NOTICE: This is an unofficial transcript of the Security Holder Director Nominations 
Roundtable that was held at the Commission on March 10, 2004.  This unofficial 
transcript has not been edited, may contain typographical or other errors or 
omissions, and is presented for convenience only.  In particular, please note that, 
while the unofficial transcript indicates that this event was a Commission hearing, 
it was not; it was held in a roundtable format.  An archive of the webcast of the 
roundtable can be found at www.sec.gov/spotlight/dir-nominations.htm. 
------------------------------------------------------------------------
             1   UNITED STATES SECURITIES AND EXCHANGE COMMISSION

             2

             3   In the Matter of:           )

             4                               )  File No. 57-19-03

             5   SEC ROUNDTABLE ON PROPOSED  )

             6   SECURITY HOLDER DIRECTOR    )

             7   NOMINATIONS RULES           )

             8   PAGES:    1 through 290

             9   PLACE:    Securities and Exchange Commission

            10             450 Fifth Street, N.W., Room 1C30

            11             Washington, D.C.  

            12   DATE:     Wednesday, March 10, 2004

            13

            14        The above-entitled matter came on for hearing, pursuant 

            15   to notice, at 9:05 a.m.

            16

            17   BEFORE:

            18        WILLIAM C. DONALDSON, Chairman

            19        ROEL C. CAMPOS, Commissioner

            20        PAUL S. ATKINS, Commissioner

            21        CYNTHIA A. GLASSMAN, Commissioner

            22        HARVEY J. GOLDSCHMID, Commissioner

            23

            24                Diversified Reporting Services, Inc.

            25                           (202) 467-9200



             1                          C O N T E N T S

             2                                                            PAGE

             3   OPENING REMARKS - Chairman Donaldson                       6 

             4   INTRODUCTION OF ISSUES - Alan L. Beller

             5   and Martin P. Dunn, Division of Corporation 

             6   Finance                                                   12 

             7

             8   PANEL ONE -  What problems in the proxy process

             9   need to be addressed?                                     14 

            10   MODERATORS - Alan L. Beller and Martin P. Dunn,

            11        Division of Corporation Finance

            12   PARTICIPANTS:

            13        LUCIAN ARYE BEBCHUK, Harvard Law School

            14        RANDALL S. KROSZNER, Graduate School of 

            15             Business, University of Chicago

            16        MARTIN LIPTON, Wachtell, Lipton, Rosen 

            17             & Katz

            18        NELL MINOW, The Corporate Library

            19        RICHARD H. MOORE, State of North Carolina

            20        STEVE ODLAND, AutoZone, Inc.

            21        ERIC ROITER, Fidelity Management & 

            22             Research Company

            23        DAMON SILVERS, AFL-CIO

            24

            25




             1   PANEL TWO - Is the proposal a reasonable solution?        74 

             2   MODERATORS - Alan L. Beller and Martin P. Dunn,

             3        Division of Corporation Finance

             4   PARTICIPANTS:

             5        RICHARD C. BREEDEN, Richard C. Breeden & Co.

             6        PETER C. CLAPMAN, TIAA-CREF

             7        THOMAS J. DONOHUE, U.S. Chamber of Commerce

             8        CHARLES M. ELSON, University of Delaware

             9        JOSEPH A. GRUNDFEST, Stanford Law School

            10        IRA M. MILLSTEIN, Weil, Gotshal & Manges

            11        PETER J. WALLISON, American Enterprise Institute

            12        RALPH V. WHITWORTH, Relations Investors, LLC; 

            13             Apria Healthcares Group, Inc.

            14

            15   PANEL THREE - The application of the proposal            131 

            16   of companies and investors.

            17   MODERATORS - Alan L. Beller and Martin P. Dunn, 

            18        Division of Corporation Finance

            19   PARTICIPANTS:

            20        WARREN L. BATTS, National Association of 

            21             Corporate Directors

            22        J. CARTER BEESE, JR., Allied Capital 

            23             Corporation

            24        FRANKLIN D. RAINES, Fannie Mae

            25        DAVID S. RUDER, Northwestern School of Law




             1        JEFFREY A. SONNENFELD, Yale University School of

             2             Management

             3        TED WHITE, California Public Employees' Retirement

             4             System

             5        SUSAN ELLEN WOLF, Schering-Plough Corporation

             6        ANN YERGER, Council of Institutional Investors

             7

             8   PANEL FOUR - Impact of the proposal on retail and         195

             9   other investors.

            10   MODERATOR - Martin P. Dunn, Division of 

            11        Corporation Finance

            12   PARTICIPANTS:

            13        EVELYN Y. DAVIS, Highlights & Lowlights

            14        LES GREENBERG, Commitee of Concerned 

            15             Shareholders

            16        LANCE E. LINDBLOM, The Nathan Cummings 

            17             Foundation

            18        DENISE L. NAPPIER, State of Connecticut

            19        PAUL M. NEUHAUSER, University of Iowa College 

            20             of Law (retired)

            21

            22   PANEL FIVE - Legal Issues                                 220

            23   MODERATORS - Alan L. Beller, Division of Corporation 

            24        Finance and Giovanni P. Prezioso, Office of 

            25        General Counsel




             1   PARTICIPANTS:

             2        JOHN C. COFFEE, JR., Columbia University Law 

             3             School

             4        JILL E. FISCH, Fordham University School of Law

             5        DAVID A. KATZ, Wachtell, Lipton, Rosen & Katz

             6        ROBERT TODD LANG, Weil, Gotshal & Manges

             7        DONALD C. LANGEVOORT, Georgetown University Law 

             8             Center

             9        E. NORMAN VEASEY, Supreme Court of Delaware

            10

            11   PANEL SIX - Impact of the proposal on proxy voting        258

            12   mechanics

            13   MODERATOR - Elizabeth Murphy, Division of 

            14        Corporation Finance

            15   PARTICIPANTS:

            16        RICHARD J. DALY, Automatic Data Processing, 

            17             Inc.

            18        JAMES E. HEARD, Institutional Shareholder 

            19             Services

            20        GREGORY P. TAXIN, Galss, Lewis & Co.

            21        JOHN C. WILCOX, Georgeson Shareholder 

            22             Communications, Inc.

            23

            24   CONCLUSION                                               287 

            25




             1                       P R O C E E D I N G S

             2             CHAIRMAN DONALDSON:  Good morning, everyone. 

             3   Welcome to the Securities and Exchange Commission's

             4   Roundtable to discuss our proposed rules regarding proxy

             5   disclosure of security holder director nominations.

             6             The proposal has evoked a considerable amount of

             7   interest and some strongly held views.  Since we published

             8   the proposed rule for comment in October, we have received

             9   literally thousands of comments, both form letters as well as

            10   many detailed, extremely thoughtful, critical, and

            11   constructive letters.

            12             It is in this latter vein that we welcome an

            13   extraordinary roster of experts to participate as panelists

            14   in today's roundtable.

            15             I want to take this moment to express the

            16   Commission's great appreciation to all of the panelists who

            17   will give us the benefit of their expertise and judgment

            18   throughout the day.

            19             We are grateful that you have agreed to help us

            20   wrestle with the complexities of this issue and to try and

            21   anticipate the consequences of any final rule adoption.

            22             We all know that the Commission has on several

            23   previous occasions considered proposals regarding the proxy

            24   process and the role of shareholder director nominations. 

            25   But today's roundtable is different.  It is set against the




             1   backdrop of a remarkable decade in which corporate governance

             2   in many instances was grossly inadequate or failed

             3   completely.

             4             The more notorious breakdowns produced truly

             5   record-setting corporate frauds.  The discovery of those

             6   frauds, in turn, produced the Sarbanes-Oxley Act and other

             7   important changes, including new listing standards, which

             8   together have forced a reassessment of the role of a board of

             9   directors.

            10             These changes mandated that the responsibility of

            11   directors be partially redefined, redefined with the

            12   objective that directors should finally emerge from the long

            13   shadow of "the imperial CEO" of the '90s and should assert

            14   their oversight authority and corporate decision-making.

            15             So the question of how directors are elected to

            16   this refocused and reenergized board and how the proxy

            17   process works becomes critical.

            18             In a pre-Sarbanes-Oxley world, overly compliant

            19   boards of directors often allowed management almost

            20   unfettered control over many critical governance issues,

            21   including over the proxy process related to the nomination

            22   and election of directors.

            23             As a result, some company boards and managements

            24   completely ignored dissatisfied shareholders in a proxy

            25   process.




             1             Immediately after the annual meeting, shareholder

             2   resolutions passed by a large plurality, or in some cases a

             3   majority of votes cast, were just disregarded and never

             4   implemented.  And when significant numbers of company

             5   shareholders expressed their disapproval of management

             6   director nominees by withholding their votes, management and

             7   the incumbent board ignored the withheld votes, too.

             8             Management and boards refused to respond in any

             9   demonstrable way to a clear expression of dissatisfaction of

            10   large numbers of shareholders.

            11             So in addition to implementing the provisions of

            12   Sarbanes-Oxley, the Commission took the first step to address

            13   this issue head on last fall.  We adopted new standards to

            14   address the breakdown in shareholder communications by

            15   improving corporate disclosure in two areas.

            16             First, improved disclosure regarding the nominating

            17   committee process, the process by which committees consider

            18   director candidates, including those recommended by

            19   shareholders.

            20             And, second, improved disclosure about the process

            21   by which security holders could communicate directly with

            22   members of the board.

            23             It is our hope that the transparency created by

            24   these standards, which, by the way, are effective for the

            25   current proxy season, will help produce more communication




             1   among management, directors, and shareholders generally, but

             2   especially with respect to the nomination of candidates for

             3   boards of directors.

             4             Today we consider a second step the Commission

             5   could take to address the issue.  All of our roundtable's

             6   participants are by now familiar with the Commission's

             7   proposed rule.  The rule would require the inclusion of

             8   shareholder nominees in the company's proxy materials under

             9   limited circumstances, and only upon the occurrence of

            10   certain triggering events.

            11             But irrespective of the details of the proposal, I

            12   want us to consider for a minute one of the key purposes

            13   behind this proposal, which is to address the breakdown in

            14   shareholder communications that I just outlined.

            15             Consider the situation faced by a sizeable group of

            16   shareholders who are committed to the long-term prospects for

            17   a certain company, but who confront a company management that

            18   refuses to respond to or even communicate about the

            19   shareholder group's concern.

            20             The dilemma is that the shareholders have really

            21   only two practical choices.  First, they can choose to cease

            22   being committed to the long-term health of the company.  In

            23   other words, they can sell their stock.  Under this choice,

            24   they would be forced to give up their belief that with some

            25   modest changes in company direction, the company could be




             1   more successful in its markets and could therefore be an

             2   extremely productive investment over the long time.

             3             Their second, and really only other choice is to

             4   wage an extremely expensive proxy fight.  This contest could

             5   be for the entire board of directors or for only some seats o

             6   the board, the so-called short slate.

             7             In either case, the proxy fight takes on the

             8   trappings of a contest for control.  Under this choice, too,

             9   the shareholders would be forced to give up their belief that

            10   modest changes of company direction could produce the long-

            11   term benefits they seek as long-term investors.

            12             Instead, they are forced to divert the company's

            13   resources away from the business they're building to the

            14   proxy fight they're waging, the last thing the shareholders

            15   really want for the company's future.

            16             The proposal up for discussion today is an attempt

            17   to find a middleground between the extreme choices of forcing

            18   shareholders to give up their long-term interest in the

            19   company and sell their stock, on the one hand, and forcing

            20   them to wage a wasteful proxy fight, on the other.

            21             It is an attempt to find a middleground that would,

            22   under certain circumstances, limitations, and restrictions,

            23   provide shareholders who have a true interest in the long-

            24   term health of their company with a more effective proxy

            25   process that gives them a better voice in the nomination and




             1   election of the board of directors.

             2             In essence, it is an attempt to find a middleground

             3   that would encourage management and long-term shareholders to

             4   communicate more effectively with each other about the

             5   company's future.

             6             In my view, this attempt to find middleground is

             7   the central purpose of the proposal before us today.

             8             The question then is whether the Commission's

             9   proposed rule, as drafted, is the best way to achieve this

            10   purpose.  We are here to discuss, for example, how would the

            11   proposal likely work?  What consequences, intended or

            12   unintended, might the proposal have?  Are the specific

            13   details of the proposal appropriately crafted?  Are some

            14   elements unnecessary to achieve the proposal's purpose?

            15             And throughout every part of the discussion, we

            16   want to hear about alternative solutions, other, perhaps

            17   better, ways to achieve the same purpose.

            18             With these objectives in mind, I very much look

            19   forward to our discussion today and the follow-on comments we

            20   will receive as a result of the day's roundtable.

            21             Let's begin now, really begin now, by calling on

            22   Alan Beller and Marty Dunn, Director and Deputy Director of

            23   our Division of Corporate Finance.

            24             That division has the responsibility, as you all

            25   know, of administering our proxy rules.  We have had the




             1   laboring war in the effort to develop a rule proposal we are

             2   discussing today.  I thank them and the many members of the

             3   staff across divisions who have worked on this proposal. 

             4   They has been exceptional and tireless.

             5             Alan and Marty are going to be our moderators for

             6   most of the day.  Of course, they've organized the questions

             7   that I just posed in a much more systematic and methodical

             8   program, one that examines whether there is a problem that

             9   needs addressing, or the proposal is a reasonable solution to

            10   the problem and how it would apply to companies and

            11   shareholders.

            12             So I think I will thank once again all of our

            13   panelists for being here, for devoting your time.  I hand it

            14   over to Alan and Marty to introduce the program.

            15             Thank you very much.

            16             MR. BELLER:  Thank you, Chairman Donaldson.  We

            17   have a full day today, a total of six panels discussing a

            18   variety of the issues raised by the Commission's proposal,

            19   and perhaps in a couple of cases raised as conditions

            20   precedent to the Commission's proposal.

            21             We have two panels this morning.  The first one is

            22   going to address what, if any, problem there is in the proxy

            23   process area that needs to be addressed.

            24             And the second panel will address the question of

            25   whether the Commission's proposal is a reasonable solution to




             1   whatever problem is out there.

             2             I want to just summarize a few of the ground rules

             3   and what we're trying to achieve today.  The intent of this

             4   roundtable is to try to have an interactive, spirited, and

             5   informative discussion among the panelists on each of the

             6   panels.

             7             Marty Dunn, my deputy, is going to moderate with

             8   me, and we're going to take the lead on various of the panels

             9   this morning and generally throughout the day.  We have a

            10   couple of our colleagues who will be joining us for a couple

            11   of the afternoon panels.

            12             We certainly are looking forward to and would

            13   encourage interaction among the panelists.  We anticipate a

            14   number of questions from the members of the Commission who

            15   are readied at the ends of the tables.

            16             We have -- as we indicated in our earlier

            17   correspondence with the panelists, we are not looking for

            18   opening statements today as part of the discussion.  As we've

            19   indicated before, we would welcome statements of the

            20   panelists' positions in addition to supplementary --

            21   complementary to comment letters.  

            22             In the cases of those who have submitted comment

            23   letters, we will put anything that is submitted to us up on

            24   the Website so that the public will be able to see it.  But

            25   we have a full agenda, and a day to cover it, and opening




             1   statements seem to us less important than the kind of

             2   discussion we're hoping to achieve.

             3             Finally, I guess, I would ask your indulgence in

             4   one respect.  That is, to follow what I think is a pretty

             5   good European custom for being recognized.  Anyone on the

             6   panel, and also, please, the Commissioners, if you would like

             7   one of the moderators to recognize you -- and we'll keep

             8   track and try to do this in order -- if you would just turn

             9   your tent card up on end, that is a pretty effective way of

            10   getting our attention, and we'd ask you to do that throughout

            11   the day.

            12             I'm now going to turn this over to Marty to begin

            13   the discussion on the first panel.

            14             MR. DUNN:  I was afraid you were all going to turn

            15   your tent cards over at exactly the same time when Alan said

            16   that.

            17             Good morning, everybody.  I mainly want to say good

            18   morning because I mean it very much.  Thank you all for

            19   coming.  I also want to say it because it might the last two

            20   real words I get in here in the next hour and 15 minutes.

            21             The purpose of our first panel is to assess what

            22   problems, if any, there are in the proxy process as related

            23   to election and nomination of directors.

            24             Not too much needs to be said that hasn't been said

            25   in that regard, so I'm just going to dive in.  The first




             1   question I wanted to ask -- we're going to get to all the

             2   points in the briefing paper, but I want to take one step

             3   back before that and look at the broader question and give

             4   some perspective.  And I'd like to start with Nell Minow, if

             5   that's okay.

             6             In Mr. Lipton's article, he says that those who

             7   support the Commission's proposal believe that -- and this is

             8   a quote -- "the goal of corporate governance is to conform

             9   managerial action to shareholder wishes."

            10             Is that true?  And, if not, what is the goal?

            11             MS. MINOW:  The goal of corporate governance is to

            12   achieve a series of checks and balances to establish

            13   credibility for the capitalist system.  So shareholders don't

            14   want to run companies.  Shareholders aren't interested in

            15   rearranging the leaves on the trees.  But shareholders do

            16   play a role in the forest, and the most important forest

            17   decision is who is on the board of directors.

            18             We've had a lot of reforms in the post-Enron era

            19   and a lot of the emphasis has been on independence.  And yet

            20   there's never been an academic study linking the number of

            21   independent directors to any benefit whatsoever to

            22   shareholders.

            23             The reason for that is not that independence is not

            24   important.  The reason is that our markers for independence,

            25   with all deference to the SEC and its disclosure




             1   requirements, is just riddled with loopholes.

             2             And even if you could find any possible connection,

             3   the CEO and the board member went to summer camp together or

             4   whatever, it really doesn't matter.  Independence has to do

             5   with who the person is, and there's no way to determine that,

             6   but this is a way to determine who invites them on the board. 

             7   It's a natural human impulse to dance with the one who brung

             8   you to the party.

             9             And I think Warren Buffet, who is a pretty

            10   independent-minded guy, has documented in his own reports

            11   that he was not a very good director on the companies where

            12   he was invited on by the CEO, that he agreed to outrageous

            13   compensation.  But when he came in on his own at Salomon, he

            14   said what every board should say to every CEO:  If you lose

            15   money, we'll be forgiving.  If you lose reputation, we will

            16   be ruthless.

            17             That's because of how he got on the board.  And you

            18   will not have any genuine independence on the board unless

            19   you have some mechanism for shareholders to play a role.

            20             And, ultimately, I am really horrified that the

            21   bastions of the capitalist system from the corporate

            22   community refuse to put their director candidates to a market

            23   test.

            24             MR. DUNN:  What do you think of that, Mr. Lipton? 

            25   What do you think the goals are?




             1             MR. LIPTON:  Well, let me start with saying that

             2   the fundamental goal of the corporate system is to produce

             3   goods and services.  It's not to be a paragon of corporate

             4   governance.  And corporate governance plays a significant

             5   role in the proper functioning of business corporations, but

             6   the real fundamental purpose of the business corporation is

             7   to run a successful business corporation and produce goods

             8   and services.

             9             It's too easy after a situation like what we

            10   experienced here with Enron and WorldCom and the other

            11   companies that were involved in the millennium bubble

            12   scandals to say, well, we need to fix this, we need to fix

            13   that, we need to fix everything.

            14             I think we've fixed it.  I think that the New York

            15   Stock Exchange, corporate governance reforms, the Sarbanes-

            16   Oxley Act, and the rules promulgated by the Securities and

            17   Exchange Commission create a whole new regime of corporate

            18   governance that needs to be given a chance to function

            19   without piling on more and more requirements.

            20             I think it's not true that corporations ignore the

            21   wishes of shareholders, and it's not true that are 14(a)(8)

            22   proxy resolutions that received majority votes are ignored or

            23   that the withhold campaigns against certain directors are

            24   ignored.

            25             My experience is that in most of the cases,




             1   significant changes take place either to negotiate the

             2   withdrawal of the 14(a)(8) resolution or to negotiate the

             3   withdrawal of the withhold the vote campaign.

             4             So I think there are examples of 14(a)(8)

             5   resolutions that have been passed by a majority of the votes

             6   cast and have been ignored by the corporation.  But I don't

             7   think that, on an overall basis, boards of directors of

             8   corporations are ignoring the wishes of shareholders.  Just

             9   the opposite.  

            10             The various organizations that advise shareholders 

            11   -- ISS, Council of Institutional Investors, and so on, have

            12   over the years developed a very effective means of

            13   communication with institutional shareholders and are having

            14   a major impact the attitude of corporations and corporate

            15   boards.

            16             There's an example that I think is worth thinking

            17   about.  In 1720 the South Sea bubble burst in England, and

            18   relatively it had a greater impact on the economy of Great

            19   Britain at that time than the millennium bubble's bursting

            20   had on the U.S. economy in 2000 and 2001.

            21             For 110 years thereafter it was virtually

            22   impossible to form a joint stock company because of the

            23   reaction to the South Sea bubble.

            24             I think what we're experiencing today is an extreme

            25   overreaction to Enron and WorldCom.  It isn't necessary to go




             1   where we're going.  We shouldn't do it.  We should give the

             2   reforms that I mentioned before a chance to work, and if

             3   they're not working three to five years from now, we can

             4   reexamine it.  But I think it's a very serious mistake to

             5   take this step at this time.

             6             MR. DUNN:  Mr. Bebchuk?  I'm paying attention to

             7   the whole card thing.

