need some more attention to whether or 11 not it's really workable but you're on the right track. 12 MR. BELLER: Thank you. Let me mention one ground 13 rule that I mentioned at the beginning but I'm not sure 14 everybody from the afternoon panels was here. It would be 15 fairly effective if you want to be recognized, just flip up 16 your card as opposed to raising your hand or jumping over the 17 table or something else. 18 Dean Sonnenfeld, what's your reaction to those 19 questions and to the proposal? 20 MR. SONNENFELD: I think it's only fair game when 21 nobody puts up their card that you hit the schoolteacher. 22 I'd do the same thing myself. 23 But since you've put me in role, let me retaliate 24 by first saying that like everybody said on the prior two 25 panels, that it is an honor to be here, but I'd like to 1 comment on the educational side. 2 It's just the process of the discussion we had so 3 far this morning I thought was suspiciously excellent that 4 the first group -- now I hear you giggling -- so obviously 5 with the provocateur throwing out the grenade, the mouse said 6 why not the market test and Marty coming back saying yeah, 7 maybe, but not now, we had a pretty ferocious but divergent 8 first session. 9 The second session, I don't know, with Peter such a 10 nice guy or whatever, got Ira and Joe rapidly forming 11 concessions with Tom, I thought that we should just go home 12 at lunch time because all we're going to do is make things 13 worse on the process side. So let me say that with all that 14 out there, I'd like to help make things worse. A lot has 15 been exposed and I kind of feel like that proverbial mosquito 16 in a nudist colony. I hardly know where to strike first on 17 this. 18 There is a galaxy of stars in the room, too. I 19 guess I'd congratulate you on it but I think it exposes us 20 and this whole kind of discussion in an important way and 21 that last comment is relevant, by the way, because we have in 22 the room seven -- at least around the semi-circle this 23 morning and through this afternoon -- seven corporate 24 executives, three economists and 33 attorneys, one Evelyn and 25 one me, and that -- what does that mean what we have here? 1 The language that we use is the language we always 2 use. There's a whole field of hundreds -- in fact a hundred, 3 specifically, of sociologists working on white collar crime 4 that have a different language for the things we wrestled 5 with this morning. 6 They walk away with debates over the failure of 7 deterrents to work but also the inadequacy of punishment to 8 be properly tested because they look at the same issues that 9 you look at and a sociologist, which is my training in the 10 behavioral world -- that's the sort of one me, I'm not an 11 accountant, not one of the economists or attorneys in the 12 room -- is that the sociological perspective is we 13 consistently punish the institution of the infractions of 14 individuals. 15 And with the present company here, I wouldn't dare 16 take a look at the Wall Street settlement and who pays the 17 price or the Xerox settlement and who pays the price, but 18 some have argued that the same people get victimized twice 19 and the sociologists complain that's because we have lawyers 20 handling this, is that you don't get individuals to change 21 their behavior, we don't individually deal with that 22 psychology. So instead we have language that we had this 23 morning, checks and balances. 24 Well, our constitutional framers were cited this 25 morning and sure it was appropriate. Checks and balances -- 1 well, Warren, as a businessperson, I don't think a check and 2 balance was -- you don't need to respond unless you want -- 3 was ever appropriate in your world. Checks and balances were 4 determined and created not to speed efficiency and encourage 5 risk-taking but just the opposite, is to run the risk of 6 businesses going into jeopardy and disappearing. 7 We don't want governments to run that risk so we 8 create legislative bodies, we create electoral colleges and 9 we create intentional inefficiencies because we don't want 10 checks and balances for a business. We don't want people 11 consistently second-guessing, so we don't take chances in 12 markets and hopefully in the interest of good returns for 13 shareholders, take good risks as well and sometimes 14 businesses dying to go out of business. 15 So some of the risk aversion that people trained in 16 the language of law will enter in sometimes affects how we 17 even analyze this discussion. If it weren't with that 33 18 attorneys in the room, I'd remind us Oliver Wendell Holmes 19 said that attorneys seem to think we make minds sharp by 20 making them narrow, is broadening our language here, I think 21 we have a lot of human behavior issues. 22 In fact, even Ralph mentioned it and got away with 23 it as Ralph's term for it this morning -- Ralph Whitworth -- 24 was we're really talking about poor boardroom dynamics. 25 That's social engineering. Does somebody think you can 1 really pass regulations, pass a law that's going to guarantee 2 us great social dynamics? It's hard to do. We can try to 3 avoid bad things from happening. We can't guarantee good 4 things will happen. 5 I've gotten Ted worked up on that one. And, you 6 know, so we think about the debate with that as a backdrop. 7 Sure there are issues about the why not that came out this 8 morning, such as well, the -- we've made such great progress, 9 should we go ahead. But then of course most anybody else in 10 the room could cite the scandals that continue to pour out 11 post-Sarbanes-Oxley or whatever. 12 But then again, boards have made progress. We've 13 seen things, I don't know, from Delta to AMR to Sprint where 14 there wasn't a financial collapse and there wasn't some huge 15 governance implosion or massive fraud, but the boards acted 16 when they didn't have to act and did some courageous things. 17 We hear that the shareholder voice is still a hard one to 18 exercise because of the cost if we don't do what we're 19 looking at today, yet at the same time we're told that by 20 holding that big stick, it has somehow catalyzed discussions 21 that didn't happen so readily before. 22 We've wondered about the concern about collegiality 23 that many of my friends in the corporate world have been 24 concerned about. Again, we look at the pattern. We have the 25 Charles Elsons or thinking of when Douglas Frazier joined the 1 board of Chrysler. I think you remember how so many in the 2 corporate community were horrified about what that would do. 3 And they'd say either he'd be ineffectual as one voice or he 4 would create a political party there and we'd have a security 5 issue in terms of confidentiality. 6 Well, Douglas Frazier is the former head, as you 7 know, of the Auto Workers, did a spectacular job on that 8 board. In fact, at another business school, I was back at 9 Harvard at the time, I even brought him before a thousand 10 MBAs to talk about his experience and he talked quite 11 intelligently about issues of international trade and 12 competitiveness and work force education. And the students 13 were shocked. 14 And finally one of them raised his hand and said 15 Mr. Frazier, you know, as a union boss on a corporate board, 16 we expected that we'd some pot-bellied, balding guy, cigar- 17 chomping foul-mouthed person. And he said oh, you expected 18 Lee Iacocca. 19 (Laughter.) 20 MR. SONNENFELD: A single individual does make a 21 difference and it can be collegial, the way Frazier and 22 Elsons apparently are on their boards as the voice of 23 intelligent dissent, but those of you who even would 24 challenge Mickey LeMater's independence as the former head of 25 the cancer center by receiving some gifts at the Enron board, 1 when you go through the transcripts you find that this very 2 senior, very erudite and wonderful human being was in fact 3 asking the questions a lot of other people should have been 4 asking about people sitting on both sides of the table and 5 things and we're wondering, you know, another voice or two 6 there could have made a big difference. 7 You've all not only heard but often used the 8 supposed Edmund Burke quote about all that's necessary for 9 the triumph of evil is for good people to do nothing, 10 although none of us can ever point to when Burke ever said it 11 or where. Single individuals can make a difference; in so 12 many of these scandals, it could have helped. 13 So when you think about the balance of these, sure. 14 But how do we manage the expectations? If mixing up the 15 chemistry helps a little, the social scientist in me says 16 we're going to raise our expectations too high, human 17 behavior is not going to be that predictable and we're not as 18 good at what we think we do. 19 We've had credentialing problems even within our 20 own professions around this room. There was a former SEC 21 chairman that had apparently a problem many decades ago with 22 integrity in Congress and had a very short reign. We looked 23 at the influential vote of ISS. We heard that ISS might have 24 a hugely credentialing role and many in the business 25 community are concerned about that and others say well, they 1 do a good job and as we heard from folks this morning from 2 Fidelity or elsewhere, we don't have the time to do all the 3 credentialing who would be a good board member. 4 Well, is it the rest of us? Is it fair to put ISS 5 under that burden? I think most people in the room would 6 certainly tend to agree that ISS had a hugely influential 7 role in throwing the vote through their recommendation on the 8 HP-Compaq merger. Had they gone the other way, I'd bet my 9 life savings, which is not a big bet for some of us in the 10 room it would be a big bet, that that vote would have gone 11 out differently. 12 Who was the author? The author of that report, Ron 13 Kumar, the influential report that helped persuade large 14 shareholders to support Hewlett Packard's proposed purchase 15 of Compaq, has resigned from his firm because of dispute over 16 the credentials he presented to his employees. Turned out he 17 didn't have the JD and that he thought they -- so can we be 18 in a position of saying we can credential who is going to be 19 a good director? Do we really know about human character 20 issues? 21 And I think in closing, I actually like the more 22 broader principled approach of encouraging the dialogue that 23 both Joe and I were talking about, about some higher triggers 24 that would help lead to a debate and a discussion rather than 25 necessarily confrontation and credentialing. 1 MR. BELLER: Ted? 2 MR. WHITE: At the risk of this table dominating 3 the conversation, I'll be a little more brief. 4 MR. SONNENFELD: Well, nobody had their card up. I 5 was looking. 6 MR. WHITE: First to your question, does this 7 define the right universe, our initial position is that we 8 did not like the concept of triggers. However, through 9 conversations with the business community and with the SEC, 10 we've come to recognize that it's likely to contain it. 11 In that instance, we are interested in the right 12 triggers to define the right universe. And I'll tell you 13 what we come from is an organization is that it's all about 14 value. Our interest is in getting at the universe in cases 15 where companies are destroying value and the governance 16 triggers that you have in here are linked to that and I think 17 are appropriate and, you know, we've listed a few suggestions 18 for defining those triggers, which I think we can talk about. 19 On the cost issue, I think something that should be 20 considered here is that the majority of the costs are likely 21 to be variable and at the choice of the company. The cost 22 that's going to be hardwired into this if a shareholder were 23 to use this are going to be minimal and are going to need to 24 print a few more pages in the proxy. To the degree that you 25 want to defend this and turn it into an HP-Compaq, it's going 1 to be costlier. 2 And one point on social -- the social engineering 3 and social dynamics comment, that is not what Ralph Whitworth 4 meant. I am certain of it. Here is the issue. Why we're 5 interested in this rule is that we need a general tweak in 6 accountability. Boards need to recognize that they need to 7 be more accountable to shareholders. That's what the board 8 dynamics is about. 9 When Ralph Whitworth or Charles Elson or some other 10 shareholder-oriented individual sit on boards, they bring 11 that perspective, and that's what this rule is all about. 12 It's rather simple and straightforward. I do not believe 13 that the special interests are going to make it on boards and 14 Commissioner Goldschmid has raised the point several times, 15 very appropriately, you have to get 50 percent to get on the 16 board. And I have ultimate confidence in the market that the 17 wrong people simply will lose, the wrong proposals will lose, 18 and good people will make it through. 19 MR. BELLER: Mr. Batts? 20 MR. BATTS: First, I'd better stick to the NACD. 21 We just finished one of our efforts, Council of Institutional 22 Investors, on a task force, trying to spell out what would be 23 the best practices for shareholders and directors 24 communication. And through the directors, the shareholders 25 seemed to come to a rational set of conclusions which are 1 available on our web site, that I think maybe have a chance 2 to work. 3 If you think about it, most companies -- not most - 4 - a large percentage of companies have been trying to be 5 responsive to shareholders for a long period of time. As 6 chairman of one board committee or another for the last 10 or 7 15 years, I've been standing up at annual meetings answering 8 questions from people who are not particularly large 9 shareholders but who had some shares, attended a meeting and 10 asked a rational question. And we were always willing to 11 meet with shareholders before, after and any other time. 12 I think this as the practice spreads and it becomes 13 very apparent that if shareholders want to meet with 14 directors, directors had better with the shareholders, I 15 would at least give that process a chance to work. As I -- 16 put that to one side for a moment. 17 But just look at what is the problem this proposal 18 is trying to address, and I've read it, I've listened as 19 carefully as I could, being one of the non-33 lawyers or how 20 many are here, not sure I understood everything that was 21 being said. It seems to me there are two issues that might 22 be on the table. 23 One, the company has not performed well for a long 24 period of time, which is a good target for Ralph in this 25 group to get on the board and help straighten it out. The 1 other is the company may be performing okay but has been 2 indifferent or non-responsive to shareholders who want to 3 talk to the directors about some issue. 4 I would say in the first case boards in their 5 subtle way, without beating drums and clashing cymbals, have, 6 over the period of time I've been a director, have been 7 reasonably effective of doing something slowly. I went on 8 the first public board in 1969, a small company. I've 9 progressively served on larger boards and now I'm at the end 10 of the cycle I'm serving on small boards again. 11 In the last 20 years, I've been through eight CEO 12 successions. Only two of those CEOs reached normal 13 retirement age, and I was one of them. The rest left early 14 because of poor performance and yet there was not a lot of 15 noise being made, there was not a lot of publicity, newspaper 16 articles or what-have-you. Boards -- in a very quiet way, 17 boards tend to do their job in terms of trying to improve 18 performance. 19 Now, there is a hard core of CEOs surrounded by 20 boards who are not very responsive, who are not doing very 21 well, who will fight to the last ditch any effort to unseat 22 them and put in a better management team. I'm not so sure 23 this issue -- this proposal will help in that regard. I'd 24 like to come back. 25 For the boards that are simply not -- have not been 1 responsive to directors -- to shareholders, the directors not 2 responsive to shareholders, I think the proposals that we've 3 made will help as that becomes a better understood and 4 practiced process of actually meeting and discussing things. 5 Boards tend to get more active when faced with reality. 6 When it comes to the issue of nominating directors, 7 there is nothing, to my knowledge -- and I figured out about 8 35 years I've been on public boards, have never -- and I've 9 served on full boards or nominating committees for nearly all 10 that time. I don't think there's been a single incident of a 11 responsible shareholder group proposing a candidate to stand 12 for election on the board. Not one. 13 There have been people who have nominated 14 themselves who patently or after further examination would 15 clearly not be qualified to serve on a particular board. I 16 was on the Sears board at the time that Mr. Monk ran for 17 office. As Nell and I have discussed -- Nell has helped 18 teach my class -- as we have discussed, he was running for my 19 seat. 20 MS. MINOW: Nothing personal. 21 MR. BATTS: Nothing personal. Actually -- I 22 actually had a discussion of should I step aside and let him 23 have it. 24 There had been a small minority of Sears directors 25 who were trying very hard to get some corporate governance 1 changes made and thank goodness Mr. Monks came along because 2 all of a sudden management was interested in making those 3 changes and we got one heck of a lot done in a very short 4 period of time. 5 Don Rumsfeld became chairman of our nominating 6 committee. We had a fairly responsible group and in 18 7 months the company made the decision to break itself in 8 different pieces. So I'd give the man credit for being the 9 catalyst to get something done. 10 Had he come on the board, I don't think we would 11 have gotten that much done in that period of time. It would 12 have been dropping a lot into quicksand, unless we'd made 13 those corporate governance changes along with his election or 14 before his election. 15 So I would think that a cycle here where large 16 shareholder groups actually meet with directors, make 17 proposals of who they would like to see on that board, and 18 give it a chance to work without coming up with another layer 19 of complicated processes. 20 The one comment I'd make -- now I'm talking 21 about -- I've been CEO of four companies. We won't discuss 22 my ability to hold a job. The ambiguity and the time frame 23 of this proposal is in my view too long. I would be much 24 more inclined to go with something Howard Millstein or 25 Professor Grundfest made today, something that's faster. 1 You have in a company, an organization of human 2 beings, you have a management team you're trying to hold 3 together, you're trying to recruit, you have shareholders -- 4 employees at lower levels. You have vendors, you have 5 customers and you have debt holders. And all of a sudden you 6 put this cloud on top of this company for several years. I'm 7 not sure you're creating value in that process. I think 8 you'd tend to destroy it. 9 Something needs to happen a lot faster than what 10 this proposal seems to me to be geared for. And with that, I 11 would quit. 12 MR. BELLER: I would like to jump over you for one 13 second and just ask -- there's one point that Mr. Batts 14 raised which is your view of the history of larger or more 15 responsible shareholders meeting with boards or with 16 nominating committees or directors up for consideration and 17 is it in fact the case that there's no history of that, 18 should that be given an opportunity to work in the next year 19 or so? What can we learn? 20 MS. YERGER: I appreciate the opportunity. I did 21 want to comment immediately as co-authors of the report on 22 improving shareowner-board communications, that the Council 23 in no way believes that communication at this point should be 24 a substitute for moving forward also with this reform. We 25 think they address two very different issues. 1 We think this reform that's being discussed is 2 something that has not been covered by any of the other 3 reforms, whether it's under Sarbanes-Oxley or the stock 4 exchange listing standards, and that's whether long term 5 shareowners, and I stress the word owners here, we're not 6 holders, we're not traders but we're owners in these 7 companies, should have a meaningful ability to influence the 8 director nomination process and indeed have a meaningful 9 ability to actually elect the directors who are representing 10 them on the board, not simply rubber stamping the candidates 11 that are being advocated by the nominating committee and/or 12 with the input of management. 13 I think it's a good question about whether should 14 we just allow there to be a process for a while where 15 shareowners can make suggestions for candidates. I think 16 that process has been going on and at many companies, 17 frankly, I think companies do ask candidates that have been 18 suggested by shareowners. But in some cases they simply 19 don't and then owners are left with the decision of whether 20 they should undertake the very significant expenses of 21 running a proxy contest to put someone on the board. 22 And speaking for our members who are fiduciaries, I 23 think it's very difficult for them to justify the 24 extraordinary expense of a proxy contest to get someone on 25 the board. 1 I think there's a general sense that at some 2 companies, and unfortunately the companies probably in most 3 need to have fresh blood on boards, these are the ones that 4 are going to probably disregard the candidates suggested by 5 shareowners. So I think we look at this reform as really the 6 last step. 7 I mean, this is something that our members 8 certainly aren't going to undertake unless they've already 9 tried discussions and dialogue and it's failed. 10 MR. BELLER: Mr. Raines, I guess I'd ask you, in 11 addition to your other remarks to address this issue. The 12 business roundtable comment letter makes clear that in its 13 view the costs of this proposal would far outweigh any 14 benefits. I think that's a quote. And I guess I'd like you 15 to address the cost benefit issue and maybe in connection 16 with that, one thing in particular, and that is -- I think it 17 was Mr. White's point that the Commission and the world are 18 thinking about costs and benefits, we should keep in mind 19 that the bigger element of the costs that corporations have 20 indicated they would incur are in fact costs corporations -- 21 they're not costs of compliance with the rule, they are costs 22 that many corporations would voluntarily incur in deciding to 23 fight either and not be in -- or a contest, small C -- 24 THE COURT REPORTER: Could you open your 25 microphone, please? 1 MR. BELLER: -- able to nominate -- 2 MR. RAINES: Well, thank you. And let me express 3 my appreciation for the invitation to be here today to 4 participate in this panel. 5 Let me start by just observing that the issue that 6 I think we're dealing with here, this longstanding issue of 7 how owners express their control of corporations, is one that 8 is quite longstanding and quite difficult. And it's one of 9 the most important issues of corporate law and unfortunately 10 there aren't a lot of levers in which to deal with it and it 11 seems to me that the proposal before the Commission now is an 12 effort to try to have a big impact on a big issue with a very 13 narrow range of levers in which to operate and I think that 14 causes some of the difficulties. 15 Now, if this were a proposal that effectively 16 targeted what have been called, I guess, several times, dead 17 companies or unresponsive companies, I don't think we would 18 be having this forum. I don't think there would be a big 19 disagreement that dead companies or companies that 20 intentionally are not responsive to their shareholders should 21 be shaken up. 22 But that is unfortunately not the nature of this 23 proposal and I don't see that as being intentional, it's just 24 very hard to target what do you mean by dead companies, what 25 do you mean by companies that have ignored their 1 shareholders. How do we know that? What external evidence 2 is there of it? 3 And necessarily, this proposal, it seems to me, 4 reaches well beyond that range of companies, even if we all 5 could agree on what those companies were and what the 6 criteria were and what the indicators were of their 7 misbehavior. 8 The -- it also raises another issue that's related 9 to agency and that is control on behalf of whom. And we've 10 had a lot of discussions about comparing this to democracy in 11 political process, governmental political process, and I 12 think the comment earlier that corporations are not 13 government, and that the kind of controls you want on 14 governments is exactly the kinds of controls you don't want 15 on enterprises that you seek to be risk-takers as opposed to 16 enterprises that you seek not to be risk-takers, but also 17 raises questions about other intermediaries. 18 For example, if we really believe in corporate 19 democracy, what role should there be, if any, for advisory 20 firms where the entities who are employing the advisory firms 21 expressly say I'm going to do no independent investigation, 22 I'm solely going to go by what this advisory firm says? 23 There are some who would say that's an abdication 24 of the fiduciary responsibilities as opposed to an embracing 25 of that fiduciary responsibility. I don't know of any other 1 case where a fiduciary can say I'm affirmatively refusing to 2 become informed myself and I'm going to delegate my vote to 3 someone else, and that they've met their fiduciary 4 responsibility. 5 But it's an unusual form of democracy that we're 6 talking about here, if we're talking about a delegation of 7 the most fundamental aspect. 