[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                      SEC PROXY ACCESS PROPOSALS:

                       IMPLICATIONS FOR INVESTORS

=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 27, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-63



                     U.S. GOVERNMENT PRINTING OFFICE

39-542 PDF                 WASHINGTON DC:  2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001



                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 27, 2007...........................................     1
Appendix:
    September 27, 2007...........................................    33

                               WITNESSES
                      Thursday, September 27, 2007

Castellani, John J., President, Business Roundtable..............    10
Kirshbaum, Donald A., Principal Investment Officer, Office of the 
  Treasurer, State of Connecticut................................     6
Smith, Timothy, Senior Vice President-Director of Social 
  Investing, Walden Asset Management.............................    12
Stevens, Paul Schott, President and Chief Executive Officer, 
  Investment Company Institute...................................    13
Yerger, Ann L., Executive Director, Council of Institutional 
  Investors......................................................     8

                                APPENDIX

Prepared statements:
    Maloney, Hon. Carolyn B......................................    34
    Waters, Hon. Maxine..........................................    36
    Castellani, John J...........................................    39
    Kirshbaum, Donald A..........................................    44
    Smith, Timothy...............................................    59
    Stevens, Paul Schott.........................................    78
    Yerger, Ann L................................................    94

              Additional Material Submitted for the Record

Neugebauer, Hon. Randy:
    Letter from the Business Roundtable to the SEC...............   179
    Statement of the U.S. Chamber of Commerce....................   217


                      SEC PROXY ACCESS PROPOSALS:



                       IMPLICATIONS FOR INVESTORS

                              ----------                              


                      Thursday, September 27, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Members present: Representatives Frank, Kanjorski, Maloney, 
Moore of Kansas, McCarthy, Baca, Scott, Cleaver, Davis of 
Tennessee, Klein; Pryce, Feeney, Hensarling, Neugebauer, and 
Campbell.
    The Chairman. This hearing of the Committee on Financial 
Services will come to order. This is a hearing on the question 
of proxy access, a matter of some interest to various members 
of the committee, on both sides of the aisle.
    The gentleman from California, Mr. Campbell, is someone who 
has raised this consistently, as have others. We touched on 
this in a couple of earlier hearings. It became relevant when 
we talked about executive compensation, because you can talk 
about shareholder involvement either issue-by-issue or in a 
more generic way.
    We are appreciative of the fact that the SEC has now 
promulgated some proposals. They are--I guess I've heard, as a 
lawyer, of pleading in the alternative; regulating in the 
alternative is a new concept to me, but as I have chaired this 
committee, I have learned some things.
    And it is an opportunity to have some input. It's a matter 
on which this committee has a great deal of interest, and we 
have a panel that I think is fairly representative of the range 
of views, so we look forward to the hearing. And I'm going to 
get right to that.
    I'll now turn--let me just announce that the ranking member 
was called back home to Alabama by some very important family 
business involving both his own family, and more sadly, the 
family of someone very close to him. He is going to be 
returning today, but the vice chair of the committee, Mr. 
Neugebauer, will be here in his absence, and I will now 
recognize the gentleman from Texas who has, I believe, a 
unanimous consent request to make.
    Mr. Neugebauer. That's correct. Mr. Chairman, I have a 
unanimous consent request that--I have some recorded testimony 
by the U.S. Chamber of Commerce and a letter from the Business 
Roundtable to the Securities and Exchange Commission on 
shareholder proposals relating to the election of directors, 
and would ask unanimous consent that--
    The Chairman. If there is no objection, those will be 
entered into the record. Let me, at this point, give general 
leave, if there are other statements that members would like--
from any interested parties--to enter into the record, without 
objection, that will be granted.
    And the gentleman is recognized for his statement.
    Mr. Neugebauer. Well, thank you, Mr. Chairman. I am 
actually reading this on behalf of Deborah Pryce who could not 
be with us again today.
    ``Thank you, Chairman Frank, for calling this morning's 
hearing to review the Securities and Exchange Commission's two 
very different proposals to amend the SEC's rules governing 
shareholder proxy access.
    ``This hearing may be a little premature, however. With the 
comment period for both proposals ending in 4 days, the 
committee should allow the SEC time to review the comment 
letters and reach a thoughtful decision. I hope that the 
committee will have an opportunity to hear from Chairman Cox 
once the SEC reaches its decision.
    ``Earlier this year the committee considered executive 
compensation legislation, as the chairman just mentioned, with 
the premise that it would increase shareholder democracy. It is 
unclear what is undemocratic about the current structure of the 
proxy voting, though. Every publicly traded company has a 
nominating process that allows shareholders to recommend 
qualified candidates to serve on the board.
    ``The real question is whether including the outside 
nominees in the country's own proxy statement rather than in 
separate proxy statements somehow improves the process.
    ``There are real questions about who pays for adding more 
candidates to the proxy statement and whether it actually 
weakens the quality of disclosure available to shareholders. 
Since Sarbanes-Oxley, boards of directors are smaller and far 
more responsive to shareholders. Their independence from 
management is also increasing and CEO tenure is decreasing as 
boards are no longer beholden to management and more companies 
are adopting majority voting to elect directors.
    ``All of these governing changes are welcome and market 
driven, which is always a better solution. Successful companies 
are those who value and invite shareholder input and are able 
to balance companies' competing constituencies.
    ``Open communications between boards and shareholders on a 
wide variety of corporate matters makes companies more 
responsive to all shareholders and not simply those who speak 
with the loudest voice. Shareholders already have the power to 
change the board. Large institutions like union pension funds 
and foundations mutual funds can easily afford to challenge the 
nominees put forward by the company.
    ``What special interest shareholders such as labor unions 
really want to do is circumvent the company's nominating 
process and have direct access to the proxy statement. If this 
happens, the proxy statement will look like a preliminary 
parliamentary election ballot with potentially hundreds of 
names indistinguishable from one another. This will only cause 
confusion.
    ``The board's role will diminish and along with it good 
governments. It is not the best way to run a company, increase 
shareholder value or add jobs. Allowing the politicization of 
the boardroom could very easily lead to concessions from boards 
that are not supported by a majority of the shareholders or as 
workers.
    ``In closing, I would like to thank the witnesses for their 
testimony and I yield the balance of my time.''
    The Chairman. Are there any other requests for opening 
statements?
    The gentleman from California.
    Mr. Campbell. Thank you, Mr. Chairman.
    What we're talking about here today is that we have all 
seen over time that sometimes companies have been operated for 
the benefit of the executives rather than for the benefit of 
the shareholders. We have also seen companies that are operated 
poorly, it can happen, not getting good results; and in some 
cases where perhaps the company believes they're operating well 
but the shareholders believe they're not achieving the 
shareholders' expectations based on the industry and the market 
at the time.
    So what can shareholders do? What are their remedies when 
they see one of these things happen where a company is not 
operated in what they believe is their best financial interest?
    There was a proposal earlier this year which passed this 
committee and this House which effectively was direct democracy 
within a corporation, that allowed shareholders to vote 
specifically on one specific thing, which was executive 
compensation. Now I happen to think that's a very dangerous 
road to go down.
    If we have shareholders approve executive compensation do 
we have them approve union contracts, do we have them approve 
marketing budgets, do we have them approve every acquisition, 
do we have them approve other executives? You know, what do we 
have them approve? The correct way for shareholders to express 
their disapproval with a company is through the board rather 
than through direct democracy.
    But others would say that they have another remedy, that 
shareholders have another remedy, which is to sell the stock. 
And yes, that remedy, in fact, does exist. But that remedy has 
severe limitations. Some stockholders are semipermanent holders 
in companies. We have those that are large pension funds or 
large investment organizations or large mutual funds. There are 
certain companies in which they are just generally not going to 
disinvest.
    Or if someone is trying to replicate or hold either through 
a SPDR or directly the Dow industrials or the Fortune 100 or 
the S&P 500 then they also, unless they are removed from that 
list, have essentially a semi-permanent investment in that 
company. And furthermore, even individual investors, because of 
the Capital Gains tax, if they have a gain in a stock and they 
sell it, or a dollar, they are unlikely to be reinvesting a 
dollar. They may be reinvesting 99 cents or, in my State, if 
they've held the stock for a long time, they could be 
reinvesting as little as 75 cents.
    So to say the only remedy I have for a company that's not 
being run in the way I think it should be run is to give up 5 
or 10 or 15 or 25 percent of my investment to reinvest in 
another company is, at best, a very imperfect solution. No, the 
correct solution or the best solution, I think, for 
shareholders who are displeased with what's going on is to 
express that displeasure by changing the board.
    So what do we have now? Now we have a system under which 
the alternatives for board members are nominated only by the 
board. Now if you want to change something that's going on in a 
company you don't ask the people who you want to change to 
offer up that change. You generally would like to have some 
other alternative to that.
    So as you can probably tell by this I am someone who 
believes that having shareholders have the opportunity to 
nominate alternative directors to a board is something that 
shareholders in public companies ought to have the right to do. 
Now private companies are an entirely different matter, but 
when one goes public, and therefore submits themselves to the 
regulation of the SEC amongst other things, it seems that 
giving shareholders that opportunity is something that should 
be a part of being a public company.
    There are a few questions that I have that I hope that even 
though I obviously believe that having shareholders have 
opportunities to nominate directors is something which--I 
believe there are several questions I have, and I hope to hear 
from the panel today on some of these things.
    First of all, you don't want, as was mentioned in the 
previous opening statement, a small percentage of the 
shareholders, whether it is 1 percent or 2 percent or 5 
percent, to be able to dictate the operations of that company 
if the other 95 percent don't want that to happen.
    That is no better than executives running a company for 
their own behalf and ignoring the interests of the 
shareholders. So I suggest that there be, in conjunction with 
proxy access, a majority vote requirement so that for anybody 
to be seated on a board you have to have over 50 percent of 
those voting shareholders vote for it or they don't get on the 
board. If there are other remedies for that, I would appreciate 
hearing them.
    And what is the correct percentage? You certainly don't 
want someone with one share or 100 shares or whatever to be 
able to make a nomination to the board. That would create the 
kind of chaos that was discussed in the previous opening 
statement, but what is the correct percentage?
    I know the SEC in one of their proposals has proffered up 5 
percent. Is that right? Should it be less? Should it be more?
    Should there be a difference in the percentage required for 
the market capitalization of a company? Obviously someone of 
any institutional holder or any other holder is considerably 
less likely to hold a large percentage of Google or General 
Electric or Exxon-Mobil than they are of some hundred million 
dollar small cap company where you could easily have 
shareholders, institutional or otherwise, owning 10 percent or 
20 percent or so forth. And so should there be a different 
percentage there?
    And lastly, what disclosures and what procedures would be 
correct to make sure that this is done or can be done in the 
proper manner?
    I look forward to hearing from the panel on those issues, 
and also your opinions generally on the issue, and I yield back 
the balance of my time.
    The Chairman. Are there any further opening statements? If 
not, we will--oh, the gentleman from Texas.
    Mr. Hensarling. Thank you, Mr. Chairman.
    As we approach this very important subject, I hope that we 
will approach it with a certain amount of caution. I once again 
hope that as the SEC looks at this issue, as do we, that first 
we do no harm.
    I certainly believe that the corporate structure and our 
corporate governance laws have a lot to do with the creation of 
jobs, hope, wealth, and opportunity in America and the type of 
very systemic change that we are looking at with this 
particular issue. I'm concerned about the adverse consequences 
it might have on the wealth and job creation that we see coming 
out of our corporate structure in America today.
    I look at other countries, particularly in the European 
Union, that appear to have a system of proxy voting that is 
perhaps being contemplated today. I don't think I see as much 
robust wealth creation as what I see in America, and I do think 
this is an issue that goes to the heart and the ability of 
corporations to remain profitable. I also note that this Nation 
has a long history of allowing our State law to govern the 
corporation's ability in many respects to manage its own 
affairs.
    And so I think that although the issue is meritorious, it's 
one that we should be very, very careful about how we proceed. 
It also may be somewhat premature as the SEC has yet to take 
action. As I listen carefully to my good friend from California 
there is also another option for people who are unhappy with 
corporate governance. They don't only have the option to sell, 
they also have the option to buy, and they can always buy more 
stock and gain even a greater influence in the corporate 
affairs of that particular corporation.
    With that, Mr. Chairman, I look forward to hearing the 
testimony of our panelists, and I yield back.
    Mrs. Maloney. Mr. Chairman.
    The Chairman. Yes, the gentlewoman from New York.
    Mrs. Maloney. I, first of all, would like to thank you for 
following up on the June meeting we had with all five SEC 
Commissioners. There was a general agreement for a follow-up 
hearing on the issue of the proxy access; it is tremendously 
important.
    Since our hearing, the SEC has published for comment two 
proposals to amend its rules and the comment period on both of 
these proposals will end on October 2nd. I believe many Members 
of Congress and the public will be commenting on it and I'd 
just like to counter some of the statements saying that this is 
premature.
    I think it's very important that we hear the perspectives 
of the witnesses on these proposals prior to the end of the 
comment period and have their judgment as we formulate possibly 
our own comments that we may want to put into the comment 
period.
    In any case I'm interested in what they have to say. I have 
an opening statement, but in the interest of time I'm going to 
put it in the record. Thank you.
    The Chairman. We will now begin with the testimony and let 
me start just on my left with Donald Kirshbaum, who is the 
principal investment officer in the Office of the Treasurer of 
the State of Connecticut.