             8             MR. BEBCHUK:  A brief reaction to what Marty said.

             9             One is I want to agree that corporate governance,

            10   or good corporate governance is not an end in itself, but,

            11   rather, it's an instrument, and it's an instrument for

            12   achieving higher long-term shareholder values.

            13             So that's what we all want to accomplish.

            14             But given that directors are human beings, the way

            15   to assure long-term shareholder value is to hold them at

            16   least somewhat accountable, so to have some sort of an

            17   outside check.

            18             And a critical element of our corporate structure,

            19   to quote Chancellor Allen in a very famous Delaware case, is

            20   that the shareholder power to replace directors is the

            21   foundation of the rule of the directors.

            22             And that's an important safety valve that ensures

            23   the directors will be attentive to achieving higher long-term

            24   share value.

            25             Now, Marty said that the directors do the right




             1   thing most of the time, and I think that most of us will

             2   agree with this.  But most of the time is not always.  That's

             3   why we need a safety valve.  The safety valve is not expected

             4   to be used all the time, but it's expected to be there.

             5             And the last observation -- and I'm sure that this

             6   will be an issue that we'll be coming back to -- relates to

             7   the growing independence of directors.  And the question

             8   isn't what Marty and others in the community have been

             9   stressing.  That might be enough.  

            10             But if we reflect on this quote from Chancellor

            11   Allen, he was not saying the director independence is

            12   sufficient foundation for the rule of directors.  He was

            13   saying that we need something else.  We need at least in some

            14   rare occasions to have shareholders be in possession of the

            15   power to replace the directors because mere independence is

            16   not sufficient to ensure the directors will be well selected

            17   and will have the right incentives.

            18             So we need something else, and that something is

            19   lacking right now.

            20             MR. DUNN:  We'll go to Mr. Kroszner.

            21             MR. KROSZNER:  I just want to agree that the -- I

            22   think the main goal of any sort of reforms -- and when I was

            23   working in the administration and thinking about the response

            24   to Enron and the other scandals, as well as working on

            25   Sarbanes-Oxley, was to try to think about how do we enhance




             1   shareholder value?  That's ultimately what we want to do.

             2             Now, I think, exactly as Nell Minow had said, part

             3   of that is making sure that the corporation is credible, and

             4   the reason that that's an important part of maximizing

             5   shareholder values, if the corporation is credible, it will

             6   be able to raise capital at a lower rate.

             7             There's less information outstanding.  If the board

             8   is not seen as taking appropriate actions, the cost of

             9   capital is lower.  

            10             We've seen examples of this when certain owners of

            11   firms have suddenly passed away unexpectedly, and the value

            12   of the firm suddenly pops up.  Because they had significant

            13   ownership, they were not maximizing shareholder value, they

            14   were doing things for their own personal benefit, and then

            15   when they suddenly are removed from the scene, the stock

            16   price goes up.

            17             And so it's sort of a clear manifestation of how a

            18   change in corporate governance -- and you can think of that

            19   as -- economists talk about an exogenous change, someone

            20   suddenly passes away, is manifest in the change in the value

            21   of the -- the cost of capital, the value of the equity as

            22   well as potentially the debt that's outstanding.

            23             So we have to think about, well, how do we gain

            24   credibility to enhance shareholder value?  And certainly that

            25   can be done in a variety of ways.  We've talked a little bit




             1   about independent directors, and actually some -- I think

             2   there is a little bit of research that suggests that in some

             3   cases independent directors can have a positive influence. 

             4   But I think the data are quite mixed on that.

             5             But I'm not sure that the focus of the proposal

             6   that the SEC has put out is one that's really going to help

             7   that much on this margin.  I think the spirit behind it, to

             8   be able to have more -- be able to exercise more control by

             9   significant shareholders, that significant shareholders have

            10   more of a voice is a very good one, and that's an instrument

            11   to getting towards the goal of enhancing shareholder value

            12   and building credibility for the corporation.

            13             But I'm not sure that focusing on the proxy

            14   process, with a fairly complex set of triggers and other

            15   approaches, is really the best way to go at the moment.

            16             One, we certainly have had a lot of changes

            17   recently, and so I have some sympathy with what Marty Lipton

            18   had said, that we maybe should allow some of these things to

            19   work out.

            20             But something that wasn't really focused on in what

            21   I would call phase one of the responses, which is Sarbanes-

            22   Oxley, the administration's response and the first set of

            23   responses by the Commission, are the role of the

            24   institutional investor.  And that's why I think this is sort

            25   of a good thing to focus on for phase two.




             1             And what we need to do, I think, is, instead of

             2   proposing a complex new set of rules, think about, well, are

             3   there rules existing that are interfering with the ability of

             4   institutional investors to be able to exercise some voice at

             5   the corporations.

             6             And part of that may come from -- there are

             7   problems -- potential concerns about antitrust, that if large

             8   institutions were to work together, there could be some

             9   concerns there.

            10             There's the so-called short swing rule, 16(b) rule,

            11   that if there are different institutions that seem to be

            12   working in concert, their different trading rules may -- or

            13   trading activity may be taken as a whole rather than taken as

            14   independent actions.  And that could be potentially

            15   problematic.

            16             And so there are also a number of regulations far

            17   beyond what the SEC has power over -- coming from ERISA,

            18   coming from other -- from state insurance regulation -- that

            19   make it more difficult for certain institutional investors to

            20   either take a large stake or have an active role.

            21             The Investment Company Act of '40 the SEC has some

            22   control over, that may be putting some blockages in the way

            23   of some institutional investors becoming more active.

            24             So I think focusing on the existing restrictions

            25   that are there were potential discouragements, either




             1   statutory, regulatory, or even just fear of litigation, of

             2   becoming involved and then getting a lawsuit if the

             3   suggestions don't work out ex post, are things that are

             4   really first order.

             5             And I think the focus on the proxy contest is much

             6   more second order for both building credibility as well as

             7   for trying to get the institutional investors to be -- have a

             8   more active and beneficial role.

             9             MR. BELLER:  Mr. Kroszner, can I just ask a follow-

            10   up on that?  Because what you said a few minutes ago, that

            11   shareholder involvement of the sort that you alluded to is an

            12   element of shareholder value.

            13             That maybe what the Commission has proposed is,

            14   (a), and what you said, sort of second order and maybe ought

            15   to be put off, but also is complicated and sort of operates

            16   on the margins.

            17             Would you be a supporter of, in effect, a more far-

            18   reaching proposal that would give shareholders the ability to

            19   get director nominees more effectively in front of

            20   shareholders, sort of not encumbered by the triggers and all

            21   these percentages and all the bells and whistles that are

            22   attached to the current proposal.

            23             I mean, in a sense, are you saying the proposal

            24   doesn't go far enough, and, therefore, that's one of its

            25   problems?  Or are you saying it ought to be put off in any




             1   event to deal with what you alluded to as the first order

             2   issues?

             3             MR. KROSZNER:  I think it certainly goes too far,

             4   and in other ways, it doesn't go far enough.  And so I think

             5   that what I would like to do is focus on the restrictions

             6   that exist now in various guises.  And not all under SEC

             7   control, but that make it more difficult for institutional

             8   investors to become more active.

             9             I don't see the particular focus in the proxy

            10   process is sort of the key for doing that.  I think one of

            11   the things that would be valuable is thinking about

            12   difficulties -- and again, this may be outside of the SEC's

            13   purview, because it may be more at the state level -- of

            14   making it difficult for takeovers to occur.  I think most

            15   institutional investors don't want to actually run the

            16   company, the ones that I've talked with, Jack Brennan and

            17   others.  That's not what they're about.  And they don't seem

            18   to think that actually having a director on the board is

            19   really the key thing, or using this kind of mechanism.  But

            20   if someone is willing to do a -- in fact, an outside

            21   consulting job, trying to say, "Well, I think the corporation

            22   should be run a different way, and I'd like to try to gather

            23   shares to try to take over the corporation and run it

            24   differently," then we'd like to be able to support that and

            25   support that more easily.




             1             So I think working on those kinds of margins were

             2   the ones with the bigger pay-offs.  Here, I just find that

             3   the proposal is raising so many questions and so many

             4   uncertainties that it doesn't seem to be going exactly in the

             5   right direction, with the broad spirit of getting more --

             6   thinking about how to get the institutional investors more

             7   active, I think, is one that I very much share with the

             8   Commission. 

             9             MR. DUNN:  In self-preservation, I tend to have the

            10   Commissioner first rule.  So Commissioner Glassman, I haven't

            11   lost track of you guys.  Don't worry.  I'm paying attention. 

            12             COMMISSIONER GLASSMAN:  I like that rule.  That's a

            13   good rule.  

            14             Just listening to those of you who have already

            15   spoken, there seems to be an implicit assumption that

            16   institutional investors always have the best interest of all

            17   investors in mind.  And so my question is assuming that the

            18   ultimate goal of our proposal is more than just getting a

            19   nominee on the proxy, but it's for some purpose, and that, in

            20   my mind, would be to max my shareholder value, are there

            21   cases where the interests of institutional investors might

            22   diverge from some or all other shareholders, and not

            23   ultimately lead to maximizing shareholder value?

            24             MR. DUNN:  Anybody.  You get to pick, Commissioner.

            25             COMMISSIONER GLASSMAN:  Oh, whoever wants to




             1   answer, that's fine.

             2             MR. DUNN:  We'll start with -- Damon hasn't had a

             3   chance to talk yet.  Oh, I blew Mr. Moore off.  Sorry.  We'll

             4   go with Mr. Moore.  You go ahead.  Sorry.

             5             MR. MOORE:  No, I can't think of a single instance. 

             6   And I appreciate you asking that question.  I'm Richard

             7   Moore.  I'm the treasurer of the State of North Carolina.  I

             8   run the ninth largest public pension plan in the country. 

             9   I'm the sole trustee of almost 700,000 North Carolinians who

            10   are looking to me to grow their retirement:  teachers,

            11   firefighters, sanitation workers, law enforcement officers. 

            12   I can't imagine a more representative group of average

            13   Americans, small investors, who both have investments in

            14   their traditional defined benefit pension with me, but in

            15   many instances, also have a stand-aside, very small 401-K

            16   account, of which I am also the trustee of what those

            17   investment options are.

            18             I can't think of any instance where our interest in

            19   looking after the long-term value of a company -- and by

            20   definition, those of us who are in the defined benefit

            21   business are looking at 30-year -- at least 30-year -- time

            22   horizons, that by definition, what is in our interest is also

            23   in the interest of both the overall market place and the

            24   small investor. 

            25             And I would also say that I think that we are the




             1   only people that you will hear from in this discussion who

             2   have absolutely no conflicting financial motives whatsoever. 

             3   And you, as representatives of the people on this Commission,

             4   I hope you bear in mind the motives of why people are here

             5   today and what they're saying.  And we -- our fiduciary duty

             6   is pure.  We make no short-term profit no matter what

             7   happens.

             8             Now, that being said, I would like to illustrate

             9   why I think this is exactly the right issue, the right

            10   pressure point.  This is a totally separate discussion in

            11   Sarbanes-Oxley, the wonderful new listing standards, the New

            12   York Stock Exchange.  This is a separate discussion.  This is

            13   about the preservation of majority rights.  

            14             And the reason we need this particular avenue is

            15   because in most instances, we have done something that the

            16   people who started these companies and the body of law that

            17   grew around them never thought that we would need.  And that

            18   is the total loss of an inside check, a situation where it's

            19   totally a group of people spending other people's money.  In

            20   many instances, it's a lot like government in large,

            21   publicly-traded companies.  We need this outside check.  This

            22   is an appropriate outside check. 

            23             One last point that I want to make on this topic. 

            24   I'm often told by my friends who are directors of large

            25   companies, "Well, Mr. Treasurer, why don't you just vote with




             1   your feet?"  And I think this point has been made.  We no

             2   longer can vote with our feet.  And I want to give you just

             3   some very quick statistics, because I do think they bear on

             4   what you're trying to get done.

             5             Twenty-five years ago, the State of North Carolina

             6   had a $433 million equity portfolio.  We had two managers. 

             7   They were both actively-managed accounts.  The managers could

             8   vote with their feet.

             9             Today, we have a $35 billion domestic equity

            10   portfolio.  But here's the interesting part of it.  Only 22

            11   percent of it is actively managed.  And I think these are

            12   representative statistics of all public pension funds.

            13             So in 78 percent of the time, we cannot vote with

            14   our feet.  We're in an index or an enhanced index product

            15   where it embodies the long-term growth of the market, and we

            16   need an effective way to get directly into board rooms.  And

            17   as a matter of fact, we have in our formal presentation of

            18   formal materials, we'd like to strengthen this role, make it

            19   stronger than it is now.  Thank you. 

            20             MR. DUNN:  Thank you.  Thank you all for respecting

            21   me.  I'm keeping track of who's here.  Damon, if you could

            22   address what's come up so far, and also Mr. Lipton's earlier

            23   point about 14(a)8 and how effective that is and the

            24   negotiations of that, I'd appreciate it.

            25             MR. SILVERS:  That's a big agenda. 




             1             MR. DUNN:  I know.  And you've got eight minutes. 

             2   Go.

             3             MR. SILVERS:  I wanted, actually, to begin -- and I

             4   think some of the things that I'm going to say are very much

             5   related to what Mr. Moore just said.  I want to begin with

             6   the question of the purpose.  Because I actually agree with

             7   Marty on the purpose of corporate governance.  And I think a

             8   number of people have talked about the purpose being to

             9   maximize shareholder value.

            10             The board of directors in most states has a legal

            11   duty to the long-term well-being of the corporation and its

            12   shareholders.  And that's not quite the same thing as

            13   maximizing shareholder value.  It may, obviously, encompass

            14   it, but it's not identical.

            15             Both of those things, in my opinion, exist to serve

            16   a higher purpose, which is the creation of wealth in our

            17   society, the goods and services Marty mentioned, the jobs

            18   that, frankly, my organization and I think most Americans

            19   have some great concern for.  And I will stip to the fact

            20   that there are multiple interests at this table.  And the

            21   interest I represent is working people for whom corporate

            22   America not only produces profits and share appreciation, but

            23   jobs, goods, services, and the good things in life.

            24             The purpose of corporate governance is to forward

            25   all of these things, and to insure most fundamentally that




             1   the corporation is not converted into a vehicle for very few

             2   individuals to enrich themselves at the expense of all of

             3   those who are depending on the corporation to provide the

             4   good things in life.

             5             Now, what does all that have to do with the rule

             6   before the Commission?  And here I come, I think, to

             7   Commissioner Glassman's question about our institutional

             8   investors necessarily have the broader interests of the

             9   corporation in mind.

            10             The set of facts that Treasurer Moore just went

            11   through describe a trend that is leading to the stock of our

            12   large publicly-traded corporations to be increasingly held by

            13   funds with long-term investment objectives who are in

            14   everything.  They really have no choice.  Some might

            15   criticize the public pension fund community for holding

            16   indexed funds, and say, "Well, why aren't you more active?" 

            17             The reality is that when you're 40, 50, $100

            18   billion, you have to own everything.  You can't buy and sell,

            19   and indexing is the cheapest way to hold everything. 

            20             That type of investor, with that fully-diversified

            21   portfolio locked in over decades, looks a lot like the

            22   corporation and its shareholders, that legal touchstone of

            23   our corporation law. 

            24             And this proposal, with its emphasis on voice, on

            25   holding for a long time, on large holdings, is designed to




             1   put the ability to be on the proxy, and thus the greater

             2   likelihood of being able to get into the board room, in the

             3   hands of precisely those shareholders whose interests look

             4   most like that term of art in Delaware law, the interest of

             5   the corporation and its shareholders.  And that is, to my

             6   mind, the critical syllogism here, the critical logic of this

             7   proposal, and why we support it so strongly.

             8             Marty, you asked me to talk about 14(a)8.  I will,

             9   for the moment.

            10             The current system we have does have the two

            11   choices that a long-term investor has that the chairman

            12   addressed in his opening comments, the choice of running an

            13   expensive and divisive control contest, which my colleague to

            14   my right appears to feel is the best way to get things done,

            15   and the choice of walking away.

            16             For the long-term investor, neither of those

            17   choices -- for the large institutional long-term investor,

            18   neither of those choices are very palatable.  The costs, from

            19   a fiduciary perspective of running that contest, are very

            20   high.  The idea of encouraging corporate takeovers and

            21   raiders to solve your problems is not very helpful if you own

            22   everything.  

            23             Bernie Ebbers was a wonderful user of the corporate

            24   control market.  He bought up a lot of "undervalued assets." 

            25   It's not clear that that was wonderful for those of us whose




             1   retirement funds lost billions of dollars when those assets

             2   were all sort of vaporized.

             3             The other alternative that the system has is the

             4   current shareholder proposal rule and its interface with

             5   state law.  And that shareholder proposal rule, the 14(a)8

             6   rule, allows for a variety of proposals.  In most instances,

             7   they're predicatory.  They're advisory.

             8             It is true that increasingly, as Marty said, that

             9   management of corporate America is responsive in various ways

            10   to those proposals.  But I think as a general matter, the

            11   more -- shall we say the more -- the less these proposals go

            12   to the harder things, the more responsive they are.  

            13             And there's been an astounding correlation between

            14   the degree of seriousness with which the Commission is taking

            15   the proxy access proposal and the degree of responsiveness

            16   from which we're hearing from corporate America.  In fact, it

            17   appears that with each passing week, each passing day, the

            18   level of responsiveness is increasing.  In fact, I suspect

            19   that tomorrow will be truly a very responsive day.  And I'm

            20   somewhat concerned about what would happen were, ultimately,

            21   the Commission to either back away or in any real manner

            22   weaken this proposal on that level of responsiveness. 

            23             MR. DUNN:  Thanks.  One note in this.  If you're

            24   going to address the Commissioner's question also, the mutual

            25   funds have been kind of not the leading voice in this whole




             1   debate.  So you get a chance to be the voice of more than

             2   just you here.

             3             MR. ROITER:  Thank you.  And everybody can consider

             4   my motives. 

             5             Well, let me first start -- and I will answer your

             6   questions by making the observation that Winston Churchill

             7   once made of a political rival when he observed that his

             8   rival was a very modest person, and he had much to be modest

             9   about.

            10             I don't mean it in a perjurative way, but this

            11   proposal of the SEC is a very modest proposal.  But I

            12   actually mean it in a complimentary way.  I think it can add

            13   to the overall improvement in corporate governance in this

            14   country. 

            15             But let me add that we view corporate governance,

            16   as others have mentioned, as a means to an end, and we can

            17   all come up with our verbal formulations of what that end

            18   should be.  I don't think there is too much difference

            19   between the long-term interest of shareholders and the long-

            20   term interest of the corporation, but I will accept that

            21   there may be a subtle distinction.

            22             But let me stress that it is only one means, and we

            23   should not lose sight of other means.  And what is called the

            24   Wall Street Rule is often denigrated.  But if you step back

            25   to think of what the Wall Street Rule itself rests upon, I




             1   think you may take a more balanced view.

             2             When one focuses simply on corporate governance,

             3   there's a tendency to see the vast dispersion of equity

             4   ownership in this country and the problems of collective

             5   action and the active and deep trading of publicly-reported

             6   company securities in the secondary market as somehow the

             7   Achilles' heel of corporate governance as some fundamental

             8   weakness in the way our capitalist structure operates.

             9             Well, perhaps there are some disadvantages to wide

            10   equity dispersion and the problems associated with collective

            11   action, and perhaps some investors trade too frequently.  But

            12   the great strength of our capitalist structure, the great

            13   strength of our capital markets -- indeed, the envy -- to the

            14   rest of the world is the very depth and liquidity of our

            15   secondary markets.

            16             And if we didn't have investors who were sending

            17   their own message and, in fact, voting every day by going to

            18   the secondary markets and buying and selling publicly-

            19   reported stock at the price they think those companies are

            20   worth, then we would have, I think, a much bigger problem on

            21   our hands.  And so I would urge a broader view of corporate

            22   governance as a means, but not an exclusive means, to enhance

            23   your owner value.

            24             I would say in response to Commissioner Glassman's

            25   point that before we get to matters of public location, I




             1   would observe as a matter of law, at least current law, that,

             2   speaking as the general counsel of an investment management

             3   company, we owe our fiduciary duties to our fund

             4   shareholders, and solely to our fund shareholders.  That

             5   doesn't mean that we're out to do harm to others in the

             6   market place, but it is to say that we owe a singular

             7   unqualified, unstinting fiduciary duty solely to our fund

             8   shareholders.  We make wise decisions.  We make decisions

             9   that, in hindsight, prove not to be particularly enlightened,

            10   but that's a different point.

            11             Now, to the question of whether there can ever be a

            12   departure or deviation between the interests of the funds

            13   that we manage and other institutional investors and other

            14   shareholders in underlying portfolio companies, I would say

            15   again, as a matter of law, that one minority shareholder owes

            16   no duty to any other minority shareholder.  

            17             There are negative duties.  You cannot deceive. 

            18   You can't manipulate the markets.  You cannot engage in

            19   fraud.  But those are negative duties.  There are no

            20   affirmative obligations that one minority shareholder in an

            21   underlying company owes to another.  Perhaps people want to

            22   rethink those standards, but I think they've served us

            23   exceedingly well throughout the course of our economic

            24   history.

