[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
SEC PROXY ACCESS PROPOSALS:
IMPLICATIONS FOR INVESTORS
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 27, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-63
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39-542 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York PETER T. KING, New York
MELVIN L. WATT, North Carolina EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
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Page
Hearing held on:
September 27, 2007........................................... 1
Appendix:
September 27, 2007........................................... 33
WITNESSES
Thursday, September 27, 2007
Castellani, John J., President, Business Roundtable.............. 10
Kirshbaum, Donald A., Principal Investment Officer, Office of the
Treasurer, State of Connecticut................................ 6
Smith, Timothy, Senior Vice President-Director of Social
Investing, Walden Asset Management............................. 12
Stevens, Paul Schott, President and Chief Executive Officer,
Investment Company Institute................................... 13
Yerger, Ann L., Executive Director, Council of Institutional
Investors...................................................... 8
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn B...................................... 34
Waters, Hon. Maxine.......................................... 36
Castellani, John J........................................... 39
Kirshbaum, Donald A.......................................... 44
Smith, Timothy............................................... 59
Stevens, Paul Schott......................................... 78
Yerger, Ann L................................................ 94
Additional Material Submitted for the Record
Neugebauer, Hon. Randy:
Letter from the Business Roundtable to the SEC............... 179
Statement of the U.S. Chamber of Commerce.................... 217
SEC PROXY ACCESS PROPOSALS:
IMPLICATIONS FOR INVESTORS
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Thursday, September 27, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:03 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Kanjorski, Maloney,
Moore of Kansas, McCarthy, Baca, Scott, Cleaver, Davis of
Tennessee, Klein; Pryce, Feeney, Hensarling, Neugebauer, and
Campbell.
The Chairman. This hearing of the Committee on Financial
Services will come to order. This is a hearing on the question
of proxy access, a matter of some interest to various members
of the committee, on both sides of the aisle.
The gentleman from California, Mr. Campbell, is someone who
has raised this consistently, as have others. We touched on
this in a couple of earlier hearings. It became relevant when
we talked about executive compensation, because you can talk
about shareholder involvement either issue-by-issue or in a
more generic way.
We are appreciative of the fact that the SEC has now
promulgated some proposals. They are--I guess I've heard, as a
lawyer, of pleading in the alternative; regulating in the
alternative is a new concept to me, but as I have chaired this
committee, I have learned some things.
And it is an opportunity to have some input. It's a matter
on which this committee has a great deal of interest, and we
have a panel that I think is fairly representative of the range
of views, so we look forward to the hearing. And I'm going to
get right to that.
I'll now turn--let me just announce that the ranking member
was called back home to Alabama by some very important family
business involving both his own family, and more sadly, the
family of someone very close to him. He is going to be
returning today, but the vice chair of the committee, Mr.
Neugebauer, will be here in his absence, and I will now
recognize the gentleman from Texas who has, I believe, a
unanimous consent request to make.
Mr. Neugebauer. That's correct. Mr. Chairman, I have a
unanimous consent request that--I have some recorded testimony
by the U.S. Chamber of Commerce and a letter from the Business
Roundtable to the Securities and Exchange Commission on
shareholder proposals relating to the election of directors,
and would ask unanimous consent that--
The Chairman. If there is no objection, those will be
entered into the record. Let me, at this point, give general
leave, if there are other statements that members would like--
from any interested parties--to enter into the record, without
objection, that will be granted.
And the gentleman is recognized for his statement.
Mr. Neugebauer. Well, thank you, Mr. Chairman. I am
actually reading this on behalf of Deborah Pryce who could not
be with us again today.
``Thank you, Chairman Frank, for calling this morning's
hearing to review the Securities and Exchange Commission's two
very different proposals to amend the SEC's rules governing
shareholder proxy access.
``This hearing may be a little premature, however. With the
comment period for both proposals ending in 4 days, the
committee should allow the SEC time to review the comment
letters and reach a thoughtful decision. I hope that the
committee will have an opportunity to hear from Chairman Cox
once the SEC reaches its decision.
``Earlier this year the committee considered executive
compensation legislation, as the chairman just mentioned, with
the premise that it would increase shareholder democracy. It is
unclear what is undemocratic about the current structure of the
proxy voting, though. Every publicly traded company has a
nominating process that allows shareholders to recommend
qualified candidates to serve on the board.
``The real question is whether including the outside
nominees in the country's own proxy statement rather than in
separate proxy statements somehow improves the process.
``There are real questions about who pays for adding more
candidates to the proxy statement and whether it actually
weakens the quality of disclosure available to shareholders.
Since Sarbanes-Oxley, boards of directors are smaller and far
more responsive to shareholders. Their independence from
management is also increasing and CEO tenure is decreasing as
boards are no longer beholden to management and more companies
are adopting majority voting to elect directors.
``All of these governing changes are welcome and market
driven, which is always a better solution. Successful companies
are those who value and invite shareholder input and are able
to balance companies' competing constituencies.
``Open communications between boards and shareholders on a
wide variety of corporate matters makes companies more
responsive to all shareholders and not simply those who speak
with the loudest voice. Shareholders already have the power to
change the board. Large institutions like union pension funds
and foundations mutual funds can easily afford to challenge the
nominees put forward by the company.
``What special interest shareholders such as labor unions
really want to do is circumvent the company's nominating
process and have direct access to the proxy statement. If this
happens, the proxy statement will look like a preliminary
parliamentary election ballot with potentially hundreds of
names indistinguishable from one another. This will only cause
confusion.
``The board's role will diminish and along with it good
governments. It is not the best way to run a company, increase
shareholder value or add jobs. Allowing the politicization of
the boardroom could very easily lead to concessions from boards
that are not supported by a majority of the shareholders or as
workers.
``In closing, I would like to thank the witnesses for their
testimony and I yield the balance of my time.''
The Chairman. Are there any other requests for opening
statements?
The gentleman from California.
Mr. Campbell. Thank you, Mr. Chairman.
What we're talking about here today is that we have all
seen over time that sometimes companies have been operated for
the benefit of the executives rather than for the benefit of
the shareholders. We have also seen companies that are operated
poorly, it can happen, not getting good results; and in some
cases where perhaps the company believes they're operating well
but the shareholders believe they're not achieving the
shareholders' expectations based on the industry and the market
at the time.
So what can shareholders do? What are their remedies when
they see one of these things happen where a company is not
operated in what they believe is their best financial interest?
There was a proposal earlier this year which passed this
committee and this House which effectively was direct democracy
within a corporation, that allowed shareholders to vote
specifically on one specific thing, which was executive
compensation. Now I happen to think that's a very dangerous
road to go down.
If we have shareholders approve executive compensation do
we have them approve union contracts, do we have them approve
marketing budgets, do we have them approve every acquisition,
do we have them approve other executives? You know, what do we
have them approve? The correct way for shareholders to express
their disapproval with a company is through the board rather
than through direct democracy.
But others would say that they have another remedy, that
shareholders have another remedy, which is to sell the stock.
And yes, that remedy, in fact, does exist. But that remedy has
severe limitations. Some stockholders are semipermanent holders
in companies. We have those that are large pension funds or
large investment organizations or large mutual funds. There are
certain companies in which they are just generally not going to
disinvest.
Or if someone is trying to replicate or hold either through
a SPDR or directly the Dow industrials or the Fortune 100 or
the S&P 500 then they also, unless they are removed from that
list, have essentially a semi-permanent investment in that
company. And furthermore, even individual investors, because of
the Capital Gains tax, if they have a gain in a stock and they
sell it, or a dollar, they are unlikely to be reinvesting a
dollar. They may be reinvesting 99 cents or, in my State, if
they've held the stock for a long time, they could be
reinvesting as little as 75 cents.
So to say the only remedy I have for a company that's not
being run in the way I think it should be run is to give up 5
or 10 or 15 or 25 percent of my investment to reinvest in
another company is, at best, a very imperfect solution. No, the
correct solution or the best solution, I think, for
shareholders who are displeased with what's going on is to
express that displeasure by changing the board.
So what do we have now? Now we have a system under which
the alternatives for board members are nominated only by the
board. Now if you want to change something that's going on in a
company you don't ask the people who you want to change to
offer up that change. You generally would like to have some
other alternative to that.
So as you can probably tell by this I am someone who
believes that having shareholders have the opportunity to
nominate alternative directors to a board is something that
shareholders in public companies ought to have the right to do.
Now private companies are an entirely different matter, but
when one goes public, and therefore submits themselves to the
regulation of the SEC amongst other things, it seems that
giving shareholders that opportunity is something that should
be a part of being a public company.
There are a few questions that I have that I hope that even
though I obviously believe that having shareholders have
opportunities to nominate directors is something which--I
believe there are several questions I have, and I hope to hear
from the panel today on some of these things.
First of all, you don't want, as was mentioned in the
previous opening statement, a small percentage of the
shareholders, whether it is 1 percent or 2 percent or 5
percent, to be able to dictate the operations of that company
if the other 95 percent don't want that to happen.
That is no better than executives running a company for
their own behalf and ignoring the interests of the
shareholders. So I suggest that there be, in conjunction with
proxy access, a majority vote requirement so that for anybody
to be seated on a board you have to have over 50 percent of
those voting shareholders vote for it or they don't get on the
board. If there are other remedies for that, I would appreciate
hearing them.
And what is the correct percentage? You certainly don't
want someone with one share or 100 shares or whatever to be
able to make a nomination to the board. That would create the
kind of chaos that was discussed in the previous opening
statement, but what is the correct percentage?
I know the SEC in one of their proposals has proffered up 5
percent. Is that right? Should it be less? Should it be more?