STATEMENT OF DONALD A. KIRSHBAUM, PRINCIPAL INVESTMENT OFFICER, 
         OFFICE OF THE TREASURER, STATE OF CONNECTICUT

    Mr. Kirshbaum. Thank you very much, Chairman Frank, and 
members of the committee. I'm Donald Kirshbaum, and as said, I 
am an investment officer in the Office of the Connecticut State 
Treasurer, Denise Nappier. Treasurer Nappier is the principal 
fiduciary of our $26 billion State pension fund, which manages 
the retirement assets of our 160,000 pension beneficiaries.
    I have a brief oral statement here and I have submitted a 
longer statement, which I--
    The Chairman. Without objection, all of the statements and 
supporting documents of all of the witnesses will be made part 
of the record.
    Mr. Kirshbaum. Great, thank you.
    Since taking office in 1999, Treasurer Nappier has been 
actively involved in corporate governance. She particularly 
believes that shareholder activism is a plan asset and uses 
communication with companies in which we invest, including 
proxy voting and shareholder resolutions, as a mechanism to 
protect and enhance the long-term value of pension fund assets.
    And again, pension funds by their nature are long-term 
investors, so we're really talking about the long-term issue 
here. Today's hearing addresses the two pending rules at the 
SEC. Our office has extensive experience working with and 
within these rules, and I'm pleased to share our experience 
with you today.
    There are essentially three issues in these rules. Proxy 
access we have talked about, and there also are some issues 
regarding advisory shareholder resolutions and electronic 
forums. I'll spend most of my time on the first and then I'll 
briefly touch on the other two.
    Now we've talked about shareholder access to the proxy, so 
I really won't go into details of what that is, but the issue 
is for us that the board of directors is elected by the 
shareholders and oversee the management of the corporation on 
behalf of the shareholders who are the owners.
    Most board members and boards perform their job very well. 
However when shareholders believe the boards are not acting in 
the best interests of the shareholders there are some things we 
can do, but nominating directors on a company's ballot is not 
one of them.
    The existing mechanism for replacing directors is to run a 
proxy contest on a challenge slate with a separate proxy card. 
So there is a mechanism right now where shareholders can 
nominate directors, but it is onerous and expensive.
    It's a mechanism geared more toward corporate takeovers 
than to improving the performance of the existing board. SEC 
Chairman Cox agrees that a new mechanism is needed and has put 
forward the access to the proxy proposals. We support the 
concept here and also the--we continue to work with the SEC to 
come up with a rule that is actually workable for shareholders, 
and we'll go into some details of that in a minute.
    Last year the second circuit court in AFSCME v. AIG ruled 
that the SEC had been improperly allowing companies to exclude 
access to the proxy resolutions. And we joined State pension 
funds in North Carolina and New York and the AFSCME employees 
pension fund filing such a resolution against Hewlett Packard.
    The resolution received broad shareholder support; 43 
percent of shareholders supported this resolution. This is not 
a special interest or fringe--it's not something that only 
special interests are interested in--that 43 percent represents 
the core investors.
    There were resolutions filed at two other companies which 
received 45 percent in a majority vote, so this is mainstream 
investors who are interested in access to the proxy. The large 
vote led us to continuing discussions with the company, which 
we are hoping will result in a productive conclusion.
    Now one of the SEC rules, note it's a short rule, would 
close this avenue to shareholders to file access to the proxy 
resolutions. We believe that the adoption of this rule is not 
necessary or appropriate and we would oppose the implementation 
of this. With respect to the directors and goals on behalf of 
their owners, when it's not happening this mechanism of access 
to the proxy is needed.
    There are two issues that have been highlighted in the SEC 
rule. One is the 5 percent rule and the other is the disclosure 
issues. As a pension fund investing for the employees, we're a 
long-term investor. Also our asset allocation is spread over a 
number of asset classes, and with respect to investments in 
public equity we are very diversified and have a significant 
portion of assets in core index funds.
    This means that not only do we have long-term investments 
in the broad economy but we do not build up a large holding in 
any one specific company. Most public pension funds also have 
the same type of investment strategy, and it's really mandated 
by the nature of what a public pension fund is.
    Because of that, the 5 percent ownership threshold really 
does not work for long-term investors. The fact that--for 
example, we hold over 3 million shares of Exxon-Mobil worth 
over $330 million. However, 5 percent of Exxon-Mobil's 
outstanding stock right now is worth $25 billion.
    The 5 percent--we would have to invest our entire pension 
fund in Exxon-Mobil to reach the 5 percent level. As it is, we 
hold--even this large holding is only .07 of 1 percent. So we 
need a mechanism in terms of the 5 percent rule that really is 
workable, and that is one that we would hope that we can 
continue to work with the SEC and others on.
    The disclosure requirements in this rule also go far beyond 
anything that shareholders would find useful in voting proxy 
access proposal. As with the ownership threshold, it's not 
clear that any additional disclosure is warranted, simply 
because the proposal concerns proxy access.
    The proposal itself would not change the board's 
composition, which would only occur if the resolution were 
adopted by a majority of shareholders and then the ensuing year 
there would be the opportunity to nominate candidates for the 
board.
    So these disclosures are really overly onerous and really--
we don't see the benefit to the level of disclosure in the 
rule, and again, would be happy to work with others to try to 
come up with something that would be appropriate.
    Let me just quickly say that there are two other issues. 
One is the advisory shareholder resolutions. The SEC rule 
requests comments on possible changes to the advisory 
resolution process currently available under rule 14a-8. 
Without going into detail, Treasurer Nappier opposes any 
limitation to current shareholder rights to submit nonbinding 
proposals.
    This is--for 65 years these proposals have promoted 
effective communication between shareholders, management, and 
board members and I know that others will be testifying on 
this, so I will let my comments for the record talk about the 
detail on that.
    The other issue, quickly, is the electronic forums which 
are in the proposal. With regard to electronic forums we can 
support them as a potential enhancement to the existing avenues 
of communication. However were these electronic forums in any 
way to substitute for any shareholder rights currently in 
place, well, we would oppose those.
    In conclusion, on behalf of Treasurer Nappier, I would like 
to thank you for this opportunity to share our views with the 
committee on these important issues. I would be happy to answer 
questions and be of further assistance to the committee.
    [The prepared statement of Mr. Kirshbaum can be found on 
page 44 of the appendix.]
    The Chairman. Thank you.
    Next we'll hear from Ms. Ann Yerger, who is the executive 
director of the Council of Institutional Investors.

  STATEMENT OF ANN L. YERGER, EXECUTIVE DIRECTOR, COUNCIL OF 
                    INSTITUTIONAL INVESTORS

    Ms. Yerger. Good morning. Thank you for the opportunity to 
be here on behalf of the Council.
    By way of introduction, the Council of Institutional 
Investors is an association of more than 130 public, union, and 
corporate employee benefit plans with more than $3 trillion in 
assets. They are responsible for safeguarding the assets used 
to fund retirement benefits of millions of individuals 
throughout the United States.
    They have a very significant commitment to the U.S. capital 
markets with the average fund investing about 75 percent of its 
portfolio in the stocks and bonds of U.S. public companies, and 
they are long-term investors due to their heavy commitment to 
passive investment strategies.
    As a result, U.S. corporate governance issues are of great 
interest to members of the Council. The ability to file 
shareowner proposals is particularly important to Council 
members because they are unable to exercise the ``Wall Street 
walk'' and sell their shares when they are dissatisfied.
    Shareowner proposals provide an opportunity to present 
their concerns to management and directors, to communicate with 
other investors, to encourage reforms, and to improve corporate 
performance. And over the past several decades, these 
resolutions have motivated profound improvements to boardroom 
performance in particular and the U.S. governance model in 
general.
    Under debate today at the SEC is whether the shareowner 
proposal rule in general should be changed and in particular 
whether shareowners should have the right to file resolutions 
suggesting or mandating processes to include shareowner-
suggested director candidates on company proxy cards.
    I'm going to tackle the second issue first. Because 
directors are the cornerstone of our U.S. corporate governance 
model, and the primary role of share owners is limited to 
electing and removing directors, the Council believes owners 
should have the ability to file access resolutions and the 
marketplace at large should have the opportunity to vote on 
whether those resolutions are in the best interests of the 
companies and the owners.
    The legality of any approved mechanisms ultimately and 
appropriately should be determined by State courts and not 
preempted by a new Federal mandate.
    The Council applauds the SEC for again taking up the very 
important issue of proxy access. We appreciate the many hours 
the SEC staff and the Commission have devoted to developing the 
two most recent proposals. Unfortunately, the Council strongly 
opposes both proposals as currently drafted.
    The Commission's shorter proposal would obliterate the 
current rights of shareowners to submit binding or nonbinding 
access resolutions. The only circumstance in which the Council 
could possibly support the adoption of this flawed proposal 
would be if it was accompanied by the adoption of another rule 
that provided an alternative, meaningful approach to access.
    Unfortunately this hasn't happened. The Commission's longer 
proposal imposes such onerous requirements on proponents of 
access resolutions that the proposal is empty and unworkable. 
More specifically, the proposed 5 percent threshold for 
submitting a proposed bylaw amendment is too high a barrier for 
owners who routinely file resolutions.
    Even the 10 largest public pension funds combined would be 
unlikely to meet this threshold at a public company of any 
size, be it a large, mid-size, or small cap company. In 
addition, the proposed disclosures are unnecessary and overly 
burdensome, and for some inexplicable reason are far more 
expensive than currently required, even for shareowners 
planning a hostile takeover of a public company.
    Also inexplicable are the Commission's reasons for imposing 
such excessive requirements on proposals that ultimately would 
have to face the test of the marketplace and be approved by a 
majority or even in some cases the super majority of the 
outstanding shares.
    The Council believes the end result of these onerous 
requirements would be that few if any shareowners would ever 
again have the ability to exercise what we believe is a 
fundamental right, the right to sponsor resolutions addressing 
the processes involving the election of directors.
    Speaking of fundamental rights, the Council strongly 
opposes any shift from the current SEC rules governing 
shareowner proposals in general to a State-by-State, company-
by-company model. We believe the uniformity and consistency 
provided by the current Federal oversight model is in the best 
interests not only of Council members but of other owners, 
companies, and the capital markets at large.
    Notwithstanding our very strong opposition to both of the 
SEC's proposals we stand ready to work cooperatively with the 
Commission, this committee, my fellow panelists, and other 
interested parties to develop meaningful proxy access reforms 
that best serve the needs of investors in the capital markets.
    Thank you.
    [The prepared statement of Ms. Yerger can be found on page 
94 of the appendix.]
    The Chairman. Thank you.
    Mr. John Castellani is next, the president of the Business 
Roundtable.