            25             I will give an example.  And you may think that




             1   it's an unenlightened way to act, and that all investment

             2   managers ought to accept the dogma that all assets should be

             3   managed passively.  We happen to take a different approach,

             4   and we hold out our business model to investors, and they

             5   make an informed choice in whether they would like their

             6   assets actively managed or not.  In fact, Fidelity has index

             7   funds.  But we believe in active management.  And our fund

             8   managers -- trust me on this -- are not monolithic in their

             9   outlook.  Some are more patient than others.

            10             But I think it's true of all of our equity fund

            11   managers that when they look at their portfolio securities,

            12   they ask themselves not an absolute question -- "Do I like

            13   this company or not?" -- but a relative question -- "Do I

            14   like this company in my portfolio compared to other companies

            15   I could own?"

            16             They also ask themselves, and they ask the

            17   investment analysts that work at Fidelity, "What really is

            18   the value of this company?"  I need to know that.  Because

            19   when I hold every stock, I am betting that I'm better

            20   investing in that stock than in other stock.  I need to know

            21   if this stock is under-valued or it's over-valued.

            22             Now, let's assume a company has its shareholders'

            23   meeting on June 15th, and the fund manager is asking that

            24   question of a company to his or her analyst within Fidelity

            25   on October 15th.  So more than half a year away is the




             1   shareholders' meeting.  And the analyst comes back to say,

             2   "You know, I think this company's stock is over-valued."  

             3             And the analyst then explains why, and you'll get a

             4   combination of reasons.  One reason may be that the board is

             5   hidebound, that there is a founder who has become lethargic

             6   or complacent, a board that is too compliant.  

             7             But you also may hear other reasons.  You may hear

             8   that -- well, let's just make up some facts.  This is a high-

             9   tech company.  It came up with a great product in the

            10   computer field, but it was based on closed architecture.  It

            11   didn't want others creating competing products that it could

            12   sell or have to compete against. 

            13             The analyst might say, "You know, that's great."

            14   But the time is running out.  They're losing market share. 

            15   And they're going to have to switch to an open architecture

            16   business model.  

            17             Same kinds of analogies can be applied to drug

            18   companies.  Patents are running out.  We believe that stocks

            19   are over-valued or under-valued, and it's our job to find

            20   those out. 

            21             So on October 15th, the fund manager decides, "This

            22   stock is over-valued.  I could wait eight or nine months, and

            23   I might have the possibility of nominating one director who

            24   would be, by definition, in the minority to a board that's

            25   hidebound in a company that is lagging its competitors in




             1   innovation and product development.  And if I perhaps did

             2   that, perhaps that would rebound to the benefit of all the

             3   shareholders of this company.  But am I being true to my

             4   fiduciary duty to the shareholders in my fund?"  

             5             I think the answer is certainly a debatable one. 

             6   In my view, it's if you think that stock is over-valued, and

             7   you can find a stock that has a more reasonable value in the

             8   market, you should be selling the over-valued stock and

             9   buying the under-valued one.  And that may have unfortunate

            10   consequences for the company and for the other shareholders

            11   as the market price of that stock goes down.

            12             But I would just return to my original point.  The

            13   market itself is a great discipline of corporate management. 

            14   And that message is sent every day when shareholders vote by

            15   buying and selling securities. 

            16             MR. DUNN:  Mr. Odland, if you can bring to a close

            17   your answer to Commissioner Glassman, we'll return to the

            18   chairman.  But go ahead.

            19             MR. ODLAND:  Well, as a CEO representative of the

            20   business roundtable, it has been interesting over the past

            21   few years to learn all the potential negative adjectives that

            22   can come in front of the word "CEO."  It must be a great

            23   relief to the attorneys in the room to get off of late-night

            24   television and have the CEOs get on.

            25             MR. ROITER:  Don't leave out politicians.




             1             MR. ODLAND:  You know, I think that the business

             2   roundtable has been appalled by the scandals that have come

             3   out in the last few years.  I personally have been appalled

             4   by it.  And I think that the objective that has been

             5   outlined, which is to try to make boards more responsive to

             6   shareholders, is a real positive objective.

             7             I think, though, that the rules that have been

             8   proposed don't quite match the objectives.  If you think

             9   about it as, you know, one neighboring country having an

            10   issue with another neighboring country, rather than using

            11   diplomacy, you invade with troops and try to force your will

            12   on another country, and after taking them over, then you'll

            13   talk about it, I think that if we want responsiveness, then

            14   the first sign, you don't try to, you know, recompose the

            15   board.  

            16             And I'm struck by a comment that was made earlier

            17   that we've got to get -- we need to get a way into corporate

            18   board rooms.  And that strikes me as interesting.  I didn't

            19   hear that we need to have corporations become more responsive

            20   or listen to the shareholders, and that is concerning.

            21             I think the rules are intended to target a few, but

            22   in reality, hit everybody.  And I don't think that any

            23   individual shareholder necessarily has the same objectives. 

            24   As another shareholder, and I think by definition, there are

            25   individuals or the groups that are all different.  And so by




             1   definition, you can't possibly represent other shareholders. 

             2             I think that if you look at what we're attempting

             3   to do here, we're looking -- you'll forgive me, as CEO of

             4   AutoZone -- I think we're trying to drive the car by looking

             5   in the rearview mirror a bit, rather than looking through the

             6   windshield.  And I feel a little bit like we're trying to

             7   solve the sins of past generations, rather than deal and look

             8   at the realities of today.

             9             I look at my own situation.  I joined AutoZone

            10   three years ago.  Didn't know anybody on the board.  We have

            11   a very independent board of directors led by Charles Elson,

            12   who will speak later as the head of our independent

            13   nominating committee.  Three directors have joined our

            14   company since then.  I didn't know any of them.  They all

            15   came in through the independent nominating committee.  

            16             I think if you look at the facts from the business

            17   roundtable companies, 80 percent of our companies have boards

            18   that are 80 percent or more independent, 86 percent of

            19   nominating committees have criteria for directors.  They have

            20   a process -- 87 percent have a process to correspond and

            21   communicate with shareholders.  These are all nascent changes

            22   that didn't exist.  

            23             And I think if you look at what exists five years

            24   ago and what existed today, we have entirely different

            25   situations.  I think we have situations today where boards




             1   are independent, where there are independent nominating

             2   committees, where there are communication procedures, where

             3   there are director reviews.  I think there's been a "C"

             4   change in the corporate governance world.

             5             You know, when we wrote our very first set of

             6   corporate governance guidelines three years ago, in our

             7   company, there were none to copy at that point, and nobody

             8   had every heard of corporate governance.  I've been trying to

             9   talk to shareholders about corporate governance for years. 

            10   I've been very proud that we have been ranked number five in

            11   the ISS surveys.  I can't get any of our investors or the

            12   funds to focus on it, however.  They say, "Yeah, yeah.  Let's

            13   talk about your performance, and let's talk about the

            14   shareholder returns."  They don't want to talk about

            15   corporate governance.  It's been very interesting to me.

            16             I think that an issue here is that those people who

            17   are those proxy rating services will become more powerful in

            18   this process.  They're unregulated private entities.  They

            19   are businesses unto themselves, actually, trying to make a

            20   profit.  It's interesting when you get a rating, you have to

            21   buy their services to understand their rating and correct

            22   some of the assumptions made in them.

            23             I think that a very small number of shareholders

            24   can make a huge impact on companies, and they have that

            25   ability today.  And I think that a very small number of




             1   shareholders would like to impose their will on the majority. 

             2   And we're talking about very small thresholds in this thing.

             3             It just seems to me that we should let independent

             4   boards, which are very, very new to corporate America, and

             5   let independent directors and independent nominating

             6   committees do their work.  The way that we ought to have this

             7   done is for the independent nominating committees to respond

             8   to shareholders for proposals.  

             9             If you went to AutoZone's web site today, it would

            10   instruct you exactly how you could become a shareholder -- I

            11   mean a nominee to our board of directors.  I think that the

            12   independent nominating committees are the way to respond to

            13   shareholders, and I think that the "C" change of corporate

            14   governance in the last couple years has put that into place

            15   today.

            16             MR. DUNN:  We have three or four folks who want to

            17   respond.

            18             CHAIRMAN DONALDSON:  Yeah, I'd like to direct my

            19   question to Marty Lipton in terms of your statement. 

            20   Basically -- and the reason I'm addressing it to you is you

            21   touch upon one of the -- as we've looked at the letters

            22   coming in, you touch upon one of the oft repeated reasons for

            23   not doing anything now in terms of the timing of this

            24   proposal.  And that reason is broadly stated.  Give Sarbanes-

            25   Oxley a chance to work.  Give the new listing standards a




             1   chance to work.

             2             As Nell Minow indicates, the definition of

             3   independence has been written down on paper.  But the true

             4   performance of an independent director, I think, is the

             5   market test.  Not whether they went to school with somebody,

             6   or whether they have connections or whatever, but it's what

             7   they do.

             8             And so my question is in terms of the timing here,

             9   if we had a board that had totally independent directors,

            10   according to the rules that are written, and yet at the next

            11   meeting of that board, there was a 35 percent or a 50 percent

            12   withhold vote, that to me is the market place of judgment as

            13   to whether shareholders think the board is acting in an

            14   independent way.  So my question is why wait to get that

            15   feel?

            16             MR. LIPTON:  I agree completely.  But if you have a

            17   majority of the outstanding shares that are in favor of a

            18   particular action or a particular person, that's something

            19   that should be accorded great deference.  But I don't agree

            20   that 35 percent should overrule 65 percent.  I think that,

            21   you know, in looking at it and saying that, you know, if

            22   there's a 10 to 35 or a 10 to 49 percent withhold, that means

            23   that director should no longer serve.  I think you have to

            24   look at it the other way and say somewhere between 90 and 51

            25   percent of the shares think that that director should




             1   continue to serve.

             2             CHAIRMAN DONALDSON:  But if you -- excuse me for

             3   interrupting.  But if you -- you're arguing about the level

             4   of withhold, you know, which is an open thing that we'd like

             5   to hear a discussion on.  But I think you're saying that

             6   there's no reason to delay the market test of the

             7   independence of the board in terms of the timing of this

             8   proposal.  That's a question, not a --

             9             MR. LIPTON:  No, I don't agree with that, Mr.

            10   Chairman.  I think that this proposal is a serious mistake at

            11   this time, and that it should not be adopted by the

            12   Commission.  I think that what we're involved in at the

            13   moment is a reaction, both in government and in the board

            14   room, to the scandals of the late '90s.  And government has

            15   taken very significant action to deal with them, and we

            16   haven't had an opportunity to test whether that action is

            17   going to be effective.  And to keep adding further

            18   obligations and restraints on boards, I believe to be a

            19   mistake.  

            20             It is clear already that it is getting more and

            21   more difficult to attract people to serve on boards.  It's

            22   not because they fear liability or fear lawsuits and so on. 

            23   They just don't want to be involved in a contentious

            24   situation.  

            25             What they want to do is act collegially to do what




             1   they believe to be in the best interest of the corporation,

             2   and they don't want to be involved in a situation where they

             3   are facing a proxy contest, where they're facing campaigns

             4   that disparage their independence or disparage their

             5   performance.  And therefore, they say, "I'd rather not serve

             6   under these circumstances."  I think that's a factor that the

             7   proposal fails to take into account.  

             8             We have a very, very difficult problem today to

             9   attract independent, competent people to serve on corporate

            10   boards.  Not people who will not express their views, not

            11   people who are in some way beholden to the management of the

            12   corporation; just independent, competent people who are

            13   willing to serve.  And I think that in the long run, that's a

            14   far more significant problem than the problem of the

            15   corporations that some investors feel are not fully

            16   responsive to their desires.

            17             You know, on a day-to-day basis when proxy

            18   resolutions are presented to a corporation, or a substantial

            19   shareholder has instituted a withhold campaign, the first

            20   thing that, you know, a corporation does is sort of get in

            21   touch with the Council of Institutional Investors, get in

            22   touch with ISS, go to Boston to meet with Fidelity, which is

            23   usually the largest shareholder of the company.  There's an

            24   immediate seeking out of the views of the shareholders to

            25   find out just what the major shareholders think that the




             1   corporation ought to do.  I think it's working.  I think it's

             2   working just fine.  There's no question that you can point to

             3   occasional situations where resolutions are ignored.  But I

             4   don't think that's a reason for sort of this major change in

             5   the whole process.

             6             MR. DUNN:  Commissioner Goldschmid?

             7             COMMISSIONER GOLDSCHMID:  Common ground, I think,

             8   if I hear the panel, is that this whole idea ought to be

             9   about efficiency and productivity and profitability of the

            10   major corporation.  And I guess I have two questions.  

            11             Marty, assume a dead company and a compliant board

            12   and excessive compensation, and I've invested in this

            13   company, and the shares have fallen from 40 to 20.  So Eric's

            14   Wall Street Rule won't work quite so well.  If I pull away,

            15   I'm going to lose, and the company may lose more.  What do we

            16   do about that in the present situation? 

            17             And Mr. Odland, a question for you.  You were

            18   talking about narrow shareholder groups taking advantage. 

            19   How are they going to take advantage in a process where you

            20   need two majority votes, and the 35 percent withhold is

            21   roughly a majority vote, but you need a second majority vote

            22   before you can elect one minority director or two?  How is a

            23   minority group going to take advantage?  

            24             MR. LIPTON:  Do you want me to try and answer the

            25   first question, and have Steve answer the second question? 




             1             If it's worth doing, I would say that there ought

             2   to be a full-fledged proxy fight to change the board, a new

             3   group take over and do whatever is necessary.

             4             COMMISSIONER GOLDSCHMID:  And Marty, you know the

             5   rule --

             6             MR. LIPTON:  And if it isn't worth doing, you're

             7   much better off getting $20 and not staying with something

             8   that's going to go to five.

             9             COMMISSIONER GOLDSCHMID:  Marty, how many proxy

            10   fights have you been involved in or do you know about for

            11   companies with over 200 million market cap that are of real

            12   size in the United States? 

            13             MR. LIPTON:  I don't think that's the issue,

            14   Harvey.

            15             COMMISSIONER GOLDSCHMID:  Even if the issue,

            16   doesn't it indicate this system isn't working?

            17             MS. MINOW:  Yes.

            18             (Laughter.) 

            19             MR. LIPTON:  I think it's working just fine.  I

            20   think that when a company is a bargain out there, somebody

            21   comes along and makes a -- the real question, or the real

            22   answer, is I'm only aware of two or three companies that have

            23   remained independent in the face of a significant premium

            24   takeover proposal. 

            25             COMMISSIONER GOLDSCHMID:  Even with your poison




             1   pill?

             2             MR. LIPTON:  Even with my poison pill.

             3             COMMISSIONER GOLDSCHMID:  I mean, poison pill

             4   basically serves to enable a board of directors to do what it

             5   thinks is in the best interest of the shareholders.  If the

             6   best interest of the shareholders is to remain independent,

             7   it enables the board to do that.

             8             But as you're aware, since 1989, most companies

             9   that have poison pills, including most companies with poison

            10   pills and staggered boards that have become the target of a

            11   significant premium tender offer by a bidder who is prepared

            12   to conduct a proxy fight have, in fact, ended up doing a

            13   transaction, either with the original bidder or with someone

            14   who's offered a better price.

            15             MR. DUNN:  Mr. Odland?

            16             MR. ODLAND:  I think it's a good question.  Thirty-

            17   five percent is not --

            18             COMMISSIONER GOLDSCHMID:  Well, you need a 50

            19   percent in the second year before you get a minority

            20   director. 

            21             MR. ODLAND:  Yeah.  But I think the issue here is,

            22   you know, are we trying to fix the problems of a few years

            23   ago versus the problems that we do or don't have today?  And

            24   I would argue that, you know, sitting in a board room today

            25   with all, except me, independent directors is an interesting




             1   process.  And it's got to be an entirely different process

             2   than what I'm hearing described of years ago, where, you

             3   know, the CEO nominally controlled the board.  I mean, that

             4   just doesn't describe today's reality.

             5             There's so much debate.  We have independent

             6   directors that agonize over every decision that's going on in

             7   the company -- the capital allocations -- and these kind of

             8   debates are really important for companies.  But, you know,

             9   if you toss in the middle of that a director that is

            10   advocating a point of view, whether it's an environmentalist

            11   point of view, a religious point of view, or --

            12             COMMISSIONER GOLDSCHMID:  How about an efficiency

            13   point of view?

            14             MR. ODLAND:  Well, listen.  I think that the

            15   definition of long-term well-being of a corporation is a very

            16   interesting one.  It's interesting to me as a board member

            17   and as a member of management today to try to guide a company

            18   for the long term when there are so many pressures for short-

            19   term issues today.  And, you know, the idea of a shareholder,

            20   I think, has evaporated.  These aren't shareholders.  These

            21   are, a large part, traders.  And I know we've got holders

            22   represented up here.  

            23             But if you deal with the realities of today's

            24   traders, they're flipping shares, the turnover is constant. 

            25   They're dealing with what they want today.  And perhaps there




             1   are some very good shareholders here who would advocate very

             2   good change.  There are also a lot of people who are trying

             3   to have short-term benefits created.  And you can destroy a

             4   company, as you know, very quickly with these things.

             5             I think if you look in the past three months, there

             6   have been 20 shareholders who have withdrawn proposals after

             7   discussions with companies resolve their concerns.  There's a

             8   whole long list of responsive companies and examples that I

             9   could throw out.  

            10             I don't mean to do that, but I think that boards

            11   are listening today.  I think boards are listening more not

            12   because of anything that's happened in this city, but because

            13   they are appalled at what's happened with the corporate

            14   scandals, and they're afraid of what can happen. 

            15             If you watched what happened to Enron, the collapse

            16   of an enormous corporation, the destruction of jobs.  I'm

            17   struck by Mr. Silver's remarks about jobs.  And here we are

            18   sitting with the presidential campaign that is talking all

            19   about jobs, and we fear jobs in America today.  I think we

            20   have to allow boards and management to try to create the jobs

            21   today without a divisive atmosphere.  Boards should be

            22   collegial, independent people who debate and do the right

            23   thing for the well-being of all their constituents.  

            24             I think that's what the rules have set up.  And

            25   listen.  All the rules haven't even gone into effect yet, and




             1   I think you see changes already.  I'm very heartened by that.

             2             COMMISSIONER GOLDSCHMID:  Yeah.  But you wouldn't

             3   deny that there are dead companies out there, would you?

             4             MR. ODLAND:  Well, I think by definition, companies

             5   have come and gone.  But, you know, there are efficiencies in

             6   the system.  And I know that sounds bad.  But we are a

             7   capitalist society with the ability of companies to come and

             8   to go, and with the abilities of companies to succeed and

             9   fail.  We don't like the scandals.  That's terrible.  But,

            10   you know, I don't think we should take away our capitalist

            11   system or deny what has built the greatest economy in the

            12   world.

            13             COMMISSIONER GOLDSCHMID:  You do that by giving the

            14   owners the right to influence the company a bit?

            15             MR. ODLAND:  I think if you start destroying the

            16   ability of boards to work, and take management and boards'

            17   focus off of the long-term well-being of a company, and

            18   having to deal with all these kinds of situations, unintended

            19   consequences of small shareholders trying to hijack the

            20   process for whatever purpose, I think you could take and set

            21   the economy on its ear, quite frankly.

            22             MR. DUNN:  We have 15 minutes and seven people, so

            23   I'm going to go fairly quickly.  You're next.  You've been

            24   waiting to burst out of your chair for --

            25             MS. MINOW:  Yes, absolutely.  Okay.  Well, I'm




             1   going to talk really fast and respond to several of the

             2   points.

             3             First of all, 35 percent does not overrule anyone. 

             4   It just gives you the chance to make your case to the

             5   majority.  

             6             My firm rates boards of directors.  And by the way,

             7   you can't buy a subscription to find out how it works.  You

             8   just get that for free from us.  But we rate boards of

             9   directors.  And a director who got a bad grade called up and

            10   complained about it.  And I said, among the various things I

            11   talked to him about, for free, was -- I said, "You know, you

            12   had three shareholder resolutions that have got over a

            13   majority that the board has not responded to, and one of them

            14   got 60 percent."  He said, "Nell, I'm glad you brought that

            15   up.  The corporate secretary explained to me those are fringe

            16   shareholders."  I said, "Sixty percent.  You're the fringe."

            17             (Laughter.) 

            18             MS. MINOW:  I said, "If you had 60 percent of your

            19   customers rejecting some of your product, you would not say,

            20   'Oh, they're the fringe.'  You would not marginalize them. 

            21   You have to respond."

            22             I think that when you have critical mass, when you

            23   have a majority of the shareholders, no individual

            24   shareholder is going to be right all the time, or is going to

            25   be looking into the long-term best interest all the time. 




             1   But all together, they are.  That's the basic fundamental

             2   principle of our entire system, and our economic system and

             3   our political system.  

             4             And if you can get Eric and Damon and Richard all

             5   to support your candidate, and all of the various other kinds

             6   of funds and approaches, then you probably are right.  And if

             7   you're wrong, hey, that's exactly the market Steve was

             8   talking about.

             9             The best speech I ever read about the board of

            10   directors of independence and integrity was delivered by Ken

            11   Lay at the Houston Conference on Ethics.  And we have had

            12   independent directors for a long time.  We've had independent

            13   directors -- let the record show I'm making quote marks here

            14   -- "independent directors" -- for a long time.  We need

            15   genuinely independent directors, and that means that they're

            16   put to a genuine market test.