Should there be a difference in the percentage required for
the market capitalization of a company? Obviously someone of
any institutional holder or any other holder is considerably
less likely to hold a large percentage of Google or General
Electric or Exxon-Mobil than they are of some hundred million
dollar small cap company where you could easily have
shareholders, institutional or otherwise, owning 10 percent or
20 percent or so forth. And so should there be a different
percentage there?
And lastly, what disclosures and what procedures would be
correct to make sure that this is done or can be done in the
proper manner?
I look forward to hearing from the panel on those issues,
and also your opinions generally on the issue, and I yield back
the balance of my time.
The Chairman. Are there any further opening statements? If
not, we will--oh, the gentleman from Texas.
Mr. Hensarling. Thank you, Mr. Chairman.
As we approach this very important subject, I hope that we
will approach it with a certain amount of caution. I once again
hope that as the SEC looks at this issue, as do we, that first
we do no harm.
I certainly believe that the corporate structure and our
corporate governance laws have a lot to do with the creation of
jobs, hope, wealth, and opportunity in America and the type of
very systemic change that we are looking at with this
particular issue. I'm concerned about the adverse consequences
it might have on the wealth and job creation that we see coming
out of our corporate structure in America today.
I look at other countries, particularly in the European
Union, that appear to have a system of proxy voting that is
perhaps being contemplated today. I don't think I see as much
robust wealth creation as what I see in America, and I do think
this is an issue that goes to the heart and the ability of
corporations to remain profitable. I also note that this Nation
has a long history of allowing our State law to govern the
corporation's ability in many respects to manage its own
affairs.
And so I think that although the issue is meritorious, it's
one that we should be very, very careful about how we proceed.
It also may be somewhat premature as the SEC has yet to take
action. As I listen carefully to my good friend from California
there is also another option for people who are unhappy with
corporate governance. They don't only have the option to sell,
they also have the option to buy, and they can always buy more
stock and gain even a greater influence in the corporate
affairs of that particular corporation.
With that, Mr. Chairman, I look forward to hearing the
testimony of our panelists, and I yield back.
Mrs. Maloney. Mr. Chairman.
The Chairman. Yes, the gentlewoman from New York.
Mrs. Maloney. I, first of all, would like to thank you for
following up on the June meeting we had with all five SEC
Commissioners. There was a general agreement for a follow-up
hearing on the issue of the proxy access; it is tremendously
important.
Since our hearing, the SEC has published for comment two
proposals to amend its rules and the comment period on both of
these proposals will end on October 2nd. I believe many Members
of Congress and the public will be commenting on it and I'd
just like to counter some of the statements saying that this is
premature.
I think it's very important that we hear the perspectives
of the witnesses on these proposals prior to the end of the
comment period and have their judgment as we formulate possibly
our own comments that we may want to put into the comment
period.
In any case I'm interested in what they have to say. I have
an opening statement, but in the interest of time I'm going to
put it in the record. Thank you.
The Chairman. We will now begin with the testimony and let
me start just on my left with Donald Kirshbaum, who is the
principal investment officer in the Office of the Treasurer of
the State of Connecticut.
STATEMENT OF DONALD A. KIRSHBAUM, PRINCIPAL INVESTMENT OFFICER,
OFFICE OF THE TREASURER, STATE OF CONNECTICUT
Mr. Kirshbaum. Thank you very much, Chairman Frank, and
members of the committee. I'm Donald Kirshbaum, and as said, I
am an investment officer in the Office of the Connecticut State
Treasurer, Denise Nappier. Treasurer Nappier is the principal
fiduciary of our $26 billion State pension fund, which manages
the retirement assets of our 160,000 pension beneficiaries.
I have a brief oral statement here and I have submitted a
longer statement, which I--
The Chairman. Without objection, all of the statements and
supporting documents of all of the witnesses will be made part
of the record.
Mr. Kirshbaum. Great, thank you.
Since taking office in 1999, Treasurer Nappier has been
actively involved in corporate governance. She particularly
believes that shareholder activism is a plan asset and uses
communication with companies in which we invest, including
proxy voting and shareholder resolutions, as a mechanism to
protect and enhance the long-term value of pension fund assets.
And again, pension funds by their nature are long-term
investors, so we're really talking about the long-term issue
here. Today's hearing addresses the two pending rules at the
SEC. Our office has extensive experience working with and
within these rules, and I'm pleased to share our experience
with you today.
There are essentially three issues in these rules. Proxy
access we have talked about, and there also are some issues
regarding advisory shareholder resolutions and electronic
forums. I'll spend most of my time on the first and then I'll
briefly touch on the other two.
Now we've talked about shareholder access to the proxy, so
I really won't go into details of what that is, but the issue
is for us that the board of directors is elected by the
shareholders and oversee the management of the corporation on
behalf of the shareholders who are the owners.
Most board members and boards perform their job very well.
However when shareholders believe the boards are not acting in
the best interests of the shareholders there are some things we
can do, but nominating directors on a company's ballot is not
one of them.
The existing mechanism for replacing directors is to run a
proxy contest on a challenge slate with a separate proxy card.
So there is a mechanism right now where shareholders can
nominate directors, but it is onerous and expensive.
It's a mechanism geared more toward corporate takeovers
than to improving the performance of the existing board. SEC
Chairman Cox agrees that a new mechanism is needed and has put
forward the access to the proxy proposals. We support the
concept here and also the--we continue to work with the SEC to
come up with a rule that is actually workable for shareholders,
and we'll go into some details of that in a minute.
Last year the second circuit court in AFSCME v. AIG ruled
that the SEC had been improperly allowing companies to exclude
access to the proxy resolutions. And we joined State pension
funds in North Carolina and New York and the AFSCME employees
pension fund filing such a resolution against Hewlett Packard.
The resolution received broad shareholder support; 43
percent of shareholders supported this resolution. This is not
a special interest or fringe--it's not something that only
special interests are interested in--that 43 percent represents
the core investors.
There were resolutions filed at two other companies which
received 45 percent in a majority vote, so this is mainstream
investors who are interested in access to the proxy. The large
vote led us to continuing discussions with the company, which
we are hoping will result in a productive conclusion.
Now one of the SEC rules, note it's a short rule, would
close this avenue to shareholders to file access to the proxy
resolutions. We believe that the adoption of this rule is not
necessary or appropriate and we would oppose the implementation
of this. With respect to the directors and goals on behalf of
their owners, when it's not happening this mechanism of access
to the proxy is needed.
There are two issues that have been highlighted in the SEC
rule. One is the 5 percent rule and the other is the disclosure
issues. As a pension fund investing for the employees, we're a
long-term investor. Also our asset allocation is spread over a
number of asset classes, and with respect to investments in
public equity we are very diversified and have a significant
portion of assets in core index funds.
This means that not only do we have long-term investments
in the broad economy but we do not build up a large holding in
any one specific company. Most public pension funds also have
the same type of investment strategy, and it's really mandated
by the nature of what a public pension fund is.
Because of that, the 5 percent ownership threshold really
does not work for long-term investors. The fact that--for
example, we hold over 3 million shares of Exxon-Mobil worth
over $330 million. However, 5 percent of Exxon-Mobil's
outstanding stock right now is worth $25 billion.
The 5 percent--we would have to invest our entire pension
fund in Exxon-Mobil to reach the 5 percent level. As it is, we
hold--even this large holding is only .07 of 1 percent. So we
need a mechanism in terms of the 5 percent rule that really is
workable, and that is one that we would hope that we can
continue to work with the SEC and others on.
The disclosure requirements in this rule also go far beyond
anything that shareholders would find useful in voting proxy
access proposal. As with the ownership threshold, it's not
clear that any additional disclosure is warranted, simply
because the proposal concerns proxy access.
The proposal itself would not change the board's
composition, which would only occur if the resolution were
adopted by a majority of shareholders and then the ensuing year
there would be the opportunity to nominate candidates for the
board.
So these disclosures are really overly onerous and really--
we don't see the benefit to the level of disclosure in the
rule, and again, would be happy to work with others to try to
come up with something that would be appropriate.
Let me just quickly say that there are two other issues.
One is the advisory shareholder resolutions. The SEC rule
requests comments on possible changes to the advisory
resolution process currently available under rule 14a-8.
Without going into detail, Treasurer Nappier opposes any
limitation to current shareholder rights to submit nonbinding
proposals.
This is--for 65 years these proposals have promoted
effective communication between shareholders, management, and
board members and I know that others will be testifying on
this, so I will let my comments for the record talk about the
detail on that.
The other issue, quickly, is the electronic forums which
are in the proposal. With regard to electronic forums we can
support them as a potential enhancement to the existing avenues
of communication. However were these electronic forums in any
way to substitute for any shareholder rights currently in
place, well, we would oppose those.
In conclusion, on behalf of Treasurer Nappier, I would like
to thank you for this opportunity to share our views with the
committee on these important issues. I would be happy to answer
questions and be of further assistance to the committee.
[The prepared statement of Mr. Kirshbaum can be found on
page 44 of the appendix.]
The Chairman. Thank you.
Next we'll hear from Ms. Ann Yerger, who is the executive
director of the Council of Institutional Investors.
STATEMENT OF ANN L. YERGER, EXECUTIVE DIRECTOR, COUNCIL OF
INSTITUTIONAL INVESTORS
Ms. Yerger. Good morning. Thank you for the opportunity to
be here on behalf of the Council.
By way of introduction, the Council of Institutional
Investors is an association of more than 130 public, union, and
corporate employee benefit plans with more than $3 trillion in
assets. They are responsible for safeguarding the assets used
to fund retirement benefits of millions of individuals
throughout the United States.