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE

    Mr. Castellani. Mr. Chairman, and members of the committee, 
thank you for inviting me here to talk about this important 
topic.
    Business Roundtable has been a strong supporter of 
corporate governance reforms. We supported Sarbanes-Oxley. We 
supported the enhanced listing standards of the exchange, 
additional disclosures on executive compensation, and majority 
voting of directors.
    And as these reforms demonstrate, we are committed to the 
highest standards of transparency and governance. Similarly we 
remain committed to promoting the accountability and 
responsiveness of boards, enhancing the transparency so 
investors could make informed decisions, facilitating 
communications between companies and shareholders, and creating 
certainty and predictability for companies and their 
shareholders.
    As you know, the issue of proxy access has been debated 
over the years and previous Commissions have concluded that 
changing the current system is inconsistent with State law and 
unworkable from a practical standpoint. Currently the SEC is 
once again receiving comments about the two proposed rules 
whose issuance followed a lengthy process of testimony by 
experts from the legal, academic, corporate, and shareholder 
communities.
    The heart of these issues involved how corporate director 
elections are governed and how a company proxy is used. 
Director elections are governed by State law where the company 
is incorporated and the proxy is a management mechanism for 
shareholders to vote when not attending shareholder meetings.
    Shareholders do have the right to nominate directors and 
run campaigns but not on the company proxy. The SEC has 
consistently recognized this and excluded director election 
proposals from the company proxy.
    Proponents of proxy access want to turn the system on its 
head by creating a Federal rule which allows virtually any 
board candidate to be placed directly on the proxy. As you 
might expect, we're concerned with this for several reasons.
    First and foremost, it represents a fundamental change to 
the successful corporate model that has produced enormous 
returns for all shareholders. Nominating committees of boards 
exist for a specific reason, to identify qualified candidates 
with expertise in judgment who represent all shareholders, not 
one particular group.
    We believe the proxy access proposal will result in special 
interest board candidates and will politicize the director 
election process. In this day and age of short-term holdings, 
hedge funds and foreign government investment in U.S. 
corporations, the last thing shareholders need are fractured 
boards representing divergent constituencies or single-issue 
board members.
    Further, we believe such a process will discourage 
qualified independent directors from serving. And finally, as 
some proponents have suggested, we do not want the cost of the 
special interest nominees to shift to companies and ultimately 
to that company's shareholders.
    Proponents of proxy access often cite the need for 
additional reforms in the boardroom. The fact is, however, that 
our companies have dramatically changed during the past 5 
years. Indeed, we have seen more governance changes in the past 
5 years than we have seen in the previous 50 years.
    Each year the Business Roundtable surveys its own members 
on governance practices, and the results this year speak for 
themselves: 90 percent of our boards are made up of at least 80 
percent independent directors; 71 percent of our boards meet in 
executive sessions at every meeting; and 100 percent meet at 
least once a year.
    Seventy-four percent of our CEOs serve on no more than one 
board other than their own, and 82 percent of our boards have 
adopted majority voting for directors, coming up from zero in 
just 2 years. Indeed that has been manifested, as was said 
earlier, in the fact that the average tenure of a chief 
executive officer is now down to 4 years, and 10 years ago, it 
was 8 years.
    These numbers demonstrate that company boards and 
executives have transformed themselves and are demanding 
greater accountability and exercising more oversight as they 
should. Shareholders now have a true ``yes'' or ``no'' vote on 
board candidates and these votes provide a meaningful voice in 
the director election process.
    And now there is enhanced dialogue. Board members regularly 
meet with shareholders, answering questions and discussing 
everything from compensation to mergers to capital 
expenditures.
    Companies desire to attract and retain shareholders because 
it is in their best interests to do so. In light of these 
reforms, the challenge now is to ensure that boards can attract 
and retain qualified directors and leaders who are able to 
innovate, increase revenues and profits, and ultimately 
increase shareholder value.
    Given the record of reforms and our belief that politics 
and narrow agendas have no place in the boardroom, we believe 
that the SEC is correct in reaffirming its exclusion of 
director election proposals from the proxy. Simply put, proxy 
access is a bad idea whose time has passed.
    Preserving the current balance between shareholders, 
boards, and management will allow corporate directors to 
continue on focused on what they are there to do, provide 
judgment and oversight and help create long-term value for all 
shareholders.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Castellani can be found on 
page 39 of the appendix.]
    The Chairman. Next we have Mr. Timothy Smith, who is the 
senior vice president and director of social investing at 
Walden Asset Management, and also the chair of the Social 
Investment Forum.
    Mr. Smith.

 STATEMENT OF TIMOTHY SMITH, SENIOR VICE PRESIDENT-DIRECTOR OF 
           SOCIAL INVESTING, WALDEN ASSET MANAGEMENT

    Mr. Smith. Thank you, Mr. Chairman, and members of the 
committee. It is an honor to provide testimony today. As you 
have heard, I work with an investment firm in Boston, Walden 
Asset Management. I also serve as the chair of the board of the 
Social Investment Forum. But in my testimony today, I'm also 
going to refer to my 30 years of experience working for the 
Interfaith Center on Corporate Responsibility, which is a 
coalition of religious investors with approximately $110 
billion in assets.
    Together we have decades of experience in addressing 
companies and have used the shareholder resolution process to 
good effect as an essential tool for over 35 years.
    My comments today are going to focus on the shareholder 
resolution process, part of the SEC concept releases rather 
than on the access issue. If you look at the three major parts 
of the SEC concept, if adopted, these concepts would either 
eliminate entirely or severely limit the ability of any 
investor to sponsor a shareholder proposal. The result would be 
a curtailment of shareholder rights and, I would suggest, the 
elimination of meaningful investor input to corporate boards 
and management.
    The SEC has proposed three things for us to think about, 
one they call the opt-out approach.
    The SEC asked for comments on whether companies should have 
the right to withdraw from the shareholder resolution process. 
An opt-out option would have significant negative consequences. 
The most unresponsive companies would be likely to opt out.
    Just imagine a scenario where a board is criticized for 
poor governance, irresponsible behavior for example, backdating 
of options that leads to legal action against the company. They 
simply decide they don't like the criticism and decide to opt-
out, a disaster.
    The second proposal the SEC offers is the electronic forum 
or chat room. Should the Commission provide a provision whereby 
the electronic forum exists instead of the shareholder 
resolution process?
    We strongly support new forms of electronic communication 
between investors and the board and management, not as a 
substitute for, but as a supplement to, the existing resolution 
process. The present proposal about the electronic forum has 
many unanswered questions. For example, what if you're an 
institutional investor, as the State of Connecticut is; maybe 
you own 500 companies. How are you expected to monitor 500 
electronic forums, and what if there is a vote of some sort or 
a poll? Who is really in the forum to participate and what does 
the poll result mean? So at present the idea of an electronic 
forum as a substitute for shareholder resolutions is fatally 
flawed.
    The third part of the proposal or concept rather that the 
SEC raises is increasing the thresholds for resubmitting 
resolutions. They suggested you needed to get a 10 percent vote 
the first year, 15 percent the second year, and 20 percent the 
third year. It's important to assess who is affected by the 
present shareholder resolutions and who needs relief. In the 
year 2007 there were fewer than 1,200 resolutions filed at 
about under 1,000 companies, and this represents less than 20 
percent of companies on the stock market.
    Clearly the business community is not burdened 
significantly by the resolution process. And let's add to the 
fact that often when resolutions are sponsored, the companies 
negotiate dialogue, have discussions with the proponents and 
they're withdrawn because agreements are reached.
    I would suggest, in summary, that the shareholder 
resolution process is not a burden on companies, but changing 
the thresholds would be a real burden on proponents. On issues 
over the years, as varied as apartheid in South Africa to 
corporate governance reforms like majority vote for directors 
or climate change, sometimes investors need a couple of years 
to study an issue before they start voting for it. If you raise 
the threshold, you will cut off many of these issues before 
they even get started.
    For example, the Institutional Shareholders Services 
reminds us that this last year only under 200 shareholder 
resolutions on social and environmental issues came to a vote 
but 81 percent of them got the votes to come back. With the new 
rule, only 36 percent of them would come back. This would 
negatively impact the ability to raise important social 
governance and environmental issues.
    So I conclude, Mr. Chairman, by saying the impact of these 
shareholder petitions, these resolutions, is demonstrable, it's 
clear, it has a track record over close to 40 years, and it 
makes a difference in corporate thinking, in corporate 
behavior, in corporate policies. The SEC should not be allowed 
to take steps that would disadvantage the ability of investors 
to petition the companies in which they are owners through the 
shareholder resolution process.
    Thank you.
    [The prepared statement of Mr. Smith can be found on page 
59 of the appendix.]
    The Chairman. Next, Mr. Paul Schott Stevens, who is the 
president and chief executive officer of the Investment Company 
Institute.

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, INVESTMENT COMPANY INSTITUTE

