[Senate Hearing 111-315]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-315
 
 PROTECTING SHAREHOLDERS AND ENHANCING PUBLIC CONFIDENCE BY IMPROVING 
                          CORPORATE GOVERNANCE 

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                 SECURITIES, INSURANCE, AND INVESTMENT

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

EXAMINING THE IMPROVEMENT OF CORPORATE GOVERNANCE FOR THE PROTECTION OF 
         SHAREHOLDERS AND THE ENHANCEMENT OF PUBLIC CONFIDENCE

                               __________

                             JULY 29, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

         Subcommittee on Securities, Insurance, and Investment

                   JACK REED, Rhode Island, Chairman

            JIM BUNNING, Kentucky, Ranking Republican Member

TIM JOHNSON, South Dakota            MEL MARTINEZ, Florida
CHARLES E. SCHUMER, New York         ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          DAVID VITTER, Louisiana
DANIEL K. AKAKA, Hawaii              MIKE JOHANNS, Nebraska
SHERROD BROWN, Ohio                  BOB CORKER, Tennessee
MARK R. WARNER, Virginia
MICHAEL F. BENNET, Colorado
CHRISTOPHER J. DODD, Connecticut

               Kara M. Stein, Subcommittee Staff Director

      William H. Henderson, Republican Subcommittee Staff Director

                   Dean V. Shahinian, Senior Counsel

                Brian Filipowich, Legislative Assistant

                      Randy Fasnacht, GAO Detailee

                   Hester Peirce, Republican Counsel

          William Henderson, Republican Legislative Assistant

                                  (ii)






















                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JULY 29, 2009

                                                                   Page

Opening statement of Chairman Reed...............................     1
    Prepared statement...........................................    42

Opening statements, comments, or prepared statements of:
    Senator Bunning..............................................     2
    Senator Schumer..............................................     3

                               WITNESSES

Meredith B. Cross, Director, Division of Corporation Finance, 
  Securities and Exchange Commission.............................     6
    Prepared statement...........................................    42
    Responses to written questions of:
        Senator Bunning..........................................   230
John C. Coates IV, John F. Cogan, Jr., Professor of Law and 
  Economics, Harvard Law School..................................     8
    Prepared statement...........................................    45
    Responses to written questions of:
        Senator Bunning..........................................   232
        Senator Vitter...........................................   234
Ann Yerger, Executive Director, Council of Institutional 
  Investors......................................................     9
    Prepared statement...........................................    50
    Responses to written questions of:
        Senator Bunning..........................................   235
        Senator Vitter...........................................   239
John J. Castellani, President, Business Roundtable...............    11
    Prepared statement...........................................   127
    Responses to written questions of:
        Senator Bunning..........................................   240
J.W. Verret, Assistant Professor of Law, George Mason University 
  School of Law..................................................    13
    Prepared statement...........................................   224
    Responses to written questions of:
        Senator Bunning..........................................   244
        Senator Vitter...........................................   244
Richard C. Ferlauto, Director of Corporate Governance and Pension 
  Investment, American Federation of State, County, and Municipal 
  Employees......................................................    15
    Prepared statement...........................................   225
    Responses to written questions of:
        Senator Bunning..........................................   245

                                 (iii)


 PROTECTING SHAREHOLDERS AND ENHANCING PUBLIC CONFIDENCE BY IMPROVING 
                          CORPORATE GOVERNANCE

                              ----------                              


                        WEDNESDAY, JULY 29, 2009

                                       U.S. Senate,
     Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:35 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Jack Reed (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF CHAIRMAN JACK REED

    Chairman Reed. Let me call the hearing to order and welcome 
our witnesses. Thank you, ladies and gentlemen. We expect 
momentarily that the Ranking Member will arrive, and I thank 
Senator Corker and Senator Menendez for joining us.
    Today's hearing will focus on corporate boardrooms and try 
to help us better understand the misaligned incentives that 
drove Wall Street executives to take harmful risks with the 
life savings and retirement income of so many people. This 
Subcommittee has held several hearings in recent months to 
focus on gaps in our financial regulatory system, including the 
largely unregulated markets for over-the-counter derivatives, 
hedge funds, and other private investment pools.
    We have also examined problems that resulted from 
regulators simply failing to use the authority they had, such 
as our hearing in March that uncovered defective risk 
management systems at major financial institutions.
    But although regulators play a critical role in policing 
the markets, they will always struggle to keep up with evolving 
and cutting-edge industries. Today's hearing will examine how 
we can better empower shareholders to hold corporate boards 
accountable for their actions and make sure that executive pay 
and other incentives are used to help companies better focus on 
long-term performance goals over day-to-day profits. In this 
latter regard, this is a timely hearing based on the action 
yesterday of the House Financial Services Committee.
    Wall Street executives who pursued reckless products and 
activities they did not understand brought our financial system 
to this crisis. Many of the boards that were supposed to look 
out for shareholders' interests failed at this most basic of 
jobs. This hearing will help determine where the corporate 
governance structure is strong, where it needs improvement, and 
what role the Federal Government should play in this effort.
    I will ask our witnesses what the financial crisis has 
revealed about current laws and regulations surrounding 
corporate governance, including executive compensation, board 
composition, election of directors and other proxy rules, and 
risk management. In particular, we will discuss proposals to 
improve the quality of boards by increasing shareholder input 
into board membership and requiring annual election of and 
majority voting for each board member.
    We will also discuss requiring ``say-on-pay,'' or 
shareholder endorsements of executive compensation. We need to 
find ways to help public companies align their compensation 
practices with long-term shareholder value and for financial 
institutions overall firm safety and soundness. We also need to 
ensure that compensation committee members who play key roles 
in setting executive pay are appropriately independent from the 
firm managers that they are paying.
    Other key proposals would require public companies to 
create risk management activities on their boards and separate 
the chair and CEO positions to ensure that the CEO is held 
accountable by the board and an independent chair.
    I hope today's hearing will allow us to examine these and 
other proposals and take needed steps to promote corporate 
responsiveness to the interests of shareholders, and I welcome 
today's witnesses and look forward to the testimony.
    Now let me recognize Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman. I am sorry I am 
just a little late. Phone calls are a pain right now.
    This is a very important topic for us, but a hard one to 
deal with. While we may be able to make some reforms that will 
promote good long-term performance and responsible behavior, we 
will not, I say, be able to prevent bad decisions or failures. 
After all, we cannot legislate good judgment or ethics. And we 
already have the ultimate form of accountability through 
bankruptcy.
    In general, pay should promote good long-term performance, 
and shareholders must share in the gain, not just executives 
and traders. Boards must be more involved--I say that again: 
Boards must be more involved and be an effective check on 
management. Proxy access must benefit the majority of 
stockholders and encourage long-term values. If we are not 
careful, those changes could have the exact opposite effect by 
empowering a minority of shareholders to strip the company of 
value and encourage risky behavior in search of short-term 
profits.
    While we are right to be outraged at what has gone on in 
the financial sector, we must be careful that efforts to rein 
in Wall Street's behavior do not put handcuffs on other 
businesses that have different needs and challenges. Corporate 
law for the first 230-plus years of this country has been 
handled pretty well at the State level, and if we are going to 
change that, we should be sure of what we are doing. And I am 
sure looking forward to hearing what our panel has to say.
    Thank you.
    Chairman Reed. Thank you very much, Senator Bunning.
    Senator Corker, do you have any opening comments?
    Senator Corker. As always, I prefer to listen to the 
witnesses and ask questions, but thank you all for being here.
    Chairman Reed. Thank you, Senator.
    Senator Schumer has arrived, and I know he has taken a 
leadership role on this issue of corporate governance with his 
legislative proposals and his constant attention. In fact, it 
was Senator Schumer's suggestion that we hold this hearing, so 
I want to recognize him for any comments that he might have.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Well, thank you, Senator Reed, and let me 
express my profound gratitude to you for holding this hearing 
and to Ranking Member Bunning for being here as well on such an 
important subject.
    As you acknowledged, Mr. Chairman, corporate governance is 
of great importance to me, and I introduced the Shareholder 
Bill of Rights with Senator Cantwell earlier this year. The 
bill was supported by 20 major pension funds, consumer groups, 
labor unions, and just yesterday, the House Financial Services 
Committee passed a ``say-on-pay'' bill similar to the ``say-on-
pay'' we have in the Shareholder Bill of Rights. So I am glad 
to see Congress is moving forward in this process, and today's 
hearing is a great opportunity to get a chance to explore these 
issues in more detail.
    In the last year-plus, we have talked a great deal about 
the failures of regulation and Government oversight in the 
financial system. But our dynamic economy and capital markets 
also depend on internal oversight by vigilant boards of 
directors who ensure that management is steering the ship in 
the right direction.
    Unfortunately, there are far too many cases recently where 
boards of directors, not just regulators, were asleep at the 
wheel, or even complicit in practices that caused great harm to 
our economy and shook public confidence in our capital markets. 
Executives who encouraged risk-taking that they did not 
understand were not checked by their boards. Compensation 
packages that rewarded short-term actions but not long-term 
thinking were not undone by their boards.
    Fundamentally, too many boards neglected their most 
important job: prioritizing the long-time health of their firms 
and their shareholders and carefully overseeing management. In 
other words, there was widespread failure of corporate 
governance that has proven disastrous not just for individual 
businesses but for the economy as a whole.
    And there are many in this room on both sides of the aisle 
who say, you know, the Government cannot get involved in the 
details of what a company does. And that is right. That is our 
free market system. But the place that there is supposed to be 
a check is in the board of directors, and when over the years 
in too many companies--there are many companies that have good 
boards and many companies that already have implemented many if 
not all the reforms in our bill. But in too many companies, the 
boards did not do the job.
    And the damage. What if the board of AIG had checked some 
of its actions? What is the board of Bear Stearns had checked 
some of its actions? The taxpayers probably would have saved 
hundreds of billions of dollars. So it affects all of us. It is 
not just the internals of the company.
    And so Senator Cantwell introduced our bill. It makes 
corporate boards accountable to the shareholders whose 
interests they are supposed to protect. The Shareholder Bill of 
Rights will go a long way to making sure that these failures do 
not happen again, and as everyone knows, there are six key 
components in our bill. I am not going to read them. I am going 
to save that in the interest of time.
    Several elements of the bill have already been in place, as 
I said, by many corporations, and that is important to 
remember, because for many corporations, these are already best 
practices. Well-run companies do not fear their shareholders 
because they recognize that boards, management, and 
shareholders share the same interests: long-term growth and 
profitability. The greatest damage occurs not when boards are 
too active, but when they are not active enough.
    I think the Shareholder Bill of Rights will go a long way 
to ensuring that companies are responsive to their 
shareholders' interests. I thank you and congratulate you, 
Chairman Reed, for putting together an excellent panel. I look 
forward to the hearing, the testimony of the witnesses, and I 
would ask that my entire statement be put in the record.
    Chairman Reed. Without objection, all statements will be 
put in the record.
    Senator Corker, do you have a comment?
    Senator Corker. Mr. Chairman, this is an unusual request. I 
do not really know what those six elements are, and I think 
since it sounds like----
    Senator Schumer. Since you ask----
    Senator Corker. This has not been a highly debated bill. 
Since I sense this hearing has a lot to do with the fact that 
this bill is being introduced, it might be good for all of us 
to know what those six elements are?
    Senator Schumer. OK. May I read them, Mr. Chairman? It will 
take a minute.
    Chairman Reed. Absolutely. This is----
    Senator Schumer. Unusual.
    Chairman Reed. Unusual. Usually, you do not need 
encouragement.
    [Laughter.]
    Senator Corker. Let me say this. I want to, for the record, 
note that I usually do not like to hear any opening comments, 
but in this case, since----
    Senator Schumer. Yes, well, thank you. And I was going to 
say, similar to what Jack Reed said, this is the first time 
that someone has asked Chuck Schumer to say more on a subject 
than he has said. Here they are.
    First, we require all public companies hold an advisory 
shareholder vote on executive compensation and obtain 
shareholder approval for golden parachutes.
    Second, we instruct the SEC to issue rules allowing long-
term shareholders with significant stakes in the company to 
have access to the company's proxy form if they want to 
nominate directors to the board. If you are going to try to 
keep the board honest, you ought to have access to proxies. Now 
it is next to impossible for people to get.
    Third, it requires boards of directors to receive a 
majority of the vote in uncontested elections in order to 
remain on the board. It makes no sense for board members to be 
reelected if the majority of shareholders casting ballots vote 
against them.
    Fourth, it eliminates staggered boards which insulate board 
members from the consequences of their decisions by requiring 
all directors to face election annually.
    Fifth, it requires public companies to split the jobs of 
CEO and chairman of the board and requires the chairman to be 
an independent director. That one has gotten the most pushback 
from the corporate world. That surprised me, but that is the 
facts.
    And, sixth, and finally, requires public companies to 
create a separate risk committee containing all independent 
directors to assess the risks that the company is undertaking.
    Thank you, Mr. Chairman. Thank you, Senator Corker.
    Chairman Reed. Thank you both.
    We have been joined by Senator Warner. I wonder if you have 
any opening comments, Senator.
    Senator Warner. I will--have I missed testimony already?
    Chairman Reed. No, you have not.
    Senator Warner. I am anxiously looking forward to the 
testimony.
    Chairman Reed. Thank you. Now let me introduce our 
witnesses.
    Our first is Ms. Meredith B. Cross, the Director of the 
Division of Corporation Finance at the U.S. Securities and 
Exchange Commission. Prior to joining the staff in June 2009, 
Ms. Cross was a partner at Wilmer, Cutler, Pickering, Hale & 
Dorr in Washington, DC, where she advised clients on corporate 
and securities matters, was involved with the full range of 
issues faced by public and private companies in capital raising 
and financial reporting. Prior to joining Wilmer Hale, Ms. 
Cross worked at the SEC from 1990 to 1998 in various 
capacities, including chief counsel and deputy director of the 
division she now leads.
    Our next witness is Professor John C. Coates. Professor 
Coates is the John F. Cogan, Jr. Professor of Law and Economics 
at Harvard Law School. He joined the faculty in 1997 after 
practicing at the New York law firm of Wachtell, Lipton, Rosen 
& Katz where he was a partner specializing in mergers and 
acquisitions, corporate and securities law, and the regulation 
of financial institutions. He is a member of the Legal Advisory 
Committee of the New York Stock Exchange, and he is the author 
of a number of articles on corporate, securities, and financial 
institution law and for 7 years coauthored the leading annual 
survey of development and financial institution M&A.
    Our next witness is Ms. Ann Yerger. She is the Executive 
Director of the Council of Institutional Investors, an 
organization of public, corporate, and Taft-Hartley pension 
funds. Ms. Yerger joined the council in early 1996 as the 
Director of the Council's Research Service before being named 
Executive Director in January 2005. Her prior experiences 
include work at the Investor Responsibility Research Center and 
Wachovia Bank.
    Our next witness is Mr. John J. Castellani. Mr. Castellani 
is the President of the Business Roundtable, an association of 
chief executive officers of U.S. companies. Mr. Castellani 
joined the Business Roundtable in May 2001 and had led the 
group's efforts on public policy issues ranging from trade 
expansion to civil justice reform to fiscal policy. Prior to 
becoming President of the Business Roundtable, Mr. Castellani 
was Executive Vice President of Tenneco, Incorporated.
    Our next witness is Professor J.W. Verret. Professor Verret 
is an Assistant Professor of Law at George Mason University 
School of Law. He has written extensively on corporate law 
topics, including a recent paper cowritten with Chief Justice 
Myron T. Steele of the Delaware Supreme Court. Prior to joining 
the faculty at George Mason Law School, Professor Verret was an 
associate in the SEC Enforcement Defense Practice Group at 
Skadden Arps in Washington, DC, and also served as a law clerk 
for Vice Chancellor John W. Noble of the Delaware Court of 
Chancery. This forum is critical for disputes between 
shareholders and directors of Delaware corporations--which, by 
the way represents about 70 percent of the publicly traded 
corporations.
    Our final witness is Mr. Richard C. Ferlauto. Mr. Ferlauto 
is Director of Corporate Governance and Pension Investment at 
the American Federation of State, County, and Municipal 
Employees, AFSCME, where he is responsible for representing 
public employee interest and public retirement and benefit 
systems. Mr. Ferlauto is also the founder and chairman of 
ShareOwners.org, a nonprofit, nonpartisan shareholder education 
organization. Prior to joining AFSCME, Mr. Ferlauto was the 
Managing Director of Proxy Voter Services/ISS, which provides 
proxy advisory services to Taft-Hartley and publicly funded 
plan sponsors.
    I appreciate all of your appearance here today and let me 
recognize Ms. Cross.

     STATEMENT OF MEREDITH B. CROSS, DIRECTOR, DIVISION OF 
    CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION

    Ms. Cross. Good afternoon, Chairman Reed, Ranking Member 
Bunning, and Members of the Subcommittee. My name is Meredith 
Cross, and I am Director of the Division of Corporation Finance 
at the U.S. Securities and Exchange Commission. As you noted, I 
just rejoined the SEC staff in June of this year after more 
than 10 years in private practice here in Washington. I worked 
at the SEC for most of the 1990s, and I am delighted to be back 
at the agency at this critical time in the regulation of our 
financial markets. I am pleased to testify on behalf of the 
Commission today on the topics of corporate governance and the 
agency's ongoing efforts to assure that investors have the 
information they need to make informed voting and investment 
decisions.
    Good corporate governance is essential to investor 
confidence in the markets, and it cannot exist without 
transparency--that is, timely and complete disclosure of 
material information. In responding to the market crisis and 
erosion of investor confidence, the Commission has identified 
and taken steps over the past months in a number of significant 
areas where the Commission believes enhanced disclosure 
standards and other rule changes may further address the 
concerns of the investing public.
    Two months ago, the Commission voted to approve proposals 
designed to help shareholders more effectively exercise their 
State law right to nominate directors. Under the proposals, 
shareholders who otherwise have the right to nominate directors 
at a shareholder meeting would, subject to certain conditions, 
be able to include a limited number of nominees in the company 
proxy materials that are sent to all shareholders whose votes 
are being solicited. Shareholders also would have an expanded 
ability to include in company proxy materials shareholder 
proposals addressing this important topic. In addition, the 
Commission recently proposed amendments to its proxy rules to 
enhance the disclosure that is provided to shareholders in 
company proxy statements, a key document in shareholders' 
voting decisions on the election of directors.
    Under the proposals, shareholders would receive expanded 
information about the qualifications of directors and director 
candidates, the board's leadership structure and role in risk 
management, and potential conflicts of interest of compensation 
consultants, in addition to enhanced disclosure concerning the 
company's compensation policies and whether they create 
incentives for employees to act in a way that creates risks 
that are not aligned with the company's objectives. The 
proposal also would improve the reporting of annual stock and 
option awards to company executives and directors and would 
require quicker reporting of shareholder vote results.
    The Commission also recently proposed amendments to the 
proxy rules to clarify the requirements consistent with the 
Emergency Economic Stabilization Act of 2009 for a ``say-on-
pay'' vote at public companies that have received and not 
repaid financial assistance under the TARP and approved changes 
to the New York Stock Exchange rules to prohibit brokers from 
voting shares held in street name in director elections unless 
they have received specific voting instructions from their 
customers.
    Finally, the Commission has asked the staff to undertake 
this year a comprehensive review of other potential 
improvements to the proxy voting system and shareholder 
communications rules. The Commission looks forward to hearing 
from the public on the outstanding proposals and to carefully 
considering all views in moving forward over the coming months.
    Thank you again for inviting me to appear before you today 
and for the Subcommittee's support of the agency in its efforts 
at this critical time for our Nation's investors. The 
Commission will remain vigilant in its efforts to support 
strong corporate governance and disclosure practices and also 
stands ready to lend whatever assistance it can to the work 
that is going on outside the agency on these important topics.
    I would be happy to answer any questions you may have.
    Chairman Reed. Thank you very much, Ms. Cross.
    Professor Coates.

 STATEMENT OF JOHN C. COATES IV, JOHN F. COGAN, JR., PROFESSOR 
            OF LAW AND ECONOMICS, HARVARD LAW SCHOOL

    Mr. Coates. Thank you, Senator Reed, thank you, Ranking 
Member Bunning, and the rest of the Members of the Committee 
who are. I very much appreciate the opportunity to talk about 
corporate governance.
    Good corporate governance is an essential foundation to 
economic growth, and so this could not be a more important time 
for the Congress to be focusing on it.
    There are a large number of reforms--six in Senator 
Schumer's bill alone, and there are many others--that we could 
talk about. I am going to talk about a few. I am happy to talk 
about others that you may have questions about or want to 
explore. But before I talk about specifics, let me make two 
general remarks that I think should be kept in mind in thinking 
about any particular reform.
    First, and maybe a little controversially, I think it is 
fair to say that the academic perspective on corporate 
governance would view financial firms differently than other 
kinds of corporations, and not in the straightforward way that 
you might think; that is to say, shareholders of financial 
firms want financial firms to take risk and want them to take 
more risk than may be appropriate from the perspective of the 
taxpayer. That is because many of the large financial 
institutions are, as we have learned, too big, too complex to 
fail, so that from the shareholders' perspective, if things go 
well with the risks that the companies take, they are on the 
upside; and if things go badly, then in the end it is the 
taxpayer who helps defray the costs to the shareholders.
    As a result of that, I do not think that it would be a good 
idea to give shareholders considerably more power in the 
governance of large financial institutions. I think, in fact, 
if anything, financial regulators should be given more 
authority to check the power that shareholders have, at least 
on particular issues--compensation being one. The compensation 
structures and incentives that shareholders, even if the boards 
are doing exactly the right thing for shareholder, that 
shareholders want of large banks are not the ones that are 
going to be the most safe and most sound from the perspective 
of the American public. So that is the first general remark.
    Second is across the board on this, I think it is fair to 
say that academic and scientific research more generally is 
quite weak. It is evolving. There is almost no nontrivial issue 
in corporate governance about which there is not fierce 
academic as well as political argument. That cautions against 
passing rules that are fixed, mandatory, and are hard to change 
over time. Instead, it cautions for giving shareholders the 
ability to adopt rules for their own companies, facilitating 
collective action by them--and that is an important role, I 
think, that regulation can play. Shareholders of public 
companies are dispersed, cannot easily act on their own, and 
often face entrenched boards who are unwilling to make changes 
when they are, in fact, the best thing for the companies.
    The caution about the weakness of the scientific evidence 
is also not a reason to do nothing because what I just said is 
one thing that there is general consensus on. Disperse 
shareholders have a hard time acting for themselves as the 
number of shareholders increase. And the other general 
consensus, I would say, across the board is that corporate 
governance in the United States in the last 10 to 20 years has 
not performed terribly well at a large number of companies. And 
so there is need for change, and there is need for carefully 
considered moderate reforms of a kind that can be revised over 
time as learning on these subjects grows.
    So on the specifics, let me say quickly, I think the 
evidence that we do have is that ``say-on-pay'' is a good idea, 
and I am happy to expound on that beyond that bottom-line 
conclusion.
    I would say for large companies, splitting CEOs from 
chairmen has some evidence behind it that that is a good thing. 
Smaller companies, I am not so sure the evidence is there. But 
as long as the SEC is given appropriate authority to tailor any 
legislation in this area, I think that would be a good thing to 
pursue.
    I would say that staggered boards, the evidence, if 
anything, runs against eliminating them. They are an important 
option between, on the one hand, a fully contestable corporate 
governance structure where every director is up for election 
every year, and a governance structure where essentially the 
insiders have complete control, as in the case of Google, which 
is a reasonably successful company. In between, staggered 
boards have proven to be a type of governance structure that 
investors and new IPOs have been willing to put their money 
behind, and to ban them across the board I don't think is 
supported by the evidence at the moment.
    On shareholder access, just to wrap up, frankly there is no 
evidence, and I think there is--that is a reason to proceed, 
but to proceed cautiously, to proceed through the SEC, and here 
I think the SEC already has adequate authority to pursue this 
topic. But the one thing Congress probably could clarify is 
exactly what their authority is in this area, and I think that 
would be a good thing.
    With that, thank you.
    Chairman Reed. Thank you very much, Professor Coates.
    Ms. Yerger.

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

    Ms. Yerger. Good afternoon. Thank you very much for the 
opportunity to share the council's views on the very important 
issues under consideration today.
    By way of introduction, council members are responsible for 
safeguarding assets used to fund the retirement of millions of 
individuals throughout the United States. They are capitalists, 
responsible for an aggregate portfolio of somewhere north of $3 
trillion in assets. They have a very significant commitment to 
the domestic markets, on average investing about 60 percent of 
their portfolios in stocks and bonds of U.S. public companies. 
And they are long-term, patient investors due to their long 
investment horizons and their very heavy commitment to passive 
investment strategies.
    Council members have been very deeply impacted by the 
financial crisis, and they have a vested interest in ensuring 
that the gaps and shortcomings exposed by this crisis are 
repaired. Clearly, a review and restructuring of the U.S. 
financial regulatory model are necessary steps toward restoring 
investor confidence and protecting against a repeat of these 
failures. But regulatory reform alone is insufficient. 
Corporate governance failures also contributed to this crisis, 
and as a result, governance reforms are an essential piece of 
the reform puzzle.
    Failures of board oversight, of enterprise risk, and 
executive pay were clear contributors to this crisis. In 
particular, far too many boards structured and approved 
executive pay programs that motivated excessive risk-taking and 
paid huge rewards, often with little or no downside risk, for 
short-term results. Current corporate governance rules also 
failed by denying owners of U.S. companies the most basic 
rights to hold directors accountable. The council believes 
governance reforms in four areas are essential, and, Senator 
Schumer, they will be familiar to you.
    First, Congress should mandate majority voting for 
directors of all U.S. public companies. It is a national 
disgrace that under most State laws the default standard for 
uncontested director elections is a plurality vote, which means 
that a director is elected even if a majority of the shares are 
withheld from the nominee. The corporate law community has 
taken baby steps to accommodate majority voting, and some 
companies have volunteered to adopt majority voting, but 
sometimes only when pressured by shareowners.
    But while many of the largest U.S. companies have adopted 
majority voting, plurality voting still dominates at small and 
midsized U.S. companies. This is a fundamental flaw in our 
governance model. Given the failure by the States, particularly 
Delaware, to lead this reform, the council believes that the 
U.S. Congress must legislate this important and most basic 
shareowner right.
    Second, Congress should affirm the SEC's authority to 
promulgate rules allowing owners to place their director 
nominees on management's proxy card. The council believes a 
modest proxy access mechanism would substantially contribute to 
the health of our U.S. governance model by making boards more 
responsive to shareowners, more thoughtful about whom they 
nominate, and more vigilant about their oversight 
responsibilities.
    The council commends the SEC for its leadership on this 
important reform, but, unfortunately, the SEC may face 
unnecessary, costly, and time-consuming litigation in response 
to any approved access mechanism. To ensure that owners of U.S. 
companies face no needless delays over the effective date of 
this critical reform, the council recommends congressional 
affirmation of the SEC's authority.
    Third, Congress should pass legislation mandating annual 
advisory votes on executive pay, explore strengthening clawback 
standards, and support the SEC's efforts to enhance executive 
pay disclosures.
    Council members have a vested interest in ensuring that 
U.S. companies attract, retain, and motivate the highest-
performing employees and executives. But as highlighted by this 
crisis, they are harmed when poorly structured pay programs 
reward go-for-broke, short-term performance that ultimately 
harms the company's long term.
    The council believes executive pay issues are best 
addressed by: first, requiring companies to provide full 
disclosure of key elements of pay; second, ensuring that 
directors can be held accountable for their pay decisions 
through majority voting and access mechanisms; third, by giving 
shareowners oversight of executive pay via annual nonbinding 
votes; and, fourth, by requiring disgorgement of ill-gotten 
gains.
    One technical suggestion. We recommend that legislation 
mandating annual advisory votes stipulate that these are a 
nonroutine matter for purposes of New York Stock Exchange Rule 
452.
    Fourth, Congress should mandate that all corporate boards 
be chaired by an independent director. The council believes 
separating these positions appropriately reflects differences 
in the roles, provides a better balance of power between the 
CEO and the board, and facilitates strong, independent board 
leadership and functioning.
    In closing, empirical evidence from around the globe 
supports these reforms. The experiences in other countries and, 
where applicable, here in the United States are powerful 
evidence that these reforms are not harmful to the markets and, 
of note, these measures do not reward short-termism. On the 
contrary, they are tools to enable owners to think and act for 
the long term.
    Thank you for your consideration of these important issues, 
and I look forward to answering any questions.
    Chairman Reed. Thank you very much, Ms. Yerger.
    Mr. Castellani.

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE

    Mr. Castellani. Thank you. Good afternoon, Mr. Chairman, 
Ranking Member Bunning, Members of the Committee. I am John 
Castellani, President of the Business Roundtable.
    The Business Roundtable has long been at the forefront of 
efforts to improve corporate governance. We have, in fact, been 
issuing best practice statements in this area for more than 
three decades. All of those best practice statements are driven 
by one principle: To further U.S. companies' ability to create 
jobs, product service benefits, and shareholder value that 
improve the well-being of all Americans.
    At the outset, I must respectfully take issue with the 
premise that the most significant cause of the current 
financial crisis was problems in corporate governance. The 
financial crisis likely stemmed from a variety of complex 
factors, including failures of the regulatory system, over-
leveraged financial markets, a real estate bubble, as well as 
failures in risk management.
    The recently established Financial Crisis Inquiry 
Commission is just starting its work, and any attempt to make 
policy in response to the purported causes would seem 
premature. In fact, to do so could well exacerbate factors that 
may have contributed to the crisis, such as the emphasis on 
short-term gains at the expense of long-term sustainable 
growth.
    Moreover, the problems giving rise to the financial crisis 
occurred at a specific group of companies, financial 
institutions. Responding by enacting a one-size-fits-all 
corporate governance regime applicable to all 12,000 publicly 
traded companies really does not make much sense. This approach 
fails to consider a number of factors that I would like to 
spend the remainder of my time this afternoon discussing.
    First, there has been sweeping transformation of corporate 
governance practices in the past 6 years, many of which have 
been proactively adopted by companies. For example, the average 
board independence of S&P 1500 companies increased from 69 
percent in 2003 to 78 percent in 2008. That same group of 
companies that have a separate chairman of the board increased 
from 30 percent in 2003 to 46 percent in 2008. Many companies 
have appointed an independent lead or presiding director who, 
among other things, presides over executive sessions of the 
independent directors. Companies have adopted majority voting 
standards for the election of directors. In fact, more than 70 
percent of the S&P 500 companies have done so. And many 
companies have moved to the annual election of directors.
    Second, applying a single one-size-fits-all approach to 
corporate governance regardless of a company's size, 
shareholder base, and other circumstances simply will not work. 
While there is a multitude of guidance about best practices in 
corporate governance, each company must periodically assess the 
practices that will best enable it to operate most effectively 
to create long-term shareholder value.
    In this regard, we share the concerns recently expressed by 
New Jersey Investment Council in the letter to SEC Chairman 
Schapiro, that it is, quote, ``troubled by the proliferation of 
rigid, prescriptive responses which are costly, time consuming, 
unresponsive to individual fact settings surrounding specific 
companies and industries, and which may correlate only randomly 
with the creation of shareholder value.''
    Third, for more than 200 years, State corporate law has 
been the bedrock upon which the modern business corporation has 
been created and has thrived. It remains the most appropriate 
and effective source of corporate governance. In large part, 
this stems from the flexibility provided by its enabling nature 
and by its responsiveness in adjusting to current developments. 
The amendments to Delaware and other States' laws over the past 
several years have facilitated majority voting and director 
elections, and the very recent amendments in Delaware law to 
facilitate proxy access and proxy reimbursement bylaws are 
examples of this responsiveness and flexibility.
    Fourth, to the extent that shareholders desire change in a 
particular company's corporate governance, many avenues are 
available to them to make their views known and for companies 
to respond. For example, shareholders may seek to have their 
proposals included in company proxy statements. In recent 
years, many companies have responded to these proposals by 
adopting significant corporate governance changes, including 
majority voting for directors, special meetings called by 
shareholders, and the elimination of super-majority voting 
requirements. Recently, some companies have implemented an 
advisory vote on compensation, so-called ``say-on-pay,'' in 
response to shareholder proposals. Shareholders often engage in 
withhold campaigns against particular directors. And further, 
shareholders can engage in proxy contests to elect their 
director nominees to a company's board.
    Finally, the SEC has an important role in seeing that 
shareholders receive the disclosures that they need to make 
informed decisions. In this regard, the SEC has issued a number 
of corporate governance-related proposals that are aimed at 
improving disclosure about director experience, board 
leadership structure, oversight of risk management, executive 
compensation, and potential conflicts of interest with 
compensation consultants. The Business Roundtable generally 
supports those.
    Another more controversial SEC proposal seeks to amend the 
proxy rules to permit shareholders to nominate directors in a 
company's proxy materials. We have serious concerns with this 
proposal, and we will share those concerns with the SEC in our 
comments. But briefly, we believe that the adoption of this 
proposal could promote short-termism, deter qualified directors 
from serving on corporate boards, and lead to the election of 
special interest directors, increase the influence of the proxy 
advisory services, and highlight voting integrity problems in 
the system.
    In closing, let me emphasize the Roundtable's commitment to 
effective governance practices and enabling U.S. companies to 
compete globally, create jobs, and generate economic growth. 
However, we must be careful that in a zeal to address our 
current financial crisis, we do not adopt a one-size-fits-all 
approach that can undermine the stability of boards of 
directors and place companies under even greater pressure for 
short-term performance. We must be cautious that we don't 
jeopardize the engine of American wealth and prosperity.
    Thank you.
    Chairman Reed. Thank you very much, Mr. Castellani.
    Professor Verret, please.

 STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, GEORGE 
                 MASON UNIVERSITY SCHOOL OF LAW

    Mr. Verret. Chairman Reed, Ranking Member Bunning, and 
distinguished Members of the Committee, I appreciate the 
opportunity to testify in this forum today. My name is J.W. 
Verret. I teach corporate law at George Mason Law School. I am 
a Senior Scholar with the Mercatus Center Financial Markets 
Working Group, and I also run the Corporate federalism 
Initiative, a network of scholars dedicated to studying the 
intersection of State and Federal authority in corporate 
governance.
    I will begin by addressing proxy access and executive 
compensation rules under consideration, neither of which 
address the current financial crisis and both of which may 
result in significant unintended consequences. Then I will 
close with a list of factors that did contribute to the present 
financial crisis.
    I am concerned that some of the corporate governance 
proposals recently advanced impede shareholder voice in 
corporate elections. This is because they leave no room for 
investors to design corporate governance structures appropriate 
for their particular circumstances and particular companies. 
Rather than expanding shareholder choice, the proxy reform and 
``say-on-pay'' proposals before this committee actually stand 
in the way of shareholder choice. Most importantly, they do not 
permit a majority of shareholders to reject the Federal 
approach.
    The Director of the United Brotherhood of Carpenters said 
it best. Quote, ``We think less is more. Fewer votes and less 
often would allow us to put more resources toward intelligent 
analysis.'' The Brotherhood of Carpenters opposes the current 
proposal out of concern about compliance costs. The proposals 
at issue today ignore their concerns, as well as concerns of 
many other investors.
    Consider why one might limit shareholders from considering 
alternative means of shareholder access. It can only be because 
a majority of shareholders at many companies might reject the 
Federal approach if given the opportunity. Not all shareholders 
share the same goals. Public pension funds run by State elected 
officials and union pension funds are among the most vocal 
proponents of the proposals before this committee. There are 
many examples where they used their power, their existing 
shareholder power, toward their own special interests. Main 
Street investors deserve the right to determine whether they 
want the politics of unions and State pension funds to take 
place in their 401(k)s.
    The current proposals also envision more disclosure about 
compensation consultants. Such a discussion would be incomplete 
without mentioning conflicts faced by proxy advisory firms like 
RiskMetrics, an issue the current proposals have failed to 
address.
    In addition, I will note that there is no evidence that 
executive compensation played a role in the current crisis. If 
executive compensation were to blame for the present crisis, we 
would see significant difference between compensation policies 
at those companies that recently returned their TARP money and 
those needing additional capital. We do not.
    Many of the current proposals also seek to undermine and 
take legislative credit for efforts currently underway at the 
State level and in negotiations between investors and boards. 
This is true on proxy access, the subject of recent rule making 
at the State level, and it is true for Federal proposals on 
staggered boards, majority voting, and independent chairmen.
    We have run this experiment before. The Sarbanes-Oxley Act 
passed in 2002 was an unprecedented shift in corporate 
governance, designed to prevent poor management practices. 
Between 2002, when Sarbanes-Oxley was passed, and 2008, the 
managerial decisions that led to the current crisis were in 
full swing. I won't argue that Sarbanes-Oxley caused the 
crisis, but this does suggest that corporate governance reform 
at the Federal level does a poor job of preventing crisis.
    And yet the financial crisis of 2008 must have a cause. I 
commend this Committee's determination to undercover it, but 
challenge whether corporate governance is, in fact, the 
culprit. Let me suggest six alternative contributing factors 
for this Committee to investigate.
    One, the moral hazard problems created by the prospect of 
Government bailout.
    Two, the market distortions caused by subsidization of the 
housing market through Fannie Mae, Freddie Mac, and Federal tax 
policy.
    Three, regulatory failure by the banking regulators and the 
SEC in setting appropriate risk-based capital reserve 
requirements for investment in commercial banks.
    Four, short-term thinking on Wall Street, fed by 
institutional investor fixation on firms making and meeting 
quarterly earnings predictions.
    Five, a failure of credit-rating agencies to provide 
meaningful analysis caused by an oligopoly in the credit-rating 
market supported by regulation.
    Six, excessive write-downs in asset values under mark-to-
market accounting, demanded by accounting firms who refuse to 
sign off on balance sheets out of concern about exposure to 
excessive litigation risk.
    Corporate governance is the foundation of American capital 
markets. Shifting that foundation requires deliberation and a 
respect for the roles of States in corporate governance. 
Eroding that foundation risks devastating effects for capital 
markets.
    Thank you for the opportunity to testify and I look forward 
to answering your questions.
    Chairman Reed. Thank you very much, Professor.
    Mr. Ferlauto, please.

         STATEMENT OF RICHARD C. FERLAUTO, DIRECTOR OF
          CORPORATE GOVERNANCE AND PENSION INVESTMENT,
 AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES

    Mr. Ferlauto. Good afternoon, Chairman Reed and Members of 
the Committee. My name is Rich Ferlauto. I am Director of 
Corporate Governance and Pension Investment for AFSCME, the 
public employee union.
    Our union has a long-term abiding interest in the health of 
the capital markets. Our 1.6 million members are invested 
through public pension systems that have assets over $1 
trillion. They depend on those assets for long-term retirement 
security. Those public pension systems have got time horizons 
of 20 to 30 years in which they need to pay out our member 
benefits so that we are a long-time, long-term investor with 
those types of time horizons.
    I might also mention that AFSCME and the AFSCME Pension 
Fund early on sued AIG over proxy access rights because we 
understood that the board had failed to do the type of risk 
disclosure that we felt was necessary and part of the 
responsibility of directors.
    I am also Chairman of Shareowners.org, a new nonprofit, 
nonpartisan social networking organization designed to give 
voice to retail shareholders who rarely have opportunities to 
communicate with regulators, policy makers, and companies in 
which they are invested.
    I am here today to urge your focus on corporate governance. 
We believe that corporate governance reform is essential to 
good performing capital markets, and, in fact, with greater 
corporate governance and shareholder rights, we could have 
avoided some of the $11 trillion in asset loss that was faced 
and felt dearly by our members and certainly the U.S. 
households.
    According to a recent public opinion survey by the Opinion 
Research Corporation conducted for Shareowners, investors want 
to see Congress take strong action to fix financial markets and 
to clean up Wall Street. Such action, we believe, is essential 
in order for you to rebuild confidence in the markets. Capital 
markets will not work without investors. Investors will not 
come back if they don't have confidence that the markets are 
running appropriately.
    Support for such action is strong across all age, income, 
and educational and political affiliations. Thirty-four percent 
of the investors that we surveyed used the term ``angry'' to 
describe their views. The number one reason for the loss of 
investor confidence in the market, we found, were ``overpaid 
CEOs and/or unresponsive management and boards'' at 81 percent. 
Six out of ten investors said that strong Federal action would 
help restore their confidence in the fairness of the markets.
    When we queried them about policy preferences, the survey 
found that four out of five American investors agreed that 
shareholders should be permitted to be actively involved in CEO 
pay. Eighty-two percent agreed that shareholders should have 
the ability to nominate and elect directors. And 87 percent of 
investors who lose their retirement savings to fraud and abuse 
should have the right to go to court to reclaim that money.
    Fully consistent with these findings, we think that the 
Committee should focus on fixing corporate governance. The core 
to fixing corporate governance is to focus on the directors and 
the responsibility between asset owners and their agents, 
directors on corporate boards. The most critical change to do 
that is to create a proxy access right so that shareholders, 
particularly long-term shareholders who own patient capital in 
the markets, so that they may cost effectively nominate 
candidates for election to boards.
    We are very encouraged that the SEC is in the process of 
rule making on this issue but also believe that this is such an 
important right that it should not become a political football 
for future commissions. There needs to be long-term consistency 
in securities laws and the Exchange Act is the appropriate 
place to clearly codify the authority that the Commission has 
to require disclosure of nominees running for board seats. 
Proxy access is fundamental to free and fair election for 
directors.
    Second, shareholders should have a right to ``say-on-pay,'' 
a vote on the appropriateness of CEO compensation. We are 
excited that we saw the vote in the House the other day, expect 
to see a full vote this week, and as Ann Yerger from CII said, 
we think it is absolutely essential that broker votes not be 
included in the total so that a change to 452, excluding broker 
votes on ``say-on-pay,'' would be a tremendous enhancement to 
see on the Senate side.
    I could make other comments, but let me wrap up by saying 
we thank you, Mr. Chairman, for the opportunity to testify 
today. Rebuilding investor confidence in the market depends on 
thoughtful policymaking that expands investor rights and 
authorizes the SEC to strengthen its advocacy role on behalf of 
all Americans and their financial security.
    I would be happy to answer any questions.
    Chairman Reed. Thank you very much, Mr. Ferlauto.
    Let us do a 6-minute initial round with the intention of 
doing a second round so we can quickly get everyone to ask some 
questions. We are extremely fortunate your testimony 
collectively and individually has, I think, advanced this 
argument and debate significantly.
    Ms. Cross, one of the issues here that has been alluded to 
by Professor Verret and others is the interaction between the 
SEC and States, primarily Delaware, since they have 70 percent 
of the public corporations. Can you comment upon this? In fact, 
I think I noted in your proposed rules that they are subject to 
the State corporate law, is that correct?
    Ms. Cross. That is correct. Under the access proposal, you 
would have a right of access to include nominees in an SEC 
proxy--SEC-filed proxy only if you have a State law right to 
nominate directors. So we start with the State law and then we 
enable shareholders to exercise their State law rights through 
the Federal proxy rules.
    Chairman Reed. That raises the issue, really, of since the 
proxy rules are Federal rules and not required by any States, I 
don't think, I think this is a principal sort of issue between 
whether or not there should be the ability of the SEC to 
require these rules even if the State doesn't. Is that 
something that you can't do now under present law or you choose 
not to do?
    Ms. Cross. That is a good question. Under State law now, 
recent changes in Delaware include an ability for shareholders 
to decide to vote to require the proxy access. We have 
authority under our current rules, under the 34 Act, to also 
require companies to include nominees in their proxy statement 
and we believe these do coexist. The way we have done our 
proposal assures that shareholders would have immediate access 
to the proxy to nominate their holders if they satisfy our 
requirements. They still could vote under State law to have--to 
relax the standard so that more shareholders can do so.
    Chairman Reed. Professor Verret, I think you are interested 
in this topic. Your comments?
    Mr. Verret. Mr. Chairman, I would only offer that the SEC's 
proposal does include references to State law, but 
specifically, the SEC's proposal says, sure, you can adopt a 
bylaw that would describe how proxy access will work only if it 
complies with the SEC's mandate. So it is very clear on that. 
It runs roughshod, I think, over State corporation law 
determining election rights, and so I think it expressly--you 
might find references in there to State law, but the references 
are intended to make clear that the SEC determines how proxy 
access is going to work and if there is any--you can certainly 
make up your own rules, only if they comply completely with the 
SEC's rules on this essentially State corporate law matter.
    Chairman Reed. Well, there are State corporate laws, but I 
think you recognize that the proxy process is a result 
primarily of Federal laws.
    Mr. Verret. Well, the proxy process, sure, and the proxy 
process was intended mostly about issues of disclosure. And I 
would offer a quote from Justice Powell in CPS v. Dynamics. You 
don't have to listen to me. Take Justice Powell's word for it. 
No principle of corporate law is more firmly established than a 
State's authority to regulate domestic corporations, including 
the voting rights of shareholders. So Justice Powell, at least, 
is with me on that one.
    Chairman Reed. Do you agree with all of his opinions?
    Mr. Verret. Well, no. No. I wouldn't say that.
    [Laughter.]
    Mr. Verret. But I like that one.
    Chairman Reed. Let me shift to Professor Coates and Mr. 
Castellani. You have described--in fact, you might comment on 
this issue, too, Professor Coates, and then I have another 
question.
    Mr. Coates. I think it is, as I said in my opening remarks, 
I think that if Congress were not to act, the SEC were to adopt 
proxy access, it is almost certainly the case that someone will 
challenge their authority to do so precisely along the lines 
that Professor Verret has suggested. I think that challenge 
will lose because I think the proposal is about communication. 
It is allowing shareholders to exercise rights that they 
clearly do have under State law.
    The SEC's proposal would allow, contrary to what was 
suggested earlier, any State to change its law and make it 
clear that shareholders would not have the right to nominate 
directors in this fashion and then the SEC's rules would not 
override that State law decision. So the proposal, at least the 
way I read it and the way I believe that a court would read it, 
would not, in fact, conflict with State law on this issue.
    Chairman Reed. Let me follow up on one of the comments you 
made in your statement, and that is that we assume, I think, 
that--at least there is a general assumption that shareholder 
participation the way we describe would enhance the performance 
of the company. But you suggest in certain situations, 
financial institutions, for example, that it could have 
perverse effects.
    It seems to me that there are three or four different 
decisions here. You can pay dividends. You can pay the 
executives instead of paying dividends. Or you can reinvest and 
increase shareholder value, et cetera. The shareholders, I 
think, would be interested in dividends and maybe also, second, 
long-term value, but less interested in compensation for 
executives. But that is just a sort of prelude to the question 
of what are the--what specific disincentives do you see if 
shareholders can vote like this?
    Mr. Coates. I mean, there has been a longstanding economic 
theory about which there is a fair amount of evidence that 
suggests that in a company's capital structure, there are 
conflicts between the shareholders who are entitled to all 
upside beyond the fixed payments that creditors are entitled to 
and the creditors. The U.S. Government, because it insures the 
deposits of all the banks that it insures, which is most of 
them, is fundamentally a creditor of the large banking 
institutions, and so there is, in fact, going to be on many 
occasions a conflict of interest between shareholder interests 
and the interest of the taxpayer with respect to insured 
depository institutions. That is the fundamental conflict.
    And to the extent that the proposals go toward increasing 
shareholder power, that simply makes the bank regulators' jobs 
in restraining risk taking by those banks at the behest of 
shareholders and boards who are seeking to maximize share 
value, even if it is long-term share value, that much harder. 
So any effort in this area, I submit, should be accompanied by 
clear authority for the banking regulators to at least moderate 
the way these things play out for banking institutions.
    Chairman Reed. Thank you. My time has expired.
    Senator Bunning. And we will do a second round.
    Senator Bunning. Thank you, Mr. Chairman.
    Professor Verret, if we are going to make proxy access 
easier for shareholders, what restrictions would you recommend 
to make sure that the SS benefit a majority of shareholders and 
the long-term value of the company and does not just benefit 
small groups of investors and lead to short-term profits?
    Mr. Verret. Well, Senator Bunning, I would offer that the 
best person to make--the best group to make that assessment is 
the shareholders themselves. And so I would leave it to 
shareholders to determine how proxy access should work, how it 
should operate.
    And so for that reason, I think the innovations at the 
level of Delaware and in the Model Business Code, which forms 
the basis for 20 to 30 other corporate law codes of other 
States, are on the right track. And I think also Commissioner 
Paredes has offered a proposal to the SEC to help buttress this 
development, to permit access for shareholder election bylaws 
to the corporate ballot.
    So in other words, instead of saying this is how the 
elections should work, we say shareholders can put forward a 
bylaw that should say how the election should work. All the 
shareholders should determine how that election should work. In 
many ways, it is similar to the Constitutional Convention. 
Rather than choosing--the people got to choose the mechanism 
by----
    Senator Bunning. You are not suggesting we go back to a 
Constitutional Convention----
    Mr. Verret. No, no, but----
    [Laughter.]
    Senator Bunning. Not now.
    Mr. Verret. But in effect, a ratification of a shareholder 
election bylaw is kind of like a Constitutional Convention for 
shareholders. I think that is an apt analogy.
    Senator Bunning. Professor Coates, in your written 
testimony--written--you raised an interesting idea. Rather than 
forcing a structure on all companies, you suggested an opt out 
vote by shareholders every few years for some governance 
proposals. That idea could be applied to proxy access and 
advisory vote procedures as well, instead of Government 
deciding what the rules will be.
    I want to know what each of you think of that approach, of 
a mandatory opt in or opt out vote every few years to decide 
certain matters. Let us start with you, Professor Coates. Since 
you seem to have expressed this idea, now I would like to hear 
your comments on it.
    Mr. Coates. Sure. Thank you for the--obviously, I like my 
idea, but----
    Senator Bunning. Well, I hope so.
    Mr. Coates. ----to explain, I don't think of it as 
necessary to prevent imposing Government regulation, because I 
don't think that is actually the intent of any of the proposals 
that are currently being debated. I do think it would be a good 
idea to preserve flexibility in what sorts of corporate 
governance structures companies are either required or induced 
to adopt, and one way to achieve that is to let shareholders, 
who, after all, this is meant to be in the interest of 
shareholders, so if shareholders every 5 years are given the 
option of rejecting a particular idea on the ground that it is 
too expensive, for example, too cumbersome, or simply inapt for 
their company, and here I would join Professor Verret in saying 
I think that is a reasonable approach.
    The key point, though, is it needs to be opt out, because 
as I alluded to in my opening remarks, shareholders on their 
own, despite the 20, 30 years of efforts by organizations like 
the one led by Ms. Yerger, have had a very hard time getting 
companies to be responsive. It has been 20 years since proxy 
access has been proposed by leading institutional shareholders 
and only now is it being taken seriously. So I have to, with 
all due respect, disagree with the Business Roundtable's 
suggestion that, in fact, corporate boards are generally 
responsive to shareholder desires. Start with a good rule----
    Senator Bunning. Ms. Cross.
    Mr. Coates. Sorry.
    Ms. Cross. Thank you, sir. It is an interesting idea and I 
think with respect to our proxy access proposal, which is the 
one that we have on the table right now, we include requests 
for comment in our proposal about whether or not you should be 
able to opt out and have the shareholders choose a different 
access mechanism, and we very much look forward to receiving 
comments on that. This is a proposal as we----
    Senator Bunning. How much more time do we have?
    Ms. Cross. On the proposal?
    Senator Bunning. No, to make suggestions or to comment.
    Ms. Cross. The comment period runs through August 16 or 17, 
I believe.
    Senator Bunning. Thank you very much.
    Ms. Yerger.
    Ms. Yerger. I have a couple of observations. First of all, 
I am not a lawyer, so I come at this from a different 
perspective----
    Senator Bunning. Good. I am very happy to hear that.
    [Laughter.]
    Ms. Yerger. Our belief is that the board of directors is 
the cornerstone of the corporate governance model and the 
primary rights assigned to owners, aside from buying and 
selling their shares, is to elect and remove directors. And the 
fact is that we do not have those tools here in the United 
States. And that is why we advocate majority voting and access 
to the proxy. We think these are two principled rules. They are 
applicable to all companies at all times.
    In terms of an opt out idea, I mean, I don't see how an opt 
out would be relevant at all to majority voting for directors. 
I mean, I just believe fundamentally that if a director does 
not win support of a majority of the votes cast, that director 
should not stand----
    Senator Bunning. Thank you.
    Ms. Yerger. ----on the board. But one quick point on 
access. There is already a----
    Senator Bunning. I have only got 35 seconds, and I have got 
one more question.
    Ms. Yerger. OK, sorry.
    Senator Bunning. That is OK. This is for Professors Coates 
and Verret. Several weeks ago, Professor Henry Hu raised an 
interesting problem before this Subcommittee. He pointed out 
that with derivatives, the voting rights of shares can now be 
separated from the economic right of the shares, setting up a 
situation where the person voting has no interest in the long-
term health of the company. What can and should be done about 
that? Take a shot at it, both of you.
    Mr. Coates. I have a negative 5 seconds.
    Senator Bunning. Well, that is all right.
    Mr. Coates. That is all right. OK.
    Senator Bunning. You get to answer.
    Mr. Coates. Henry's issue is a serious one. It is one that 
has affected a number of companies in the past--in the recent 
years during the financial turmoil because it allows hedge 
funds' short-term speculators who have distinctly different 
interests than the long-term shareholders represented at this 
table----
    Senator Bunning. They can have a negative interest.
    Mr. Coates. Exactly. Now, I believe that if the SEC is 
given time to address the issue adequately, they already 
understand that this is a significant problem. There are no 
simple fixes to this, just as there are no simple fixes to most 
problems in the market.
    Senator Bunning. You have not made a suggestion yet.
    Mr. Coates. Well, disclosure is usually the place the SEC 
does and should start. That is the place where I would start on 
addressing the problem.
    Senator Bunning. Disclosure.
    Mr. Coates. Yes, full disclosure of hedge fund positions.
    Mr. Verret. I would echo that disclosure is--that sunlight 
is the best disinfectant and that the central mission of the 
SEC is disclosure. And, in fact, that is part of the reason why 
I am opposed to the SEC's current proposal on proxy access, and 
it is proxy access through legislation so that it goes beyond 
the central mission of the SEC for disclosure.
    Senator Bunning. Thank you.
    Chairman Reed. Thank you, Senator Bunning.
    Senator Schumer, please.
    Senator Schumer. Thank you. I thank all the witnesses. Very 
informative testimony. I am going to make two comments--one to 
Professor Verret, one to Professor Coates--to which you can 
comment in writing, because I do not have much time and I want 
to ask other questions.
    To Professor Verret, ``Let the shareholders decide,'' as 
Ms. Yerger points out, is a tautology. Shareholders do not 
decide now, so just saying let us leave it up to the 
shareholders and whatever they decide happens happens, in too 
many instances they just do not have the ability to decide now. 
Our rules are supposed to let them decide, and you are sort of 
proposal, well, whatever they say is what they want--not under 
these rules. You can respond in writing.
    [Ed. note: Answer not received by time of publication.]
    Senator Schumer. To Professor Coates, this idea that 
financial firms, because they could be bailed out, the 
shareholders would have a different structure, I would like you 
to ask the shareholders of Citigroup or AIG, former, if they 
feel that they have done quite well because they have let risks 
go too far and they were bailed out. In other words, most 
companies, by the time they are bailed out, their shares are 
worth very, very little. And I do not think they would have a 
different structure, and I would argue that the recent history 
would undercut your argument even further, and that is, 
allowing risk--because you are a financial firm and you might 
be bailed out allows you to take risk, and that is fine for the 
shareholders? They are going to be very wary of risk over the 
next 5 years, whether they are bailed out or not, because 
shares went way down.
    You can respond in writing to that one, but I just do not 
think the facts, the recent history bears out that hypothesis.

    Response: One of the most basic and widely accepted principles of 
corporate finance is that shareholders--who are entitled to all of the 
upside if a company does well--would rather that the company take more 
risks than do the creditors, who are generally entitled only to receive 
back the principal and preset interest on their loans. See R.A. Brealey 
and S.C. Myers, Principles of Corporate Finance (5th ed. 1996) at 492 
(``stockholders of . . . firms [with debt] gain when business risk 
increases. Financial managers who act strictly in their shareholders' 
interests (and against the interests of creditors) will favor risky 
projects over safe ones. They may even take risky projects with 
negative [net present expected value]''). Nothing in the recent crisis 
has affected that general conclusion. Higher risk generally means 
higher return for shareholders, but for creditors, whose return is 
fixed, risk-taking by corporate borrowers just increases the odds that 
they will not get repaid in full.
    Generally, creditors protect themselves against shareholders 
pressuring companies to take too much risk by negotiating for explicit 
restrictions in their contracts. For example, a bank loan may forbid a 
company from reducing its cash on hand below a set level, or from 
making large new investments without creditor approval. The U.S. 
Government, as back-stop creditor of all of the major commercial banks 
(and, as it turned out, AIG, too, even though AIG was not an insured 
bank), tries to protect itself against excessive risk-taking by setting 
capital requirements and imposing other forms of regulation on banks. 
Existing regulations have not proven effective, and many proposals 
under consideration would strengthen those regulations, and limit 
further the risks that banks may take with taxpayer funds. 
Strengthening the hand of shareholders of major banks may undercut 
those efforts.
    You are right that not all risks turn out to be good ones for 
shareholders, and that there are risks that turn out badly for 
shareholders as well as creditors, as has been the case in the recent 
crisis. But when the managers of large financial institutions are 
making decisions, they do not know how the risks will play out. Imagine 
a manager can choose between two investments, each to be financed 
partly with $5 of shareholder money and partly with a $5 loan from the 
creditor. One investment will pay off $5 100 percent of the time--it 
has no ``risk'', but it also promises no return to the shareholders, 
since the whole return will go to creditors. The second investment will 
pay off $10 90 percent of the time, and will generate a loss of $100 10 
percent of the time. The second investment is clearly better for 
shareholders, since (in expectation) it is worth $5 90 percent of the 
time ($10 less the $5 loan), and -$5 10 percent of the time (loss of 
their $5 investment). But the second investment involves a risk to the 
creditors (e.g., the U.S. taxpayers) since it involves a potential loss 
and an inability by the company to pay back the loan, and is worse for 
society as a whole. Suppose the managers nevertheless choose the second 
investment, and it pays off badly--i.e., it generates a loss. With 
hindsight, shareholders have lost, too, along with the creditors. But 
that doesn't mean that the investment was bad for the shareholders. It 
is only after the loss has appeared that the investment looks bad. If 
they had to do all over again, most diversified shareholders generally 
would have the managers choose the second investment. This example is 
stylized, but it is no different in kind than the investment decisions 
that financial institution managers make every day.
    Corporate governance rules are changed rarely--you will be writing 
legislation not for the next 5 years, but for decades, through 
recessions and boom markets alike, and will apply to a range of 
publicly held companies. If the managers are forced by strong corporate 
governance reforms to follow more closely the directions of 
shareholders, they will tend, on average, to take more risks than they 
would if shareholder power were weaker. For most companies, creditors 
can take care of themselves, through contract, and in principle, as the 
bank regulators can offset any general increase in risk-taking by 
managers caused by shareholders, by requiring higher capital ratios or 
imposing more restrictive regulations. But the tendency of bank 
regulators has been, unfortunately, to fail to impose strict enough 
regulations to cope with the pressure of incentive compensation and 
other techniques for tying managers' interests to shareholder goals. 
General corporate governance changes of the kind being discussed should 
be written with that unfortunate fact in mind.

