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