            17             When my business partner, Bob Monks, decided to run

            18   for one seat in a very Quixotic adventure on the board of

            19   Sears, Mr. Lipton -- this is how I met him -- filed a lawsuit

            20   against us because we had the temerity to ask for a

            21   shareholder list.  He said we wanted it for an improper

            22   purpose.  It seems to me that running for the board is the

            23   actual purpose for which this list was intended. 

            24             But nevertheless, we didn't have the money to fight

            25   him.  We didn't have Sears's bank account.  Sears used our




             1   money to fight us, but we couldn't use Sears's money to fight

             2   us.  It's just a very, very, very bad system. 

             3             As for attracting people to be on boards, you know

             4   what?  We've been attracting the wrong people.  Boards always

             5   ask for consensus builders, and they're lovely people to

             6   have.  I don't happen to be one, but they are wonderful

             7   people to have. 

             8             (Laughter.)

             9             MS. MINOW:  And the problem is you get kind of a

            10   lowest common denominator dynamic operating.  We need people

            11   who are willing to be more independent, more outspoken. 

            12   Capitalism is not for sissies.  And let's put these boards to

            13   a real market test.  And if this be shareholder treason, make

            14   the most of it.

            15             (Laughter.)

            16             MR. DUNN:  Mr. Silvers, then Commissioner Campos.

            17             MR. SILVERS:  The real question, I think, the

            18   Commission faces is embodied in -- the question of this

            19   panel, is there a problem?  It's been asserted that the

            20   problem is yesterday's problem.  

            21             I don't know what newspapers everybody's reading

            22   here.  The ones I read have front page stories pretty much

            23   every day about something new, all right?  About some new

            24   company.  Now, some of them, you know, Hollinger and Shell

            25   and so forth, it's merely our money, not our corporate




             1   governance system.  But the problems are very much the

             2   problems of the day.

             3             Others -- and I'm not going to get into all the

             4   names -- I'd use up all my time -- are problems of companies

             5   that operate completely and are a corporate governance

             6   system.  Every day, there are new ones.

             7             So is there a problem in the broadest sense? 

             8   Absolutely.  And it keeps going and going and going.  You

             9   know, it's like the Energizer bunny.  There's always a new

            10   one.

            11             The question the Commission faces here, given that

            12   that is the case -- and I think we all know that that is the

            13   case.  The question the Commission faces is is there going to

            14   be some system of accountability for directors that is in the

            15   middle between taking your money and going home and taking

            16   your loss and putting up the millions of dollars it takes to

            17   effectively conduct a proxy contest?

            18             The response from the corporate community since

            19   Enron occurred has been deeply disappointing to me, because I

            20   have said -- and Marty Lipton has been in the room on many

            21   occasions -- I have said on behalf of the AFL-CIO that

            22   Sarbanes-Oxley and its attendant new regulatory system is

            23   designed to deal in large part -- it uses bright-line rules

            24   to deal with outlier problems.  Very important outlier

            25   problems that must be dealt with.  But that's what it does. 




             1   And it's sub-optimal for dealing with the fundamental issues

             2   of how to run a business, and whether or not boards are

             3   really functioning, and it's in our interest as investors,

             4   having a more flexible governance-oriented system. 

             5             The corporate community's response -- and I think

             6   you've heard it in spades this morning -- has been, "Oh, our

             7   shareholders are all short-termers.  We don't want to be

             8   accountable to them."  And then when it's pointed out, of

             9   course, that this proposal doesn't actually give the short-

            10   termers any powers at all, those people aren't short-termers. 

            11   They're all special interests of some kind with sinister

            12   hidden agendas. 

            13             And, in fact, what's left is the nolle say. 

            14   There's no one -- no one -- who is really worthy to hold the

            15   CEO accountable.  Their answer, three years after Enron, is

            16   no one.  No accountability.  Nothing.  And that answer just

            17   doesn't pass the laugh test.

            18             The Commission has crafted a proposal that, in the

            19   opinion of many of us in the worker shareholder community, is

            20   not strong enough, but it does have the -- it is conceptually

            21   correct.  It has the right approach to the question of who? 

            22   Who holds them accountable?  Because the answer "no one" just

            23   doesn't work.  And that, I think, is the -- that is the issue

            24   on the table.  And it is connected to this question of

            25   collegiality.  




             1             Because the other question the Commission faces is

             2   is collegiality at all costs?  Is collegiality over

             3   accountability?  Is collegiality over responsibility?  Is

             4   collegiality over the interests of the corporation and its

             5   shareholders?  Should that really be the public policy of the

             6   United States in the board room today, after Enron and

             7   WorldCom, and on and on and on and on?  Is that really what

             8   our policy should be?  And again, I just don't think that

             9   proposition passes the laugh test.

            10             And finally, with respect to Enron and jobs, I

            11   cannot resist saying that I personally have known hundreds of

            12   Enron employees, employee shareholders, who lost everything,

            13   and whom the American labor movement fought with the money of

            14   our members to try to help get pennies on the dollar back. 

            15   And I know that those people feel that the entire system of

            16   corporate governance in the United States failed them and

            17   ruined their families' lives.  And I could tell you

            18   individual story after individual story.  

            19             This proposal does not give and would not give

            20   those individual investors much power.  And some people will

            21   be here this afternoon to complain about it.  But what it

            22   does give is it gives people just like them and their

            23   fiduciaries some ability to make sure that doesn't happen

            24   again.

            25             And since all of our time is running out, on behalf




             1   of my members, I'd like to commend the Commission for its

             2   courage and responsibility in bringing that proposal forward.

             3             MR. DUNN:  I'm going to turn it over to one of the

             4   Commissioners, Commissioner Campos.

             5             COMMISSIONER CAMPOS:  Thank you.  Well, it seems

             6   clear to me that in terms of addressing whether there's a

             7   problem, if one lines up the numbers of letters we've

             8   received and the commentary, there was a clear majority that

             9   say there is a problem.  And things end up, it seems to me,

            10   in terms of investor organizations, whether they're

            11   institutional or individual, retail or otherwise, and there

            12   is a clear overwhelming response that the Commission has to

            13   deal with that there is a problem.  

            14             And the problem, as I think has been very well

            15   stated and articulated -- and I'll go over that again -- ends

            16   up being a function of accountability to shareholders.  And

            17   while some academics have posited that maybe the ownership

            18   model in America is no longer valid, that maybe, you know,

            19   ownership of capital shouldn't necessarily control decision-

            20   making for the long term, our laws still do.  And owners are

            21   owners.  And we're faced, it seems to me, with that reality. 

            22             And so from a very pragmatic standpoint, this

            23   particular proposal, as it would say very clearly, is modest

            24   because it is modest.  And so as I'm listening here, I'm

            25   trying to understand why it's so terrible for the corporate




             1   community to deal with this.  

             2             Number one, it's not a takeover item.  There's no

             3   way, you know, under this particular proposal that management

             4   can be replaced under this particular proposal. 

             5             Secondly, a nominating shareholder, if you get to

             6   that particular position, cannot propose someone who

             7   represents its interest.  It can only propose an independent

             8   member of the board.  So in other words, to enhance the board

             9   from an independence perspective.

            10             So why do you do this?  I've asked myself over and

            11   over.  This is a modest, modest proposal.  Who would go and

            12   undertake the effort, you know, to gather support, to

            13   undertake this whole effort unless you've got a very real

            14   problem?  Unless fundamentally, the board is so bad that,

            15   given the obligations that the shareholders have, whether

            16   it's through fiduciary or institutional or otherwise,

            17   something needs to be done.

            18             So that's the first item that strikes me.  And I've

            19   been listening carefully.  I've been trying to find empirical

            20   evidence, discreet evidence about the problems, because I am

            21   concerned about the corporate world.  And I've been on

            22   boards, and I've been, you know, on the CEO side, and I

            23   understand those kinds of pressures.  But I understand

            24   accountability.  

            25             And as far as the issues that I've heard,




             1   distraction.  I'm looking for evidence of companies being

             2   distracted, you know, by this.  I can't think of anything

             3   more important than being responsive to shareholders.  If a

             4   shareholder is successful and an independent director goes on

             5   the board, why is that going to be divisive?  Why is that

             6   going to necessarily mess up congeniality, if that's even a

             7   reasonable goal?  You know, that particular director is going

             8   to have fiduciary duties as well, as far as I see the law. 

             9   And if they're going to have special interests or something

            10   that is not to the benefit of shareholders and the discharge

            11   of fiduciary duties, that particular director would have

            12   problems. 

            13             So I guess the other idea is somehow that there's a

            14   hijacking or a special interest situation here that would

            15   somehow create a subversive or some sort of a disruptive

            16   situation of the board.  

            17             Now, again, I remind everyone that this particular

            18   nominee, if it gets past the first triggering point, has to

            19   be elected by a majority.  And then if that particular

            20   director isn't discharging his or her responsibilities,

            21   they're legal remedies for that particular situation. 

            22             And again, in most companies, you have very large

            23   shareholder holdings, and so interests are very difficult to

            24   be narrowly focused, and have that be the overwhelming

            25   desire.  And I would submit that most shareholders simply




             1   want long-term value, and know that the management has some

             2   plan that is moving toward there. 

             3             So, you know, my basic proposition is a very

             4   practical one.  Even if somehow it's not needed, because

             5   today's generation of directors and today's CEOs are now

             6   going to be responsive, what's the harm?  What is so bad in

             7   having an access, a limited access situation like it is?  And

             8   there's very good arguments that that issue be much more.

             9             It's a little bit like William Douglas said about

            10   the SEC in general, you know?  Our rules and our laws are

            11   like a well-oiled shotgun in the corner, that's also either

            12   loaded or the ammunition is nearby, that is rarely used.  You

            13   know, I wonder how often this would be used.

            14             So I don't know who wants to address that, but I'd

            15   like to hear direct evidence about the danger or the harm,

            16   and why there isn't a problem. 

            17             MR. DUNN:  Well, I will jump in.  We have four

            18   folks who have been waiting for a second bite at the apple

            19   that we'll run a few minutes over and go with.  You were

            20   first.  And then I think we'll finish with you at the risk of

            21   letting an economist go last, which I know can be --

            22             (Laughter.) 

            23             MR. MOORE:  I understand.  And I promise I will

            24   keep my comments very brief.

            25             Commissioner Campos, I'd also like to make one




             1   further point along what you just said, that we can never

             2   forget how tough a hurdle this is.  This is majority vote,

             3   majority vote, majority vote.  I hope you all keep that in

             4   mind all day long today.

             5             But who ultimately bears the responsibility if

             6   we're wrong?  Well, we do, the long-term shareholders of the

             7   company.  And I think that's a point that cannot be

             8   overlooked, not only -- and I neglected to say I'm here today

             9   not just on behalf of North Carolina, but the National

            10   Coalition for Corporate Reform.  And we have somewhere around

            11   a trillion dollars worth of assets in the market that have

            12   signed on to some access to the proxy, and it's approximately

            13   20 percent of publicly-traded companies.  And I don't think

            14   we're a fringe element. 

            15             But if you consider who is ultimately responsible

            16   if we are wrong, I hope that gives us even more of a voice at

            17   the table.  And do not forget that this will only be achieved

            18   when you have an instance where you have very diverse long-

            19   term shareholders who all get together.  I submit to you that

            20   that instance will only happen where there is a history of

            21   long-term poor performance, coupled with severe indifference

            22   on the part of the existing board and management. 

            23             MR. DUNN:  Mr. Bebchuk.

            24             MR. BEBCHUK:  Commissioner Campos raised the issue

            25   of empirical evidence, so I thought what I should do is




             1   highlight three pieces of empirical evidence which I think

             2   are relevant to what people have been saying.

             3             First of all, assuming that we are bound to have

             4   some "dead" or under-performing companies, what is going to

             5   happen with them?  Randy and Marty talked about the

             6   possibility of a takeover.  Two colleagues and I have an

             7   empirical -- which we looked at all the takeover bids in the

             8   second half of the '90s.  And what we find is that for

             9   companies for targets with staggered boards, which are about

            10   half of the targets, the likelihood of remaining independent

            11   three years down the road is about 60 percent, and those

            12   target shareholders lose an average risk adjusted more than

            13   20 percent. 

            14             The reason why we have permitted this elaborate

            15   structure of takeover defenses is because people have been

            16   saying the corporation is representing a democracy.  If you

            17   are dissatisfied with what is happening, you should not

            18   facilitate a takeover, but rather, you should replace the

            19   directors.  So we go and look at what is happening in that.

            20             And in the written materials I submitted, I put

            21   forward our evidence about the incidence of proxy contest. 

            22   And what we see is that in the seven-year period from '96 to

            23   2002, out of about 10,000 public companies, we have proxy

            24   contests in only about 10 companies a year.  And out of

            25   those, only about two are companies with a market




             1   capitalization that is greater than 200 million.

             2             Now, one possible inference is that all the other

             3   10,000 companies in the country that are the business

             4   roundtable -- seems to believe that all the other 10,000

             5   companies, their shareholders are quite satisfied and

             6   content, and that's why we don't have a proxy contest.  It

             7   seems to me that an even more plausible interpretation is

             8   that almost non-existent incidence of proxy contest is at

             9   least in part due to the impediments that the current

            10   arrangements produce.

            11             And the last piece around empirical evidence is

            12   that there is substantial work by financial economists that

            13   looks at the facts of corporate governance provisions that

            14   insulate boards from shareholders -- like staggered boards,

            15   limits to shareholder power -- to amend by-laws and so forth.

            16             And the conclusion of those -- which I survey in

            17   the written materials I submitted, is that when you have

            18   those arrangements, when you have more insulation, market

            19   values lower, stockholder returns during the '90s were lower,

            20   operating performance is worse, and executive compensation

            21   goes higher and less sensitive to performance.  

            22             So this evidence suggests that at least on the

            23   margin having less insulation of boards from shareholders

            24   would be a good thing for shareholder value.  And therefore,

            25   I commend the Commission for considering this step to avoid




             1   reducing, to some extent, board insulation.

             2             MR. DUNN:  Thank you.  I'm going to let you guys

             3   split five minutes.  And I realize we're kind of steamrolling

             4   downhill and not giving Steve a chance to answer us.  Maybe

             5   60 seconds at the end, we'll throw, okay?  So be prepared. 

             6   All right?  Go ahead, Eric.

             7             MR. ROITER:  Thank you.  I'll try to be brief.  But

             8   I thought it would be useful if I just took two minutes and

             9   told you what my preliminary thinking is about how we would

            10   actually live with this rule if it were adopted in

            11   essentially the form it's proposed. 

            12             First, I think it would be a by-product.  We

            13   wouldn't probably deliberately plan to be a five percent

            14   shareholder.  But we would inevitably be a five percent or

            15   greater shareholder in a great number of companies.  

            16             One thing is we'll have to change our systems,

            17   because I don't believe we currently try to track day by day

            18   by day whether we are at five percent or not.  And therefore,

            19   there's now some more work to be done to make sure that we --

            20   as I understand the Commission's rule, you have to continue

            21   to be at least a five percent holder in every day for that

            22   two-year period.

            23             Again, I would start by the proposition that we are

            24   a fiduciary to our fund shareholders.  And if we're given --

            25   forgive me for using this word -- a privilege -- but I think




             1   it is an entitlement -- to do something that otherwise was

             2   not available to us, then we would have a serious fiduciary

             3   duty to examine how and when we would use this new

             4   entitlement.

             5             Last year, to give you a rough sense of our size,

             6   we voted proxies at the annual meetings of over 3600 U.S.

             7   companies.  If you count foreign companies, it gets to about

             8   6,000.  I'm not sure we can get into the headhunting business

             9   and come up with a roster for all of those companies, or even

            10   for a significant fraction of those.

            11             We do have, I think, a duty to examine what we can

            12   do, if that opportunity were available to us.  One approach I

            13   think we would give serious thought to would be to step back

            14   -- and I'm echoing now what has been said by a number of

            15   participants here this morning -- look at what kind of

            16   qualifications, what kind of characteristics are important

            17   for independent directors.  In a sense, independent directors

            18   are really a misnomer.  What we really want to find are

            19   directors that are dependent, but dependent on shareholders,

            20   and responsive to shareholders.

            21             And we, I think, can come up with factors, filters,

            22   both positive and negative ones, that would look to such

            23   things.  Are there reciprocal relationships where somebody is

            24   the CEO of one company, on the board of a second company, and

            25   the CEO of that second company is on the board of that first




             1   company?  I think serious thought needs to be given,

             2   generally speaking -- and these things can't be dispositive -

             3   - but looking to see how many boards any individual serves

             4   on, especially if that individual is a full-time officer of

             5   another company.  There may be a preference to at least have

             6   people that aren't engaged full-time in a day job.

             7             So those are some of the practical factors that we

             8   think we would bring to bear.  It may turn out that we

             9   develop those, publish them, give them to companies, invite

            10   them to speak with us -- and, in fact, we're getting

            11   invitations now to speak with management in the wake of the

            12   Commission's other rule regarding the role of the nominating

            13   committee -- and invite nominated committees to come back to

            14   us to say we found some potential candidates.  Hopefully,

            15   they'll be more than the number of nominations we could make,

            16   so we would have some kind of choice, and we could give some

            17   kind of feedback about which one we think would be

            18   preferable.  It may come to the point where some companies

            19   really are in extremis that we would actually offer up a

            20   particular individual.  So I see a combination there.  

            21             And I would tell people who are thinking of using

            22   the Commission's rule to look at our proxy voting guidelines,

            23   which are on our web and filed with the SEC, and other large

            24   institutional investors have them as well.  There are certain

            25   conditions under which we tell people we are going to




             1   withhold votes on board members the next time around if

             2   certain actions are taken, including adopting a poison pill

             3   plan without putting that poison pill plan to a shareholder

             4   vote.

             5             So one way to maximize, perhaps, the use of this

             6   new rule if it's adopted is to look to see the conditions

             7   under which institutional investors currently are saying they

             8   will withhold votes for directors.

             9             MR. DUNN:  Thank you.  Mr. Kroszner.

            10             MR. KROSZNER:  Thanks.  I think the best way to

            11   summarize a response to the Commissioner's question is that I

            12   think it's -- the proposal is the wrong answer to the right

            13   question.  Because I think the right question is thinking

            14   about what are the role of shareholders in particular, large

            15   shareholders?  Because small, dispersed shareholders don't

            16   have enough expertise or enough time to be able to

            17   effectively monitor, but large shareholders may be more able

            18   to.  Although as we just heard, holding 3600 companies in the

            19   U.S., even for a very large institution like Fidelity,

            20   doesn't make things very easy to monitor all those companies.

            21             And that's why I think not focusing on this type of

            22   proposal of sort of trying to get some extra directors on

            23   under certain circumstances, but doing things like -- and I

            24   think Lucian would also agree with this -- maybe facilitating

            25   the takeover process, allowing for an outsider to be able to




             1   more easily gather the votes necessary to run a successful

             2   takeover.

             3             So the outside entrepreneur comes in and visits

             4   Fidelity, visits Van Guard, visits just a small number of

             5   others -- Barclay's Global, State Street, our large trustees.

             6             So if you look at, like, the Dow Jones 30

             7   industrials, the top five institutions, on average, own 20

             8   percent.  The top 10 institutions own 30 percent.  So if they

             9   could just easily go to a small number of these people and

            10   feel that they would have a decent chance of being able to

            11   run a takeover contest, that seems to be the effective means,

            12   or more effective means, rather than these other approaches. 

            13             Things that may be obstacles to that are, as I had

            14   mentioned before, concerns about short swing rules, if this

            15   is seen as acting as a group; the Williams Act disclosure,

            16   because, of course, the entrepreneur has to be able to

            17   develop enough of a holding in his or herself to make it

            18   worthwhile to undertake this.  And so thinking about those

            19   kinds of rules, I think, is really an important way to go.

            20             In particular, some of the concerns, I think, that

            21   people would have with this proposal is that a lot of the

            22   trigger levels are fairly arbitrary.  They're not really

            23   based on good systematic evidence.  Commissioner Goldschmid

            24   reminded me of one of the election commissioners in Florida. 

            25   Thirty-five percent is, well, close to majority.  And I




             1   think --

             2             COMMISSIONER GOLDSCHMID:  Randy, you need a second

             3   vote.

             4             MR. KROSZNER:  Oh, yes.  

             5             COMMISSIONER GOLDSCHMID:  And brokers can vote on

             6   the 35 percent, which means it is close to a majority in

             7   itself.

             8             MR. KROSZNER:  For sure.  But you had said two

             9   majority votes in one of your earlier comments.  So I just

            10   was making --

            11             COMMISSIONER GOLDSCHMID:  There's a second problem

            12   to this that requires majority twice, an access proposal.

            13             MR. KROSZNER:  And I think -- so it's open to

            14   potential tinkering and such, and not really based on

            15   something systematic.  So it allows to change down the line. 

            16   There's a bit of a camel's nose under the test that I think

            17   creates uncertainty, and I can understand that.  But also, it

            18   changes the threat point of sort of outside groups maybe

            19   trying to put pressure on firms, even if this isn't actually

            20   used very much.

            21             It's the same thing with the takeovers.  Even if

            22   they're not actually used very much, it's the threat of

            23   takeover that is really the key.  You don't actually have to

            24   see very many of them for them to be effective.  And I think

            25   the same thing can be here.  And I think there's a concern




             1   not that you're actually going to get a particularly special

             2   interest person on the board.  But it makes it more easy to

             3   try to extract some concessions from a board or from a

             4   corporation that might not be consistent with shareholder

             5   value, even if they actually can't get someone onto the

             6   board.