    Mr. Stevens. Thank you, Chairman Frank, Congressman 
Neugebauer, and members of the committee. I'm pleased to be 
able to take part in today's hearing.
    Mutual funds and other registered investment companies that 
are represented by the Investment Company Institute have a 
unique position in the debate over shareholder proxy access. 
Our members offer the investment vehicles of choice for 
millions of Americans saving for retirement, education, and 
other goals. They hold approximately 25 percent of the 
outstanding shares of U.S. companies and they have an 
obligation to vote those shares in the best interests of fund 
investors.
    But funds are also issuers of stock with their own 
shareholders, their own boards of directors, and their own 
proxies, so we understand the importance of the SEC striking 
the right balance when changing longstanding rules on 
shareholder access to and use of a company's proxy.
    In considering this issue we asked, what is the right 
result here for the fund shareholders that our members serve 
and for other long-term investors? Our conclusion was that 
under prescribed circumstances, corporate shareholders should 
be able to place their proposals or bylaw amendments related to 
director nomination procedures on a company's proxy.
    Nonetheless, the ability to piggyback on a company's proxy 
should not be granted lightly. Care must be taken to ensure 
that the Federal securities laws do not inadvertently 
facilitate efforts to use a company's proxy machinery at the 
company's expense in the service of narrow interests or in a 
way that redounds to the detriment of the company and its 
shareholders as a whole.
    How can the SEC craft a rule that achieves this balance? We 
believe the Commission has rightly identified four areas in 
which standards must be set. Let me briefly give you the 
institute's view on each.
    The first concerns the intent of the shareholders seeking 
access to the proxy. We strongly agree with the Commission that 
access should be limited to proponents who do not intend to 
change or influence control of the company. Shareholders 
seeking to challenge corporate management or to exert control 
over the company have recourse to the existing mechanisms for 
proxy contests. They should not be granted license to pursue 
their objectives at the companies' and other shareholders' 
expense.
    The second criterion involves the ownership threshold. It 
is entirely appropriate to limit the privilege of access to the 
proxy machinery to shareholders with a significant ownership 
interest. The SEC has proposed that proponents must be required 
to hold collectively a 5 percent stake. Our research shows it 
is not uncommon for even a single institution to hold 5 percent 
or more of a public company.
    In the fourth quarter of 2006, we estimate that 87 mutual 
fund complexes had a total of almost 1,900 holdings of 5 
percent or more of U.S. companies, and mutual funds are not 
alone in this regard. Many kinds of institutional investors 
have holdings concentrated at this level, among them, some 
public pension funds.
    For example, based on its most recent 2007 filings with the 
SEC, it appears that the State of Wisconsin Investment Board 
has 5 percent or more of the stock of 28 U.S. public companies. 
All of them, I should note, small cap firms.
    Hedge funds very commonly seek to assemble large positions 
in public companies for their own ``activist purposes.'' We 
believe the Commission should study the shareholding patterns 
and establish a threshold sufficiently high, 5 percent or even 
more, to ensure that the process will be used to advance 
interests common to many shareholders.
    Third and similarly, access to the proxy machinery should 
be limited to long-term shareholders who meet a minimum holding 
period for their shares. The Commission has proposed that 
proponents be required to have held their shares for one year 
or longer. We believe that is a minimum acceptable threshold 
and expect to recommend that the SEC consider requiring a 
longer holding period.
    Again, the standard here should work to ensure that 
shareholder proponents are committed to the company's long-term 
interests.
    Finally, we support the requirements of the SEC proposal 
that shareholder proponents disclose their background, 
intentions, and course of dealing with the company. This 
information will be highly material to other shareholders and 
to the marketplace in general in considering a proposed bylaw 
amendment.
    In sum, according shareholders access to a company's proxy 
for these purposes is appropriate subject to the conditions I 
have described. Generally we believe the Commission's proposed 
approach will advance the interest of investors, including 
millions of mutual fund shareholders. We stand ready to work 
with the Commission and this committee and the Congress on 
these important issues, and I thank you for the opportunity to 
present our views.
    [The prepared statement of Mr. Stevens can be found on page 
78 of the appendix.]
    Mr. Kanjorski. There seems to be quite a clash as to the 
panel. Who would make the argument, just leave the status quo 
as it is and forget the two proposals by the SEC?
    Yes.
    Ms. Yerger. Certainly, I think from the Council's 
perspective, and our members' perspective, we would prefer the 
status quo to what has been proposed by the SEC. I sort of 
explained the key reasons why we oppose the proposals.
    The status quo would enable owners to continue to present 
proposals on and submit them for consideration by the owners at 
large and let the marketplace make a determination about what 
the appropriate access mechanism is. And indeed if it runs into 
a problem with State law constraints then the issue would be 
challenged in State court.
    Mr. Kanjorski. Yes.
    Mr. Smith. Yes, sir. We would also agree that the present 
situation is better than the two proposals as they are 
presented. The second longer proposal, even with the 5 percent 
access clause, takes away shareholder rights, as I described in 
my testimony. And we feel the 5 percent actually makes it a 
rather unworkable proposal.
    And of course the first, shorter proposal just doesn't give 
the right of access at all, which we would disagree with. So 
both of them I think as presented have enough flaws that we 
hope they will not be passed.
    Mr. Kanjorski. Is there any State in the union in their 
corporate law that allows no access for voters or do they all 
have methodologies in which to reach their--
    Mr. Castellani. I'm not aware of one. I believe they all 
have some form of access.
    Mr. Kanjorski. What are the most restrictive States? Is it 
reasonable to assume the great State of Delaware would be very 
restrictive or not?
    Mr. Castellani. No.
    Mr. Kanjorski. How--obviously this didn't just come about. 
I'm rather surprised. I sort of thought the people's argument 
would be on the side that you're looking at greater access and 
a new rule, but apparently you're looking at this as 
infringement upon the existing capacity to be heard.
    Mr. Kirshbaum. The issue of what is currently permitted 
based on the decision of the second circuit court of appeals 
that last year for the first time permitted--in a long time, 
the proxy access resolutions to appear. Previously the 
Securities and Exchange Commission had permitted companies to 
not put these resolutions on their proxy, granting them no 
actions.
    And so last year was the first year that there were these 
three shareholder resolutions on access to the proxy. We 
believe that process worked well during 2007 and also that 
there was very significant shareholder support for these 
resolutions, and we think that the--if the SEC just took no 
action at all this newly returned right to file these 
shareholder resolutions would be a good--good to continue next 
year.
    Ms. Yerger. And I should note that in 2003, the SEC did 
release a rule that would have mandated an access procedure at 
all companies, and the Council indeed would support such an 
approach. We believe, and we agree with fellow panelists it 
should be a limited tool. In fact, the Council's policy is that 
access to the corporate proxy card to actually put someone on 
the card should be limited to 5 percent owners or groups who 
have held for at least 3 years.
    So we agree that this should be a tool for long-term 
owners. It should not be used for control purposes and it 
should be very limited in scope. But what's on the table right 
now at the SEC isn't an access proposal that would be mandated 
for every company. It's an issue about whether owners can file 
proposals suggesting these mechanisms.
    During the past proxy season three such proposals, as John 
summarized, were presented. They were very limiting and I think 
restraining. I think they proposed 3 percent owners or groups 
could put one or a few candidates on a proxy card, and there 
was very strong market support for that.
    So I think the Council's perspective is yes, we would love 
to see a rule that's mandated that applies to all companies, 
but if we're--looking at the current situation, what we want is 
at least access to the card to submit proposals recommending 
different kinds of procedures and let the marketplace vote on 
those.
    The Chairman. Thank you. Apparently Mr. Campbell has been 
designated the Republican spokesman on this issue, which is 
fine with me, so I'll recognize the gentleman from California.
    Mr. Campbell. I can't say, Mr. Chairman, that I speak for 
all Republicans on this committee necessarily on this issue, 
but--
    The Chairman. Do you meet the 5 percent threshold?
    Mr. Campbell. Yes, I probably do meet--are there more than 
20? I may meet the 5 percent threshold. But let me ask--Mr. 
Stevens I think raised some very interesting points, that a 
number of these mutual funds have more than 5 percent holdings, 
but I also understand from the pension fund side that many of 
you have restrictions in order to have diversity where 
regardless of the market cap for the company you want to keep 
your interests at 1 percent or below.
    But it would seem to me that it would be unwise to have 5 
percent if that means a Fidelity, for example, just to pick 
something out of the air, some big mutual fund has the 
opportunity to go on 60 or 70 different companies and have 
access to that proxy for--unilaterally without any other 
shareholders being involved.
    Do the rest of you agree with that? I sense that Mr. 
Stevens thinks the threshold should be higher than 5 percent. 
Do the rest of you agree with that and/or if so do you have an 
alternative idea?
    Mr. Smith. Mr. Campbell, I think that you raise a very good 
theoretical question, but in fact we should be clear that the 
right of access to nominate directors is probably only going to 
happen in a company that is dysfunctional and whose board is 
not serving the share owners.
    I think proponents are only going to seek to nominate 
directors in such companies. Secondly, if there was a frivolous 
nomination, it wouldn't pass because the vast majority of 
investors, the Fidelities of the world would say, ``This has no 
meaning, I am voting against it.'' It would go nowhere.
    So the third thing to say is that in theory you are right 
that the Fidelities of the world could be proactive, but they, 
in their corporate governance guidelines on their Web site, 
have not defined their role to be an active, engaged proponent, 
more an active proxy voter. And there's a very real difference 
between a pension fund or a proponent who thinks that 
engagement of companies is an appropriate thing to do and a 
mutual fund who feels, as we heard Mr. Stevens say, it's their 
fiduciary duty to vote the shares, but they don't feel it's 
appropriate to go further.
    Mr. Campbell. Mr. Stevens, I think, and then we'll go to 
Mr. Kirshbaum.
    Mr. Stevens. Yes, I just respond that in the situation that 
Mr. Smith describes, if the company is truly dysfunctional, 
will it be so hard to get a group of shareholders that are like 
minded at a 5 percent level or so to say, ``We need to fix 
this,'' because the SEC's proposal does not limit it to one 
shareholding. It's a group of shareholders who can get 
together.
    In fact, the electronic forum is intended to extend to all 
shareholders an opportunity that now exists for institutional 
shareholders to communicate freely about matters affecting a 
company whose shares they hold. So it would facilitate that 
process.
    But the question we ask ourselves is, should a single 
institution at whatever level is chosen, be able to exercise 
that, and will there be the appropriate restraint. I hope that 
the proposal, if in fact it is adopted, would only be used in 
exceptional circumstances. But I agree with Mr. Castellani that 
it is a significant intrusion into the normal way in which 
corporations are and frankly should be managed.
    Mr. Campbell. What do you think is the right solution? You 
are now chairman of the SEC, so what--
    Mr. Stevens. Well, you know, I said in my testimony that I 
think we need to study the shareholding levels because I just 
don't think that there is enough understanding about the 
aggregations at different market capitalization. And perhaps a 
refinement along the lines of what you suggested--very large 
companies, perhaps a smaller threshold, smaller ones, a 
different one.
    So I think that's something that ought to be studied in the 
proposal process. Our instinct is that 5 percent is not an 
unreasonable threshold for this purpose.
    Mr. Campbell. Mr. Kirshbaum, and then we'll go to Mr. 
Castellani again.
    Mr. Kirshbaum. The 5 percent is a little confusing because 
we're really talking about four different steps of a process 
here of which we're sort of--we have to clarify the 5 percent 
on two of those steps. The first is that in the proposed SEC 
rule the 5 percent refers to the number of shareholders that 
would be necessary to file a resolution changing the bylaws of 
the company to permit access to the proxy.
    Under the previous rule put forth under Chairman Donaldson, 
the 5 percent had to do with how many shareholders would be 
necessary to actually nominate somebody. So the 5 percent in 
the current rule has to do with just getting the shareholder 
resolution out there.