They have a very significant commitment to the U.S. capital
markets with the average fund investing about 75 percent of its
portfolio in the stocks and bonds of U.S. public companies, and
they are long-term investors due to their heavy commitment to
passive investment strategies.
As a result, U.S. corporate governance issues are of great
interest to members of the Council. The ability to file
shareowner proposals is particularly important to Council
members because they are unable to exercise the ``Wall Street
walk'' and sell their shares when they are dissatisfied.
Shareowner proposals provide an opportunity to present
their concerns to management and directors, to communicate with
other investors, to encourage reforms, and to improve corporate
performance. And over the past several decades, these
resolutions have motivated profound improvements to boardroom
performance in particular and the U.S. governance model in
general.
Under debate today at the SEC is whether the shareowner
proposal rule in general should be changed and in particular
whether shareowners should have the right to file resolutions
suggesting or mandating processes to include shareowner-
suggested director candidates on company proxy cards.
I'm going to tackle the second issue first. Because
directors are the cornerstone of our U.S. corporate governance
model, and the primary role of share owners is limited to
electing and removing directors, the Council believes owners
should have the ability to file access resolutions and the
marketplace at large should have the opportunity to vote on
whether those resolutions are in the best interests of the
companies and the owners.
The legality of any approved mechanisms ultimately and
appropriately should be determined by State courts and not
preempted by a new Federal mandate.
The Council applauds the SEC for again taking up the very
important issue of proxy access. We appreciate the many hours
the SEC staff and the Commission have devoted to developing the
two most recent proposals. Unfortunately, the Council strongly
opposes both proposals as currently drafted.
The Commission's shorter proposal would obliterate the
current rights of shareowners to submit binding or nonbinding
access resolutions. The only circumstance in which the Council
could possibly support the adoption of this flawed proposal
would be if it was accompanied by the adoption of another rule
that provided an alternative, meaningful approach to access.
Unfortunately this hasn't happened. The Commission's longer
proposal imposes such onerous requirements on proponents of
access resolutions that the proposal is empty and unworkable.
More specifically, the proposed 5 percent threshold for
submitting a proposed bylaw amendment is too high a barrier for
owners who routinely file resolutions.
Even the 10 largest public pension funds combined would be
unlikely to meet this threshold at a public company of any
size, be it a large, mid-size, or small cap company. In
addition, the proposed disclosures are unnecessary and overly
burdensome, and for some inexplicable reason are far more
expensive than currently required, even for shareowners
planning a hostile takeover of a public company.
Also inexplicable are the Commission's reasons for imposing
such excessive requirements on proposals that ultimately would
have to face the test of the marketplace and be approved by a
majority or even in some cases the super majority of the
outstanding shares.
The Council believes the end result of these onerous
requirements would be that few if any shareowners would ever
again have the ability to exercise what we believe is a
fundamental right, the right to sponsor resolutions addressing
the processes involving the election of directors.
Speaking of fundamental rights, the Council strongly
opposes any shift from the current SEC rules governing
shareowner proposals in general to a State-by-State, company-
by-company model. We believe the uniformity and consistency
provided by the current Federal oversight model is in the best
interests not only of Council members but of other owners,
companies, and the capital markets at large.
Notwithstanding our very strong opposition to both of the
SEC's proposals we stand ready to work cooperatively with the
Commission, this committee, my fellow panelists, and other
interested parties to develop meaningful proxy access reforms
that best serve the needs of investors in the capital markets.
Thank you.
[The prepared statement of Ms. Yerger can be found on page
94 of the appendix.]
The Chairman. Thank you.
Mr. John Castellani is next, the president of the Business
Roundtable.
STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE
Mr. Castellani. Mr. Chairman, and members of the committee,
thank you for inviting me here to talk about this important
topic.
Business Roundtable has been a strong supporter of
corporate governance reforms. We supported Sarbanes-Oxley. We
supported the enhanced listing standards of the exchange,
additional disclosures on executive compensation, and majority
voting of directors.
And as these reforms demonstrate, we are committed to the
highest standards of transparency and governance. Similarly we
remain committed to promoting the accountability and
responsiveness of boards, enhancing the transparency so
investors could make informed decisions, facilitating
communications between companies and shareholders, and creating
certainty and predictability for companies and their
shareholders.
As you know, the issue of proxy access has been debated
over the years and previous Commissions have concluded that
changing the current system is inconsistent with State law and
unworkable from a practical standpoint. Currently the SEC is
once again receiving comments about the two proposed rules
whose issuance followed a lengthy process of testimony by
experts from the legal, academic, corporate, and shareholder
communities.
The heart of these issues involved how corporate director
elections are governed and how a company proxy is used.
Director elections are governed by State law where the company
is incorporated and the proxy is a management mechanism for
shareholders to vote when not attending shareholder meetings.
Shareholders do have the right to nominate directors and
run campaigns but not on the company proxy. The SEC has
consistently recognized this and excluded director election
proposals from the company proxy.
Proponents of proxy access want to turn the system on its
head by creating a Federal rule which allows virtually any
board candidate to be placed directly on the proxy. As you
might expect, we're concerned with this for several reasons.
First and foremost, it represents a fundamental change to
the successful corporate model that has produced enormous
returns for all shareholders. Nominating committees of boards
exist for a specific reason, to identify qualified candidates
with expertise in judgment who represent all shareholders, not
one particular group.
We believe the proxy access proposal will result in special
interest board candidates and will politicize the director
election process. In this day and age of short-term holdings,
hedge funds and foreign government investment in U.S.
corporations, the last thing shareholders need are fractured
boards representing divergent constituencies or single-issue
board members.
Further, we believe such a process will discourage
qualified independent directors from serving. And finally, as
some proponents have suggested, we do not want the cost of the
special interest nominees to shift to companies and ultimately
to that company's shareholders.
Proponents of proxy access often cite the need for
additional reforms in the boardroom. The fact is, however, that
our companies have dramatically changed during the past 5
years. Indeed, we have seen more governance changes in the past
5 years than we have seen in the previous 50 years.
Each year the Business Roundtable surveys its own members
on governance practices, and the results this year speak for
themselves: 90 percent of our boards are made up of at least 80
percent independent directors; 71 percent of our boards meet in
executive sessions at every meeting; and 100 percent meet at
least once a year.
Seventy-four percent of our CEOs serve on no more than one
board other than their own, and 82 percent of our boards have
adopted majority voting for directors, coming up from zero in
just 2 years. Indeed that has been manifested, as was said
earlier, in the fact that the average tenure of a chief
executive officer is now down to 4 years, and 10 years ago, it
was 8 years.
These numbers demonstrate that company boards and
executives have transformed themselves and are demanding
greater accountability and exercising more oversight as they
should. Shareholders now have a true ``yes'' or ``no'' vote on
board candidates and these votes provide a meaningful voice in
the director election process.
And now there is enhanced dialogue. Board members regularly
meet with shareholders, answering questions and discussing
everything from compensation to mergers to capital
expenditures.
Companies desire to attract and retain shareholders because
it is in their best interests to do so. In light of these
reforms, the challenge now is to ensure that boards can attract
and retain qualified directors and leaders who are able to
innovate, increase revenues and profits, and ultimately
increase shareholder value.
Given the record of reforms and our belief that politics
and narrow agendas have no place in the boardroom, we believe
that the SEC is correct in reaffirming its exclusion of
director election proposals from the proxy. Simply put, proxy
access is a bad idea whose time has passed.
Preserving the current balance between shareholders,
boards, and management will allow corporate directors to
continue on focused on what they are there to do, provide
judgment and oversight and help create long-term value for all
shareholders.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Castellani can be found on
page 39 of the appendix.]
The Chairman. Next we have Mr. Timothy Smith, who is the
senior vice president and director of social investing at
Walden Asset Management, and also the chair of the Social
Investment Forum.
Mr. Smith.
STATEMENT OF TIMOTHY SMITH, SENIOR VICE PRESIDENT-DIRECTOR OF
SOCIAL INVESTING, WALDEN ASSET MANAGEMENT
Mr. Smith. Thank you, Mr. Chairman, and members of the
committee. It is an honor to provide testimony today. As you
have heard, I work with an investment firm in Boston, Walden
Asset Management. I also serve as the chair of the board of the
Social Investment Forum. But in my testimony today, I'm also
going to refer to my 30 years of experience working for the
Interfaith Center on Corporate Responsibility, which is a
coalition of religious investors with approximately $110
billion in assets.
Together we have decades of experience in addressing
companies and have used the shareholder resolution process to
good effect as an essential tool for over 35 years.
My comments today are going to focus on the shareholder
resolution process, part of the SEC concept releases rather
than on the access issue. If you look at the three major parts
of the SEC concept, if adopted, these concepts would either
eliminate entirely or severely limit the ability of any
investor to sponsor a shareholder proposal. The result would be
a curtailment of shareholder rights and, I would suggest, the
elimination of meaningful investor input to corporate boards
and management.
The SEC has proposed three things for us to think about,
one they call the opt-out approach.
The SEC asked for comments on whether companies should have
the right to withdraw from the shareholder resolution process.
An opt-out option would have significant negative consequences.
The most unresponsive companies would be likely to opt out.
Just imagine a scenario where a board is criticized for
poor governance, irresponsible behavior for example, backdating
of options that leads to legal action against the company. They
simply decide they don't like the criticism and decide to opt-
out, a disaster.
The second proposal the SEC offers is the electronic forum
or chat room. Should the Commission provide a provision whereby
the electronic forum exists instead of the shareholder
resolution process?