             7             So my bottom line is that I really applaud the

             8   Commission for moving to phase 2, for thinking about the role

             9   of large investors, significant shareholders, and what they

            10   can be doing.  But I think it's the wrong focus.  Take away

            11   the existing restrictions rather than put on a complex new

            12   set of rules.

            13             MR. DUNN:  Thank you.  Steve, you get to close.

            14             MR. ODLAND:  Well, I think that the business

            15   roundtable agrees that companies need to be shareholder

            16   responsive, shareholders of all size.  I think that the

            17   Commission -- and in many of the comments, I think that the

            18   intentions here are targeted towards relatively few

            19   companies.  Unfortunately, there are a few, but it is a

            20   relatively few that are unresponsive.

            21             I think companies today are reading out to

            22   shareholders.  I'll use our own company just as one little

            23   example.  But our largest shareholder himself sits on our

            24   board.  We've reached out.  Our independent nominating

            25   committee did reach out and took a nomination from that




             1   largest shareholder and put that person on the board.  Our

             2   independent nominating committee has reached out to Fidelity

             3   and a number of our other shareholders and asked for

             4   nominations.

             5             This is going on today far differently than what

             6   was happening, I think, a few years ago.  The business

             7   roundtable believes this is a matter for state law, and state

             8   law does say that every individual board member has a

             9   fiduciary responsibility to all shareholders.  And that means

            10   that perhaps not every shareholder is going to always be

            11   happy with every decision, because the fiduciary

            12   responsibility is to the whole.

            13             I think the way the rules are set up here, I think

            14   it does not address the objective.  I think you've

            15   established here one percent triggers, and I think, you know,

            16   many comments have been made that this isn't going to happen

            17   very often.  I disagree.  I think it's going to happen a lot. 

            18   Because I think that one percent shareholders are going to

            19   try to trigger proxy access, because it's only in effect the

            20   next year and so forth, just in case.  And I think you're

            21   going to see these triggers broadly used across, and it's

            22   going to distract from management.  And I think management

            23   and boards need to -- it's going to distract from both. 

            24   Management and boards need to be focused on their

            25   shareholders and creation of shareholder value over the long




             1   term.

             2             I think that we should let the newly independent

             3   governance and nomination committees do their jobs.  I know

             4   that the comment has been made that there have been

             5   independent directors around for a long time.  There have not

             6   been independent boards around for a long time in most of

             7   these companies.  This is a new phenomenon.  A lot of these

             8   rules haven't even taken effect yet.  And there's incredible

             9   -- there are incredible statistics out there that companies

            10   have changed dramatically just in the past year.  I think we

            11   need to let -- this whole thing was set up to have

            12   independent nominating committees assess and be reactive to

            13   shareholders, and responsive to shareholders.  And we need to

            14   let this process work, because I think it is and will work

            15   for the future.  

            16             MR. DUNN:  Thank you all very, very much.  You've

            17   been incredibly responsive and helpful.  I'm sure these are

            18   themes that we'll be addressing as the day goes on.  I'll

            19   turn it over to Alan to close.

            20             MR. BELLER:  Again, thank you all on this panel for

            21   your contributions.  We're running a little late.  I'd like

            22   to convene the second panel promptly at 10:55, so we'll take

            23   a break for about nine minutes. 

            24             (A brief recess was taken.) 

            25             MR. BELLER:  If we could all take our seats,




             1   please.  Thank you.  Okay.  We're now going to address the --

             2   the second panel of our -- of our day's agenda, which focuses

             3   around the question of whether the Commission's proposal is a

             4   reasonable solution.  I think I will, for the benefit of the

             5   audience, including the -- the Net audience, at least go

             6   around the table and identify our participants on the second

             7   panel.  

             8             From my left, Peter Wallison of the American

             9   Enterprise Institute, Ira Millstein of Weil, Gotshal &

            10   Manges, Ralph Whitworth of Relational Investors, Charles

            11   Elson from the University of Delaware, Richard Breeden of

            12   Breeden & Company, and the only formers we're identifying is

            13   former members of the Commission, and Richard is a former

            14   chairman of the SEC.  Next to him Joe Grundfest, a former

            15   commissioner, now at Stanford Law School, Thomas Donohue at

            16   the U.S. Chamber of Commerce, and finally Peter Clapman here

            17   representing TIAA-CREF.

            18             I think I'd like to start.  This panel is about is

            19   the proposal a -- a reasonable solution.  The first panel

            20   addressed whether there was a problem, and what it was, and

            21   there were a couple of sides of that issue.  So I assume this

            22   panel without necessarily claiming unanimity on the first

            23   panel, that there -- that there is as problem, or being able

            24   to identify it.  In light of that debate, certainly a number

            25   of participants in the debate on the Commission's proposal




             1   have agreed that there is a problem involving unresponsive

             2   board and/or sub-standard performance at some companies.  And

             3   also a lack of effective means of shareholders to address

             4   those issues.  

             5             One approach to that, that has long been advocated

             6   by some, including some shareholders, is greater shareholder

             7   ability to play a role in the process of nominating and

             8   electing directors.  The Commission's proposal before us

             9   today follows that approach in one particular respect,

            10   involving a change in the proxy process to permit significant

            11   shareholders, or groups of shareholders to require that

            12   nominees be included in company proxy materials.

            13             The requirement would be triggered by one of two or

            14   three other proxy-related events, suggesting that a

            15   substantial percentage of shareholders were dissatisfied

            16   either with the way the proxy process was working, or with

            17   director nominees put forward by companies.  It would also be

            18   subject to other conditions.  And we're not going to talk

            19   about the details of that proposal very much, I hope, on this

            20   panel, because we're going to leave much of that for the next

            21   panel.

            22             Obviously, we will -- there are no clear lines, and

            23   I think the discussions will overlap.  But I guess I'd like

            24   to start with a question for Mr. Breeden.  Among your current

            25   activities is, you're acting as the corporate monitor of




             1   WorldCom MCI.  And in connection with that, you recommended

             2   in your report on improvements in corporate governance a

             3   procedure not unlike the Commission's proposal for a

             4   particular company that had been involved in gross wrongdoing

             5   and had shown I guess what I'd describe as appalling

             6   weaknesses in governance and controls.  And the question I'd

             7   like to start with is, is the Commission's approach an

             8   appropriate one to address the -- the broader but less

             9   extreme problems among public companies generally, or among

            10   that sub-set that the -- that the proposal would attempt to

            11   identify?

            12             MR. BREEDEN:  Well thank you, Alan.  First of all,

            13   it's a great pleasure to be back here, and I'd like to just

            14   compliment the -- the Commissioners and the staff for holding

            15   this roundtable, and -- and for soliciting the kind of

            16   dialogue and public discussion of what is a very important

            17   proposal.  And I think this an example of the Commission at

            18   its best, trying to put forward a balanced solution to a

            19   national problem.  To get all the best thinking that it can,

            20   and ultimately make the decision that you will have to make

            21   going forward.  So, this is a very, very healthy process, and

            22   -- and I'm glad to see it.

            23             I'm struck by the -- the words of the immortal Yogi

            24   Berra that it's deja vu all over again.  We tried to

            25   restructure the proxy rules in -- from 1990 to 1992, when I




             1   served as chairman.  And at the time, we were trying to

             2   achieve three things, which we did change the rules to do. 

             3   One to permit greater communications among major shareholder

             4   groups, two to establish the short slate -- the ability to

             5   have a proxy contest for less than all of the board, and

             6   three to improve disclosure regarding compensation, and

             7   particularly equity instruments.  

             8             And I can remember Jack Welch in my office upstairs

             9   telling me that options had no value, and therefore it would

            10   create chaos if we were to require disclosure concerning

            11   options grants.  The same arguments were raised against the

            12   proposals then.  They're premature, they were unnecessary,

            13   they were interfering unduly with the role of the states,

            14   they were an over-reaction, they were going to be costly. 

            15   The world would end if we adopted them.  And we did adopt

            16   them, and last time I checked, the world is still here.  

            17             If anything, many people who said we didn't go far

            18   enough perhaps were correct in hindsight -- 20/20 hindsight. 

            19   But I think the arguments for the status quo will always be

            20   raised, but one of the greatest virtues of capitalism as an

            21   institution is its ability to evolve to meet the challenges

            22   of the times.  And this is an example of the SEC, I think,

            23   trying to solve a problem that we have in our system -- not

            24   to destroy the system or harm it, but to make it better.  

            25             At MCI, we faced the case, as Alan mentioned, where




             1   a serious problem of -- of governance dysfunction -- anytime

             2   that eight of your most senior corporate officers get

             3   indicted, I think it's a fair -- fair conclusion that you

             4   have a dysfunctional governance system.  And admittedly, the

             5   WorldCom problem is an extreme example, at one end of the

             6   system.  Its misbehavior that virtually all public companies

             7   do not have.  It's a limited case, and it's an extreme case. 

             8             But like Enron, it did happen.  And -- and I think

             9   the Commission can't stand back and ignore the fact that when

            10   Fortune 100 companies implode and cause losses to investors

            11   measured not in billion, but in tens of billions or hundreds

            12   of billions, that we have a problem with our system that we

            13   can't be so complacent as to say we won't even try to make

            14   improvements.  And so, in the MCI situation, we decided that

            15   mere disclosure was not an adequate solution to problems, and

            16   that there had to be some ability, if shareholders believed

            17   the board was not adequately representing shareholder

            18   interest, for the shareholders to put forward candidates who

            19   they thought would do a better job.

            20             Now, in our system at MCI, there are no triggers. 

            21   Every year, when there is a vacancy, there is a process under

            22   which the nominating committee does as it would do in any

            23   company -- select who they believe to be a list of some of

            24   the best candidates.  And unlike other companies, they are

            25   then required to sit down with their larger shareholders,




             1   share their list, discuss with the shareholders are these the

             2   best candidates we can find, take in put if the shareholders

             3   think those candidates are not as -- the best that could be

             4   found, and if, hopefully, as in the shareholder resolution

             5   process, in most years, they'll reach an agreement.  

             6             If they don't, then the shareholders have the right

             7   to nominate someone to have a contested election for that

             8   seat.  And horrors of horrors.  We might actually have a

             9   contested election, just like every town and state and

            10   national office in America, just like every major university,

            11   just like most other institutions that practice democracy. 

            12   And it isn't something that we would expect will happen every

            13   year.  If the company is well run, does a good job, has good

            14   performance, there's no reason to think shareholders will try

            15   and force changes in the board.  

            16             But if the company is on a path, as WorldCom was in

            17   the past, rather than waiting for the criminal process to

            18   take over, and the immense collateral damage that can occur

            19   to shareholders and employees, and customers and others, it's

            20   an attempt to have a process that would operate sooner.  In

            21   terms of whether the Commission has done the right job in

            22   coming up with a rule for all companies, rather than

            23   companies who have had the WorldCom history, I think you've

            24   done an excellent job.  

            25             And my one message that I would hope would be heard




             1   here is, don't let the perfect be the enemy of the good.  You

             2   have a good proposal.  It's balanced -- it's not perfect.  I

             3   personally, were I doing it, would have thresholds that were

             4   a bit lower.  I think your thresholds are a little bit high. 

             5   There's a risk of a lot of litigation, because some of them

             6   are complex.  You have a risk that the process is going to

             7   work slowly.  

             8             But, I wouldn't hold back from passing the rule,

             9   which is an excellent rule, and does focus on -- on a real

            10   problem in our corporate sector.  I think the complexity is

            11   there because the Commission has done what it always does. 

            12   It's tried to be balanced and responsive, it's tried to

            13   listen to the objections and craft a reasonable middle

            14   ground.  I don't think the Commission should ever be at the

            15   extreme.  It is a body that looks for the middle ground, and

            16   while this rule isn't perfect, it's a very, very good rule,

            17   and I think you should adopt it.  

            18             MR. BELLER:  Thank you.  Mr. Donohue, I know that

            19   the U.S. Chamber of Commerce's comment letter asserts that

            20   there's been, and I'll quote "There's been no compelling

            21   objective showing of need for the new rules."  I guess I'd

            22   start by asking you, do you recognize some need for

            23   shareholders to play a larger role in the process of

            24   nominating and electing directors, and if so, as an

            25   alternative to the Commission's rule since the letter clearly




             1   indicates that the Commission's proposal doesn't work -- are

             2   there any suggestions as to what approach would be

             3   appropriate?

             4             MR. DONOHUE:  Well thank you, Alan.  First of all,

             5   the thesis of our argument is based on the fact that we have,

             6   in recent time, gone through some of the most substantive

             7   adjustments in how boards of directors are required to

             8   operate, both under Sarbanes-Oxley, under the new rules from

             9   the New York Stock Exchange concurred in by the SEC, from the

            10   new rules under the NASDAQ concurred in the by the SEC, and

            11   from a whole series of practices that are developing not only

            12   because of the rules, but because of the realities of the

            13   market place, and the realities of the legal place.

            14             Everything that happens in our companies is now

            15   affected by what happens with either the securities lawyers

            16   or the class action lawyers, and we spend an extraordinary

            17   amount of time in boards talking about that.  

            18             I think that while the former chairman and a very

            19   talented man points out that everybody else runs for office

            20   in a democracy, I -- my own view is that corporate directors

            21   -- the ones you really want to get -- are not very good local

            22   politicians.  And I would not like to see on the boards of

            23   corporations on a regular basis the whole running-for-office

            24   for one overriding reason.  And that is that some of the best

            25   of people that we want on those boards won't run. 




             1             Second, I ask a series of questions that I hope the

             2   Commission will consider.  And that is, who's behind all of

             3   this?  And now, I'm not talking about the lawyers and the

             4   academics and the -- and the former commissioners and others

             5   who are considering these matters.  But who's really behind

             6   it?  Who's really driving this issue, and who sees an

             7   opportunity in this -- in this new  milieu to -- to advance

             8   their other issues?  

             9             It's very clear to those that have carefully looked

            10   at the matter, that unions that have been unable to deal with

            11   corporations on a whole series of issues see this as a great

            12   opportunity to leverage the corporations.  They don't even

            13   believe that it'll happen that often, but they think they'll

            14   have the sword to hold over their heads.  I suppose there are

            15   other interest groups, as well, that might do the same thing.

            16             Now, when we began to look at this, we didn't just

            17   dismiss it out of hand.  You remember in our comments, we had

            18   about 30 suggestions that we looked at that might make it

            19   better.  For example, the whole question of deciding how you

            20   get to your percentage.  I mean, does everybody -- is it

            21   everybody that has a share, or the people that decide to

            22   vote?  Because some of your most thoughtful, mature and

            23   skilled investors may not vote for a lot of reasons that

            24   they've long established.  And that puts you at more risk. 

            25             We went through these 30 objectives of improvement,




             1   and at the end of it, we looked at it, and we said, you know,

             2   even with all of those 30 issues, for two reasons, we would

             3   oppose it.  One reason, that's what we believe in terms of

             4   having to deal with all of the new things that are in place,

             5   and that are being put in place, that it would be best not to

             6   do this now.  And the second reason is, we think with all of

             7   the enthusiasm that has been gendered up on this issue, maybe

             8   by us saying absolutely not, we can get a little bit of more

             9   detail thought about it.  

            10             As a matter of fact, there are those amongst my

            11   colleagues who believe that the Commission doesn't have the

            12   authority to do this under the law, and we may well be in a

            13   position, if this were to be passed, particularly as it's

            14   written, to go to the court to test that.  Now, make sure you

            15   understand one thing.  The chamber is not acting in an

            16   irresponsible way at all.  We understand there are 17,000

            17   public companies.  We understand that there are some

            18   companies whose behavior, and executives whose behavior, and

            19   boards whose behavior is totally unacceptable, and we ought

            20   to get those people out of our business. 

            21             What we are concerned about is that this great

            22   American miracle that generates all of the capital and the

            23   inventions and the leadership -- the economic leadership in

            24   the world -- is not so strangled with new rules, new

            25   regulations, new approaches, new leverages, that they don't




             1   tend to their business.  I think -- I think what we really

             2   want here, is we -- we don't want special interests

             3   masquerading as shareholder interests.  We want a system

             4   where shareholders can have their voice, and where boards

             5   will be responsive to that voice.  

             6             There are a whole series of things, from -- from --

             7   as I mentioned, what will happen on the follow-on to these

             8   actions?  Short sellers, questions of legal issues, the

             9   ability to attract good board members, who's going to vote. 

            10   It's just so that we can put a stake at the other end of the

            11   issue.  This is not a timely matter.  I -- Mr. Breeden

            12   indicated that Jack Welch didn't think so, even though Jack

            13   Welch had a little problem with his compensation.  He created

            14   one of the greatest companies in the history of the world. 

            15             What we want to do is put a stake in the ground and

            16   say look, can we be a little more reflective about this?  Can

            17   we understand that there's more new stuff in a board room,

            18   and that 60 percent of our time is spent doing things that

            19   have been put on our plate, not on leading our companies? 

            20   And we need a careful thought about who's behind it, why it's

            21   there, and what are you going to pass.  And we want to be

            22   very -- very reasonable about this, and I thank you for the

            23   opportunity to offer our points.

            24             MR. BELLER:  I guess I turn to Mr. Clapman, if I

            25   could, to maybe respond to some of what we've heard so far.  




             1             MR. CLAPMAN:  First, TIAA-CREF, with a sense

             2   similar to what Richard Breeden just said, strongly supports

             3   the proposal as it has been proposed, and urges adoption of

             4   it.  We think it's a very -- to use the word just employed --

             5   reflective -- it's a product of a very reflective process at

             6   the Commission itself.  We believe that it really -- if you

             7   start to run the numbers and see the spectrum of shareholders

             8   in the United States, it can only produce effects if whatever

             9   develops out of this is broadly supported by a large, full

            10   spectrum of shareholders in the United States.

            11             What we try to at TIAA-CREF is engage in a

            12   corporate governance program that depends in its first

            13   instance on quiet diplomacy.  And a point that I would make,

            14   just as a starting point, here, is that the very fact that

            15   the Commission has been considering such a rule starting with

            16   the staff report, has, in our view, substantially affected

            17   the dynamics of discussions we are currently having with

            18   companies.  

            19             And a concern that I would express, recognizing

            20   that there are some honest views that believe that this is a

            21   mistake, is if this were ever pulled by the Commission, I

            22   think it would adversely affect the ability of shareholders

            23   to have positive results with their quiet diplomacy with --

            24   with companies.  So I really urge that as -- as a -- as a

            25   consideration.




             1             I also believe that this rule is complementary, not

             2   in challenge to the reforms of the Stock Exchange and

             3   Sarbanes-Oxley.  Those rules and provisions, and listing

             4   requirements really don't get at the heart of how

             5   shareholders in limited circumstances, with a limited number

             6   of companies -- and that's really where I believe it would

             7   fall -- can have an effective voice in corporate governance. 

             8   So, although I applaud those reforms, that is not a rationale

             9   not to take this step, because I don't think, again, whether

            10   you think it's a reasonable proposal, depends on whether you

            11   think there's a problem.  

            12             The problems in corporate governance in the United

            13   States have not yet been fixed.  This is an extremely modest

            14   -- as it was pointed out in the earlier session -- attempt to

            15   address those issues, and give the right shareholders a

            16   potential voice here, and to depend ultimately on

            17   shareholders understanding what their best interest is.  And

            18   I have great faith that shareholders who are fiduciaries for

            19   the people that they manage the money for will operate in

            20   that way.

            21             The notion that we should give now time for the

            22   reforms that have just been adopted, to see how those reforms

            23   -- whether they work or whatever, I think is a polite way of

            24   saying we shouldn't have such a rule.  Because, by the time

            25   you could get a reasonable enough time to make any




             1   determination, probably people will have forgotten why we

             2   engaged in this effort in the first place.  And then you'd

             3   have the same level of dispute and challenges to whether it

             4   really didn't work, it did work, or what have you.  So, I

             5   reject that as a notion to not have this rule adopted.  

             6             Finally, if I could just -- just close on -- on

             7   this note.  I think any conjecture as to how often this would

             8   be used is -- is nothing more than conjecture.  We can all

             9   make a good guess.  I think the SEC has, in the spirit of

            10   reflecting on this issue, probably reflected long and harder

            11   on -- on it than anybody could have reasonably expected.  And

            12   I think good things would occur with adoption of the rule,

            13   where organizations such as TIAA-CREF, which was not an

            14   original proponent of this rule, would use it for positive

            15   purposes, I think to benefit all shareholders.  

            16             So, I urge it on that basis, I believe it's as good

            17   a starting point for seeing how a needed reform would work in

            18   practice with -- with real triggers and real rules, and I

            19   think it would work extremely well.  And people, upon

            20   reflecting where we were, sometime in the future will wonder

            21   what the fuss was about it in the first place.  

            22             MR. BELLER:  Thank you.  I'd like to turn to Mr.

            23   Whitworth, and Relational Investors' comment letter, which --

            24   which does support the proposal, states in particular, and

            25   again, I'll quote.  "The rules if adopted will inject an




             1   increased level of accountability into the director selection

             2   process."  I guess I'd ask you to evaluate that thought

             3   against the concern that we've heard expressed, I think, on

             4   the first panel, and also by Mr. Donohue, that the

             5   Commission's proposal would allow the director selection

             6   process to be taken over in some circumstances by people with

             7   special interests masquerading as -- as shareholders.