    Senator Schumer. Ms. Cross, the SEC has proposed ``say-on-
pay'' for TARP recipients but not for other public companies. 
If ``say-on-pay'' is a good idea when the Government is a 
shareholder, why isn't it a good idea for all shareholders?
    Ms. Cross. Chairman Schapiro has indicated that she 
supports ``say-on-pay'' for all public companies, and we do not 
have authority to require ``say-on-pay'' at public companies 
beyond the TARP companies.
    Senator Schumer. But you would be supportive of it.
    Ms. Cross. I cannot speak for the Commission, and the 
Commission has not taken a position.
    Senator Schumer. OK. But Chairman Schapiro is supportive of 
it.
    Ms. Cross. Chairman Schapiro has said she supports it, and 
we stand ready to implement it if Congress enacts it.
    Senator Schumer. OK, good.
    Mr. Castellani, you note that some of the proposals--and I 
think that is significant, and I appreciate that. You note that 
some of the proposals in the Shareholder Bill of Rights are 
already being adopted by your member companies and reflect an 
emerging consensus on best practices in corporate governance. 
Well, if that is the case, then what are you so afraid of? If 
this is the trend anyway, if you seem to indicate this is the 
right thing to do, what is wrong with pushing those--you know, 
I had a discussion with one of your members, and I will not 
reveal who it is, but he said, ``Look, I am not''--and then he 
named his predecessor. ``You do not have to legislate for me.'' 
I said, ``That is my whole point. We are not legislating for 
you. You are a good CEO, and whether your shareholders made you 
be a good CEO or not, you would be. But what about your 
predecessor?''
    So, question: Doesn't the Shareholder Bill of Rights create 
a competitive advantage for the companies that follow the best 
practices? And why does the Roundtable, most of whom comply, I 
think overwhelmingly, with some of our proposals, and many 
comply with just about all of our proposals, why are they going 
so far to defend the outlier companies for whom the laws are 
needed most?
    Mr. Castellani. Senator, in fact, many of the Roundtable 
companies do and have adopted many of the practices that are in 
your proposal. The difference--
    Senator Schumer. And you cite that with pride.
    Mr. Castellani. Yes, absolutely. The difference is those--
--
    Senator Schumer. That is not a very good argument against 
my proposal.
    Mr. Castellani. Well, those who have not have made--those 
who have and those who have not have made the determination 
that that is best for their company. Their directors have made 
that determination, that that is best for their company under 
their circumstances.
    For example, the issue that you cited in the separation of 
the chairman and the chief executive officer, in some instances 
it makes very good sense to separate the chairman and chief 
executive officer, particularly where it is a transition event. 
But in other circumstances, boards feel that it makes best 
sense to have both together, but protect against the downside 
by having a presiding director or----
    Senator Schumer. As I mentioned--and I am----
    Mr. Castellani. So the question is: Why require it?
    Senator Schumer. I do not have much time, and I cannot stay 
for a second round. I am going to have to ask you another 
question. I understand. I mean, the one, as I said, that got 
the most kickback and that I am open to listening to change on 
or proposals on is the CEO and the independent director. You 
noted that 75 percent of your member organizations, 70 percent 
of S&P 500 companies, have adopted majority voting, and roughly 
half of the S&P 500s now hold annual director elections. Yet 
you argue that the one-size-fits-all approach simply will not 
work.
    Can you give me one good reason that a director who gets 
only one vote at an annual meeting should be allowed to 
continue as a director?
    Mr. Castellani. I cannot give you any good reason why any 
director who does not receive a majority vote of the 
shareholders should be seated, unless--unless--it jeopardizes 
the ability of that company to be able to operate and that 
board to operate.
    For example, many companies who have adopted majority 
voting put in a safeguard for their companies such that if they 
require that particular director--that may be the only director 
that has the financial expertise that is required on the audit 
committee, the only director that would have the compensation 
expertise that is required on the compensation committee. If 
that would force the company to be in noncompliance, then what 
companies do is----
    Senator Schumer. How about take away that exception? Any 
other justification? Let us assume we wrote into the law----
    Mr. Castellani. Not as long as the board can function and 
the company can function.
    Senator Schumer. OK, thanks. Well, good, we have won you 
over on at least two-thirds of one of our proposals.
    Mr. Verret. And, legally, Senator, I would offer that 
failure to seat a quorum could result in a wide variety of 
legal circumstances, including, for instance, it could be an 
event of default under the company's debt obligation.
    Senator Schumer. I am sure we could deal with that, 
particularly with the quorum issue, in the interim until there 
was another election.
    Thank you, Mr. Chairman. My time has expired.
    Chairman Reed. Thank you, Senator Schumer.
    Senator Corker, please.
    Senator Corker. Thank you, Mr. Chairman, and to the Senator 
from New York, I appreciate you offering something to look at.
    I do want to observe the staggered board issue I think has 
not been universally accepted, and I think we have a body on 
the other side of the Capitol that does not have staggered 
boards, and sometimes things come out of there pretty hot, like 
the 90-percent tax on the AIG bonuses. So I think there is some 
merit in that and hope you might consider that particular piece 
evolving. But I want to say one other thing.
    Professor Coates, I know that to assume that the folks who 
own AIG today are the same folks who might have encouraged the 
risk would not be a good assumption. I mean, those guys sold 
out high, and the folks that are left behind--so, again, I do 
not think you can make that assessment. So I hope we can look 
at some of those things, and I look forward to really trying to 
work with you on something that we both might consider to be 
improved.
    We talked to Carl Icahn on the phone some time ago--I 
shared this with Senator Schumer--and he is obviously someone 
who cares a great deal about corporate governance. He has 
written about this, or I would not relay our conversation. It 
is certainly something he publicly feels. But the whole issue 
of where companies are incorporated seems to be an issue that 
is maybe even bigger than anything that has been laid out 
today. And I wonder if a couple of you might respond to that.
    Obviously, companies incorporate in States in many cases 
that give them many protections and keep shareholders from 
being able to make huge changes. And I wonder, Professor Coates 
and Professor Verret, if you might both respond to that, and 
anybody else who might have something salient.
    Mr. Verret. Well, I am aware that Mr. Icahn has funded 
North Dakota's Business Incorporation Act. He hired a lawyer to 
write it for him, and he hopes to get companies to 
reincorporate to North Dakota.
    Having clerked for the Delaware Court of Chancery, I am a 
bit biased. I think Delaware is a very effective court for 
litigating corporate governance issues--mostly due to the 
intelligence and superior talent of their law clerks. But I 
would also offer that, to some extent, I think some of what is 
behind some of this effort is short-termism, some of the short-
termism that got us into this problem in the first place: Let 
us cash out on dividends rather than invest in R&D.
    And sometimes hedge fund activism is very effective in 
long-term growth and in sort of rattling the saber a little bit 
and getting things moving. And sometimes hedge fund activism, 
though, kills companies that should continue to survive and 
strips them of their assets. And so I think that is part of 
what is behind the approach.
    Also, I think we----
    Senator Corker. In essence, then, you are saying that you 
like some activism on behalf of shareholders, but not too much.
    Mr. Verret. Absolutely, and I am a little bit suspicious of 
Mr. Icahn's motives, at some of his activism in activism in 
favor of State incorporation.
    Senator Corker. Thank you.
    Mr. Coates.
    Mr. Coates. So it has been true for a long time that 
shareholders cannot force a reincorporation from one State to 
another on their own. They need the board to go along with it. 
And the board cannot do it on their own; it has got to be a 
joint decision. And as a result, there is actually relatively 
little movement between States once they have chosen their 
initial State of incorporation.
    At the moment before they go public, that is really the 
crucial decision point, and for that reason I think that fact 
that Delaware has a 70-percent share of the market, so to 
speak, it reflects well on Delaware. I think it is actually a 
reasonably healthy sign that Delaware is being responsive, as 
best it can, to balancing the interests of both shareholders 
and the managers that have to run them.
    One thing, however, I would note about Delaware and its 
permissiveness toward a little bit of activism is it only 
passed that enabling legislation in the past year, and it did 
it in response to the threat of Federal intervention coming 
from this body. And so I do not think you should think about 
Delaware acting on its own to help shareholders. I think you 
should think about Delaware acting in relationship to this 
body, and things that you do are going to very much impact it.
    Senator Corker. Mr. Castellani, I have served on several 
public company boards, certainly not of the size of AIG or some 
of the other companies we have had troubles with. But I do not 
think there is any question that boards in many cases--not all, 
and yours, I am sure, is not this way. But it ends up being 
sort of a social thing. I mean, you are on the board because 
the CEO of this company and the CEO of that company is on the 
board, and, you know, it is sort of a status thing in many 
cases. The CEO in many cases helps select who those board 
members are. And most of the time these board--many of the 
times, these board members have their own fish to fry. They 
have companies that they run, they are busy with, and, for 
instance, a complex financial institution, there is no way, 
like no possible way that most board members of these 
institutions really understand some of the risks that are 
taking place. With the limited number of board meetings, even 
if they are on the audit committee, very difficult to do.
    So some of these things need to be addressed certainly by 
governance issues that we might address here, hopefully not too 
many. Some of them need to be addressed, obviously, internally 
at the companies. I know you have advocated that in the office. 
But that issue of sort of the culture of the way boards in many 
cases are. Not in every case. I wonder if you might have a 
comment there, and then add to that--I am familiar with a 
company that makes investments in large companies, and one of 
the rules they have is they do not allow the CEO himself to 
actually serve on the board. They report to the board. They are 
at the meeting. But they do not allow them to serve on the 
board. So I would love for you to respond to both of those 
inquiries.
    Mr. Castellani. I think, Senator, for your first question, 
what you are reflecting may have been the experience when you 
served on the boards. But what I think it does not reflect is 
the tremendous change that has occurred in the boardrooms over 
the last 8 years.
    We now see boards of directors, in the case of Business 
Roundtable companies, that are at least 80 percent independent, 
and that is, the directors are independent of the company 
management.
    Indeed, the governance committees or the nominating 
committees that nominate the directors by requirement of the 
listing standards and the SEC are made up entirely of 
independent directors. So the nomination of a board member, a 
prospective board member, is no longer--if it indeed every 
was--controlled by the chief executive officer.
    And then, third, I would point out particularly the amount 
of time that is involved and the amount of expertise that is 
involved. It is not only the specific requirement of the 
expertise that is in the listing standards and the SEC 
requirements, but indeed what boards themselves are demanding 
and what companies and their shareholders are demanding has 
resulted in not only greater expertise in specific areas, but a 
tremendous increase in the amount of time.
    For example, I was recently talking to the chair of the 
audit committee of a large U.S. company. That chair spent 800 
hours of, in this case, his time as the chair of an audit 
committee over the last year because of some very complex 
financial issues. So the board members are spending more and 
more time. So I would submit to you, sir, that it is very 
different than when you served on the boards.
    And in terms of the boards being able to have the CEO as a 
member of the board, the CEO as a member of a board, in fact, 
the CEO and chairman where companies choose it, is a very, very 
important nexus between the governance of a corporation and the 
management of a corporation.
    We have found and experience has shown over a long period 
of time that if you separate the governance from the 
management, you get precisely the kinds of problems that this 
Committee is trying to avoid. So having the CEO on the board is 
a very, very important nexus. In many cases, companies and 
boards believe that having the CEO as chairman of the board is 
also very important.
    Again, my point would be what I have said in my testimony: 
That is up to every company to decide, and their board of 
directors representing the shareholders to decide, rather than 
be prescriptive, because it is not always right, but it is 
always right for the company that makes the right decision, and 
they should be allowed to make that decision.
    Senator Corker. Thank you.
    Chairman Reed. Thank you very much, Senator Corker.
    Senator Menendez, please.
    Senator Menendez. Thank you, Mr. Chairman. Thank you all 
for your testimony.
    Let me ask you, I understand that in a previous question, 
most of you--I understand just one or two objections, but most 
of you said that you support the SEC's May 20th rule to allow 
certain shareholders to include their nominees and proxies that 
are sent to all the other shareholders. Do you think that goes 
far enough? Or is to too far? If you support it, I assume that 
it goes far enough, it is sufficient. But is there something 
that should be done than that? Does that embody what we want to 
see?
    Mr. Ferlauto. Senator Mendendez, I think it is an 
appropriate use of rule making, which is purely disclosure-
based, which is very important; that is that it leaves up to 
the States the creation of rights in terms of the nomination of 
directors, but it empowers shareholders to be informed through 
shareholder communications about the fact that those elections 
are indeed occurring, and then votes through the proxy 
materials on that right. So I think that is a good balance.
    In addition, something that we have not talked about, the 
rule goes further, and it empowers shareholders to make binding 
bylaw amendments to improve those shareholder rights for the 
election of directors so that this disclosure right at 1 
percent--or actually it is a tiered system that they have in 
the disclosure rule right now for comment--becomes a floor of 
disclosure, and then at the State level, through an election 
system based on a shareholder proposal or a board proposal, 
they can increase or tweak that right in an interesting way.
    For example, I talked about ShareOwners.org being 
interested in retail shareholders. They can never hope to get 1 
percent. But as in the U.K., you might be able to get 100 
shareholders, retail shareholders, each owning $5,000 or 
$10,000 worth together who might be an appropriate group to 
create different types of rights.
    So that there is flexibility, which I think is quite 
welcome.
    Mr. Verret. Senator Menendez, I would offer that 
Commissioner Paredes of the SEC has offered a competing 
proposal to the Chairman's proposal, and I think Commissioner 
Paredes' proposal is much more reasonable in that it considers 
facilitation of State law rights rather than running roughshod 
over them and sort of keeping the lion's share of the meat and 
leaving the table scraps for the States. And I think 
Commissioner Paredes' proposal also strikes a balance in 
limiting the ability of special interests to hijack the 
corporate ballot. And so I would offer that for this 
Committee's attention.
    Senator Menendez. Does anyone else have any opinion on it?
    Mr. Castellani. Yes, Senator, I was not one of the majority 
who supported that, and I just wanted to make sure that you 
knew that.
    Our concern is that what the SEC is proposing to give 
access to the shareholders does preempt what has been 
traditionally done in the States. And, quite frankly, we think 
that there is symmetry in the argument that says if we trust 
the shareholders to elect the boards of directors, which we do 
implicitly, then we ought to trust the shareholders to set the 
threshold at which shareholders can nominate those board of 
directors candidates.
    Ms. Yerger. I would just note that, as I said earlier, we 
think this is a core right that should be federalized. The 
States have failed investors too long, Delaware in particular, 
and it really only acted when it had to. And I think it is 
important that the SEC take action on this important reform.
    Senator Menendez. Let me ask in a different context. In 
practice, a corporation serves multiple masters, right? It has 
shareholders, it has corporate management, its creditors, the 
public in general. There are many cases where what is best for 
corporate management may not necessarily be the best for 
shareholders. Or there are also cases where what is best for 
shareholders is not what is best for the general public or the 
financial institution as a whole.
    How do we reconcile those tensions?
    Mr. Castellani. That is a very interesting question that 
has been discussed--I am the oldest on the panel, so I can say 
this--for at least most of my corporate career.
    Senator Menendez. There is no one seeking to claim 
objection, I notice.
    [Laughter.]
    Mr. Castellani. I am used to it.
    Senator Menendez. You have created compromise already.
    Mr. Castellani. There was particularly a very important 
topic in the 1980s, particularly when there was as lot of 
activity related to hostile takeovers, and that is, to whom is 
a board of directors and a management responsible? And the 
argument was a stakeholder argument, that there were 
shareholders, there were employees, there were communities, 
there were suppliers, there were customers, all of which had a 
legitimate position in the decisions.
    I would think it is fair to say that in the 1990s and the 
early part of this decade, that balance switched more to the 
shareholders, but what happened is the nature of the 
shareholders has changed very, very considerably. And that is, 
the average holding period, for example, of a New York Stock 
Exchange-listed company is about 7\1/2\ months. So if your 
management and your board--you are really dealing with share 
renters and traders as much, if not more, than shareholders. 
And I think what we are all discussing here and we all have a 
perspective on is: Going forward, what is the correct balance 
between those who have a very, very short-term interest in very 
quick gain out of a company and may want to do some of the 
things that have been discussed here? You give access, you give 
rights to small percentages of shareholders. We already know in 
many cases how they act. Some funds come in and say, ``We own 5 
percent of your company. What we want you to do is leverage the 
company, buy back the shares, give us about a 10-or 20-percent 
jump, and we are out of here, quickly.'' As opposed to other 
shareholders who say, ``I think there is a value-added.''
    I do not know that anybody is in the long term. I do not 
know that any of us know the right answer to that. But I think, 
quite frankly, that is the question that is at the crux of what 
this Committee should be looking at. Obviously----
    Mr. Ferlauto. And, Senator, I--interestingly enough for 
here, this is where the Business Roundtable and certainly 
AFSCME, and I think some members of CII agree. It is all about 
how you empower long-termism and long-term shareholders, which 
we believe that proxy access ultimately will do, so that the 
best interests of the company to achieve long-term shareholder 
value is achieved. And the way you do that, actually, in terms 
of this long-termism, is getting into the DNA of the board. How 
does the board become most effective by being diverse, by being 
able to absorb many different points of view, by being--to 
evaluate itself to make sure that it is focused on long-term 
strategic implementation and that CEO pay incentives are 
aligned with that long strategic vision? And when we see a 
company that fails, we see a failure in all of those areas, 
which is bad for the shareholders, which is bad for the 
employees, which is bad for management, and for all other 
stakeholders in the process.
    So we want proxy access to fix boards because they cannot 
self-evaluate, because they are not diverse enough to share the 
interests of their stakeholders, which ultimately they need in 
order to achieve long-term shareholder value, and because their 
DNA is warped enough that it only serves management or a 
minority of shareholders and not achieve value for the long 
term. And that is the very essence of why we want proxy access 
and we need it now.
    Senator Menendez. Thank you.
    Mr. Verret. Senator, may I just also add quickly, I want to 
commend Senator Warner and Senator Corker for the introduction 
of the TARP Recipient Ownership Trust Act. Shareholders and 
boards are complicated enough. When Government becomes a 
shareholder, things become even more tricky, and I want to 
commend the introduction of that act as dealing with some--
going down the road to dealing with those unique conflicts.
    Chairman Reed. Thank you very much. Thank you, Senator 
Menendez.
    Senator Johanns.
    Senator Johanns. Mr. Chairman, thank you. To all the panel 
members, thank you very much for being here.
    What I am trying to figure out as I listened to this very 
interesting dialogue between the Senators and each of you, is 
this: I kind of look at this as maybe a little bit black and 
white. There are big players here, and there are small players 
here. But they are all affected by the decisions we make here.
    Now, Mr. Ferlauto, if I could start with you, how much 
money do you have under investment, say at this point in time?
    Mr. Ferlauto. AFSCME itself is a rather small player. Our 
employee pension system itself has got less than $1 billion in 
it. But most importantly is that we are concerned about the 
retirement security of our members, and our members depend on 
well-functioning capital markets and boards to achieve value. 
In order for them to pay the benefits, all of our members want 
a market that will succeed, that has got the ability to achieve 
a value over time. We are not speaking and we are not active on 
the part necessarily of what is in our portfolio, but what is 
in the interests of not only our members, but all American 
families seeking to achieve long-term financial security. And 
those are the people that I speak on behalf of.
    Senator Johanns. Great. Well, I have never had $1 billion 
under management, so I see you as a big player. What if some 
institution out there who has $1 billion under investment or 
$10 billion, or whatever--let us say they are a big player, 
like I think you are. Let us say you decide that you think the 
worst possible course of action for a company is to be pro-
trade, and there are some that very openly espouse that theory, 
that trade has really cost jobs and hurt America and this and 
that.
    If you have access to the proxy, you then have the right to 
elect somebody who espouses that view. Would that be correct?
    Mr. Ferlauto. No, not necessarily. What we have the right 
to do is to potentially nominate somebody, but in order for 
somebody to be elected, they would have to be elected by a 
majority of everybody who is voting, and then presumably all 
the owners, as in a regular election, would assert their 
choices based on what is in their self-interests. So that I 
would assume that a minority player working on any--you know, 
any motivated self-interest would not be able to achieve 
victory.
    Senator Johanns. Here is what I am trying to get to, and I 
am not trying to be coy about this. I am trying to be very, 
very direct about this. I have got 100 shares; you have got $1 
billion worth of shares. I am pro-trade, let us say, and 
whoever this institution is--I am not say AFSCME is this, but 
whoever this institution is, it takes a very, very different 
view than I do that may not be in the best interest.
    Mr. Ferlauto. It is actually a very good point, but who I 
am concerned about are actually the large financial 
intermediaries, particularly mutual funds, who are seeking to 
do business, you know, with other large companies to sell their 
investment products through their 401(k) plans so that they 
actually may cast their votes in a way that would be looked 
kindly on by the CEO because they are not voting against his 
compensation plan, rather than voting in the interests of all 
the small individual investors who put their money into that 
fund, you know, thinking that that is the way to achieve value. 
And those are the kinds of conflicts that are rife in this 
system that we are very concerned about.
    Senator Johanns. Yes, and I am going to be very direct 
again. You and I are going to have an easy time agreeing that 
there are a lot of ways to be self-interested. A lot of ways. 
So, Mr. Castellani, let me turn to you. Based on your corporate 
experience, what impact does that have on your company if there 
is, for lack of better terminology, ease of entry here?
    Mr. Castellani. One of the things that we are concerned 
about is that it would politicize the board. The board is 
legally required to represent all shareholders. So each member 
of the board is to represent all shareholders, not a 
particularly constituency of shareholders. But, in fact, there 
are constituencies of shareholders, people who want short-term 
gains, people who want--you were giving an example, my company, 
Tenneco, owned Newport News Shipbuilding. We had a shareholder, 
a nice little group from Connecticut, a group of nuns who owned 
$2,600 of the company and wanted us to get out of the nuclear 
shipbuilding business. And every year, they would have that on 
the proxy.
    The point is that dissension first costs the shareholders 
money, because that is who pays for the proxy process. It 
doesn't come out of the management's pocket. It doesn't come 
out of the Government's pocket. The shareholders pay for the 
dissension.
    But second--directly, they pay for the proxy process--but 
second, boards best operate when they operate by consensus, 
when there is an agreement among the board of the strategic 
direction of the company and who should implement that 
strategic direction. It doesn't mean there isn't discussion. It 
doesn't mean there isn't questioning, that there isn't 
dissension. But when they make a decision, companies operate 
best when you don't second-guess, until there is reason to 
second-guess, the direction the company is going.
    Senator Johnson. I am out of time, and I won't press that 
too much today because we have been given extra time today, but 
I want to offer one other thought on a totally different 
approach. I was on a panel yesterday in this room, and as I 
started my questioning, I said to the panelists, I said, I am 
going to warn you. I am a former Governor. It just astounds me 
how we have this philosophy here--and I am very new to this 
Senate job--it just astounds me how we think all of the best 
solutions are here in Washington with a Federal approach. This 
really does impact States in a very, very significant way. That 
in itself is a very, very profound issue. And yet we just kind 
of jump right in the middle of it with this new approach that 
just casts aside 50 State corporate laws.
    And I will share this with you. When I started as Governor 
many years ago, I decided that I wanted to be a State that 
attracted business to my State. We needed jobs and we needed 
economic growth in the State of Nebraska and I decided I was 
going to take on Delaware to try to make that happen. You know 
what I realized about Delaware? They had one heck of a good 
start and they were doing more things right than they were 
doing wrong and it was going to be very, very difficult to dent 
that.
    And yet in this hearing, again, whether it is Delaware or 
Nebraska or Wyoming or California, whoever, we have a very, 
very profound impact on the history of corporate governance in 
this Nation and I just don't think we should do that lightly. I 
think you would have 50 Governors in those seats back there 
ready to come to the table to chew on us about that, because it 
does have very significant consequences for the States where 
the jobs do exist, where the jobs are created, where hopefully 
the businesses grow and expand and create economic 
opportunities for the people out there who then pay the taxes 
that allow us to come here and do the social and other programs 
that we just love to do.
    So I just think it is really an important philosophical 
issue and that is my little sermonette at the end of the 
questioning. Thank you.
    Chairman Reed. Thank you, Senator Johanns.
    Let us begin the second round.
    Ms. Yerger, what is the status of majority voting on 
Delaware law now? Is it----
    Ms. Yerger. Under Delaware, and again, I am not a lawyer, 
it is not the default standard, but the laws do accommodate 
majority voting so companies can adopt it voluntarily.
    Chairman Reed. They can adopt it voluntarily. But under 
the--and Ms. Cross, under the SEC's proposal, that would not 
upset Delaware law if you were talking about majority voting. 
It would be optional.
    Ms. Cross. We don't have a proposal on majority voting. The 
way it would work with our proxy access is that if there were 
more people running than there were slots, you would usually 
revert to plurality voting because majority wouldn't work.
    Chairman Reed. OK. Thank you.
    Mr. Castellani, again, thank you for being here and for 
your testimony. I think the core of the issue is who knows best 
about the company, the directors or the shareholders. Under the 
present arrangement, and we have got enough lawyers who can 
criticize my legal analysis, is that the directors essentially 
control access in most companies to the proxy unless you want 
to mount a very expensive proxy fight. They decide in most 
cases and in most companies what will get on as an issue and 
what won't get on as an issue. So the current practice, unless 
we do something, will leave sort of the directors with critical 
control of the process and then on both sides of this argument 
we are talking about empowering shareholders. So your comments, 
and then I will open it up to the panel.
    Mr. Castellani. Sure. First, for the record, let me state I 
am a scientist and engineer, not a lawyer.
    Chairman Reed. Well, Senator Bunning, again, thank you on 
his behalf.
    Mr. Castellani. I want to say that as often as I can.
    In fact, the directors do not control access to the proxy 
for all issues. In fact, the SEC controls. Therefore, companies 
like Tenneco get proposals. All companies get proposals related 
to social issues, governance issues, economic issues, labor 
issues, environmental issues. But I don't think that is what 
you are talking about.
    What you are talking about is the access for the purposes 
of nominating directors and we have to talk about that in the 
context of any group of shareholders, any single shareholder 
has an ability, if they can afford it, and it is an expensive 
proposition----
    Chairman Reed. Yes.
    Mr. Castellani. ----to nominate directors and run in 
competition to the directors that are nominated by the 
Nominating Committee. That is how we do takeovers and that is 
how the companies make sea changes, or investors make sea 
changes.
    What I am concerned about and what we are concerned about 
is we have, by majority vote, by and large, directors who are 
elected to represent all shareholders. Those directors are, by 
and large, elected every year. And so if the shareholders elect 
the directors and the shareholders can remove the directors 
under majority voting, then how does the company best operate 
on behalf of the shareholders?
    Is it best operated in letting those directors make, in 
their collective judgment, decisions about who should be on the 
board representing the shareholders, who should manage the 
company, or do we subject those directors or a portion of 
them--a significant portion, 25 percent of them--to a 
reelection challenge every year and turn them into essentially 
corporate politicians, because these are contested elections. 
They are somehow going to have to be run as contested 
elections.
    And what does that do to the director? Does that then 
distract her from the business that we all want her to do, 
which is overseeing the shareholders' interests in that board 
room, or does she have to be more concerned because the 
conflicting nominee was elected because they didn't want us to 
be in the nuclear shipbuilding business, in my case, or they 
didn't want us to do business in a particular part of the 
world, or they wanted our product lines to change, or they 
wanted some practices to change.
    What our concern is is that boards should be free to do and 
responsible for doing what the shareholders want them to do, 
and that is be good stewards of their investment in the 
company.
    Chairman Reed. Well, my sense is--and you are right to 
narrow down my focus to the directors' election because social 
issues, they do get on the board because the SEC has required 
that and there is an argument they could require the directors 
also to be subject to proxy access.
    But the other side of the argument is there is a group of 
directors that essentially nominates the Nominating Committee. 
Usually the Nominating Committee is directors----
    Mr. Castellani. Right.
    Chairman Reed. ----who then choose other people they think 
are sympathetic to them and their views and the shareholders, 
unless they are not in a proxy fight, generally they either 
have to accept this board, and many times, as you pointed out, 
the board is not elected by a majority. In fact, there are many 
times where less than a majority of shareholders, a small 
number of shareholders even vote, and I think there has been a 
lot of discussion back and forth about motivation for voting, 
but most shareholders don't know--it is not the politics as 
practiced elsewhere. Most shareholders are reflecting on their 
dividends, their share value, what they think the company 
should be doing economically for their benefit. It is quite 
self-interested.
    Mr. Castellani. I think, Senator, another point I should 
make--two other points I should make is that good boards, and 
certainly I would include our companies, have means by which 
they communicate and allow shareholders to suggest directors. 
And in fact, that is something that all of our member companies 
do now.
    So small groups of shareholders--and let us not kid 
ourselves. I mean, any management, any board that is worth 
anything, that can wake up and make their own breakfast in the 
morning, when a large shareholder comes in and says, we want to 
talk to you about the make-up of the board, by God, we listen, 
because you forget, we are in the business of trying to sell 
our shares to members and convince investors that we are a good 
company to invest in. So we listen to investors.
    The problem that we have is that sometimes in these 
discussions, you are talking about individual investors and we 
have to be responsive to our largest investors, which are 
institutional investors. And so the desires of individuals come 
through intermediaries, the mutual fund and the fund managers, 
and that message is very different than what some of the things 
that you are describing.
    Chairman Reed. This is a conversation that could go on at 
length, but I am going to stop and recognize Senator Bunning. 
Thank you.
    Senator Bunning. Thank you very much.
    Professor Verret, there has been a lot of talk about giving 
shareholders a vote on pay packages but little discussion on 
the details. If we were to require such a vote, what 
specifically should we vote on and how often should we vote?
    Mr. Verret. Well, notably, I think one thing I would draw 
out is that there is a big difference between ``say-on-pay'' 
and say on severance packages. I think those are two distinct 
issues. There is a healthy debate about both of them, but I 
think it is a mistake to lump them in together. I think the big 
difference between say on severance is that severance packages 
are used to facilitate efficient mergers and acquisitions. 
Basically, sometimes when a good M&A deal goes through, the CEO 
of the target has to go. It is, you have got to leave and here 
is some walking-away money. And those deals are great, and most 
of the----
    Senator Bunning. But that isn't my question.
    Mr. Verret. OK. So my first answer is, I would 
differentiate ``say-on-pay'' and say on severance.
    With respect to ``say-on-pay,'' I think one of the details 
is how often would you approve ``say-on-pay,'' and I am aware 
that the United Brotherhood of Carpenters, at least, wants it 
every 3 years. I think some groups prefer it every----
    Senator Bunning. Every 3 years?
    Mr. Verret. Yes. They would prefer the pay package----
    Senator Bunning. By the time the second year came around, 
maybe the company would be in Chapter 11.
    Mr. Verret. Well, perhaps, but what they propose is that 
typically, pay packages are negotiated over longer terms, so 
``say-on-pay'' should be negotiated over the longer term. You 
don't necessarily reapprove the pay package every year. 
Sometimes they are longer term. Sometimes they are 5 or 10 
years.
    So one of the things I would suggest is that you leave open 
the boards of directors and the shareholders to determine how 
they want ``say-on-pay'' to work.
    Senator Bunning. Then you think they should be left open to 
the boards in negotiating with whoever they want as their CEO?
    Mr. Verret. I worry about the effects of one-size-fits-all 
packages, and I think we have seen that effect in Britain with 
their ``say-on-pay'' rules.
    Senator Bunning. And you think the negotiations on golden 
parachutes should be different completely?
    Mr. Verret. They should be, because sometimes you have to 
do them very quickly, not enough time to get approval for the 
package to deal with the specific merger.
    Senator Bunning. Would you like to comment?
    Mr. Coates. Very briefly. ``Say-on-pay'' is advisory votes 
only. There is no need for speed. There is no need for prior 
voting. The U.K., the Netherlands, Australia have successfully 
implemented this for years, and in fact, the evidence from the 
U.K. suggests that it almost never has a bad effect on 
companies, that almost all of the time, shareholders approve 
the pay package as presented. There are a few outliers that get 
their pay packages voted down and the result of that has been a 
better alignment of shareholder and manager interests over the 
past 5 years in the United Kingdom. So I think the U.K. model 
is working and I think it is a reasonable place to start.
    Mr. Verret. Although as I am sure Professor Coates might be 
aware, the shareholder electorate in the United Kingdom is very 
different from the United States--
    Senator Bunning. No. This is not a discussion between--we 
have to ask the questions.
    Mr. Verret. Sorry. He is my old professor and he gave me a 
``B'' in corporate law, so I have to----
    Senator Bunning. A ``B''? That is pretty good.
    [Laughter.]
    Senator Bunning. Unbelievable. I will give you a chance to 
talk again.
    As States respond to concerns about corporate governance 
issues with changes to their own laws, is there really a need 
to federalize business law?
    Mr. Verret. Well, I would agree, and I think we haven't 
even had time to see the effect of the State changes on proxy 
access operate after Delaware and the other States facilitated 
majority voting in 2006. From 2006 to 2007, we saw an increase 
in majority voting at companies from 20 percent of the S&P 500 
to 50 percent. So Delaware just amended its code in, I think, 
March, and the ABA is about to change the Model Business Code. 
So there hasn't been enough time to see, I think, all the proxy 
access bylaws that I think we are going to see adopted by 
boards.
    Senator Bunning. Ann, would you like to comment?
    Ms. Yerger. I firmly believe that the problem here are the 
problem companies and----
    Senator Bunning. Yes, we know about them.
    Ms. Yerger. ----and that is why I believe these issues 
should be federalized, frankly.
    Senator Bunning. Yes, but they are at the trough every time 
they have a problem, whether they are a finance company or 
whether they are an insurance company, whether they are an auto 
company. If you think they are too big to fail, then the 
Federal Government is the backstop. And if they are a GSE, we 
are the backstop for sure. So do you have some other 
suggestions that we might not have to be the backstop?
    Ms. Yerger. Suggestions regarding specifically--I am sorry. 
I have lost the question here.
    Senator Bunning. You lost the question. Well, about the 
laws being changed in the States on corporate governance.
    Ms. Yerger. I feel that majority voting, we have had plenty 
of experience and the fact is that there are many companies--in 
fact, most small companies have not adopted it. We think it is 
a core owner right and as a result it should be federalized.
    I also believe that proxy access should be federalized. The 
fact is, when council members invest in domestic companies, 
they are not doing a portfolio of Delaware companies or 
Nebraska companies. They are doing a portfolio of the U.S. 
companies, and we either make a decision that these are basic 
rights we should be offering to owners of any company here in 
the United States or not. And I think the Council firmly 
believes that----
    Senator Bunning. The fact that if I live in Kentucky, where 
I live, you want me to come in and say, the Federal Government 
should make the rules for every company in Kentucky.
    Ms. Yerger. Regarding access on majority voting----
    Senator Bunning. Yes.
    Ms. Yerger. ----yes, sir.
    Senator Bunning. You do.
    Mr. Ferlauto. If I may, another----
    Senator Bunning. It won't sell.
    Mr. Ferlauto. Another approach to this which I think might 
sell is that give shareholders the power to decide what State 
they will incorporate in, and therefore you can----
    Senator Bunning. Well, they do have the power.
    Mr. Ferlauto. No, they don't, actually, is that right now, 
it is the boards through the IPO----
    Senator Bunning. Oh, you mean beforehand, before they 
incorporate.
    Mr. Ferlauto. Maybe every 5 years. You talked about one way 
to do this is to give them a right every four or 5 years, 
similar to Mr. Coates's idea, that rather than opting in and 
opting out of a variety of laws, they actually have a right to 
decide on whether the charter and powers of a particular State 
are appropriate for them at a particular moment and allow 
shareholders to decide on their own----
    Senator Bunning. You, as a billion-dollar investor, you as 
a person who controls $1 billion worth of investment, would say 
that to the shareholders after the fact, after they have 
already incorporated?
    Mr. Ferlauto. I agree that there should be more--that the 
State of incorporation should be a greater factor when IPOs are 
made and that there is not enough emphasis or focus on 
corporate governance during the IPO process, and I think that 
would be something very interesting for the SEC to look at for 
perhaps new rule making. But if you are talking about 
empowering the States, one thing that you might consider to do 
is to give them real power and create real competition among 
Delaware and Nebraska and North Dakota and California and every 
other State by making State corporation real and let them 
compete. The only way you can let them compete is by giving 
shareholders, the owners of these companies, real power to make 
a decision about what laws are most appropriate to them.
    Senator Bunning. It won't sell.
    Mr. Ferlauto. It is a market-based----
    Senator Bunning. It won't sell. We can't sell it, because 
we would have 50 Governors up here every day trying to tell us 
to mind our own business.
    Mr. Ferlauto. Yes, but----
    Senator Bunning. Thank you. Thank you, Mr. Chairman.
    Chairman Reed. Senator Corker.
    Senator Corker. Thank you all for your testimony, and 
again, both of you, for having the hearing.
    I think what--well, based on backgrounds, Mr. Ferlauto and 
I might have a difference of opinion on many things. I think 
what you were trying to communicate is giving shareholders--you 
can domicile. You can change the corporate domicile at any time 
you wish. It doesn't matter where you are incorporated.
    I actually think that Senator Johanns was referring to a 
race to the top and I do think that, while I realize my friend 
from Delaware may disagree, it actually does give shareholders 
the ability to influence things and I hope that we will--I am 
not sure it wouldn't sell and I hope it is something we will 
understand. I am not sure I understand enough about it myself 
to support it, but I do know that it certainly would give 
shareholders much greater freedoms.
    I do want to say to you, Mr. Verret, that I think you were 
dead on in your opening comments that here we are talking about 
lots of things, but really what has driven this has been moral 
hazard, has been what happened with GSEs, and many of the 
policies we put in place here, the failure of regulators, 
short-term thinking, credit-rating agencies that didn't do what 
everyone thought they were doing, and I am not sure about the 
mark-to-market issue. We might debate that some.
    But I hope that we don't go overboard with what we do here 
because it is other factors--many other factors--that have 
created this. I do, on the other hand, think that boards are 
the final governance issue, and if you have good boards that 
actually understand the risk, especially at financial 
institutions, I think we might actually look at differentiating 
things that have to do with large companies, financial 
companies that offer systemic risk. We may look at those a 
little differently.
    But let us get down to this risk. Senator Schumer is close 
to our Chairman. My guess is that just knowing how things work 
around here, that he may to defer to him on some of these 
corporate governance issues. He laid out six things. My sense 
is that the shareholder ``say-on-pay'' issue as advisory was 
not particularly controversial amongst most here, is that 
correct, as an advisory issue.
    The shareholder input didn't seem to be----
    Mr. Castellani. Why do it every year? Why require it for 
all companies?
    Senator Corker. And maybe there is a size issue. By the 
way, I am not agreeing myself necessarily with all these. I am 
just asking you all. The independent chairperson seemed to be 
somewhat agreed by half and somewhat disagreed, especially Mr. 
Castellani, is that correct, thought that was a bad idea.
    Mr. Castellani. We believe that it should be up to every 
board of directors and every company to decide what is best for 
them.
    Senator Corker. Does anybody other than him disagree with 
what was put forth there?
    Ms. Cross. If I could note, I am not--on behalf of the SEC, 
I am not expressing views. The Commission hasn't expressed 
views on all these points.
    Senator Corker. I understand.
    Ms. Cross. By my silence, I am not commenting.
    Senator Corker. I have got you.
    Ms. Cross. Thank you.
    Ms. Yerger. We are believers in one-size-fits-all on this 
issue.
    Senator Corker. You are believers in that.
    Ms. Yerger. Yes.
    Senator Corker. The stagger board issue, I hope stays in 
place and is not eliminated, personally. The majority voting 
issue didn't seem to be a big issue to anybody here. Mr. 
Castellani, since you represent----
    Mr. Castellani. Most of our members have majority voting.
    Senator Corker. So not a big deal. So the risk committee is 
the one issue I think we haven't touched on----
    Mr. Castellani. It is very important.
    Senator Corker. ----and I just wonder if, since I think we 
have got pretty good input from you all in these other areas, 
what are your thoughts, in whatever order you want to give 
them, on the risk committee issue?
    Mr. Castellani. Senator, if I might start, I think there 
probably is going to be pretty close to--well, I don't know 
whether we would all be unanimous. The fundamental issue, which 
is whether or not a board of directors should regularly and 
thoroughly analyze the risks that face the company and its 
shareholders is not one on which there is any argument. That is 
one of the fundamental purposes of a board of directors.
    What Senator Schumer in his bill prescribes, however, is 
not appropriate, and that is that you create a separate 
committee to do that. Some companies choose to do it within 
separate committees, but other companies think that it is 
better done within its audit committee because its greatest 
risk may be in its financial structures. Some companies do it, 
because of the nature of the products, in different committees 
because their greater risk may be either the products or the 
markets in which they serve as opposed to financial risk.
    So our suggestion is that it is done, but don't specify 
that you create another committee, particularly where we have 
already run the risk of being so prescriptive to how many 
committees and what type of committees boards should have that 
we run the risk of being the best at governance compliance and 
the worst at governance implementation.
    Senator Corker. I understand. Is there anybody that 
strongly disagrees with the position he just put forth?
    Mr. Ferlauto. Let me just add one caveat to that. I think 
John is right that there needs to be some flexibility, but 
there also needs to be some very explicit disclosure about who 
is responsible for risk, what committee is responsible for it, 
what is their charter, what powers that they have, how they 
will review risk, and that needs to be disclosed much more 
heavily than it does right now.
    Senator Corker. So you would moderate the bill in that way 
and specify that it doesn't have to have a separate committee, 
but that function has to take place within the board----
    Mr. Ferlauto. And it needs to be disclosed to shareholders 
in a very precise way, OK.
    Senator Corker. So, since I am the last questioner----
    Chairman Reed. Go ahead.
    Senator Corker. ----let us go back to this issue of the 
State thing again, which longer-term advocates of shareholder 
rights have said, look, if we could just give shareholders the 
ability to race to the top, as Senator Johanns, I think was 
alluding to, I am not positive--I certainly asked the question 
earlier in the same light--Mr. Castellani, how do you feel 
about shareholders being able to say that you are not going to 
be domiciled in whatever State you are in but you are going to 
be in Texas because it gives great shareholder rights?
    Mr. Castellani. Senator, if the majority of the 
shareholders want to change the logo to pink and make me stand 
on one leg, I change the logo to pink and stand on one leg. So 
it really is what the majority of the shareholders. But I think 
it is not a decision--I think we kid ourselves that this is a 
decision that is based on what Mr. Icahn is advocating, which 
is the ability of greater ease of change of control.
    One of the reasons why Delaware is very attractive to 
corporations is Delaware has an infrastructure, with all 
deference to my colleague here, that is very efficient in 
adjudicating issues between companies and shareholders, and 
shareholders and shareholders, prior to annual meetings or 
whenever they need to be adjudicated. Delaware is very, very 
good. They have--what have they got, ten judges and a couple 
hundred staff people that make decisions very, very quickly. So 
it is not just the structure of the law that is attractive but 
it is the ability of the State to implement its law and make 
decisions when issues are in contention very quickly and very 
efficiently.
    Senator Corker. But while you are selling Delaware, and I 
am sure the Chambers of Commerce up there like that----
    Mr. Castellani. Well, let me give equal. New Jersey is also 
very good. Ohio is very good----
    [Laughter.]
    Mr. Castellani. ----and I am sure----
    Senator Corker. Their pension funds must invest in your 
company.
    Mr. Castellani. ----Tennessee is very good.
    Senator Corker. But back to the issue of whether they are 
good or not, and my guess is some of those are not so good that 
you just mentioned, but giving the shareholders the ability to 
do that is, in your opinion--and, by the way, by law? You have 
no problem with that?
    Mr. Castellani. Yes, I would. Why, again, prescribe for all 
shareholders of all companies something that they already have 
the right to do within the States where they are incorporated 
if the States allow it.
    Senator Corker. Does anybody strongly disagree with that?
    Mr. Coates. Just so we are clear, currently, shareholders 
do not have the right----
    Mr. Castellani. Do not have the right.
    Mr. Coates. ----do not have the right to force a 
reincorporation over the objection of the board, and I actually 
think for once I am on sort of the management side of the 
Business Roundtable, at least if I heard his comment earlier. I 
don't think that would be a good idea to introduce. It would be 
more powerful and more disruptive on behalf of shareholders 
than anything the SEC is proposing in the current environment.
    Senator Corker. So you think that is a really bad idea?
    Mr. Coates. Well, I just--I think it would require a great 
deal of thought about how exactly it would be implemented, and 
I think to think of it as somehow a weaker version of 
shareholder proxy access is just descriptively a mistake. It 
would be actually more empowering----
    Senator Corker. No, I agree.
    Mr. Coates. OK.
    Senator Corker. It is the most empowering thing, I think, 
that----
    Mr. Castellani. And I want to make very clear that I 
associate myself with those remarks, that that is--I can't 
imagine what the benefit would be compared to the costs or the 
disruption.
    Senator Corker. Do you want to make a comment?
    Mr. Ferlauto. I was just going to say, I think that is 
true. I think the moderate form is establishing the disclosure 
right for proxy access. But to go all the way to keep Governors 
happy, if you will, is to create competition amongst the States 
by fully empowering shareholders.
    Ms. Yerger. As radical as the Council is, I have to tell 
you, this is not an issue we have endorsed at this point, is 
giving owners the right to reincorporate an entity. We are 
studying it, but I think that it is a complex issue that I 
would be very surprised the corporate community would support.
    Mr. Ferlauto. This is the moderate version.
    Mr. Verret. I would also offer that proposals and changes 
of State of incorporation get introduced from time to time and 
the results are always there is pretty low shareholder interest 
in that.
    Senator Corker. OK. Listen, I want to say that while I ask 
numbers of questions, I am going to give the same disclosure as 
the SEC. None of them necessarily represent my point of view. 
It is just the best way to sort of understand what a very 
diverse panel of six people think about an issue and I very 
much appreciate all of your input today.
    I hope that if we do anything on corporate governance, I 
hope that it is modest and we realize that at the end of the 
day, a lot of factors led to the failures that we have had 
today, much of which, candidly, was generated out of this body 
and those who came before. I hope that we don't create a 
similar problem or another type of problem by over-legislating 
how the private sector governs itself. But I thank you all for 
your testimony.
    Chairman Reed. Thank you, Senator Corker.
    I want to thank all the witnesses. This has been a very 
insightful panel, and I particularly thank you for the time and 
effort you put into this. It was quite obvious from the 
testimony and from your response to questions.
    Let me say for the record, witnesses' complete written 
testimony will become part of the hearing record and we are 
happy to include supporting documentation for the record. The 
record will remain open for 1 week, until August 5, 2009, for 
Members to submit their own personal written statements or 
additional questions for the witnesses. We ask that witnesses 
respond to any written questions that are sent within 2 weeks 
and note that the record will close after 6 weeks in order for 
the hearing print to be prepared.
    With that, I thank you again and thank my colleagues. The 
hearing is adjourned.
    [Whereupon, at 4:38 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
                PREPARED STATEMENT OF CHAIRMAN JACK REED
    I want to welcome everyone, and thank all of our witnesses for 
appearing today.
    Today's hearing will focus on corporate boardrooms and try to help 
us better understand the misaligned incentives that drove Wall Street 
executives to take harmful risks with the life savings and retirement 
nest eggs of the American people.
    This Subcommittee has held several hearings in recent months to 
focus on gaps in our financial regulatory system, including the largely 
unregulated markets for over-the-counter derivatives, hedge funds and 
other private investment pools. We have also examined problems that 
resulted from regulators simply failing to use the authority they had, 
such as our hearing in March that uncovered defective risk management 
systems at major financial institutions.
    But although regulators play a critical role in policing the 
markets, they will always struggle to keep up with evolving and 
cutting-edge industries. Today's hearing will examine how we can better 
empower shareholders to hold corporate boards accountable for their 
actions, and make sure that executive pay and other incentives are used 
to help companies better focus on long-term performance goals over day-
to-day profits.
    Wall Street executives who pursued reckless products and activities 
they did not understand brought our financial system to its knees. Many 
of the boards that were supposed to look out for shareholder interests 
failed at this most basic of jobs. This hearing will help determine 
where the corporate governance structure is strong, where it needs 
improvement, and what role the Federal Government should play in this 
effort.
    I will ask our witnesses what the financial crisis has revealed 
about current laws and regulations surrounding corporate governance, 
including executive compensation, board composition, election of 
directors and other proxy rules, and risk management. In particular, we 
will discuss proposals to improve the quality of boards by increasing 
shareholder input into board membership and requiring annual election 
of, and majority voting for, each board member.
    We will also discuss requiring ``say-on-pay,'' or shareholder 
endorsements of executive compensation. We need to find ways to help 
public companies align their compensation practices with long-term 
shareholder value and, for financial institutions, overall firm safety 
and soundness. We also need to ensure that compensation committee 
members--who play key roles in setting executive pay--are appropriately 
independent from the firm managers they are paying.
    Other key proposals would require public companies to create risk 
management committees on their boards, and separate the chair and CEO 
positions to ensure that the CEO is held accountable by the board and 
an independent chair.
    I hope today's hearing will allow us to examine these and other 
proposals, and take needed steps to promote corporate responsiveness to 
the interests of shareholders. I welcome today's witnesses and look 
forward to their testimony.
                                 ______
                                 