8 It's also an unusual form of democracy where in 9 this case one of the triggers contemplates less than a 10 majority of the shareholders being able to cause it to come 11 into effect. I don't know of a case where you equate 12 democracy with a significant minority. And there are many 13 cases where there are minorities, significant or otherwise, 14 who are disappointed in an election process, but it's the 15 nature of elections that if you don't have a sufficient vote 16 to win, it's not a failure of democracy that you didn't win. 17 It may just be a failure of your cause or of your candidacy, 18 but you can't blame democracy because you didn't achieve your 19 goal. So that raises a number of questions in my mind about 20 the breadth of the proposal. 21 On the cost issue -- and let me try to deal with 22 this directly because I think it is a very important issue. 23 I mean, first there is a question of cost based on how many 24 companies, and I think the estimates that were included with 25 the proposal had a tremendous underestimate of a number of 1 companies who will have to pay even the most minimal cost, no 2 matter how you define it simply because I think it's a 3 foregone conclusion that there will be almost universal 4 invocation, if possible, of the desire to be able to nominate 5 directors if for no other reason than it's a good basis in 6 which you have something to say at the annual meeting, it's a 7 good basis to do organization, it's a good basis just to have 8 your bets covered in case, but as Mr. Batts was saying, you 9 want to speed the process up if you think maybe next year 10 something might happen, better to have already voted and 11 therefore you could put up a nominee right away. 12 So there will be tremendous arguments made as to 13 why this ought to be a routine item, always reenacted every 14 couple of years, as a prophylactic, just in case you might 15 need it. This will cut out a year in the timing. So I think 16 there's a wide range of companies who are going to have to 17 deal with this, even in the most narrow definition of cost. 18 Second is the issue of the cost of elections. And 19 it's an interesting phenomena, this notion of voluntary 20 expenditures. If a board and a management did not act in 21 what they believed to be the interest of the shareholders, 22 they would justifiably be sued. And if the board has 23 determined that there are certain directors that they believe 24 would be the best directors for the company and along come 25 one or two other directors who may be perfectly good human 1 beings but they're not the ones the board believes to be the 2 best, isn't it their fiduciary responsibility to indeed try 3 to elect the 10 directors who they think are the best? And 4 if they didn't do so, haven't they violated their fiduciary 5 responsibility? 6 So certainly I would expect companies to try to 7 elect the board members that they've nominated. Indeed, I'm 8 not quite sure who would stand for election in a company if 9 the company said we're going to nominate you but you're sort 10 of on your own here, we're kind of indifferent as to whether 11 you win, and we'll just put you in the proxy like everybody 12 else. And we'll be sure to say we prefer you but that's 13 about all we're going to do on your behalf. That would be a 14 very odd world in trying to recruit people for corporate 15 boards. 16 The third kind of cost -- and this is where I think 17 the majority of the costs will be. I don't think it's going 18 to be uncontested, the proxy fights. It's going to be in the 19 leverage issues. My experience is that many of these efforts 20 to become involved in corporate governance are less about 21 corporate governance than they are about other causes. And I 22 won't characterize a cause as being good or bad causes 23 because I believe in many of the causes that people are 24 trying to advance through the corporate process, but they're 25 causes. 1 And the ability to push forward your cause is 2 somewhat limited by the rules of the Commission and so people 3 do whatever they can within those rules to advance their 4 cause. And I'll give you one example. 5 One company that I'm aware of had a group that put 6 forth a resolution and as most of these resolutions evolved, 7 it produced a report because given the Commission's rules, 8 you can't actually ask them to do something but you can ask 9 for a report. 10 So the company, rather than doing its normal well, 11 here are all the reasons why we can't do a report -- you 12 know, the whole company will be tied up for the next five 13 years doing a report, they said okay, we'll do your report. 14 And the group said, oh no, no, no. That's not enough. You 15 know, you can't just do the report. What you have to do is 16 do the things that we really want you to do and here's our 17 list of 10 things that we think you need to do. 18 Now, the leverage point I think is by far the most 19 important point. Regardless of how many of these -- the 20 proposals actually come to fruition, they're all going to be 21 used for leverage. Everyone is going to say now I'm going to 22 come forward with this unless you do X, unless you do Y, 23 unless you do Z. And the amount of time, effort and money 24 that will be spent in the negotiating process I personally 25 believe swamps what will happen in this other process, and it 1 will be across the board. 2 No responsible advocate who seeks corporate action 3 on any -- and I'm here now not talking about improving 4 earnings. I'm talking about solving human health problems or 5 eliminating environmental issues, very important things, no 6 responsible advocate will be able to resist the use of this 7 lever. And the cost of dealing with that in corporate times, 8 and indeed maybe in fact in agreeing to do things, just to 9 ensure you don't have the disruption I think is going to be 10 the largest. 11 The last thing I would say is this. Anyone who 12 thinks the corporations haven't had a kick in the pants in 13 the last couple of years hasn't been paying attention. There 14 is no doubt that corporate management and corporate 15 governance has improved substantially. There's no doubt that 16 there's been an incredible focus on this. 17 Just ask any member of a corporate board. They're 18 spending two and three times as much time as they were doing 19 before. So I think it is folly not to recognize something 20 has happened. It's also, I think, folly not to recognize 21 that much of the power of what I think is being suggested by 22 the Commission's proposal is already taking place without the 23 proposal being in place. 24 Everyone has their own interpretation of what 25 happened at the Disney Company, but one thing we know is that 1 you had an effort to change the leadership of the board of 2 the Disney Company that expressed itself through the election 3 process and somehow the voters were able to do that without a 4 massive proxy fight and they were able to get change. 5 Now, was it exactly the change they wanted? Was it 6 a good change? I don't take any position on that but clearly 7 even without this proposal, for those who can in fact rally 8 something approaching a majority of the shareholders, action 9 did happen. 10 And so I would just urge that we -- if we're going 11 to use analogies to democracy, let's use democracy as we 12 normally think of it and think about 50 percent as being sort 13 of the minimum threshold to say I represent the majority. If 14 we're going to look at the issue of agency, let's look at all 15 these issues of agency and whether in fact we're advancing 16 democracy or whether we're really advancing interest group 17 politics. 18 And as we think of cost, let's think of all the 19 costs because the leverage will only be possible because of 20 the rule, so the rule is in fact creating the cost. It's not 21 a voluntary cost in that sense by the company. It would be a 22 cost that the company would not have to deal with in the 23 absence of the rule. 24 MR. BELLER: Commissioner, I want to get through 25 one round. Ms. Wolf? 1 MS. WOLF: Thank you. First, I'd like to just take 2 a brief minute to compliment everybody involved in planning 3 and organizing this meeting. Those of us who are corporate 4 secretaries know what a tremendous effort it is to pull off a 5 full day like this. We compliment you. 6 The American Society of Corporate Secretaries 7 agrees with the comments of our CEOs made by DRT, and we 8 would welcome a cooling off period. 9 MR. BELLER: Could you get closer to the mike, 10 please? 11 MS. WOLF: Is that better? Thank you. 12 We would welcome a year or two to integrate the 13 Sarbanes-Oxley requirements and the new nominating committee 14 requirements before dealing with this. 15 We also hear the sentiments from the institutional 16 investors, and we sense that year may not be possible. If 17 it's not, we have several overarching concerns on how this 18 applies to companies, and it's not just the impact on the 19 company itself, but of course, all shareholders bear the cost 20 of implementing these rules, and will suffer if there is some 21 disconnect in the implementation. 22 The first set of concerns we have are mechanical, 23 and I will not take a long time to address them because I 24 know that John Wilcox will do this later on the last panel. 25 We are hearing from our experts, our proxy 1 solicitors and our outside people who help us run the back 2 room at meetings where the proxies are actually processed and 3 the votes are counted, and then if there is any kind of a 4 dispute, the votes are verified, are telling us that the 5 current system may not be adequate to handle this rule, 6 particularly if there is a large volume of votes that are 7 close, either about the trigger or about a contested election 8 or a run off election, if you will. 9 We would urge the Commission to do something 10 similar to the Miner's Report that was recently done in the 11 U.K. that ripped the process apart and identified strengths 12 and weaknesses to help us all be confident that the process 13 will work, and if there is not time before the new rule is 14 implemented, then perhaps it would make sense to apply the 15 rule to the largest companies first and going more slowly to 16 the rest of the companies, so that we would have less volume 17 for the first few years as the rule is implemented. 18 Our second significant concern has been addressed 19 very well by earlier panelists. It is that the proposal we 20 think will make things more adversarial rather than encourage 21 the interactive consensus building behavior that is necessary 22 to get everybody back on the same page and regain the trust 23 of our institutional investors. 24 We think that Professor Grundfest's alternative 25 would be a good one that would produce much less 1 controversial and adversarial interaction than the proposal. 2 The last overarching concern of our members is 3 there is this fear, particularly by the companies who have 4 other kinds of business interactions with certain of the 5 special interest institutional investors, that the leverage 6 issue will get out of control. 7 We have suggested in our comment letter some things 8 we think will help diffuse the concern, such as very clear 9 disclosure up front, if there is to be an initiative to try 10 to trip the trigger, why they think that's needed, something 11 company and board specific that deals with corporate 12 governance concerns and concerns about the proxy process or 13 shareholder value. 14 We think that kind of disclosure and transparency 15 would go a long way to allaying these concerns. 16 Thank you. 17 MR. BELLER: Mr. Beese? 18 MR. BEESE: Thank you. Let me start with Franklin 19 Raines' comments, that things are indeed different in the 20 board room. I certainly can attest to that. I would have 21 liked to have been here this morning, but was at a board 22 meeting, where we did discuss the director selection process. 23 They are quite different. Sarbanes-Oxley and the 24 new standards by the Exchanges have made things quite 25 different. I do believe that while they may not specifically 1 address some of the issues that others are concerned about, 2 we should at least understand what has changed before we move 3 to the next generation. We don't know really what has 4 changed yet. 5 One thing that certainly has changed if you talk to 6 the major head hunters, there is a 80 percent turn down rate, 7 and they start with qualified candidates. That is 8 drastically different than say three to four years ago, and 9 clearly, there has been a change in that selection process, 10 as well as the way the process works in the board room today. 11 The other thing that has changed certainly is the 12 cost to companies. There is a disproportionate cost that 13 Sarbanes-Oxley, as legislated by the Congress, has placed on 14 smaller public companies. I do think we need to fully 15 understand the ramifications of that and the ramifications of 16 costs that we have unilaterally imposed on U.S. companies 17 that are trying to compete in a very global and competitive 18 world, before we impose additional costs on them, and 19 understand the global economic consequences to what we are 20 trying to do to U.S. companies and its effect on the U.S. 21 economy. 22 There has been, I believe, a significant 23 accountability, and one that again, we don't know the full 24 ramifications of. If I read the press correctly, the next 25 saga in the current drama is individual director liability. 1 I believe some members of the New York Stock Exchange Board 2 may find out exactly what individual director liability may 3 be, if I read the press correctly. 4 I also believe a number of the other corporate 5 cases, the major institutional shareholder of Hollinger that 6 started this current debate at Hollinger, has talked about 7 seeking redress from individual directors if they are not 8 able to get satisfactory redress through the process that is 9 currently going on. 10 Lastly, let me just say that during my stay in this 11 building, one thing I became increasingly conscious of was 12 the law of unintended consequences, not having been here this 13 morning, I would have liked to have heard some of the 14 solutions, such as Professor Grundfest's suggestions. 15 I do believe this rule in particular as proposed is 16 very prone to that law of unintended consequences. 17 Chairman Ruder talked about the Rube Goldberg 18 nature of this law, and I think that is not an inaccurate 19 description and one that clearly suggests it could easily 20 move down that path of unintended consequences. 21 Institutional shareholders have a way of asking for 22 more redress in this whole area. What I would like to know 23 specifically about certain classes of institutional 24 shareholders, what actions this could possibly procreate by 25 certain types of institutional shareholders, namely hedge 1 funds, which I think is a very amorphous term and covers way 2 too broad of a segment of asset class of a market, but 3 certainly I would like to see the Commission go further down 4 their view of hedge funds, particularly a certain class of 5 hedge funds that spend a lot of time gaming the market, and 6 I'd like to know how that would play out with that group of 7 investors and how this rule might enhance their, if you will, 8 gaming of the corporate marketplace. 9 I think there are more questions than answers now, 10 and I do worry about that law of unintended consequences. 11 Thank you. 12 MR. BELLER: Commissioner Goldschmid? 13 COMMISSIONER GOLDSCHMID: I have two sets of 14 questions. One for you, Mr. Batts. I do agree with you and 15 with Franklin Raines and Mr. Beese. Sarbanes-Oxley has made 16 corporate governance much better. I take it you would 17 concede that there are situations in which there is my 18 deadwood company, deadwood board, and don't you think there 19 ought to be something out there to do something about that? 20 The second part of my question, in addition to what 21 we are suggesting, would you like to see a provision which 22 would allow 10 or 20 percent of the shareholders to 23 automatically trigger an election? Would that help you in 24 terms of speed? 25 For Franklin Raines, I have several also. I agree 1 with you on the difficulty, but I think that's why we defined 2 and developed that process and proposal as we did, to focus 3 on process. If shareholders twice over a two year period 4 decide they need help, this is a company that needs help and 5 responsiveness, isn't that a wonderful paradigm for a company 6 that needs change, that needs corporate governance 7 development, that needs some kind of new dynamic, rather than 8 try to define it, put it in the hands of those people who 9 care about efficiency and productivity and profitability. 10 On leverage, I guess my question to you on that is 11 why do you think it will happen? If somebody comes to you 12 with a self interest proposal or something that would harm 13 the efficiency or productivity of the company, isn't it easy 14 for you to say no, you are running a good company, you know 15 the shareholders will support you, the institutions won't go 16 along, what's the difficulty of getting rid of blackmail by 17 saying we won't accept such nonsense? 18 Those are my questions. 19 MR. BATTS: If I can remember the question, I would 20 say that contrary to one point that you made today, my own 21 observation, with due respect, shareholders by not voting 22 vote against their own economic interests year after year 23 after year. I don't know the numbers, but I doubt 100 24 percent of the Disney shares just voted. 25 Therefore, what we are talking about, we are 1 talking about the numbers of people who did vote. If the 2 number not voting was 30 or 40 percent, did Mr. Eisner did 3 not win, or had the possibility of not winning. 4 The point is that something needs to be done to 5 make sure the shareholders participate and get involved in 6 the game. 7 The question for the company that is hard core, we 8 all have the same problem with that company. If the 9 shareholders in one year said no and voted against that board 10 instead of not voting, or the rules were changed so that if 11 you didn't vote, it's the same as a no vote, and assume the 12 company had a staggered board, you would wipe out a third of 13 the directors a year, and in two years, you would have a new 14 board. 15 If the shareholders want action, they have to sort 16 of get off the duff and do it. 17 I don't know that -- 18 COMMISSIONER GOLDSCHMID: The footnote on that, and 19 it was explained this morning, I think, clearly, it's 20 extraordinarily hard to have a proxy contest. 21 MR. BATTS: All we have to do is vote no. 22 COMMISSIONER GOLDSCHMID: Without any information? 23 We are giving them that opportunity. 24 MR. BATTS: But they are not taking advantage of 25 it. 1 COMMISSIONER GOLDSCHMID: Without the proposal, 2 they may well. 3 MR. BATTS: I'm not so sure I would agree with 4 that. If you look at the current proxy a voter receives, it 5 does not clearly define the interrelationship among the 6 board. It takes a wizard to figure out that the chairman of 7 the compensation committee and the CEO serve on two other 8 boards together and they fly around the company together. 9 There is not enough information about the directors 10 standing for election in a proxy. The proxy card is not 11 designed where you say yes/no, or pass on an individual 12 director. Some very simple changes could provide some more 13 mechanisms. 14 I think a man named John Bogle used to serve on the 15 Board of Mead when I was CEO -- he mutual funds, a lot of 16 large institutional investors, simply are not representing 17 their shareholders well by not voting. By letting that 18 continue, a smaller minority of shareholders who are 19 activists, can swing things maybe not in everybody's best 20 interest. 21 COMMISSIONER GOLDSCHMID: Ten or 20 percent added 22 to what we have would be able to get an immediate election. 23 MR. BATTS: I think that would be a mistake. I 24 think it needs a larger number than that. 25 COMMISSIONER GOLDSCHMID: Thirty percent. 1 MR. BATTS: There, you would have to get into 2 charter changes, a lot of different legal issues. I'd be 3 very uncomfortable of a relatively small minority of people 4 being able to call a general election. And then after 5 calling it, a majority of shareholders not voting. I think 6 you have the worse of all worlds. 7 COMMISSIONER GOLDSCHMID: The Disney vote was a 8 high percentage of shareholders voting and broker dealers 9 voted for management, as I understand it in general, in the 10 context of their shareholders hadn't voted. 11 MR. RAINES: I'm a little confused because your 12 proposal it seems to me to be going in the wrong way. If the 13 idea here is the protection of the majority of the 14 shareholders, why is it that empowering ten percent helps 15 them? 16 Your proposal you just put forward about the 10 to 17 20 percent for a quick vote. 18 COMMISSIONER GOLDSCHMID: Because people are 19 arguing for fast vote. The question is do you really want to 20 open it up to 10 or 20 percent. That's why I asked it. We 21 didn't propose it. 22 MR. RAINES: My point is the company is owned by 23 the shareholders. It ought to be controlled by a majority of 24 the shareholders. For all the proposals that don't address 25 the majority seem to me to be fatally flawed. At least one 1 of the triggers before the Commission does not involve two 2 majorities. It involves 35 percent and then a majority. 3 The last time I looked, winning 65/35 was a 4 landslide. It wasn't a failure to succeed. 65 percent of 5 the shareholders voting the other way should not be ignored 6 in my view. If we were really talking about majority and 7 majority, I think it's a somewhat different conversation than 8 the conversation about 35 percent or 10 percent or some other 9 number. 10 On the leverage point, I tried to state this fairly 11 because sometimes this is stated unfairly, I'm not worried 12 about people who would come in with patently bad ideas. The 13 problem isn't that. It's the people come in and say we think 14 your company should divert resources to stop AIDS. That's 15 not a bad idea. The question is should the resources of this 16 company, which may have nothing to do with that particular 17 issue, be diverted from doing the best interest of the 18 shareholders, to what I might personally agree to be a very 19 important cause. 20 It's not the people who come in with kooky ideas 21 that's the problem. It's people who come in with ideas that 22 on the surface are good ideas, but they are not good ideas 23 for your company. 24 The CEO can say I will now choose to spend the next 25 six months making this case that this is not a good idea for 1 our company, or I'll sit down with them and see if we can cut 2 a deal because the six months that I would otherwise have 3 spent on an important issue could better be spent on trying 4 to make the company a better company. 5 Not because someone comes in with a stupid idea, 6 and that has absolutely no merit. These advocates are 7 advocating things that they think are very important, and 8 they would like everybody in the world to share their 9 passion. I can understand that, but they want to do it with 10 other people's money. 11 The management is there to protect the interests of 12 the shareholders, as much as we might agree with the passion 13 of the advocates, and that's where the leverage issue comes 14 in. People with powerful ideas who say I want this to become 15 your number one priority, even though in your calculus and 16 the board's calculus and the shareholders' calculus, it is 17 not the number one idea. 18 I don't think the Commission ought to be providing 19 another platform for that to be played out. We have more 20 than enough platforms now. 21 COMMISSIONER GOLDSCHMID: They can use 14(a)(8) to 22 raise that issue, and if a majority of shareholders want to 23 do it, are you sure you want to protect them? 24 MR. RAINES: These proposals have nothing to do 25 with the majority. 35 percent vote against someone, 65 1 percent agree -- 2 COMMISSIONER GOLDSCHMID: We've got a proposal of 3 50/50, two votes. Our thinking was 35 percent, even the vote 4 of broker dealers, was the equivalent of 50 percent. 5 MR. RAINES: If there's a problem with the broker 6 dealer, that ought to be fixed directly. It shouldn't be 7 dealt with indirectly by assuming in all cases that 8 management always will get -- if we have a problem 9 communicating -- 10 COMMISSIONER GLASSMAN: Can I just clarify one 11 thing in our proposal? The 50 percent is not 50 percent of 12 shareholders. It's 50 percent of votes cast, which is not 13 necessarily a majority of shareholders in any event. 14 The question is why did the other people not vote. 15 We don't know why the other people didn't vote. Maybe it's 16 their ignorance. Maybe they are comfortable with management. 17 I don't know. 18 I just wanted to be clear, none of our proposals is 19 50 percent of shareholders. 20 MR. RAINES: I couldn't agree with you more. I 21 believe it ought to be 50 percent of the shareholders because 22 whether they vote or not, they have an economic interest. 23 That economic interest should not be ignored. If they have 24 made a choice that they have chosen not to cast that ballot, 25 we shouldn't say we now know what their intention was in any 1 way. 2 MR. BELLER: Mr. Raines, I don't want to just throw 3 this one out to you, but it's really a follow up from 4 Commissioner Goldschmid. 5 Let's slip it around. Let's take Ira Millstein's 6 proposal. What would happen if our proposal were triggered 7 or anything else we have heard about today were triggered, if 8 a director failed to receive 50.1 percent of the votes 9 outstanding in the election? 10 It seems to me if 50.1 percent is good, on the 11 negative, we ought to at least consider whether it's good on 12 the positive. 13 Should a trigger occur if a director doesn't get 14 50.1 percent of the votes outstanding? That suggests that a 15 majority of the shareholders have not voted for that person. 16 As I say, I'm not addressing that entirely to you. 17 MR. RAINES: I think that's a very fair question 18 you asked. I think that once you get to 50 percent, you are 19 headed more in the right direction. 20 I would say there was one other fact you would 21 probably want to know, and that was is that person being put 22 up for re-election. If the board reads that and says the 23 shareholders, the majority, do not support this person, the 24 board at least ought to have the opportunity to its 25 nominating committee to respond to their own shareholders 1 before, in my view, you would invoke a wholly new process. 