    The second step is, of course, the shareholders themselves 
voting on that resolution where a majority would be needed to 
make that change to the bylaws. The third step would be the 
nomination itself. And again under the process in the proposed 
rule, that level would be determined in the actual bylaw 
amendment that was filed for access to the proxy.
    Again, under the Donaldson proposal that was more clearly 
set out in the rule. And then of course the fourth piece is the 
actual election itself. No one is going to be elected to the 
board unless the shareholders, all the shareholders pass the 
vote saying the majority of them support the nominee.
    So I think that the 5 percent rule needs to be, at least in 
terms of the putting the issue in front of all the 
shareholders, that level is too high. And because a majority of 
shareholders have to both support the change in the bylaws to 
put the access to the proxy in place and then the 
shareholders--again, the majority of them have to vote to elect 
new members of the board, we think that that addresses the 
issue that was raised about the narrowness or the special 
interests. You can't be a narrow special interest candidate and 
get a 50 percent vote on either of these.
    Mr. Campbell. My time is up, but Mr. Chairman, could Mr. 
Castellani and Ms. Yerger respond? Thank you.
    Mr. Castellani. Just a point of information and two 
comments. One, information. Of the Business Roundtable's 25 
largest companies, 20 of them have a single shareholder that 
holds at least 5 percent. The remaining five companies would 
take two shareholders to meet the 5 percent threshold.
    Two comments. In my own corporate experience, certainly in 
my company and certainly with our members, if this is an issue 
of communications, we spend our time trying to get Mr. 
Stevens's members and Ms. Yerger's members to buy 5 or 10 
percent of our companies. Indeed, anybody who owns that gets 
the attention--or could potentially own it gets the attention 
of the board and the management. We are trying to sell our 
shares to the members that are represented here.
    The second is that in the comments that came as a part of 
the roundtables that the SEC held in proposing these two 
alternative rules, a number of issues were raised about who the 
shareholders are, the voting process, what do you do with 
broker-dealer held accounts, which could represent a 
significant portion of the shares, and what is the role of the 
proxy advisory services? There are lots of things--what is the 
role, indeed, of the process by which we now count shares, 
which does indeed present some problems?
    There are lots of issues that have not been resolved that 
were raised in the hearings at the SEC, the roundtables of the 
SEC that bear on this election process, some of which can bear 
very significantly on them, so that it is not a very true and 
clean vote of all of the shareholders voting for or against any 
one of the proposals that are on the proxy.
    Ms. Yerger. I just want to note quickly that I'm not a 
lawyer, so maybe I'm naive when I think about rules and 
regulations, but I think they should be grounded in reality. 
And what we're talking about here is again how many share 
owners need to be--to get together. What is the shareownership 
to actually file a proposal that people would end up voting on 
about a mechanism to then put a candidate on management's proxy 
card?
    And the fact is that the 10 largest institutional money 
managers, and many of them are not just institutional money 
managers but also mutual fund companies, have never, at least 
in our research in the past 10 years, sponsored a shareowner 
resolution. So we need to be thinking practically about who 
actually would be filing these proposals.
    Even though Mr. Stevens' members may be supporting these 
proposals when they come on management's proxy card, they tend 
not to sponsor them.
    Mr. Campbell. Thank you.
    The Chairman. The gentlewoman from New York.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Stevens, the SEC proxy access proposal will also allow 
the establishment of electronic shareholder forums that could 
potentially greatly increase interaction among shareholders and 
make it easier for them to organize and to push management to 
pursue shareholder interests.
    Given the fact that so many investors today use the 
internet to monitor their portfolios and to make their 
investment decisions, I personally think this would be a useful 
tool, and you have testified in support of them.
    Do you think that investment companies would establish or 
take advantage of the electronic shareholder forums discussed 
in the SEC proposal?
    Mr. Stevens. We've discussed the proposal with our 
membership and they are very supportive of it. It extends 
authority that has existed for some time for institutional 
investors to engage in a dialogue about matters that concern a 
company whose shares they hold. This would now extend it to 
rank and file investors so that there would be an even broader 
opportunity for an exchange of views.
    More generally we think the SEC's rules should make the 
maximum possible use of the new technologies like the internet, 
and this is a good step in that direction.
    Mrs. Maloney. Thank you. I'd like to ask all of the 
panelists this same question. Much of this debate centers 
around the rights of the minority versus the rights of the 
majority and looks at the 5 percent shareholder threshold and 
the one-year holding period, and I'd like each of you to 
comment on where you stand on those two proposals.
    I believe, Mr. Kirshbaum, you support, you think the 5 
percent is too high. Do you support the 1-year holding period? 
Is that too long or too short?
    Mr. Kirshbaum. The 1-year holding period we do support and 
we do feel that the--as long-term investors and as--that the 
holding period is a more appropriate approach to this than the 
number of shares that you own, the long-term shareholders are 
really the ones who are looking for the long-term interests of 
the company. They are not in and out, they are not looking for 
a short-term gain. And if we're looking for a measure of 
interest in the long-term interest of the company, the holding 
period is much more important than the number of shares.
    Mrs. Maloney. Ms. Yerger, could you testify whether you 
think that 5 percent is too high or too low and the 1-year 
holding period?
    Ms. Yerger. Five percent level to file a shareowner 
proposal is too high in our opinion. We don't think it's too 
high to actually put a candidate on the proxy card. We think 
the one-year holding period is appropriate.
    Mrs. Maloney. Okay. And Mr. Castellani, your position on 
the two proposals?
    Mr. Castellani. We don't feel that the proposal is 
necessary in light of the reforms in majority voting that are 
already in place and becoming more prevalent across publicly 
traded companies.
    So as to the holding period, it should be significant. 
Long-term shareholders are hard to find and come by these days.
    Mrs. Maloney. And Mr. Smith?
    Mr. Smith. I would also agree that at least a 1-year 
holding period, perhaps longer. We're trying to act on behalf 
of long-term owners here, and I would reiterate what Ann Yerger 
said, to get 5 percent of the shares to present an idea for a 
vote by shareholders that then has to be voted on and then 
nominating a director is plenty of safety valve, a 2-year 
period in the process.
    So I think a normal process for putting the resolution and 
then looking at a 3 percent, for example, group of shareholders 
to nominate the director would be appropriate.
    I would just add to your very good comment about the 
electronic forum; this is an electronic age. I think most of us 
would support the SEC moving in this direction and we'd be 
thrilled to have a discussion on, say, executive pay, online 
with companies.
    Mrs. Maloney. I think the chairman would like to chair that 
discussion.
    Mr. Smith. But as you know, the SEC proposal is to 
substitute the forum for the resolution process, and you're 
getting across-the-board opposition by investors on that.
    Mrs. Maloney. And Mr. Stevens, 5 percent and the year?
    Mr. Stevens. We have not supported the notion, 
Congresswoman, of substituting the forum for the process that's 
now in rule 14a-8, just to be clear. But no, we believe that 
the SEC ought to carefully study the holding patterns.
    I do not believe 5 percent is an unreasonable threshold 
even for advancing a bylaws amendment of that significance to 
allow shareholders to put nominees on the corporate ballot. And 
I think that if there is a situation within a company that 
requires such a move, 5 percent will not be difficult to 
achieve.
    Mrs. Maloney. My time is up, but the one-year holding 
period, what is your position on that?
    Mr. Stevens. We would support a minimum of one year.
    Mrs. Maloney. Thank you. My time is up. Thank you.
    The Chairman. The gentlewoman from Ohio.
    Ms. Pryce of Ohio. Thank you, Mr. Chairman. I want to thank 
the panel. I'm very sorry that I missed your testimony. It has 
been summarized very adequately by my staff however, and so I 
appreciate the hard work that went into preparing for this.
    Let me ask a question that occurs to me. Boards composed of 
directors with fractious and conflicting interests is probably, 
currently the norm in Europe, and they have proven to be 
ineffective governance models that don't really yield improved 
shareholder returns. Now the reforms that we made through 
Sarbanes-Oxley were designed to generate boards that are more 
independent, not beholden to management or any interests other 
than those of the shareholders.
    And so given that, why do you think the SEC should take a 
u-turn from the board independence reforms that we so 
painstakingly enacted and open the door for this European-style 
special interest-laden board structures that don't seem to be 
having the desired effect in Europe. Does anybody have an 
opinion on that?
    Mr. Kirshbaum. I don't think that we are looking toward a 
European model at all. What we're looking toward here is just a 
way to add one or two additional board members to the ballot 
and to have them be elected with--on a slate with majority 
support from all of the shareholders.
    I think that the issue of having a fractious board based on 
small special interests is not going to happen here, again, 
because of the protections in place from the majority vote to 
elect the board members.
    In addition, we are not talking about turning independence 
on its head at all here. We are looking at an opportunity to 
nominate more independent board members for the board. The non-
independent board members are usually those that either work 
for the company or have some financial relationship with the 
company.
    The access to the proxy rule I don't think would result in 
any further nominees of insider directors. I think what we 
should be looking at, again, is a strengthening of the 
independent directors on the board.
    Ms. Pryce of Ohio. Does any panel member disagree with 
that?
    Mr. Castellani. Boards operate best when they are 
independent, when they are informed, when they are inquisitive, 
when they are engaged, and when they are cohesive.
    Right now, State law which governs this area requires all 
directors to represent all shareholders, so it is a very 
different process than, for example, this body. Decisions in 
corporate boards are not made by split votes or votes along 
lines. They are generally made by discussion and consensus so 
that the company can move forward very clearly. Our concern is 
that if that was made to be the equivalent, functional 
equivalent of a legislative body, then they would be unable to 
take the kinds of risks and make the kinds of decisions that in 
fact create shareholder value. So we would be concerned about 
this turning it into a fractionated board that was divided 
similar to some of the European models, if you're talking about 
codetermination in particular.
    Mr. Smith. I'd love to respond to this. The words Mr. 
Castellani uses about a cohesive board and then a fractionated 
board is setting up a strawman here. In fact, a good board 
today should be a board that has vigorous debates. They should 
work together with the shareholder interests in mind, so I 
agree with him if that's the benchmark for a cohesive board. 
But what we need is boards that are more independent, think 
independently, and are willing to challenge the CEO or the top 
management, not in a destructive way, but in a creative way.
    And those create good board decisions. The kinds of board 
members who are being discussed to be put on the Hewlett 
Packard board, which I think we admit has some degree of 
dysfunction, or the Home Depot board, which has changed; it has 
two new board members on it. This is not bringing in people who 
represent a ``special interest'' and are trying to push one 
issue. These are people who feel that the company needs to make 
some changes in its direction. The Home Depot board is 
responding very, very positively, under new management 
leadership by the way as well as new voices on the board.
    So we would support the idea of having a board that is 
working together for shareowners. But I think the great fear 
that the Business Roundtable brings up, that bringing in some 
independent, new voices on a board is somehow going to make a 
board dysfunctional is a myth. Some of our boards are 
dysfunctional already. Bringing in new people might be a breath 
of fresh air that would get a company going down a new track.
    Mr. Castellani. Could I respond to that, because that is a 
mischaracterization of my position. Of course we want vigorous 
debate in boards. And the two examples that were cited, Hewlett 
Packard and Home Depot are examples of what I am saying is 
occurring across all of the large companies and across 
corporate America, and that is the boards responded in and of 
themselves after discussions with the shareholders, to improve 
their governance.
    Mr. Smith. After discussions with the shareholders?
    Mr. Castellani. After discussions with the shareholders, 
which we very much support. You know, communications with the 
shareholders are key to this and key to ensuring that the board 