             8             MR. WHITWORTH:  Okay.  I wanted to start off, as

             9   others have, complimenting the Commission and its staff, not

            10   just on this roundtable, but on all the work they've done

            11   over the past few years in this area.  And this, I think, of

            12   all the initiatives that have been put forward, whether it be

            13   by the Commission or other bodies, is the most critical, and

            14   potentially the most powerful in addressing what I think were

            15   the causes of -- of many of the scandals that we -- that we

            16   have all experienced over the past number of years.  

            17             In all of those, even though there were different

            18   circumstances that gave rise to each of those scandals, and

            19   in some cases quite divergent circumstances, the common

            20   denominator in all of them was poor board room dynamics.  And

            21   so, I think this rule, alone, gets at that issue.  

            22             Mr. Donohue mentioned, as you suggested, that I

            23   might address, the -- the -- sort of the disruptive impact

            24   that this might have, or the empowerment of special

            25   interests.  And I would suggest that those special interests




             1   -- their leverage would only be as strong as the

             2   vulnerability that the company left itself in.  And the way

             3   that they can address that vulnerability, is by having a

             4   board, and having a nominating process that was vigorous, and

             5   that put forth a board of directors, and put forth a image of

             6   its -- of their board dynamics such that the other

             7   shareholders wouldn't support changes.  

             8             And so therefore, this voice of a -- of a potential

             9   special interest would be a rather muted on in that

            10   circumstance.  And I think that that dynamic is the most

            11   powerful aspect of this rule.

            12             The -- the rule would spur nominating committees

            13   and boards to be even more introspective, and even be more

            14   concerned about how the shareholders are ultimately going to

            15   feel about their board.  The people that are representing

            16   them.  And it would also cause them to think more about,

            17   rather than just the resumes of the people on the -- on the

            18   board.  Because if you look at WorldCom, or you look at

            19   Enron, or you look at any of these situations, I don't think

            20   anyone would argue that we didn't have highly, highly

            21   qualified people.  Maybe not to the person, but -- but

            22   certainly 'way over majority in all of these situations, were

            23   the kind of people that you'd like to see on corporate

            24   boards.  But what was missing is the dynamic.  

            25             So, the only other point I would make, and then




             1   we'll let you move onto the other panelists, is that -- that

             2   the triggering mechanisms, despite what's been said about

             3   them, I actually think that -- that they are going to cause

             4   more of this distraction and disruption than if you just had

             5   a straightforward five percent, because they have lower

             6   thresholds, and they will sort of embolden, or stir up some

             7   of these interests to maybe try to qualify for future status,

             8   rather than causing them in the first instance to muster five

             9   percent, or some percentage, then put the -- put the nominee

            10   forward.  

            11             And what we did at Apria, where we have a access

            12   rule that, I think, many of you have may be heard about or --

            13   or potentially studied in detail -- what we did was, we put

            14   it on the flip side, or the back side, where we said that if

            15   the nominee -- not the nominator, but if the nominee didn't

            16   receive 25 percent of the vote, then they couldn't be re-

            17   nominated for -- I believe it's three years.  So that was

            18   where we tried to temper it.  And so, anyway -- I know that

            19   the next panel is going to start to talk more about the

            20   details, but I think that's an important thing that we should

            21   think about.  

            22             MR. BELLER:  Thank you very much.  Mr. Wallison,

            23   you've got --

            24             MR. WALLISON:  Thanks very much, Alan.  In

            25   listening to the first panel, I think that the problem, if




             1   there was a problem, was arrayed as a problem of

             2   accountability.  And this panel is supposed to deal with the

             3   question of whether this rule addresses the problems of the

             4   first panel.  And I'd like to really talk about that.  We

             5   have a problem of accountability, it is said.  But in the

             6   first panel, there was much disparagement, I think, or at

             7   least not enough attention paid to the simple question of

             8   shareholders selling their shares.  I mean, that is the way,

             9   and a very powerful way, for shareholders to make their views

            10   known about how they think their companies are being

            11   operated.

            12             Now, it is true that some shareholders may not be

            13   able to sell the shares, indexation, and so forth, would be

            14   one -- at least one cited reason.  But of course, you buy an

            15   index fund in part for the diversification.  You take the

            16   good with the bad.  The purpose is to spread your investment

            17   over the entire economy.  And so, in the index, there are

            18   going to be companies with which you don't necessarily agree. 

            19             So, from my point of view, we have a -- the real

            20   question here is, should we have a rule that deals with what

            21   I think are the very few cases -- the anecdotal cases that we

            22   heard cited here -- of the very few cases where companies are

            23   actually not responsive.  In my experience, companies hire

            24   vast numbers of people, shareholder or investor, liaisons,

            25   representatives, to make sure their shareholders are getting




             1   a response.  And the reason for that is that they do not want

             2   to risk the possibility that there will be wholesale

             3   disposition sale of their shares, which will cause their

             4   capital costs to rise.  

             5             So, should we have a rule that deals with these few

             6   cases where the shareholders can't sell?  And my answer to

             7   that is no.  But then we get to the question, well, should we

             8   have this rule, even assuming the answer you at the SEC come

             9   up with is yes, we should have a rule, then my -- my next

            10   question would be should we have this rule?  And again, I

            11   think the answer to that is no.  

            12             The reason I think so, is that the way the rule is

            13   structured ignores what I think everyone agrees is the

            14   purpose that we expect shareholders to be interested in, and

            15   that is the improvement in shareholder value.  The rule

            16   actually is phrased in terms of shareholder dissatisfaction. 

            17   Dissatisfaction is a good deal broader than shareholder

            18   value.  And if you think about it, that's one of the reason

            19   why so many people -- listening to Mr. Donohue is a perfect

            20   example -- so many people are concerned that this rule

            21   creates a vehicle for special interests to have their way in

            22   dealing with, or influencing boards either directly through

            23   getting a -- a director on the board, or forcing companies to

            24   negotiate with them.  And we've understood that that is

            25   actually something that is happening now.  Companies feel




             1   they have to negotiate, because of the existence of this

             2   rule.  

             3             Those are -- those are issues that we needn't have

             4   gotten into. and this rule needn't have focused on, if it had

             5   focused on what the shareholders really should be interested

             6   in, what we believe -- but I think everyone here believes

             7   they're interested in, and that is the improvement in

             8   shareholder value.  

             9             So, if I were working on this rule, and thinking

            10   about amending it, I would focus on the things that would

            11   create a definition of a troubled company, not shareholder

            12   dissatisfaction as -- as the result of the kinds of things

            13   you have in here as triggering mechanisms, but the failure of

            14   the company to match its peers, for example, in -- in

            15   profitability.  Or things of that nature.  That way, if you

            16   were going to have a rule, you at least have one that was

            17   specifically narrow enough to deal with a question that

            18   shareholders ought to be worried about.

            19             Now, okay.  So, if you have such a rule -- if you

            20   have the existing rule, what would be so wrong with putting a

            21   couple of shareholders on -- or a couple of shareholder

            22   nominees on the board?  And the answer to that is, that if

            23   you are starting with a standard that is shareholder

            24   satisfaction, you could have a good deal of difficulty

            25   arising out of that.  For example, if the CEO of the company




             1   is very active in religious or political activities, it could

             2   well be that shareholders are dissatisfied about that.  Those

             3   are not, however, reasons why shareholders ought to be given

             4   an opportunity to vote.

             5             So, I think what we should be looking at here is a

             6   much more narrowly structured rule, if we need a rule at all. 

             7   Thank you.

             8             MR. BELLER:  Thank you.  I'd actually like to

             9   follow up on -- on that a little bit.  In your presentation

            10   yesterday, the AEI had a -- was it yesterday or day before?

            11             MR. WALLISON:  Day before.

            12             MR. BELLER:  Day before.  The AEI had a program

            13   addressing the Commission's rule, and one of the things you

            14   said, which I think directly relates to what you just said,

            15   is that it's not possible to debate the efficacy of the

            16   Commission's proposal unless -- without coming to a

            17   conclusion on the fundamental question of what are the

            18   legitimate interests of shareholders.  And I think you've

            19   just articulated what you -- what you believe the legitimate

            20   interests of shareholders are --

            21             MR. WALLISON:  That's right.

            22             MR. BELLER:  -- which is the maximization of -- of

            23   value.  I guess the -- if you would grant me that long term,

            24   at least, there isn't always, or isn't often a monolithic

            25   view of how one gets to maximization of value.  Is it a -- is




             1   it a -- is it a virtue or a vice of the Commission's proposal

             2   that it leaves -- it, in effect leaves to shareholders --

             3   ultimately, majorities of shareholders, although it can be

             4   triggered by smaller percentages -- but it ultimately leaves

             5   to majorities of shareholders to determine through their

             6   voting what they believe their legitimate interests are.

             7             MR. WALLISON:  That's how they do express it,

             8   through the election of a board of directors, or through the

             9   sale of the shares.  If they believe that the company is not

            10   pursuing the right policies in order to be profitable, having

            11   read the financial statements and all the disclosures that

            12   are required by the SEC, they have an opportunity to sell the

            13   shares.  

            14             There are -- if there are a million shareholders,

            15   there are probably 500,000 different views of how the company

            16   should be operated.  And if one thinks that by voting for a

            17   single member of the -- of the board of directors, you can

            18   actually change the way the company is -- is operated for the

            19   good in the view of all those shareholders, I think that's a

            20   highly doubtful proposition.

            21             MR. BELLER:  Our chief economist, Larry Harris.

            22             MR. HARRIS:  Clearly, to be well-informed about how

            23   assets are being used by existing management is very

            24   expensive.  And when a fund or a shareholder discovers to

            25   their satisfaction that the assets are not being well used,




             1   they need to take some action.  As we think of the various

             2   alternatives, I want to ask about the rewards to the -- to

             3   the potential actions.  

             4             So for instance, it's been suggested that

             5   shareholders can always vote with their feet, by selling

             6   their securities.  In what sense does a shareholder get

             7   rewarded for doing the research necessary to value the firm,

             8   when they then leave the firm?  They avoid the potential cost

             9   of future ownership of that firm, but in what sense do they -

            10   - do they obtain the rewards for having identified the fact

            11   that the firm is poorly managed?  

            12             MR. WALLISON:  Is that addressed to me?

            13             MR. HARRIS:  Yes.

            14             MR. WALLISON:  The way the shareholder benefits

            15   from that is that he or she puts the investment into a

            16   company that would be better managed.  If the shareholder

            17   finds that the company is poorly managed and believes as a

            18   result of this poor management, and this is another question

            19   entirely, whether there is such a cause and effect

            20   relationship, but assuming the shareholder believes that poor

            21   management of the company will result in a decline in the

            22   share values, then the shareholder benefits having done the

            23   work to see if that decline is going to occur, the

            24   shareholder then moves the investment to another company

            25   which is better managed, and presumably, at least by that




             1   shareholder's rights, benefits from that change.

             2             MR. HARRIS:  Leaving behind the firm that

             3   presumably is still poorly managed, how does that benefit the

             4   economy?

             5             MR. WALLISON:  I think if companies that are poorly

             6   managed have much higher capital costs, two things happen. 

             7   Either they go out of business because they can't compete

             8   because of their very high capital costs, or the companies

             9   change their methods of management, so that they conform to

            10   what shareholders believe is the right way for them to be

            11   managed.

            12             MR. HARRIS:  So, the beneficiaries, assuming that

            13   either process takes place, then are people different from

            14   the people who identified the problem in the first place. 

            15   How does that mismatch promote efficiency?  

            16             Normally, efficiency is promoted when somebody is

            17   rewarded for doing good.

            18             MR. WALLISON:  I don't think I necessarily

            19   understand what your question is.

            20             MR. HARRIS:  The price is depressed by someone who

            21   has done their research and decided they had no hope of re-

            22   establishing control of people who aren't performing well, so

            23   they are just going to move and go elsewhere to avoid

            24   continued losses.

            25             They are selling the firm at possibly a loss to




             1   them.  It makes the firm cheap and creates an environment in

             2   which change will take place.  

             3             The change may take place through take over,

             4   because the firm is now cheap, or through the pressures of

             5   the capital markets as you described, which by the way, only

             6   works if the firm has to return to the capital markets, but

             7   when the change finally does take place, the beneficiaries of

             8   the change are the then existing shareholders, the person

             9   doing the take over, and not the person who originally

            10   identified the problem and acted upon it.

            11             There is a mismatch of incentives.

            12             MR. WALLISON:  That's excellent, because that gives

            13   people an incentive to look for these companies that are weak

            14   because of bad corporate governance, if you believe that

            15   makes a difference, and buy those companies in the hope that

            16   they will go up when there has been a take over or some other

            17   change in management.

            18             What is very clear to me is that putting one or two

            19   directors on the board of a company that is say a dead

            20   company, as was mentioned in the first panel, it would not do

            21   anything to improve the management of a company that is a

            22   dead company.

            23             I have grave doubts about whether any of these

            24   ideas would really work.

            25             MR. BELLER:  A lot of cards just went up.  I am




             1   going to go to Peter Clapman, who has been waiting patiently,

             2   and then Commissioner Goldschmid has a question.  Peter?

             3             MR. CLAPMAN:  I'm going to go to the heart of why

             4   we have a corporate governance program at TIAA-CREF in the

             5   first place.  It is the belief that -- I really would

             6   challenge the point that has just been made -- if you have an

             7   active investment program, which TIAA-CREF has to some

             8   degree, that if we don't like a particular company's

             9   corporate governance, we can just sell the stock.

            10             We do believe that constructive engagement is a

            11   legitimate part of what we have a corporate governance

            12   program for, to produce value for our constituents, and

            13   therefore, it is not just the indexers that should be the

            14   ones engaging.  

            15             I think it's a responsible position for us to take,

            16   and I think it has produced long term value for TIAA-CREF and

            17   for other shareholders, and we are willing to accept the free

            18   rider issue because we are concerned if it produces value for

            19   TIAA-CREF as such and benefits other shareholders as well,

            20   that is fine.

            21             Another point is this notion that the leverage that

            22   this potential rule would give would get into the wrong

            23   aspect of negotiation with companies.  We negotiate with

            24   companies all the time, and the issues we identify are

            25   excessive executive compensation, board independence, and




             1   other issues that are legitimate shareholder concerns, and

             2   that is where we are getting a change occur in part because

             3   of the impetus of a possible rule to this effect.

             4             I think there is no real risk that issues will be

             5   pressed on managements that would be contrary to legitimate

             6   shareholder interests.  That is where we will do our focus

             7   and others that have that kind of focus and shareholder

             8   power.

             9             MR. BELLER:  Commissioner Goldschmid?

            10             COMMISSIONER GOLDSCHMID:  Peter, let me take you

            11   back to my dead company.  What good is the Wall Street rule? 

            12   That's really what Larry Harris was asking.  

            13             I bought at $40.  This dead company over a period

            14   of years has gone down to $20.  The board is compliant.  The

            15   compensation is terribly excessive.  It's running as

            16   inefficiently as anyone could wish. 

            17             Exactly why do you think the Wall Street rule works

            18   here?  If I sell out, what I have done?  I haven't change

            19   governance.  Yes, $20 now can circulate, depending on my

            20   number of shares.  Do you really want to have this system

            21   work that we have to wait for bankruptcy before we can cure

            22   what could have been cured much earlier?

            23             I guess the second part of my question is what's

            24   wrong with shareholder dissatisfaction?  The shareholders as

            25   an aggregate group in a majority of contexts over time




             1   believe this company isn't running well, productively,

             2   efficiently, why won't you trust them?  Don't you believe in

             3   the market that much?

             4             In terms of whether this is going to have some

             5   effect out there, we have had two panels now.  We have had

             6   Fidelity and the labor groups and TIAA-CREF, everyone that is

             7   involved is telling you it's having real effect.

             8             What's your empirical evidence that it won't have

             9   effect?

            10             MR. WALLISON:  I guess to your first point, which I

            11   think I understood, you have a rule you are proposing here

            12   which would put one or two directors on a board.  If you

            13   start off with a dead company, which has declined from $40 to

            14   $20, one or two directors is not going to make the

            15   difference.

            16             COMMISSIONER GOLDSCHMID:  You don't think majority

            17   votes publicly and put there by TIAA-CREF isn't going to have

            18   an effect?

            19             MR. WALLISON:  I agree, if I could just continue

            20   the point, I agree with Randy Kroszner's view and the view of

            21   a number of other people whose views on this I respect, that

            22   what we ought to be focusing on is how to change the entire

            23   board, not put one or two directors on a board with the

            24   possibility that they will simply be harassers of management,

            25   but change the entire board.




             1             That's not what this rule does.  In fact, this rule

             2   would not accomplish what I think you hope the rule will

             3   accomplish.

             4             When you talk about shareholder dissatisfaction,

             5   what's wrong with that, I'm not one who wants shareholders to

             6   be dissatisfied.  I'm not really that kind of person.  Not

             7   everyone would agree with this, of course.

             8             My view is that shareholder dissatisfaction is just

             9   too broad a standard.  We know what we expect shareholders to

            10   be interested in, and that is improving the profitability of

            11   the company.

            12             If we are going to have a rule, and I'm not for it,

            13   but if we did have a rule, that rule should be focused on

            14   that question.  In fact, the use of this very broad standard,

            15   which is shareholder dissatisfaction, makes it very difficult

            16   to establish the middle way that the Chairman was talking

            17   about in his opening remarks, because it creates in the minds

            18   of many people in the corporate community the idea that Mr.

            19   Donohue expressed so well in his opening remarks, that this

            20   is really going to be a vehicle for a whole lot of things

            21   that corporations shouldn't have to deal with, that aren't

            22   really the province of the shareholders.

            23             COMMISSIONER GOLDSCHMID:  Do you think the majority

            24   of shareholders are going to vote against their economic self

            25   interests twice?  Have you ever seen it happen?




             1             MR. WALLISON:  I don't know whether you'd ever be

             2   able to determine whether that has happened, so I can't say

             3   that I have.

             4             MR. BELLER:  I'd like to move this on.  Professor

             5   Elson, you have been waiting patiently.

             6             MR. ELSON:  I've got my hackles up a little bit.

             7             A couple of quick thoughts.

             8             MR. BELLER:  I'm glad we gave you time to calm

             9   down.

            10             MR. ELSON:  Lots of water.

            11             A couple of points.  First of all, vis-a-vis the

            12   argument against the rule, on the special interests, I

            13   respectfully dissent from that particular approach.  Number

            14   one, I don't think the idea of having a shareholder access to

            15   a proxy or short slate, if you will, would promote the

            16   interest of particular groups.

            17             Frankly, to get elected, you have to have a

            18   majority of the votes.  To get a majority of the votes, you

            19   have to cross a lot of different issues.  It all comes back

            20   to economic issues.  That's number one.

            21             People want folks on boards who represent broad

            22   economic decisions, not a particular political issue or

            23   another.  I've always thought that argument was not a

            24   particularly good one.

            25             Frankly, the special interests that are typically




             1   active in this area typically call for broad-based governance

             2   type resolutions that are attractive to a lot of folks,

             3   whether they are anti-staggered board, and they attract a

             4   substantial majority of the votes.

             5             If you are going to attack the proposed rule, I

             6   don't think that's the right approach.

             7             Number two, the collegiality approach.  By putting

             8   someone on, you have someone who is not going to be

             9   collegial.  Having been a disagreeing director, and Ralph has

            10   as well, I don't think that necessarily is the case.

            11             Frankly, you are certainly not welcomed with open

            12   arms when you show up, clearly.  However, I think the key is

            13   achieving a sense of consensus within the room, within the

            14   board room, to effect change.

            15             I think where you have seen directors come on

            16   through this particular process in a short slate, typically

            17   they have produced a very good result, a result that everyone

            18   in the end is happy with.  I think that's critical.

            19             The idea is who you get there.  I think anyone who

            20   gets elected to a board is probably going to have to be the

            21   type of individual who gets a majority of the vote.

            22             Let me back up a second.  This is the reasonable

            23   alternative, this is the reasonable proposal.

            24             I agree with every thought behind the proposal

            25   itself.  I think it makes perfect sense, vis-a-vis having




             1   shareholder access, not to the proxy, but shareholder access

             2   to the process.  I think the short slate is not a bad thing. 

             3   I think it's a very healthy thing long term.

             4             My quibble with the proposal is not the proposal

             5   itself and not the reason behind the proposal, but the

             6   approach, because I don't think it answers the ultimate

             7   question here.

             8             I think there is a problem that has to be

             9   identified, so I would agree with the conclusion of the first

            10   panel.

            11             I think the solution is number one, independent

            12   nominating committee, that in fact seek out representation

            13   from large investors, or all investors for that matter. 

            14   That's not the ultimate solution.

            15             I think you have to have the availability at some

            16   point of some kind of access where the system is broken to

            17   bringing other nominees into the process.  I think the way

            18   you do that frankly is not simply by giving someone access to

            19   the proxy.  That's only half of it.  That's only a quarter of

            20   it.

            21             The real issue is who pays for it.  You can get on

            22   the proxy, but if you have to mount the campaign out of your

            23   own pocket, there is a real disincentive to doing it

            24   correctly.