2 We just put in place an approach to nominating 3 committees and independent directors. We shouldn't ignore 4 that whole process here in our effort to try to empower 5 shareholders, but at least I think that raises the issue. 6 I think once you are talking about the majority of 7 the shareholders, then you are now, in my view, talking about 8 the owners speaking, and not some number short of a majority 9 of the shareholders and saying that the minority can be 10 imputed to be speaking on behalf of the majority. 11 MR. BELLER: Mr. White? You have been very 12 patient. 13 MR. WHITE: Thank you. I have a couple of points I 14 just wanted to follow up on from earlier commentary. First, 15 you were looking for examples of external evidence where 16 shareholders are dissatisfied. There are several triggers 17 that are proposed by the SEC or by other parties that 18 demonstrate that very well, and none more than the majority 19 vote issue, which is the supposed non-responsiveness. 20 You have had several examples where companies 21 ignore a majority vote, but I can't think of a better 22 example. We would propose that be in the final rule. 23 I would just offer somewhat of an example. How 24 would the Commission feel if three or four of you voted to do 25 something and your staff said no, and then you voted again, 1 and your staff said no. That's what happens to us as 2 shareholders. 3 The issues that are passed are the issues that are 4 legitimate. 5 MR. RAINES: Happens all the time. 6 (Laughter.) 7 MR. WHITE: The points that have been raised -- 8 MR. DUNN: Ted, is your microphone on? 9 MR. WHITE: The points that have been raised about 10 the number of public policy issues that are raised in the 11 proxies, that's correct. There are some very sensitive 12 issues which quite frankly I'm not sure should be dealt with 13 through the proxy process. That's not the best medium, but 14 it's there, whether you adopt this rule or not. 15 Is this going to give additional leverage? 16 In some ways, this rule may give boards more 17 defense against special interest groups. I strongly believe 18 that the majority of shareholders are still driven purely by 19 economics, and that if directors are held more accountable to 20 that majority that are based on economics, when the special 21 interest groups come through the door and want, whether it be 22 environmental or other social issues, I think it's simply 23 easier for them to say I'm going to be more susceptible to 24 the shareholders saying you're not doing your job. 25 It is also going to give the directors more ability 1 to say you know what, my shareholders are going to fire me if 2 I do that. 3 One other comment, Mr. Batts raised, clearly, he 4 wanted to see shareholders off their duffs. I'd like to 5 suggest that this is the type of rule that is a tool in our 6 tool box that I think will help do that. It is not an 7 aggressive rule by any means. I think it's been well thought 8 out. It's been massaged quite a bit. There has been lots of 9 great debate on it. 10 Quite frankly, I think the descriptions of this 11 being modest are right on. This will help us in our job. We 12 are the owners of these corporations, our livelihood depends 13 on them being successful. If we thought this was going to 14 ruin capitalism and they wouldn't take the right kind of 15 risks in the money long term, we would be the first to say 16 no. 17 MR. BELLER: Mr. Chairman? 18 CHAIRMAN DONALDSON: My problem is that we really 19 haven't had -- first of all, I'd like to narrow the 20 conversation down to what we are really talking about here, 21 which is the election of directors. We have a lot of 22 peripheral stuff we are talking about. We are talking about 23 the slate for the election of directors. 24 In effect, we have never really had an election 25 because of the withhold vote nature. If we have 100 shares 1 voting and 99 withhold, the director gets elected. 2 What we are talking about here is the frustration 3 of certain shareholders that they haven't really been given 4 an opportunity to vote. 5 My question is, and whether it's 35 percent 6 withhold or 50 percent withhold, what do you do about that 7 situation, and it really doesn't make any difference how many 8 amalgamations of dissatisfaction among the shareholder group, 9 it doesn't make any difference so long as a total of 35 or 50 10 or whatever want to withhold their vote. 11 It's a frustration maybe on a whole series of 12 things. It's a frustration for not participating in a real 13 voting situation. It's a frustration, and to me, the real 14 test of the independence of the board and the real test of 15 what we are talking about here, and I throw this out as a 16 question, what do you do about shareholders, 35 percent, 40 17 percent, 50 percent of your shareholders who feel they have 18 never participated in a real election? 19 That obviates the need to make judgments on why 20 they are disappointed. They could be disappointed for lots 21 of reasons. If 35 or 40 or you name it say that they want a 22 chance to vote, they want to have a real election, they want 23 to have somebody on the board they can have a real election 24 for, what do you do about that? 25 I think that's what we are talking about. 1 MR. RAINES: Mr. Chairman, I always thought it was 2 kind of bizarre myself, this process, but it's a process that 3 has been established by state law that creates this anomaly, 4 and it can only really be solved in terms of having a real 5 election, yes/no, for/against, by changing the corporate law. 6 I think in effect in 99.9 percent of the cases, 7 these votes are treated as no's. They are treated as votes 8 against. In 99.9 percent of the cases, people who get a 9 substantial negative vote tend not to be around. 10 There may be some particular cases where that is 11 not true, but that is not the case in the vast majority, 12 indeed, even relatively small negative votes have led to 13 substantial changes at companies. 14 I know there are exceptions. I know there are 15 cases where there are these bad or dead or unresponsive 16 companies. It's a very small number. 17 If we can find a way to change this with held 18 versus no, I think that would be good, because the options I 19 think are very bad. 20 CHAIRMAN DONALDSON: Let's assume we have to deal 21 with that, which is what we do have to deal with. We have to 22 deal with a system that has withhold votes in it. The result 23 of that is that substantial majorities of shareholders have 24 their dissatisfaction frustrated. That's what we have to 25 deal with. We are not going to change the state laws. We 1 have to deal with that. 2 MR. RAINES: I think the suggestion that I put 3 forward is nothing should occur until you know that is true 4 for a majority. As badly as I might feel for a minority who 5 is frustrated, that happens. You don't have the votes, you 6 don't have the votes. You live with the fact that it is a 7 majoritarian system. 8 I personally don't feel that there is a need to 9 intervene on behalf of minority shareholders to ensure they 10 are not frustrated. There is nothing you can do, I think, to 11 deal with that that is fair to the majority, who would 12 otherwise have to bear the costs of all of these minorities 13 having their right to -- 14 CHAIRMAN DONALDSON: You would be satisfied with 50 15 percent? 16 MR. RAINES: I don't think you can even begin to 17 think about this until you are thinking about 50 percent of 18 the shareholders, and then when you have done that, I think 19 you always have to say what did the board did, what happened 20 after the majority in fact had acted? 21 In our system, if we are going to maintain this 22 corporate fiction, shareholders should not get into running 23 the company. There always has to be operating through their 24 board, otherwise we are reinventing the whole nature of 25 corporations. 1 If you have majority and if the board has not 2 acted, then I think you could probably find many mechanisms 3 that people could agree to, that at that point, we now have a 4 closer version of that case, that small number of 5 unresponsive companies, because they didn't respond directly 6 to the shareholders and the nominating process in the board, 7 because you can now say was not representative of the 8 majority. 9 If you start designing at that stage, I think you 10 will be more likely to find methods that don't raise all the 11 kinds of issues that I've tried to raise here, that I think 12 are the real world issues of how smart people will take a 13 change in law and turn it to their advantage. I believe they 14 are very smart people. Some of them are my friends. I know 15 exactly what they do. I know exactly what I would do if I 16 was in their shoes. This is a God send for them in terms of 17 greater leverage. 18 If this is limited to that very rare case where you 19 have a majority of the shareholders and the board hasn't 20 acted, then that leverage is dramatically reduced, not 21 eliminated, but dramatically reduced. 22 CHAIRMAN DONALDSON: I'm talking about the 35 23 withhold vote part of the proposal. Let's assume for a 24 minute that 35 maybe isn't the right number. Maybe it should 25 be 50, but whatever. 1 You said it depends upon what the board does, but 2 the proposal sets up a procedure. It's being taken out of 3 the board's hands and it's being put up to a vote. The 4 candidate from the proposing group just goes on the ballot 5 and has to compete with everybody else on the ballot. 6 That's prescribed by the proposed rule, at least 7 that part of it. 8 MR. RAINES: I agree with you, that is what is 9 being set up, and I think that's the problem. Look at how it 10 could easily happen. Today, many of these advisory groups 11 are saying make this point but hold your vote. Because we 12 don't like the constitution of the executive pay or because 13 we don't like this person on this board or this relationship, 14 you can get the 35 percent for a variety of reasons. It may 15 not be the same reasons. 16 What happens here is if you get the 35 percent, or 17 you get the 50 percent, I think 35 violates the majority rule 18 provisions, and then the board undertakes to say we'd like 19 you to resign because clearly you are not representative of 20 the shareholders. Under this proposal, you would still go 21 forward with an election the next year, even though the board 22 did exactly what you wanted them to do. 23 MR. BELLER: Let me broaden this out a little bit. 24 Professor Ruder? 25 MR. RUDER: I think we have had an interesting 1 discussion. What we are talking about is creating more 2 effective boards of directors. The way to get there, as I 3 see it, is to improve the voting process, primarily through 4 the use of institutional investors. 5 I think, Mr. Chairman, if the Commission has the 6 power to regulate the proxy system, you might well think a 7 little bit farther outside the box, first of all, fix the 8 brokers voting process so that the votes are real, and 9 secondly, when there's an election for a director, treat a 10 withhold vote as a no vote. If the director doesn't 51 11 percent of the vote, that director is not elected. I would 12 not deal with absolute majorities, but with the majority of 13 the people voting. 14 What I've said may sound a whole lot like the 15 Grundfest/Millstein approach, but it seems to me it's much 16 simpler and gets you out -- excuse me for saying it -- Rube 17 Goldberg approach that you seem to making very complicated. 18 I would like to see the institutional investors say 19 do we want this board of directors or individual director, 20 and let's vote up or down, and then the institutional 21 investors can say all right, I've done my job, I don't have 22 to hide underneath the question of whether we are dealing 23 with a social question or dealing with an environmental 24 question or a poison pill question. That is to vote a 25 director up or down. 1 MR. BELLER: Ms. Yerger? 2 MS. YERGER: There is so much to comment on, I'm 3 going to limit mine to a few observations about the voting 4 and issues that were raised. 5 The first is I'm actually disappointed to hear 6 suggestions that shareholder candidates or shareholder 7 proposals have to be approved by majority of the outstanding 8 shares. 9 Currently, company directors don't have to be 10 approved by a majority of outstanding shares. The company 11 proposed stock option plans don't have to be approved by a 12 majority of outstanding shares. I think it's an extremely 13 high bar that should not have to be met by shareholders. 14 I also agree with all the comments that the broker 15 voting system absolutely has to be addressed. It was evident 16 last week at Disney, the difference between the withheld 17 votes, with and without the broker votes, meant the no vote 18 from 44 percent to over 50 percent. That's a huge 19 difference, and it's a problem that needs to be addressed. 20 I also want to directly talk about the issue about 21 the power of the proxy on voting advisory firms, because I 22 think there is concern about that. Frankly, I think the 23 concern is overblown. 24 The first is our members are fiduciaries and most 25 institutional investors are. They have an obligation to vote 1 in the best interest of their plan participants, 2 beneficiaries or their investors. The fact is our members 3 who may use the proxy advisory services to help them make 4 their voting decisions, but most of them have proxy voting 5 guidelines. They do not blindly follow the recommendations, 6 particularly the largest institutional investors. 7 I think the number of funds setting up their own 8 proxy voting guidelines is increasing, thanks in part to the 9 new requirements that mutual funds have to disclose their 10 proxy vote, a change we are very much in favor of, we are 11 finding that more council members are also developing more 12 proxy voting guidelines. 13 I actually think that no votes or withhold votes, 14 which currently right now are very symbolic, so there may be 15 a number of reasons why people would withhold a vote from a 16 director, that may change. I think that if there are 17 ramifications from a high no vote, I think that institutional 18 investors are going to be even more careful about a decision 19 to withhold votes. 20 I think we would find the trends and the numbers, 21 which frankly right now, even at the 35 percent vote level, 22 show a very limited number of companies that would be subject 23 or would trigger this vote. 24 We did a random survey of 100 S&P 500 companies, 25 mid cap, and 100 small cap companies, and we only found six 1 companies that have one director with a no vote exceeding 2 that. I think that number actually might go down in the 3 future if this rule were put in place. 4 Second, there's more competition in the proxy 5 voting advisory firms. There is not just one provider. I 6 think that is going to make a huge difference. 7 Finally, I just want to make an observation. 8 Everyone keeps talking about this power concentrated, there 9 are a number of votes that are represented by institutional 10 shareholders' services. No one, I think, ever mentions the 11 fact that there is a significant percentage of institutional 12 assets that are held by corporate pension funds, insurance 13 companies, trust companies, and to a certain extent, mutual 14 funds, which I think in the past have tended to probably be 15 fairly supportive of management. 16 I think there has been a block of shares that has 17 tended to probably pretty much vote in support of management. 18 MR. SONNENFELD: With everything we have stated 19 here, do we really think we have gotten our job done? If the 20 debate of this last panel migrated back to the debate over 21 triggers, and if we wave the magic wand and we agree to the 22 triggers in the vote process, do we have what Mr. Ruder just 23 referred to as more effective boards of directors? 24 Maybe I'm the only one in the room who feels this 25 way, but I don't see how we have ensured that in any way. 1 We have additional names coming from additional people. What 2 gives us the confidence to think that has fixed the problem? 3 You say more effective, I guess it's more diligent. 4 Other than monitoring, we have not made a lot of 5 progress with Sarbanes-Oxley. Boards have other roles, other 6 roles that have to do with the linkage roles to other 7 constituencies which are legitimate ways that boards are 8 solicited to be attentive and represent the reputations, and 9 boards have other roles that have to do with being advisory 10 and partners with management. It's not the adversarial, 11 lower lip attitude all the time. There needs to be some of 12 that kind of partnership. It is part of the role of a board. 13 Granted all that, let's just go to diligence, who 14 in this room thinks they know how to do better and why than 15 an honest board of directors? Based on what criteria are we 16 going to use to decide now we are going to trigger these 17 votes and we are going to do better. 18 If you look at most of the proxy firms, they say if 19 a director serves on a board, it's going to go bankrupt, they 20 will be disqualified. Do you realize who you are going to 21 allow to be thrown out as directors now? 22 If you were some valiant person, and companies that 23 could be on the edge of bankruptcy, we could all think of 24 some good companies right now, I think it's really darn noble 25 of people to go on those boards. We will probably be 1 disqualifying them by this. 2 Financial literacy? Come on. That's a standard so 3 often used, and we will start seeing that. That has nothing 4 to do with Enron or the New York Stock Exchange's challenges 5 or Freddie Mac or anybody. We have a lot of myths about what 6 good governance will be. All those myths will be used as our 7 criteria, and I'm not so sure that okay, now we have made it 8 to this stage, our job is done. 9 We need to think through what would lead to 10 credentialing and how do we do it. You give an F to Health 11 South's management. ISS is given 94 percent. GMI. Moody's, 12 but they are in the governance assessment business 13 themselves. 14 We have a lot of inconsistency to what good is. 15 How can we think that just because we now are going to have 16 new people, throwing out new names, these names will be any 17 better? 18 Warren, when I went out 26 years ago and 19 interviewed CEOs for price fixing, and senior management, 20 yours was the only company in the industry that wasn't hit, 21 and you were personally in charge at the time. I wanted to 22 find out what it was about Mead that you weren't in trouble. 23 You had only one lawyer, right? One corporate counsel. One 24 person. You set a model and you had all of your management 25 and board grilled. You had to bring in their expense 1 accounts, I think, didn't you? 2 (Laughter.) 3 MR. SONNENFELD: These have to do with practices 4 rather than credentials. 5 MR. BELLER: The ASCS letter like the BRT letter is 6 pretty clear that this proposal of the Commission targets too 7 broad a group. We have heard some play between the Chairman 8 and Mr. Raines about how that could be different or could be 9 narrower. 10 I guess I'd like to hear your view as to if we 11 don't have -- assuming that you agree there is some group of 12 dead companies or companies that are deserving of 13 improvement, how would we shape the Commission's proposal to 14 more accurately identify those companies while leaving the 15 good ones by the way side? 16 MS. WOLF: It's a very hard question and I think 17 the proposal did a very good first shot at it. However, we 18 think that if there is to be a trigger as opposed to a 19 Grundfest alternative, it should be a very clear trigger, a 20 proposal that articulates why the trigger should be tripped, 21 what's wrong with the company, what's wrong with the board, 22 and then that should get a majority vote, so that it's clear 23 that the shareholders are all intending to cause the trigger 24 to be tripped and that they are all in alignment as to why. 25 As we pointed out in our comment letter, for 1 example, if you use a broken company test, it has failed to 2 keep up with its peers' performance, it has had certain kinds 3 of legal troubles, you might catch some companies where the 4 board has done the right thing, fired the CEO, brought in a 5 new management team, is in the middle of a turn around. We 6 tend to think those very boards are the boards that need the 7 disruption of perhaps having a dissident member added to the 8 board in the middle of this very tenuous time the most. 9 We think some kind of a very clear trigger such as 10 a proposal that articulates why it should be tripped in this 11 particular company would allow all the shareholders to fully 12 consider whether it is in fact merited for this company and 13 this board at the particular time. 14 MR. BELLER: Mr. White? 15 MR. WHITE: One further comment to follow up on 16 Susan's point. It's clear that you have put a tremendous 17 amount of effort into this rule to mitigate the potential for 18 abuses and concerns about applying to the right universe. 19 This doesn't like me for some reason. 20 MR. SONNENFELD: It worked fine over here. 21 (Laughter.) 22 MR. WHITE: I would also like to suggest that to a 23 large degree, the Commission might not need to worry about 24 that, and that the markets, as I've indicated, tend to have 25 very strong economic forces that drive the ultimate result, 1 and if we target a company that doesn't need to be targeted, 2 they will not be successful at even passing the simplest of 3 shareholder proposals, let alone putting a director on the 4 board or getting one off. 5 The markets work very well. I'm on both sides of 6 that issue. I have sought support for our proposals and I 7 have considered other people's requests for our support. The 8 market is very rigorous on that. It's accurate, the stronger 9 the impact of a potential proposal or a dissident slate, the 10 more seriously the market tends to take it, deeper into the 11 institutions analysis will go, the PMs and a lot of the 12 mutual funds even, and it's a proportionate sort of drop in 13 what are speared as the automatic support. 14 These things have a huge economic impact on the 15 individuals that are making the votes and on our 16 beneficiaries, and they are taken very seriously. 17 MR. BELLER: We are running a little over. There 18 are a couple of very specific issues about targeting and 19 appropriateness that I do want to get to before we break. 20 There has been a lot of discussion and a lot of 21 comment about special interests and single purpose directors. 22 I guess I throw open for a couple of folks to answer, is 23 there something -- the comment from the business community 24 was notwithstanding the restrictions of separateness or 25 independence from nominators, the nominees are possibly or 1 likely or certainly going to be special interests. I think 2 the shareholder groups have generally said no separateness 3 requirements at all, we shouldn't be subject to any more 4 requirements than anybody else. 5 Any thoughts as to how to square that circle? I 6 guess how to square that circle with one observation. For 7 those who say there is a great risk there is going to be 8 special interests for the directors, why should the 9 Commission believe that a director who is elected by 50 10 percent of the shareholders isn't going to respect his or her 11 fiduciary duty the same way any other director is, and is 12 there something we can do to increase that assurance if you 13 don't think it's enough? 14 We will play Jeopardy here, anybody who wants to 15 take that. 16 MR. SONNENFELD: I'd just like to advance this 17 proposition. Early in my career, I read the means of 18 separation of ownership and control and control, and 19 subsequently I had an exchange of correspondence with Adolph 20 Burley, and I finally read his last book. 21 He ended up, although opposing the role of 22 directors and criticizing it, he ended up saying he believed 23 that once a person rose to a position of prominence and 24 responsibility, that person would behave in a way which was 25 responsible and would be able to shed prejudices that he or 1 she had. 2 I believe that would lead me to say don't put 3 restrictions on persons nominated by a nominating group. Let 4 that person go on the board, if that person can be elected, 5 and let that person behave in a responsible way. 6 It seems to me that's an attitude that at least I 7 hold with Professor Burley, that almost all the directors 8 today are acting responsibly, and if we have new people on 9 the board elected because there is a need for more 10 responsible people, I would expect them to behave that way. 11 MR. BELLER: Ms. Wolf, any thoughts? 12 MS. WOLF: Yes. I think we would be satisfied with 13 the transparency as to relationships. Perhaps meeting the 14 same independence test with respect to the company, the 15 auditors, et cetera, that the other directors have to meet, 16 but then also disclosing with full transparency any 17 relationships with the people who tripped the trigger and 18 nominated them. We think that disclosure would be adequate, 19 rather than some other hurdles that would be a bar to 20 serving. 21 MS. YERGER: We would support that, but we also 22 believe there should be transparency about relationships 23 between management or board recommended candidates, which 24 currently we think the rules are lacking. I think the best 25 solution, in our opinion, is to make sure there is full 1 transparency regardless of who is nominating the director, 2 and then let the share owners decide who they want 3 representing them. 4 MR. RAINES: I would just add, I'm more in the 5 school of Dean Sonnenfeld on this issue. I think this gets 6 into social engineering to try to believe there is a process 7 that will produce collegiality. 8 I think I'm one of the few people who actually 9 lives with a stakeholder board. I have five directors who 10 were appointed by the President of the United States with 11 quite a bit of turn over. 12 Our experience with them has actually been quite 13 good, because they have defined themselves as representatives 14 of all the shareholders and not as special interest 15 shareholders, but I'm also quite aware of companies where 16 people have been on the board as special interest 17 shareholders expressly, and it was a disaster. The company 18 boards no longer function as collegial bodies. 