We strongly support new forms of electronic communication
between investors and the board and management, not as a
substitute for, but as a supplement to, the existing resolution
process. The present proposal about the electronic forum has
many unanswered questions. For example, what if you're an
institutional investor, as the State of Connecticut is; maybe
you own 500 companies. How are you expected to monitor 500
electronic forums, and what if there is a vote of some sort or
a poll? Who is really in the forum to participate and what does
the poll result mean? So at present the idea of an electronic
forum as a substitute for shareholder resolutions is fatally
flawed.
The third part of the proposal or concept rather that the
SEC raises is increasing the thresholds for resubmitting
resolutions. They suggested you needed to get a 10 percent vote
the first year, 15 percent the second year, and 20 percent the
third year. It's important to assess who is affected by the
present shareholder resolutions and who needs relief. In the
year 2007 there were fewer than 1,200 resolutions filed at
about under 1,000 companies, and this represents less than 20
percent of companies on the stock market.
Clearly the business community is not burdened
significantly by the resolution process. And let's add to the
fact that often when resolutions are sponsored, the companies
negotiate dialogue, have discussions with the proponents and
they're withdrawn because agreements are reached.
I would suggest, in summary, that the shareholder
resolution process is not a burden on companies, but changing
the thresholds would be a real burden on proponents. On issues
over the years, as varied as apartheid in South Africa to
corporate governance reforms like majority vote for directors
or climate change, sometimes investors need a couple of years
to study an issue before they start voting for it. If you raise
the threshold, you will cut off many of these issues before
they even get started.
For example, the Institutional Shareholders Services
reminds us that this last year only under 200 shareholder
resolutions on social and environmental issues came to a vote
but 81 percent of them got the votes to come back. With the new
rule, only 36 percent of them would come back. This would
negatively impact the ability to raise important social
governance and environmental issues.
So I conclude, Mr. Chairman, by saying the impact of these
shareholder petitions, these resolutions, is demonstrable, it's
clear, it has a track record over close to 40 years, and it
makes a difference in corporate thinking, in corporate
behavior, in corporate policies. The SEC should not be allowed
to take steps that would disadvantage the ability of investors
to petition the companies in which they are owners through the
shareholder resolution process.
Thank you.
[The prepared statement of Mr. Smith can be found on page
59 of the appendix.]
The Chairman. Next, Mr. Paul Schott Stevens, who is the
president and chief executive officer of the Investment Company
Institute.
STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, INVESTMENT COMPANY INSTITUTE
Mr. Stevens. Thank you, Chairman Frank, Congressman
Neugebauer, and members of the committee. I'm pleased to be
able to take part in today's hearing.
Mutual funds and other registered investment companies that
are represented by the Investment Company Institute have a
unique position in the debate over shareholder proxy access.
Our members offer the investment vehicles of choice for
millions of Americans saving for retirement, education, and
other goals. They hold approximately 25 percent of the
outstanding shares of U.S. companies and they have an
obligation to vote those shares in the best interests of fund
investors.
But funds are also issuers of stock with their own
shareholders, their own boards of directors, and their own
proxies, so we understand the importance of the SEC striking
the right balance when changing longstanding rules on
shareholder access to and use of a company's proxy.
In considering this issue we asked, what is the right
result here for the fund shareholders that our members serve
and for other long-term investors? Our conclusion was that
under prescribed circumstances, corporate shareholders should
be able to place their proposals or bylaw amendments related to
director nomination procedures on a company's proxy.
Nonetheless, the ability to piggyback on a company's proxy
should not be granted lightly. Care must be taken to ensure
that the Federal securities laws do not inadvertently
facilitate efforts to use a company's proxy machinery at the
company's expense in the service of narrow interests or in a
way that redounds to the detriment of the company and its
shareholders as a whole.
How can the SEC craft a rule that achieves this balance? We
believe the Commission has rightly identified four areas in
which standards must be set. Let me briefly give you the
institute's view on each.
The first concerns the intent of the shareholders seeking
access to the proxy. We strongly agree with the Commission that
access should be limited to proponents who do not intend to
change or influence control of the company. Shareholders
seeking to challenge corporate management or to exert control
over the company have recourse to the existing mechanisms for
proxy contests. They should not be granted license to pursue
their objectives at the companies' and other shareholders'
expense.
The second criterion involves the ownership threshold. It
is entirely appropriate to limit the privilege of access to the
proxy machinery to shareholders with a significant ownership
interest. The SEC has proposed that proponents must be required
to hold collectively a 5 percent stake. Our research shows it
is not uncommon for even a single institution to hold 5 percent
or more of a public company.
In the fourth quarter of 2006, we estimate that 87 mutual
fund complexes had a total of almost 1,900 holdings of 5
percent or more of U.S. companies, and mutual funds are not
alone in this regard. Many kinds of institutional investors
have holdings concentrated at this level, among them, some
public pension funds.
For example, based on its most recent 2007 filings with the
SEC, it appears that the State of Wisconsin Investment Board
has 5 percent or more of the stock of 28 U.S. public companies.
All of them, I should note, small cap firms.
Hedge funds very commonly seek to assemble large positions
in public companies for their own ``activist purposes.'' We
believe the Commission should study the shareholding patterns
and establish a threshold sufficiently high, 5 percent or even
more, to ensure that the process will be used to advance
interests common to many shareholders.
Third and similarly, access to the proxy machinery should
be limited to long-term shareholders who meet a minimum holding
period for their shares. The Commission has proposed that
proponents be required to have held their shares for one year
or longer. We believe that is a minimum acceptable threshold
and expect to recommend that the SEC consider requiring a
longer holding period.
Again, the standard here should work to ensure that
shareholder proponents are committed to the company's long-term
interests.
Finally, we support the requirements of the SEC proposal
that shareholder proponents disclose their background,
intentions, and course of dealing with the company. This
information will be highly material to other shareholders and
to the marketplace in general in considering a proposed bylaw
amendment.
In sum, according shareholders access to a company's proxy
for these purposes is appropriate subject to the conditions I
have described. Generally we believe the Commission's proposed
approach will advance the interest of investors, including
millions of mutual fund shareholders. We stand ready to work
with the Commission and this committee and the Congress on
these important issues, and I thank you for the opportunity to
present our views.
[The prepared statement of Mr. Stevens can be found on page
78 of the appendix.]
Mr. Kanjorski. There seems to be quite a clash as to the
panel. Who would make the argument, just leave the status quo
as it is and forget the two proposals by the SEC?
Yes.
Ms. Yerger. Certainly, I think from the Council's
perspective, and our members' perspective, we would prefer the
status quo to what has been proposed by the SEC. I sort of
explained the key reasons why we oppose the proposals.
The status quo would enable owners to continue to present
proposals on and submit them for consideration by the owners at
large and let the marketplace make a determination about what
the appropriate access mechanism is. And indeed if it runs into
a problem with State law constraints then the issue would be
challenged in State court.
Mr. Kanjorski. Yes.
Mr. Smith. Yes, sir. We would also agree that the present
situation is better than the two proposals as they are
presented. The second longer proposal, even with the 5 percent
access clause, takes away shareholder rights, as I described in
my testimony. And we feel the 5 percent actually makes it a
rather unworkable proposal.
And of course the first, shorter proposal just doesn't give
the right of access at all, which we would disagree with. So
both of them I think as presented have enough flaws that we
hope they will not be passed.
Mr. Kanjorski. Is there any State in the union in their
corporate law that allows no access for voters or do they all
have methodologies in which to reach their--
Mr. Castellani. I'm not aware of one. I believe they all
have some form of access.
Mr. Kanjorski. What are the most restrictive States? Is it
reasonable to assume the great State of Delaware would be very
restrictive or not?
Mr. Castellani. No.
Mr. Kanjorski. How--obviously this didn't just come about.
I'm rather surprised. I sort of thought the people's argument
would be on the side that you're looking at greater access and
a new rule, but apparently you're looking at this as
infringement upon the existing capacity to be heard.
Mr. Kirshbaum. The issue of what is currently permitted
based on the decision of the second circuit court of appeals
that last year for the first time permitted--in a long time,
the proxy access resolutions to appear. Previously the
Securities and Exchange Commission had permitted companies to
not put these resolutions on their proxy, granting them no
actions.
And so last year was the first year that there were these
three shareholder resolutions on access to the proxy. We
believe that process worked well during 2007 and also that
there was very significant shareholder support for these
resolutions, and we think that the--if the SEC just took no
action at all this newly returned right to file these
shareholder resolutions would be a good--good to continue next
year.
Ms. Yerger. And I should note that in 2003, the SEC did
release a rule that would have mandated an access procedure at
all companies, and the Council indeed would support such an
approach. We believe, and we agree with fellow panelists it
should be a limited tool. In fact, the Council's policy is that
access to the corporate proxy card to actually put someone on
the card should be limited to 5 percent owners or groups who
have held for at least 3 years.
So we agree that this should be a tool for long-term
owners. It should not be used for control purposes and it
should be very limited in scope. But what's on the table right
now at the SEC isn't an access proposal that would be mandated
for every company. It's an issue about whether owners can file
proposals suggesting these mechanisms.
During the past proxy season three such proposals, as John
summarized, were presented. They were very limiting and I think
restraining. I think they proposed 3 percent owners or groups
could put one or a few candidates on a proxy card, and there
was very strong market support for that.
So I think the Council's perspective is yes, we would love
to see a rule that's mandated that applies to all companies,
but if we're--looking at the current situation, what we want is
at least access to the card to submit proposals recommending
different kinds of procedures and let the marketplace vote on
those.
The Chairman. Thank you. Apparently Mr. Campbell has been
designated the Republican spokesman on this issue, which is
fine with me, so I'll recognize the gentleman from California.