is acting in all of the shareholders' best interests. So no, 
we're not asking for diminished communications; in fact, quite 
the opposite. And now we're not saying boards shouldn't have 
vigorous discussion about important issues for the company. But 
ultimately what boards need to do is act cohesively on behalf 
of all shareholders.
    Ms. Pryce of Ohio. My time has expired. Thank you, Mr. 
Chairman.
    The Chairman. I'm going to take off from there, Mr. 
Castellani, because I'm glad you clarified it, but I must say 
in your original statement there was one thing you said that 
did trouble me, which was that you didn't like to see split 
votes.
    Now it's one thing to say you don't want people being 
representative of different issues, but split votes are a sign 
of rational thought going on. The absence of split votes means 
group think. I am struck by Warren Buffett's note that he has 
now been excluded from the compensation committees of the 
boards that he was on. Mr. Buffett has written that he has been 
on 32 boards and after he dissented on one compensation 
committee he was never again on the compensation committee.
    So I am troubled by your dislike of split votes. People 
are--well, that's what you said.
    Mr. Castellani. No, my description is that boards operate. 
Boards don't operate by votes and then move forward. Boards 
operate by discussion, disagreement but then ultimately the 
best boards operate by coming to a consensus and moving 
forward.
    The Chairman. Well, I just think that's not the way human 
decisions go forward, and the notion that you never have a 
split vote is an invitation to group think. Now it is possible 
to have different votes without there being a dysfunction, and 
the notion--I really think--and it's what Mr. Buffett seemed to 
me to be suggesting.
    The view that in the end we all have to vote the same, 
that's not a requisite for anybody to function well. And a 
notion that a dissenting vote is somehow a bad thing or a sign 
of dysfunction really does trouble me.
    Mr. Castellani. Well, Mr. Chairman, I'm certainly not 
trying to give that opinion, but I would point, for example, to 
an example that we--both sides of this issue use as a reason 
why you should take our position, which was what happened at 
the Hewlett Packard board.
    A very, very substantial portion of that dysfunction 
occurred when board members went outside the normal--
    The Chairman. Right, which is not what we're talking about, 
so it's irrelevant to whether or not you said split votes. 
Leaking outside is--no, Mr. Castellani, that's simply not even 
remotely comparable.
    We're talking about of course you shouldn't then go and 
leak and distort other people's vision and wiretap them, and if 
you think that when you vote ``no,'' you have to go out then 
and be wiretapped, that's not any voting process I've ever 
seen.
    It's your dislike of split votes. I think you make a grave 
error and you--but let me ask you this then. You say boards 
have gotten better?
    Mr. Castellani. Absolutely.
    The Chairman. I have to say, and I am struck by the 
people--I've been around this committee for a while, and the 
people who are now telling me that boards are much better, 
never acknowledged that they weren't good before, so they went 
from good to perfect.
    And if you have any comments from the Business Roundtable 
or anybody else prior to the period of the last 5 years in 
which people acknowledge problems I'd be glad to see them. I 
don't think they're there, but the question would be what has 
made them better, why have they improved?
    Mr. Castellani. Well, those boards--and again--
    The Chairman. You said that in general boards have gotten 
better. What's been--
    Mr. Castellani. Here are the fundamental things that we 
believe have improved the board process.
    The Chairman. No, I'm looking at the causality. I'm not 
talking about the examples of improvement. But when things are 
going along a certain way and then there's a significant change 
I think it's relevant to look at the causality. What caused 
those improvements in the last 5 years?
    Mr. Castellani. Well, in large part the boards reexamining, 
companies reexamining how those boards operated in light of 
some of the scandals. Obviously no board, no company, no 
management wanted to be in a circumstance where shareholder 
value was destroyed because of improper behavior. So I think we 
learned from all of the scandals and went back and improved our 
processes, just as we daily improve our products and services 
based on what we see going wrong, to ensure that that wasn't 
going to happen in the preponderance of the U.S. corporations.
    The Chairman. I understand, but was the increase a result 
of outside agitation of shareholder activism, of even 
politicians raising questions, did that have any impact in the 
change to the board?
    Mr. Castellani. I'm sure it had an impact, but for example 
in our own companies, and within the Business Roundtable, it 
was the chief executive officers themselves right after the 
Enron scandals who stood up at our meeting subsequent--
    The Chairman. Because of the scandals.
    Mr. Castellani. --and said, ``That cannot happen to us.''
    The Chairman. Let me just say, and I'll get to you in a 
second, Mr. Smith. But I was struck--Sarbanes-Oxley has not 
been the favorite act of a number of business people although 
you have cited your support for it.
    Mr. Castellani. I do support it.
    The Chairman. But I was struck that we did get a letter 
from the Chamber of Commerce of the United States in which they 
gave Sarbanes-Oxley a lot of the credit for the improvement in 
board performance. They did it in a context of saying that 
therefore we didn't have to do anything about executive 
compensation, but the Chamber did give Sarbanes-Oxley some of 
that credit.
    Mr. Smith, you wanted to say something?
    Mr. Smith. I do, Mr. Chairman. Certainly Mr. Castellani is 
absolutely right that the scandals woke up boardrooms but also 
woke up investors, investors who lost virtually trillions of 
dollars as the market started losing confidence, woke up, 
became more active owners, became more engaged owners, and 
became much more actively involved in pressing for certain 
forms of board accountability.
    Now often, as Mr. Castellani and I would agree, boards 
readily responded positively to those calls, for example, 
majority vote for directors or even some companies that were 
expensing stock options before it was required. So it's not 
always a confrontation when there's a disagreement, but 
certainly the input--I wouldn't necessarily always call that 
agitation, but the input from investors has been key from our 
point of view in fertilizing this process and sometimes 
stimulating it.
    And on other occasions when companies don't seem to get it, 
when resolutions are sponsored on issues like majority vote for 
directors and get a 50 percent vote, to their credit the Exxon 
board, the Exxon-Mobil board and the Home Depot board, within 3 
or 4 months puts that reform in place.
    Now we needed to have shareholder leverage there to 
encourage the board to take a stand. And I'd just get on my 
soapbox again and say without the right to file shareholder 
resolutions that the shareholder--
    The Chairman. I appreciate that. I would just say you took 
a little exception to my saying ``agitation'' but you 
substituted ``fertilization.'' I think I'd rather have my 
activity characterized as agitation than as fertilizer.
    The gentleman from Kansas.
    Mr. Campbell. Mr. Chairman, if I can just comment, I am 
pleased to know that split votes can represent rational 
thought, because you're likely to see a lot of rational thought 
relative to the flood insurance bill later today.
    The Chairman. Oh, I have never tried not to have split 
votes. I think they are a very good idea.
    Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. Stevens, 
in your written testimony, you have discussed the uniqueness of 
mutual funds as institutional investors being subject to 
disclose their proxy votes. Today we're talking about access to 
the corporate proxy, but I'm also interested in your views as 
to whether other institutional investors should disclose proxy 
votes as well. Would shareholders and companies benefit from 
those disclosures by the others?
    Mr. Stevens. Thank you for the question. It is true we had 
reservations about the SEC uniquely applying regulations to us. 
They went into effect several years ago. We have learned to 
live with them, and every vote we cast with respect to every 
company whose shares we own in our portfolios across our 
industry are now there for all the world to see.
    I think it would be very beneficial for other institutional 
investors, particularly those in a fiduciary relationship to 
their customers, to be required to make a similar disclosure.
    Mr. Moore of Kansas. Thank you, sir. Thank you, Mr. 
Chairman.
    The Chairman. The gentlewoman from New York.
    Mrs. McCarthy. Thank you, Mr. Chairman. I'm sitting here 
and I'm wondering, when you were starting to talk about 
dysfunctional boards, what is your opinion on some of the 
boards that did not react fast enough or didn't know it was 
coming when we had the mortgage crisis? Did those boards know 
that what their CEOs were doing as far as putting the monies 
out to people who shouldn't have been getting mortgages? I'm 
just curious.
    I mean, obviously, the proxy voters wouldn't have known 
anything about it, because a lot of people didn't know about it 
until it hit the fan. And then obviously it affected the whole 
stock market, so that had to have a trickle-down effect. And I 
was just curious if you had any thoughts on that. I mean, it 
was going on. It didn't hit one company; it hit many companies. 
Germany, from what I understand, the German bank was the one 
that really started it rolling.
    Mr. Castellani. Certainly any board, any board member 
should know the breadth and extent of the company's activities, 
and the consequences of the activities.
    Mrs. McCarthy. Do they actually, though? I mean, do a lot 
of the board members actually--they meet how many times a year?
    Mr. Castellani. Indeed. Board meetings vary, but 
typically--well, some meet every month. Typically, it's 8 or 10 
times a year. Though what we've seen also in our data 
consistently through the years that board members and board 
meetings are taking more time, getting more information. 
Committees are meeting more and more often for greater periods 
of time getting in more and more information about the company, 
so.
    Mrs. McCarthy. Who gives them the information to make the 
decisions when they're meeting?
    Mr. Castellani. It comes from a variety of sources. It 
depends on the committees and depends on the activity. But 
typically, it comes from the company, committees, particularly 
audit committees and compensation committees, but any committee 
of a board is free and does avail themselves of outside 
information, particularly those sensitive areas. For example, 
the audit committee, the auditors report to the audit 
committee, not to the management of the company.
    Mrs. McCarthy. Again, I'm going to follow up with a 
curiosity. Because when we saw a number of hedge funds get in 
trouble, certainly mortgage companies getting in trouble, which 
was a chain reaction, if the accountants, you know, when times 
were good, they were making a lot of money, but didn't anybody, 
you know, put forward or is it not the responsibility of the 
board or the CEO to put forward, you know, we're making good 
money, but we're taking a lot of risks here? I'm just--
    Mr. Castellani. Oh, absolutely. I mean, risk assessment, 
having had the responsibility for risk management in my 
company, risk assessment is an important part of a board's 
function. Absolutely.
    Mrs. McCarthy. So they all failed?
    Mr. Castellani. Well, you know, if they understood the 
consequences of it and understood that it was coming forward, I 
can't comment on the specifics of it because I'm not 
knowledgeable about the industry in and of itself. But I would 
make the general comment is that in some cases, companies will 
fail with their products, with their services, and we want them 
to fail. Because if there aren't failures, there aren't risks 
being taken.
    Now clearly that doesn't mitigate the impact of the 
consequences of the failure in the case that you're describing, 
but we want boards and we want companies to take risks. 
Otherwise, they're not going to develop new products, new 
services, and greater shareholder value. I don't think anyone 
here would--
    Mrs. McCarthy. I understand that, but it seems from the 
Enron episode that we went through, then the mortgage bankers, 
it's the little guy who has actually gotten hurt more than 
anybody else. And I think that is something that should be a 
concern to every corporation.
    Mr. Castellani. Well, it is a concern, and I would point 
out that it is the exception and not the rule. I mean, all the 
scandals that we are talking about, Enron, whatever, however 
many you want to mention, are horrible, and that they affected 
a lot of people and caused trillions of dollars of damage.
    They affected all of us, every other corporation, because 
we exist to--and we prosper when we have an environment of 
investor trust and public trust in what we do, and we suffered 
when that trust was eroded. However, those are still a handful 
companies against the 15,000 publicly traded companies that--
    Mrs. McCarthy. Well, I agree with you, and I was the first 
one defending a lot of companies, but I still think we on this 
committee handled it in a fair-minded way. Mr. Smith?
    Mr. Smith. Mrs. McCarthy, I think this is a case where a 
cohesive board from 5 or 10 years ago who played by the rules 
of the game then on subprime lending and didn't ask hard 
questions, therefore didn't serve the company and the 
shareholders well in the long term.
    So how do you get voices from the outside who are canaries 
in the coal mine or just raising a different point of view? 
Shareholders actually were sponsoring resolutions with 
companies like Countrywide, raising questions about subprime 
lending before it was considered--well, unfortunately, the 
disaster we see today.