19 I don't know that there is much the Commission can 20 do to decide which group is going to end up there. You are 21 going to have terrific people who view themselves as 22 representing the shareholders, and you are going to have 23 people there who are there for cause. 24 I agree here with Dean Sonnenfeld that you ought to 25 be quite cautious here about how likely you can engineer a 1 good result. At a minimum though I would suggest that on the 2 independence issue, don't underestimate how stringent these 3 independence requirements are now for the three major 4 committees. 5 We are looking for every independent director we 6 can find, and the definitions of "independence" are not just 7 the ones that are created by the listing requirements but 8 every group has their own definition of "independence." Who 9 will then vote based on whether or not you meet or don't meet 10 that definition? This becomes a very important issue. 11 At a minimum, I think the independence question has 12 to be dealt with, but I would take this as just another 13 example of something to be cautious about. You could set in 14 motion a lot of forces that you didn't intend, and will look 15 back and say how did that happen. 16 Why in the world did we end up with boards having 17 dual meetings, one set of meetings for one group and another 18 set of meetings for another group, and then all of a sudden, 19 the board meetings all become very perfunctory, all in favor, 20 aye, all in favor, aye, all in favor, aye, and then you are 21 gone. There is no discussion and there is no collegiality, 22 no planning. That was the only functional way you could have 23 a meeting and get everybody out of there within a couple of 24 days. 25 The current rules, in my view, have doubled the 1 amount of time directors have to spend on boards. You bring 2 in greater complexity, that time will go up even more. The 3 number of people willing to do it is going to decline. 4 MR. BELLER: I want to end this with one last 5 question, which is very much on the Commission's mind, and I 6 think we ought to get it on this panel. 7 I am going to ask Mr. Beese and then anybody else 8 who wants to chime in very briefly, may. 9 If the Commission were to move forward with this 10 rule, should it restrict it to some category of larger 11 companies, accelerated filers, the Fortune 1000, whatever? 12 MR. BEESE: Certainly. I think the earlier 13 proposal about starting with the larger groups, the universal 14 larger companies first and moving down is a very good 15 suggestion. 16 I would echo Franklin Raines' comments. Beware of 17 consequences. His assessment of what's taking place in board 18 meetings is certainly something that I live. Maybe I need to 19 question why to still serve on boards in today's environment. 20 The other thing that happens is not only do you get 21 that type of perfunctory attitude in a board, but it shifts 22 much more down to the committee levels, actually out of the 23 board room and to other vehicles to be decided. I'm not sure 24 what we have accomplished by that. 25 MR. BELLER: Anybody else on the large 1 company/small company point? 2 MR. BATTS: I would think the large companies could 3 handle this issue with staff and funds, and be able to deal 4 with it, and you would probably be able to learn a good deal. 5 The Fortune 1000, if you look at the size of that 6 1,000th company, it's pretty small. You are getting to a 7 very small audience. Below that, they are tiny. They are 8 not equipped to deal with something as complex as this. 9 I think when you get through with that, with some 10 experience you will find it doesn't deal with your hard core 11 cases in a time frame that is going to be satisfactory to 12 anybody. 13 MR. BELLER: We are out of time. I apologize to 14 those of you who still want to speak. We are going to change 15 on the fly here for our next panel without a break. 16 We have a break. I apologize. If you could stay 17 very near your seats, because I want to start again in less 18 than ten minutes. 19 (A brief recess was taken.) 20 MR. DUNN: If we could start getting everybody to 21 their seats, that would be great. Are we ready go to? 22 This is a half an hour panel, which we are actually 23 going to try to stick to to get us back on track as we go for 24 the rest of the day. 25 For lack of a better title, it says "Retail and 1 Other Investors." I really don't know what that means. We 2 are going to ignore that for the time being. 3 From our left, we have Denise Nappier, who is the 4 Treasurer of the State of Connecticut. Thank you for being 5 here. 6 We have Paul Neuhauser, who is retired from the 7 University of Iowa Law School, I understand. 8 Les Greenberg from the Committee of Concerned 9 Shareholders, who has talked to us a great deal about all 10 this. 11 Lance Lindblom, who is the CEO and President of The 12 Nathan Cummings Foundation, who I think is an institutional 13 investor when he's not able to scare people like Ms. Nappier, 14 because she's from the government. 15 Evelyn Davis is the Editor of Highlights and 16 Lowlights. 17 What we are going to try to do is try to figure out 18 where we are with regard to this other world of folks We 19 have been talking all day about institutional investors. 20 I'd like to start out, because I might get killed 21 if I don't, with Ms. Davis, which is in your letter, you very 22 much oppose this because you oppose the notion of 23 institutional shareholders should be given any special 24 treatment at all. 25 MS. DAVIS: No. 1 MR. DUNN: One second. Commissioner Glassman asked 2 the question this morning, do they share the views of 3 everybody, do they represent the views of everybody. Do you 4 feel that way? Do you not feel that way? Go ahead. 5 MS. DAVIS: I'm Evelyn Y. Davis. I'm Editor of 6 Highlights and Lowlights. I have 40 years of practical 7 experience with corporations, CEOs, and getting shareholder 8 resolutions, and in about 95 companies, I would say only five 9 are really bad and unresponsive. 10 I also want to make it very clear, two things. I'm 11 not a lawyer and I personally have no interest in nominating 12 a director, because I don't believe in it. I think it's 13 going too far. You do things in a nice and amicable way, 14 like I have over the years, and I've gotten more results. 15 In the last two years, I have had eight companies 16 adopt proposals of mine. If you look at the record, they are 17 much more likely to adopt proposals of Evelyn Y. Davis as the 18 proponent than anybody else because I do things in a nice 19 way. I also have a great sense of humor and a good sense of 20 timing. I know when to get things done. 21 Now, the worst part here is the discrimination 22 against the small stockholders. When they say, yes, small 23 stockholders can aggregate their holdings. This is never 24 going to work. They say they won't support you in the annual 25 meeting, they will do this and that, they never follow, so 1 you would have to be a computer scientist. Small 2 stockholders are not going to practically work, and also the 3 SEC really has no authority to make two classes of 4 shareholders, and they have been very critical. 5 Everybody knows here about the so-called mutual 6 funds scandal, about the market timing and the other issue 7 involved there. 8 I have told the Chairman of the Bank of America, 9 Ken Lewis, I spoke to him last week, and the Chairman of 10 First Boston, not to pay the fines because the SEC has based 11 the whole mutual fund thing on the basis that institutional 12 shareholders were getting favors, not extended to small 13 shareholders,yet they don't practice what they preach. 14 This is outrageous what's going on, the 15 discrimination. The SEC has no authority to make two classes 16 of shareholders, and the unreasonable demands about one 17 percent or five percent. This is not possible. We have 18 resolutions, and now under 14(8)(a), you have to have minimum 19 and one year holding period. 20 I have suggested that we should have a five year 21 minimum holding period so we only get long term shareholders. 22 This is another point here. Institutions under these 23 proposed rules would just buy stock for the purpose of 24 nominating a director and then move on and try the same thing 25 at other companies. This is just not going to work. 1 I told these two chairmen not to pay the fines, and 2 as we are talking now, their lawyers are actually seriously 3 checking into it. 4 I have also talked to Steve Cutler about this two 5 days ago. I said, Steve, you may not get your fines because 6 of your colleagues in the Division of Corporate Finance. 7 MR. DUNN: Thanks for that. 8 MS. DAVIS: Okay. Just a few more points here. 9 Like I say, you have to do things in a nice way, and also if 10 this is going to happen, this is going to be like a 11 revolution, and the small stockholders are going to be hurt 12 financially. Here, they are going to hurt financially 13 because they will have to concentrate on warding off these 14 invaders and lawyers are going to benefit and consultants and 15 a whole lot of people, but the small shareholders, you will 16 see the stocks will go down, and frankly, some CEOs called me 17 about this, and I'm not going to mention any names. I'm very 18 successful in 40 years because I also know when to speak up 19 and I also know when to keep my mouth shut. That's why I am 20 a survivor. 21 They have actually told me they are just going to 22 quit or they are going to go private or they are going to 23 have mergers. It's going to be hell will break loose. This 24 is terrible. The institutions will become a threat instead 25 of a nuisance, and they will take this personally. 1 I've been around 40 years. I don't go too far, I 2 know when to stop. I know how much you can do, how much 3 patience you have to have. There again, some of the people 4 that may be nominated may be just funds for politicians. You 5 also will see requests and grants of substantial green mail 6 to get rid of these people. 7 In 1990, General Motors finally adopted after a 8 three year resolution an anti-green mail resolution, for 9 those who don't remember. Ross Perot at that time was an 10 undesirable director at General Motors. Finally, after 11 paying him $700 million, they got rid of him, which gave me 12 the opportunity to write a shareholder resolution on anti- 13 green mail. I had some people trying to copy it. 14 You are going to see this and I heard some of the 15 previous people talk about leverage. The unions will use 16 this as leverage and labor. 17 MR. DUNN: Ms. Davis, let me interrupt you for a 18 second. 19 MS. DAVIS: I have one more point. Just a moment. 20 You didn't cut them short, you're not going to cut me short. 21 MR. DUNN: I'm sorry, but you are talking about -- 22 MS. DAVIS: I'm almost finished. Also, I'd like to 23 suggest that the holding period should be five years, so that 24 we do get long term shareholders and not people who buy stock 25 for the purpose of electing a director. 1 There again, one should work on incumbent 2 directors. They are human beings, too. They listen to me, 3 Evelyn Y. Davis. They listen to me. I'm sure they would 4 listen also to other people. They are reasonable. 5 My advice is stop the whole thing, see what happens 6 in three to five years, but this discrimination against small 7 stockholders, and remember, I personally am not interested in 8 nominating directors, but small stockholders should have the 9 same privilege. 10 A final comment here, the audacity to stick 11 somewhere in the middle figuring nobody would read this, that 12 you have as an additional trigger if a resolution is not 13 adopted by a company, the shareholder has 60 percent of 14 shares, and if they have one percent or more of the shares 15 outstanding, that director could be elected. 16 This is discrimination. It should be on the merits 17 of the resolution. It doesn't matter who the proponent is, 18 if they have the other shareholders supporting them, the 60, 19 70, or even 80 percent, then the resolution should be 20 adopted, but without having a special interest director. 21 The SEC should make it mandatory for a resolution 22 to be adopted if a shareholder, regardless of the proponent, 23 if they get 60 percent for two consecutive years, then it 24 should become mandatory, but without an outside special 25 interest director. 1 MR. DUNN: I want to turn to exactly what you are 2 saying, Ms. Nappier. One of the questions is institutional 3 investors, who are they, what do they do, what chances do 4 they have. You're much more of an institution than I am. 5 You've got, what is it, the 56th largest pension fund ever 6 recorded. Do you have any luck when you try to change things 7 at a company? 8 MS. NAPPIER: Sometimes I do, sometimes I don't. 9 And I'll tell you that I -- first I want to express my 10 appreciation to the Chairman, Chairman Donaldson, for his 11 strong leadership on this issue and to the Commission and 12 their staff for their dedicated work. 13 This effort is -- goes to the heart of the most 14 important and most basic right shareholders have, individuals 15 and institutional investors, and that is why I believe that 16 these deliberations are historic. Yes, I am according to 17 pension investments for the period September 30, 2003, we are 18 ranked as the 56th largest pension fund by total asset size. 19 We are also in the top quartile relative to our long term 20 fund performance and I want to keep it that way, and so 21 that's why I'm so delighted to be here talking about 22 enhancing shareholder access to the proxy ballot. 23 I generally support the Commission's effort in this 24 proposed rulemaking, however I am concerned that as it's 25 currently drafted the rules set the bar too high to make it 1 real or effective for funds of our size, including funds like 2 the ones that are held by Ms. Davis. I concur that the -- 3 with the Commission's approach that there be safeguards in 4 the form of thresholds and triggers to ensure that the 5 shareholder nomination is not pursued for frivolous purposes, 6 but it is the degree of those safeguards and how they will be 7 applied that could undercut its effectiveness and offset the 8 likelihood that shareholders will indeed have an effective 9 ability to participate in the director nomination process. 10 So I would say that -- I would urge the Commission 11 to revise this rule in three critical ways. One, at the 12 point or at the initial point of entry to the process the 1 13 percent ownership threshold should be eliminated and in its 14 place we should be using the current threshold that one must 15 meet to introduce any resolution for any purpose, and that is 16 the -- that the shareholder must hold at least $2,000 in 17 stock in a company for at least a year in order to file that 18 resolution. Proceeding with the 1 percent ownership 19 threshold in my view is unnecessarily onerous, especially 20 given the fact that this would be only the beginning of a 21 multi-step process. 22 Secondly, beyond the Commission's proposal that 23 there be a 35 percent withhold vote I would add a third 24 alternative and that alternative would utilize this initial 25 point of entry for those companies either when they had 1 failed to implement a majority vote resolution or in cases 2 where there's evidence of serious management problems such as 3 criminal indictment or restatement of earnings. 4 Now, moving on to the next stage which is the 5 5 percent ownership threshold, I would urge the Commission to 6 roll back that recommended level down to 1 percent. And I 7 want to give you an example as to why I believe there are 8 merits to reducing the 5 percent ownership threshold. 9 The largest public equity holding within my 10 portfolio is Pfizer, with approximately 5.4 million shares 11 accounting for $197 million in market value. It would take 12 our fund aggregating with 17 other funds of similar size, 13 with similar amounts of holding at Pfizer, to reach the 1 14 percent ownership threshold. Now, to reach the 5 percent 15 ownership threshold it would take 72 funds of similar size 16 with a holding that's similar in the amount of our holding 17 which is .069 percent. 18 So I am convinced that the 5 percent ownership 19 threshold can be reduced without losing the safeguards and I 20 believe that it can be argued that sustaining that 5 percent 21 ownership threshold is or would be an unreasonable barrier 22 for any investor, be it individual or institutional, to meet. 23 I know that there's been some arguments put forth by the 24 opponents of reform that shareholder nominations would 25 disruptive to board dynamics, well I'm a little puzzled by 1 that because it is the current board dynamics and the lack of 2 accountability to shareholders that is precisely the reason 3 that shareholders are advocating for reform, and they view 4 access, better access to the proxy ballot for the purposes of 5 nominating directors as a means to protect if not increase 6 the value of our sharthat when we do not pay attention to bad 7 corporate behavior or punish it our pension fund 8 beneficiaries lose their retirement savings. 9 And so we have a fiduciary responsibility to act in 10 a manner that protects the beneficiaries' interest. We're 11 not ignorant shareholders. We're mindful of the fact that we 12 can be held liable to the extent that we do anything other 13 than look out for the best interests of the beneficiaries of 14 our pension fund assets. 15 So I would say to you that the Commission has done 16 a great job thus far in getting us -- getting this issue in 17 front of us. We do need to have increased access to the 18 proxy ballot. I believe that a majority vote should prevail 19 once the director's name is placed on that ballot and let 20 the, you know, the best guy or gal win. But I would urge the 21 Commission to look at some necessary revisions to ensure that 22 we are surely reading the intent of this nomination process, 23 and that is to give us, shareholders, access to the proxy 24 ballot. 25 MR. DUNN: Thanks. I want to kind of just go down 1 the line here for a second. You -- over the years I've seen 2 your name on more 14-8's than anyone else. So you have more 3 experience with folks trying to use -- 4 MR. GREENBERG: She's cheap. 5 MR. DUNN: -- trying to -- he's good -- trying to 6 use that process to effect change, and I was wondering if I 7 could ask you two questions, both of which are pretty brief I 8 think. One is do you think it's successful, the process we 9 have now, and the second is how do you think the proposal 10 works for the folks that you usually see in this area? 11 MR. NEUHAUSER: It's hard to say whether you're 12 successful because there are so many different events going 13 on. In a given year -- well, this year I think I've got 38 14 letters to the SEC. We will be successful on some, not at 15 the SEC I mean but overall. We will be successful on some. 16 By success, what does that mean? It means that the 17 company will either adopt or negotiate something close or 18 approximating what the shareholders were asking for. This 19 doesn't mean that either side is ever going to be totally 20 happy. The company may think it's giving up more than it 21 should. The shareholder who doesn't get 150 percent may 22 think they lost. But it's been a very useful tool over the 23 years and has I think its greatest systemic importance is 24 that at least some of my clients have identified issues for 25 several years before they become ones that are in the 1 newspaper or that are pressing down extremely heavily on the 2 corporate management, and it has gotten sometimes companies 3 to think about it earlier than they might have otherwise. 4 So, yes, I think it has been successful. It 5 doesn't mean it has been perfect but I think on balance it's 6 been a very useful thing both for management and for the 7 shareholders. 8 On the second question the original handout said 9 that retail investors, which I assume we're talking about, 10 are individuals -- individuals and small institutions. Some 11 -- from time to time, including today, one hears the phrase a 12 shareholder democracy. I guess whenever I hear that I think 13 of a conversation I had with Louie Loss about 30 odd years 14 ago where I used that phrase and Louie Loss said, "What are 15 you talking about. It's Soviet democracy. You have one 16 slate and that's it and to think about in terms of any form 17 of democracy is sort of crazy." 18 He didn't quite use those last phrases but that's 19 the essence of what he was saying. 20 I think that the proposal that is being considered 21 is a step in the right direction. It may not be a true 22 shareholder democracy, but I would view it as -- for those -- 23 another problem with having a professor. If you're 24 interested in history in England, people could vote from the 25 Middle Ages right on through until the 19th century if they 1 had property. The property classes voted prior to the Reform 2 Act of 1832. 3 What we're basically moving to is the property 4 classes have the rights. The big institutions will be able 5 to do things. I can talk a little later about why I think 6 that it would be virtually impossible for smaller 7 institutions or individuals to do much, but that doesn't mean 8 it's bad. As I say, I think it's a step in the right 9 direction. 10 In terms of two or three of the things that have 11 been talked about, I think in my own view it would be better 12 that instead of a two step procedure with triggers we talked 13 -- did the kind of thing that was talked about I guess in the 14 last panel. Why not simply say when a certain percentage of 15 shareholders get together they can put the proposal on the 16 company's proxy statement? Now, having said that I think 17 that sounds better and I would be in favor of it. I'm not 18 sure how much any of this, putting it on the -- 5 percent -- 19 5 percent putting it on or without a trigger zone, putting it 20 on, I'm not sure how much difference that will make in the 21 real world. 22 What are the costs going to be? The costs to the 23 proponent of the nominee are not going to be the costs of 24 getting -- going down and meeting with the management and 25 sending in some names and so on. There's no way that 1 anything is going to happen without a proxy fight. 2 Now, it won't require that there be the filing of 3 the proxy statement, but how are they going to get support? 4 They're going to have to go to the institutions. They're 5 going to have to talk with people, they're going to have to 6 travel around the country. 7 How did Roy Disney and Mr. Gold get support against 8 Mr. Eisner? They had a private jet, which fortunately they 9 owned, and flew around the country meeting with institutional 10 investors. The costs are still going to be extremely high 11 and very few would be my prediction. Very few people are 12 ever going to undertake, even if they can get -- have the 13 legal right to get a name in the company's proxy statement, 14 very few people are going to undertake to do that because 15 that's only the first step. Getting the name in doesn't get 16 any votes. They're going to have to go out and get votes. 17 So when we have a parade of horrors about all the 18 things that are going to happen and how this is going to be 19 happening time after time, I just don't believe it. It just 20 isn't going to be. 21 Going on from that, if we do have triggers I have a 22 comment about the couple of triggers, if we are going to have 23 that kind of a two step thing. I agree with Ms. Nappier -- 24 sorry -- Nappier. I'm sorry. I was saying it too quickly. 25 That the numbers are going to be too high. If we're talking 1 about 5 percent to get on the proxy statement what does that 2 mean in dollar terms? 3 I represented a group of shareholders this year in 4 a submission to the SEC that had, what was it, 4.3 million 5 shares of Wal-Mart, which was less than one-tenth of 1 6 percent. Getting 5 percent is very difficult dollar-wise 7 with a big company. It ought to be scaled. The larger the 8 company the less percent it really ought to be. 9 And once again at the risk of -- in this day and 10 age one shouldn't be pro-French, but I did teach in France 11 and the French system both for the 14(a)(8) and for putting a 12 nominee on the proxy statement or on the election has a 13 scaled system where it depends upon the size of the company 14 as to how big the requirement is going to be and I think that 15 that ought to be given serious consideration. 16 On the other trigger, the 1 percent, I guess I 17 agree with both Ms. Davis and Ms. Nappier that I don't quite 18 understand what it is that we're trying to accomplish by 19 this. Why is it that for this purpose the retail shareholder 20 is going to be excluded and the small investor, the small 21 institution? Even the moderate institution is effectively 22 going to be excluded. It doesn't make much sense to me. 23 I would go to the notion that if something gets a 24 majority -- if a shareholder proposal of any kind gets a 25 majority vote then that ought to be a sufficient trigger. A 1 majority of the shareholders have evidenced a disagreement 2 with management's recommendation and have gone ahead and 3 said, yes, we think you should do it even though we read your 4 recommendation that we shouldn't. I think that ought to be a 5 sufficient trigger. We shouldn't require that 1 percent of 6 the shareholders have to be backing any particular thing. 7 MR. DUNN: Can I jump off of there for one second? 8 MR. NEUHAUSER: Sure. 9 MR. DUNN: At the risk of cutting everyone off and 10 not giving everyone enough time I want to ask a question of 11 Mr. Greenberg that follows off of that. So let's see if we 12 can get back or not. 13 In your area you push for no thresholds basically 14 other than the 14(a)(8) in your letters. What -- you know, 15 based on our discussion that we've been having what success 16 -- say that there was no limit on the size of a shareholder 17 who could nominate a candidate, what do you think their odds 18 of success are? 19 MR. GREENBERG: I think it's all going to depend -- 20 let me start by thanking the Commission for inviting me here 21 today. It's a great honor. 