            25             I think the ultimate solution has to go back to the




             1   state level, interestingly enough, and for a re-thinking of

             2   the way that we in fact pay for these contests.  In a

             3   contest, on a long slate, or a short slate, typically

             4   management pays for it.  The shareholder does not pay for it,

             5   or does in fact pay for it out of their own pocket.  The

             6   company pays for the company's slate.

             7             I think that if you create a system whereby on a

             8   state level, or state approved level, the dissident

             9   shareholders, dissident slate, are entitled to a

            10   reimbursement of their expenses if in fact they are

            11   successful in getting someone onto a board on a short slate,

            12   I think that's the ultimate solution, or let's say if they

            13   don't in fact get a majority but come close, that some sort

            14   of proportional reimbursement of their expenses is

            15   appropriate.

            16             If you simply provide for access to the proxy

            17   itself, that's only a little bit of the way.  The real issue

            18   is who pays for it.  I think in a legitimate debate on the

            19   board itself, that it should come from the company's

            20   treasury, if the shareholders approve it, to have such a

            21   campaign.  I think ultimately that's going to be the long

            22   term solution here.

            23             I also have some federalism concerns, frankly, with

            24   the proposal as it stands, not on the basis of authority or

            25   not, but sort of long term dialectical concerns as to what is




             1   the best dialectical system to resolve corporate disputes,

             2   which I still think should be at the state level.

             3             MR. BELLER:  Mr. Breeden, I know you've had your

             4   card up.  I want to get a reaction to Professor Elson's

             5   proposal as an alternative to the Commission's.

             6             MR. BREEDEN:  I certainly would agree with Charles

             7   that the states bring an enormous amount to the party.  I

             8   don't think we ever under estimate the value, and I've

             9   personally participated recently in a rather extensive trial

            10   in the State of Delaware over a rather hotly contested

            11   government situation.

            12             Having a system such as we have in Delaware of

            13   courts that are deeply versed in business dynamics and that

            14   have the level of experience they have with fiduciary issues

            15   is a tremendous asset.

            16             I think federalism doesn't mean the Federal

            17   Government goes away entirely.  It goes to the right balance

            18   of actions by Federal and state governments.  

            19             I think long run here, appropriate action at the

            20   Federal level needs to be reflective of what's going on in

            21   the states, and there may be better ways to solve some issues

            22   or some parts of issues through the state process.

            23             I also wanted to just -- I think we have heard from

            24   Peter an eloquent articulation of what I call the Marie

            25   Antoinette School of Corporate Governance.  If you don't like




             1   what's going on, sell your shares and buy a house in Beverly

             2   Hills.

             3             I really don't think that sort of cynical approach

             4   of permanent disenfranchisement of shareholders is the way

             5   our corporate system ought to evolve.  I think the arguments

             6   one can make of special interests, goodness gracious, we

             7   don't want them to get out of control.

             8             Let's remember, Michael Eisner was a special

             9   interest, too.  He's a different kind of special interest.

            10             It is all well and good to say we don't want the

            11   corporate system unduly disrupted. That's right.  We have to

            12   be very careful, and I agree with some of what Tom Donohue

            13   has said, we have to be careful that these proposals are

            14   balanced, but the idea that accountability should be foreign

            15   to the system and access and participation, that we should

            16   slam the door on shareholders who are concerned about their

            17   property, the operation of their company, it seems to me goes

            18   too far.

            19             MR. BELLER:  I want to put Professor Grundfest and

            20   Mr. Millstein at ease.  We are going to go to at least 12:15. 

            21   We didn't start until 12:00.  I definitely want to get to

            22   both your comments on what has been said so far, and also

            23   your proposals, which have been submitted to the Commission

            24   as alternatives.

            25             I'm going to exercise the Chairman's prerogative to




             1   let him ask a question first, and then we will move on.

             2             CHAIRMAN DONALDSON:  I just wanted to bring the

             3   panel back to a central question.  If you presume that the

             4   prior panel determined there is a problem, and let's just

             5   assume for one minute there is a problem, I'm not saying the

             6   panel said that, let's assume there is a problem.

             7             What do you do about it?  You can be against it. 

             8   You can be for it.  If you assume there's a problem, how do

             9   you modify what's been put forward here?  How do you attack

            10   this thing?  Or do you just say we can't do anything?  Too

            11   many people against it, too many people for it.

            12             I think that is part of your assignment here.

            13             MR. BELLER:  Professor Grundfest?

            14             MR. GRUNDFEST:  Thank you very much, Mr. Chairman,

            15   and thank you also, Alan.  I'm happy to begin with that

            16   assumption, because I think there's a lot of evidence

            17   suggesting that the assumption is true.  I think the

            18   challenge that faces the Commission is extraordinarily

            19   important.  It's obvious that the issue is quite

            20   controversial, and for that reason, I think it's prudent for

            21   the agency to take the time to make sure that it gets its

            22   response to this issue just right.  Several people have

            23   observed, if we had a more active market, a less regulated

            24   market for corporate control, we might be able to eliminate a

            25   large percentage of the issues that currently drive core




             1   governance phenomena, and I agree with that entirely.  

             2             But unfortunately, taking steps to relax some of

             3   the restrictions that we currently encounter in that market

             4   aren't on the agenda today.  Perhaps as part of a broader

             5   consideration, we might consider a real market solution to

             6   that part, because it would address Commissioner Goldschmid's

             7   observation about his dead company.  Then we would know how

             8   to take it out back and shoot it.  Right now, there's a

             9   version of gun control in that area that prevents taking that

            10   company out back and putting it and its shareholders out of

            11   its misery.

            12             So, from that perspective, there are simpler ways

            13   to solve Commissioner Goldschmid's problem, and I -- I would

            14   strongly endorse the agency to look at those.  But if one

            15   steps back and takes a look at the proposal that's currently

            16   pending before the agency, even if one agrees that there is a

            17   problem, and the problem needs to be resolved, it's not at

            18   all clear that this is necessarily the best possible

            19   resolution.  

            20             In particular, if one wanted to critique the

            21   proposal, it would be easy to reach the conclusion that the

            22   proposal is slow, it's complicated, it's arbitrary, it's

            23   confrontational -- unnecessarily so.  It leads to potentially

            24   unequal interstate impacts, and it can give rise to a version

            25   of the California gubernatorial campaign in which you had




             1   lots of followers with no real chance of ever winning

             2   participating in a campaign because they have an independent

             3   value associated with running for the election.

             4             Briefly, it's slow because if there's a problem in

             5   a corporation, here you have to have an election to have an

             6   election.  And in two years, a great deal changes, not only

             7   in a corporation, but also in the world.  So slowness -- if

             8   you really believe there is a problem, slow is bad, fast is

             9   good.  It's complicated, all right?  Simple approach in

            10   designing legal systems -- any sort of system -- simple is

            11   better, complicated is worse.  And here, the rules for these

            12   elections for elections -- you have to have five years.  It

            13   continually has to be a five years.  You've got to change all

            14   of the internal measuring mechanisms of fidelity to know if

            15   you even qualify, all right?  

            16             If you -- if you look at all of the moving parts,

            17   it seems as though Rube Goldberg had visited corporate

            18   governance, and had come up with a mechanism a bit like this. 

            19   There are many arbitrary rules. Why is it five percent here,

            20   one percent here, continuous holding -- you could challenge

            21   all of these and many of the -- the proposals really go after

            22   that.  It unnecessarily confrontational.  The goal, I think,

            23   of the shareholder community -- and I think it's entirely

            24   legitimate -- is to force directors to take significant

            25   shareholder concerns seriously.  All right?




             1             There are many different ways to achieve that goal,

             2   and putting one director in head-to-head combat with another

             3   director isn't necessarily the best way to get from here to

             4   there.  As a technical matter -- on a later panel we'll

             5   address this -- it's a potential inequality in terms of how

             6   this rule might operate on a state level if, for example, a

             7   state would allow a corporation to adopt a bylaw that says

             8   there will be no shareholder direct nominations.  Then we

             9   have an issue, as I read the rule, as to whether the rule

            10   could even apply in that context.  And then again, as I've

            11   suggested, people may have an incentive to run for the board

            12   even if there's no chance that at the end of the day, they

            13   might actually prevail.

            14             Those observations suggest to me that it might make

            15   sense to look at alternatives.  Ira Millstein has suggested

            16   an alternative, I've got an alternative -- Ira's and mine, 

            17   independently developed are remarkably quite similar, I

            18   think.  I'll describe mine very briefly, and I'll ask Ira to

            19   describe his, and then I think it would be a great idea if

            20   everybody else described theirs, because what the agency

            21   should, I think, do, is agree that there is a problem, and

            22   then ask itself whether it really has the most effective and

            23   efficient approach.  

            24             Very briefly, how else might you approach this

            25   problem?  Well, for guidance, you might look to an




             1   interesting document that's called the Constitution of the

             2   United States of America.  And it contains a provision,

             3   Article Two, Section Two, that establishes an advice and

             4   consent mechanism.  When the President of the United States

             5   wants to add somebody to his cabinet, appoint somebody to

             6   cabinet, the President can't appoint any old croney the

             7   President likes.  Rather, the Senate has the right to veto. 

             8   The Senate does not have the right to select who the nominee

             9   is, but the Senate can simply say, for whatever reason, we

            10   don't find this person acceptable.

            11             Now, if you believe in the economic principle of

            12   comparative advantage, that makes a lot of sense.  The

            13   President knows who the best member of his or her team can

            14   be, whereas the Senate can have its legitimate reasons for

            15   opposing.  Is it possible to take the Senatorial advice and

            16   consent provision of Article Two, Section Two, and adapt it

            17   to the corporate process?  Yeah.  I think it can be done. 

            18   And here's how you do it.  The board continues to nominate

            19   just the way it is today.  

            20             However, if a majority of the shareholders -- or if

            21   the Commission wants to make it some lower percentage, it

            22   could, but I've got this thing for majorities -- if the

            23   majority of the shareholders withhold under the current proxy

            24   rule -- withhold authority for the re-nomination of the

            25   director, then a variety of disabilities can attach to the




             1   performance of that director at the federal level is still

             2   elected under state law.  State law isn't adversely affected

             3   at all.  Some of the possible disabilities might be that we

             4   amend the definition of director in the SEC's own rules and

             5   regulations, so that a person elected over a majority is --

             6   is not a valid director for any federal securities law

             7   purposes.  

             8             You could change the SRO rules -- The New York

             9   Stock Exchange or the NASDAQ rules, and say that any person

            10   elected over the opposition of the majority can't qualify as

            11   independent.  You could get more aggressive if you like, and

            12   you could say as a matter of public policy, the SEC will

            13   challenge indemnification and insurance in the event of -- of

            14   any violation of federal securities laws if such a director

            15   serves.  

            16             So there's -- there's a gradation of potential

            17   forms of disability, but in connection with the attaching the

            18   disability, I think there also should be a mechanism for a

            19   cure, that the corporation can reach out to the shareholders. 

            20   If you get a sufficient number of shareholders' consent to

            21   the withdrawal, all right, of their -- of their withholding

            22   of the vote, then under those circumstances, the director can

            23   go ahead and serve.  The mechanism, then, forces

            24   consultation, it forces cooperation, it avoid the kind of

            25   confrontation that you otherwise will run into, and it's




             1   simpler, faster, and less arbitrary.  Ira?

             2             MR. BELLER:  Mr. Millstein.

             3             MR. MILLSTEIN:  Well, by the time you get to this

             4   stage of the proceedings, everything's been said, but not by

             5   everybody, so I'll try to -- I'll try to say something

             6   different.  

             7             I agree with Joe completely.  Simplicity here is

             8   important, and I -- I address this to the -- my two best

             9   friends on the Commission.  I -- I believe it was a very good

            10   idea to put this on the table, because it has stirred up a

            11   lot of thinking about a problem.  And the problem is around

            12   what is corporate governance really, really?  And it's made

            13   up of active shareholders -- and they should be active

            14   shareholders -- and a very, very good board led by an in

            15   dependent chairman.  And it seems to me, that's the heart of

            16   the whole story.  

            17             What we're missing in this arrangement, and what

            18   we're missing -- I think the point we've all sort of missed

            19   is that there's something fundamentally wrong with the way

            20   boards are elected.  And I think you ought to go back and

            21   take a look at the fundamental problem.  The fundamental

            22   problem is that today, shareholders have no voice in the

            23   election of directors.  Now, this is absurd, when you think

            24   about it.  It grew out of an historical arrangement that

            25   required -- the state law requires a plurality to vote.  That




             1   means -- to elect somebody, that means that there are a

             2   hundred shareholders, and 99 don't vote, and one says yes,

             3   that person is elected.  

             4             Now, something -- something's odd about that.  That

             5   doesn't -- that's not a -- that's not a very good system,

             6   because it means that there is no real way for the

             7   shareholders today to express dissatisfaction other than a

             8   withhold vote, which is really precatory.  And the board can

             9   or cannot do something about it, depending upon how they

            10   feel.  Now, I personally think precatory votes of 30 and 40 

            11   percent have a real resonance in the board room.  But they're

            12   not able to cause anything to happen.  All they can do is

            13   cause the board to reflect. 

            14             How can we get into a position where boards -- or,

            15   I should say shareholders -- can make something happen?  And

            16   I think you can do it.  It seems to me today, they can't make

            17   anything happen, and that's probably the heart of today's

            18   problem.  That a board, or a shareholder cannot cause

            19   anything to happen.  It's -- it's vote is essentially

            20   meaningless.  That -- that can't be a good system.  And I

            21   would urge you to go back to this problem, which is a real

            22   problem, namely that shareholders don't really have a voice,

            23   and visit funny election.  You put up a slate, and they're

            24   elected.  Period.  Because all you need is one vote to get

            25   them elected.  That's plurality.  There's no way to stop that




             1   system from working.  That can't be right.

             2             And so, I'm suggesting to you, go back to the

             3   beginning, and take a look at how could we begin to give

             4   shareholders a voice.  Very simply.  And the simpler the

             5   better.  You could have a listing requirement, that says that

             6   every director has to be elected by a majority.  And that --

             7   in that election, withheld votes count.  So that in my

             8   example, if 99 withheld, and one voted yes, that director

             9   would not be elected.  Period.  Because he didn't get a

            10   majority.

            11             Now, I can't conceive of anything wrong with that. 

            12   What's the matter with that system?  A new listing

            13   requirement that says you must have a majority to sit, and to

            14   be elected.  And if you don't have that majority, you are not

            15   elected.  So you might ask, what happens then?  Well, in the

            16   proposal we have, the board then has to sit down and have a

            17   series of choices to make.  They can negotiate with the

            18   dissenting shareholders, or the objectors, and talk about a

            19   new -- a new director.  Or, they can ask the un-elected

            20   director to resign, and replace him with somebody else.  Or,

            21   they can call a new election.  

            22             The thing I like about this suggestion is, it puts

            23   the responsibility back on the board.  There's no more

            24   regulatory action required.  Once that elector is not elected

            25   by a majority, the board then has to do something.  And any




             1   board that didn't do anything in the face of that, would be

             2   idiotic.  It would change the dynamics of the process

             3   completely.

             4             Now, it's as simple as all of that.  I could go

             5   back into history as to why the original plurality was there. 

             6   It was there because corporations were different in those era

             7   -- in that era.  I don't think we should do that.  I really

             8   wish the Commission would just focus on the one issue, namely

             9   that today, under these arcane plurality rules, there is no

            10   way for a shareholder to have any effect on an election. 

            11   Change it.  Get a listing requirement, require a majority

            12   vote to elect, and then turn it over to the board if

            13   something goes wrong.  I have enough confidence in boards

            14   today, because they're really concerned, and they're really

            15   coming along, as everybody else has said.  They'll do

            16   something.  

            17             And they'll do something appropriate, or have their

            18   heads cut off at the next election, because it seems to me,

            19   any board that continues to let a director who hasn't

            20   received a majority vote sit, is committing suicide.  And it

            21   seems to me it's a simple solution.  I don't know why -- I

            22   don't know why we've gone on all these years without changing

            23   that rule.  It just seems to me to be arcane and nonsensical

            24   to continue this process.  And, I would suggest to the

            25   Commission, what's the matter with that as a first step? 




             1   Let's see how that works. I think it would work just fine. 

             2   And if it doesn't, we can always move on to access.  But it

             3   seems to me, as a first step, let's give the shareholders a

             4   voice.  A real voice.

             5             COMMISSIONER GOLDSCHMID:  Ira, quick question on

             6   that.  Assuming I think it's a good idea, and I do, thought I

             7   don't think it necessarily would duplicate ours, or fix

             8   ours -- can you get the exchanges to promulgate such a rule?

             9             MR. MILLSTEIN:  I think so.  I think if you were to

            10   suggest it, the chairman of the Commission has a way of

            11   suggesting things to exchanges that seem to work.

            12             (Laughter.)

            13             MR. BELLER:  Mr. Donohue, you can --

            14             MR. DONOHUE:  Thank you.  Two very quick comments

            15   as our time runs out.  Number one, Mr. Chairman, I feel

            16   better about this panel than I thought I was going to feel

            17   about it.  

            18             (Laughter.)

            19             MR. DONOHUE:  No, seriously, I think there have

            20   been legitimate arguments raised, not only about the -- the

            21   concerns of shareholders, but the best way to package what

            22   we're attempting to do.  And I would hope that -- that these

            23   discussions on all sides would -- would provide a lot of

            24   thought for you and your colleagues.  I would like to go back

            25   to Larry's point, just for the record, however.  On your




             1   question of does anyone have any recourse?  Well, Larry, a

             2   quick reading of the "Wall Street Journal" or any other

             3   business paper you like, provides you the -- the recourse

             4   every day.  

             5             Today, compared to what would have happened ten or

             6   15 years ago, you can lost 40 percent of your market cap

             7   overnight.  And by the way, that wakes boards up in a big

             8   hurry.  And you can use it when TIAA-CREF and others take

             9   actions to move against a piece of stock -- against a share 

            10   -- because of the -- the results, because of the proposals,

            11   because of the projections.  But even more critical than that

            12   is to look at the every changing faces of the CEOs.  Now, you

            13   can respond to me and say some people walk away with big

            14   packages and all that -- focus on your question.  

            15             If a CEO's not cutting it, he doesn't survive. 

            16   There are clear examples of places where, in this instance or

            17   that instance, doesn't happen.  But if you watch the papers

            18   every day, the people that are not getting the results that

            19   the companies want, for the most part, pay a horrific price. 

            20   And so I would suggest that while the Commission is

            21   considering the very thoughtful comments that were made here,

            22   in response to your question, they might look at what a.,

            23   boards have been doing in the past in a productive and

            24   aggressive way, b., what might come out of the new rules that

            25   have been put in place already, and c., what about some of




             1   these other suggestions that were made here that might get to

             2   the direction we want to get without some of the negatives

             3   issues we'd like to avoid.  Thank you very much.

             4             MR. BELLER:  Mr. Whitworth?

             5             MR. WHITWORTH:  Yeah, just a few comments.  First,

             6   I like Ira's idea, and I actually think you should consider

             7   that, along with the access proposal.  I mean, I've always

             8   been disturbed that whether you vote for them, against them,

             9   or not at all, you get the slate.  

            10             Two points that I wanted to respond to.  One, we do

            11   have a mechanism now, where shareholders can influence the

            12   nominating process.  In fact, we use that year in and year

            13   out, and it's result -- it's the bonafide -- change in the

            14   bonafide nominee rule that -- in 1992 that allows us, now, to

            15   nominate short slates, as we call them, and has been very

            16   effective for our fund and others.  And as a result, we have

            17   served on eight of our portfolio company boards as a direct

            18   result of that.  

            19             So, anything that you do in this area, as my

            20   reading of the rule, it doesn't impact this -- you know, do

            21   not change that, because it's a very powerful tool that --

            22   that we and others use.  And it's available to all other

            23   shareholders, by the way.  So, all this rule really does, is

            24   takes that concept and says you can actually use that -- that

            25   change in the bonafide nominee rule and put it in the proxy,




             1   and have a similar dignity of the -- of the management's

             2   nominees.  

             3             The second point was whether one or two directors

             4   can make a difference in a board room.  And let me tell you,

             5   one or two directors can have a -- have a terrific impact in

             6   a board room.  It's been my own experience.  And what we're

             7   very proud of -- as I mentioned those eight companies, two of

             8   which I've been the chairman of in crisis situations.  Today

             9   I'm the presiding director at Waste Management, the chairman

            10   of the board of Apria Healthcare as the direct result of --

            11   of our investments.  In some cases, we had as little as 1

            12   percent.  

            13             But what we're proud of, is that you could go to

            14   every board member on every board that we've served on, and

            15   the member of the management team, and they would say that

            16   "Well, yes, we were a little skeptical at first, or

            17   concerned, but this was a -- has been a very constructive

            18   phenomena in our board room, and it's been very positive." 

            19   And the change in the dynamic, if you just think about it --

            20   if you had a large shareholder, or a shareholder that came to

            21   the process other than by nomination by the incumbent

            22   chairman and nominating committee -- at Enron, when they said

            23   "We have just a little change in this transaction.  We have

            24   to waive our ethics policy,"  Do you think the dynamic would

            25   have been different?  