                PREPARED STATEMENT OF MEREDITH B. CROSS
  Director, Division of Corporation Finance, Securities and Exchange 
                               Commission
                             July 29, 2009
Introduction
    Good afternoon Chairman Reed, Ranking Member Bunning, and Members 
of the Subcommittee. My name is Meredith Cross, and I am the Director 
of the Division of Corporation Finance at the U.S. Securities and 
Exchange Commission. I just rejoined the SEC staff in June of this year 
after more than 10 years in private practice here in Washington. I 
worked at the SEC for most of the 1990s, and I am delighted to be back 
at the agency at this critical time in the regulation of our financial 
markets. I am pleased to testify on behalf of the Commission today on 
the topics of corporate governance and the agency's ongoing efforts to 
assure that investors have the information they need to make educated 
investment and voting decisions.
    Investor confidence is critical to our securities markets. In the 
context of the issues that the Subcommittee is discussing today, 
investors need to feel confident that they have the information they 
need to make educated decisions about their investments, including 
whether to reelect or replace members of the board of directors. Good 
corporate governance is essential to investor confidence in the 
markets, and it cannot exist without transparency--that is, timely and 
complete disclosure of material information. In responding to the 
market crisis and erosion of investor confidence, the Commission has 
identified and taken steps over the past months in a number of 
significant areas where the Commission believes enhanced disclosure 
standards and other rule changes may further address the concerns of 
the investing public.
Shareholder Director Nominations
    A fundamental concept underlying corporate law is that a company's 
board of directors, while charged with managerial oversight of the 
company, is accountable to its shareholders who have the power to elect 
the board. Thus, boards are accountable to shareholders for their 
decisions concerning, among other things, executive pay, and for their 
oversight of the companies' management and operations, including the 
risks that companies undertake. While shareholders have a right under 
State corporate law to nominate candidates for a company's board of 
directors, it can be costly to conduct a proxy contest, so this right 
is only rarely exercised.
    The Commission's proxy rules seek to enable the corporate proxy 
process to function, as nearly as possible, as a replacement for in-
person participation at a meeting of shareholders. With the wide 
dispersion of stock prevalent in today's markets, requiring actual in-
person participation at a shareholders' meeting is not a feasible way 
for most shareholders to exercise their rights--including their rights 
to nominate and elect directors. Two months ago, the Commission voted 
to approve for notice and comment proposals that are designed to help 
shareholders to more effectively exercise their State law right to 
nominate directors. \1\
---------------------------------------------------------------------------
     \1\ ``Facilitating Shareholder Director Nominations'', Securities 
Exchange Act Release No. 34-60089 (June 10, 2009). The Commission's 
vote was 3-2 in favor of the proposal, with Chairman Schapiro and 
Commissioners Walter and Aguilar voting to approve the staff's 
recommendation to propose rules, and Commissioners Casey and Paredes 
voting not to approve the staff's recommendation. For the 
Commissioners' statements regarding the proposal at the Commission 
meeting at which the proposal was considered, see http://www.sec.gov/
news/speech.shtml#chair.
---------------------------------------------------------------------------
    Under the proposals, shareholders who otherwise have the right to 
nominate directors at a shareholder meeting would, subject to certain 
conditions, be able to have a limited number of nominees included in 
the company proxy materials that are sent to all shareholders whose 
votes are being solicited. To be eligible to have a nominee or nominees 
included in a company's proxy materials, a shareholder would have to 
meet certain security ownership requirements and other specified 
criteria, provide certifications about the shareholder's intent, and 
file a notice with the Commission of its intent to nominate a 
candidate. The notice would include specified disclosure about the 
nominating shareholder and the nominee for inclusion in the company's 
proxy materials. This aspect of the proposals is designed to provide 
important information to all shareholders about qualifying shareholder 
board nominees so that shareholders can make a more informed voting 
decision.
    To further facilitate shareholder involvement in the director 
nomination process, the proposals also include amendments to Rule 14a-8 
under the Exchange Act, which currently allows a company to exclude 
from its proxy materials a shareholder proposal that relates to a 
nomination or an election for membership on the company's board of 
directors or a procedure for such nomination or election. This so-
called ``election exclusion'' can prevent a shareholder from including 
in a company's proxy materials a shareholder proposal that would amend, 
or that requests an amendment to, a company's governing documents 
regarding nomination procedures or disclosures related to shareholder 
nominations. Under the proposed amendment to the shareholder proposal 
rule, companies would be required to include such proposals in their 
proxy materials, provided the other requirements of the rule are met.
    The proposing release seeks comments from the public on the rule 
proposals generally and also includes numerous specific questions. The 
comment process is a critical component of every rule making, and one 
that the Commission takes very seriously. We sincerely want to hear 
from all interested parties and truly believe that the rule-making 
process is better informed as a result of the comments that we receive.
Proxy Disclosure Enhancements
    One of the key disclosure documents for shareholders in deciding 
how to vote in the election of directors is the proxy statement. This 
document, which includes information about the directors, certain board 
practices, executive compensation, related party transactions, and 
other matters, is a critical component of the U.S. corporate governance 
landscape. The Commission, on July 1, voted to propose a series of rule 
amendments that are designed to significantly improve proxy 
disclosures, thereby enabling shareholders to make more informed voting 
decisions. \2\
---------------------------------------------------------------------------
     \2\ ``Proxy Disclosure and Solicitation Enhancements,'' Securities 
Exchange Act Release No.34-60280 (July 10, 2009).
---------------------------------------------------------------------------
    One area that has garnered significant public attention and can 
drive investors' investment and voting decisions is executive 
compensation. The Commission's existing disclosure rules are designed 
to elicit comprehensive and detailed information about all elements of 
a company's compensation practices and procedures with respect to its 
most senior executives. This information includes a ``Compensation, 
Discussion and Analysis''; detailed tables followed by related 
narrative disclosure; and a report from the Compensation Committee. 
Based on this information, investors can form opinions about a 
company's executive compensation policies, including whether the board 
of directors has acted appropriately in setting incentives and rewards 
for management.
    Today, if material, a company must discuss the risk considerations 
of its compensation policies and decisions with respect to its ``named 
executive officers.'' (``Named executive officers'' generally include 
the chief executive officer, chief financial officer, and next three 
highest paid officers.) Some have argued, however, that the recent 
financial crisis has demonstrated that a company's compensation 
practices beyond these five named executive officers can have a 
dramatic impact on its risk profile; the manner in which some trading 
arms of financial institutions have been compensated would be an 
example. Therefore, the Commission has proposed requiring disclosure 
about how the company incentivizes its employees--beyond the named 
executive officers--if its compensation policies may result in material 
risks to the company. This disclosure is intended to enable investors 
to gauge whether the company's compensation policies create appropriate 
incentives for its employees, as opposed to creating incentives for 
employees to act in a way that creates risks not aligned with the risk 
objectives of the company.
    The Commission's recent proxy enhancement proposals also would 
require expanded information about the qualifications of directors and 
director candidates, about the board's leadership structure and role in 
risk management, and about potential conflicts of interests of 
compensation consultants. The proposals also would improve the 
reporting of annual stock and option awards to company executives and 
directors, and would require quicker reporting of shareholder vote 
results. The Commission believes that all of this information would 
enable shareholders to more intelligently exercise their proxy vote, 
thereby further enhancing corporate accountability.
Broker Discretionary Voting
    Also on July 1, the Commission approved changes to New York Stock 
Exchange Rule 452, which governs broker discretionary voting, to 
prohibit brokers from voting shares held in street name in director 
elections unless they have received specific voting instructions from 
their customers. \3\ NYSE Rule 452 generally allows brokers to vote 
such shares on behalf of their customers in uncontested director 
elections, as such elections are currently deemed to be ``routine;'' 
under the revised rule, such elections will no longer be deemed to be 
routine. This amendment, which the NYSE approved at least in part based 
on recommendations from the NYSE's Proxy Working Group, will become 
effective on January 1, 2010.
---------------------------------------------------------------------------
     \3\ ``Order Approving Proposed Rule Change, as modified by 
Amendment No. 4, to Amend NYSE Rule 452 and Corresponding Listed 
Company Manual Section 402.08 to Eliminate Broker Discretionary Voting 
for the Election of Directors, Except for Companies Registered Under 
the Investment Company Act of 1940, and to Codify Two Previously 
Published Interpretations that Do Not Permit Broker Discretionary 
Voting for Material Amendments to Investment Advisory Contracts with an 
Investment Company,'' Securities Exchange Act Release No. 34-60215 
(July 1, 2009). The Commission's vote was 3-2 in favor of the proposal, 
with Chairman Schapiro and Commissioners Walter and Aguilar voting to 
approve the rule change, and Commissioners Casey and Paredes voting not 
to approve the rule change. For the Commissioners' statements regarding 
the proposal at the Commission meeting at which the rule change was 
approved, see http://www.sec.gov/news/speech.shtml#chair.
---------------------------------------------------------------------------
    The Commission also has asked that the staff undertake--this year--
a comprehensive review of other potential improvements to the proxy 
voting system and rules governing shareholder communications, including 
exploring whether issuers should have better means to communicate with 
street name holders. With over 800 billion shares being voted annually 
at over 7,000 company meetings, it is imperative that our proxy voting 
process work well, beginning with the quality of disclosure and 
continuing through to the integrity of the vote results.
Say-on-Pay for TARP Companies
    Also on July 1, the Commission proposed amendments to the proxy 
rules to set out the requirements for a ``say-on-pay'' vote at public 
companies that that have received (and not repaid) financial assistance 
under the Troubled Asset Relief Program. \4\ Under the Emergency 
Economic Stabilization Act of 2009, these companies are required to 
permit an annual advisory shareholder vote on executive compensation. 
Consistent with the EESA, the Commission's proposals would require 
public companies that are TARP recipients to provide a separate 
shareholder vote on executive compensation in proxy solicitations 
during the period in which any obligation arising from financial 
assistance provided under the TARP remains outstanding. These proposals 
are intended to clarify what is necessary under the Commission's proxy 
rules to comply with the EESA vote requirement and help to assure that 
TARP recipients provide useful information to shareholders about the 
nature of the required advisory vote on executive compensation.
---------------------------------------------------------------------------
     \4\ ``Shareholder Approval of Executive Compensation of TARP 
Recipients,'' Securities Exchange Act Release No. 34-60218 (July 1, 
2009).
---------------------------------------------------------------------------
Conclusion
    As governance and compensation practices continue to evolve, the 
Commission will remain vigilant in seeking to assure that our 
disclosure rules provide investors with the information they need to 
make informed investment and voting decisions. We know that there also 
is a great deal of thought and work outside the agency regarding 
corporate governance and executive compensation best practices, and we 
stand ready to lend whatever assistance we can in those efforts.
    Thank you again for inviting me to appear before you today and for 
the Subcommittee's support of the agency in its efforts at this 
critical time for the Nation's investors. I would be happy to answer 
any questions you may have.
                                 ______
                                 
                PREPARED STATEMENT OF JOHN C. COATES IV
 John F. Cogan, Jr., Professor of Law and Economics, Harvard Law School
                             July 29, 2009
Introduction
    Chairman Reed, Ranking Member Bunning, and Members of the 
Subcommittee, I want to thank you for inviting me to testify. Effective 
corporate governance is a crucial foundation for economic growth, and I 
am honored to have been asked to participate.
A. Are There Any General Lessons for Corporate Governance from the 
        Financial Crisis?
    Some have described the ongoing financial crisis as reflecting 
poorly on U.S. corporate governance, as with the accounting scandals 
and stock market bubbles of the late 1990s and early 2000s that led to 
the Sarbanes-Oxley Act. Unlike those episodes, however, the ongoing 
financial crisis has not exposed new and widespread problems with the 
basic governance of most U.S. publicly held corporations. Outside the 
financial and automotive sectors, most companies have suffered only as 
a result of the crisis, and did not contribute to or cause it. Stock 
prices have fallen across the board, but most price declines have more 
to do with the challenges facing the real economy, and the spillovers 
from the financial sector on companies in need of new capital, and 
little to do with any general problem with corporate governance. As a 
result, we have learned relatively little about many long-standing 
concerns and debates surrounding the governance of publicly held 
corporations--and there are few if any easy lessons that can be drawn 
from the crisis for corporate governance generally.
    I do not mean to minimize those concerns and debates, or suggest 
lawmakers should remain passive in the field of corporate governance. 
To the contrary, the crisis makes reform more important and urgent than 
ever, because well-governed companies recover and adapt more readily 
than poorly governed firms. But the best reform path will need to 
attend to differences between governance across industries, and ways 
that corporate governance interacts with industry-based regulation--and 
in particular, financial industry regulation--if legal changes are not 
to make things worse, rather than better. Governance flaws at Citigroup 
differed dramatically from governance flaws at GM, and attempts to fix 
the problems at firms like GM through laws directed at all public 
companies could make things worse at firms like Citigroup.
    One important problem at financial firms was excessive risk-taking, 
stemming from a so-called ``bonus culture'' of compensation practices 
strongly linked to share prices. But the risks that financial firms 
took on were harmful for the Nation as a whole because the financial 
firms were so important (and complex) and existing resolution authority 
so weak and poorly designed that those financial firms could not 
generally be allowed to fail. As a result, in economic terms, financial 
firms' compensation practices did not take into account the external 
effects on taxpayers in the event of insolvency. In effect, financial 
firms were allowed to gamble with taxpayer money. This would have been 
true even if managers of those firms had been perfect stewards of 
shareholder wealth. The suggestion of my colleagues Holger Spamann and 
Lucian Bebchuk (2009)--praised by the New York Times editors earlier 
this week--that financial firms be required to link compensation to 
returns on their bonds as well as their common stocks reflects this 
point. Shareholders are not the only important corporate constituency 
to consider in setting corporate governance rules for banks.
    At most public companies, the diagnosis has not been the same. If 
anything, the conventional critique of the governance of nonfinancial 
companies is that boards and managers have tended (from the shareholder 
perspective) to be excessively resistant to change, and to have tied 
executive compensation too weakly with performance. When commentators 
attempt to link compensation at firms like AIG and claims about 
excessive executive compensation at public companies generally, they 
fail to acknowledge that most shareholders do not mind if executives 
make an enormous amount of money, as long as shareholders also gain. 
Efforts to increase shareholder power to encourage managers more 
strongly to pursue shareholder wealth could--at financial firms--
undermine efforts by bank regulators to restrain risk-taking by those 
same firms. The most important practical lesson of the financial crisis 
is, then, this: whatever form general corporate governance reform 
takes, careful thought should be given to exempting--or at least 
allowing relevant financial regulatory authorities to exempt or 
override--financial firms from those reforms.
B. Evidence on Policy Options
    Turning from the general lessons of the financial crisis to some of 
the specific governance reforms that have been discussed or proposed in 
the last few years, it is important to bear in mind that corporate 
governance is not rocket science--in fact, it is much more complicated 
than rocket science. Corporations are in their simplest sense large 
groups of people coordinating their activities for profit. Science has 
a hard enough task tracking inert matter moving through space; it has a 
harder time predicting the behavior of a single actual or typical 
human; and it has the hardest time of all attempting to describe or 
predict how large groups of people will act--if for no other reason 
than researchers cannot experiment on large groups of people in 
realistic settings. As a result, there are few consensus views among 
researchers about any nontrivial topic in corporate governance, and 
evidence tends to emerge slowly, is rarely uncontested, and is subject 
to constant (and often dramatic reevaluation). As a result, everything 
that you do in setting rules for corporate governance should keep the 
fragility of the evidence in mind: set rules that can be changed by 
delegating to regulatory agencies; direct those agencies to review and 
reassess their own rules regularly; and provide ``opt outs'' and 
``sunsets'' to governance mandates that are expected to last 
indefinitely, as at many corporations.
    As one example, to my knowledge, there is no reliable large-scale 
empirical evidence--good or bad--on the effects of shareholder access 
to a company's proxy statement, along the lines proposed by the SEC and 
mandated by S. 1074, H.R. 3269 and H.R. 2861, because there has no been 
no significant observed variation in such a governance system within 
any modern developed economy. This does not mean that there is no 
information relevant to evaluating how such a system would operate in 
practice, or that there is no basis on which such a system could be 
recommended or adopted. Rather, the absence of observed variation means 
that there is no general body of data that is capable of revealing 
whether such a system would consistently have good or bad effects on 
shareholder welfare--and no such data will exist unless and until a 
large number of companies voluntarily adopt such a system or are 
required to by law. That is generally true of many corporate governance 
proposals, and to require such data before adopting rule changes would 
effectively freeze laws governing corporate governance in place 
indefinitely, preventing further inquiry or development of evidence.
    Nonetheless, there are some corporate governance topics about which 
evidence is better than others. Here I set out what is necessarily an 
abbreviated summary of the evidence on three topics addressed in one or 
more bills pending in the current Congress, including the Shareholder 
Bill of Rights Act of 2009 (S. 1074): (a) ``say-on-pay,'' (b) mandatory 
separation of the chairman and CEO positions, and (c) mandatory annual 
board elections.
a. Say-on-Pay
    The proposed requirement that shareholders be given an advisory 
vote on executive pay has the advantage that it is very similar to a 
requirement adopted in another jurisdiction (the United Kingdom (U.K.)) 
that has capital markets and laws that are otherwise similar to those 
applicable in the United States. \1\ This fact enables a research 
approach that is otherwise unavailable: a before-and-after test of 
board and shareholder responses, compensation practices, stock market 
reactions and shareholder returns, and other items of interest 
surrounding the adoption of ``say-on-pay'' in the U.K.. Different 
researchers have conducted several investigations of this kind and the 
results published at least informally. Those researchers report that 
``say-on-pay's'' adoption in the U.K.:
---------------------------------------------------------------------------
     \1\ Say-on-Pay legislation has also been adopted in Australia, 
Norway, Sweden, and the Netherlands. Deane (2007).

    improved the link between executive pay and corporate 
---------------------------------------------------------------------------
        performance (Ferri and Maber 2007);

    led firms (both before and after relatively negative 
        shareholder votes) to adopt better pay practices (id.);

    led activist shareholders to target firms with weak pay-
        performance links and those with higher-than-expected executive 
        compensation levels (id.; Alissa 2009);

    did not reduce or slow the overall increase in executive 
        compensation levels (Ferri and Maber 2007; Gordon 2008).