22 As for the level of success that could be achieved, 23 it's going to depend a lot upon what the institutional 24 investors will do. And the reason we propose that is to 25 dovetail it with the idea that institutional investors as we 1 see it in the -- will not nominate candidates for 2 directorships. They have not done in the past, at least 99 3 9/10 percent have not, and they will not do it in the future. 4 It's not a matter of money. Our campaign which we 5 ran as a group of individual investors who met on the 6 Internet and we engaged in a proxy contest with a New York 7 Stock Exchange listed company, the company had approximately 8 $500 million in sales. We had a special interest and our 9 special interest was that we had large losses on our 10 investments and the company was heading toward bankruptcy. 11 Our candidates won 24 percent of the votes cast. Two of the 12 shareholder proposals that we put forth got 60 percent of the 13 vote and were never heard of again. 14 Our results were that the CEO departed from the 15 company, the chairman of the board retired, and a white 16 knight came in to save the company which we thought was 17 spiraling toward bankruptcy. We don't think that individual 18 investors either have the time, the money or the know how to 19 really do what we did. And it's essentially -- it's a lot of 20 legal issues involved, it's a lot of work, and we don't think 21 that individual investors will do it. What it's going to 22 really require is that individual investors if we want to be 23 protected, from a reality standpoint we're going to have to 24 rely on the institutional shareholders. 25 But, you know, going to the threshold idea, one of 1 the problems we have with it, if the objective is director 2 accountability, then thresholds serve no purpose. It's like 3 being a little bit pregnant. You're for it or -- you know, 4 it exists or it doesn't exist. You're for accountability of 5 directors or you're not. We don't need all these hurdles to 6 step through. 7 Also my wife came up with a theory. It was called 8 what's good for the goose is good for the gander, and what 9 she says, and it made a lot of sense to me and I've 10 plagiarized it since is, it doesn't matter if you have a 30 11 percent threshold, a 25 percent threshold for ownership 12 interests to nominate candidates for directorship at a public 13 company as long as you have that same threshold for the 14 nominators on the nominating committee of the corporation 15 itself. Why should they get off when in our case our 16 candidates owned more stock than the entire board of 17 directors and yet we were the outsiders? They owned -- and 18 many of them owned little or no stock whatsoever but they 19 were the nominators, they were the board of directors. 20 We did a survey, and I'm not saying it was 21 scientific, but it seems like the board of directors at most 22 companies own about 1/10 of 1 percent of the stock 23 outstanding. So why not a 1/10 of the 1 percent ratio 24 instead of 1 percent or 5 percent? And also there's no 25 proportional relationship between the stock ownership and the 1 level of discontent of shareholders. We owned 1/4 of 1 2 percent of the stock of Luby's. When we did our campaign we 3 got 24 percent of the votes. So what you're saying in effect 4 is with a 1 percent or a 5 percent criteria you really want 5 to take the voice away in our case of 24 percent of the 6 shareholders. 7 Now, what I was alluding to with regard to 8 institution, we feel that money has not been the issue for 9 them not taking action. I think they really want to legally 10 distance themselves from candidates and one of the speakers 11 in the morning mentioned multiple reasons why they want to 12 put that distance there. 13 We ran -- well, what we say is they can run a bare 14 bones campaign by filing a bare bones proxy statement and 15 calling up 30 of their favorite institutional friends and 16 they can elect candidates. But as I said, they want -- in 17 our experience, with the $15,000 out-of-pocket expense, I 18 think they can handle that expense. And we solicited with 19 that money 80 percent of the shareholders involved. 20 So what I'm getting at is -- oh. Also -- and I 21 really agree with Ms. Nappier that it is -- there was an 22 article in the L.A. Times about what it took to put together 23 a pension fund group, this was 10 pension funds wanting to 24 write a letter to UniCal and they got 1.6 percent of the 25 outstanding shares to be able to write that letter. They're 1 not going to be able to hit the 5 percent level. It is 2 virtually impossible. 3 And the reason I say that -- I just want to give 4 you a little insight on how difficult it is to put together 5 and maintain a group. First of all, you have to decide on a 6 constitution. Then you have to decide on your strategies. 7 You're dealing with strangers. There's paranoia about 8 company spies and what information is getting back to the 9 company. 10 Getting money out of a group is like pulling teeth. 11 Deciding on candidates would be a really key issue. In our 12 case, there were four slots available for candidates but our 13 groups had put up four nominees and we really had a problem 14 and eventually it led to the splitting of the group. 15 Also, the situation you're going to have is say you 16 have 5.2 percent of the shareholders aligned to do a 17 campaign. The companies are not going to sit back. What 18 they're going to do is as they did in our case. They're 19 going to pick one group, focus on them, promise them anything 20 that they want -- they may not get it in the future, but it 21 will split the group. 22 Our group split -- the day before we were ready to 23 file our definitive proxy statement, I got a call and half of 24 the group says we're leaving. And they did. But we went 25 ahead anyway. 1 So what could happen is say you have 5.2 percent of 2 the vote, one of your subgroups has .3 percent, the day 3 before, that group with 5.2 percent is going to get a 4 telephone call and boom, they don't qualify. And that's the 5 way the game in reality is going to be played. 6 Also, then another hurdle about forming groups is 7 that they will -- oh. What will happen is again you'll be 8 put -- when they leave, they go out and they'll solicit your 9 candidates to leave, too, and they'll try to get other 10 support to drop off. 11 Very quickly, we have -- on August 1, 2002, we 12 filed formally with the corporate net.gov group, James 13 McRitchie in Sacramento, we filed a petition for rulemaking, 14 4.4.61. We asked that the shareholder proposal procedure be 15 used in nominating, cut out all the other hurdles. We had 16 hundreds of letters of positive support that are published on 17 the SEC's bulletin board, had 125,000 hits on our web site. 18 It's a well-tested procedure and one thing we 19 didn't add that we came up with later, people will say well, 20 there will be hordes of candidates coming out of the woodwork 21 on this and one way we have suggested that that can be dealt 22 with is like a lead nominator, like a lead plaintiff in a 23 class action suit, the one with the most shares gets to make 24 the nominations. And in that way it will cut down on the 25 numbers. If somebody wants to be the lead nominator, they'll 1 just have to buy more securities. 2 And one other thing. It will have an impact on the 3 14,000 other corporations that many individual investors are 4 shareholders of that the people on the prior panels don't 5 have anything to do with. 6 Thank you. 7 MR. DUNN: Wonderful. Mr. Lindblom, I get to let 8 you play us out here. I want you to respond to all that 9 we've had and tell us about your experience, but I also want 10 to address the notion of how large is your fund, how -- 11 MR. LINDBLOM: As of yesterday -- there's no market 12 today -- $430 million. 13 MR. DUNN: Talk about how large that is with any 14 particular company and how many folks you have to get 15 together and whether you think our proxy rules keep you 16 from -- 17 MR. LINDBLOM: Well, I mean, it really varies. The 18 issues that Denise and Paul brought up are very real issues. 19 The bar is very high. And in trying to put together those 20 groups, there are lots of transactions costs because even the 21 institutional investors are really different entities with 22 different purposes. But the fact is we all speak a common 23 language, which is long-term shareholder value and that's 24 really the basis on which those coalitions are built. 25 We feel perfectly confident working with people 1 like the treasurer of North Carolina, the treasurer of 2 Connecticut, et cetera, because their universal holdings 3 really lead them to take a look at that long-term value. So 4 in a lot of ways, we're allowed to kind of surf off some of 5 the work that they've done and in putting together those 6 coalitions, there are individual holdings that we have 7 because we're active investors, in which we can supply a 8 substantial amount in building that coalition. 9 I think the issues that we're less concerned about, 10 especially with the larger institutional holders, are the so- 11 called special interest issues or the danger of getting 12 special interest people on the board. I think the fact that 13 they have to be elected by 50 percent of the stockholders is 14 in itself a lens and a sieve to deal with that issue. 15 But I have to say in listening to the testimony of 16 the -- or the panels this morning, the more I heard, the more 17 I realized how much we really need a rule like this because I 18 heard managements and directors and their lawyers telling us 19 that they knew what was best for the stockholders and also 20 that they knew what a special interest was and what a special 21 interest wasn't. 22 I think I admire their prescience and their 23 ability. However, it was really interesting to see that 24 those views were not necessarily congruent with our actual 25 stockholders' and that's really the important issue here. 1 The question is that Sarbanes-Oxley, et cetera, was a very 2 important step and we applaud that step. 3 What that allowed is that certain board members be 4 put on who are, quote, independent. That deals with interest 5 issues. That doesn't mean that they're going to act 6 independently or when the time comes that they speak truth 7 power or raise those difficult questions. 8 I don't call that social engineering. I call that 9 governing, and that's what the issue is about here, is the 10 ability that in the last resort -- and, believe you me, to 11 put these coalitions together or directors is a last resort. 12 It's because you can't get in the door at all. 13 And I have to say that we've had lots of 14 discussions with managements and some are incredibly 15 cooperative. We disagree or we agree to disagree but there's 16 a serious discussion. We're talking about the people who 17 slam the door here and are really not responsive at all, and 18 this is the sort of last report that allows that possibility 19 that the stockholders can act. 20 Remember, when we take a look at that proxy card, 21 we vote for or withhold. We can't vote against. We have no 22 voice in dealing with specific directors in that way. It's 23 so indirect. And this in itself is also an indirect way 24 because we have to go through the triggering events, but it 25 is a good way to start. It's the first step. 1 MR. DUNN: Wonderful. We've taken our half hour 2 panel and of course gone 40 minutes, which is kind of the 3 norm for today. So I think this is very important because 4 the actual reality of where this hits the road is -- you can 5 only get by talking to folks, and so I really appreciate 6 that. 7 I'd like to thank Ms. Nappier, Professor Neuhauser, 8 Mr. Greenberg, Mr. Lindblom and Ms. Davis. Thank you all 9 very, very much for getting us almost back on time for Alan 10 here, and we'll turn it back over. 11 MR. BELLER: Thank you. We're going to change here 12 on the fly, no break, and go to the legal issues panel. 13 This panel is about legal issues. Morty, having 14 tried to get us close to on time, we're going to try to keep 15 this one to the allotted time. 16 Before we start, our panelists, starting again from 17 my left, Jack Coffee, a professor at Columbia Law School, 18 Donald Langevoort, a professor at Georgetown University Law 19 Center, Norman Veasey, the Chief Justice of the Delaware 20 Supreme Court, David Katz, partner at Wachtell, Lipton, Rosen 21 & Katz, I think a different Katz but so be it, Todd Lang, a 22 partner at Weil, Gotschal & Manges, and finally Jill Fisch, a 23 professor at Fordham University Law School. 24 I'd like to kick this off by asking Professor 25 Coffee to give us sort of the law school exam issue spotting 1 approach, if you will, if we are the Commission and it's a 2 general counsel -- incidentally -- and I should probably -- 3 I'm sorry -- introduce, to my right Giovanni Prezioso who is 4 the general counsel of the Commission who is going to help 5 moderate this panel. 6 If you are the Commission or if you're Giovanni or 7 if you're even I thinking about the legal issues in crafting 8 the Commission's proposed rule or something like it, what are 9 the things we should be thinking about? 10 MR. COFFEE: Well, I think in asking me that 11 question you're inviting me to be a little less of an 12 advocate than I might have been and more of a somewhat 13 slightly neutral objective overviewer. 14 MR. BELLER: You get the advocate shot later on. I 15 think we just want to start with the landscape. 16 MR. COFFEE: The legality of proposed rule 17 14(a)(11) really depends on where courts will draw the line 18 between the realm of state corporate governance, which is 19 primarily regulated by state law, and the realm of securities 20 regulation, which is primarily regulated by the SEC. 21 There is no simple bright line that's recognized by 22 all between those two realms. Some will tell you that 23 securities regulation simply addresses disclosure and state 24 law addresses voting rights and other kinds of powers of 25 shareholders. But I think that's over-simple. 1 If you look at the federal securities laws, you see 2 a number of very specific rights they accord to shareholders 3 that are not related to disclosure. An example would be the 4 Williams Act where there is a best price rule that gives you 5 the right to the highest price paid to anyone else. 6 Indeed, there are a number of very specific rights 7 under section 14(a) which regulates the proxy process. Since 8 at least 1947 or earlier, the Commission has had specific 9 rights there relating to access to a shareholder list, 10 relating to shareholder proposals under 14(a)(8), relating to 11 unbundling the vote and relating to the special right to 12 withhold consent and express at least a kind of symbolic 13 disapproval. 14 The issue that gets triggered by this new 15 opposition to proposed 14(a)(11) is whether all of those 16 rights might be invalidated by a very broad judicial decision 17 that 14(a) only permits disclosure. And what I want to 18 assess for a moment with you is what the arguments would be 19 on that kind of issue. 20 The simplest way to begin the analysis is to look 21 at the structure of section 14(a). It's not your typical 22 statute. It doesn't look at all like the disclosure- 23 regulating provisions that are littered throughout the 24 federal securities laws, where you're just told not to 25 disclose material information in a variety of contexts. 1 Nor does its look like your anti-fraud rule that 2 says don't use any manipulative or deceptive devices. 3 Rather, on the face of the statute, it gives the SEC more 4 authority. It says no one can solicit proxies without 5 complying with the rules and regulations adopted by the 6 Commission. 7 I think, and commentators for roughly 60 years have 8 thought, that that was intended to give the Commission at 9 least some power to realize a right of fair corporate 10 suffrage. Now, that right is most easily implemented through 11 procedural rules and since 1947, when the Commission adopted 12 rule 14(a)(8) which entitles shareholders to put an issue 13 onto the corporation's agenda for a vote at the annual 14 shareholders' meeting, there has been some right of 15 shareholder initiative at shareholder annual meetings 16 pursuant to the federal proxy rules. 17 I want to stress the continuity here because I 18 think your proposed rule, 14(a)(11), is really a kind of 19 giant footnote to rule 14(a)(8) that's been around since 20 1947. It essentially expands the kind of issues you can put 21 on the corporation's agenda at the annual meeting by putting 22 it on a director nomination as opposed to say a bylaw 23 amendment or some precatory proposal. 24 There is obviously some limitation on the 25 Commission's authority under 14(a) and the leading skeptical 1 decision is the business roundtable decision versus the SEC 2 in 1994. We'll hear more about that later from others, but I 3 would point out that even that decision recognizes that the 4 Commission's authority is not limited to disclosure. It 5 knows that the Commission has some power over procedure as 6 well as over disclosure underneath 14(a). 7 Now, how far does that power over procedure go? 8 Let me just acquaint you with what the commentary has been 9 over sort of 60 years, very briefly. The very first article 10 on this whole topic appeared in 1940 in the University of 11 Chicago Law Review where the idea was expressed that the key 12 procedural goal underlying section 14(a) was to place the 13 absent shareholder in the same position as the shareholder 14 who attended the shareholder meeting. 15 In other words, the SEC has created this new proxy 16 statement that we want people who are not going to the 17 meeting to have the same rights as those who go to the 18 meeting. Applying that to the rule or to the context of 19 proposed rule 14(a)(11), I think it follows from that very 20 logically that if you can nominate directors at the annual 21 meeting as someone present at the annual meeting, you should 22 be able to nominate directors pursuant to the proxy statement 23 without going to the annual meeting because the procedural 24 goal here is to prevent discrimination against absent 25 shareholders, equalize their position but only equalize their 1 position with the rights that a shareholder would have at the 2 annual meeting. 3 That now brings us to the big contested area. 4 Since 19 -- well, since actually the early 1950s when the 5 Commission amended Rule 14(a)(8), the Commission has said the 6 only thing you can vote on under Rule 14(a)(8) is something 7 that's a proper subject for shareholder action pursuant to 8 state law. So there is a state law clause. And in looking 9 at that, I think you picked that up in 14(a)(11) by looking 10 at whether or not you would be entitled to nominate 11 shareholders under state law as a condition, as a trigger, 12 for 14(a)(11) rights. 13 But there's some ambiguity in what you've said and 14 some dissension in the case law as to what state law really 15 means, how far it goes. I think that state law essentially 16 here means not only the narrow state law of the mandatory 17 rules but the broader more permissive state law, and Norm 18 Veasey will speak to this because the hallmark of Delaware 19 law is the permissive authority it gives to shareholders, to 20 design any kind of corporate structure, including any kind of 21 voting structure, under state law. 22 Thus -- let me give you an example. There's a 23 well-known decision in the Delaware Supreme Court during 24 Chief Justice Veasey's tenure, but probably not one written 25 by him, called Stroud versus Grace. And in Stroud versus 1 Grace, the shareholders of a Delaware corporation adopted a 2 charter position by a 75 percent vote that said the only 3 people eligible to be directors of this corporation were 4 director candidates who had substantial experience in line 5 rather than staff positions in substantial private 6 institutions. 7 Now, that may be a crazy provision that was 8 basically intended to keep investment bankers and lawyers off 9 the board, which may be a worthy goal but a debatable one. 10 Nonetheless, the Delaware courts upheld that. 11 MR. BELLER: Dean Sonnenfeld would tell you it was. 12 MR. COFFEE: I would think that that broader view 13 of what state law means would have to recognize that charter 14 provisions and bylaws that limited who was eligible to be a 15 director or who could make a nomination would have to be 16 respected by Rule 14(a)(11), subject to one proviso. I do 17 think that Rule 14(a)(11) insists upon -- Rule 14(a) insists 18 upon equalizing the absent shareholder and the present 19 shareholder. So you couldn't have a rule that said people 20 who were present could do this but people could not do it by 21 the proxy statement. 22 Now, having said that's the law, I think the way 23 the business roundtable case reads -- I should tell you 24 there's one other major decision, the impact of which has to 25 be balanced. In about 1947 also, the Third Circuit in SEC 1 versus TransAmerica gave the Securities and Exchange 2 Commission a major victory in finding that a bylaw that 3 precluded bylaw amendments was invalid and could not be used 4 to frustrate your federal right under 14(a)(8). There, 5 TransAmerica had established a bylaw saying no bylaw could be 6 voted on unless it had earlier appeared in the notice of 7 meeting and because management had left the insurgence bylaw 8 amendment out of the notice of meeting, there was no way he 9 was eligible to vote on it at the meeting. 10 So they ruled, the Third Circuit reversed. The 11 Third Circuit said broadly, and this is sort of the real 12 tension, that you can't use any kind of state law provision 13 to frustrate a federal right; federal supremacy applies. 14 Alternatively, the business roundtable decision seems to say 15 that you cannot have federal law in franchise shareholders 16 and give them greater voting rights than they have under 17 state law. 18 There is some tension between those two decisions. 19 I would suggest to you that consistent with what you've 20 already done under 14(a)(8), you probably need to recognize 21 that only nominations that are proper under state law can 22 really be protected and implemented by Rule 14(a)(11), but 23 I'm sure we'll hear some debate from others on that. 24 MR. BELLER: Thank you very much. I think I'd like 25 to turn next to Mr. Lang and the ABA comment letter certainly 1 casts some doubt on the Commission's -- or expresses some 2 doubt on the Commission's authority to adopt 14(a)(11) in the 3 proposed form and I guess I'd like you to elaborate on that, 4 I guess particularly in light of what Professor Coffee just 5 said. 6 MR. LANG: Okay. First of all, I'd like to join 7 others in thanking everybody, particularly the Staff, for 8 really a prodigious effort here. This is a tough, 9 controversial subject and I think it's been handled with 10 depth and however it turns out, I think that it's a credit to 11 the institution. I also feel that at this stage of the 12 afternoon, I'm going to run into some repetition and some 13 redundancy so I'll try and avoid some of that. But I would 14 like to say this; that, however this turns out, I think 15 there's a lot of good coming from it. 16 One of the things that appeals to me, without 17 authority -- and I'll jump into that in a moment -- is that 18 it demonstrates what I hope the next panel will discuss, that 19 is, the proxy machinery needs to be updated. The voting 20 rights of shareholders has be to reexamined. Vote formation 21 has to be examined, and I would suggest the Commission, which 22 as nothing on its plate, should take this as a very important 23 task in the near future. If nothing else happened as a 24 result of this, I think that would be highly productive and 25 also very much in the interest of shareholders. 1 Now, I've heard Jack's comments and it may not 2 surprise you that I'm not in total agreement with him. The 3 way I read the proposing release and all the other materials, 4 since as Alan and I were talking earlier we've been doing 5 this now almost a year and ABA has put in four separate 6 pieces of paper down the line here. 7 It seems to me that the Commission has asserted its 8 authority based upon the fact that if there's a nomination 9 right under state law which is not barred by organizational 10 documents of the company, that it now becomes essentially a 11 matter of disclosure and therefore Rule 14(a)(11) could be 12 enacted for that purpose. 13 I suggest, and the task force which I co-chair has 14 written extensively, that what's really happened here, 15 cutting through it, is that there's a new federally created 16 right granted to stockholders that does not exist under state 17 law and therefore constitutes substantive, not procedural, 18 rulemaking by the Commission. I mean, that's the bottom line 19 of what our position and our concern is. 20 Assuming that the SEC's authority is limited to 21 disclosure and voting procedures, the business roundtable 22 decision, which Jack has discussed earlier, makes it clear 23 that these are plain English definitions. The SEC has no 24 power-defined authority by interpretation or indirection. If 25 Congress wants to preempt state law, Congress has the power 1 to do that. And, indeed, since that decision in Sarbanes 2 we've certainly seen some specific preemption, notably in 3 audited committees and on insider loans. But you can't 4 interpret it in by saying we have broad powers, protect 5 investors, public interests. Those are called by that court 6 too tenuous a standard, I think that was the phrase, in order 7 to sustain SEC authority in that area. 8 And the same thing would go with disclosure and the 9 same thing goes with the possibility under that decision of 10 using voting procedures. I think that has a plain English 11 definition also. 12 So against that background, which my task force 13 believes and I believe, let's take a look at some of the 14 consequences that come from the position which the Commission 15 has taken. First of all, look at the construct of the rule. 16 First of all, not only could there be proxy contests and 17 likely to be in the election of directors, but bi-annually 18 this is up for review. So you're going to have another round 19 of fighting over whether access under the SEC rule is going 20 to be there. And assuming that there are triggering events, 21 since stockholders have no state law access right for such 22 purposes, this has got to be new and federally created but it 23 is going to have and generate a lot of controversy. 