Mr. Campbell. I can't say, Mr. Chairman, that I speak for
all Republicans on this committee necessarily on this issue,
but--
The Chairman. Do you meet the 5 percent threshold?
Mr. Campbell. Yes, I probably do meet--are there more than
20? I may meet the 5 percent threshold. But let me ask--Mr.
Stevens I think raised some very interesting points, that a
number of these mutual funds have more than 5 percent holdings,
but I also understand from the pension fund side that many of
you have restrictions in order to have diversity where
regardless of the market cap for the company you want to keep
your interests at 1 percent or below.
But it would seem to me that it would be unwise to have 5
percent if that means a Fidelity, for example, just to pick
something out of the air, some big mutual fund has the
opportunity to go on 60 or 70 different companies and have
access to that proxy for--unilaterally without any other
shareholders being involved.
Do the rest of you agree with that? I sense that Mr.
Stevens thinks the threshold should be higher than 5 percent.
Do the rest of you agree with that and/or if so do you have an
alternative idea?
Mr. Smith. Mr. Campbell, I think that you raise a very good
theoretical question, but in fact we should be clear that the
right of access to nominate directors is probably only going to
happen in a company that is dysfunctional and whose board is
not serving the share owners.
I think proponents are only going to seek to nominate
directors in such companies. Secondly, if there was a frivolous
nomination, it wouldn't pass because the vast majority of
investors, the Fidelities of the world would say, ``This has no
meaning, I am voting against it.'' It would go nowhere.
So the third thing to say is that in theory you are right
that the Fidelities of the world could be proactive, but they,
in their corporate governance guidelines on their Web site,
have not defined their role to be an active, engaged proponent,
more an active proxy voter. And there's a very real difference
between a pension fund or a proponent who thinks that
engagement of companies is an appropriate thing to do and a
mutual fund who feels, as we heard Mr. Stevens say, it's their
fiduciary duty to vote the shares, but they don't feel it's
appropriate to go further.
Mr. Campbell. Mr. Stevens, I think, and then we'll go to
Mr. Kirshbaum.
Mr. Stevens. Yes, I just respond that in the situation that
Mr. Smith describes, if the company is truly dysfunctional,
will it be so hard to get a group of shareholders that are like
minded at a 5 percent level or so to say, ``We need to fix
this,'' because the SEC's proposal does not limit it to one
shareholding. It's a group of shareholders who can get
together.
In fact, the electronic forum is intended to extend to all
shareholders an opportunity that now exists for institutional
shareholders to communicate freely about matters affecting a
company whose shares they hold. So it would facilitate that
process.
But the question we ask ourselves is, should a single
institution at whatever level is chosen, be able to exercise
that, and will there be the appropriate restraint. I hope that
the proposal, if in fact it is adopted, would only be used in
exceptional circumstances. But I agree with Mr. Castellani that
it is a significant intrusion into the normal way in which
corporations are and frankly should be managed.
Mr. Campbell. What do you think is the right solution? You
are now chairman of the SEC, so what--
Mr. Stevens. Well, you know, I said in my testimony that I
think we need to study the shareholding levels because I just
don't think that there is enough understanding about the
aggregations at different market capitalization. And perhaps a
refinement along the lines of what you suggested--very large
companies, perhaps a smaller threshold, smaller ones, a
different one.
So I think that's something that ought to be studied in the
proposal process. Our instinct is that 5 percent is not an
unreasonable threshold for this purpose.
Mr. Campbell. Mr. Kirshbaum, and then we'll go to Mr.
Castellani again.
Mr. Kirshbaum. The 5 percent is a little confusing because
we're really talking about four different steps of a process
here of which we're sort of--we have to clarify the 5 percent
on two of those steps. The first is that in the proposed SEC
rule the 5 percent refers to the number of shareholders that
would be necessary to file a resolution changing the bylaws of
the company to permit access to the proxy.
Under the previous rule put forth under Chairman Donaldson,
the 5 percent had to do with how many shareholders would be
necessary to actually nominate somebody. So the 5 percent in
the current rule has to do with just getting the shareholder
resolution out there.
The second step is, of course, the shareholders themselves
voting on that resolution where a majority would be needed to
make that change to the bylaws. The third step would be the
nomination itself. And again under the process in the proposed
rule, that level would be determined in the actual bylaw
amendment that was filed for access to the proxy.
Again, under the Donaldson proposal that was more clearly
set out in the rule. And then of course the fourth piece is the
actual election itself. No one is going to be elected to the
board unless the shareholders, all the shareholders pass the
vote saying the majority of them support the nominee.
So I think that the 5 percent rule needs to be, at least in
terms of the putting the issue in front of all the
shareholders, that level is too high. And because a majority of
shareholders have to both support the change in the bylaws to
put the access to the proxy in place and then the
shareholders--again, the majority of them have to vote to elect
new members of the board, we think that that addresses the
issue that was raised about the narrowness or the special
interests. You can't be a narrow special interest candidate and
get a 50 percent vote on either of these.
Mr. Campbell. My time is up, but Mr. Chairman, could Mr.
Castellani and Ms. Yerger respond? Thank you.
Mr. Castellani. Just a point of information and two
comments. One, information. Of the Business Roundtable's 25
largest companies, 20 of them have a single shareholder that
holds at least 5 percent. The remaining five companies would
take two shareholders to meet the 5 percent threshold.
Two comments. In my own corporate experience, certainly in
my company and certainly with our members, if this is an issue
of communications, we spend our time trying to get Mr.
Stevens's members and Ms. Yerger's members to buy 5 or 10
percent of our companies. Indeed, anybody who owns that gets
the attention--or could potentially own it gets the attention
of the board and the management. We are trying to sell our
shares to the members that are represented here.
The second is that in the comments that came as a part of
the roundtables that the SEC held in proposing these two
alternative rules, a number of issues were raised about who the
shareholders are, the voting process, what do you do with
broker-dealer held accounts, which could represent a
significant portion of the shares, and what is the role of the
proxy advisory services? There are lots of things--what is the
role, indeed, of the process by which we now count shares,
which does indeed present some problems?
There are lots of issues that have not been resolved that
were raised in the hearings at the SEC, the roundtables of the
SEC that bear on this election process, some of which can bear
very significantly on them, so that it is not a very true and
clean vote of all of the shareholders voting for or against any
one of the proposals that are on the proxy.
Ms. Yerger. I just want to note quickly that I'm not a
lawyer, so maybe I'm naive when I think about rules and
regulations, but I think they should be grounded in reality.
And what we're talking about here is again how many share
owners need to be--to get together. What is the shareownership
to actually file a proposal that people would end up voting on
about a mechanism to then put a candidate on management's proxy
card?
And the fact is that the 10 largest institutional money
managers, and many of them are not just institutional money
managers but also mutual fund companies, have never, at least
in our research in the past 10 years, sponsored a shareowner
resolution. So we need to be thinking practically about who
actually would be filing these proposals.
Even though Mr. Stevens' members may be supporting these
proposals when they come on management's proxy card, they tend
not to sponsor them.
Mr. Campbell. Thank you.
The Chairman. The gentlewoman from New York.
Mrs. Maloney. Thank you, Mr. Chairman.
Mr. Stevens, the SEC proxy access proposal will also allow
the establishment of electronic shareholder forums that could
potentially greatly increase interaction among shareholders and
make it easier for them to organize and to push management to
pursue shareholder interests.
Given the fact that so many investors today use the
internet to monitor their portfolios and to make their
investment decisions, I personally think this would be a useful
tool, and you have testified in support of them.
Do you think that investment companies would establish or
take advantage of the electronic shareholder forums discussed
in the SEC proposal?
Mr. Stevens. We've discussed the proposal with our
membership and they are very supportive of it. It extends
authority that has existed for some time for institutional
investors to engage in a dialogue about matters that concern a
company whose shares they hold. This would now extend it to
rank and file investors so that there would be an even broader
opportunity for an exchange of views.
More generally we think the SEC's rules should make the
maximum possible use of the new technologies like the internet,
and this is a good step in that direction.
Mrs. Maloney. Thank you. I'd like to ask all of the
panelists this same question. Much of this debate centers
around the rights of the minority versus the rights of the
majority and looks at the 5 percent shareholder threshold and
the one-year holding period, and I'd like each of you to
comment on where you stand on those two proposals.
I believe, Mr. Kirshbaum, you support, you think the 5
percent is too high. Do you support the 1-year holding period?
Is that too long or too short?
Mr. Kirshbaum. The 1-year holding period we do support and
we do feel that the--as long-term investors and as--that the
holding period is a more appropriate approach to this than the
number of shares that you own, the long-term shareholders are
really the ones who are looking for the long-term interests of
the company. They are not in and out, they are not looking for
a short-term gain. And if we're looking for a measure of
interest in the long-term interest of the company, the holding
period is much more important than the number of shares.
Mrs. Maloney. Ms. Yerger, could you testify whether you
think that 5 percent is too high or too low and the 1-year
holding period?
Ms. Yerger. Five percent level to file a shareowner
proposal is too high in our opinion. We don't think it's too
high to actually put a candidate on the proxy card. We think
the one-year holding period is appropriate.
Mrs. Maloney. Okay. And Mr. Castellani, your position on
the two proposals?
Mr. Castellani. We don't feel that the proposal is
necessary in light of the reforms in majority voting that are
already in place and becoming more prevalent across publicly
traded companies.
So as to the holding period, it should be significant.
Long-term shareholders are hard to find and come by these days.
Mrs. Maloney. And Mr. Smith?