Together, these findings suggest that ``say-on-pay'' legislation would 
have a positive impact on corporate governance in the U.S. While the 
two legal contexts are not identical, there is no evidence in the 
existing literature to suggest that the differences would turn what 
would be a good idea in the U.K. into a bad one in the U.S.
    Researchers have also exploited the introduction of earlier ``say-
on-pay'' legislation in the U.S. to examine stock price reactions to 
the prospect of such a governance reform. Consistent with the U.K. 
findings, they report that stock investors appear to have viewed the 
proposed legislation as good for firms with higher-than-typical 
executive compensation, firms with weak pay-performance links, and 
firms with weak corporate governance measured in various ways (Cai and 
Walkling 2009). \2\ They also report data showing that the market 
reacted positively at most sample firms to the proposed legislation. 
The same researchers also report that shareholder-sponsored efforts to 
introduce ``say-on-pay'' rules at individual firms--particularly when 
sponsored by unions with low stock holdings in the targeted firms--were 
not well-received by the stock market, in part because they were not 
directed at firms with higher-than-typical executive compensation or 
firms with weak pay-performance links, but instead simply at companies 
that happen to be large. The researchers suggest that their findings 
show that one-size-fits-all ``say-on-pay'' legislation may be harmful, 
but this implication does not in fact follow from their findings. If 
anything, the U.K. evidence summarized above suggests that general 
``say-on-pay'' legislation will weaken the ability of special interest 
shareholder activists to exploit executive compensation as an issue, 
and will lower the costs of the broad run of shareholders to use their 
advisory votes on pay to target firms that are most in need of pressure 
to improve pay practices.
---------------------------------------------------------------------------
     \2\ The authors report that firms with the very weakest corporate 
governance ratings did not exhibit negative stock price reactions to 
steps toward to the passage of ``say-on-pay'' legislation, and 
plausibly suggest that this may be because such firms may not respond 
to advisory shareholder votes.
---------------------------------------------------------------------------
b. Mandatory Separation of Chairman and CEO Positions
    In comparison to research on ``say-on-pay'' rules, the evidence on 
the proposal to mandate the separation of the chair and the CEO of 
public companies is more extensive and considerably more mixed. At 
least 34 separate studies of the differences in the performance of 
companies with split vs. unified chair/CEO positions have been 
conducted over the last 20 years, including two ``meta-studies.'' 
Dalton et al. (1998) (reviewing 31 studies of board leadership 
structure and finding ``little evidence of systematic governance 
structure/financial performance relationships'') and Rhoades et al. 
(2001) (meta-analysis of 22 independent samples across 5,271 companies 
indicates that independent leadership structure has a significant 
impact on performance, but this impact varies with context). The only 
clear lesson from these studies is that there has been no long-term 
trend or convergence on a split chair/CEO structure, and that variation 
in board leadership structure has persisted for decades, even in the 
U.K., where a split chair/CEO structure is the norm.
    One study provides evidence consistent with one explanation of the 
overall lack of strong findings: optimal board structures may vary by 
firm size, with smaller firms benefiting from a unified chair/CEO 
position, with the clarity of leadership that structure provides, and 
larger firms benefiting from the extra monitoring that an independent 
chair may provide given the greater risk of ``agency costs'' at large 
companies. Palmon et al. (2002) (finding positive stock price reactions 
for small firms that switch from split to unified chair/CEO structure, 
and negative reactions for large firms). If valid, this explanation 
would suggest that it would be a good idea for any legislation on board 
leadership to (a) limit any mandate to the largest firms and (b) permit 
even those firms to ``opt out'' of the requirement through periodic 
shareholder votes (e.g., once every 5 years).
c. Mandatory Annual Board Elections
    The evidence on the last legislative proposal I will address--
mandatory annual board elections (i.e., a ban on staggered boards)--is 
thinner and at first glance more compelling than that on board 
leadership structure, but on close review is just as mixed. There have 
been at least two studies that focus on the specific relationship 
between annual board elections and firm value (Bebchuk and Cohen 2005; 
Faleye 2007), and a number of other papers that include annual board 
elections in studying the relationship between broader governance 
indices and firm value more generally (e.g., Gompers et al., 2003; 
Cremers and Ferrell 2009). Most (but not all \3\) conclude that annual 
board elections (either on their own or in combination with other 
governance practices) are associated with higher firm value, as 
measured by the ratio of firms' stock prices to their book values. \4\ 
The governance-valuation studies, however, generally suffer from a 
well-known ``endogeneity'' problem--that is, it is difficult (and given 
data limitations, sometimes impossible) to know whether annual 
elections improve firm value, or firm value determines whether a 
company chooses to hold annual elections. While there are statistical 
techniques that can address this issue, none of the studies to date 
have presented compelling evidence that annual elections lead to better 
performance, at least in the last 20 years, during which time public 
companies rarely switched from annual to staggered elections. Moreover, 
the longer a given study of this type has been available for others to 
attempt to replicate, the more fragile the findings have appeared to 
be, suggesting that the bottom-line conclusions of more recent studies 
may not hold up in the face of continued research.
---------------------------------------------------------------------------
     \3\ Ahn, Goyal, and Shrestha (2009) (finding that annual board 
elections reduces pay-performance sensitivity and investment efficiency 
in firms with low monitoring costs, while having the opposite effects 
on firms with high monitoring costs).
     \4\ Some suggest that the difference in firm value follows from 
the fact that annual board elections make hostile takeovers easier. See 
Bebchuk, Cohen, and Ferrell 2009. See also Bebchuk, Coates, and 
Subramanian 2001 (finding that staggered board elections reduce hostile 
bid completion rates, conditional on hostile bids being made).
---------------------------------------------------------------------------
    Evidence on annual elections is further complicated by the fact 
that companies that ``go public'' for the first time continue to adopt 
staggered board elections at high rates, as late as 2007. \5\ Since the 
evidence regarding the purported ability of staggered boards to improve 
firm value has been known for some time, and since shareholders have 
the ability to adjust the prices they pay for newly issued IPO shares 
to reflect governance practices, the fact of continued adoption of 
staggered board elections prior to IPOs suggests that there may be a 
social advantage to permitting these structures, at least when adopted 
before a company goes public. Other researchers have made a similar 
point about ``dual class'' capital structures, which give low or no 
votes to public investors, while letting founders or their family 
members retain high vote stock. SEC rules and stock exchange listing 
standards have for a long time permitted such structures to be adopted 
in the U.S. only prior to a company going public, and not once a 
company has gone public. Such structures, as with staggered board 
elections, have long been thought to reduce firm value, measured by 
reference to public stock prices. Yet, as with staggered boards, some 
companies continue to adopt dual class structures--and some have done 
quite well by their shareholders (e.g., Google Inc.--still up over 300 
percent since its IPO despite the recent market meltdown).
---------------------------------------------------------------------------
     \5\ See data available at SharkRepellent.Net, which reported that 
despite general declines in takeover defenses at public companies in 
the 2000s, defenses at firms going public continued to increase, with 
almost \3/4\s of newly public companies adopting staggered boards. See 
also Coates 2001.
---------------------------------------------------------------------------
    The best explanation offered by academic researchers to explain the 
continued use of dual class structures and staggered board elections is 
that they provide founders assurance of continued control, which they 
value more than the stock price of their companies might reflect. Such 
private value may arise because of particular attachments the founders 
have toward the companies they have helped build from scratch, or 
because they hope to pass control of their companies to their children, 
or because they have developed ``firm-specific capital'' that they 
would lose if the company were acquired (and which would be hard to 
value by outsiders). Some evidence has been developed consistent with 
these explanations (see Coates 2004, reviewing prior research). This 
evidence is worth considering not only because dual class structures 
are analogous to staggered board elections--and interfere with hostile 
takeovers and shareholder voting rights even more than do staggered 
board elections--but also because any to mandate annual board elections 
would also require a ban on dual class structures, or else it would 
simply push companies to adopt the more restrictive dual class 
structure in lieu of staggered boards.
C. Recommendations
    My recommendations flow from my review of the implications of the 
financial crisis and my review of evidence above:
    First, any corporate governance reform that attempts to shift power 
from boards or managers to shareholders should either not include 
financial firms, or should include a clear delegation of authority to 
financial regulators to exempt financial firms from these power shifts 
by regulation. Simply directing financial regulators to regulate the 
same governance practices (as in H.R. 3269) may not suffice to prevent 
shareholder pressure from encouraging firms to craft ways around those 
regulations. It would be better more generally to moderate the pressure 
of shareholders on financial firms to maximize short-term profit at the 
potential expense of the financial system and taxpayers.
    Second, ``say-on-pay'' legislation is likely to be a good idea. By 
enabling shareholders across the board to provide feedback in the form 
of advisory votes to boards on executive compensation, such a 
requirement would be likely to increase board scrutiny on one element 
of corporate governance that has the greatest potential for improving 
incentives and firm performance in the long run. At the same time, it 
should be recognized that ``say-on-pay'' is not likely to achieve 
general distributive goals--wealthy CEOs will continue to earn outsize 
compensation, as long as their shareholders benefit. If the goal of 
Congress is to reduce wealth or income disparities, ``say-on-pay'' is 
not the right mechanism, and executive compensation is only a 
relatively minor part of the picture. For that reason, efforts to use 
corporate governance practices--which after all only affect a subset of 
all U.S. companies, those that have dispersed shareholders--to force a 
linkage between CEO and employee pay seem to me misguided. It would be 
better to address pay disparities in the tax code.
    Third, while mandating a split between the chair and the CEO is not 
clearly a good idea for all public companies, it may well be a good 
idea for larger companies. Because shareholders of those same companies 
may find it difficult to initiate such a change, given the difficulties 
of collective action, a legislative change requiring a split leadership 
structure but permitting shareholder-approved opt outs may improve 
governance for many companies while imposing relatively minor costs on 
companies generally. Requiring that companies give shareholders a vote 
on such a choice episodically (e.g., every 5 years) would also be a way 
to help solve shareholders' inevitable collective action problems 
without forcing a one-size-fits-all solution on companies generally.
    Fourth, mandating that all public companies hold annual elections 
for all directors is not clearly supported by evidence or theory. It 
perhaps bears mentioning that other important institutions (the SEC, 
the Fed, the Senate) permit staggered elections for good reason, and 
that any rule mandating annual elections would ride roughshod over 
State law--in Massachusetts, for example, companies are required to 
have staggered board elections unless they affirmatively opt out of the 
requirement. In prior writing, I have suggested it be left to the 
courts to review director conduct with a more skeptical eye at 
companies that adopted staggered boards prior to the development of the 
poison pill (Bebchuk, Coates, and Subramanian 2001), and I have also 
suggested elsewhere reasons to consider ``re-opening'' corporate 
governance practices put in place long ago (Coates 2004). Both 
approaches would be better than an across-the-board annual election 
mandate, which would be likely to lead new companies to adopt even more 
draconian governance practices without any clear net benefit.
    Finally, precisely because there is no good evidence on the 
potential effects of shareholder proxy access, it would seem to be the 
best course to move cautiously in adopting rules permitting or 
requiring such access. For that reason, the most that would seem 
warranted for a hard-to-change statute to achieve is to mandate that 
the SEC adopt a rule providing for such access, and thereby to clarify 
the SEC's authority to do so. Any shareholder access rule will need to 
address not only the length of the holding period and ownership 
threshold required to obtain such access, the ability of shareholders 
to aggregate holdings to obtain eligibility, rules for independence of 
nominees and shareholders using the rule, and the availability of the 
rule to those seeking control or influence of a company. Efforts to 
specify rules for such access at a greater level of detail will 
probably miss the mark, and be difficult to correct if experience shows 
that the access has either provided too much or too little access to 
accomplish the presumed goal of enhancing shareholder welfare.
References
Seoungpil Ahn, Vidhan K. Goyal, and Keshab Shrestha, ``The Differential 
    Effects of Classified Boards on Firm Value'', Working Paper (June 
    27, 2009).
Walid M. Alissa, ``Boards' Response to Shareholders' Dissatisfaction: 
    The Case of Shareholders' Say-on-Pay in the U.K.'', Working Paper 
    (2009).
Lucian A. Bebchuk, John C. Coates, and Guhan Subramanian, ``The 
    Powerful Antitakeover Force of Staggered Boards: Theory, Evidence 
    and Policy,'' 54, Stanford Law Review 887 (2002), available at 
    ssrn.com/abstract_id=304388.
Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell, ``What Matters in 
    Corporate Governance?'', Review of Financial Studies 22, 783 
    (2009).
Lucian A. Bebchuk and Holger Spamann, ``Regulating Bankers' Pay'', 
    Working Paper, forthcoming Georgetown Law Journal (2009).
Jay Cai and Ralph A. Walkling, ``Shareholders' Say-on-Pay: Does It 
    Create Value?'', Working Paper (2009).
John C. Coates IV, ``Explaining Variation in Takeover Defenses: Blame 
    the Lawyers'', 89, California Law Review 1376 (2001).
John C. Coates IV, ``Ownership, Takeovers and EU Law: How Contestable 
    Should EU Corporations Be?'', In Reforming Company and Takeover Law 
    in Europe, Guido Ferrarini, Klaus J. Hopt, Jaap Winter, and Eddy 
    Wymeersch, eds., Oxford University Press, 2004, available at 
    ssrn.com/abstract_id=424720.
Martijn Cremers and Allen Ferrell, ``Thirty Years of Corporate 
    Governance: Determinants and Equity Prices'', Working Paper (2009).
Dan R. Dalton, Catherine M. Daily, Alan E. Ellstrand, and Jonathan L. 
    Johnson, ``Meta-Analytic Reviews of Board Composition, Leadership 
    Structure and Financial Performance'', 19, Str. Mgt. J. 269 (1998).
S. Deane, ``Say-on-Pay: Results From Overseas'', The Corporate Board, 
    July/August 2007, 11-18 (2007).
Olubunmi Faleye, ``Classified Boards, Firm Value, and Managerial 
    Entrenchment'', Journal of Financial Economics, 83, 501-529 (2007).
Fabrizio Ferri and David Maber, ``Say-on-Pay Vote and CEO Compensation: 
    Evidence From the U.K.'', Working Paper (2007).
Paul Gompers, J. Ishii, and A. Metrick, ``Corporate Governance and 
    Equity Prices'', Quarterly Journal of Economics 118, 107-155 
    (2003).
Jeffrey N. Gordon, `` `Say-on-Pay': Cautionary Notes on the U.K. 
    Experience and the Case for Shareholder Opt-In'', Working Paper 
    (2008).
O. Palmon and J.K. Wald, ``Are Two Heads Better Than One? The Impact of 
    Changes in Management Structure on Performance by Firm Size'', 8, 
    J. Corp. Fin. 213 (2002).
D.L. Rhoades, P.L. Rechner, and C. Sundaramurthy, ``A Meta-Analysis of 
    Board Leadership Structure and Financial Performance: Are `Two 
    Heads Better Than One'?'', 9, Corp. Gov.: An Int'l Rev. 311 (2001).
                                 ______
                                 
                    PREPARED STATEMENT OF ANN YERGER
         Executive Director, Council of Institutional Investors
                             July 29, 2009
    Chairman Reed, Ranking Member Bunning, and Members of the 
Subcommittee: Good morning. I am Ann Yerger, Executive Director, of the 
Council of Institutional Investors (Council). I am pleased to appear 
before you today on behalf of the Council.
    My testimony includes a brief overview of the Council followed by a 
discussion of our views on the following issues that you informed me 
were the basis for this important and timely hearing:

    What weaknesses has the financial crisis revealed about 
        executive compensation, board composition, proxy rules, or 
        other corporate governance issues?

    What key legislative and regulatory changes should be 
        considered to ensure shareholders are adequately protected and 
        appropriate incentives exist for optimal long-term performance 
        at companies?

    What information exists about the potential impact of 
        various approaches to improving corporate governance 
        regulation?
The Council
    Founded in 1985 the Council is a nonpartisan, not-for-profit 
association of public, labor and corporate employee benefit funds with 
assets exceeding $3 trillion. \1\ Today the organization is a leading 
advocate for improving corporate governance standards for U.S. 
companies and strengthening investor rights.
---------------------------------------------------------------------------
     \1\ See Attachment 1.
---------------------------------------------------------------------------
    Council members are responsible for investing and safeguarding 
assets used to fund retirement benefits of millions of participants and 
beneficiaries throughout the U.S. They have a significant commitment to 
the U.S. capital markets, with the average Council member investing 
approximately 60 percent of its entire portfolio in U.S. stocks and 
bonds. \2\
---------------------------------------------------------------------------
     \2\ Council of Institutional Investors, Asset Allocation Survey 
2008 at 2, http://www.cii.org/UserFiles/file/resource%20center/
publications/2008%20Asset%20Allocation%20Survey.pdf.
---------------------------------------------------------------------------
    They are also long-term, patient investors due to their investment 
horizons and their heavy commitment to passive investment strategies. 
Because these passive strategies restrict Council members from 
exercising the ``Wall Street walk'' and selling their shares when they 
are dissatisfied, corporate governance issues are of great interest to 
our members.
    Council members have been deeply impacted by the financial crisis. 
As a result, they have a vested interest in ensuring that the gaps and 
shortcomings revealed by the financial crisis are repaired.
What weaknesses has the financial crisis revealed about executive 
        compensation, board composition, proxy rules, or other 
        corporate governance issues?
    The Council believes the financial crisis has exposed some very 
significant weaknesses in the regulation and oversight of the U.S. 
capital markets. Gaps in regulation, inadequate resources at existing 
regulators and failures of regulatory will were key contributors. But 
so were failures in the corporate boardroom.
    Council members, U.S. citizens, and investors around the globe, 
have paid the price for these failures. Not only have they suffered 
trillions of dollars in investments losses, they have also lost 
confidence in the integrity of our markets and in the effectiveness of 
board oversight of corporate management.
    A comprehensive review and a meaningful restructuring of the U.S. 
financial regulatory model are necessary steps toward restoring 
investor confidence in our markets and protecting against a repeat of 
these failures. But regulatory reform alone is insufficient, because 
vigorous securities regulation on its own cannot solve many of the 
issues that led to the current crisis. The Council believes that many 
corporate governance failures contributed to this financial crisis. And 
as a result, the Council believes corporate governance improvements are 
a critical component of the necessary package of reforms.
    In some cases corporate boards failed shareowners. Some failed to 
adequately understand, monitor and oversee enterprise risk. Some failed 
to include directors with the necessary blend of independence, 
competencies, and experiences to adequately oversee management and 
corporate strategy. And far too many corporate boards structured and 
approved executive compensation programs that motivated excessive risk 
taking and yielded outsized rewards--with little to no downside risk--
for short-term results.
    Current rules and regulations also failed shareowners. Today, 
shareowners around the world--including in countries with far less 
developed capital markets than the U.S.--enjoy basic rights that 
shareowners of U.S. companies are denied. Rights such as requiring 
directors to be elected by majority vote, giving owners advisory votes 
on executive pay, and providing owners modest vehicles to access 
management proxy cards to nominate directors are noticeably absent in 
much of corporate America. Their nonexistence weakens the ability of 
shareowners to oversee corporate directors--their elected 
representatives--and hold directors accountable.
    The U.S. has long been recognized as a leader when it comes to 
investor protection, market transparency, and oversight. But the U.S. 
has fallen short when it comes to corporate governance issues. The 
Council believes that corporate governance enhancements are a long 
overdue and essential component of the bold reforms required to restore 
confidence in the integrity of the U.S. capital markets.
What key legislative and regulatory changes should be considered to 
        ensure shareholders are adequately protected and appropriate 
        incentives exist for optimal long-term performance at 
        companies?
    The Council believes a number of key corporate governance reforms 
are essential to providing meaningful investor oversight of management 
and boards and restoring investor confidence in our markets. Such 
measures would address many of the problems that led to the current 
crisis, and more importantly, empower shareowners to anticipate and 
address unforeseen future risks. These measures, rather than 
facilitating investors seeking short-term gains, are consistent with 
enhancing long-term shareowner value.
    More specifically, the governance improvements that the Council 
believes would have the greatest impact and, therefore, should be 
contained in any financial markets regulatory reform legislation 
include:

    Majority Voting for Directors: Directors in uncontested 
        elections should be elected by a majority of the votes cast.

    Shareowner Access to the Proxy: A long-term investor or 
        group of long-term investors should have access to management 
        proxy materials to nominate directors.

    Executive Compensation Reforms: Recommended reforms include 
        advisory shareowner vote on executive pay, independent 
        compensation advisers, stronger clawback provisions and 
        enhanced disclosure requirements.

    Independent Board Chair: Corporate boards should be chaired 
        by an independent director. \3\
---------------------------------------------------------------------------
     \3\ See Attachments 2 and 3.
---------------------------------------------------------------------------
Majority Voting for Directors
    Directors are the cornerstone of the U.S. corporate governance 
model. And while the primary powers of shareowners--aside from buying 
and selling their shares--are to elect and remove directors, U.S. 
shareowners have few tools to exercise these critical and most basic 
rights.
    The Council believes the accountability of directors at most U.S. 
companies is weakened by the fact that shareowners do not have a 
meaningful vote in director elections. Under most State laws the 
default standard for uncontested director elections is a plurality 
vote, which means that a director is elected in an uncontested 
situation even if a majority of the shares are withheld from the 
nominee.
    The Council has long believed that a plurality standard for the 
election of directors is inherently unfair and undemocratic and that a 
majority vote standard is the appropriate one. The concept of majority 
voting is difficult to contest--especially in this country. And today 
majority voting is endorsed by all types of governance experts, 
including law firms advising companies and corporate boards.
    Majority voting makes directors more accountable to shareowners by 
giving meaning to the vote for directors and eliminating the current 
``rubber stamp'' process. The benefits of this change are many: it 
democratizes the corporate electoral process; it puts real voting power 
in hands of investors; and it results in minimal disruption to 
corporate affairs--it simply makes board's representative of 
shareowners.
    The corporate law community has taken some small steps toward 
majority voting. In 2006 the ABA Committee on Corporate Laws approved 
amendments to the Model Business Corporation Act to accommodate 
majority voting for directors, and lawmakers in Delaware, where most 
U.S. companies are incorporated, amended the State's corporation law to 
facilitate majority voting in director elections. But in both cases 
they stopped short of switching the default standard from plurality to 
majority.
    Since 2006 some companies have volunteered to adopt majority voting 
standards, but in many cases they have only done so when pressured by 
shareowners forced to spend tremendous amounts of time and money on 
company-by-company campaigns to advance majority voting.
    To date, larger companies have been receptive to adopting majority 
voting standards. Plurality voting is the standard at less than a third 
of the companies in the S&P 500. However, plurality voting is still 
very common among the smaller companies included in the Russell 1000 
and 3000 indices. Over half (54.5 percent) of the companies in the 
Russell 1000, and nearly three-quarters (74.9 percent) of the companies 
in the Russell 3000, still use a straight plurality voting standard for 
director elections. \4\ Statistics are not available for the thousands 
of additional companies not included in these indices; however, the 
Council believes most do not have majority voting standards.
---------------------------------------------------------------------------
     \4\ Annalisa Barrett and Beth Young, ``Majority Voting for 
Director Elections'', Directorship 1 (Dec. 16, 2008), http://
www.directorship.com/contentmgr/showdetails.php/id/33732/page/1.
---------------------------------------------------------------------------
    Plurality voting is a fundamental flaw in the U.S. corporate 
governance system. It is time to move the default standard to majority 
voting. Given the failure by the States, particularly Delaware, to take 
the lead on this reform, the Council believes the time has come for the 
U.S. Congress to legislate this important and very basic shareowner 
right.
Shareowner Access to the Proxy
    Nearly 70 years have passed since the Securities and Exchange 
Commission (``SEC'' or ``Commission'') first considered whether 
shareowners should be able to include director candidates on 
management's proxy card. This reform, which has been studied and 
considered on and off for decades, is long overdue. Its adoption would 
be one of the most significant and important investor reforms by any 
regulatory or legislative body in decades. The Council applauds the SEC 
for its leadership on this important issue.
    The financial crisis highlighted a longstanding concern--some 
directors are not doing the jobs expected by their employers, the 
shareowners. Compounding the problem is the fact that in too many cases 
the director nomination process is flawed, largely due to limitations 
imposed by companies and the securities laws.
    Some boards are dominated by the CEO, who plays the key role in 
selecting and nominating directors. All-independent nominating 
committees ostensibly address this concern, but problems persist. Some 
companies don't have nominating committees, others won't accept 
shareowner nominations for directors, and Council members' sense is 
that shareowner-suggested candidates--whether or not submitted to all-
independent nominating committees--are rarely given serious 
consideration.
    Shareowners can now only ensure that their candidates get full 
consideration by launching an expensive and complicated proxy fight--an 
unworkable alternative for most investors, particularly fiduciaries who 
must determine whether the very significant costs of a proxy contest 
are in the best interests of plan participants and beneficiaries. While 
companies can freely tap company coffers to fund their campaigns for 
board-recommended candidates, shareowners must spend their own money to 
finance their efforts. And companies often erect various obstacles, 
including expensive litigation, to thwart investors running proxy 
fights for board seats.
    The Council believes reasonable access to company proxy cards for 
long-term shareowners would address some of these problems. We believe 
such access would substantially contribute to the health of the U.S. 
corporate governance model and U.S. corporations by making boards more 
responsive to shareowners, more thoughtful about whom they nominate to 
serve as directors and more vigilant about their oversight 
responsibilities.
    As such, Council members approved the following policy endorsing 
shareowner access to the proxy:

        Companies should provide access to management proxy materials 
        for a long-term investor or group of long-term investors owning 
        in aggregate at least three percent of a company's voting 
        stock, to nominate less than a majority of the directors. 
        Eligible investors must have owned the stock for at least 2 
        years. Company proxy materials and related mailings should 
        provide equal space and equal treatment of nominations by 
        qualifying investors.

        To allow for informed voting decisions, it is essential that 
        investors have full and accurate information about access 
        mechanism users and their director nominees. Therefore, 
        shareowners nominating director candidates under an access 
        mechanism should adhere to the same SEC rules governing 
        disclosure requirements and prohibitions on false and 
        misleading statements that currently apply to proxy contests 
        for board seats. \5\
---------------------------------------------------------------------------
     \5\ See Attachment 2, 3.2 Access to Proxy.

    The Council is in the process of submitting a comment letter to the 
SEC on the Commission's outstanding proposal, Facilitating Shareholder 
Director Nominations. \6\ While we have some suggested enhancements, 
the Council by and large is very supportive of the proposal. We firmly 
believe that a Federal approach is far superior to a State-by-State 
system.
---------------------------------------------------------------------------
     \6\ 74 Fed. Reg. 29,024 (proposed June 18, 2009), http://
www.sec.gov/rules/proposed/2009/33-9046.pdf.
---------------------------------------------------------------------------
    The Council believes Congress should support the SEC's efforts by 
affirming the Commission's authority to promulgate rules allowing 
shareowners to place their nominees for director on management's card. 
The Council believes the SEC has the authority to approve an access 
standard. However others disagree, and the Commission is likely to face 
unnecessary, costly and time-consuming litigation in response to a 
Commission-approved access mechanism. To ensure that owners of U.S. 
companies face no needless delays over the effective date of this 
critical reform, the Council recommends Congressional affirmation of 
the SEC's authority.
    Of note, the Council believes access to the proxy complements 
majority voting for directors. Majority voting is a tool for 
shareowners to remove directors. Access is a tool for shareowners to 
elect directors.
Executive Compensation Reforms
    As long-term investors with a significant stake in the U.S. capital 
markets, Council members have a vested interest in ensuring that U.S. 
companies attract, retain, and motivate the highest performing 
employees and executives. They are supportive of paying top executives 
well for superior performance.
    However, the financial crisis has offered yet more examples of how 
investors are harmed when poorly structured executive pay packages 
waste shareowners' money, excessively dilute their ownership in 
portfolio companies, and create inappropriate incentives that reward 
poor performance or even damage a company's long-term performance. 
Inappropriate pay packages may also suggest a failure in the boardroom, 
since it is the job of the board of directors and the compensation 
committee to ensure that executive compensation programs are effective, 
reasonable, and rational with respect to critical factors such as 
company performance and industry considerations.
    The Council believes executive compensation issues are best 
addressed by requiring companies to provide full, plain English 
disclosure of key quantitative and qualitative elements of executive 
pay, by ensuring that corporate boards can be held accountable for 
their executive pay decisions through majority voting and access 
mechanisms, by giving shareowners meaningful oversight of executive pay 
via nonbinding votes on compensation and by requiring disgorgement of 
ill-gotten gains pocketed by executives.

    Advisory Vote on Compensation: The Council believes an 
        annual, advisory shareowner vote on executive compensation 
        would efficiently and effectively provide boards with useful 
        information about whether investors view the company's 
        compensation practices to be in shareowners' best interests. 
        Nonbinding shareowner votes on pay would serve as a direct 
        referendum on the decisions of the compensation committee and 
        would offer a more targeted way to signal shareowner discontent 
        than withholding votes from committee members. They might also 
        induce compensation committees to be more careful about doling 
        out rich rewards, to avoid the embarrassment of shareowner 
        rejection at the ballot box. In addition, compensation 
        committees looking to actively rein in executive compensation 
        could use the results of advisory shareowner votes to stand up 
        to excessively demanding officers or compensation consultants. 
        Of note, to ensure meaningful voting results, Federal 
        legislation should mandate that annual advisory votes on 
        compensation are a ``nonroutine'' matter for purposes of New 
        York Stock Exchange Rule 452.

    Independent Compensation Advisers: Compensation consultants 
        play a key role in the pay-setting process. The advice provided 
        by these consultants may be biased as a result of conflicts of 
        interest. Most firms that provide compensation consulting 
        services also provide other kinds of services, such as benefits 
        administration, human resources consulting, and actuarial 
        services. Conflicts of interest contribute to a ratcheting up 
        effect for executive pay and should thus be minimized and 
        disclosed.

    Stronger Clawback Provisions: The Council believes a tough 
        clawback policy is an essential element of a meaningful ``pay 
        for performance'' philosophy. If executives are rewarded for 
        ``hitting their numbers''--and it turns out that they failed to 
        do so--they should not profit. While Section 304 of the 
        Sarbanes-Oxley Act gave additional authority to the SEC to 
        recoup bonuses or other incentive-based compensation in certain 
        circumstances, some observers have suggested this language is 
        too narrow and perhaps unworkable. The Council does not 
        advocate a reopening of the Sarbanes-Oxley Act, but it does 
        recommend that Congress consider ways to cover cases where 
        performance-based compensation may be ``unearned'' in 
        retrospect but not meet the high standard of ``resulting from 
        misconduct'' required by Section 304.

    Enhanced Disclosures: Of primary concern to the Council is 
        full and clear disclosure of executive pay. As U.S. Supreme 
        Court Justice Louis Brandeis noted, ``sunlight is the best 
        disinfectant.'' Transparency of executive pay enables 
        shareowners to evaluate the performance of the compensation 
        committee and board in setting executive pay, to assess pay-
        for-performance links and to optimize their role of overseeing 
        executive compensation through such means as proxy voting. The 
        Council is very supportive of the SEC's continued efforts to 
        enhance the disclosure of executive compensation, including its 
        recent proposal to require disclosures about (1) how overall 
        pay policies create incentives that can affect the company's 
        risk and management of risk; (2) the grant date fair value of 
        equity-based awards; and (3) remuneration to executive/director 
        compensation consultants. We believe the disclosure regime in 
        the U.S. would be substantially improved if companies would 
        have to disclose the quantitative measures used to determine 
        incentive pay. Such disclosure--which could be provided at the 
        time the measures are established or at a future date, such as 
        when the performance related to the award is measured--would 
        eliminate a major impediment to the market's ability to analyze 
        and understand executive compensation programs and to 
        appropriately respond.

    As indicated earlier in my testimony, the Council believes that a 
federally imposed standard for majority voting for directors and a SEC-
approved access mechanism will be two of the most powerful tools for 
addressing executive pay excesses and abuses. Their absence in the U.S. 
corporate governance model effectively insulates directors from 
meaningful shareowner oversight. We believe enhancing director 
accountability via both mechanisms would help rein in excessive or 
poorly structured executive pay packages.
Independent Board Chair
    The issue of whether the chair and CEO roles should be separated 
has long been debated in the U.S., where the roles are combined at most 
publicly traded companies. Interest in the issue renewed in recent 
years in the wake of Enron and other corporate scandals and, most 
recently, in response to the financial crisis.
    The U.S. approach to the issue differs from other countries, 
particularly the U.K. and other European countries which have comply-
or-disclose requirements regarding the separation of the roles and/or 
recommend it via nationally recognized best practices. According to the 
Millstein Center for Corporate Governance and Performance at the Yale 
School of Management:

        Up until the early 2000s, the percentage of the S&P 500 
        companies with combined roles remained barely unchanged in the 
        previous 15 years, at 80 percent. Today, approximately 36 
        percent of S&P 500 companies have separate chairs and CEOs; 
        this is up from 22 percent in 2002. However, only 17 percent of 
        S&P 1500 firms have chairs that can be qualified as independent 
        and the incidence of independent chairs is concentrated on 
        small and midcap firms. This is in sharp contrast to the 
        landscape of other countries. \7\
---------------------------------------------------------------------------
     \7\ ``Chairing the Board: The Case for Independent Leadership in 
Corporate North America'' 17 (2009), http://millstein.som.yale.edu/
2009%2003%2030%20Chairing%20The%20Board.pdf [hereinafter ``Chairing''].

    At the heart of the issue is whether the leadership of the board 
should differ from the leadership of the company. Clearly the roles are 
different, with management responsible for running the company and the 
board charged with overseeing management. The chair of the board is 
responsible for, among other things, presiding over and setting agendas 
for board meetings. The most significant concern over combining the 
roles is that strong CEOs could exert a dominant influence on the board 
and the board's agenda and thus weaken the board's oversight of 
management.
    The Conference Board Commission on Public Trust and Private 
Enterprise discussed the issue in its post-Enron corporate governance 
report. \8\ The Commission suggested three approaches--including naming 
an independent chair--for ensuring the appropriate balance of power 
between board and CEO functions, and it recommended that ``each 
corporation give careful consideration, based on its particular 
circumstances, to separating the offices of the Chairman and Chief 
Executive Officer.'' \9\
---------------------------------------------------------------------------
     \8\ The Conference Board, Commission on Public Trust and Private 
Enterprise 19 (Jan. 9, 2003),http://www.conference-board.org/pdf_free/
SR-03-04.pdf.
     \9\ Id.
---------------------------------------------------------------------------
    The Council believes separating the chair/CEO positions 
appropriately reflects the differences in the roles, provides a better 
balance of power between the CEO and the board--particularly when the 
CEO dominates the board, and facilitates strong, independent board 
leadership/functioning.
What information exists about the potential impact of various 
        approaches to improving corporate governance regulation?
    Empirical evidence from companies in the U.S. and countries around 
the globe support the reforms recommended by the Council.
Majority Voting for Directors
    Majority voting for directors is not an alien concept. It is 
standard practice in the United Kingdom, France, Germany, and other 
European nations. And as discussed, it is also in place at some U.S. 
companies. The experiences in these countries and in the U.S. indicate 
that majority voting is not harmful to the markets and does not result 
in dramatic and frequent changes to corporate boards.
Shareowner Access to the Proxy
    Shareowner access to the proxy is a common right in countries 
around the globe. According to Glass Lewis, the shareowners of 
companies in the following countries are provided an access mechanism 
(Country/Requirement):

    Australia--Minimum of 5 percent

    Canada--Minimum of 5 percent

    China--Minimum of 1 percent

    Finland--Minimum of 10 percent

    Germany--Minimum of 5 percent of the issued share capital 
        or shares representing at least =500,000 of the company's share 
        capital

    India--Deposit of INR 500, refundable if the nominee is 
        elected

    Italy--Minimum of 2.5 percent of the company's share 
        capital

    Russia--Minimum of 2 percent of the voting stock

    South Africa--Minimum of 5 percent

    United Kingdom--Minimum of 5 percent or at least 100 
        shareowners each with shares worth a minimum of 100

    In addition, a handful of U.S. companies--including Apria 
Healthcare and RiskMetrics--have voluntarily adopted access mechanisms. 
And Delaware recently revised its corporation code to allow corporate 
bylaws to require that a company's proxy include shareowner nominees 
for director along with management candidates. The experiences in these 
countries and in the U.S. indicate that proxy access is not harmful to 
the markets. Indeed these mechanisms have rarely been used by owners in 
these markets--powerful evidence that the existence of the mechanism 
may enhance board performance and board-shareowner communications.
Advisory Vote on Compensation
    According to the CFA Institute Centre for Financial Market 
Integrity, the following countries have some form of shareowner vote on 
executive compensation:

    Australia

    France

    Germany (51 percent of companies researched provide such a 
        vote)

    India

    Italy

    Poland

    Switzerland

    Taiwan

    United Kingdom \10\
---------------------------------------------------------------------------
     \10\ CFA Institute Centre for Financial Market Integrity, 
Shareowner Rights Across the Markets: A Manual for Investors (2009), 
http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2009.n2.1.

    Again, the experiences in these markets suggest that advisory votes 
on compensation are not harmful to the markets. And the fact that few 
compensation schemes are voted down suggests that shareowners are 
careful stewards of their voting responsibilities and that advisory 
votes do not require dramatic ``rearview mirror'' adjustments to pay.
Independent Board Chair
    Nonexecutive chairs are common in many countries outside the United 
States. Some 79 percent of companies in the United Kingdom's FTSE 350 
index report that they have independent chairs. \11\ Splitting the role 
of chair and CEO is the norm also in Australia, Belgium, Brazil, 
Canada, Germany, the Netherlands, Singapore, and South Africa. \12\ 
Again, the experiences in these markets suggest that independent board 
chairs are not harmful to the markets.
---------------------------------------------------------------------------
     \11\ Chairing, supra note 7, at 17.
     \12\ Id.
---------------------------------------------------------------------------
Conclusion
    The Council is not the only group advocating corporate governance 
reforms. The Investors' Working Group, an independent task force 
cosponsored by the Council and the CFA Institute Centre for Financial 
Market Integrity, issued July 15 a report recommending a set of reforms 
to put the U.S. financial regulatory system on sounder footing and make 
it more responsive to the needs of investors. \13\ Noting that 
``investors need better tools to hold managers and directors 
accountable,'' its recommendations include six corporate governance 
reforms:
---------------------------------------------------------------------------
     \13\ See Attachment 4.

    In uncontested elections, directors should be elected by a 
---------------------------------------------------------------------------
        majority of votes cast.

    Shareowners should have the right to place director 
        nominees on the company's proxy.

    Boards of directors should be encouraged to separate the 
        role of chair and CEO or explain why they have adopted another 
        method to assure independent leadership of the board.

    Securities exchanges should adopt listing standards that 
        require compensation advisers to corporate boards to be 
        independent of management.

    Companies should give shareowners an annual, advisory vote 
        on executive compensation.

    Federal clawback provisions on unearned executive pay 
        should be strengthened. \14\
---------------------------------------------------------------------------
     \14\ Id. at 22-23.