24 To me, when you give stockholders that right and 25 take it away from the directors, you're creating massive 1 change, potentially, in the structure of state corporate law 2 which is exactly what the roundtable decision addresses. 3 Now, Rule 14(a)(11) alters this relationship in a 4 number of ways. The most important part, and this is what 5 strikes me in all the dialogue I read and heard is that no 6 one ever talks about the fact that the proponent stockholders 7 are not fiduciaries and are not accountable as distinguished 8 from the directors. It seems to me if they're going to have 9 that kind of influence, there should be some level of 10 accountability and some level of fiduciary responsibility. 11 You can't have it both ways. If the directors are 12 responsible, it's their proxy statement, they should be 13 dealing with it. 14 And the other thing that's important is that the 15 role of the directors is eliminated in this process, both in 16 nominations and ultimately on these renewals. The process 17 that's been set up by the SEC and the markets on nominating 18 committees I think is a very positive, powerful measure and I 19 think it's going to produce a good many changes as I think 20 there should be. 21 But that is totally end run in the way the 22 Commission has proposed the rules. In other words, anybody 23 who has this federally created right has a perfect right to 24 go ahead and put up whoever they want, provided they meet the 25 independence and no control test under the rule, and that's 1 the end of it. And the nominating committee has no power, 2 they can't inquire, they don't -- so the procedure for the 3 nominating committee seems to be set up for small 4 shareholders and insiders. 5 Why do we have a nominating committee process which 6 this Commission has deemed to be extremely important -- and I 7 must say I agree with that. Other consequences which flow 8 from this, which can affect the authority issue, is this 9 process facilitates the proxy contest and which can be 10 disruptive and not in the interest of shareholders as a 11 group. 12 Second of all, divided boards of directors -- well, 13 some people who are proponents for this change have said we 14 want to get people on the board so they'll challenge the rest 15 of the board. Is that really a purpose that this Commission 16 wants to get behind, that we're going to put people on who 17 are actively against the board? That doesn't make a lot of 18 sense to me as a matter of governance. 19 The next thing is the likelihood of proponents and 20 their candidates serving special interest, which I won't 21 be -- some people say it's going to happen, some people say 22 it won't, I say human nature says it must happen and that's 23 the way it is, and finally there are questions for proponents 24 which have not been addressed here particularly on 25 transparency, filing obligations, whether you can use 13(g) 1 or whether you're going to have to go to 13(d), when you 2 start to influence, and other issues which I think are going 3 to have a very important part of this process. 4 Now, two other points I'd like to make, Alan, and 5 then I'll be quiet. The first is that the process of 6 facilitating contests I think is dubious as a corporate 7 governance matter. By giving some stockholders these rights, 8 controversy and division are likely. My suggestion is, and I 9 think others support this, that we ought to be looking for a 10 model which would allow management and the directors and the 11 shareholders to work things out on an amicable basis and 12 align their interests as much as possible, and the new 13 nominating committee process I think holds great potential 14 for that. 15 And if anybody thinks that's a band-aid, it is not. 16 It's a very powerful mechanism where institutional 17 shareholders, without getting into a proxy fight, are going 18 to exert a great deal of influence, I think, on nominating 19 committees and boards. 20 The second thing is that I've read and re-read the 21 proposing release and the related literature very carefully 22 and repeatedly. And I still can't figure out what the 23 specific reasons are for this imitative. If the purpose is 24 to grant access to shareholders and that's what you want to 25 do, then this becomes by definition a new right. 1 Now, there are an awful lot of reasons that have 2 been advanced both in the literature and today as to why this 3 is a good thing or may be a good thing, but I still haven't 4 heard it from the Commission and I think one thing I would 5 recommend, whatever you do, should you go forward with this, 6 it would be a good idea to tell us why these rules should be 7 adopted. 8 MR. BELLER: Thank you. Professor Fisch, do you 9 agree with Mr. Lang? 10 MS. FISCH: We've been talking about it all day, 11 trying to negotiate agreement. 12 First of all -- and it's a great pleasure to be 13 here. Thank you for inviting me. 14 I disagree with the characterization of this right 15 as a new right. I think proposed rule 14(a)(11) is quite 16 explicit in grounding this right in state law. State law is 17 the source of shareholder voting rights, state law is the 18 source of shareholder nominating rights. And if you look to 19 Delaware law, there is case law, there are statements not 20 just in law review articles but in cases by vice chancellor 21 Leo Strine, by former vice chancellor, now Delaware Supreme 22 Court Justice Jack Jacobs, saying that shareholders have a 23 right to nominate directors. 24 And I think that that is key because all of the 25 federal proxy rules are grounded on rights and powers that 1 are defined by reference to state law. The fact that 2 stockholders nominate -- elect directors to begin with, the 3 fact that the quorum requirements and the annual meeting 4 requirements make it necessary for the company to solicit 5 proxies to replicate the annual -- the individual attendance 6 at an annual meeting, that's what drives the federal proxy 7 rules. 8 And so without that, you wouldn't have this whole 9 body of federal law and federal law is heavily dependent on 10 the pre-existing state law rights. I think that's the first 11 thing. 12 The second thing, with respect to the business 13 roundtable decision, I think that within the text of the D.C. 14 Circuit's opinion, it is quite clear that regulation of proxy 15 solicitation is different from regulation of voting rights, 16 one share, one vote rule. And I think there's an awful lot 17 of room in which the D.C. Circuit makes it clear that it's 18 not addressing that question. 19 Why is it different? Well, for one thing, the text 20 of the statute, Section 14(a), is much broader than the 21 authority that the Commission has to regulate exchanges. The 22 text of the statute, it says you can't solicit proxies 23 without complying with SEC rules. It doesn't say you can't 24 solicit proxies without complying with the Commission's 25 mandated disclosure. 1 It would be easy to have a disclosure-oriented 2 statute. In fact, the Supreme Court has focused on that in 3 its interpretation of Section 10(b). This statute doesn't 4 have that language. 5 Second, if you look at the legislative history and 6 looking at the legislative history and the purposes of 14(a) 7 I think is particularly telling in light of some of the 8 comments this morning. There were a lot of comments this 9 morning that suggest that this is a new issue, it's a 10 response to Enron, why do this now, and in fact if you look 11 at the legislative history, you see that the concern about 12 insider domination and particular insider control of the 13 proxy machinery was one of the issues that was raised in the 14 hearings in 1933 and 1934. That's one of the things that 15 Congress was focusing on. 16 It was one of the problems to which the Exchange 17 Act was addressed and Congress responded specifically to that 18 problem with the adoption of Section 14(a). In addition, the 19 idea of shareholder access or disclosure of shareholder- 20 nominated director candidates, that's been on the table since 21 1942 when the SEC proposed a rule to that effect. 22 And you might ask well, why hasn't it happened if 23 it's been on the table for so many years. And I guess the 24 answer is partly political, but I think more a matter of the 25 SEC really trying to focus, as Joe Grundfest suggested, on 1 getting the rule right. And I think that's perhaps part of 2 the problem. 3 It's very hard to predict the effect that proposed 4 rule 14(a)(11) is going to have. It's very hard to know is 5 this going to open the floodgate, is it not going to make a 6 difference at all, what's the right threshold and so forth. 7 And then although it's a commendable effort to try, I think 8 at some point the idea to try and get it exactly right is 9 causing a certain degree of administrative gridlock. 10 It also is problematic because the more fine- 11 tailored the rule becomes, the more you start to get into a 12 problem, is this really disclosure or disclosure plus 13 procedure. Now, I've looked at the legislative history of 14 section 14(a) and I think you can make a pretty good argument 15 that section 14(a) authorizes the SEC to do more than 16 disclosure and perhaps more than disclosure plus procedure. 17 There's an idea in fair corporate suffrage that 18 fair corporate suffrage, at least in the context of access to 19 the proxy machinery, something that was on the table, means 20 making sure that stockholders do have rights that they didn't 21 have under then-existing state law, although I don't think 22 that's what this rule does. 23 But the obvious or at least one obvious response is 24 to back off, to have a simpler rule and to a certain extent 25 for the Commission to get out of the way of state law and 1 company-specific experimentation in this area. We have a 2 system of proxy regulation in which the Commission has 3 essentially occupied the field for the last 60-plus years. 4 There is I think a reluctance on the part of state 5 courts and a reluctance on the part of individual 6 corporations to experiment with different corporate 7 governance mechanisms, with different ways of creating a 8 dialogue or creating access to the proxy because in part of 9 the effect of Commission rules, including the rules that 10 limit the ability to use 14(a)(8) to propose changes to the 11 nominating mechanism as well as proposing individual director 12 candidates. 13 So if the -- whatever the form of 14(a)(11) that 14 the Commission adopts, I think one clear value and one clear 15 way to address this gridlock going forward is to explicitly 16 provide a little more flexibility. In other words, it 17 already says in the proposed rule that this is subject to 18 state law, which means that if the critics of the rule are 19 right and this opens the floodgates, a state legislature, a 20 state court can respond and say okay, there's not going to be 21 this broad right of shareholders to nominate or we're going 22 to put in additional conditions. 23 I think Jack Coffee is right that it would be 24 useful to make explicit that individual companies could do 25 this in their charters, and I also think it would be valuable 1 to make the reverse explicit, that companies and states could 2 go farther without going into conflict with the rule so that 3 if the advocates of greater shareholder access are right, 4 there's at least a possibility for company-specific 5 experimentation to demonstrate that that is the case. 6 MR. BELLER: Thanks very much. Professor 7 Langevoort, I guess first, generally, is there -- do you have 8 anything to add to the debate so far? Then I have a followup 9 question for you. 10 MR. LANGEVOORT: Okay. I'll be brief. Not fun to 11 go after Jack and Jill on this question. 12 (Laughter.) 13 MR. BELLER: That's why we set it up that way. 14 MR. LANGEVOORT: I probably feel a bit more 15 strongly than Jack that the Commission's authority under 16 section 14(a) reflects a statutory dissatisfaction with 17 leaving questions of shareholder suffrage to the states and 18 that the interest of federal uniformity and the promotion of 19 shareholder opportunity in publicly traded corporations is an 20 area that the Commission can move in without having to 21 apologize to the states, and indeed with the ability to 22 preempt, should there be a discrete conflict. 23 I would be less inclined than Jill to signal in the 24 adoption of any such rule that a state can opt out from this. 25 Yes, states can decide that shareholders cannot nominate but 1 short of that, I would not want states to say we can adopt a 2 rule different from 14(a)(11), for example, one that says it 3 has to be 20 percent or 5 years or whatever, and have that 4 supercede the Commission's rule. 5 But beyond that, I suspect I am much closer to 6 agreement with what they said than disagreement. 7 MR. BELLER: Thank you. The followup, if the 8 Commission were to look at adopting a rule that was slightly 9 different from the proposed rule, for example, if it were to 10 get rid of the triggering events and simply say a shareholder 11 who held X percent for Y months or Y years had a right to get 12 its -- and that was consistent -- and that rule was not 13 prohibited by state law, would have a right to get into the 14 company's proxy materials, I assume that would be no harder 15 and maybe an easier case than the current one. 16 MR. LANGEVOORT: I agree. I think we ought to say 17 what in effect anybody who knows administrative law should 18 acknowledge up front. We can all quote snippets from case 19 law one way or the other, or snippets from legislative 20 history. It's going to be the strength of the rulemaking 21 record and the Commission's articulation of a need for this 22 rule that ultimately is going to drive the outcome on whether 23 the rule is upheld. 24 Show me a strong recognition in the rulemaking 25 record that the rule you described is necessary and 1 appropriate, I do think it's an easier case. 2 MR. BELLER: How about if the Commission included 3 either additional or different triggering events from the 4 ones in the proposal, and I guess in particular triggering 5 events that were tied to corporate performance or triggering 6 events that were tied to events of alleged or proven 7 corporate wrongdoing, such as indictments or convictions or 8 enforcement actions or the like. How would that affect, if 9 at all, the analysis we've been discussing? 10 MR. LANGEVOORT: putting aside -- obviously those 11 are hard questions and you have to begin with, as you know 12 very well, the definition of any of those triggering 13 events -- 14 MR. BELLER: Assume I've already defined them. 15 MR. LANGEVOORT: -- and create a record problem in 16 articulating the need, because you have to tie your 17 particular structure of the rule to the claim for its 18 validity. The image I use in my head for where that blurry 19 line is between where the Commission can go and where it 20 can't has to do with -- the Commission clearly has the 21 ability to step in in order to promote their corporate 22 suffrage. I emphasize not the words corporate or suffrage 23 but fair, even playing field. As Jack mentioned, that 24 wonderful phrase that Louie Loss repeated so many times, the 25 Commission's objective is designed to make the proxy process 1 the closest practicable substitute for attendance at the 2 meeting. 3 I think you ought to tie, and to maintain the 4 validity of the rule need to tie, all the exceptions, all the 5 triggers to a notion of promoting fair corporate suffrage. 6 Once you start provisions like well, the company didn't do so 7 well, therefore these rights are triggered, it comes a lot 8 closer to merit regulation and I think that's where problems 9 are going to be raised with respect to the validity of the 10 rule. 11 That question of who should be a director or what 12 kinds of companies are on our blacklist is too far distant 13 from questions of are shareholders being heard and that would 14 become problematic. 15 MR. BELLER: Thank you. Professor Coffee, any on 16 that last point? 17 MR. COFFEE: Well, I think just as a matter of sort 18 of defensive advice, your position is stronger. You are more 19 safely within your bunker the more this looks like a 20 procedural rule. I understand that Todd Lang disagrees with 21 me and says it's substantive, but most of his criticisms seem 22 to be more policy arguments. 23 I think the more you make it look procedural, the 24 more you're in the narrow core of a series of concentric 25 circles that might define your authority. You clearly have 1 procedural power. It is arguable, as Don says, that you 2 might have somewhat greater power than that, but the more you 3 can cast it as a procedural rule, the safer it is. 4 MR. BELLER: I'd like to turn to state law issues, 5 particularly Chief Justice Veasey. What issues -- if the 6 Commission were to adopt this rule, what issues does it raise 7 under Delaware law and would the rule as proposed, if 8 adopted, conflict with Delaware law? And I suppose I want to 9 hold for a second the ambiguity that Professor Coffee raised 10 about the charter or shareholder adopted bylaw provision. If 11 we could leave that aside and attack that separately. 12 JUSTICE VEASEY: Well, I want to thank the 13 Commission for the opportunity to be here and I agree with 14 Todd Lang that this discussion is a very helpful discussion, 15 the process in itself is a very helpful discussion and I'm 16 glad you turned to me for state law and didn't ask me to get 17 into the thicket of whether the SEC has power to adopt this 18 rule. 19 Whether as a matter of policy you should adopt it 20 is a different issue because the -- one looks to state law to 21 govern the internal affairs of corporations and then there's 22 that blurred line of whether you should or should not do it, 23 but there are some potential problems here that -- for 24 example, the idea that if the state does not prohibit 25 shareholder nomination, perhaps could invite states to 1 prohibit and opt out and lead the race to the bottom. That's 2 sort of an interesting irony in the rule as proposed, raising 3 some questions about whether it's good policy to do it. 4 And other conflict questions involve a feature of 5 the dispute about small stockholders versus large 6 stockholders and whether you should discriminate between 7 small stockholders and large stockholders with respect to the 8 opportunity to take advantage of this right. And I think it 9 is a substantive right that's being granted here. 10 That said, I think there's something to be said for 11 changing state law in this area that might obviate a lot of 12 these problems with a procedure that some see as flawed. 13 First of all, let me say that the Delaware 14 judiciary as an institution doesn't really have a dog in this 15 fight. There is, of course, an interest on the part of the 16 state of Delaware, the executive and the legislative 17 branches, that internal affairs not be interfered with, but 18 the Delaware judiciary, as an institution, is the third 19 branch of government. 20 Our mission is to decide our cases fairly and 21 swiftly and in a balanced way for stockholders and directors 22 and to try to be predictable and clear going down the road. 23 And I think that our fiduciary duty decisions have been very 24 responsible in this area. 25 For example, there is a strong view in Delaware law 1 that the franchise of the stockholders, the right of 2 stockholders to vote, is something that should not be 3 interfered with, and the Blazius case stands for that 4 proposition. So the Delaware courts certainly are out there 5 to protect the stockholders at the same time to make sure 6 that the business judgment role is not compromised or watered 7 down in any way. 8 And what you've seen in recent decisions, I think, 9 has been a look at the processes of directors and the whole 10 issue of good faith, and the like that have been, I think, 11 pointed up a little bit more dramatically in recent years by 12 better pleading and taking advantage of books and records 13 before derivative suits are brought. 14 So I'm very proud of what the Delaware judiciary 15 has done in this respect, and I particularly appreciate 16 Richard Breeden's comments about the service that the 17 Delaware judiciary has providing. 18 Now, all that said I think that there is a lot to 19 be said for Ira Millstein's point this morning that the core 20 of the problem is the fact that this withhold vote and the 21 plurality provision means that stockholders really don't have 22 a strong say in the election of directors. 23 So his proposal that would, essentially, leave it 24 to the exchanges to have an exchange rule on the majority of 25 those voting being necessary to elect directors creates 1 another federalism problem in itself, but if it were state 2 law, if state law were amended to do that or if corporations 3 adopted a bylaw or certificate of incorporation -- and there 4 is a little unsettled problem there in Delaware law that I 5 don't want to talk about because it may come before the 6 courts. 7 But if state law provided this majority of the 8 voting in order to be elected or the certificate of 9 incorporation or possibly the bylaws so provided, I think it 10 would go a long way forward getting that done. 11 And perhaps the Commission would want to consider 12 if you want to adopt the provision you have on the table to 13 create an exception for any state law that allows the 14 majority of the voting, for example, or any organic document 15 of a corporation like the certificate of incorporation or 16 bylaws be effective, to allow that, then this provision 17 wouldn't apply to any such situation as that. 18 I think it would be an interesting proposal for the 19 Delaware legislative branch to consider through the good 20 offices of the counsel of the Delaware State Bar Association 21 Corporate Law's Committee, and there are others. 22 Joe Grundfest's proposal and Charles Elson's 23 proposal on the proportionate sharing are something that 24 could be done with state legislative law, and I would be very 25 interested in that. 1 And finally, my final point is, and I guess this 2 gets to alternatives that you hadn't asked me about, but I'll 3 answer it anyway. I have answers for which there are no 4 questions. I was over in England, and they were quite proud 5 of their Higgs report and the Smith report and the Combined 6 Code and the success that they've had in England about comply 7 or disclose. 8 And the Commission, of course, has a number of 9 provisions about comply or disclose in certain other areas, 10 and this might be an area where that might be effective, 11 although I haven't thought that through. I thought that the 12 UK experience was particularly interested on comply and 13 disclose generally. 14 And finally, let me say that our courts have 15 encouraged these best practices of corporate governance, 16 independence of directors, executive sessions, and the 17 nominating and corporate governance committee I think is 18 really the conscience of the corporation. 19 And I think there has been an increased improvement 20 in the behavior of corporations, and there's a lot of focus 21 now on the importance of this nominating committee being 22 independent and operating with a good process just like good 23 processes have to be used with all of the committees. 24 MR. BELLER: I guess one specific Delaware law 25 question, which I think is important given the proposal and 1 given the ambiguity that Professor Coffee noted, if a 2 Delaware corporation were to adopt a charter provision -- and 3 I guess I'd like to know about a shareholder adopted bylaw 4 provision as well -- that prohibit shareholders from 5 nominating directors, would that be a valid bylaw, charter 6 bylaw provision under Delaware law? Is that a question I can 7 fairly ask you? 8 JUSTICE VEASEY: Well, I'm not going to be a judge 9 forever. I think it would be. 10 MR. BELLER: You think it would be? 11 JUSTICE VEASEY: Yeah. 12 MR. PREZIOSO: One question I might ask, which is 13 you were talking about some of the states and things they 14 might do. Do you have any sense as to what some states may 15 be considering in that vein at this time? 16 MR. BELLER: Well, I think David Katz -- 17 JUSTICE VEASEY: No. I really don't. 18 MR. BELLER: David has done a lot of work in that 19 area. 20 JUSTICE VEASEY: Because I'm busy deciding cases. 21 Sorry. 22 MR. BELLER: Mr. Katz is busy looking at this 23 because I think he has got some folks who are very interested 24 in it. I think that's a great question. 25 MR. KATZ: I'll try to answer it as well as I can. 1 We spent a lot of time on behalf of the American Society of 2 Corporate Secretaries and some other organizations really 3 looking at the law of all 50 states, and I think there is a 4 couple of important points that come out. 5 There are several states where there are either 6 judicial decisions or some statutory language that would 7 bring into question some issues under 14(a)(11) as drafted, 8 although I don't think there's any state where we can clearly 9 stay there's a contradiction that it would be very clear that 10 it would be prohibited. 11 And I'm not aware of any action in any specific 12 states right now to, sort of, amend corporate laws to take 13 care of this type of issue, although I do note that some of 14 the bar associations that make the proposals in certain 15 states are looking at the issue to see if some type of change 16 is required. 17 I do think that it's important to note, though, 18 that in a variety of situations on a state-by-state basis 19 corporations clearly have the right to adopt provisions that 20 would allow them to opt out of 14(a)(11) either -- I think, 21 for the most part, it's going to be very difficult in this 22 day and age for a corporation to simply adopt an amendment to 23 its charter or decide to put in a bylaw amendment that would 24 cause an issue here. 25 But I think there are bylaw amendments -- there are 1 bylaws that exist today. There are certainly charter 2 provisions that exist today that would be contrary to 3 14(a)(11). 