Mr. Smith. I would also agree that at least a 1-year
holding period, perhaps longer. We're trying to act on behalf
of long-term owners here, and I would reiterate what Ann Yerger
said, to get 5 percent of the shares to present an idea for a
vote by shareholders that then has to be voted on and then
nominating a director is plenty of safety valve, a 2-year
period in the process.
So I think a normal process for putting the resolution and
then looking at a 3 percent, for example, group of shareholders
to nominate the director would be appropriate.
I would just add to your very good comment about the
electronic forum; this is an electronic age. I think most of us
would support the SEC moving in this direction and we'd be
thrilled to have a discussion on, say, executive pay, online
with companies.
Mrs. Maloney. I think the chairman would like to chair that
discussion.
Mr. Smith. But as you know, the SEC proposal is to
substitute the forum for the resolution process, and you're
getting across-the-board opposition by investors on that.
Mrs. Maloney. And Mr. Stevens, 5 percent and the year?
Mr. Stevens. We have not supported the notion,
Congresswoman, of substituting the forum for the process that's
now in rule 14a-8, just to be clear. But no, we believe that
the SEC ought to carefully study the holding patterns.
I do not believe 5 percent is an unreasonable threshold
even for advancing a bylaws amendment of that significance to
allow shareholders to put nominees on the corporate ballot. And
I think that if there is a situation within a company that
requires such a move, 5 percent will not be difficult to
achieve.
Mrs. Maloney. My time is up, but the one-year holding
period, what is your position on that?
Mr. Stevens. We would support a minimum of one year.
Mrs. Maloney. Thank you. My time is up. Thank you.
The Chairman. The gentlewoman from Ohio.
Ms. Pryce of Ohio. Thank you, Mr. Chairman. I want to thank
the panel. I'm very sorry that I missed your testimony. It has
been summarized very adequately by my staff however, and so I
appreciate the hard work that went into preparing for this.
Let me ask a question that occurs to me. Boards composed of
directors with fractious and conflicting interests is probably,
currently the norm in Europe, and they have proven to be
ineffective governance models that don't really yield improved
shareholder returns. Now the reforms that we made through
Sarbanes-Oxley were designed to generate boards that are more
independent, not beholden to management or any interests other
than those of the shareholders.
And so given that, why do you think the SEC should take a
u-turn from the board independence reforms that we so
painstakingly enacted and open the door for this European-style
special interest-laden board structures that don't seem to be
having the desired effect in Europe. Does anybody have an
opinion on that?
Mr. Kirshbaum. I don't think that we are looking toward a
European model at all. What we're looking toward here is just a
way to add one or two additional board members to the ballot
and to have them be elected with--on a slate with majority
support from all of the shareholders.
I think that the issue of having a fractious board based on
small special interests is not going to happen here, again,
because of the protections in place from the majority vote to
elect the board members.
In addition, we are not talking about turning independence
on its head at all here. We are looking at an opportunity to
nominate more independent board members for the board. The non-
independent board members are usually those that either work
for the company or have some financial relationship with the
company.
The access to the proxy rule I don't think would result in
any further nominees of insider directors. I think what we
should be looking at, again, is a strengthening of the
independent directors on the board.
Ms. Pryce of Ohio. Does any panel member disagree with
that?
Mr. Castellani. Boards operate best when they are
independent, when they are informed, when they are inquisitive,
when they are engaged, and when they are cohesive.
Right now, State law which governs this area requires all
directors to represent all shareholders, so it is a very
different process than, for example, this body. Decisions in
corporate boards are not made by split votes or votes along
lines. They are generally made by discussion and consensus so
that the company can move forward very clearly. Our concern is
that if that was made to be the equivalent, functional
equivalent of a legislative body, then they would be unable to
take the kinds of risks and make the kinds of decisions that in
fact create shareholder value. So we would be concerned about
this turning it into a fractionated board that was divided
similar to some of the European models, if you're talking about
codetermination in particular.
Mr. Smith. I'd love to respond to this. The words Mr.
Castellani uses about a cohesive board and then a fractionated
board is setting up a strawman here. In fact, a good board
today should be a board that has vigorous debates. They should
work together with the shareholder interests in mind, so I
agree with him if that's the benchmark for a cohesive board.
But what we need is boards that are more independent, think
independently, and are willing to challenge the CEO or the top
management, not in a destructive way, but in a creative way.
And those create good board decisions. The kinds of board
members who are being discussed to be put on the Hewlett
Packard board, which I think we admit has some degree of
dysfunction, or the Home Depot board, which has changed; it has
two new board members on it. This is not bringing in people who
represent a ``special interest'' and are trying to push one
issue. These are people who feel that the company needs to make
some changes in its direction. The Home Depot board is
responding very, very positively, under new management
leadership by the way as well as new voices on the board.
So we would support the idea of having a board that is
working together for shareowners. But I think the great fear
that the Business Roundtable brings up, that bringing in some
independent, new voices on a board is somehow going to make a
board dysfunctional is a myth. Some of our boards are
dysfunctional already. Bringing in new people might be a breath
of fresh air that would get a company going down a new track.
Mr. Castellani. Could I respond to that, because that is a
mischaracterization of my position. Of course we want vigorous
debate in boards. And the two examples that were cited, Hewlett
Packard and Home Depot are examples of what I am saying is
occurring across all of the large companies and across
corporate America, and that is the boards responded in and of
themselves after discussions with the shareholders, to improve
their governance.
Mr. Smith. After discussions with the shareholders?
Mr. Castellani. After discussions with the shareholders,
which we very much support. You know, communications with the
shareholders are key to this and key to ensuring that the board
is acting in all of the shareholders' best interests. So no,
we're not asking for diminished communications; in fact, quite
the opposite. And now we're not saying boards shouldn't have
vigorous discussion about important issues for the company. But
ultimately what boards need to do is act cohesively on behalf
of all shareholders.
Ms. Pryce of Ohio. My time has expired. Thank you, Mr.
Chairman.
The Chairman. I'm going to take off from there, Mr.
Castellani, because I'm glad you clarified it, but I must say
in your original statement there was one thing you said that
did trouble me, which was that you didn't like to see split
votes.
Now it's one thing to say you don't want people being
representative of different issues, but split votes are a sign
of rational thought going on. The absence of split votes means
group think. I am struck by Warren Buffett's note that he has
now been excluded from the compensation committees of the
boards that he was on. Mr. Buffett has written that he has been
on 32 boards and after he dissented on one compensation
committee he was never again on the compensation committee.
So I am troubled by your dislike of split votes. People
are--well, that's what you said.
Mr. Castellani. No, my description is that boards operate.
Boards don't operate by votes and then move forward. Boards
operate by discussion, disagreement but then ultimately the
best boards operate by coming to a consensus and moving
forward.
The Chairman. Well, I just think that's not the way human
decisions go forward, and the notion that you never have a
split vote is an invitation to group think. Now it is possible
to have different votes without there being a dysfunction, and
the notion--I really think--and it's what Mr. Buffett seemed to
me to be suggesting.
The view that in the end we all have to vote the same,
that's not a requisite for anybody to function well. And a
notion that a dissenting vote is somehow a bad thing or a sign
of dysfunction really does trouble me.
Mr. Castellani. Well, Mr. Chairman, I'm certainly not
trying to give that opinion, but I would point, for example, to
an example that we--both sides of this issue use as a reason
why you should take our position, which was what happened at
the Hewlett Packard board.
A very, very substantial portion of that dysfunction
occurred when board members went outside the normal--
The Chairman. Right, which is not what we're talking about,
so it's irrelevant to whether or not you said split votes.
Leaking outside is--no, Mr. Castellani, that's simply not even
remotely comparable.
We're talking about of course you shouldn't then go and
leak and distort other people's vision and wiretap them, and if
you think that when you vote ``no,'' you have to go out then
and be wiretapped, that's not any voting process I've ever
seen.
It's your dislike of split votes. I think you make a grave
error and you--but let me ask you this then. You say boards
have gotten better?
Mr. Castellani. Absolutely.
The Chairman. I have to say, and I am struck by the
people--I've been around this committee for a while, and the
people who are now telling me that boards are much better,
never acknowledged that they weren't good before, so they went
from good to perfect.
And if you have any comments from the Business Roundtable
or anybody else prior to the period of the last 5 years in
which people acknowledge problems I'd be glad to see them. I
don't think they're there, but the question would be what has
made them better, why have they improved?
Mr. Castellani. Well, those boards--and again--
The Chairman. You said that in general boards have gotten
better. What's been--
Mr. Castellani. Here are the fundamental things that we
believe have improved the board process.
The Chairman. No, I'm looking at the causality. I'm not
talking about the examples of improvement. But when things are
going along a certain way and then there's a significant change
I think it's relevant to look at the causality. What caused
those improvements in the last 5 years?
Mr. Castellani. Well, in large part the boards reexamining,
companies reexamining how those boards operated in light of
some of the scandals. Obviously no board, no company, no
management wanted to be in a circumstance where shareholder
value was destroyed because of improper behavior. So I think we
learned from all of the scandals and went back and improved our
processes, just as we daily improve our products and services
based on what we see going wrong, to ensure that that wasn't
going to happen in the preponderance of the U.S. corporations.
The Chairman. I understand, but was the increase a result
of outside agitation of shareholder activism, of even
politicians raising questions, did that have any impact in the
change to the board?
Mr. Castellani. I'm sure it had an impact, but for example
in our own companies, and within the Business Roundtable, it
was the chief executive officers themselves right after the
Enron scandals who stood up at our meeting subsequent--
The Chairman. Because of the scandals.
Mr. Castellani. --and said, ``That cannot happen to us.''