    Or the issue that's very much on the front pages today on 
climate change; 10 or 15 years ago, investors began knocking on 
companies' doors and raising questions about the risk related 
to climate change. Happily, today you'll see hundreds of 
companies acknowledging that risk, speaking out about it, and 
day-by-day changing their policies.
    But the boards had to be stimulated, activated to think 
outside the box, whether you were an insurance company, whether 
you're British Petroleum or not. That's not to say that the 
boards did a bad job. It's just to say they played by the 
expected rules of the road in their board meetings. And when 
you have outsiders through the shareholder resolution process 
saying why don't you think about it this way, it does--that 
agitation does pay off.
    Mrs. McCarthy. Thank you. I yield back the balance of my 
time.
    The Chairman. The gentleman from Missouri.
    Mr. Cleaver. Thank you, Mr. Chairman. Mr. Castellani, thank 
you very much for being here. Thank all of you for being here 
today. In your prepared remarks, you said, given the strong 
record of reforms and our belief that politics and narrow 
agendas have no place in the boardroom, what do you--can you 
break that down? What--I mean, politics and what narrow 
agendas? Give me some examples.
    Mr. Castellani. Sure. There are a number of narrow agendas 
that exist, and in fact, one of the things that Mr. Smith has 
addressed is a good example of them. When you talk about 
various proxy proposals, they range in their attention from 
things that are directly related to the governance of the 
company--how is the board structured? Is it an annually elected 
board or is it a staggered board? How are nominees brought 
forth? Does the board have change of controls, circumstances, 
and thing that relate to governance.
    And then you get at the other end of the spectrum, well 
meaning shareholders who have specific interests that may have 
been frustrated somewhere else. For example, in my own company, 
we had a group of shareholders who every year asked us to get 
out of the nuclear shipbuilding business. Well, that was fine. 
But it was 40 percent of our cashflow and of substantial value 
to our shareholders.
    Mr. Cleaver. Okay. But--
    Mr. Castellani. Because they were against nuclear power.
    Mr. Cleaver. Okay. What about the politics?
    Mr. Castellani. Well, if those particular interests and 
specific interests are represented on the board and that is the 
only purpose of a board member to come to, for example, I've 
used my company, which doesn't exist any more. We took it 
apart--to come to every board meeting and say I'm not going to 
support investment in the shipbuilding business because it is 
nuclear powered shipbuilding, we should get out of it and push 
that agenda, then it would be to the detriment of the 
shareholders because they were benefitting greatly from the 
profitability and the cashflow of that operation.
    Mr. Cleaver. Now, I'm a United Methodist pastor, and we 
own--the Methodist Church owns substantial stock in Coca-Cola. 
And we went through the very same process you did by getting--
some years back--by trying to force Coca-Cola to divorce itself 
from South Africa. And so you're saying that if--in a situation 
like that, those individuals who are single-minded should not 
have access?
    Mr. Castellani. No. Because you did it from the standpoint 
of a shareholder. What I'm saying is if the director, if a 
director had that as his or her only--
    Mr. Cleaver. Yes.
    Mr. Castellani. --and disrupts all of the other operations, 
then that's the concern we have.
    Mr. Cleaver. But that's the whole point I'm making. You 
don't want them to be directors, right?
    Mr. Castellani. We want voices--
    Mr. Cleaver. I know. But you don't want them to be 
directors, right?
    Mr. Castellani. We want diverse voices in the directorship, 
but we want boards ultimately to reach consensus in operation.
    Mr. Cleaver. Okay. So, if the wolfman and his friends are 
on the board and people are investing in the silver bullet 
factory, you don't want them on the board because--I mean, they 
want the silver bullets produced at a much higher rate, because 
they have a direct interest.
    Mr. Castellani. If they hurt the interests of the other 
shareholders of the company--
    Mr. Cleaver. You don't want them on the board.
    Mr. Castellani. --the majority of the shareholders, then, 
no, they should not be on there.
    Mr. Smith. Mr. Cleaver, Mr. Castellani and I are not too 
far apart on this.
    Mr. Cleaver. Well, we are. He and I are.
    Mr. Smith. And I just wanted to explain that if the person 
only had one issue and was on the board, that would be 
disruptive. But as you know, sir, Dr. Leon Sullivan--
    Mr. Cleaver. Yes.
    Mr. Smith. --and Clifton Wharton were on General Motors and 
Ford boards. They spoke out strongly on the South Africa issue, 
and they were convincing. In the end, they helped bring the 
board's decision around to the position held by the United 
Methodist Church.
    Mr. Castellani. Clifton Wharton was on our board.
    Mr. Smith. That's right. And this is creative discussion 
within the boardroom rather than--
    Mr. Cleaver. My problem is--and maybe these are just words 
that were not--that were put in your--that you wrote into your 
report, and I shouldn't focus in on it. You said we believe 
proxy access will result in special interest board candidates 
and will politicize the director election process.
    And I'm not saying people, you know, who purchase stock 2 
weeks before a board meeting, and I think all of you agree that 
they should be long term. But, I mean, I'm wondering when you 
say special interest, are you talking about organized labor? 
Are you talking about--I'm sorry?
    Mr. Castellani. Could be. Could be. Any shareholder--
    Mr. Cleaver. I mean, since AFSCME--
    Mr. Castellani. Any shareholder who comes with a single 
agenda that would be to the detriment of the other shareholders 
of the--
    Mr. Cleaver. Who determines whether they have a single 
agenda?
    Mr. Castellani. They do.
    Mr. Cleaver. No, no, no, no. They may be speaking to an 
issue, but they may have other reasons for being on the board, 
and so, the board members--I mean, so you're saying that the 
people on the board decide whether or not you are a single 
agenda stockholder?
    The Chairman. Would the gentleman yield?
    Mr. Cleaver. Yes.
    The Chairman. Because it's very relevant to two bills that 
have come out of this committee. We've authorized and we talked 
to the ICI about this as well as others, the Council of 
Institutional Investors--we have authorized a suspension of the 
potential of a lawsuit on fiduciary responsibility with regard 
to Darfur and Iran. We have in this committee, and 
overwhelmingly in the House, gotten more than 400 votes for 
each bill. This made it easier for people to push for 
divestiture either from Darfur in connection with their 
activity, or the nuclear weapons in Iran. Would you 
characterize people seeking to push for any kind of 
disengagement in either Iran or Darfur, would they be in the 
special interest category?
    Mr. Castellani. Not if it was determined to be in the best 
interest of all shareholders.
    The Chairman. Well, but no. Excuse me. The ``if'' doesn't 
work for now, Mr. Castellani. We're not in a hypothetical. If 
resolutions were now put forward saying, cut off your 
activities with the companies doing business in Darfur, cut off 
Iran, would you characterize those as special interests?
    Mr. Castellani. Boards have, boards and management have the 
utmost responsibility to comply with the laws of the United 
States. They will comply. If you make a law--
    The Chairman. Well, Mr. Castellani--please answer the 
question. I don't mean to be rude.
    Mr. Castellani. No, I--
    The Chairman. You're not answering the question. If it were 
the law--we're not--there are things that people can be doing 
that are investing that don't violate the law. Yes, I'm not 
accusing people of breaking the sanction. But there are people 
who want to go beyond the sanctions and say, yes, it's illegal 
to do this. But we want to go beyond that. I'm not talking 
about the sanctions bill. I'm talking about legislation that 
allows people to say, I don't want my money being used to deal 
with--to help these people in Darfur who are in power or Iran 
where it's not legally required. And the question is--it seems 
to be a fair question--would people seeking to get companies to 
divest beyond what the law absolutely required with regard to 
Darfur or Iran, be in that special interest category?
    Mr. Castellani. If the board of directors determined it was 
in the interest of all of the shareholders. If it--
    The Chairman. You're not answering the question, Mr. 
Castellani. I didn't ask you what the board--I'm asking your 
characterization. You say there are these special interests. 
It's an intellectual issue. You're just dodging the question.
    Mr. Castellani. There are--
    The Chairman. Do you characterize people who come and say 
look--there's no if's here--I don't want my company, I don't 
care how profitable it is. I don't want my company making money 
off genocide. I don't want my company helping nuclear weapons. 
Is that a special interest or not?
    Mr. Castellani. Is it a special interest if I come forward 
and I say I don't want my company investing in Massachusetts 
because I don't like the Boston Red Sox? I'm a Yankees fan.
    The Chairman. I would say that that was kind of silly. 
Having answered your question, will you answer mine? I mean, 
why do you refuse to answer the question? And do you really--
excuse me, Mr. Castellani, you know what? And I understand this 
is off the top of your head, but equating dislike of the Red 
Sox to equating a dislike of genocide, really it doesn't 
advance serious discussion.
    Mr. Castellani. No, sir, I--
    The Chairman. I'm asking you the question and your refusal 
to answer it frankly is more revealing than your answer.
    Mr. Castellani. I can't answer a question that can't be 
answered in the context of what is in the best interest of all 
of the shareholders.
    The Chairman. Here is the context.
    Mr. Castellani. The board of directors makes that decision.
    The Chairman. You know--I'm not--it isn't hypothetical. 
It's Darfur today. In other words, you think it would be a 
special interest and you'd be embarrassed to say so in your 
characterization.
    Mr. Castellani. No, sir.
    The Chairman. Yes.
    Mr. Castellani. There are specific issues that come before 
any board of directors. A board of directors' deliberation is 
to ensure that those specifics, whether it's an individual 
product or an individual market or an individual political 
circumstances are in the interest of all shareholders. That is 
their fiduciary responsibility.
    The Chairman. That's not the question I asked you. Mr. 
Smith, did you want to--
    Mr. Smith. Well, I'll try to answer it, not for Mr. 
Castellani, but indeed the U.S. Chamber of Commerce says this 
all the time about advocates who are raising questions about 
subprime lending, about climate change, about diversity, about 
corporate governance--
    The Chairman. They say what all the time?
    Mr. Smith. We are special interest groups who have no 
interest in shareholder value. And it's a transparent myth used 
of course to marginalize proponents. Mr. Castellani has not 
said that today, but the business community too easily falls 
into, I don't like the position you're raising, therefore, 
you're a special interest group, rather than I just disagree 
with the position you're raising.
    The Chairman. Let me go back to the gentleman from 
Missouri. I captured his time, and I apologize.
    Mr. Cleaver. That was the point I was trying to make. You 
said it perhaps more articulately. The problem I have is, you 
know, somebody sitting on a board has the distinct and 
exclusive power to determine what a special interest is, and 
that troubles me.
    Let me ask my final question. Has there been any evidence--
this is for anybody--any evidence in the United States or 
anywhere else that would indicate that direct shareholding--
shareholder voting has destroyed a corporation?
    Mr. Castellani. No, because it doesn't exist.
    Mr. Cleaver. I'm sorry?
    Mr. Castellani. No, because it doesn't exist.
    Mr. Cleaver. You are absolutely right. We now agree. And so 
since it doesn't exist, how do you know that it's evil?
    Mr. Castellani. We're making our best judgment based on--
    Mr. Cleaver. But your best judgment is prejudiced.
    Mr. Castellani. On a model that works pretty darn well.
    Ms. Yerger. If I can make one comment, I think that we 
don't want to lose sight of the fact that when it comes to the 
board of directors, they are elected by the owners. And anyone 
who is sitting in the boardroom has been elected by the owners. 
I have a lot of confidence in our marketplace. I have a lot of 
confidence in the sophistication of our institutional investors 
and our investors, and I don't think they would elect anyone 
with a special interest only to represent them on a board. And 
once they're sitting in the boardroom, they have a fiduciary 
duty to represent all share owners. So I think we should 
remember that this is about giving owners the power they 
actually have, which is to elect directors.
    The Chairman. Let's finish up with Mr. Kirshbaum.
    Mr. Kirshbaum. Thank you. In terms of the special 
interests, I think that anybody on the board, if someone 
happens to be a member of a union, doesn't mean that they 
represent the union. If they are a lawyer, it doesn't mean they 
represent all lawyers. If they're a university president, it 
doesn't mean that they're only there representing universities.
    I think that picking out somebody just because of what 
their background is, and saying that they have a special 
interest, is just a false way of addressing this issue. 
Everybody comes from some background, but they're all elected 
by the majority of the shareholders to serve the interests of 
all of the shareholders, and they act accordingly.
    The Chairman. The hearing is adjourned.
    [Whereupon, at 11:39 a.m., the hearing was adjourned.]
                            A P P E N D I X