4 There would also be situations where companies 5 going public for the first time where they can write their 6 charters how they decide to write them, and then the market 7 attaches a discount or measures it however they want where, 8 if the rule is adopted, that clearly could be done as well, 9 which would be a matter of state law. 10 I understand Jill's point that you may want to be 11 specific on this. I don't think you have to be. I think 12 under the language of 14(a)(11) as it's drafted you do limit 13 it to situations where state law would allow it. And by 14 definition, since the charter is a state law granted right, 15 that would be sufficient. 16 I think there are some questions in certain 17 jurisdictions about simply if it was done in the bylaws, as 18 opposed to the certificate, whether that would be sufficient. 19 I do think, though, that there are certainly a number of 20 states where shareholders on their own can adopt bylaws that 21 would go further than 14(a)(11) or could have some form of 22 14(a)(11), if shareholders felt strongly about taking that 23 approach. 24 In most states, they couldn't adopt charter 25 amendments, obviously, because in most states you need board 1 of directors to approve the charter amendment. But bylaw 2 provisions can be done that I think would be effective in a 3 number of situations. 4 I think one thing that has been missed in the 5 debate, and I think it's something that I think people have 6 hinted at all day, is that really some of the Commission's 7 new rules and some of what the exchanges have done 8 specifically with nominating committees, the disclosure 9 requirements that now surround nominations I think you really 10 need to let those have a chance to work and to see what 11 nominating committees do when they're presented with 12 nominations. 13 I can tell you that having represented people that 14 are in proxy fights or are looking to avoid proxy fights or 15 are simply looking to expand boards of directors have 16 recently gone to a number of their institutional investors 17 and asked them to suggest directors. And to this day, we 18 have not been successful in getting an institution to 19 designate a director, to make a suggestion about a director. 20 So I question whether some of what's being done 21 here is more a point of giving people leverage or power and 22 how much the rule will be used if it's adopted. That's an 23 open question that certainly nobody can determine now. 24 I guess the last point I would make is that there 25 are nominating provisions under most significant size public 1 companies that certainly tell people when they have to have 2 their nominations in by. They provide sufficient time so 3 that if somebody wants to run a proxy fight the market can be 4 any informed. 5 But there is nothing that stops any investor, be it 6 a small shareholder or a large shareholders, from mounting 7 their own slate and trying to convince people to elect their 8 directors. And what the new rule does is it specifically 9 empowers a subset of shareholders and gives them specific 10 rights to use the corporate mechanics. 11 I think the points that were made this morning that 12 if it's in everybody's economic interest to run a proxy fight 13 and replace bad management or a bad board, certainly the 14 costs of the proxy fight in the scheme of things for large 15 companies is going to be very small when compared to what 16 people view as the benefits from improving management. 17 And that process has worked for years. I think 18 there are many more proxy fights that are out there than 19 people were giving credit to this morning. There are a lot 20 of different situations. And frankly, the threat of the 21 proxy fight in and of itself often spurs change, and I think 22 that boards respond to that. 23 I don't think you need to do some of the changes -- 24 especially in light of some of the recent corporate 25 governance changes growing out of Sarbanes-Oxley I don't 1 think you need to grant an extra right on top of that to give 2 people the leverage and to give people the power to force 3 change. Boards listen. 4 MR. PREZIOSO: Thank you. 5 MR. BELLER: Commissioner? 6 COMMISSIONER GOLDSCHMID: Let me make a few points. 7 Number one, I just wanted to complement what Chief Justice 8 Veasey was really suggesting. The Delaware courts have been 9 terrific on corporate governance and suffrage in the last 10 years, and nothing we're thinking about is meant to be anti- 11 state or anti-Delaware. 12 And I fully share, as you know, an enormous regard 13 for the Delaware judiciary. And I think the idea of thinking 14 in our rule-making of carving out certain areas to encourage 15 the Delaware legislature and other state governments is a 16 very interesting idea at least in terms of creating 17 incentives that we certainly think about. 18 As everyone knows, too, I think I have a certain 19 bias in favor of law professors and so find myself easily in 20 agreement with Jack Coffee, my colleague at Columbia, and Don 21 Langevoort and Jill Fisch. Some there's some difference 22 among the three of you, but I take it all three of you would 23 agree that we clearly, as you read it, have the power now to 24 do the kind of thing we're suggesting. 25 Is that fair, Jack? 1 MR. COFFEE: I think that's what I'm saying, yes. 2 COMMISSIONER GOLDSCHMID: Don? 3 MR. LANGEVOORT: Yes. 4 COMMISSIONER GOLDSCHMID: Jill? 5 MS. FISCH: Yes. 6 COMMISSIONER GOLDSCHMID: Now, Todd, I noticed you 7 may slightly disagree, and you're a colleague, too. Do you 8 really read the roundtable cases over all the enormous 9 authority we get under 14(a) and Chevron? And I'll even 10 leave TransAmerica aside. 11 But also, if I understand your reading, do we have 12 to get rid of now 14(a)(8) and shareholder proposals? 13 MR. LANG: We'll leave that for the moment, Harvey. 14 COMMISSIONER GOLDSCHMID: No, no. Don't leave it. 15 I mean, how can you possibly -- 16 MR. LANG: I'll tell you why. I and lots of others 17 who are not on this dias today read business roundtable 18 differently. We read it that says when we talk about 19 disclosure and procedure we're talking about the plain 20 English use of those words. You cannot by interpretation 21 take authority when it gets into the internal affairs of a 22 corporation. 23 Number two, the roundtable decision says you can't 24 use the broad standards which I said about protecting the 25 public investors and public interest as a means of gaining 1 jurisdiction. And therefore, our analysis is -- and I say 2 "ours." There's a lot of people involved in this. I'm just 3 the messenger in this case -- who take a very strong position 4 that if the roundtable decision is valid, and it's one of a 5 kind, so I'm not suggesting that it has been cited a lot, 6 that you simply can't adopt these rules without getting into 7 the affairs under state law, which I talked about before. 8 And if somebody misunderstood that I didn't dwell 9 on procedure -- I mean, procedure means procedure. There's 10 lots of them under the proxy rules, and that's fine, but I 11 don't see where this becomes procedure at all. This gives 12 somebody rights to do things that they simply never had 13 before, couldn't have before, and they've turned to the SEC 14 and said you give it to us. That's fundamentally what has 15 happened here. 16 Now, as far as 14(a)(8) is concerned, 14(a)(8) has 17 13 exclusions led by the director exclusion, and while that's 18 there nobody has challenged that, and I think the lower 19 courts at least have always sustained 14(a)(8) as a general 20 matter. 21 If the Commission decided we're going to get rid of 22 the director election exclusion, for example, or modify it 23 significantly, that may raise an issue. It may raise an 24 issue even under 19(b) when the Commission gets to pass upon 25 some of these things. So I say that's not a bridge we have 1 to cross today because that isn't is issue. 2 COMMISSIONER GOLDSCHMID: But doesn't it set up the 3 same kind of process we're talking about here? 4 MR. LANG: Not at all. 5 COMMISSIONER GOLDSCHMID: Well, how would 6 shareholders -- vote on a proposal that the states have said 7 is proper under state law to give advice to management? 8 MR. LANG: But 14(a)(8) is used, basically, for 9 precatory proposals and a few bylaw amendment very 10 occasionally diagnose on state law. It does not get into 11 proxy contests. That's a separate set of rules which you've 12 said up a long time ago and which work. 13 All of a sudden, if you're going to convert this 14 into proxy contests, that's not what it was designed for, and 15 it will raise some issues, yes. 16 COMMISSIONER GOLDSCHMID: Good minds can agree to 17 disagree. 18 MR. LANG: I think that may happen. 19 MR. BELLER: On that note, I think we'll round this 20 panel up. Thank you very much. I'm going to ask one 21 question of the Commission hear, which is we are running at 22 the point where if we don't take a break here we can be done 23 by 5:30. Is that something that you can put up with? 24 MR. LANG: I'm strong. 25 MR. BELLER: Okay. Then let's change on the fly to 1 the voting mechanics panel and go from there. 2 I think I'd like to roll right into this, if we 3 could, moderator's prerogative. Before we start this last 4 panel, I want to take a moment. I certainly want for the 5 Commission and for the people who are listening to this this 6 roundtable wouldn't have been possible without the help of 7 several people on the staff of the Commission in the 8 Facilities area. 9 This room at 4:30 yesterday afternoon looked 10 completely different. It has been configured for something 11 that I think has been really well set up and very successful, 12 and without the help of a number of people in the Division of 13 Corporation Finance -- and I do want to recognize them for 14 the record -- my deputy, Marty Dunn, who is gone because he's 15 off to the airport to fly off to speak at another conference 16 tomorrow, on my right right now, Betsy Murphy, who is the 17 head of our Office of Rulemaking. 18 But more important for the panel, we're about to do 19 the resident expert on voting and proxy mechanics, and the 20 like. I'd like to thank Giovanni for helping me moderate the 21 last panel but also and very particularly Lillian Brown and 22 Consuelo Hitchcock of Corp Fin who have been carrying the 23 laboring oar on this proposal and this roundtable and 24 organizing it and Andrew Brady and Iona Howard who helped us 25 today in making this such a successful event. Thank you all. 1 And with that I'm going to turn this over to Betsy. 2 MS. MURPHY: I'd like to introduce our four 3 panelists. We have Richard Daly, who is the co-president of 4 ADP's Brokerage Services Group. Next, we have Jamie Heard, 5 CEO of ISS, Institutional Shareholder Services. Then we have 6 John Wilcox, vice president of Georgeson Shareholder 7 Communications. And we also have Greg Taxin, who is the CEO 8 of Glass, Lewis. 9 And I wanted to start with a question for Jamie. 10 Jamie, the first thing I wanted to ask you is what are the 11 factors that go into an ISS determination to recommend a 12 withhold vote from a particular director or the entire board? 13 MR. HEARD: I will answer that question, Betsy, but 14 Is want to thank the staff, Alan in particular and members of 15 the Commission. And since we're last today probably 16 everything has been said and said many times. 17 I do, though, want to go on record as saying that 18 we support this proposal. We don't think it's perfect, but, 19 as I think was said earlier in the day, it's a fair 20 compromise, and it does give shareholders, longer substantial 21 shareholders, meaningful access to nominate and elect 22 directors. And we think that is important. It in no way 23 contradicts or undermines the other reforms that have been 24 made. In fact, we think it complements them. 25 To answer your question, when ISS looks at 1 directors, thereby a number of reasons why we might consider 2 withholding votes for directors. In the past, the principal 3 reason has been lack of independence, directors who don't 4 immediate our standards of independence who serve on 5 committee committees of the board -- audit, compensation, 6 governance, nominating committee. 7 We think we'll see less of that this year and going 8 forward because of the new listing standards. The ISS 9 standards and the exchange standards are not identical, but 10 they are converging. But that is one reason why we would 11 recommend no votes or withhold votes for director. 12 A second reason would be directors who attend less 13 than 75 percent of the meetings and don't have a good reason. 14 We don't see that as much as we used to. Being busy is not a 15 good reason. Being ill is or some type of family emergency 16 is. 17 A new proposal or a new, I would say, standard that 18 we put if place this year is that directors who serve on more 19 than six boards are what we call over-boarded, and we would 20 withhold from directors who serve on more than six boards. 21 We haven't seen very many of those this year, and we don't 22 expect to see very many. 23 In fact, we've had quite a few directors come to us 24 who are on more than six boards and say, "I just want you to 25 know I'm getting off of one or two words, and I'm only going 1 to be on six," and we think that's a good thing. 2 At reason we might withhold for directors, if for 3 two years consecutively a shareholder resolution has received 4 a majority vote, and the board has failed to take action. 5 Typically, these are shareholder resolutions asking companies 6 to declassify the board and elect all directors annually or 7 asking companies to submit their shareholder resolutions for 8 ratification. 9 So those would be the major reasons why we would 10 recommend a withhold. Most recently and on a very high 11 profile case at Walt Disney we recommended a withhold vote 12 for Michael Eisner. We made it clear in our analysis that we 13 thought in view of the problems over the years with respect 14 to performance and with respect to governance we thought the 15 positions of chairman and CEO should be separated at Disney. 16 And so you could view our withhold vote at Disney 17 as really a message to the company that it was time to 18 separate those two positions. 19 MS. MURPHY: Greg, I wanted to ask you a question 20 along the same lines. Do you think that the background 21 information that is required to appear in the proxy statement 22 about director candidates is sufficient for your purposes in 23 making decisions about whether to recommend support for a 24 director? 25 MR. TAXIN: Let me again thank the Commission for 1 holding these hearings and say that when Glass, Lewis makes 2 recommendations to withhold from directors we use many of the 3 same criteria that ISS uses. We would many additional and 4 some different definitions along the way. 5 So the information in the proxy statement is a good 6 start. We do a lot of other work on people's backgrounds. 7 For example, we do work on paper performance. We try to 8 understand the financial transparency in the accounting 9 statements. One of your own, Len Turner, helps us understand 10 whether the accounting policies themselves are overly 11 aggressive. 12 So we look at some other substantive things that 13 really aren't today in the proxy statement, but they're 14 available publicly elsewhere, and we get along. I would say 15 there are some areas that, frankly, could be enhanced in a 16 proxy statement that I think our clients, institutional 17 investors, tell us are important to them, things like 18 interlocking boards, which today you can with enough work 19 discover, but it's not as obvious or apparent as it could be 20 in a proxy statement. 21 I think CVs and resumes which go back five years, 22 which I think is the rule, are nice, but we often now go back 23 and try to look back farther. That's especially true for 24 audit committee members, for example, where someone is deemed 25 a financial expert. It's nice to actually see more of their 1 resume and understand how expert, in fact, they are. 2 So there are some other elements that, you know, I 3 think could be enhanced in the disclosure regime. As I say, 4 we get along reasonably well by hunting them down elsewhere. 5 It would be more convenient if they were in the proxy, I 6 suppose. 7 MS. MURPHY: And would you have any need to have 8 different information about a shareholder candidate than you 9 get about the management candidates? 10 MR. TAXIN: Well, I think the -- and I think the 11 rule, sort of, addresses this with a 500 word statement and a 12 reference to a web site. I think the burden really ought to 13 go on the shareholder nominated director to demonstrate that 14 there's a problem at the company that the current directors 15 have ignored or failed to solve either in attention to 16 shareholder interest, a performance problem, whatever the 17 case may be. 18 But I think the burden falls squarely on the 19 shareholder nominated director not only to prove that case 20 but then to demonstrate why their addition would be useful 21 and incremental to the directors who are there. I'm not sure 22 one can do that effectively in 500 words, frankly, but I 23 think the reference to a web site, you know, would certainly 24 permit someone to create as long a record as they wanted. 25 My guess is if limited to 500 words a shareholder 1 nominee would have trouble making their case persuasively and 2 carrying what I think will be regarded as their burden to 3 demonstrate why they ought to be put into a spot that today 4 is occupied by someone else. 5 MR. HEARD: Presumably, there would not be any 6 prohibition against the shareholder nominee providing 7 additional information either on a web site or in newspaper 8 ads are through direct mail so long as they were consist end 9 with the antifraud provisions of the Commission's rules. 10 MR. BELLER: That's certainly what we contemplated. 11 I guess I have a question for both Mr. Heard and Mr. Taxin 12 following up on what Betsy asked. And that is if the 13 Commission were to adopt a rule that had a withhold vote 14 trigger would you, as a result, change -- or maybe I should 15 ask you instead would you think you would review whether you 16 should change the standards you use for deciding whether or 17 not to recommend a 4(a) withhold vote? 18 MR. HEARD: That's a great question, Alan. I think 19 up until now we've looked at withhold votes as being largely 20 symbolic, although the Disney vote would suggest that they 21 can be consequential. If you adopt this rule, I think a 22 wholly vote does clearly become much more consequential, and 23 I think we would have to look at our policies and say do we 24 really want to tighten up here on what we are going to 25 consider is grounds for withholding given the consequences of 1 a withhold vote. 2 Now, having said that, we've looked at some numbers 3 to see how many withhold votes, say, last year got anywhere 4 near the 35 percent level. We were able to identify nine 5 companies of which the percentage was approximately in the 30 6 percent area. 7 So even if ISS or Glass, Lewis or others were 8 recommending withhold votes in a large number of cases, 9 unless you have an organized campaign on the part of unhappy 10 shareholders I don't think you're going to get anywhere near 11 that 35 percent. 12 MR. BELLER: Of course, one of the open questions 13 is how turning a no vote into a trigger will affect behavior 14 of that sort as well, which is why I think people are so 15 interested in how your two organizations and your competitors 16 are going to think about withhold votes in that context. 17 MR. TAXIN: Well, I think one of the keys to this 18 is that both ISS and Glass, Lewis are in the recommendation 19 business. We advise, but we certainly don't control the 20 votes that get lodged by our clients. And by the way, we 21 have lots of joint clients, people who read both of our 22 opinions, and we often differ in our opinions, and 23 institutions make up their own minds as fiduciaries. 24 So I'm not certain that whatever we do will impact 25 very much. I'd actually point you to the recent Disney case 1 as an example where the withhold votes, for example, on 2 Mr. Mitchell were substantial, 24 percent, I think, 24, 25 3 percent despite ISS recommending in favor of him. 4 So lots of institutions making up their own mind 5 and similarly on Esterin and Bryson and some other directors 6 there who had substantial withhold votes despite a 7 recommendation, you know, in favor. I think, obviously, you 8 know, we hope our advise is sound, and we hope it makes a 9 difference in people's judgments, but we certainly don't 10 control how people vote. 11 And I might suggest as well -- I think Ann Yerger 12 said earlier today that she thought that the number of 13 withhold votes might go down with the adoption of this rule. 14 I'm not certain that's going to be the case. One thing I 15 know is that institutions will pay much closer attention to 16 their proxy voting for directors, and I think we saw that in 17 Disney. 18 We saw an incredible turnout among institutional 19 investors. People took it very seriously, ran it through 20 their organizations and thought long and hard about it, and I 21 think part of the reason is that the proposed rule here 22 would, if adopted as written, would go back to meetings as of 23 January 1, 2004. 24 So people were interested and concerned about 25 whether that would be a triggering event, and I think that's 1 healthy for the capital markets. I think it's healthy that 2 institutions will watch these votes much more carefully. One 3 of the things we've found as we've gone out to talk to 4 institutions is people said, well, there is a requirement for 5 a mutual fund now to disclose votes, so we, sort of, pay 6 attention, but we feel like these board votes are 7 meaningless, and they're not a good use of our time and 8 intellectual energy. 9 Well, I think if we make those votes actually 10 meaningful even if only as a triggering event that will cause 11 people to spend significantly more energy focused on 12 critiques of the board and their processes and their people, 13 and that has got to be good for the capital markets to send a 14 better signal to those boards. 15 MR. HEARD: If I could just add, Greg stole my 16 number there because I was going to cite the Mitchell vote as 17 a clear indication that clients really do decide for 18 themselves. We recommended that Senator Mitchell be 19 reelected. Notwithstanding the ISS recommendation that 20 Senator Mitchell be reelected about 25 percent of the votes 21 were cast against Senator Mitchell. 22 So ultimately, the clients do decide for themselves 23 particularly on these very important high-profile issues. 24 There were three clients of ours, and they may be clients of 25 Greg's who would testify before you today, CalPERS, Fidelity 1 and TIAA-CREF, every one of those institutions I think reads 2 ISS's analysis and our recommendations, but I can assure you 3 they make up their own minds about how they want to vote. 4 Another one of our clients was publicly quoted in the Wall 5 Street Journal, T. Rowe Price, by saying they were going to 6 withhold votes for the entire slate of directors at Disney. 7 That's not what we did. We recommended withhold for only one 8 person at Disney. 9 The institutional investors today, particularly the 10 large ones and particularly those who have a longer-term 11 perspective, are really stepping up, are really paying tanks. 12 They're taking input from ISS, from Glass, Lewis and from 13 others, but they are making their own decisions. 14 MS. MURPHY: Commissioner Atkins, we'll take your 15 question, and then we'll get to you, John. 16 COMMISSIONER CAMPOS: Thank you. I just had a 17 couple of things. I'm not exactly familiar with your 18 procedures and how you arrive at recommendations, so I was 19 wondering what sort of internal procedures do you have? How 20 transparent are they to people outside? And then, in 21 particular, one part of our -- we have between prongs to our 22 proposal. 23 One prong is very broad and wide-ranging, this opt- 24 in shareholder proposal basis by which the shareholders would 25 opt into this new regime. How would you approach that 1 particular prong of this? Because to me it sounds like it 2 might be the same for every company. 3 MR. HEARD: It wouldn't be the same for us, 4 Commissioner. First, to your question of how do we decide, 5 ISS has a set of policies that are in a manual that's given 6 to all of our clients. Anybody else who wants to buy it can 7 buy it. The manual has been refined, expanded and updated 8 over 15 years. 9 We try and use empirical evidence wherever we can 10 find it to buttress our policies. The guiding principles in 11 our policies is we want to protect and promote shareholder 12 rights and corporate accountability, and we want to do 13 everything we can to ensure that we preserve and protect 14 long-term shareholder value. 15 We have a research staff that depending on the 16 nature of the issue can spend days looking not only at 17 documents but also meeting with parties. In the condition 18 test, for example, in the Disney vote, which was in all 19 respects a proxy contest, we met with management, including 20 Mr. Eisner. We met with the dissident directors. We met 21 with advisors to both sides. So we spend a lot of time 22 particularly where we know there's tremendous controversy 23 trying to get it right. 24 As to the shareholder resolutions that we might 25 see, if that is part of what you adopt, we would propose -- 1 and we said this in our letter to the Commission in 2 December -- we would look at each of these issues on a case- 3 by-case basis. So if there is a shareholder resolution 4 saying we'd like to have access to nominate directors, we'll 5 look at those on case-by-case basis. 6 If there were actual candidates, when you get over 7 the thresholds, we'll look at those on a case-by-case basis. 