The Chairman. Let me just say, and I'll get to you in a
second, Mr. Smith. But I was struck--Sarbanes-Oxley has not
been the favorite act of a number of business people although
you have cited your support for it.
Mr. Castellani. I do support it.
The Chairman. But I was struck that we did get a letter
from the Chamber of Commerce of the United States in which they
gave Sarbanes-Oxley a lot of the credit for the improvement in
board performance. They did it in a context of saying that
therefore we didn't have to do anything about executive
compensation, but the Chamber did give Sarbanes-Oxley some of
that credit.
Mr. Smith, you wanted to say something?
Mr. Smith. I do, Mr. Chairman. Certainly Mr. Castellani is
absolutely right that the scandals woke up boardrooms but also
woke up investors, investors who lost virtually trillions of
dollars as the market started losing confidence, woke up,
became more active owners, became more engaged owners, and
became much more actively involved in pressing for certain
forms of board accountability.
Now often, as Mr. Castellani and I would agree, boards
readily responded positively to those calls, for example,
majority vote for directors or even some companies that were
expensing stock options before it was required. So it's not
always a confrontation when there's a disagreement, but
certainly the input--I wouldn't necessarily always call that
agitation, but the input from investors has been key from our
point of view in fertilizing this process and sometimes
stimulating it.
And on other occasions when companies don't seem to get it,
when resolutions are sponsored on issues like majority vote for
directors and get a 50 percent vote, to their credit the Exxon
board, the Exxon-Mobil board and the Home Depot board, within 3
or 4 months puts that reform in place.
Now we needed to have shareholder leverage there to
encourage the board to take a stand. And I'd just get on my
soapbox again and say without the right to file shareholder
resolutions that the shareholder--
The Chairman. I appreciate that. I would just say you took
a little exception to my saying ``agitation'' but you
substituted ``fertilization.'' I think I'd rather have my
activity characterized as agitation than as fertilizer.
The gentleman from Kansas.
Mr. Campbell. Mr. Chairman, if I can just comment, I am
pleased to know that split votes can represent rational
thought, because you're likely to see a lot of rational thought
relative to the flood insurance bill later today.
The Chairman. Oh, I have never tried not to have split
votes. I think they are a very good idea.
Mr. Moore of Kansas. Thank you, Mr. Chairman. Mr. Stevens,
in your written testimony, you have discussed the uniqueness of
mutual funds as institutional investors being subject to
disclose their proxy votes. Today we're talking about access to
the corporate proxy, but I'm also interested in your views as
to whether other institutional investors should disclose proxy
votes as well. Would shareholders and companies benefit from
those disclosures by the others?
Mr. Stevens. Thank you for the question. It is true we had
reservations about the SEC uniquely applying regulations to us.
They went into effect several years ago. We have learned to
live with them, and every vote we cast with respect to every
company whose shares we own in our portfolios across our
industry are now there for all the world to see.
I think it would be very beneficial for other institutional
investors, particularly those in a fiduciary relationship to
their customers, to be required to make a similar disclosure.
Mr. Moore of Kansas. Thank you, sir. Thank you, Mr.
Chairman.
The Chairman. The gentlewoman from New York.
Mrs. McCarthy. Thank you, Mr. Chairman. I'm sitting here
and I'm wondering, when you were starting to talk about
dysfunctional boards, what is your opinion on some of the
boards that did not react fast enough or didn't know it was
coming when we had the mortgage crisis? Did those boards know
that what their CEOs were doing as far as putting the monies
out to people who shouldn't have been getting mortgages? I'm
just curious.
I mean, obviously, the proxy voters wouldn't have known
anything about it, because a lot of people didn't know about it
until it hit the fan. And then obviously it affected the whole
stock market, so that had to have a trickle-down effect. And I
was just curious if you had any thoughts on that. I mean, it
was going on. It didn't hit one company; it hit many companies.
Germany, from what I understand, the German bank was the one
that really started it rolling.
Mr. Castellani. Certainly any board, any board member
should know the breadth and extent of the company's activities,
and the consequences of the activities.
Mrs. McCarthy. Do they actually, though? I mean, do a lot
of the board members actually--they meet how many times a year?
Mr. Castellani. Indeed. Board meetings vary, but
typically--well, some meet every month. Typically, it's 8 or 10
times a year. Though what we've seen also in our data
consistently through the years that board members and board
meetings are taking more time, getting more information.
Committees are meeting more and more often for greater periods
of time getting in more and more information about the company,
so.
Mrs. McCarthy. Who gives them the information to make the
decisions when they're meeting?
Mr. Castellani. It comes from a variety of sources. It
depends on the committees and depends on the activity. But
typically, it comes from the company, committees, particularly
audit committees and compensation committees, but any committee
of a board is free and does avail themselves of outside
information, particularly those sensitive areas. For example,
the audit committee, the auditors report to the audit
committee, not to the management of the company.
Mrs. McCarthy. Again, I'm going to follow up with a
curiosity. Because when we saw a number of hedge funds get in
trouble, certainly mortgage companies getting in trouble, which
was a chain reaction, if the accountants, you know, when times
were good, they were making a lot of money, but didn't anybody,
you know, put forward or is it not the responsibility of the
board or the CEO to put forward, you know, we're making good
money, but we're taking a lot of risks here? I'm just--
Mr. Castellani. Oh, absolutely. I mean, risk assessment,
having had the responsibility for risk management in my
company, risk assessment is an important part of a board's
function. Absolutely.
Mrs. McCarthy. So they all failed?
Mr. Castellani. Well, you know, if they understood the
consequences of it and understood that it was coming forward, I
can't comment on the specifics of it because I'm not
knowledgeable about the industry in and of itself. But I would
make the general comment is that in some cases, companies will
fail with their products, with their services, and we want them
to fail. Because if there aren't failures, there aren't risks
being taken.
Now clearly that doesn't mitigate the impact of the
consequences of the failure in the case that you're describing,
but we want boards and we want companies to take risks.
Otherwise, they're not going to develop new products, new
services, and greater shareholder value. I don't think anyone
here would--
Mrs. McCarthy. I understand that, but it seems from the
Enron episode that we went through, then the mortgage bankers,
it's the little guy who has actually gotten hurt more than
anybody else. And I think that is something that should be a
concern to every corporation.
Mr. Castellani. Well, it is a concern, and I would point
out that it is the exception and not the rule. I mean, all the
scandals that we are talking about, Enron, whatever, however
many you want to mention, are horrible, and that they affected
a lot of people and caused trillions of dollars of damage.
They affected all of us, every other corporation, because
we exist to--and we prosper when we have an environment of
investor trust and public trust in what we do, and we suffered
when that trust was eroded. However, those are still a handful
companies against the 15,000 publicly traded companies that--
Mrs. McCarthy. Well, I agree with you, and I was the first
one defending a lot of companies, but I still think we on this
committee handled it in a fair-minded way. Mr. Smith?
Mr. Smith. Mrs. McCarthy, I think this is a case where a
cohesive board from 5 or 10 years ago who played by the rules
of the game then on subprime lending and didn't ask hard
questions, therefore didn't serve the company and the
shareholders well in the long term.
So how do you get voices from the outside who are canaries
in the coal mine or just raising a different point of view?
Shareholders actually were sponsoring resolutions with
companies like Countrywide, raising questions about subprime
lending before it was considered--well, unfortunately, the
disaster we see today.
Or the issue that's very much on the front pages today on
climate change; 10 or 15 years ago, investors began knocking on
companies' doors and raising questions about the risk related
to climate change. Happily, today you'll see hundreds of
companies acknowledging that risk, speaking out about it, and
day-by-day changing their policies.
But the boards had to be stimulated, activated to think
outside the box, whether you were an insurance company, whether
you're British Petroleum or not. That's not to say that the
boards did a bad job. It's just to say they played by the
expected rules of the road in their board meetings. And when
you have outsiders through the shareholder resolution process
saying why don't you think about it this way, it does--that
agitation does pay off.
Mrs. McCarthy. Thank you. I yield back the balance of my
time.
The Chairman. The gentleman from Missouri.
Mr. Cleaver. Thank you, Mr. Chairman. Mr. Castellani, thank
you very much for being here. Thank all of you for being here
today. In your prepared remarks, you said, given the strong
record of reforms and our belief that politics and narrow
agendas have no place in the boardroom, what do you--can you
break that down? What--I mean, politics and what narrow
agendas? Give me some examples.
Mr. Castellani. Sure. There are a number of narrow agendas
that exist, and in fact, one of the things that Mr. Smith has
addressed is a good example of them. When you talk about
various proxy proposals, they range in their attention from
things that are directly related to the governance of the
company--how is the board structured? Is it an annually elected
board or is it a staggered board? How are nominees brought
forth? Does the board have change of controls, circumstances,
and thing that relate to governance.
And then you get at the other end of the spectrum, well
meaning shareholders who have specific interests that may have
been frustrated somewhere else. For example, in my own company,
we had a group of shareholders who every year asked us to get
out of the nuclear shipbuilding business. Well, that was fine.
But it was 40 percent of our cashflow and of substantial value
to our shareholders.
Mr. Cleaver. Okay. But--
Mr. Castellani. Because they were against nuclear power.
Mr. Cleaver. Okay. What about the politics?
Mr. Castellani. Well, if those particular interests and
specific interests are represented on the board and that is the
only purpose of a board member to come to, for example, I've
used my company, which doesn't exist any more. We took it
apart--to come to every board meeting and say I'm not going to
support investment in the shipbuilding business because it is
nuclear powered shipbuilding, we should get out of it and push
that agenda, then it would be to the detriment of the
shareholders because they were benefitting greatly from the
profitability and the cashflow of that operation.