    The Administration, legislators, and regulators have also 
recognized the need for corporate governance enhancements. The Council 
commends the SEC for its bold efforts to date, and it applauds the 
Obama administration and leaders on Capitol Hill for evaluating 
corporate governance issues and, in some cases, proposing formal 
reforms. Many of these proposals would address the key governance 
shortfalls identified by the Council.
    Thank you, Mr. Chairman for inviting me to participate at this 
hearing. I look forward to the opportunity to respond to any questions.
Attachments
1. Council of Institutional Investors (Council) General Members

2. Council Corporate Governance Policies

3. Council Corporate Governance Reform Advocacy Letter (December 2008)

4. U.S. Financial Regulatory Reform: The Investors' Perspective, a 
Report by the Investors' Working Group

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                PREPARED STATEMENT OF JOHN J. CASTELLANI
                     President, Business Roundtable
                             July 29, 2009
Introduction
    Business Roundtable (www.businessroundtable.org) is an association 
of chief executive officers of leading U.S. companies with more than $5 
trillion in annual revenues and nearly 10 million employees. Member 
companies comprise nearly a third of the total value of the U.S. stock 
markets and pay nearly half of all corporate income taxes paid to the 
Federal Government. Annually, they return $133 billion in dividends to 
shareholders and the economy. Business Roundtable companies give more 
than $7 billion a year in combined charitable contributions, 
representing nearly 60 percent of total corporate giving. They are 
technology innovation leaders, with $70 billion in annual research and 
development spending--more than a third of the total private R&D 
spending in the United States.
    We appreciate the opportunity to participate in this hearing on 
``Protecting Shareholders and Restoring Public Confidence by Improving 
Corporate Governance.'' Business Roundtable has long been at the 
forefront of efforts to improve corporate governance. We have been 
issuing ``best practices'' statements in this area for three decades, 
including Principles of Corporate Governance (November 2005), The 
Nominating Process and Corporate Governance Committees: Principles and 
Commentary (April 2004), Guidelines for Shareholder-Director 
Communications (May 2005), and Executive Compensation: Principles and 
Commentary (January 2007) (attached as Exhibits I through IV). More 
recently, Business Roundtable became a signatory to Long-Term Value 
Creation: Guiding Principles for Corporations and Investors, also known 
as The Aspen Principles, a set of principles drafted in response to 
concerns about the corrosiveness that short-term pressures exert on 
companies. The signatories to The Aspen Principles are a group of 
business organizations, institutional investors and labor unions, 
including the AFL-CIO, Council of Institutional Investors, and TIAA-
CREF, who are committed to encouraging and implementing best corporate 
governance practices and long-term management and value-creation 
strategies. In addition, Business Roundtable recently published its 
Principles for Responding to the Financial Markets Crisis (2009) 
(attached as Exhibit V), and many of our suggestions have been 
reflected in the Administration's proposal to reform the financial 
regulatory system.
    At the outset, we must respectfully take issue with the premise 
that corporate governance was a significant cause of the current 
financial crisis. \1\ It likely stemmed from a variety of complex 
financial factors, including major failures of a regulatory system, 
over-leveraged financial markets and a real estate bubble. \2\ But even 
experts disagree about the crisis's origins. \3\ Notably, with the 
support of Business Roundtable, Congress recently established the 
Financial Crisis Inquiry Commission to investigate the causes of the 
crisis. \4\
---------------------------------------------------------------------------
     \1\ See Lawrence Mitchell, ``Protect Industry From Predatory 
Speculators'', Financial Times, July 8, 2009. Professor Mitchell, a 
George Washington University law professor, argues that it is 
``hyperbolic'' to suggest that inattentive boards had anything 
significant to do with the current recession.
     \2\ See Robert G. Wilmers, ``Where the Crisis Came From'', The 
Washington Post, July 27, 2009.
     \3\ Ben S. Bernanke, ``Four Questions About the Financial Crisis'' 
(Apr. 14, 2009), available at http://www.federalreserve.gov/newsevents/
speech/bernanke20090414a.htm.
     \4\ Stephen Labton, ``A Panel Is Named To Examine Causes of the 
Economic Crisis'', N.Y. Times, July 16, 2009, at B3.
---------------------------------------------------------------------------
    Because the recently established Financial Crisis Inquiry 
Commission is just starting its work, any attempt to make policy in 
response to those purported causes would seem premature. In fact, a 
legitimate concern is that many of the proposals currently being 
suggested could even exacerbate factors that may have contributed to 
the crisis. For example, commentators have asserted that the emphasis 
of certain institutional investors on short-term gains at the expense 
of long-term, sustainable growth played a role in the crisis. \5\ Some 
of the current corporate governance proposals, including a universal 
``say-on-pay'' right and the Securities and Exchange Commission's 
recent proposal for a mandatory process access regime, may actually 
exacerbate the emphasis on short-term gains. One large institutional 
investor, the New Jersey State Investment Council, recently expressed 
this concern, stating that, ``we do not want a regime where the primary 
effect is to empower corporate raiders with a short-term focus.'' \6\ 
Thus, we must be cautious that in our zeal to address the financial 
crisis, we do not jeopardize companies' ability to create the jobs, 
products, services and benefits that improve the economic well-being of 
all Americans.
---------------------------------------------------------------------------
     \5\ See Lawrence Mitchell, ``Protect Industry From Predatory 
Speculators'', Financial Times, July 8, 2009.
     \6\ Letter from Orin S. Kramer, Chair, New Jersey State Investment 
Council to Mary Schapiro, Chairman, Securities and Exchange Commission 
re: comments on File S7-10-09 (July 9, 2009).
---------------------------------------------------------------------------
    Moreover, the problems giving rise to the financial crisis occurred 
at a specific group of companies in the financial services industry. 
Having the Federal Government impose a universal one-size-fits-all 
corporate governance regime on all public companies based on the 
experience at a small subset of companies could undermine the stability 
of boards of directors and place corporations under even greater 
pressure for short-term performance.
    We also cannot ignore the sweeping transformation in corporate 
governance practices in the past 6 years, many of which have been 
adopted voluntarily by corporations, sometimes in response to 
shareholder requests. Similarly, State corporate law has been the 
bedrock upon which the modern business corporation has been created and 
it remains the appropriate and most effective source for law as it 
applies to corporate governance. It has been responsive to developments 
in corporate governance, most recently to majority voting for 
directors, proxy access, and proxy contest reimbursement. Further, the 
SEC plays an active role in seeing that shareholders receive the 
information they need to make informed voting decisions, and, in this 
regard, recently has issued a number of proposals designed to provide 
shareholders with additional corporate governance information.
Recent Developments in Corporate Governance
    The past few years have seen a sea change in corporate governance 
through a combination of legislation, rule making by the SEC and the 
securities markets and voluntary action by companies. As long-time 
advocates for improved corporate governance, Business Roundtable has 
supported and helped effect many of these changes while simultaneously 
working to ensure that they provide necessary operational flexibility 
and avoid unintended negative consequences.
Board Independence
    In the past several years, public companies have taken a number of 
steps to enhance board independence. First, there has been a 
significant increase in the number of independent directors serving on 
boards. A 2008 Business Roundtable Survey of member companies (attached 
as Exhibit VI) indicated that at least 90 percent of our member 
companies' boards are at least 80 percent independent. According to the 
RiskMetrics Group 2009 Board Practices, average board independence at 
S&P 1,500 companies increased from 69 percent in 2003 to 78 percent in 
2008. According to the same study, in 2008, 85 percent of S&P 1,500 
companies, and 91 percent of S&P 500 companies, had boards that were at 
least two-thirds independent.
    Second, directors increasingly meet in regular ``executive 
sessions'' outside the presence of management and 75 percent of our 
member companies hold executive sessions at every meeting, compared to 
55 percent in 2003. Moreover, the NYSE listing standards require a 
nonmanagement director to preside over these executive sessions and 
require companies to disclose in their proxy materials how interested 
parties may communicate directly with the presiding director or the 
nonmanagement directors as a group.
    Third, there has been a steady increase in the number of companies 
that have appointed a separate chairman of the board. According to the 
RiskMetrics Group 2009 Board Practices survey, from 2003 to 2008, the 
number of S&P 1,500 companies with separate chairmen of the board 
increased from 30 percent to 46 percent. Moreover, many companies 
without an independent chair have appointed a lead or presiding 
director in order to provide for independent board leadership. A 2007 
Business Roundtable survey of member companies indicated that 91 
percent of companies have an independent chairman or an independent 
lead or presiding director, up from 55 percent in 2003. According to 
the 2008 Spencer Stuart Board Index, by mid-2008, 95 percent of S&P 500 
companies had a lead or presiding director, up from 36 percent in 2003. 
Lead directors' duties are often similar to those of an independent 
chairman and include: presiding at all meetings of the board at which 
the chairman is not present, including executive sessions of the 
independent directors; serving as liaison between the chairman and 
independent directors; approving information sent to the board; 
approving meeting agendas for the board; approving meeting schedules to 
assure that there is sufficient time for discussion of all agenda 
items; having authority to call meetings of the independent directors; 
being available for consultation and direct communication with major 
shareholders; and serving as interim leadership in the event of an 
emergency succession situation. Many companies provide information 
about their board leadership structures in their corporate governance 
guidelines, their proxy statements or both, and the SEC recently has 
proposed to require disclosure about a company's leadership structure 
and why that structure is appropriate for the company.
    Finally, various organizations are focusing on voluntary steps that 
companies can take to enhance independent board leadership. In the 
spring of 2009, the National Association of Corporate Directors, with 
the support of Business Roundtable, issued a set of Key Agreed 
Principles To Strengthen Corporate Governance for U.S. Publicly Traded 
Companies. One ``key agreed principle'' states that boards should have 
independent leadership, either through an independent chairman or a 
lead/presiding director, as determined by the independent directors. 
The principles further recommend that boards evaluate their independent 
leadership annually. In March 2009, the Chairman's Forum, an 
organization of nonexecutive chairmen of U.S. and Canadian public 
companies, issued a policy briefing calling on companies to appoint an 
independent chairman upon the succession of any combined chairman/CEO. 
The policy briefing recognizes, however, that particular circumstances 
may warrant a different leadership structure and recommends, in these 
instances, that companies explain to shareholders why combining the 
positions of chairman and CEO represents a superior approach.
Majority Voting and Annual Elections
    Companies also have taken steps to enhance accountability through 
the adoption of majority voting standards for the election of directors 
and the establishment of annual elections for directors. Historically, 
most U.S. public companies have used a plurality voting standard in 
director elections. Under plurality voting, the director nominees for 
available board seats who receive the highest number of ``For'' votes 
are elected. In a typical annual election, the number of nominees 
equals the number of available Board seats, so if at least one share is 
voted ``For'' the election or reelection of a nominee, the nominee will 
gain or retain a seat on the Board. Accordingly, director nominees in 
uncontested elections are assured election. Under a majority voting 
regime, a candidate must receive a majority of votes cast in order to 
retain his or her board seat. Majority voting thus increases 
shareholder influence and encourages greater board accountability.
    In 2004, several labor unions and other shareholder groups began to 
broadly advocate that companies adopt a majority vote standard in 
uncontested director elections, in order to demonstrate directors' 
accountability to shareholders. Companies and shareholders alike 
recognized the merits of a majority voting standard and this corporate 
governance enhancement was quickly adopted by many companies. According 
to our 2008 Survey of Corporate Governance Trends, 75 percent of our 
member companies have adopted some form of majority voting for 
directors. According to the leading study on majority voting, as of 
October 2008, more than 70 percent of S&P 500 companies had adopted 
some form of majority voting, as compared with only 16 percent in 2006, 
\7\ and mid- and small-cap companies increasingly are adopting majority 
voting as well. \8\
---------------------------------------------------------------------------
     \7\ Melissa Klein Aguilar, ``Shareholder Voice Getting Louder, 
Stronger'', Compliance Week (Oct. 21, 2008) available at http://
www.complianceweek.com/article/5113/shareholder-voices-getting-louder-
stronger (quoting Claudia Allen, author of Study of Majority Voting in 
Director Elections).
     \8\ See Claudia H. Allen, Study of Majority Voting in Director 
Elections (Feb. 5, 2007) available at http://www.ngelaw.com/files/
upload/majoritystudy111207.pdf.
---------------------------------------------------------------------------
    A growing number of companies have moved to annual director 
elections too. According to the RiskMetrics Group 2009 Board Practices 
survey, 64 percent of S&P 500 companies held annual director elections 
in 2008 as compared to only 44 percent in 2004. Likewise, 50 percent of 
S&P 1,500 companies held annual director elections in 2008, and the 
number of S&P 1,500 companies with classified boards had decreased to 
50 percent in 2008 from 61 percent in 2004. The decrease in the 
prevalence of classified boards is reflected across mid- and small-cap 
companies as well. \9\ However, as discussed below, there are reasons 
why some companies believe it is in the best interests of their 
shareholders to retain their classified boards.
---------------------------------------------------------------------------
     \9\ See RiskMetrics Group, Board Practices: The Structure of 
Boards of Directors at S&P 1,500 Companies (2008).
---------------------------------------------------------------------------
One Size Does Not Fit All
    While Business Roundtable consistently has worked toward enhancing 
corporate governance practices, we strongly believe that with respect 
to many of these practices a ``one-size-fits-all'' approach simply will 
not work. Companies vary tremendously in their size, shareholder base, 
centralization and other factors that can change over time. Attempting 
to shoehorn all companies, whether it is a Fortune 50 company or a 
small company with a single significant shareholder, into the same 
corporate governance regime deprives companies and their shareholders 
of choices about the practices that will enable them to operate their 
businesses in a way that most effectively creates the jobs, products, 
services, and benefits that improve the economic well-being of all 
Americans. In this regard, corporate governance initiatives intended to 
improve corporate functioning and protect shareholders can actually end 
up harming companies and the interests of the shareholders they were 
meant to protect. This realization has been echoed by others including 
the New Jersey Investment Council, which oversees the New Jersey $63 
billion public pension system. The Council recently stated in a letter 
to SEC Chairman Mary Schapiro that it is ``troubled by the 
proliferation of rigid prescriptive responses. which are costly, time-
consuming, unresponsive to the individual fact settings surrounding 
specific companies and industries, and which may correlate only 
randomly with the creation of shareholder value.'' \10\
---------------------------------------------------------------------------
     \10\ Letter from Orin S. Kramer, Chair, New Jersey State 
Investment Council to Mary Schapiro, Chairman, Securities and Exchange 
Commission re: comments on File S7-10-09 (July 9, 2009).
---------------------------------------------------------------------------
    For instance, despite the increasing trend of annual director 
elections, some companies have concluded that it is in the best 
interest of their shareholders to retain a classified board. In this 
regard, some economic studies have found that a classified board can 
enhance a board's ability to negotiate the best results for 
shareholders in a potential takeover situation by giving the incumbent 
directors additional opportunity to evaluate the adequacy and fairness 
of any takeover proposal, negotiate on behalf of all shareholders and 
weigh alternative methods of maximizing shareholder value. \11\ In 
addition, classified boards can have other advantages, including 
greater continuity, institutional memory and stability, thereby 
permitting directors to take a longer-term view with respect to 
corporate strategy and shareholder value. Some recent proposed 
legislation, however, would deprive boards of directors and 
shareholders of this choice. \12\
---------------------------------------------------------------------------
     \11\ See,, e.g., M. Sinan Goktan, et al., ``Corporate Governance 
and Takeover Gains'' (Working Paper 2008) available at http://
www.fma.org/Texas/Papers/corpgov_takeovergains_fma2008.pdf; Lucian A. 
Bebchuk, et al., ``The Powerful Antitakeover Force of Staggered Boards: 
Theory'', Evidence and Policy, 54 Stanford L. Rev. 887-951 (2002).
     \12\ See Shareholder Bill of Rights Act of 2009 S. 1074, 111th 
Cong. 3 (2009).
---------------------------------------------------------------------------
    Likewise, Business Roundtable believes that it is critical for 
boards of directors to have independent board leadership, but a single 
method of providing that leadership is not appropriate for all 
companies at all times. While some companies have separated the 
position of chairman of the board and chief executive officer, others 
have voluntarily established lead independent or presiding directors. 
This illustrates the need for, and advantages of, an individualized 
approach and demonstrates that a universally mandated approach is 
neither necessary nor desirable. \13\ It would, in fact, deprive boards 
of directors, and indeed shareholders, of the flexibility to establish 
the leadership structure that they believe will best equip their 
companies to govern themselves most effectively for long-term growth 
and value creation.
---------------------------------------------------------------------------
     \13\ See Shareholder Bill of Rights Act of 2009 S. 1074, 111th 
Cong. 5 (2009) and Shareholder Empowerment Act of 2009 H.R. 2861, 
111th Cong. 2 (2009).
---------------------------------------------------------------------------
State Law Is the Bedrock for Effective Corporate Governance
    Historically, for more than 200 years, State corporations statutes 
have been the primary source of corporate law and have enabled 
thoughtful and effective corporate governance policies and practices to 
be developed. In large part, this stems from the flexibility and 
responsiveness of State corporate law in responding to evolving 
circumstances. In this regard, State corporate law is described as 
``enabling'' because it generally gives corporations flexibility to 
structure their governance operations in a manner appropriate to the 
conduct of their business. It also preserves a role for private 
ordering and shareholder choice by permitting shareholder proposed 
bylaws to address corporate governance issues.
    Where a corporation and its shareholders determine that a 
particular governance structure--such as a majority voting regime--is 
appropriate, enabling statutes permit, but do not mandate, its 
adoption. And when changes in State corporate law are determined to be 
necessary, such as to facilitate changes to a majority voting standard, 
States responded by amending their statutes. For example, Delaware 
amended its corporate law to provide that, if shareholders approve a 
bylaw amendment providing for a majority vote standard in the election 
of directors, a company's board of directors may not amend or repeal 
the shareholder-approved bylaw. \14\ Other States have also amended 
their corporations statutes to address majority voting as well, 
including California, Nevada, North Dakota, Ohio, Utah, and others. 
\15\ In addition, the American Bar Association approved amendments to 
the Model Business Corporation Act, which 30 States have adopted, 
permitting a company's board or shareholders to adopt majority voting 
in director elections through bylaw amendments rather than through a 
more cumbersome process. \16\
---------------------------------------------------------------------------
     \14\ Delaware General Corporations Law 216 (2009).
     \15\ See California Corporations Code 708.5 (2009); Nevada 
General Corporation Law 330 (2009); North Dakota Century Code 10-35-
09 (2009); Ohio General Corporation Law 1701.55 (2009); and Utah 
Revised Business Corporation Act 728 (2009).
     \16\ Model Business Corporation Act 10.22 (2006).
---------------------------------------------------------------------------
    Most recently, in April of this year, Delaware amended its 
corporate law to clarify the ability of companies and their 
shareholders to adopt proxy access bylaws, as well as bylaws providing 
for the reimbursement of expenses incurred by a shareholder in 
connection with the solicitation of proxies for the election of 
directors. \17\ New Section 112 of the Delaware General Corporation Law 
permits a company to amend its bylaws to provide that shareholders may 
include in the company's proxy materials shareholder nominees for 
director positions. The bylaws may condition the obligation to include 
shareholder nominees on the satisfaction of eligibility requirements 
and/or compliance with procedures set forth in the bylaws. New Section 
113 permits shareholders to adopt bylaws that require the company to 
reimburse expenses incurred by a shareholder in connection with the 
solicitation of proxies for the election of directors. The American Bar 
Association is considering similar amendments to the Model Business 
Corporation Act. \18\ Like the majority voting enabling legislation 
described above, these reforms will allow companies and their 
shareholders to determine whether the costs of proxy access and proxy 
reimbursement outweigh the benefits for a particular company.
---------------------------------------------------------------------------
     \17\ Delaware General Corporation Law 112 and 113.
     \18\ See Press Release, American Bar Association Section of 
Business Law, ``Corporate Laws Committee to Address Current Corporate 
Governance Issues'' (Apr. 29, 2009).
---------------------------------------------------------------------------
    In contrast to the enabling approach of State corporate law, some 
recently proposed Federal legislation in response to the financial 
crisis, the Shareholder Bill of Rights Act of 2009 \19\ and the 
Shareholder Empowerment Act of 2009, \20\ would mandate specific board 
structures. Such Federal Government intrusion into corporate governance 
matters would be largely unprecedented as the Federal Government's role 
in corporate governance traditionally has been limited. The Sarbanes-
Oxley Act of 2002 did not change the role of the States as the primary 
source of corporate law; rather, it was a rare instance of Federal 
action in the area of corporate governance.
---------------------------------------------------------------------------
     \19\ See Shareholder Bill of Rights Act of 2009 S. 1074, 111th 
Cong. 5 (2009).
     \20\ See Shareholder Empowerment Act of 2009 H.R. 2861, 111th 
Cong. 2 (2009).
---------------------------------------------------------------------------
Shareholders Have Effective Means of Influencing Corporate Governance
    Under the existing corporate governance framework, shareholders 
have the ability to make their views known to the companies in which 
they invest through a variety of methods. First, many companies provide 
means for shareholders to communicate with the board about various 
matters, including recommendations for director candidates and the 
director election process in general. In this regard, in 2003 the SEC 
adopted rules requiring enhanced disclosure about companies' procedures 
for shareholder communication with the board and for shareholders' 
recommendations of director candidates. \21\ In addition, companies 
listed on the New York Stock Exchange must have publicized mechanisms 
for interested parties, including shareholders, to make their concerns 
known to the company's nonmanagement directors. \22\ The SEC's 2008 
rules regarding electronic shareholder forums also provided additional 
mechanisms for communications between the board and shareholders. \23\ 
According to a 2008 survey, board members or members of management of 
nearly 45 percent of surveyed S&P 500 companies reached out to 
shareholders proactively. \24\
---------------------------------------------------------------------------
     \21\ Disclosure Regarding Nominating Committee Functions and 
Communications Between Security Holders and Boards of Directors, 
Release No. 33-8340, 68 Fed. Reg. 69,204 (Dec. 11, 2003).
     \22\ NYSE Listed Company Manual 303A.03.
     \23\ Electronic Shareholder Forums, Release No. 34-57172, 73 Fed. 
Reg. 4450 (Jan. 25, 2008). See also Jaclyn Jaeger, ``The Rise of Online 
Shareholder Activism'', Compliance Week (Mar. 11, 2008), available at 
http://www.complianceweek.com/article/4007/the-rise-of-online-
shareholder-activism (providing examples of successful online 
shareholder activism).
     \24\ Spencer Stuart Board Index at 28 (2008), available at http://
content.spencerstuart.com/sswebsite/pdf/lib/SSBI-2006.pdf.
---------------------------------------------------------------------------
    Second, shareholders can submit proposals to be included in company 
proxy materials. These proposals have been an avenue for shareholders 
to express their views with respect to various corporate governance 
matters. For example, the CEO of Bank of America stepped down as 
chairman of the board this year after a majority of shareholders 
approved a binding bylaw amendment requiring an independent chair for 
the company's board. \25\ In addition, predatory shareholder proposals 
can engender dialogue between companies and shareholder proponents 
about corporate governance issues. \26\ In this regard, an advisory 
vote on compensation has been implemented at several companies that 
received shareholder proposals on this topic. \27\ Moreover, as 
advocates of such votes have suggested that it is a way to enhance 
communication between shareholders and their companies about executive 
compensation, many companies have responded by employing other methods 
to accomplish this goal. These include holding meetings with their 
large shareholders to discuss governance issues, as well as using 
surveys, blogs, webcasts and other forms of electronic communication 
for the same purpose. \28\
---------------------------------------------------------------------------
     \25\ Dan Fitzpatrick and Marshall Eckblad, ``Lewis Ousted as BofA 
Chairman'', Wall St. J., Apr. 30, 2009, at A1.
     \26\ Edward Iwata, ``Boardrooms Open Up to Investors' Input'', USA 
Today, Sept. 7, 2009, available at http://www.usatoday.com/money/
companies/management/2007-09-06-shareholders-fight_N.htm.
     \27\ Thus far, in 2009, shareholders have submitted shareholder 
proposals to over 100 individual companies requesting an advisory vote 
on executive compensation. In response to previous years' shareholder 
proposals, many companies are providing shareholders with such a vote, 
including Aflac Incorporated, H&R Block, Inc., Jackson Hewitt Tax 
Service, Inc., Littlefield Corporation, RiskMetrics Group, Inc. and 
Zale Corporation. At least 25 other companies including Intel 
Corporation, Motorola, Inc. and Verizon Communications, Inc. have 
agreed to hold an annual advisory vote voluntarily or in response to 
their shareholders' concerns.
     \28\ A 2007 Business Roundtable survey of member companies 
indicated that in 2007, board members of 28 percent of companies met 
with shareholders. Another survey indicates that in 2008, board members 
or members of management of nearly 45 percent of S&P 500 companies 
reached out to shareholders proactively. Other companies have 
established e-mail links on their Web site for investors to provide 
feedback to the compensation committee. And in April 2009, Schering-
Plough Corp. submitted a survey to its shareholders to obtain their 
views on a variety of compensation issues.
---------------------------------------------------------------------------
    Third, the proliferation of ``vote no'' campaigns in recent years 
has provided shareholders with another method of making their views 
known and effecting change in board composition. In these low-cost, 
organized campaigns, shareholder activists encourage other shareholders 
to withhold votes from or vote against certain directors. Although 
``vote no'' campaigns do not have a legally binding effect where the 
targeted company uses a plurality voting regime in an uncontested 
election, evidence indicates that such campaigns are nonetheless 
successful in producing corporate governance reform. \29\ For example, 
following a 2008 ``vote no'' campaign at Washington Mutual in which 
several shareholder groups called for shareholders to withhold votes 
from certain directors, the finance committee chairman stepped down 
upon receiving 49.9 percent withheld votes. \30\ In addition, a recent 
study of ``vote no'' campaigns found that targeted companies 
experienced improved post-campaign operating performance and increased 
rates of forced CEO turnover, suggesting that ``vote no'' campaigns are 
effective. \31\ At companies that have adopted majority voting in 
director elections, ``vote no'' campaigns are likely to have an even 
greater impact.
---------------------------------------------------------------------------
     \29\ See Joseph A. Grundfest, `` `Just Vote No': A Minimalist 
Strategy for Dealing With Barbarians Inside the Gates'', 45 Stan. L. 
Rev. 857 (1993).
     \30\ RiskMetrics Group 2008 Post-Season Report, at 10 (October 
2008).
     \31\ Diane Del Guercio, et al., ``Do Boards Pay Attention When 
Institutional Investor Activists `Just Vote No' ?'', Journal of 
Financial Economics, Oct. 2008.
---------------------------------------------------------------------------
    Fourth, the existing framework allows shareholders to make their 
views known through nominating their own director candidates and 
engaging in election contests. In fact, they have done so recently at 
companies including Yahoo! Inc. and Target Corporation. ``Short slate'' 
proxy contests in which dissidents seek board representation but not 
full board control, have been very successful in recent years. 
According to a recent study conducted by the Investor Responsibility 
Research Center Institute, during a 4-year period, short slate proxy 
contest dissidents were able to gain representation at approximately 75 
percent of the companies they targeted. \32\ Significantly, in the 
majority of these cases, dissidents found it unnecessary to pursue the 
contest to a shareholder vote; instead, they gained board seats through 
settlement agreements with the target companies. \33\ Clearly the 
threat of proxy contests, to say nothing of the contests themselves, is 
an effective mechanism for shareholder nomination of directors. 
Moreover, the SEC adopted ``e-proxy'' rules in 2007 that permit 
companies and others soliciting proxies from shareholders to deliver 
proxy materials electronically, which has streamlined the proxy 
solicitation process and greatly reduced the costs of printing and 
mailing proxy materials. \34\ All of this has made it easier and less 
costly for shareholders to nominate directors themselves.
---------------------------------------------------------------------------
     \32\ Chris Cernich, et al., ``Investor Responsibility Research 
Center Institute, Effectiveness of Hybrid Boards'', at 4 (May 2009), 
available at http://www.irrcinstitute.org/pdf/
IRRC_05_09_EffectiveHybridBoards.pdf.
     \33\ Id. at 4, 13 (noting that 76 percent of dissidents gaining 
representation were able to do so through settlement).
     \34\ Internet Availability of Proxy Materials, Exchange Act 
Release No. 34-55146, 17 Fed. Reg. 240, 249 and 274 (March 30, 2007).
---------------------------------------------------------------------------
    Finally, increasing numbers of companies have been amending their 
governing documents to allow shareholders to call special meetings of 
shareholders or, for companies that already allow shareholders to call 
meetings, to lower the thresholds required to call those meetings. 
Currently 45 percent of S&P 500 and 46 percent of S&P 1,500 companies 
\35\ permit their shareholders to call special meetings, the majority 
of which require either 25 percent or a majority of the outstanding 
shares to call a special meeting. Beginning in 2007, shareholder 
proponents began submitting a large number of shareholder proposals 
requesting that 10 percent-20 percent of outstanding shares be able to 
call special meetings. The number of such proposals has increased 
dramatically since 2007 and these proposals have been receiving high 
votes. \36\
---------------------------------------------------------------------------
     \35\ Data provided by SharkRepellent.net (S&P 500) and RiskMetrics 
Group, Inc. (S&P 1,500) as of June 2009.
     \36\ Based on data from RiskMetrics Group, Inc. as of July, in 
2009, shareholders have submitted special meeting shareholder proposals 
to 74 individual companies. The average support for these votes has 
been 52.3 percent, and 26 companies have received majority votes in 
support of the proposal.
---------------------------------------------------------------------------
    Clearly, there currently are numerous and potent methods that 
shareholders can use to see that their voices are heard and their views 
made known to the companies in which they invest. Accordingly, 
proposals to increase shareholder rights must be considered in the 
context of existing shareholder leverage and the manner in which 
shareholders vote their shares. In this regard, the extensive reliance 
of many institutional investors on the recommendations of the proxy 
advisory services must be considered. Unfortunately, these services 
often do not engage in company-by-company analysis when making their 
recommendations, applying a one-size-fits-all approach to important 
corporate governance decisions at individual companies.
The SEC Is Addressing Corporate Governance Matters
    While, as noted above, State corporate law is central to corporate 
governance, the SEC plays a role in assuring that shareholders receive 
the information they need to make informed voting decisions, including 
about corporate governance matters. In this regard, earlier this month, 
the SEC proposed several rule changes intended to provide shareholders 
with additional disclosure concerning individual director experience 
and qualifications, board leadership structure and oversight of risk 
management, compensation practices and potential conflicts of interest 
with compensation consultants and compensation matters.
    The proposed amendment relating to individual directors would 
require companies to provide disclosure about (1) the experience, 
qualifications, attributes and skills of directors and director 
nominees that qualify them to serve as a director and as a member of 
each committee on which they serve, (2) all public company 
directorships held by directors and director nominees during the past 5 
years, as opposed to just current directorships (as required under the 
current rules), and (3) the involvement of directors, director nominees 
and executive officers in legal proceedings during the prior 10 years.
    With regard to board leadership, the proposal would require 
disclosure about a company's board leadership structure and why the 
structure is appropriate for the company. The proposed disclosure would 
need to include a discussion of whether the company separates or 
combines the roles of the chairman and chief executive officer, whether 
the company has a lead independent director, and the board's role in 
the company's risk-management process and the effects, if any, that 
this role has on the company's board leadership structure.
    Finally, the proposal relating to compensation consultant 
disclosures would require enhanced disclosure of potential conflicts of 
interest involving compensation consultants that provide advice to the 
board or compensation committee regarding executive or director 
compensation and also provide other services to the company. 
Specifically, this disclosure would need to include a discussion of (1) 
any other services that the compensation consultant or its affiliates 
provide to the company and the fees paid for such services, (2) the 
aggregate fees paid for advising on executive and director 
compensation, (3) whether the consultant was engaged for these other 
services by or on the recommendation of management, and (4) whether the 
board or compensation committee approved these other services.
    We believe that this disclosure approach to matters relating to 
board leadership and risk oversight is far superior to the one-size-
fits-all approach in proposed legislation that would mandate the 
separation of the chairman and CEO position and require all public 
companies--no matter what size of industry--to establish a risk 
committee of the board. \37\ Companies and their shareholders should 
have the choice to determine the structures that will best enable them 
to grow and prosper.
---------------------------------------------------------------------------
     \37\ See Shareholder Bill of Rights Act of 2009 S. 1074, 111th 
Cong. 5 (2009) and Shareholder Empowerment Act of 2009 H.R. 2861, 
111th Cong. 2 (2009).
---------------------------------------------------------------------------
    In addition to the corporate governance disclosure enhancements 
described above, the SEC also approved an amendment to NYSE Rule 452, 
which will prohibit brokers from voting uninstructed shares in director 
elections. \38\ This rule amendment, which will be effective for annual 
meetings after January 1, 2010, is likely to have a considerable impact 
on the director election process, particularly for companies that have 
adopted a majority voting standard.
---------------------------------------------------------------------------
     \38\ Note that this amendment moots part of section 2 of the 
Shareholder Empowerment Act of 2009. See Shareholder Empowerment Act of 
2009 H.R. 2861, 111th Cong. 2 (2009) which would require that a broker 
not be allowed to vote securities on an uncontested election to the 
board of directors of an issuer to the extent that the beneficial owner 
of those securities has not provided specific instructions to the 
broker.
---------------------------------------------------------------------------
    Another significant recent SEC action is the proposal to amend the 
proxy rules to permit shareholders to nominate directors in a company's 
proxy materials. If adopted, the proposed rules would establish a 
Federal proxy access right and permit proxy access shareholder 
proposals. The Federal process right would permit a shareholder or 
group of shareholders to nominate one or more directors and have those 
nominees included in a company's proxy materials contingent on the 
shareholder or group beneficially owning a certain percentage of the 
company's voting shares (which varies depending on a company's size) 
for at least 1 year prior to submitting the nomination. Shareholders 
meeting the proposal's requirements would be allowed to have their 
proposed nominees (up to 25 percent of the board) included in the 
company's proxy statement, on a first-come first-served basis.
    In contrast to our support for the SEC's disclosure proposals, we 
believe that the proposed Federal proxy access right could result in 
serious, harmful consequences, as well as being beyond the SEC's 
authority to adopt. First, widespread shareholder access to company 
proxy materials will promote a short-term focus and encourage the 
election of ``special interest'' directors who will disrupt boardroom 
dynamics and jeopardize long-term shareholder value. Second, the 
proposed rules will enhance the influence of proxy advisory firms and 
institutional investors, which may use the rules as leverage for 
advancing special interest causes and promoting policies to encourage 
short-term gains in stock price. Third, the increased likelihood of 
divisive and time-consuming annual election contests could deter 
qualified directors from serving on corporate boards. Fourth, 
shareholder-nominated directors could impede a company's ability to 
satisfy board composition requirements. Finally, serious questions have 
been raised about the ability of the current proxy voting system to 
handle the increasing number of proxy contests that would result from 
the implementation of the proxy access proposal. While the Commission's 
proposing release touches upon some of these issues, it fails to 
seriously address them. We currently are preparing a comment letter to 
the SEC on these proposals which will expand upon our concerns.
Conclusion
    Business Roundtable is committed to enhanced corporate governance 
practices that enable U.S. companies to compete globally, create jobs 
and generate long-term economic growth. We are concerned, however, that 
in a rush to respond to the financial crisis, Congress, and the SEC, 
are considering hastily prepared and universally applicable legislation 
and regulation that will exacerbate some of the factors that led to the 
crisis. In particular, an advisory vote on compensation and proxy 
access could well increase the pressure on short-term performance to 
the detriment of long-term value creation. The flexible approaches of 
State corporate law, SEC disclosure and shareholder and company choice 
that have produced the engine of economic growth that is the American 
corporation should not be ignored.
Attachments
Exhibit I--Principles of Corporate Governance (November 2005)