8 We'll treat it almost like a proxy contest. 9 COMMISSIONER CAMPOS: What criteria would you use? 10 MR. HEARD: Let's look at the shareholder 11 resolution. We would look at the reasons that are being put 12 forward by the proponent in support of it. Why are they 13 doing this? What are their stated reasons? What problems 14 exist at the company, governance problems, strategy problems, 15 performance problems? What is the company' response to the 16 proposal? Have they been willing to consider alternative 17 nominees to the board? 18 When you get down to the actual candidates 19 themselves, if you get that far, as I said, it's almost like 20 a proxy contest. You're looking performance of the company. 21 You're looking who the nominees are. You're looking what's 22 the case that they're making. And each one of these I think 23 is very fact specific. But the idea that we would across the 24 board always be for them I can assure you that that's not our 25 intention. 1 MR. TAXIN: I would say as to the resolution 2 itself, if one were offered up -- we, obviously, haven't 3 developed standards for it yet, because it hasn't happened -- 4 we set our policies based on our clients overall viewpoints. 5 We don't pretend to be a beacon of truth. We try to 6 understand from our clients the type of analysis that they'd 7 like assistance with. 8 So what we would do is do what we do for all of our 9 policies, which is reach out to our clients and ask them what 10 do they think the right criteria is, and then we try to, you 11 know, do some of the hard work of assessing that at any given 12 instance. 13 My guess is given our focus we would certainly not 14 have a blanket rule here. We would instead end up with 15 something that looks like poor performance over a long period 16 of time and an unwillingness on the part of a board to engage 17 with shareholders. 18 Now, as I say, that's a guess on my part. I would 19 want to talk to our clients to see what the analysis is 20 they'd be looking for. But I guess, in short, we would 21 perform whatever work, you know, they thought was most 22 appropriate to try to determine whether such a shareholder 23 resolution should be adopted. 24 In terms of dealing with the candidates themselves, 25 I think both ISS and our firm have some experience in dealing 1 with proxy contests, and we each have our own criteria. But 2 it involves even in the current system some assessment of 3 competing people and business plans and strategies maybe for 4 the company, and some assessment needs to get made and laid 5 out. 6 I'll suggest to you as well, in the Disney 7 situation, which was essentially a proxy contest, we wrote 21 8 pages on why we thought people ought to go with our 9 recommendation. So it's not a vote this way. We don't have 10 any reasoning or explanation behind it for people to 11 consider. We're trying to, sort of, lay out the case in 12 these very difficult situations so that people can make their 13 own decisions based on the facts and the factual record. I 14 think we try to do something like that in these situations. 15 Let me just add another word about transparency, 16 which I think is really important as well. We're big 17 believers in transparency. Unlike ISS, we have a slightly 18 different approach to learning information from contestants. 19 We believe in making sure that all of that's done, sort of, 20 on the record. 21 So when we meet with people and talk to them, we 22 try to create a transcript and make sure that's available for 23 shareholders so they can listen to it and make their own 24 judgments. We're not trying to fiat in our own conclusion. 25 We want to help people with their decision-making process. 1 MR. HEARD: Just one other point I'd like to make 2 about our policies. We do review and vet our policies every 3 year with our clients to make sure that the changes that 4 we're making, the updates that we're making, and so on, 5 really are consistent with what they think we should be 6 doing, too. So we're looking to our institutional investor 7 clients to give us their feedback on policies. 8 We probably will see -- it looks like after Qwest's 9 no-action letter we will see at least one and maybe more 10 shareholder resolutions in 2004 in which both of our firms 11 are being asked to make a recommendation on proposals that 12 are not dissimilar from what you're going to have in the 13 rule, if you adopt the rule. 14 MR. BELLER: I'm sorry to belabor these points, but 15 they really are, I think, important in the context of the 16 proposal and the comment file. There are a number of 17 comments from critics of the proposal, and we heard I think 18 on a couple of occasions in prior panels this notion that 19 institutional shareholders would view either an opt-in 20 resolution or a withhold campaign as, in effect, a free 21 option that would give them the right to seek access next 22 year, if they wanted it, sort of a just in case if they were 23 concerned about the corporation tipping, or whatever. 24 Is that in your experience -- and I know this is 25 predictive and not historical, so based on your experience 1 would you predict that to be the case? And I guess secondly, 2 would you anticipate that your own policies would take the 3 free option theory into account in deciding how to evaluate 4 those resolutions, either the withhold vote or an opt-in 5 proposal? 6 MR. HEARD: We certainly wouldn't take an approach 7 that people should have a free option. We think they ought 8 to have a good reason, and we would look for a good reason 9 either to withhold votes for directors or to support a 10 shareholder resolution. 11 I couldn't speak to what others might do. I 12 couldn't speak to what a very diverse group of institutional 13 investors might do. There may be some hedge funds out there 14 that might think this is a great idea to have a free option. 15 I would tell you from experience, though, of more 16 than 20 years in this field the institutional investors who 17 time and time again have spoken out for good corporate 18 governance -- and you've heard from them here today -- they 19 are serious long-term investors. They're not playing games. 20 They're not gaming the system. So at least from that 21 component of the market I don't think you'll see that 22 happening. 23 MS. MURPHY: John, did you want to respond to the 24 earlier discussion? 25 MR. WILCOX: Actually, I just wanted to say to Alan 1 that I wish he had asked that question of the institutional 2 shareholders that we had up here in the earlier panels, 3 because I think it is a very important question, particularly 4 about the free option. 5 I know there's a lot of discussion about whether 6 the vote in the Disney situation was increased. The withhold 7 vote was larger because of the opportunity that may be 8 presented if this rule is put into effect for the annual 9 meeting next year. 10 MS. MURPHY: John, I also wanted to ask a question 11 of you about your concern that you've expressed -- if you 12 would explain what some of your concerns are -- that there 13 are little problems in the current mechanics of the proxy 14 process that if these proposals got adopted could be 15 exacerbated. Would you talk about that? 16 MR. WILCOX: Sure. Well, most of what we've been 17 hearing today is about how this rule ought to be designed and 18 what its impact will be, but I have a very simple point to 19 make, and that is you can have the best designed rule, the 20 most legal rule in place, but if it's not going to work in 21 practice it's of no use. 22 And I would urge the Commission to think about how 23 this is going to work in practice. I believe that the 24 current proxy system that we have is inadequate to handle 25 this rule. There's a lot of discussion about how much it 1 will be used, whether it will just be there as a threat or 2 whether there will actually be many proxy fights waged under 3 this rule, whether there will be a lot of campaigns because 4 of the free option. 5 I don't think you should address that question. I 6 think you have to, as an agency, think about how this rule 7 would work if it were used optimally, if it were used 8 aggressively by shareholders. I don't think it's right to 9 create a rule and then hope that it's going to slip through 10 because it isn't used very much. 11 The concerns that I have about the proxy system are 12 that it lacks transparency. There is no clear audit trail of 13 a vote, and I know we as proxy solicitors are trying to fill 14 in for many of these deficiencies, but there's only so much 15 that we are able to do. I think it is operationally quite 16 inefficient, it is certainly a very expense system as well. 17 From the viewpoint of shareholders, what they would 18 like to see is transparency. The shareholders -- in our job 19 as proxy solicitor, we are paid generally by either the 20 corporation who is soliciting votes or by a dissident 21 shareholder if we're working on a proxy fight, but we often 22 find ourselves working both for the corporation and also for 23 the institutional shareholders particularly who are concerned 24 that their voting instructions are not going to make their 25 way through the back office and into the count. 1 And the things that they would like to see, first 2 of all, are greater transparency of the system so that they 3 could be sure that their voting instructions make it into the 4 count. They would like to have an audit trail. They would 5 like to have end-to-end vote confirmation. 6 The corporations themselves suffer because they 7 cannot identify who the ultimate beneficial owners are from 8 whom they have to seek voting instructions. We have a, kind 9 of, schizophrenia in our proxy system and in our securities 10 regulations, really, in which we, on the one hand, are urging 11 corporations and really requiring corporations to disclose 12 everything to the shareholders and make everything available 13 to them and to be themselves transparent, and, on the other 14 hand, we have rules that allow these shareholders to keep 15 their identity a secret from the corporation with the result 16 that very often the corporation doesn't know who its ultimate 17 owners are. 18 And as we've seen today there are lots and lots of 19 different shareholders in corporations. You have the small 20 registered holders who are known to the company. You have 21 the big institutional shareholders. Those are mostly known 22 to the company as well through 13(f) filings. 23 But you also have hedge funds, and you have 24 arbitrageurs. You have the individuals and others who hold 25 in street name whose identity is hidden from the corporation. 1 When we go to work with a corporation on an annual meeting, 2 helping them analyze whether they can get the vote for a 3 particular proposal, part of our job at the start is to help 4 them identify who the owners are, identify what their voting 5 criteria are so that they can have a sense as to for their 6 particular audience whether what they are proposing will be 7 approved or whether it will meet resistance and needs to be 8 adjusted. 9 Well, it's very hard to do that under a system in 10 which the identity of the shareholders is not readily 11 available. So I have recommended in my Comment Letter -- 12 I've gone through a lot of the issues. 13 Another concern I have is if we have vote 14 thresholds, a 35 percent threshold or a 50 percent threshold, 15 a corporation and its legal counsel are going to want to be 16 absolutely sure that that 35 vote is authentic, and it has, 17 in fact, been achieved, particularly if it's close, or the 50 18 percent vote. We cannot do that now. 19 Only in full proxy fights do we have arrangements 20 in which through all sorts of extra efforts that are made at 21 quite an expense to the corporation and to dissident 22 shareholders. We have special inspectors of election brought 23 in. We have, of course, much more role for the staff as well 24 in a full proxy fight, and then we have the review and 25 challenge. 1 I think you could argue that you may have to 2 implement all those procedures in order to verify that these 3 trigger vote requirements have, in fact, been achieved or 4 that the shareholder candidate has, in fact, been elected. 5 We run our proxy system now with a great deal of leeway as to 6 the accuracy of the share records that are used. 7 They don't add up. If you look at a DTC listed on 8 record date, it invariably is different from the DTC position 9 on the books of the company. We live with those things. I 10 question whether we are going to be willing to live with 11 those, with this kind of loose system if a seat or two on the 12 board is riding on it or if the availability of these kinds 13 of rights is riding on the vote. 14 We're going to want the vote to be much more 15 accurate. We are able to be accurate in these back office 16 arrangements when we're dealing with corporate actions -- 17 there's extreme accuracy there -- or any sort of financial 18 issue, money transfers, and so forth, but we have not that 19 degree of accuracy with respect to votes. 20 I think that tells us something about our ability 21 to do this. So I've made some suggestions with respect to 22 direct access, getting rid of the nobo ovo rule which I don't 23 think we need anymore, allowing companies to have greater 24 access to their shareholders. 25 I think you should look very closely at these 1 suggestions, take this opportunity to -- which you're rule 2 really opens up to rethink our proxy operations and to do an 3 overhaul. And I'd recommend that you read the Minors' report 4 which Susan Wolf mentioned that was published earlier this 5 year in the UK. Paul Minors came up and did a report based 6 on the work of the shareholder voting working group in the 7 UK. 8 Much of what is said there is very relevant to what 9 we are talking about here, what I'm talking about in terms of 10 the operations. I think we could do a much better job and 11 have a much more transparent proxy system. 12 MS. MURPHY: Rich. 13 MR. DALY: Thank you I'll be the last of the day to 14 thank the Commission for the invitation. My comment on 15 behalf of ADP are that from a processing perspective and 16 purely from the point of view of the ability to do it, to 17 implement the new rules, as well as to do it accurately. 18 What I'd like to do is first address John's concern 19 about the inadequacy of the current process and then address 20 the ability to implement the new rules. Just a very quick 21 perspective. At ADP, we represent -- we act as agent for 22 about 800 brokers and banks. And using a round number, we 23 process about 75 percent of all outstanding shares in the 24 14,000 meetings that are processed each year. 25 Regarding the accuracy, I actually think the 1 Commission's job here has got a very, very good start. At 2 the encouragement of the Commission in 2001 under then the 3 director of Corp Fin, David Martin, he encouraged a private 4 initiative that would look at the adequacy of the current 5 system. 6 And a number of issues that had been raised over 7 the years by one constituency over another were addressed, 8 but this time uniquely they were addressed by having the 9 constituencies in the room at the same time. So there were 10 eight or nine meetings over a period of eleven months. 11 Rich Copus acted as facilitator of this committee. 12 Steve Norman acted as chair. Steve Norman from American 13 Express acted as share of this committee. I included in my 14 comments, which are included in the package, the findings of 15 this committee, but I do want to highlight one thing here. 16 In the summary of the findings, which go on for 17 several pages, the first finding was that institutional 18 investors require that the highest level of service be 19 maintained and that technological investments be made to 20 ensure the accuracy and reliability of the proxy systems. 21 Institutions had significant concerns around the 22 proposed idea to allow issuers to control the beneficial 23 process. It was indeed David Smith on behalf of the American 24 Society of Corporate Secretaries I believe along with Brian 25 Borders at the time representing the Association of Publicly 1 Traded Company proposed the direct access capabilities. 2 David withdrew that proposal based on the 3 institutional response about concerns for the process at that 4 point in time. So indeed, although I recognize no system as 5 perfect, it was indeed this committee that represented that 6 the street side of this process was improving from all 7 aspects. They used the word "near flawless," and they used 8 the word the efficiencies that were being driven by the 9 technology on that side were exceptional and far more 10 efficient than that of the registered side. 11 Indeed, there's a lot more that take place on the 12 street side because you have a number of variant investors 13 that require special handling, whether it be institutions, 14 whether it be trustee laws in various states, whether it be 15 special handle for various beneficial owners that require 16 different needs to participate efficiently, but particularly 17 institutional investors given the volume they have need a 18 sufficient technological solution. So again, I'll leave that 19 to the document. 20 I'd like to now move to the comment about the 21 ability to implement these rules. Right now our system has 22 just over 1,750 programs and just over 2 million lines of 23 code to process the current system. We would need to make 24 changes to 29 percent of the mainframe programs and 40 25 percent of the internet related activities. 1 We estimate that that would be just over 21,000 man 2 hours, and it would require just over 60 of the 150 3 professionals, systems professionals we have that are 4 employed to maintain and enhance the proxy processing system. 5 We believe that would be a six- to seven-month effort. 6 And therefore, we would hope that if this is to be 7 implemented for the 2005 proxy season that we would have 8 clear direction by June 1 of this year. I am highly 9 confident that we have the ability to make the changes given 10 the time and direction to have the system continue to act in 11 an accurate and very, very efficient manner. 12 But we would need clearer direction on things like 13 the card itself -- 14 MS. MURPHY: There was some direction in the 15 proposing release. Specifically, we said in the card that 16 the candidates would have to be presented in an impartial 17 manner and that companies no longer would be able to include 18 the check box where shareholders just vote for all management 19 candidates as a group. 20 But you would like additional guidance about actual 21 presentation of the card? 22 MR. DALY: Well, the current procedure is that we 23 do the best we can with our generic card to mirror the 24 standard issuer's card. If we were implementing live with 25 the issuer, what we would do is we would form our own focus 1 group source during committee to identify the best way to 2 reflect the card as accurately as possible. 3 Given that there is a possibility that until a rule 4 is issued in its finality that there will be changes we've 5 been somewhat hesitant to begin programming only to then 6 begin the programming efforts again. So again, ideally, in 7 our definition of a perfect world, six to seven months prior 8 to the enactment of the requirement of the rule. 9 Now, we don't need -- we can right now identify any 10 companies that fit into any threshold, whether it be 30 11 percent, 35 percent, et cetera. When we actually get into 12 the processing, the next round or year two of that activity 13 is what we need to make the programming and systems changes 14 for. 15 Betsy, if you'd like, the last thing I could 16 address is the comments made regarding over-voting. 17 MS. MURPHY: Sure. 18 MR. DALY: Okay. I've been involved with this 19 industry now for 25 years. When I first got involved with 20 the industry, over-voting had already been here. It's 21 something that can be generated through stock loan 22 activities, through other reconciliation activities, et 23 cetera. 24 From my point of view, the handling of this has 25 always been relatively clear in that for the broker vote the 1 issuer or tabulator in question should reduce the "for" vote, 2 and if it's not involving the discretionary vote, then they 3 should come back to the process or to the broker in question, 4 nominee in question, and ask for a reconciliation, which we 5 will always provide in conjunction with our client. 6 And the bank vote, if for some reason the bank vote 7 is over the ability to cast that number of shares, we would 8 expect people to come back regularly and ask for a 9 reconciliation. 10 Now, this has just become a new topic. Now, again, 11 it may be because of increased short selling, or it may be 12 for other reasons. We are now part of an SIA committee, 13 Securities Industry Association committee, which will likely 14 be issuing a white paper to create more clarity around this. 15 Regardless, even though I think the industry 16 practice has been clear certainly for the 25 years I've been 17 involved, going forward we will issue with you are vote clear 18 directions in terms of if there is an over-vote, how that 19 over-vote is to be treated so that there will be no 20 possibility that anybody can mistakenly are otherwise post a 21 higher vote for management than is possible or intended. 22 MR. BELLER: Just for the Commission's benefit, an 23 over-vote is when the same share gets voted twice, in effect, 24 as a result, for example, of a share-lending transaction 25 where both the beneficial owner and the borrower send in 1 proxy. There are lots of other permutations, but that's the 2 concept. 3 MR. WILCOX: If I could just make a comment for the 4 record, I don't want my comments about the proxy system to be 5 interpreted as in any way expressing a dissatisfaction with 6 the role of ADP. They have, in fact, been leaders in the use 7 of electronic technology and bringing it into the system. 8 The issues that I am addressing are larger issues 9 which really are issues for the Commission which have to do 10 with the whole relationship between shareholders and 11 corporations, the way that they communicate, whether or not 12 they be known to each other, how quickly, for example, 13(f) 13 information ought to be filed. Is it still suitable to wait 14 45 days or two months plus 45 days after the end of the 15 calendar quarter to make that information available? 16 These are larger issues. I don't want this to look 17 at if it's something as wrong with the way ADP has done its 18 job because, in fact, as I've said, they have led in the 19 introduction of technology into this process, and we would 20 hardly be able to do it at all without them. 21 MS. MURPHY: Thanks. Jamie. 22 MR. HEARD: If the Commission goes forward with 23 this rule and clearly votes on directors are no longer 24 routine votes -- we don't think they're routine votes today. 25 We don't treat them as such. We treat them as important 1 votes. We look very carefully at the qualifications of 2 directors, how many boards they serve on. Do they take 3 consulting fees from the company? There are a variety of 4 other things that we look at. 5 And in a case like Disney, we look at the 6 performance of the board overall. So we already think it's a 7 pretty important vote, but if you're going to go forward with 8 this rule, clearly it's an important vote. I believe you've 9 got to do something simultaneously about broker voting. 10 You cannot permit brokers to continue to vote on 11 behalf of their clients where they don't have an instruction 12 where anywhere from 10 to 20 percent of the vote is going to 13 be right down the line for management's nominees. I think if 14 you want brokers to vote and they need to vote for quorum 15 purposes, that's fine, but I don't believe they should be 16 allowed to vote for anything else and certainly not for 17 directors. 18 MS. MURPHY: John, I think it's about time to wrap 19 up. 20 MR. WILCOX: Right. I was just going to say on the 21 broker vote my own view is that the NYSE could not find a way 22 to continue to allow discretionary broker voting if you had 23 one of these director campaigns, and, if that happens, I 24 think that the Commission needs to think about the 25 educational responsibility and particularly if this leads 1 ultimately to the end of discretionary broker voting all 2 together, there will be a need to educate those shareholders 3 who have been living under that rule. 4 These are the street name customers who have for 5 years actually even misinterpreted the way the rule currently 6 operates. I have spoken many times with street name 7 customers who think that their shares are always and 8 automatically voted on their behalf by their broker. They 9 just don't understand how the rule operates. 10 And if the rule changes, I think there's a need for 11 a real educational system or a process to go through to 12 inform shareholders so that they are not simply 13 disenfranchised. 14 MS. MURPHY: Thanks, John. I think it's time to 15 wrap up. Alan, do you want to make some closing remarks? 16 MR. BELLER: Only about one or two sentences worth. 17 I think first I'd like to ask the chairman or the 18 Commissioners whether they had anything to say in closing. 19 COMMISSIONER GOLDSCHMID: Thank you. 20 MS. MURPHY: Absolutely. This was very valuable. 21 CHAIRMAN DONALDSON: The hour is late, but I want 22 to say once again how much we appreciate you all coming here 23 and giving us the benefit of your thoughts. I think this has 24 been a very interesting day and very, very helpful to the 25 Commission. And I thank you. 1 MR. BELLER: And I thank this panel as I change all 2 of the preceding panels for giving of their time and effort. 3 Everybody who has been here today is extraordinarily busy, 4 and we really appreciate it. 5 The last official thing I want to say is that we 6 are reopening the comment period for comments related to the 7 subjects discussed today and I suppose any other subjects 8 related to the proposed rule starting today until March 31st. 9 And with that I declare the roundtable closed and over. 10 Thank you very much. 11 (Whereupon, the roundtable was concluded.) 12 * * * * * 13 14 15 16 17 18 19 20 21 22 23 24 25