Mr. Cleaver. Now, I'm a United Methodist pastor, and we
own--the Methodist Church owns substantial stock in Coca-Cola.
And we went through the very same process you did by getting--
some years back--by trying to force Coca-Cola to divorce itself
from South Africa. And so you're saying that if--in a situation
like that, those individuals who are single-minded should not
have access?
Mr. Castellani. No. Because you did it from the standpoint
of a shareholder. What I'm saying is if the director, if a
director had that as his or her only--
Mr. Cleaver. Yes.
Mr. Castellani. --and disrupts all of the other operations,
then that's the concern we have.
Mr. Cleaver. But that's the whole point I'm making. You
don't want them to be directors, right?
Mr. Castellani. We want voices--
Mr. Cleaver. I know. But you don't want them to be
directors, right?
Mr. Castellani. We want diverse voices in the directorship,
but we want boards ultimately to reach consensus in operation.
Mr. Cleaver. Okay. So, if the wolfman and his friends are
on the board and people are investing in the silver bullet
factory, you don't want them on the board because--I mean, they
want the silver bullets produced at a much higher rate, because
they have a direct interest.
Mr. Castellani. If they hurt the interests of the other
shareholders of the company--
Mr. Cleaver. You don't want them on the board.
Mr. Castellani. --the majority of the shareholders, then,
no, they should not be on there.
Mr. Smith. Mr. Cleaver, Mr. Castellani and I are not too
far apart on this.
Mr. Cleaver. Well, we are. He and I are.
Mr. Smith. And I just wanted to explain that if the person
only had one issue and was on the board, that would be
disruptive. But as you know, sir, Dr. Leon Sullivan--
Mr. Cleaver. Yes.
Mr. Smith. --and Clifton Wharton were on General Motors and
Ford boards. They spoke out strongly on the South Africa issue,
and they were convincing. In the end, they helped bring the
board's decision around to the position held by the United
Methodist Church.
Mr. Castellani. Clifton Wharton was on our board.
Mr. Smith. That's right. And this is creative discussion
within the boardroom rather than--
Mr. Cleaver. My problem is--and maybe these are just words
that were not--that were put in your--that you wrote into your
report, and I shouldn't focus in on it. You said we believe
proxy access will result in special interest board candidates
and will politicize the director election process.
And I'm not saying people, you know, who purchase stock 2
weeks before a board meeting, and I think all of you agree that
they should be long term. But, I mean, I'm wondering when you
say special interest, are you talking about organized labor?
Are you talking about--I'm sorry?
Mr. Castellani. Could be. Could be. Any shareholder--
Mr. Cleaver. I mean, since AFSCME--
Mr. Castellani. Any shareholder who comes with a single
agenda that would be to the detriment of the other shareholders
of the--
Mr. Cleaver. Who determines whether they have a single
agenda?
Mr. Castellani. They do.
Mr. Cleaver. No, no, no, no. They may be speaking to an
issue, but they may have other reasons for being on the board,
and so, the board members--I mean, so you're saying that the
people on the board decide whether or not you are a single
agenda stockholder?
The Chairman. Would the gentleman yield?
Mr. Cleaver. Yes.
The Chairman. Because it's very relevant to two bills that
have come out of this committee. We've authorized and we talked
to the ICI about this as well as others, the Council of
Institutional Investors--we have authorized a suspension of the
potential of a lawsuit on fiduciary responsibility with regard
to Darfur and Iran. We have in this committee, and
overwhelmingly in the House, gotten more than 400 votes for
each bill. This made it easier for people to push for
divestiture either from Darfur in connection with their
activity, or the nuclear weapons in Iran. Would you
characterize people seeking to push for any kind of
disengagement in either Iran or Darfur, would they be in the
special interest category?
Mr. Castellani. Not if it was determined to be in the best
interest of all shareholders.
The Chairman. Well, but no. Excuse me. The ``if'' doesn't
work for now, Mr. Castellani. We're not in a hypothetical. If
resolutions were now put forward saying, cut off your
activities with the companies doing business in Darfur, cut off
Iran, would you characterize those as special interests?
Mr. Castellani. Boards have, boards and management have the
utmost responsibility to comply with the laws of the United
States. They will comply. If you make a law--
The Chairman. Well, Mr. Castellani--please answer the
question. I don't mean to be rude.
Mr. Castellani. No, I--
The Chairman. You're not answering the question. If it were
the law--we're not--there are things that people can be doing
that are investing that don't violate the law. Yes, I'm not
accusing people of breaking the sanction. But there are people
who want to go beyond the sanctions and say, yes, it's illegal
to do this. But we want to go beyond that. I'm not talking
about the sanctions bill. I'm talking about legislation that
allows people to say, I don't want my money being used to deal
with--to help these people in Darfur who are in power or Iran
where it's not legally required. And the question is--it seems
to be a fair question--would people seeking to get companies to
divest beyond what the law absolutely required with regard to
Darfur or Iran, be in that special interest category?
Mr. Castellani. If the board of directors determined it was
in the interest of all of the shareholders. If it--
The Chairman. You're not answering the question, Mr.
Castellani. I didn't ask you what the board--I'm asking your
characterization. You say there are these special interests.
It's an intellectual issue. You're just dodging the question.
Mr. Castellani. There are--
The Chairman. Do you characterize people who come and say
look--there's no if's here--I don't want my company, I don't
care how profitable it is. I don't want my company making money
off genocide. I don't want my company helping nuclear weapons.
Is that a special interest or not?
Mr. Castellani. Is it a special interest if I come forward
and I say I don't want my company investing in Massachusetts
because I don't like the Boston Red Sox? I'm a Yankees fan.
The Chairman. I would say that that was kind of silly.
Having answered your question, will you answer mine? I mean,
why do you refuse to answer the question? And do you really--
excuse me, Mr. Castellani, you know what? And I understand this
is off the top of your head, but equating dislike of the Red
Sox to equating a dislike of genocide, really it doesn't
advance serious discussion.
Mr. Castellani. No, sir, I--
The Chairman. I'm asking you the question and your refusal
to answer it frankly is more revealing than your answer.
Mr. Castellani. I can't answer a question that can't be
answered in the context of what is in the best interest of all
of the shareholders.
The Chairman. Here is the context.
Mr. Castellani. The board of directors makes that decision.
The Chairman. You know--I'm not--it isn't hypothetical.
It's Darfur today. In other words, you think it would be a
special interest and you'd be embarrassed to say so in your
characterization.
Mr. Castellani. No, sir.
The Chairman. Yes.
Mr. Castellani. There are specific issues that come before
any board of directors. A board of directors' deliberation is
to ensure that those specifics, whether it's an individual
product or an individual market or an individual political
circumstances are in the interest of all shareholders. That is
their fiduciary responsibility.
The Chairman. That's not the question I asked you. Mr.
Smith, did you want to--
Mr. Smith. Well, I'll try to answer it, not for Mr.
Castellani, but indeed the U.S. Chamber of Commerce says this
all the time about advocates who are raising questions about
subprime lending, about climate change, about diversity, about
corporate governance--
The Chairman. They say what all the time?
Mr. Smith. We are special interest groups who have no
interest in shareholder value. And it's a transparent myth used
of course to marginalize proponents. Mr. Castellani has not
said that today, but the business community too easily falls
into, I don't like the position you're raising, therefore,
you're a special interest group, rather than I just disagree
with the position you're raising.
The Chairman. Let me go back to the gentleman from
Missouri. I captured his time, and I apologize.
Mr. Cleaver. That was the point I was trying to make. You
said it perhaps more articulately. The problem I have is, you
know, somebody sitting on a board has the distinct and
exclusive power to determine what a special interest is, and
that troubles me.
Let me ask my final question. Has there been any evidence--
this is for anybody--any evidence in the United States or
anywhere else that would indicate that direct shareholding--
shareholder voting has destroyed a corporation?
Mr. Castellani. No, because it doesn't exist.
Mr. Cleaver. I'm sorry?
Mr. Castellani. No, because it doesn't exist.
Mr. Cleaver. You are absolutely right. We now agree. And so
since it doesn't exist, how do you know that it's evil?
Mr. Castellani. We're making our best judgment based on--
Mr. Cleaver. But your best judgment is prejudiced.
Mr. Castellani. On a model that works pretty darn well.
Ms. Yerger. If I can make one comment, I think that we
don't want to lose sight of the fact that when it comes to the
board of directors, they are elected by the owners. And anyone
who is sitting in the boardroom has been elected by the owners.
I have a lot of confidence in our marketplace. I have a lot of
confidence in the sophistication of our institutional investors
and our investors, and I don't think they would elect anyone
with a special interest only to represent them on a board. And
once they're sitting in the boardroom, they have a fiduciary
duty to represent all share owners. So I think we should
remember that this is about giving owners the power they
actually have, which is to elect directors.
The Chairman. Let's finish up with Mr. Kirshbaum.
Mr. Kirshbaum. Thank you. In terms of the special
interests, I think that anybody on the board, if someone
happens to be a member of a union, doesn't mean that they
represent the union. If they are a lawyer, it doesn't mean they
represent all lawyers. If they're a university president, it
doesn't mean that they're only there representing universities.
I think that picking out somebody just because of what
their background is, and saying that they have a special
interest, is just a false way of addressing this issue.
Everybody comes from some background, but they're all elected
by the majority of the shareholders to serve the interests of
all of the shareholders, and they act accordingly.
The Chairman. The hearing is adjourned.
[Whereupon, at 11:39 a.m., the hearing was adjourned.]
A P P E N D I X
September 27, 2007
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