                           September 27, 2007
[GRAPHIC] [TIFF OMITTED] 39542.001

[GRAPHIC] [TIFF OMITTED] 39542.002

[GRAPHIC] [TIFF OMITTED] 39542.003

[GRAPHIC] [TIFF OMITTED] 39542.004

[GRAPHIC] [TIFF OMITTED] 39542.005

[GRAPHIC] [TIFF OMITTED] 39542.006

[GRAPHIC] [TIFF OMITTED] 39542.007

[GRAPHIC] [TIFF OMITTED] 39542.008

[GRAPHIC] [TIFF OMITTED] 39542.009

[GRAPHIC] [TIFF OMITTED] 39542.010

[GRAPHIC] [TIFF OMITTED] 39542.011

[GRAPHIC] [TIFF OMITTED] 39542.012

[GRAPHIC] [TIFF OMITTED] 39542.013

[GRAPHIC] [TIFF OMITTED] 39542.014

[GRAPHIC] [TIFF OMITTED] 39542.015

[GRAPHIC] [TIFF OMITTED] 39542.016

[GRAPHIC] [TIFF OMITTED] 39542.017

[GRAPHIC] [TIFF OMITTED] 39542.018

[GRAPHIC] [TIFF OMITTED] 39542.019

[GRAPHIC] [TIFF OMITTED] 39542.020

[GRAPHIC] [TIFF OMITTED] 39542.021

[GRAPHIC] [TIFF OMITTED] 39542.022

[GRAPHIC] [TIFF OMITTED] 39542.023

[GRAPHIC] [TIFF OMITTED] 39542.024

[GRAPHIC] [TIFF OMITTED] 39542.025

[GRAPHIC] [TIFF OMITTED] 39542.026

[GRAPHIC] [TIFF OMITTED] 39542.027

[GRAPHIC] [TIFF OMITTED] 39542.028

[GRAPHIC] [TIFF OMITTED] 39542.029

[GRAPHIC] [TIFF OMITTED] 39542.030

[GRAPHIC] [TIFF OMITTED] 39542.031

[GRAPHIC] [TIFF OMITTED] 39542.032

[GRAPHIC] [TIFF OMITTED] 39542.033

[GRAPHIC] [TIFF OMITTED] 39542.034

[GRAPHIC] [TIFF OMITTED] 39542.035

[GRAPHIC] [TIFF OMITTED] 39542.036

[GRAPHIC] [TIFF OMITTED] 39542.037

[GRAPHIC] [TIFF OMITTED] 39542.038

[GRAPHIC] [TIFF OMITTED] 39542.039

[GRAPHIC] [TIFF OMITTED] 39542.040

[GRAPHIC] [TIFF OMITTED] 39542.041

[GRAPHIC] [TIFF OMITTED] 39542.042

[GRAPHIC] [TIFF OMITTED] 39542.043

[GRAPHIC] [TIFF OMITTED] 39542.044

[GRAPHIC] [TIFF OMITTED] 39542.045

[GRAPHIC] [TIFF OMITTED] 39542.046

[GRAPHIC] [TIFF OMITTED] 39542.047

[GRAPHIC] [TIFF OMITTED] 39542.048

[GRAPHIC] [TIFF OMITTED] 39542.049

[GRAPHIC] [TIFF OMITTED] 39542.050

[GRAPHIC] [TIFF OMITTED] 39542.051

[GRAPHIC] [TIFF OMITTED] 39542.052

[GRAPHIC] [TIFF OMITTED] 39542.053

[GRAPHIC] [TIFF OMITTED] 39542.054

[GRAPHIC] [TIFF OMITTED] 39542.055

[GRAPHIC] [TIFF OMITTED] 39542.056

[GRAPHIC] [TIFF OMITTED] 39542.057

[GRAPHIC] [TIFF OMITTED] 39542.058

[GRAPHIC] [TIFF OMITTED] 39542.059

[GRAPHIC] [TIFF OMITTED] 39542.060

[GRAPHIC] [TIFF OMITTED] 39542.061

[GRAPHIC] [TIFF OMITTED] 39542.062

[GRAPHIC] [TIFF OMITTED] 39542.063

[GRAPHIC] [TIFF OMITTED] 39542.064

[GRAPHIC] [TIFF OMITTED] 39542.065

[GRAPHIC] [TIFF OMITTED] 39542.066

[GRAPHIC] [TIFF OMITTED] 39542.067

[GRAPHIC] [TIFF OMITTED] 39542.068

[GRAPHIC] [TIFF OMITTED] 39542.069

[GRAPHIC] [TIFF OMITTED] 39542.070

[GRAPHIC] [TIFF OMITTED] 39542.071

[GRAPHIC] [TIFF OMITTED] 39542.072

[GRAPHIC] [TIFF OMITTED] 39542.073

[GRAPHIC] [TIFF OMITTED] 39542.074

[GRAPHIC] [TIFF OMITTED] 39542.075

[GRAPHIC] [TIFF OMITTED] 39542.076

[GRAPHIC] [TIFF OMITTED] 39542.077

[GRAPHIC] [TIFF OMITTED] 39542.078

[GRAPHIC] [TIFF OMITTED] 39542.079

[GRAPHIC] [TIFF OMITTED] 39542.080

[GRAPHIC] [TIFF OMITTED] 39542.081

[GRAPHIC] [TIFF OMITTED] 39542.082

[GRAPHIC] [TIFF OMITTED] 39542.083

[GRAPHIC] [TIFF OMITTED] 39542.084

[GRAPHIC] [TIFF OMITTED] 39542.085

[GRAPHIC] [TIFF OMITTED] 39542.086

[GRAPHIC] [TIFF OMITTED] 39542.087

[GRAPHIC] [TIFF OMITTED] 39542.088

[GRAPHIC] [TIFF OMITTED] 39542.089

[GRAPHIC] [TIFF OMITTED] 39542.090

[GRAPHIC] [TIFF OMITTED] 39542.091

[GRAPHIC] [TIFF OMITTED] 39542.092

[GRAPHIC] [TIFF OMITTED] 39542.093

[GRAPHIC] [TIFF OMITTED] 39542.094

[GRAPHIC] [TIFF OMITTED] 39542.095

[GRAPHIC] [TIFF OMITTED] 39542.096

[GRAPHIC] [TIFF OMITTED] 39542.097

[GRAPHIC] [TIFF OMITTED] 39542.098

[GRAPHIC] [TIFF OMITTED] 39542.099

[GRAPHIC] [TIFF OMITTED] 39542.100

[GRAPHIC] [TIFF OMITTED] 39542.101

[GRAPHIC] [TIFF OMITTED] 39542.102

[GRAPHIC] [TIFF OMITTED] 39542.103

[GRAPHIC] [TIFF OMITTED] 39542.104

[GRAPHIC] [TIFF OMITTED] 39542.105

[GRAPHIC] [TIFF OMITTED] 39542.106

[GRAPHIC] [TIFF OMITTED] 39542.107

[GRAPHIC] [TIFF OMITTED] 39542.108

[GRAPHIC] [TIFF OMITTED] 39542.109

[GRAPHIC] [TIFF OMITTED] 39542.110

[GRAPHIC] [TIFF OMITTED] 39542.111

[GRAPHIC] [TIFF OMITTED] 39542.112

[GRAPHIC] [TIFF OMITTED] 39542.113

[GRAPHIC] [TIFF OMITTED] 39542.114

[GRAPHIC] [TIFF OMITTED] 39542.115

[GRAPHIC] [TIFF OMITTED] 39542.116

[GRAPHIC] [TIFF OMITTED] 39542.117

[GRAPHIC] [TIFF OMITTED] 39542.118

[GRAPHIC] [TIFF OMITTED] 39542.119

[GRAPHIC] [TIFF OMITTED] 39542.120

[GRAPHIC] [TIFF OMITTED] 39542.121

[GRAPHIC] [TIFF OMITTED] 39542.122

[GRAPHIC] [TIFF OMITTED] 39542.123

[GRAPHIC] [TIFF OMITTED] 39542.124

[GRAPHIC] [TIFF OMITTED] 39542.125

[GRAPHIC] [TIFF OMITTED] 39542.126

[GRAPHIC] [TIFF OMITTED] 39542.127

[GRAPHIC] [TIFF OMITTED] 39542.128

[GRAPHIC] [TIFF OMITTED] 39542.129

[GRAPHIC] [TIFF OMITTED] 39542.130

[GRAPHIC] [TIFF OMITTED] 39542.131

[GRAPHIC] [TIFF OMITTED] 39542.132

[GRAPHIC] [TIFF OMITTED] 39542.133

[GRAPHIC] [TIFF OMITTED] 39542.134

[GRAPHIC] [TIFF OMITTED] 39542.135

[GRAPHIC] [TIFF OMITTED] 39542.136

[GRAPHIC] [TIFF OMITTED] 39542.137

[GRAPHIC] [TIFF OMITTED] 39542.138

[GRAPHIC] [TIFF OMITTED] 39542.139

[GRAPHIC] [TIFF OMITTED] 39542.140

[GRAPHIC] [TIFF OMITTED] 39542.141

[GRAPHIC] [TIFF OMITTED] 39542.142

[GRAPHIC] [TIFF OMITTED] 39542.143

[GRAPHIC] [TIFF OMITTED] 39542.144

[GRAPHIC] [TIFF OMITTED] 39542.145

[GRAPHIC] [TIFF OMITTED] 39542.146

[GRAPHIC] [TIFF OMITTED] 39542.147

[GRAPHIC] [TIFF OMITTED] 39542.148

[GRAPHIC] [TIFF OMITTED] 39542.149

[GRAPHIC] [TIFF OMITTED] 39542.150

[GRAPHIC] [TIFF OMITTED] 39542.151

[GRAPHIC] [TIFF OMITTED] 39542.152

[GRAPHIC] [TIFF OMITTED] 39542.153

[GRAPHIC] [TIFF OMITTED] 39542.154

[GRAPHIC] [TIFF OMITTED] 39542.155

[GRAPHIC] [TIFF OMITTED] 39542.156

[GRAPHIC] [TIFF OMITTED] 39542.157

[GRAPHIC] [TIFF OMITTED] 39542.158

[GRAPHIC] [TIFF OMITTED] 39542.159

[GRAPHIC] [TIFF OMITTED] 39542.160

[GRAPHIC] [TIFF OMITTED] 39542.161

[GRAPHIC] [TIFF OMITTED] 39542.162

[GRAPHIC] [TIFF OMITTED] 39542.163

[GRAPHIC] [TIFF OMITTED] 39542.164

[GRAPHIC] [TIFF OMITTED] 39542.165

[GRAPHIC] [TIFF OMITTED] 39542.166

[GRAPHIC] [TIFF OMITTED] 39542.167

[GRAPHIC] [TIFF OMITTED] 39542.168

[GRAPHIC] [TIFF OMITTED] 39542.169

[GRAPHIC] [TIFF OMITTED] 39542.170

[GRAPHIC] [TIFF OMITTED] 39542.171

[GRAPHIC] [TIFF OMITTED] 39542.172

[GRAPHIC] [TIFF OMITTED] 39542.173

[GRAPHIC] [TIFF OMITTED] 39542.174

[GRAPHIC] [TIFF OMITTED] 39542.175

[GRAPHIC] [TIFF OMITTED] 39542.176

[GRAPHIC] [TIFF OMITTED] 39542.177

[GRAPHIC] [TIFF OMITTED] 39542.178

[GRAPHIC] [TIFF OMITTED] 39542.179

[GRAPHIC] [TIFF OMITTED] 39542.180

[GRAPHIC] [TIFF OMITTED] 39542.181

[GRAPHIC] [TIFF OMITTED] 39542.182

[GRAPHIC] [TIFF OMITTED] 39542.183

[GRAPHIC] [TIFF OMITTED] 39542.184

[GRAPHIC] [TIFF OMITTED] 39542.185

[GRAPHIC] [TIFF OMITTED] 39542.186

[GRAPHIC] [TIFF OMITTED] 39542.187

[GRAPHIC] [TIFF OMITTED] 39542.188

[GRAPHIC] [TIFF OMITTED] 39542.189