Exhibit II--The Nominating Process and Corporate Governance Committees: 
Principles and Commentary (April 2004)

Exhibit III--Guidelines for Shareholder-Director Communications (May 
2005)

Exhibit IV--Executive Compensation: Principles and Commentary (January 
2007)

Exhibit V--Principles for Responding to the Financial Markets Crisis 
(2009)

Exhibit VI--2008 Business Roundtable Survey

                               EXHIBIT I

           Principles of Corporate Governance (November 2005)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               EXHIBIT II

The Nominating Process and Corporate Governance Committees: Principles 
                      and Commentary (April 2004)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                              EXHIBIT III

     Guidelines for Shareholder-Director Communications (May 2005)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               EXHIBIT IV

    Executive Compensation: Principles and Commentary (January 2007)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               EXHIBIT V

    Principles for Responding to the Financial Markets Crisis (2009)

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                               EXHIBIT VI

                    2008 Business Roundtable Survey

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                   PREPARED STATEMENT OF J.W. VERRET
   Assistant Professor of Law, George Mason University School of Law
                             July 29, 2009
The Misdirection of Current Corporate Governance Proposals
    Chairman Reed, Ranking Member Bunning, and distinguished Members of 
the Subcommittee, it is a privilege to testify in this forum today.
    My name is J.W. Verret, and I am an Assistant Professor of Law at 
George Mason Law School, a Senior Scholar at the Mercatus Center at 
George Mason University and a member of the Mercatus Center Financial 
Markets Working Group. I also direct the Corporate Federalism 
Initiative, a network of scholars dedicated to studying the 
intersection of State and Federal authority in corporate governance.
    I will begin by addressing proxy access and executive compensation 
rules under consideration and close with a list of contributing causes 
for the present crisis.
    I am concerned that some of the corporate governance proposals 
recently advanced impede shareholder voice in corporate elections. This 
is because they leave no room for investors to design corporate 
governance structures appropriate for their particular circumstances.
    Rather than expanding shareholder choice, these reforms actually 
stand in the way of shareholder choice. Most importantly, they do not 
permit a majority of shareholders to reject the Federal approach.
    The Director of the United Brotherhood of Carpenters said it best, 
``we think less is more, fewer votes and less often would allow us to 
put more resources toward intelligent analysis.'' The Brotherhood of 
Carpenters opposes the current proposal out of concern about compliance 
costs. The proposals at issue today ignore their concerns, as well as 
concerns of many other investors.
    Consider why one might limit shareholders from choosing an 
alternative means of shareholder access. It can only be because a 
majority of the shareholders at many companies might reject the Federal 
approach if given the opportunity.
    Not all shareholders share similar goals. Public Pension Funds run 
by State elected officials and Union Pension Funds are among the most 
vocal proponents of shareholder power. Main street investors deserve 
the right to determine whether they want the politics of Unions and 
State Pension funds to take place in their 401(k)s.
    The current proposals also envision more disclosure about 
compensation consultants. Such a discussion would be incomplete without 
mentioning conflicts faced by proxy advisory firms. Proxy advisory 
firms advise institutional investors on how to vote. Current proposals 
have failed to address this issue. The political clout enjoyed by these 
firms is evidenced by the fact that the CAO of RiskMetrics, the 
dominant firm in the industry, was recently hired as special advisor to 
the SEC Chairman.
    To close the executive compensation issue, I will note that if 
executive compensation were to blame for the present crisis, we would 
see significant difference between compensation policies at those 
financial companies that recently returned their TARP money and those 
needing additional capital. We do not.
    Many of the current proposals also seek to undermine, and take 
legislative credit for, efforts currently underway at the State level 
and in negotiations between investors and boards. This is true for 
proxy access, the subject of recent rule making at the State level, and 
it is true for Federal proposals on staggered boards, majority voting, 
and independent Chairmen.
    The Sarbanes-Oxley Act passed in 2002 and was an unprecedented 
shift in corporate governance designed to prevent poor management 
practices. Between 2002 and 2008, the managerial decisions that led to 
the current crisis were in full swing. I won't argue that Sarbanes-
Oxley caused the crisis, but this suggests that corporate governance 
reform does a poor job of preventing crisis.
    And yet, the financial crisis of 2008 must have a cause. I salute 
this Committee's determination to uncover it, but challenge whether 
corporate governance is the culprit. Let me suggest six alternative 
contributing factors for this Committee to investigate:

  i.  The moral hazard problems created by the prospect of Government 
        bailout;

  ii.  The market distortions caused by subsidization of the housing 
        market through Fannie Mae, Freddie Mac, and Federal tax policy;

  iii.  Regulatory failure by the banking regulators and the SEC in 
        setting appropriate risk-based capital reserve requirements for 
        investment and commercial banks;

  iv.  Short-term thinking on Wall Street fed by institutional investor 
        fixation on firms making, and meeting, quarterly earnings 
        predictions;

  v.  A failure of credit-rating agencies to provide meaningful 
        analysis, caused by an oligopoly in that market supported by 
        regulation;

  vi.  Excessive write downs in asset values under mark-to-market 
        accounting, demanded by accounting firms who refused to sign 
        off on balance sheets out of concern about exposure to 
        excessive securities litigation risk.

    Corporate governance is the foundation of American capital markets. 
If this Committee tinkers with the American corporate governance system 
merely for the appearance of change, it risks irreparable damage to 
that foundation.
    I thank you for the opportunity to testify, and I look forward to 
answering your questions.
                                 ______
                                 
               PREPARED STATEMENT OF RICHARD C. FERLAUTO
        Director of Corporate Governance and Pension Investment,
     American Federation of State, County, and Municipal Employees
                             July 29, 2009
    Good Afternoon, Chairman Reed and Members of the Subcommittee. My 
name is Richard Ferlauto, Director of Corporate Governance and 
Investment Policy at the American Federation of State, County, and 
Municipal Employees. AFSCME is the largest union in the AFL-CIO with 
1.6 million members who work in the public service. Our members have 
their retirement assets invested through public retirement systems with 
more than one trillion dollars in assets. They depend on the earnings 
of these systems to support their benefits in retirement. Large public 
pension system investments in the public markets are diversified, 
largely owning the market, and heavily indexed, which operate with time 
horizons of 20 years or more to match the benefit obligations they have 
to their plan participants. Indeed, public pension systems are the 
foundation of patient capital investment in this economy, which seeks 
long-term shareholder value creation.
    AFSCME places strong emphasis on improving corporate governance 
through direct company engagement, regulation, and legislation as a way 
to achieve long-term shareholder value. As an active shareowner, we 
have been a leading advocate for a shareholder advisory vote on CEO 
compensation and shareholder proxy access to nominate directors on 
company proxy materials.
    I am also chairman of ShareOwners.org, a new nonprofit, nonpartisan 
social network designed to give a voice to retailers or individuals who 
rarely have opportunities to communicate with regulators, policy 
makers, and the companies in which they are invested.
    We urge the Committee to create better protections for the average 
American investor in the financial marketplace. The severe losses 
suffered by tens of millions of Americans in their portfolios, 401(k)s, 
mutual funds, and traditional pension plans all point to the need for a 
new emphasis on shareowner rights and meaningful regulation in order to 
ensure the financial security of American families.
    America has tried going down the road of financial deregulation and 
reduced corporate accountability. That path has proven to be a dead end 
that is now imperiling the financial well-being of millions of long-
term shareowners. Unfortunately, shareholders in America's 
corporations--who actually should more correctly be thought of as 
``shareowners''--have limited options today when it comes to protecting 
themselves from weak and ineffectual boards dominated by management, 
misinformation peddled as fact, accounting manipulation, and other 
abuses.
    Under the disastrous sway of deregulation and lack of 
accountability, corporate boards and executives either caused or 
allowed corporations to undertake unreasonable risks in the pursuit of 
short-term financial goals that were devoid of real economic substance 
or any long-term benefits. In most cases, it is long-term shareowners--
not the deregulators and the speculators--that are paying the price for 
the breakdown in the system.
    According to a recent scientific survey that the Opinion Research 
Corporation conducted for ShareOwners.org of 1,256 U.S. investors, 
``American investors clearly want to see tough action taken soon by 
Congress to reform how our financial markets work and also to clean up 
abuses on Wall Street. Support for such action is strong across all 
groups by age, income, educational achievement and political 
affiliation. It is particularly noteworthy that such a high percentage 
of investors (34 percent) would use a term as strong as `angry' to 
describe their views about the need for such action. And, even though 
they are not angry, the additional nearly half of other investors (45 
percent) who want to see strong clean-up action taken sends an 
unmistakable message to policy makers. This is particularly true when 
you look at that data alongside the finding that nearly 6 out of 10 
investors (57 percent) said that strong Federal action would help to 
restore their lost confidence in the fairness of the markets.'' The 
full survey from ShareOwners.org is attached as an addendum to this 
testimony [Ed. note: not included, please see http://
www.shareowners.org/profiles/blogs/read-all-about-it], but I would like 
to point out the following findings:

    More than four out of five American investors (83 percent) 
        agree that ``shareholders should be permitted to be actively 
        involved in CEO pay and other important issues that may bear on 
        the long-term value of a company to their retirement portfolio 
        or other fund.''

    More than four out of five investors (82 percent) agree 
        that ``shareholders should have the ability to nominate and 
        elect directors of their own choosing to the boards of the 
        companies they own.'' Only 16 percent of Americans say that 
        ``shareholders should NOT be able to propose directors to sit 
        on the boards of the companies they own.''

    Nearly nine out of 10 investors (87 percent) say that 
        ``investors who lose their retirement savings due to fraud and 
        abuse should have the right to go to court if necessary to 
        recover those funds.'' Only one in 10 American investors think 
        that ``investor lawsuits clog up the courts and make it more 
        expensive for companies to run their businesses.''

    The number one reason for loss of investor confidence in 
        the markets: ``overpaid CEOs and/or unresponsive management and 
        boards'' at (81 percent).

    It is time for America to get back on the road of prudent financial 
regulatory oversight and increased corporate accountability. We urge 
you to recognize the devastating impact that a lack of appropriate 
regulation and accountability has had on our economy. In order to 
restore the confidence of investors in our capital markets, it is now 
necessary to take the following steps:
I. Strengthen the regulation of the markets. Key reforms needed to 
        protect the interests of shareowners include the following:
    Beef up the Securities and Exchange Commission (SEC). 
        Congress should assess the funding needs of the SEC and take 
        steps to bring the agency as quickly as possible to the point 
        that it can fully carry out its mission of oversight of the 
        markets and financial professionals in order to protect and 
        advocate for investors. Among other priorities, the SEC should 
        impose requirements for the disclosure of long and short 
        positions, enhance disclosures for private equity firms bidding 
        for public companies, and require both the registration of 
        hedge fund advisors with the Commission as investment advisors 
        and additional disclosures of the underlying hedge fund. 
        Following the request of the Administration, the SEC should be 
        given additional authority to create a full-fledged fiduciary 
        standard for broker dealers, so that the interests of clients 
        who purchase investment products comes before the self interest 
        of the broker. The SEC Division of Enforcement should be 
        unshackled to prosecute criminal violations of the Federal 
        securities laws where the Department of Justice declines to 
        bring an action.

    Clear the way for forfeiture of compensation and bonuses 
        earned by management in a deceptive fashion. Legislation should 
        be adopted to allow for the ``clawing back'' of incentive 
        compensation and bonuses paid to corporate executives based on 
        fraudulent corporate results, and should provide for 
        enforcement through a private right of action. There is no 
        reason why directors and executives should not give back ill-
        gotten gains when innocent shareowners are victimized by 
        crippling losses. The outrageous bonuses at AIG, Morgan 
        Stanley, and other banks responsible for our financial meltdown 
        were not deserved and should not be allowed to stand. If they 
        know their compensation is on the line, corporate managers and 
        directors will be less likely to engage in or turn a blind eye 
        toward fraud and other wrongdoing.

    Strengthen State-level shareowner rights. Corporation 
        structures and charters are regulated under State law. The 
        corporate law in most States has not clarified the rights, 
        responsibilities and powers of shareholders and directors or 
        ways that they should communicate outside of annual general 
        meetings. If regulation to strengthen shareholder rights does 
        not occur at the Federal level, it will be up to the States to 
        move forward. State corporate law should require proxy access, 
        majority voting and the reimbursement of solicitation expenses 
        in a board challenge. We would encourage robust competition 
        among States for corporate charters based on a race to the top 
        for improved shareowner rights. If necessary, Federal law 
        should be changed to allow for shareholders to call a special 
        meeting to reincorporate in another State by majority vote, in 
        order to avoid being shackled by the corporate State laws that 
        put the interests of management ahead of shareowners.

    Protect whistleblowers and confidential sources who expose 
        financial fraud and other corporate misconduct. Confidential 
        informants--sometimes called ``whistleblowers''--are of 
        immeasurable value in discovering and redressing corporate 
        wrongdoing. The information provided by these individuals may 
        be crucial to victims' ability to prove their claims. Often, 
        these individuals only come forward because they believe their 
        anonymity will be preserved. If their identities were known, 
        they would be open to retaliation from their employers and/or 
        others with an interest in covering up the wrongdoing. 
        Whistleblowers might lose their job or suffer other harm. 
        Legislation is needed to clearly state that the corporate 
        whistleblowers and other confidential informants will be 
        protected when they step forward.
II. Increase the accountability of boards and corporate executives. Key 
        reforms needed to protect the interests of shareowners include 
        the following:
    Allow shareowners to vote on the pay of CEOs and other top 
        executives. Corporate compensation policies that encourage 
        short-term risk-taking at the expense of long-term corporate 
        health and reward executives regardless of corporate 
        performance have contributed to our current economic crisis. 
        Shareowners should have the opportunity to vote for or against 
        senior executive compensation packages in order to ensure 
        managers have an interest in long-term growth and in helping 
        build real economic prosperity. The recently enacted stimulus 
        bill requires all companies receiving TARP bail-out funds, 
        nearly 400 companies, to include a ``say-on-pay'' vote at their 
        2009 annual meetings and at future annual meetings as long as 
        they hold TARP funds. It is now time for Congress to implement 
        Treasury Secretary Geithner's plan for compensation reform by 
        passing ``say-on-pay'' legislation for all companies and to 
        make it permanent as the center piece of needed reforms to 
        encourage executive accountability.

    A key item to making the advisory vote meaningful will be not to 
        permit brokers to cast votes on management sponsored executive 
        compensation proposals as was recently done by the SEC in 
        support of changes to NYSE Rule 452 in board elections. 
        Stockbrokers who hold shares in their own name for their client 
        investors have no real economic interest in the underlying 
        corporation but can cast votes on routine items on the proxy. 
        These pay votes are not routine items and should not be treated 
        as such by investors, issuers or the regulators and we do not 
        believe would be the intent of Congress if they give 
        authorization to the SEC to require advisory votes on pay. 
        Brokers almost universally vote for management's nominees and 
        proposals and, in effect, interfere with shareowner supervision 
        of the corporations they own.

    Empower shareowners to more easily nominate directors for 
        election on corporate boards through proxy access. The process 
        for nominating directors at American corporations is dominated 
        today by incumbent boards and corporate management. This is 
        because corporate boards control the content of the materials 
        that companies send to shareholders to solicit votes (or 
        ``proxies'') for director elections, including the 
        identification of the candidates who are to be considered for 
        election. The result is that corporate directors often are 
        selected based on their allegiance to the policies of the 
        incumbent board, instead of their responsiveness to shareowner 
        concerns. Unless they can afford to launch an expensive 
        independent proxy solicitation, shareowners have little or no 
        say in selecting the directors who are supposed to represent 
        their interests. The solution is to enable shareowners, under 
        certain circumstances, to require corporate boards to include 
        information about candidates nominated by shareowners in the 
        company's proxy materials.

    We are very encouraged that the SEC is in the process of rule 
        making on the issue but this is such an important right that we 
        believe that it should not become a political football for 
        future commissions. There needs to be long-term consistency in 
        securities law and the Exchange Act is the appropriate place to 
        clearly codify the authority that the Commission has to require 
        the disclosure of nominees running for board seats. And to 
        further enunciate that access to the proxy is fundamental to 
        free and fair elections for directors.

    Require majority election of all members of corporate 
        boards at American companies. Corporate directors are the 
        elected representatives of shareowners who are responsible for 
        overseeing management. Under the default rule applicable to 
        virtually every corporation in the United States, however, 
        corporate directors can be elected with just a single 
        affirmative vote, even if that director's candidacy is opposed 
        by the overwhelming majority of shareowners. While a few 
        corporations have adopted policies that would require a 
        director to receive support of the majority of shareowners in 
        order to be elected, most corporations--particularly those not 
        in the S&P 500--have not. True majority voting should be 
        mandatory in every uncontested director election at all 
        publicly traded corporations.

    Split the roles of chairman of the board and CEO in any 
        company. (1) receiving Federal taxpayer funds, or (2) operating 
        under Federal financial regulations. It already is the practice 
        in most of the world to divide these two key positions so that 
        an independent chairman can serve as a check on potential CEO 
        abuses. Separation of the CEO and board chair roles helps to 
        ensure good board governance and fosters independent oversight 
        to protect the long-term interests of private shareowners, 
        pension funds and institutional investors. A strong independent 
        chair can help to address legitimate concerns raised by 
        shareowners in a company. Splitting these roles and then 
        requiring a prior shareowner vote to reintegrate them would be 
        in the best interests of investors.

    Allow shareowners to call special meetings. Shareowners 
        should be allowed to call a special meeting. Shareowners who 
        own 5 percent or more of the stock of a company should be 
        permitted, as they are in other countries, to call for a 
        special meeting of all shareowners. They also should be given 
        the right to call for a vote on reincorporation when management 
        and corporate boards unduly use State laws detrimental to 
        shareowner interests to entrench themselves further.
III. Improve financial transparency. Key reforms needed to protect the 
        interests of shareowners include the following:
    Crackdown on corporate disclosure abuses that are used to 
        manipulate stock prices. Shareowners in securities fraud cases 
        have always had the burden of proving that defendants' fraud 
        caused the shareowners' losses. When corporate wrongdoers lie 
        to shareowners and inflate the value of publicly traded stock 
        through fraudulent and misleading accounting statements and 
        other chicanery, those culpable parties should be held 
        responsible for the damage wrought on the investing public that 
        is caused by their fraud. Defendants should not be allowed to 
        escape accountability to their shareowners for fraudulent 
        conduct simply by cleverly timing the release of information 
        affecting a company's stock price.

    Improve corporate disclosures so that shareowners can 
        better understand long-term risks. To rebuild shareowner 
        confidence regulators should emphasize transparency by creating 
        more mechanisms for comprehensive corporate disclosure. The SEC 
        should devote particular attention to the adequacy of 
        disclosures concerning such key factors as credit risk, 
        financial opacity, energy and climate risk and those reflecting 
        the financial challenges to the economy as identified by the 
        transition team and the new Administration. The SEC should 
        develop internal expertise on issues such as environmental, 
        social, and governance factors that pose material financial 
        risks to corporations and shareowners, and also to require 
        disclosure of these types of risks.

    Protect U.S. shareowners by promoting new international 
        accounting standards. Our current financial crisis extends far 
        beyond the borders of the U.S. and has affected financial 
        markets and investors across the globe. Part of the problem has 
        been a race to the bottom in favor of a more flexible 
        international accounting standard that would decrease 
        disclosure protection for the average investor. The current 
        crisis makes a compelling case for why we need to slow down the 
        movement toward the use of international accounting standards 
        that could provide another back door route to financial 
        deregulation and further erode confidence in corporate book 
        keeping. A slower time frame is necessary to protect 
        shareowners and allow the Administration to reach out to other 
        governments that share a commitment to high accounting and 
        transparency standards.
IV. Protect the legal rights of defrauded shareowners. Key reforms 
        needed to protect the rights of shareowners include the 
        following:
    Preserve the right of investors to go to court to seek 
        justice. Corporate and financial wrongdoers in recent years 
        have effectively denied compensation to victims of fraud by 
        requiring customers to sign away their rights to access Federal 
        courts as individuals and participate with other victims in 
        class actions when their individual claims are small. Absent 
        the ability to proceed collectively, individuals have no means 
        of redress because--as the wrongdoers know--it is frequently 
        economically impossible for victims to pursue claims on an 
        individual basis. The ability of shareowners to take civil 
        actions against market wrongdoers provides an effective adjunct 
        to securities law enforcement and serves as a strong deterrent 
        to fraud and abuse. Shareowners should have the right to access 
        Federal courts individually or as a member of a class action.

    Ensure that those who play a role in committing frauds bear 
        their share of the cost for cleaning up the mess. What is known 
        as private ``aiding and abetting'' liability is well 
        established in criminal law, and private liability for engaging 
        in an unlawful and fraudulent scheme is widely recognized in 
        civil law. In cases of civil securities fraud, however, 
        judicial decisions effectively have eliminated private 
        liability of so-called ``secondary actors''--even when they 
        knowingly participated in fraud schemes. Eliminating the 
        private liability of such ``secondary actors'' as corporate 
        accountants, lawyers and financial advisors has proven 
        disastrous for shareowners and the economy. Most recently, in 
        the subprime mortgage-backed securities debacle, bond rating 
        agencies--who were paid by the very investment bankers who 
        created the securities they were asked to rate--knowingly gave 
        triple-A ratings to junk subprime debt instruments in order to 
        generate more business from the junk marketers. The immunity 
        from private liability that these culpable third parties 
        currently enjoy should be eliminated.

    Allow State courts to help protect investor rights. The 
        previous decade saw the greatest shift in governmental 
        authority away from the States and to the Federal Government in 
        our history. The effect of this shift was to deny individuals 
        their legal rights under State laws and to protect corporate 
        defendants. Corporate interests and an Administration devoted 
        to the ideology of deregulation used the ``doctrine of 
        preemption'' (that Federal law supersedes State law) to bar 
        action at the State level that could have stopped many of the 
        abuses in subprime mortgage lending that are now at the heart 
        of our economic crisis. Indeed, State attorneys general were 
        blocked from prosecuting subprime lenders who violated State 
        laws. The integrity of State law should be restored and both 
        State officials and shareowners should be allowed to pursue 
        remedies available under State law. Federal policy should make 
        clear that State law exists coextensively with Federal 
        regulations, except where State law directly contradicts 
        Federal law.

    In conclusion, I would like to thank the Chairman for the 
opportunity to testify today. Rebuilding investor confidence in the 
market depends upon thoughtful policy making that expands investor 
rights and authorizes the SEC to strengthen its advocacy role on behalf 
of all Americans' financial security. I would be pleased to answer any 
questions.
       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                     FROM MEREDITH B. CROSS

Q.1. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.1. As you noted, this topic has been widely discussed, and a 
number of issues have been raised. One issue relates to what 
precisely the shareholders would vote on if given a vote. 
Shareholders could cast a nonbinding vote on the compensation 
of executives, as disclosed pursuant to the Commission's 
compensation disclosure rules. This is what Section 111(e) of 
the Emergency Economic Stabilization Act of 2008 requires for 
TARP recipients. Alternatively, shareholders could be asked to 
cast a nonbinding vote on the company's compensation 
philosophy, policies and procedures, as described in the 
Compensation Discussion and Analysis. As you note, another 
issue to consider would be the frequency of any such vote, 
which some have suggested either be annually or once every 2-3 
years. While these are just a few of the many issues that would 
need to be considered with regard to shareholder advisory votes 
on pay, the Commission has not expressed a view about this 
topic.
    As you may know, the Commission recently proposed rules to 
implement the ``say-on-pay'' requirement in Section 111(e) of 
the Emergency Economic Stabilization Act of 2008. The proposed 
rule would require TARP recipients to provide a separate 
shareholder vote to approve the compensation of the company's 
executives in proxies solicited during the period in which any 
obligation arising from Federal assistance provided under the 
TARP remains outstanding. In the proposing release, the 
Commission requested comment about whether the proposed rule 
should include more specific requirements regarding the manner 
in which TARP recipients should present the shareholder vote on 
executive compensation. Any information received in response to 
that request for comment will be instructive for the proposed 
rule for TARP companies.

Q.2. How do we make sure boards can be an effective check on 
management?

A.2. The recent market crisis has led many to raise serious 
questions and concerns about the accountability and 
responsiveness of companies and boards of directors, including 
questions about whether boards are exercising appropriate 
oversight of management. State corporate law and stock exchange 
listing standards play an important role in addressing this 
question. As for the Commission, in recent months, it has 
worked diligently to address those questions and concerns. As 
Chairman Schapiro has said, one of the most effective means of 
providing accountability is to give shareholders a meaningful 
opportunity to exercise the rights they have under State law to 
nominate directors. The Commission's proposed rules to 
facilitate the ability of shareholders to exercise their rights 
to nominate directors would provide shareholders a greater 
opportunity to hold directors accountable. The possibility that 
shareholders may take advantage of the rules, if adopted, may 
encourage directors to take a more active role in the oversight 
of management.
    The Chairman also has stated that shareholders should also 
be informed about how compensation structures and practices 
drive an executive's risk-taking. In an effort to improve the 
information provided to shareholders on this topic, the 
Commission recently proposed rules to require greater 
disclosure about how a company and its board manage risks, 
particularly in the context of setting and overseeing 
compensation. Requiring companies to provide enhanced 
disclosure in proxy statements about the relationship of a 
company's overall compensation policies to risk would enable 
shareholders to make more informed investment and voting 
decisions.

Q.3. How do we make sure boards and management know what is 
going on inside the large firms they are supposedly running?

A.3. The Chairman believes that directors must be sufficiently 
independent of management so that they will ask the difficult 
questions; directors also must be skilled enough to know what 
questions need to be asked. A qualified and independent board 
is the best means of ensuring that management is fully engaged. 
While the Commission generally does not prescribe these 
governance rules, the Commission's disclosure rules are 
designed to provide investors--who elect directors--with 
information about director independence and qualifications.

Q.4. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.4. I can assure you that the Commission understands the 
concerns raised, in light of the recent turmoil in our markets, 
about board and management oversight of companies; however, 
determinations regarding the appropriate size and scope of 
companies is probably best left to markets and shareholders. 
While we will continue to consider ways that we can enhance our 
disclosure rules to provide meaningful additional information 
to investors, we know that Congress is also taking steps to 
address corporate governance reforms. We look forward to 
working with you as you move forward, and lending our expertise 
where appropriate.

Q.5. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.5. The Commission recently proposed changes to the proxy 
rules to facilitate shareholder director nominations, which is 
often referred to as ``proxy access.'' Proposed Rule 14a-11 
under the Exchange Act would require, under certain 
circumstances, a company to include shareholder nominees for 
director in the company's proxy materials. Under the proposed 
rule, a nominating shareholder or group would be eligible to 
have a nominee included in a company's proxy materials if the 
nominating shareholder or group beneficially owns, as of the 
date of the shareholder notice regarding the nomination, a 
certain percentage of the company's securities entitled to be 
voted on the election of directors, which range from 1 percent 
to 5 percent depending on the size of the company. The proposal 
would require a nominating shareholder to have held the 
securities for at least 1 year. The staff will consider 
carefully the comments submitted regarding ownership thresholds 
and other requirements when making a recommendation to the 
Commission as to the appropriate threshold for any final rule 
adopted.

Q.6. What are issues that shareholders should have an opt out 
or opt in vote on?

A.6. The idea of an opt in or opt out vote has been discussed 
regarding a number of governance proposals. With respect to our 
pending proposal to facilitate shareholder director 
nominations, the Commission requested comment about whether or 
not shareholders should be able to vote to opt out of the 
proposed mechanism for shareholder director nominations, or 
vote to choose a different mechanism to nominate directors. We 
are currently considering the responses to our request for 
comment on this issue, which reflect a wide range of views.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                     FROM JOHN C. COATES IV

Q.1. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.1. I would suggest following the U.K. model, as in S. 1074: 
The shareholder advisory vote would be on the disclosure of 
compensation to top executives as disclosed in the annual proxy 
statement, as required by current SEC rules on compensation 
disclosure and analysis, which calls for a specific report on 
executive compensation.

Q.2. How do we make sure boards can be an effective check on 
management?

A.2. Making boards effective checks on management is one of the 
central goals of corporate governance--and as I emphasized in 
my testimony, much uncertainty persists about how to best 
achieve that goal, even among academic specialists who 
generally agree on both that goal and how to study progress 
toward that goal. In general, making sure that shareholders 
have sufficient information and tools to nominate and elect 
effective board members is a key first step. A second is to 
make sure that boards themselves have effective access to 
information (see answer to Question 3 below). A third is to 
make sure that boards themselves have the incentives and 
resources to take action when needed. Each of the steps I 
favor--``say-on-pay''; making a split chairman/CEO split a 
default rule for large operating companies, subject to opt out 
by shareholders; and shareholder access of the kind proposed by 
the SEC (subject to modifications that were suggested by a 
number of professors at the Harvard Law and Business Schools, 
including myself, available here: http://blogs.law.harvard.edu/
corpgov/files/2009/08/hbs_hls-letter-to-sec_0946.pdf--would be 
helpful steps, as they would represent what are likely to be 
modest improvements that do not impose irrevocable mandatory 
rules or high costs on most companies. Still, it should be 
recognized that ideal corporate governance is not likely to 
ever be fully achieved, but is something that must be 
continually pursued.

Q.3. How do we make sure boards and management know what is 
going on inside the large firms they are supposedly running?

A.3. As firms grow in size in complexity, it may not be a 
practical goal to expect boards or even top management to 
always know everything is going on inside the firms they run, 
any more than it is practical for officials in the U.S. 
Government to know everything that is going on inside the 
organization they oversee. What is important is enable 
shareholders most effectively to choose and over time modify a 
system of governance that provides both them and boards with 
ready access to information about their companies, and with the 
right incentives and tools to focus on the most important 
activities their companies undertake, and the most important 
risks their companies face. What has been disheartening about 
the recent crisis is that well-regarded boards at prominent 
financial companies did not seem to be aware of some of the 
largest risks that their companies faced. This may suggest that 
there may be natural limits to the size and complexity of an 
organization that can be safely managed by fallible humans. But 
if that is true, it would be better, in my view, to let 
investors provide the feedback to boards about that fact, as 
they raise the cost of capital for increased growth, or use 
their rights as investors to control their companies, than for 
such limits to be pursued directly as a matter of public 
policy, as some have suggested (other than pursuant to existing 
antitrust policy, which limits the concentration of any given 
industry, and thus the size of firms operating in those 
industries).

Q.4. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.4. See answer to Question 3.

Q.5. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.5. See http://blogs.law.harvard.edu/corpgov/files/2009/08/
hbs_hls-letter-to-sec_0946.pdf, where others and I suggest a 
limit of 5-10 percent. However, as noted in my testimony, I do 
not believe that this kind of detail in implementing proxy 
access is something that should be done in legislation--but 
rather, through SEC rule-making. The most important thing the 
Congress can and should do on proxy access is to affirm in 
clear terms that the SEC has the authority to adopt rules in 
this area, and perhaps to mandate that the SEC revisit its 
rules after some period of time, and/or report on the effects 
of proxy access, perhaps with a statutory opt out right for 
shareholders that do not want their companies to be subject to 
such rules.

Q.6. What are issues that shareholders should have an opt out 
or opt in vote on?

A.6. Nearly all rules of internal governance at public 
companies should be subject to an opt out or an opt in by 
shareholders. The only exceptions would be (a) where there is 
some nonshareholder constituency that might be directly 
affected by the decision to opt out, (b) where the rules 
concern disclosure--which is the predicate for investors to 
exercise their powers (including the power to opt out of 
default governance provisions), or (c) where the rule is 
designed to protect minority shareholders from majority or 
control shareholders, as opposed to insure that managers serve 
the interests of all shareholders. In general, I favor opt outs 
where the evidence suggests that the rule in question is 
beneficial for most companies, as with ``say-on-pay'' advisory 
shareholder votes, or where the difficulty (legal and/or 
financial) of opt ins is sufficiently high that shareholders 
have a difficult time acting collectively to change the 
governance rules at their companies, as with proxy access 
(where a combination of costs and legal obstacles--such as past 
decisions of the SEC itself--have long stymied efforts by 
shareholders to implement their own rules requiring proxy 
access). I favor opt ins where the rule is either best for a 
minority of companies, or where evidence does not support any 
particular rule as the best for most companies, as long as the 
ability of shareholders to pursue their own governance systems 
have not been effectively blocked by costs or legal 
impediments.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM JOHN C. COATES IV

Q.1. Professor, in your testimony you support the idea of a 
Government-mandated shareholder vote on compensation or a 
``say-on-pay.'' You sight the ``improved link between executive 
pay and corporate performance in the U.K.'' after its adoption 
there even though only five companies in England have lost 
shareholder votes on executive pay this year. Does it occur to 
you that this ``say-on-pay'' model no longer works? The vast 
majority of shares in the U.S. aren't held by an average 
investor sitting at home. If it is true that shares are 
primarily held by mutual funds and the ownership of the stock 
is a derivative instrument. How does a Government-mandated 
``say-on-pay'' vote get the participation that the 23 companies 
in the U.S., who have already offered ``say-on-pay'' votes on 
their own, not get?

A.1. The fact that few U.K. firms have lost ``say-on-pay'' 
votes is not a sign of ``say-on-pay's'' ineffectiveness. It 
only takes a few high-profile losses for incumbent managers to 
get the message. That is what the evidence suggests has 
happened in the U.K. As I noted in my testimony, the best 
evidence suggests that ``say-on-pay'' tightened the link 
between pay design and performance, and that many firms 
improved their pay practices both before and after ``say-on-
pay'' votes, including votes that were technically ``won'' 
because they received bare majorities in favor.
    You are right that most stock is now held by institutions, 
and only indirectly by individuals. Institutions such as mutual 
funds, however, owe a responsibility to their investors to use 
their voting power responsibly, and generally do so, in my 
view. In effect, institutional investors are representative 
bodies, as is the Senate. If institutional investors use their 
``say-on-pay'' vote powers irresponsibly, they will be 
disciplined by market forces in many instances, and where 
markets do not effectively control institutional investors, 
there may need to be regulation or reform of those institutions 
through the political process--as may be the case, for example, 
with public pension funds. But potential problems with 
institutional shareholders have nothing to do with ``say-on-
pay''--if there are problems with institutions, they also 
extend to ordinary voting rights that they already possess, to 
vote for and against mergers, for example.
    Finally, you ask why not continue to shareholders of 
companies effectively opt in to ``say-on-pay,'' as a small 
number of companies have done, rather than mandate ``say-on-
pay'' for all companies? To be clear, I believe that any ``say-
on-pay'' rule should permit shareholders to opt out of the 
rule, and I would expect shareholders at some companies to do 
so. The rule is thus not a ``mandate'' in the sense of 
uniformly mandatory. Thus, the difference between the status 
quo and the rule I would support boils down to whether one 
thinks that most (not all) companies would be better off with 
``say-on-pay.'' As my testimony suggests, the best evidence is 
that ``say-on-pay'' advisory votes--which, after all, are only 
advisory, and have no binding effect on companies--improve pay 
practices generally, and thus would be good for most public 
companies. What the adoption of ``say-on-pay'' would achieve is 
to speed up the process of reform, and to eliminate the costs 
associated with shareholder efforts to adopt the rules that a 
small but growing number of companies have already adopted. 
Those costs are substantial--to wage a proxy contest to 
pressure managers to adopt ``say-on-pay'' rules requires 
expensive lawyers and regulatory filings, all paid for by 
shareholders, while incumbent managers use company (i.e., 
shareholder) funds to oppose those efforts, even (at times) 
when managers know or expect most shareholders support the 
rules.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                        FROM ANN YERGER

Q.1. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.1. There is broad agreement among Council members on the 
inherent value of an advisory shareowner vote on executive 
compensation as a feedback mechanism and dialogue tool, but 
opinions differ on the frequency and type of votes. Many 
investors, such as the AFSCME Employees Pension Plan, favor one 
vote every year on the pay of the ``named executive officers 
(NEOs) set forth in the proxy statement's Summary Compensation 
Table (the ``SCT'') and the accompanying narrative disclosure 
of material factors provided to understand the SCT (but not the 
Compensation Discussion and Analysis).''
    Annual, advisory shareowner votes on executive compensation 
are required in Australia, Sweden, and the United Kingdom. In 
fact, U.K. regulations requiring such votes went into effect in 
2002, and are held on ``remuneration reports'' covering both 
the quantitative and qualitative aspects of executive 
compensation, including the nature of and rationale for 
performance conditions tied to incentive payouts. ``Say-on-
pay'' votes in the U.K. have resulted in ``better disclosure, 
better and more dialogue between shareholders and companies, 
and more thought put into remuneration policy by directors,'' 
according to David Paterson, research director of U.K.-based 
Research, Recommendations and Electronic Voting, a proxy 
advisory service. British drugmaker GlaxoSmithKline (GSK) is a 
case in point. In 2003, 51 percent of GSK shareowners protested 
the CEO's golden parachute package by either voting against or 
abstaining from voting on the company's remuneration report. 
Stunned, the GSK board held talks with shareowners and the next 
year reduced the length of executive contracts and set new 
performance targets, muting investor criticism. Other U.K. 
companies got the message and now routinely seek investor input 
on compensation policies.
    The annual-vote aspect of the AFSCME resolution and the 
U.K. vote aligns with the Council's own policy on the subject, 
which reads, ``All companies should provide annually for 
advisory shareowner votes on the compensation of senior 
executives.'' As mentioned in the background material to the 
Council's policy, an annual vote would allow shareowners to 
provide regular, timely feedback on the board's recent 
executive pay decisions. And annual votes would allow companies 
and their shareowners to gauge the trend in support for pay 
decisions. So we do specify that the ``say-on-pay'' vote should 
be annual and should be on senior executive compensation. But 
our policy gives boards the flexibility to determine exactly 
what disclosures should be covered by the vote (i.e., the 
Summary Compensation Table by itself vs. the SCT plus 
accompanying qualitative disclosures in the CD&A).
    This was discussed in the background statement to our 
``say-on-pay'' policy: ``While the push by investors for 
shareowner votes on pay has made significant headway in a short 
time, thoughts are still evolving on how best to implement the 
reform. Therefore, the Council's draft updated policy endorses 
the concept of advisory shareowner votes on executive 
compensation, but stops short of dictating the precise contents 
of such a vote.''

Q.2. How do we make sure boards can be an effective check on 
management?

A.2. As noted by renowned corporate governance expert Nell 
Minow, ``Boards of directors are like subatomic particles. They 
behave differently when they are observed.'' The Council of 
Institutional Investors believes boards would be a more 
effective check on management if an overwhelming number of 
directors are independent of management and if shareowners 
could hold directors accountable for their performance. As a 
result, the Council strongly supports mechanisms--including 
majority voting for directors, advisory votes on executive 
compensation and access to the proxy--that empower shareowners 
to truly exercise their rights to elect and remove directors.
    We believe federalization of these standards is appropriate 
and indeed essential to the investing public. While the Council 
appreciates that 50 governors, and likely many other self-
interested parties, oppose federalization of these basic 
rights, the Council believes their opposition would be 
overwhelmed by the support of the millions of U.S. citizens and 
investors who have suffered profound losses from the many 
market disruptions that have occurred in recent years, 
including the dot-com bubble, the corporate scandals of the 
early part of this decade, and most recently, the financial 
crisis.

Q.3. How do we make sure boards and management know what is 
going on inside the large firms they are supposedly running?

A.3. Robust, timely public disclosures are essential for 
providing outside parties insights into the performance of 
boards and management of large and small companies.
    Since audited financial statements are a primary sources of 
information available to guide and monitor investment 
decisions, tough audit standards and strong accounting 
standards are critical to ensuring that financial-related 
disclosures are of the highest quality.
    Auditors, financial analysts, credit-rating agencies and 
other financial ``gatekeepers'' play a vital role in ensuring 
the integrity and stability of the capital markets. They 
provide investors with timely, critical information they need, 
but often cannot verify, to make informed investment decisions. 
With vast access to management and material nonpublic 
information, financial gatekeepers have an inordinate impact on 
public confidence in the markets. They also exert great 
influence over the ability of corporations to raise capital and 
the investment options of many institutional investors. Given 
their power, the Council of Institutional Investors believes 
financial gatekeepers should be transparent in their 
methodology and avoid or tightly manage conflicts of interest. 
Robust oversight and genuine accountability to investors are 
also imperative. Regulators should remain vigilant and work to 
close gaps in oversight. Continued reforms are needed to ensure 
that the pillars of transparency, independence, oversight and 
accountability are solidly in place.

Q.4. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.4. The Council of Institutional Investors has no formal 
position on this issue. Regarding entities that may pose a 
systemic risk to the financial system at large or the economy 
at large, an independent task force, the Investors' Working 
Group (IWG), cosponsored by the CFA Institute Centre for 
Financial Integrity and the Council of Institutional Investors, 
recommended that policy makers consider the following:

    Designating a systemic risk regulator, with 
        appropriate scope and powers.

    Adopting new regulations for financial services 
        that will prevent the sector from becoming dominated by 
        a few giant and unwieldy institutions. New rules are 
        needed to address and balance concerns about 
        concentration and competitiveness.

    Strengthening capital adequacy standards for all 
        financial institutions. Too many financial institutions 
        have weak capital underpinnings and excessive leverage.

    Imposing careful constraints on proprietary trading 
        at depository institutions and their holding companies. 
        Proprietary trading creates potentially hazardous 
        exposures and conflicts of interest, especially at 
        institutions that operate with explicit or implicit 
        Government guarantees. Ultimately, banks should focus 
        on their primary purposes, taking deposits and making 
        loans.

    Consolidating Federal bank regulators and market 
        regulators. Regulation of banks and other depository 
        institutions may be streamlined through the appropriate 
        consolidation of prudential regulators. Similarly, 
        efficiencies may be obtained through the merger of the 
        SEC and the Commodity Futures Trading Commission 
        (CFTC).

    Studying a Federal role in the oversight of 
        insurance companies.

    IWG members strongly believed that all firms should be able 
to fail. As a result, it recommended that ``Congress should 
give regulators resolution authority, analogous to the Federal 
Deposit Insurance Corporation's authority for failed banks, to 
wind down or restructure troubled, systemically significant 
nonbanks.''

Q.5. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.5. The Council endorses the following policy regarding 
shareowner access to the proxy:
    Companies should provide access to management proxy 
materials for a long-term investor or group of long-term 
investors owning in aggregate at least 3 percent of a company's 
voting stock, to nominate less than a majority of the 
directors. Eligible investors must have owned the stock for at 
least 2 years. Company proxy materials and related mailings 
should provide equal space and equal treatment of nominations 
by qualifying investors.
    To allow for informed voting decisions, it is essential 
that investors have full and accurate information about access 
mechanism users and their director nominees. Therefore, 
shareowners nominating director candidates under an access 
mechanism should adhere to the same SEC rules governing 
disclosure requirements and prohibitions on false and 
misleading statements that currently apply to proxy contests 
for board seats.

Q.6. What are issues that shareholders should have an opt out 
or opt in vote on?

A.6. The Council has no position on opt in/opt out votes for 
shareowners. Council policies state that ``shareowners should 
have meaningful ability to participate in the major fundamental 
decisions that affect corporate viability, and meaningful 
opportunities to suggest or nominate director candidates and to 
suggest processes and criteria for director selection and 
evaluation.''
    In addition, the Council believes a majority vote of common 
shares outstanding should be sufficient to amend company bylaws 
or take other action that requires or receives a shareowner 
vote. Supermajority votes should not be required. A majority 
vote of common shares outstanding should be required to 
approve:

    Major corporate decisions concerning the sale or 
        pledge of corporate assets that would have a material 
        effect on shareowner value. Such a transaction will 
        automatically be deemed to have a material effect if 
        the value of the assets exceeds 10 percent of the 
        assets of the company and its subsidiaries on a 
        consolidated basis;

    The corporation's acquisition of 5 percent or more 
        of its common shares at above-market prices other than 
        by tender offer to all shareowners;

    Poison pills;

    Abridging or limiting the rights of common shares 
        to: (1) vote on the election or removal of directors or 
        the timing or length of their term of office or (2) 
        nominate directors or propose other action to be voted 
        on by shareowners or (3) call special meetings of 
        shareowners or take action by written consent or change 
        the procedure for fixing the record date for such 
        action; and

    Issuing debt to a degree that would excessively 
        leverage the company and imperil its long-term 
        viability.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                        FROM ANN YERGER

Q.1. One of the proposals you support, which is supported by 
the Administration, is to allow advisory shareowner votes on 
executive pay. How would a Government-mandated ``say-on-pay'' 
vote have prevented the current financial turmoil? How would a 
government mandated ``say-on-pay'' vote prevent future 
financial turmoil when, according to the American Federation of 
State, County, and Municipal Employees, 23 companies have 
allowed ``say-on-pay'' provisions to proceed to a vote and 
shareholders have yet to vote down a single executive pay plan 
in the U.S.?

A.1. The Council believes annual advisory shareowner votes on 
executive compensation would efficiently and effectively 
provide boards with useful information about whether investors 
view the company's compensation practices to be in shareowners' 
best interests. Nonbinding shareowner votes on pay would serve 
as a direct referendum on the decisions of the compensation 
committee and would offer a more targeted way to signal 
shareowner discontent than withholding votes from committee 
members.
    While advisory votes might not have prevented the current 
financial crisis nor might they prevent future financial 
turmoil, they might induce compensation committees to be more 
careful about doling out rich rewards, to avoid the 
embarrassment of shareowner rejection at the ballot box. In 
addition, compensation committees looking to actively rein in 
executive compensation could use the results of advisory 
shareowner votes to stand up to excessively demanding officers 
or compensation consultants.
    Historically, early ``volunteers'' for corporate governance 
reforms tend to be companies with the best practices and hence, 
nothing to fear from the reforms. As a result, I am not 
surprised that shareowners supported the compensation proposals 
of the 23 companies identified by AFSCME. Of the thousands of 
other public companies, I expect some would find that their 
owners do not support their compensation programs, and that 
this vote will provide meaningful information to board and 
compensation committees.
    In addition to the 23 companies identified by AFSCME, 
hundreds of financial firms receiving aid under the U.S. 
Troubled Assets Relief Program (TARP) were required to put 
their executive pay packages to an advisory shareowner vote. 
And while some received large ``no'' votes, ``on average 88.6 
percent of votes cast at 237 firms that have disclosed results 
were in favor of management, according to an analysis by David 
G. Wilson, a securities lawyer at Waller Lansden Dortch & Davis 
who focuses on corporate governance matters,'' according to a 
September 26, 2009, article in The Washington Post. While some 
might attribute the high support votes to a failure of the 
advisory vote concept, others might attribute the support 
levels to the pay restrictions imposed on these firms by the 
U.S. Department of Treasury and the 2009 Economic Stimulus Act.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                    FROM JOHN J. CASTELLANI

Q.1. Professor Coates raised an interesting idea in his written 
testimony. Rather than forcing a structure on all companies, he 
suggests an opt out vote by shareholders every few years for 
some governance proposals. That idea could be applied to proxy 
access and advisory vote procedures as well instead of the 
Government deciding what the rules will be. I want to know what 
you think of that approach, of a mandatory opt in or opt out 
vote every few years to decide certain matters. Please also 
comment on whether such a vote should be an opt in or opt out 
vote.

A.1. Business Roundtable believes that shareholders and 
companies should have the ability to make choices about the 
governance practices that are most appropriate for their 
circumstances. However, we do not believe that an ``opt in'' or 
``opt out'' vote on different governance practices is 
necessary. Shareholders already have the ability to communicate 
their views on whether to adopt particular practices. They can 
do this through the shareholder proposal process as well as 
procedures that companies have implemented for shareholders to 
communicate with the board as a whole and with particular 
directors. For example, shareholders who believe an advisory 
vote is necessary at their company can submit shareholder 
proposals requesting such a vote. If other shareholders agree, 
they can vote in favor of these proposals, and several 
companies have implemented advisory votes after proposals on 
this subject received significant shareholder support. Other 
companies have taken different approaches to obtaining 
shareholder views on executive compensation, such as holding 
meetings with their large shareholders or obtaining shareholder 
feedback through procedures that allow shareholders to 
communicate with the board.
    If Congress considers an ``opt in'' or ``opt out'' vote, we 
believe that an ``opt in'' vote would be preferable. An ``opt 
in'' vote would require shareholders to take the affirmative 
step of voting ``for'' a specific governance practice before a 
company adopts it, which in turn, would provide a more accurate 
indication that a critical mass of shareholders favors the 
practice.

Q.2. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.2. If Congress requires an advisory vote on executive 
compensation, Business Roundtable believes that it should give 
companies flexibility to structure the vote based on their 
individual compensation programs and packages. There are a 
number of approaches companies could use, and that companies 
have taken to date, to seek input on executive compensation 
through an advisory vote. For example, companies could ask 
shareholders to vote on: (a) the executive compensation tables 
in the annual proxy statement; (b) the company's compensation 
philosophy and procedures as described in the Compensation 
Discussion and Analysis section of the proxy statement; and/or 
(c) particular aspects of a company's compensation program, 
such as post-retirement benefits or long-term incentive plans. 
In addition, there are different approaches companies could 
take with respect to the frequency of advisory votes. Although 
many have suggested an annual vote, other practices are likely 
to emerge. For example, the United Brotherhood of Carpenters 
Pension Fund has proposed that companies hold advisory votes 
once every 3 years. Accordingly, Business Roundtable does not 
believe that a ``one-size-fits-all'' Federal legislative 
approach to advisory votes on executive compensation is 
appropriate.
    As an alternative to allowing companies and shareholders to 
determine the specifics of advisory votes, Business Roundtable 
believes that Congress should give the Securities and Exchange 
Commission (SEC) authority to adopt rules addressing matters 
such as the frequency of the vote requirement, its 
applicability to particular businesses or types of businesses, 
and the matter(s) to be voted on. This administrative 
flexibility would allow the SEC to tailor the application of 
voting requirements based on a range of factors and to make 
changes over time. For example, the SEC proposed rules in July 
2009 to help implement the advisory vote requirement in the 
Emergency Economic Stabilization Act of 2008 applicable to 
companies receiving funds under the Troubled Asset Relief 
Program. As the SEC noted in proposing these rules, their 
purpose is to provide clarity about how to comply with the 
advisory vote requirement while at the same time affording 
companies adequate flexibility in making relevant disclosures 
about the vote.

Q.3. How do we make sure boards can be an effective check on 
management?

A.3. Business Roundtable believes that an engaged and diligent 
board of directors is the most effective mechanism for 
overseeing management. One of the guiding principles in our 
Principles of Corporate Governance (2005) states that ``the 
paramount duty of the board of directors is to select a chief 
executive officer and to oversee the CEO and senior management 
in the competent and ethical operation of the corporation on a 
day-to-day basis.''
    We believe that the best way to provide for effective board 
oversight is to continue to foster the long tradition of 
addressing corporate governance matters at the State level 
through private ordering by shareholders, boards and companies 
acting within the framework established by State corporate law. 
In this regard, the corporate governance landscape has 
undergone a sea change over the past 6 years. Many of the 
corporate governance practices implemented during this time--
such as greater independent board leadership and majority 
voting in director elections--have occurred as a result of 
voluntary reforms adopted by companies and their shareholders 
under the auspices of enabling State corporate law provisions, 
rather than through legislative or regulatory fiat. Moreover, 
under State corporate law, directors have fiduciary duties 
requiring them to act in good faith, in the corporation's best 
interests, and to exercise appropriate diligence in overseeing 
the management of the corporation, making decisions and taking 
other actions. In this regard, there are consequences under 
State corporate law, as well as the Federal securities laws, 
for directors who fail to perform their responsibilities.

Q.4. How do we make sure boards and management know what is 
going on inside the large firms they are supposedly running?

A.4. Business Roundtable believes that the most effective way 
for a company's board and management to remain informed is for 
the company to have effective processes for communicating 
complete, accurate, and timely information to the attention of 
the board and management. Information flow between the board 
and senior management is critical, and well-functioning boards 
foster an environment that promotes candor and encourages 
management to bring potential issues to the board early so that 
there are ``no surprises.'' Moreover, as we recommend in our 
Principles of Corporate Governance (2005), a company's 
nominating/governance committee should assess the reporting 
channels through which the board receives information and see 
that the board obtains appropriately detailed information in a 
timely fashion. In situations where specialized expertise would 
be useful, the board and its committees should seek advice from 
outside advisors who are independent of the company's 
management. In addition, it is senior management's 
responsibility--under the direction of the CEO and CFO--to 
establish, maintain and periodically evaluate the 
corporation's: (a) internal controls (controls designed to 
provide reasonable assurance about the reliability of the 
company's financial information) and (b) disclosure controls 
(controls designed to see that a company records, processes and 
reports information required in SEC filings in a timely 
manner). In accordance with applicable law and regulations, the 
CEO and CFO also are responsible for certifying the accuracy 
and completeness of the financial statements and the 
effectiveness of the company's internal controls and disclosure 
controls.

Q.5. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.5. Business Roundtable does not believe that this is a better 
approach, nor is it consistent with the traditional U.S. 
approach to encouraging a vibrant private sector. Well-
structured and well-governed companies have the ability to deal 
with the size and scope of their businesses because they have 
solid information flow between the board and management and 
they maintain effective internal controls.

Q.6. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.6. Business Roundtable believes that a Federal proxy access 
right is unnecessary and would have serious adverse 
consequences, including promoting an unhealthy emphasis on 
short-termism at the expense of long-term value creation, 
facilitating the election of ``special interest'' directors, 
increasing the frequency of contested elections and 
discouraging qualified directors from serving on corporate 
boards. Therefore, we do not support a Federal proxy access 
right. If Congress moves forward in this area, Business 
Roundtable believes that proxy access should be available only 
to holders of a significant, long-term interest in a company. 
Accordingly, we believe that the stock ownership threshold for 
individual shareholders seeking to place nominees on company 
proxy statements should be 5 percent of a company's outstanding 
voting stock and that the threshold for shareholders 
aggregating their shares should be 10 percent. In either case, 
a ``net long'' ownership position--that is, full voting and 
investment power with respect to the shares in question--should 
be required.
    In addition, we believe that proxy access should be 
available only to shareholders who have demonstrated a 
commitment to a company and its business. Accordingly, we 
believe that shareholders should have to satisfy the relevant 
stock ownership threshold for a period of at least 2 years 
before they can nominate a director for inclusion in the 
company's proxy statement. Any shorter holding period would 
allow shareholders with a short-term focus to nominate 
directors who, if elected, would be responsible for the 
creation of long-term shareholder value. In addition, we 
believe that shareholders should have to continue to satisfy 
the relevant ownership threshold not just through the annual 
meeting at which their nominees are elected, but for the 
duration of the nominees' service on the board or at least 
through the term for which they nominated the director.

Q.7. What are issues that shareholders should have an opt out 
or opt in vote on?

A.7. As discussed above in the answer to Question 1, we do not 
believe that an ``opt in'' or ``opt out'' vote on different 
governance practices is necessary because shareholders already 
have the ability to communicate their views on whether to adopt 
particular practices. As an alternative to this approach, 
Business Roundtable supports enhanced disclosure about 
companies' corporate governance practices. For example, the SEC 
recently proposed rules that would require annual proxy 
disclosure about a company's leadership structure and why the 
company believes it is the best structure for the company, 
including discussion about whether the company combines or 
separates the roles of chairman of the board and CEO and 
whether the company has a lead independent director. Similarly, 
Business Roundtable would support a ``comply or explain'' 
approach, which some non-U.S. markets already follow, that 
would require companies to disclose whether they have adopted 
specific governance practices, and if not, why not. Either of 
these alternatives would allow companies and shareholders 
flexibility in determining the practices that are most 
appropriate for them, provide transparency to shareholders and 
avoid a ``one-size-fits-all'' approach.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                        FROM J.W. VERRET

Q.1. Professor Coates raised an interesting idea in his written 
testimony. Rather than forcing a structure on all companies, he 
suggests an opt out vote by shareholders every few years for 
some governance proposals. That idea could be applied to proxy 
access and advisory vote procedures as well instead of the 
Government deciding what the rules will be. I want to know what 
you think of that approach, of a mandatory opt in or opt out 
vote every few years to decide certain matters. Please also 
comment on whether such a vote should be an opt in or opt out 
vote.

A.1. Answer not received by time of publication.

Q.2. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.2. Answer not received by time of publication.

Q.3. Are States responding to concerns about corporate 
governance issues with changes to their own laws? Is there 
really a need to federalize business laws?

A.3. Answer not received by time of publication.

Q.4. How do we make sure boards can be an effective check on 
management?

A.4. Answer not received by time of publication.

Q.5. How do we make sure boards and management know what is 
going on inside the large firms they are supposedly running?

A.5. Answer not received by time of publication.

Q.6. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.6. Answer not received by time of publication.

Q.7. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.7. Answer not received by time of publication.

Q.8. What are issues that shareholders should have an opt out 
or opt in vote on?

A.8. Answer not received by time of publication.

Q.9. Please provide any comments you may have on the proposed 
Shareholders Bill of Rights Act, S. 1074, or otherproposed 
legislation.

A.9. Answer not received by time of publication.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                        FROM J.W. VERRET

Q.1. Professor, in your testimony you suggest alternative 
contributing factors for the Committee to investigate to 
determine the ``culprit'' of the financial crisis. The first 
factor you suggest to investigate is the moral hazard problems 
created by the prospect of the Government bailout. Do you think 
that moral hazard problem is stronger cause of the than 
corporate pay structure? Do you think the distortions to the 
housing market cause by Fannie Mae and Freddie Mac played a 
larger role in causing the financial crisis of 2008 than how a 
company pays its CEO?

A.1. Answer not received by time of publication.
                                ------                                


       RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING
                    FROM RICHARD C. FERLAUTO

Q.1. Professor Coates raised an interesting idea in his written 
testimony. Rather than forcing a structure on all companies, he 
suggests an opt out vote by shareholders every few years for 
some governance proposals. That idea could be applied to proxy 
access and advisory vote procedures as well instead of the 
Government deciding what the rules will be. I want to know what 
you think of that approach, of a mandatory opt in or opt out 
vote every few years to decide certain matters. Please also 
comment on whether such a vote should be an opt in or opt out 
vote.

A.1. The proxy access procedure that has been proposed by the 
SEC aims to remove regulatory barriers to shareholders' 
exercise of their existing rights to nominate director 
candidates. It facilitates shareholders' use of their 
nomination rights by recognizing that in the modern system of 
proxy voting, the proxy statement itself is the forum that used 
to occur at the shareholder meeting. Accordingly, the proxy 
access procedure is a disclosure measure, rather than a new 
substantive right. \1\
---------------------------------------------------------------------------
     \1\ I acknowledge that there are some who argue that section 14(a) 
of the Exchange Act does not authorize the Commission to propose a 
proxy access procedure. Although I believe that the Commission's 
authority is clear in this regard, an explicit legislative grant of 
authority would be useful in order to avoid unnecessary litigation and 
provide some measure of stability in this area.
---------------------------------------------------------------------------
    For that reason, I don't believe it would be appropriate 
for companies to opt in or opt out of the proxy access 
procedure. In the same way that companies are not permitted to 
opt out of the application of the SEC's shareholder proposal 
rule or the executive compensation disclosure requirements, 
they should not be allowed to opt out of the proxy access 
procedure.
    Of course, a company should be able to provide its 
shareholders with a more shareholder-friendly form of access 
procedure than that established by the SEC's proposed rule. For 
example, a company could provide that holders of a lower 
percentage of outstanding shares are entitled to invoke the 
proxy access procedure, or it could allow nominating 
shareholders to include longer supporting statements than the 
SEC's rules contemplate.
    The shareholder advisory vote on executive compensation 
does not primarily address disclosure, and thus stands on 
different footing. My main concern about a regime in which 
``say-on-pay'' would not apply to companies for some period of 
time is that it imposes significant delay on the process of 
obtaining shareholder voice, should shareholders believe that 
such voice is needed to safeguard shareholder value.
    For instance, one could imagine a regime that would provide 
for a vote of one kind or another every 3 years. At a company 
without ``say-on-pay'' where performance begins to suffer 
shortly before the scheduled vote, but it does not become 
apparent that the pay-performance relationship has been severed 
until shortly after the vote, shareholders might have to wait 
almost 3 years to vote in favor of applying or reinstating 
``say-on-pay.'' As Bob Pozen, formerly of Fidelity, stated in 
criticizing the triggering requirements of the SEC's 2003 
proposed proxy access procedure, ``two years is an eternity in 
this game.'' \2\
---------------------------------------------------------------------------
     \2\ See ``The Debate on Shareholder Access to the Ballot, Part I'' 
(transcript of symposium at Harvard Law School in October 2003), at 46 
(available at http://www.law.harvard.edu/programs/olin_center/
corporate_governance/papers/03.bebchuk.debate-1.pdf).
---------------------------------------------------------------------------
    In any event, the collective action problem facing 
shareholders, which has been exhaustively analyzed in the 
academic literature, argues in favor of an opt out procedure 
rather than an opt in procedure. The weight given to 
management's recommendations on proxy issues--the opt in or opt 
out proposal would be a management proposal, presumably--the 
well-documented expense and difficulty attendant to shareholder 
communication and the vote-boosting effect of the New York 
Stock Exchange's ``broker-may-vote'' rule on management 
proposals all argue in favor of making applicability of a 
governance feature the default, and requiring management to 
convince shareholders that the company is so well-governed that 
the governance feature would not be value enhancing.

Q.2. There has been a lot of talk about giving shareholders a 
vote on pay packages, but little discussion of the details. If 
we were to require such a vote, what specifically should be 
voted on, and how often?

A.2. As proposed in H.R. 3269, the Corporate and Financial 
Institution Compensation Fairness Act of 2009, shareholders 
should be given the opportunity to vote on ``the compensation 
of executives as disclosed pursuant to the Commission's 
compensation disclosure rules for named executive officers 
(which disclosure shall include the compensation committee 
report, the compensation discussion and analysis, the 
compensation tables, and any related materials, to the extent 
required by such rules).'' This vote should occur annually.

Q.3. How do we make sure boards can be an effective check on 
management?

A.3. Many factors have an impact on board effectiveness, 
including the skills, qualifications, and experience of 
directors; the independence and vitality of the board's 
leadership; and the quality of the information and advice 
provided to the board. However, the single most important 
factor determining whether the board can and will effectively 
oversee management is whether board members feel they work for 
the shareholders. If shareholders do not have a meaningful role 
in nominating and electing directors, they will not engage in 
robust monitoring. As Relational Investors' Ralph Whitworth has 
said, ``you dance with who brought you.'' \3\ Accordingly, 
measures such as proxy access that enable shareholders to more 
fully exercise their State-law right to nominate directors 
would be very useful in improving board effectiveness.
---------------------------------------------------------------------------
     \3\ See, id. at 41.

Q.4. How do we make sure boards and management know what is 
---------------------------------------------------------------------------
going on inside the large firms they are supposedly running?

A.4. Keeping boards and managements informed enough to do their 
jobs well requires different strategies. Members of management 
are employees of the company and devote themselves full-time to 
its management. The right reporting and information structures 
to ensure that senior managers are aware of what is happening 
will vary tremendously from one company to another, depending 
on the nature of the company's business, the geographical reach 
of its operations and other factors. As a result, it is not 
possible to prescribe a single structure that works well for 
all companies.
    Boards of directors, by contrast, are composed primarily of 
people from outside the company and they meet to work on 
company business only periodically. Many board members have 
demanding day jobs; those who do not are often members of 
multiple boards or engage in philanthropic or other pursuits 
that take significant time and attention. Accordingly, 
information must be collected and synthesized before 
presentation to the board, in order to use directors' time 
efficiently.
    It is important that a company's senior management not have 
a monopoly on the flow of information to the board; if it does, 
the board functions more as a rubber stamp than as an effective 
monitor and resource. Independent board leadership is the best 
way to ensure that directors have access to all the information 
they need to do their jobs well. An independent board chairman 
sets the agenda and provides relevant information to directors; 
he or she will include material furnished by members of senior 
management but will also be able to provide outside 
perspectives. Where the chairman is also the CEO, by contrast, 
his or her perspective will dominate and outside information is 
less likely to be provided to board members.

Q.5. Is a better approach to making sure boards and management 
understand what is going on inside their companies to shrink 
the size and scope of the companies?

A.5. It is possible that a company's operations may become too 
large, varied, and dispersed for adequate monitoring to be 
cost-effective. In the vast majority of cases, however, I 
believe that the mechanisms discussed in response to Questions 
3 and 4 will address the problem of ensuring robust oversight.

Q.6. For proxy access, how large of a block of shareholders 
should have to request that the item be included?

A.6. The thresholds proposed by the SEC in its current rule 
making strike the right balance between ensuring that the 
access procedure is available only to shareholders with a 
substantial stake in the company and fulfilling the objective 
of removing obstacles to the exercise of shareholders' State-
law director nomination rights.

Q.7. What are issues that shareholders should have an opt out 
or opt in vote on?

A.7. I do not favor, in the first instance, an opt in or opt 
out regime for the governance reforms discussed at the hearing. 
As discussed in the answer to Question 1, an opt in or opt out 
process is not appropriate for disclosure measures. For other 
reforms, my support of an opt out regime would depend on how 
often the vote was held and whether shareholders could quickly 
trigger an earlier vote if circumstances warranted.