             1             How about when Mr. Kozlowski, you know, lavished

             2   himself with a corporate culture that, you know, anyone with

             3   an independent view that would look at and say "There's some

             4   red flags, here.  There's some smoke."  Or Mr. Ebbers, when

             5   he was loaned $400 million to buy the company's stock,and

             6   then forgiven.  You know, things like that -- that's a change

             7   in the dynamic.  Those are easy to understand.  But it's just

             8   the day-to-day involvement of that investor who has a large

             9   incentive, and the dynamic that it changes in the board room,

            10   whether you're talking about building a heated garage for

            11   management, or some very critical strategic issue, the

            12   dynamics are different, and we have, you know, very -- a lot

            13   of experience with that.  

            14             And it's been positive, even by the admission of

            15   the people -- the directors and managements that we've worked

            16   with.  So, this is the only thing -- everything else that's

            17   been done really sets minimum standards.  Sort of like our

            18   environmental laws.  This rule has the potential, and it's a

            19   very unusual situation where government actually has a

            20   potential to pass a rule -- a promulgated rule that can

            21   actually spur optimal performance rather than just setting

            22   the minimum standard.  So I would encourage you to push on

            23   with it.  You're going to get lots of ideas and lots of

            24   criticism from all sides.  But push on with it, because all

            25   the horror stories that you're hearing -- we heard those same




             1   horror stories.  

             2             I wrote the petition for rule making back in 1990

             3   that led to the 1992 reforms, and we actually asked for this

             4   reform, and the Commission at that time didn't -- didn't move

             5   forward with it.  But we heard the same sky is going to fall

             6   concerns about shareholders just communicating with each

             7   other.  We're going to have these cabals, there's going to be

             8   secret back-room takeovers -- all these things.  And it's all

             9   been very positive.  So, you're on the right track.  This is

            10   a good rule.  Move forward with it.  

            11             MR. BELLER:  We'll do Mr. Clapman and  Mr. Breeden,

            12   and then I have one question about the listing standard

            13   proposal.  Mr. Clapman.

            14             MR. CLAPMAN:  I'll make just a very brief comment

            15   on -- on the proposal that we've just heard from Joe

            16   Grundfest and Ira Millstein.  I think these are interesting

            17   ideas, but should not divert the Commission from, I think,

            18   adopting hopefully the rule that was proposed.  And I think

            19   the missing ingredient in that -- in those proposals to what

            20   the SEC current proposal does accomplish, is it does not add

            21   onto the board a new director coming forward with a kind of,

            22   I think, majority shareholder impetus that can have, I think,

            23   a positive effect on the dynamics of the board.  We heard, I

            24   think, anecdotally, and we support the notion that an

            25   individual director coming on through that process will be




             1   constructive in terms of how a board and how a company

             2   operates.  And it's really for that reason that I would like

             3   to go back to the rules and should post.

             4             MR. BELLER:  Mr. Breeden?

             5             MR. BREEDEN:  Yeah, I -- I want to reiterate and

             6   support what Ralph said, but also second something Tom

             7   Donohue said.  I mean, I think you've heard, in the comment

             8   process, there are a great many thoughtful ideas.  And in

             9   corporate governance, I don't believe there is any magic

            10   bullet.  There is no one right way to do governance.  We're

            11   talking about a system with 17,000 companies.  Little ones,

            12   big ones, global ones, domestic ones.  And there is no one

            13   size fits all.  And -- and in any company, you have to look

            14   for the right balance of -- of interests to work well, and

            15   the Commission in picking a rule has to look for the right

            16   overall balance, what the chairman talked about the -- you

            17   know, defining the middle way.  

            18             So, you have heard and will hear many intriguing

            19   and thoughtful suggestions.  And I don't think they should be

            20   ignored.  I think you should go forward with this rule, and

            21   if you want to, then do another -- go through the process

            22   again, start it up again next year, and -- and look at some

            23   other things that could be ways of supplementing it, or

            24   changing it, fine.  There's nothing that stops you from doing

            25   that.  But the fact that there are different ways of skinning




             1   the cat shouldn't lead to freezing the process and

             2   immobilizing the Commission.  I think the shareholders of

             3   this country, and confidence in our markets will benefit from

             4   taking the modest steps forward that you've proposed.  

             5             Secondly, I wanted to -- but it shouldn't foreclose

             6   further thought on some of these very excellent ideas. 

             7   Secondly, the idea that -- that only one or two members in a

             8   board won't make a difference is just demonstrably untrue,

             9   and Ralph has spoken to it.  But I -- I think if Ralph or

            10   Charles or Joe walks into a board room in this country, and

            11   sits down at the table, that board is changed.  It's changed

            12   for the better, and will make a big difference.  I know the

            13   day I walked into the WorldCom board meeting -- board -- that

            14   board was certainly changed forever.  And so I think one or

            15   two people can make an enormous difference, and hopefully, if

            16   the intervention comes a bit earlier, we save ourselves the 

            17   -- the more difficult consequences, when reform is delayed so

            18   long that you get into the criminal process, and -- and so

            19   on.

            20             And lastly, I just wanted to respond to the idea

            21   that we can't find good board members in this country.  I

            22   think some companies have problems finding board members, and

            23   it may be because those companies, these days, that are

            24   perceived as having unresponsive boards, and boards that

            25   aren't doing a good job, may well have trouble finding new




             1   members.  But at MCI, with all the tough standards and

             2   governance that we proposed, we had at least three terrific

             3   candidates for each one of the nine vacant board slots.  And

             4   we did -- we were willing to stop fishing in the same pond

             5   that sometimes is a little over-fished of nothing but sitting

             6   CEOs to go on boards, and we were willing to look at a

             7   broader spectrum of candidates.  But I think the country is

             8   filled with men and women with terrific background and good

             9   judgement, who will make excellent board members.  And we

            10   shouldn't be deterred from making changes like this by

            11   concerns that we'll never find anybody to serve on a board.  

            12             MR. BELLER:  Thank you.  I'm tempted to let us stop

            13   on that note.  I would note that when Mr. Breeden suggested

            14   we do another rule making, Marty turned to me and said "Not

            15   in CorpFin.

            16             (Laughter.)

            17             MR. BELLER:  But we'll soldier on if that's the --

            18   if that's the answer.  I -- I think I'm going to ask my last

            19   question, because I think we left one thing hanging in the

            20   listing standard proposal.  One of the things that has

            21   concerned me about it, and that I've heard expressed by

            22   others, is that try as you might to be confident that in all

            23   cases, you will get a board that subjected to the bad news of

            24   majority votes against one or more, or a majority of its --

            25   of its candidates is going to sit down and reason together. 




             1   There is no -- there's no certain resolution other than to

             2   leave it to the board to do the right thing after it's been

             3   subjected to a substantial dose of criticism.  

             4             Is that the ultimate -- I mean, is that -- is that

             5   what ultimately results from an advice and consent type

             6   solution?  You don't get any judges nominated, because the

             7   President and the Senate don't agree?  Or is there another --

             8   is there -- is there another potential end point that -- that

             9   one could look at?  

            10             MR. BREEDEN:  How do you know, Alan, that the other

            11   side doesn't have a better solution and that solution isn't

            12   going to have unintended consequences?

            13             MR. BELLER:  I'm not suggesting ours doesn't.  I'm

            14   just wondering what --

            15             MR. MILLSTEIN:  Why don't we just take the

            16   proposition that nothing works but some things work better

            17   than others?  I mean, it seems to me that we don't have a

            18   certain solution here on either side.  My effort is to avoid

            19   a war and I feel very strongly that there is such good-faith

            20   arguments on both sides, based mostly on perceptions, not

            21   reality, that we ought to try to move forward without having

            22   this enormous contest which is being played out in this room

            23   and everywhere else.

            24             I think that finding a way to force a negotiation,

            25   which is what I'm trying to do, is the best way to go.  I




             1   really believe that this majority vote issue, putting it back

             2   to the board, forces a negotiation between the board and

             3   others, and that 99 percent of the boards are going to

             4   respond well, just as I hope -- I hope the proponents of the

             5   rule are right, that 99 cases out of a hundred the right

             6   person is going to be put on the board. 

             7             But you don't know and neither do I.  So I would

             8   rather go the negotiating route.  That's all.

             9             MR. GRUNDFEST:  I think Ira is absolutely right

            10   that as a practical matter very few directors will have the

            11   stomach to continue to serve over an overwhelming opposition

            12   of the shareholders.  There will be pariahs in the boardroom

            13   and most people who serve on boards don't want to be placed

            14   in that type of position.

            15             Just as importantly, as a matter of public policy,

            16   if you have a step that you can take that's less intrusive

            17   and that might achieve everything you need, and you have a

            18   step that's more intrusive and might create additional side

            19   effects that are unnecessary, it's smart policy and good

            20   medicine to start with a lower dose, all right?

            21             There's good reason to believe that the type of

            22   approach that Ira and I are talking about can achieve 99

            23   percent of the objectives that people are looking for in

            24   terms of shareholder access and do it without breaking as

            25   much china.




             1             MR. BELLER:  On that note, I think we're adjourned

             2   for lunch.  We are a few minutes over.  I'd like to have the

             3   third panel start at 1:15.

             4             Thank you very much.

             5             (Whereupon, a lunch recess was taken.)

             6                 A F T E R N O O N   S E S S I O N

             7             MR. BELLER:  Let's get started again.  Thank you

             8   all for joining us again.

             9             This is the third panel in our roundtable and the

            10   title of this panel is the application of the proposal to

            11   companies and investors.  We will be getting into I think

            12   some more of the details of the proposal, some of which were

            13   alluded to in our second panel but which I think we're going

            14   to get into in a good bit more depth during this panel.

            15             I would expect this will run till about 2:45.  We

            16   are a little late now and we'll push things back, maybe

            17   shorten the break a little bit.

            18             Before we start, I would like to introduce the

            19   panelists again.  Starting at my far left, we have Warren

            20   Batts of the -- who is here representing the National

            21   Association of Corporate Directors, Susan Wolf, corporate

            22   secretary of Schering-Plough and also very deeply involved

            23   with the American Society of Corporate Secretaries, Franklin

            24   Raines who is the chairman and CEO of Fannie Mae and is also

            25   the co-chair of the business governance committee of the




             1   business roundtable.

             2             Next to Mr. Raines is Ann Yerger with the Council

             3   of Institutional Investors.  Next to Ann, David Ruder,

             4   professor and former dean at Northwestern University School

             5   of Law.  And as we said, the only formers we get to announce

             6   today are former commissioners and chairmen and David is a

             7   former chairman of the SEC.

             8             Next to David is Carter Beese, also a former

             9   commissioner with the SEC.  Going last to Ted White who is

            10   here representing CalPers and next to Ted, Jeff Sonnenfeld

            11   who is the associate dean of the Yale School of Management.

            12             Let me start this off with Dr. Ruder, if I might. 

            13   Picking up from the briefing paper that was circulated and is

            14   up on our web site, sort of maybe kick this off very

            15   generally, would the rule target the appropriate companies

            16   the way it's proposed?  Would it produce desirable results,

            17   better corporate governance, better boards and management

            18   more responsive to shareholders, and would it do so at an

            19   appropriate cost to companies?

            20             MR. RUDER:  I think that your proposal to limit the

            21   number of companies to the accelerated filers is a good one,

            22   to limit the number of companies.  I think you're going to

            23   find that the result of this rule will be that companies will

            24   spend much more time looking at both precatory proposals and

            25   other kinds of proposals that are made.




             1             I think it will cause the boards of directors to be

             2   much more aware of what's going on inside the corporations. 

             3   I've tended to think that there would be some cases in which

             4   corporations will treat some of these precatory proposals the

             5   way you and I would treat our third speeding ticket, that is

             6   that we will pay a lot more attention to it than we would

             7   otherwise, and that may cause expenses and concerns at

             8   corporations that are not there now, but that probably is

             9   good.

            10             Whether or not this is the right proposal at the

            11   right time is another question.  I have had some

            12   conversations with my corporation director friends, many of

            13   whom say that there has been a dramatic shift in the way the

            14   boards operate since Sarbanes-Oxley, and I think certainly we

            15   need to pay attention to that.

            16             But I also think I would strive, in part, to the

            17   question of whether this is really the right approach towards

            18   giving more power, to the group that I think should have more

            19   power and that's the institutional investors.  We're not

            20   really talking about shareholders here.  We're talking about

            21   institutional investors, and what you have is a rule that is

            22   going to empower those institutional investors and I would,

            23   if I were reexamining this, pay close attention to the

            24   question of how the voting process will take place at the

            25   institutional investor level.




             1             Certainly, organizations like ISS and others who

             2   have the power to make recommendations regarding voting

             3   procedures, and this is particularly true for mutual funds

             4   these days, will become increasingly powerful and need

             5   somehow to be looked at as to whether they are reaching the

             6   right results.  

             7             But all in all, I think this effort to provide more

             8   responsibility at the board level is on the right way.  It

             9   seems, Mr. Chairman, a little bit like a Rube Goldberg

            10   proposal and it may need some more attention to whether or

            11   not it's really workable but you're on the right track.

            12             MR. BELLER:  Thank you.  Let me mention one ground

            13   rule that I mentioned at the beginning but I'm not sure

            14   everybody from the afternoon panels was here.  It would be

            15   fairly effective if you want to be recognized, just flip up

            16   your card as opposed to raising your hand or jumping over the

            17   table or something else.

            18             Dean Sonnenfeld, what's your reaction to those

            19   questions and to the proposal?

            20             MR. SONNENFELD:  I think it's only fair game when

            21   nobody puts up their card that you hit the schoolteacher. 

            22   I'd do the same thing myself.

            23             But since you've put me in role, let me retaliate

            24   by first saying that like everybody said on the prior two

            25   panels, that it is an honor to be here, but I'd like to




             1   comment on the educational side.

             2             It's just the process of the discussion we had so

             3   far this morning I thought was suspiciously excellent that

             4   the first group -- now I hear you giggling -- so obviously

             5   with the provocateur throwing out the grenade, the mouse said

             6   why not the market test and Marty coming back saying yeah,

             7   maybe, but not now, we had a pretty ferocious but divergent

             8   first session.

             9             The second session, I don't know, with Peter such a

            10   nice guy or whatever, got Ira and Joe rapidly forming

            11   concessions with Tom, I thought that we should just go home

            12   at lunch time because all we're going to do is make things

            13   worse on the process side.  So let me say that with all that

            14   out there, I'd like to help make things worse.  A lot has

            15   been exposed and I kind of feel like that proverbial mosquito

            16   in a nudist colony.  I hardly know where to strike first on

            17   this.

            18             There is a galaxy of stars in the room, too.  I

            19   guess I'd congratulate you on it but I think it exposes us

            20   and this whole kind of discussion in an important way and

            21   that last comment is relevant, by the way, because we have in

            22   the room seven -- at least around the semi-circle this

            23   morning and through this afternoon -- seven corporate

            24   executives, three economists and 33 attorneys, one Evelyn and

            25   one me, and that -- what does that mean what we have here?




             1             The language that we use is the language we always

             2   use.  There's a whole field of hundreds -- in fact a hundred,

             3   specifically, of sociologists working on white collar crime

             4   that have a different language for the things we wrestled

             5   with this morning.  

             6             They walk away with debates over the failure of

             7   deterrents to work but also the inadequacy of punishment to

             8   be properly tested because they look at the same issues that

             9   you look at and a sociologist, which is my training in the

            10   behavioral world -- that's the sort of one me, I'm not an

            11   accountant, not one of the economists or attorneys in the

            12   room -- is that the sociological perspective is we

            13   consistently punish the institution of the infractions of

            14   individuals.

            15             And with the present company here, I wouldn't dare

            16   take a look at the Wall Street settlement and who pays the

            17   price or the Xerox settlement and who pays the price, but

            18   some have argued that the same people get victimized twice

            19   and the sociologists complain that's because we have lawyers

            20   handling this, is that you don't get individuals to change

            21   their behavior, we don't individually deal with that

            22   psychology.  So instead we have language that we had this

            23   morning, checks and balances. 

            24             Well, our constitutional framers were cited this

            25   morning and sure it was appropriate.  Checks and balances --




             1   well, Warren, as a businessperson, I don't think a check and

             2   balance was -- you don't need to respond unless you want --

             3   was ever appropriate in your world.  Checks and balances were

             4   determined and created not to speed efficiency and encourage

             5   risk-taking but just the opposite, is to run the risk of

             6   businesses going into jeopardy and disappearing.

             7             We don't want governments to run that risk so we

             8   create legislative bodies, we create electoral colleges and

             9   we create intentional inefficiencies because we don't want

            10   checks and balances for a business.  We don't want people

            11   consistently second-guessing, so we don't take chances in

            12   markets and hopefully in the interest of good returns for

            13   shareholders, take good risks as well and sometimes

            14   businesses dying to go out of business.

            15             So some of the risk aversion that people trained in

            16   the language of law will enter in sometimes affects how we

            17   even analyze this discussion.  If it weren't with that 33

            18   attorneys in the room, I'd remind us Oliver Wendell Holmes

            19   said that attorneys seem to think we make minds sharp by

            20   making them narrow, is broadening our language here, I think

            21   we have a lot of human behavior issues.

            22             In fact, even Ralph mentioned it and got away with

            23   it as Ralph's term for it this morning -- Ralph Whitworth --

            24   was we're really talking about poor boardroom dynamics. 

            25   That's social engineering.  Does somebody think you can




             1   really pass regulations, pass a law that's going to guarantee

             2   us great social dynamics?  It's hard to do.  We can try to

             3   avoid bad things from happening.  We can't guarantee good

             4   things will happen.

             5             I've gotten Ted worked up on that one.  And, you

             6   know, so we think about the debate with that as a backdrop. 

             7   Sure there are issues about the why not that came out this

             8   morning, such as well, the -- we've made such great progress,

             9   should we go ahead.  But then of course most anybody else in

            10   the room could cite the scandals that continue to pour out

            11   post-Sarbanes-Oxley or whatever.  

            12             But then again, boards have made progress.  We've

            13   seen things, I don't know, from Delta to AMR to Sprint where

            14   there wasn't a financial collapse and there wasn't some huge

            15   governance implosion or massive fraud, but the boards acted

            16   when they didn't have to act and did some courageous things. 

            17   We hear that the shareholder voice is still a hard one to

            18   exercise because of the cost if we don't do what we're

            19   looking at today, yet at the same time we're told that by

            20   holding that big stick, it has somehow catalyzed discussions

            21   that didn't happen so readily before.

            22             We've wondered about the concern about collegiality

            23   that many of my friends in the corporate world have been

            24   concerned about.  Again, we look at the pattern.  We have the

            25   Charles Elsons or thinking of when Douglas Frazier joined the




             1   board of Chrysler.  I think you remember how so many in the 

             2   corporate community were horrified about what that would do. 

             3   And they'd say either he'd be ineffectual as one voice or he

             4   would create a political party there and we'd have a security

             5   issue in terms of confidentiality.

             6             Well, Douglas Frazier is the former head, as you

             7   know, of the Auto Workers, did a spectacular job on that

             8   board.  In fact, at another business school, I was back at

             9   Harvard at the time, I even brought him before a thousand

            10   MBAs to talk about his experience and he talked quite

            11   intelligently about issues of international trade and

            12   competitiveness and work force education.  And the students

            13   were shocked.

            14             And finally one of them raised his hand and said

            15   Mr. Frazier, you know, as a union boss on a corporate board,

            16   we expected that we'd some pot-bellied, balding guy, cigar-

            17   chomping foul-mouthed person.  And he said oh, you expected

            18   Lee Iacocca.

            19             (Laughter.)

            20             MR. SONNENFELD:  A single individual does make a

            21   difference and it can be collegial, the way Frazier and

            22   Elsons apparently are on their boards as the voice of

            23   intelligent dissent, but those of you who even would

            24   challenge Mickey LeMater's independence as the former head of

            25   the cancer center by receiving some gifts at the Enron board,




             1   when you go through the transcripts you find that this very

             2   senior, very erudite and wonderful human being was in fact

             3   asking the questions a lot of other people should have been

             4   asking about people sitting on both sides of the table and

             5   things and we're wondering, you know, another voice or two

             6   there could have made a big difference.

             7             You've all not only heard but often used the

             8   supposed Edmund Burke quote about all that's necessary for

             9   the triumph of evil is for good people to do nothing,

            10   although none of us can ever point to when Burke ever said it

            11   or where.  Single individuals can make a difference; in so

            12   many of these scandals, it could have helped.

            13             So when you think about the balance of these, sure. 

            14   But how do we manage the expectations?  If mixing up the

            15   chemistry helps a little, the social scientist in me says

            16   we're going to raise our expectations too high, human

            17   behavior is not going to be that predictable and we're not as

            18   good at what we think we do.  

            19             We've had credentialing problems even within our

            20   own professions around this room.  There was a former SEC

            21   chairman that had apparently a problem many decades ago with

            22   integrity in Congress and had a very short reign.  We looked

            23   at the influential vote of ISS.  We heard that ISS might have

            24   a hugely credentialing role and many in the business

            25   community are concerned about that and others say well, they




             1   do a good job and as we heard from folks this morning from

             2   Fidelity or elsewhere, we don't have the time to do all the

             3   credentialing who would be a good board member.

             4             Well, is it the rest of us?  Is it fair to put ISS

             5   under that burden?  I think most people in the room would

             6   certainly tend to agree that ISS had a hugely influential

             7   role in throwing the vote through their recommendation on the

             8   HP-Compaq merger.  Had they gone the other way, I'd bet my

             9   life savings, which is not a big bet for some of us in the

            10   room it would be a big bet, that that vote would have gone

            11   out differently.

            12             Who was the author?  The author of that report, Ron

            13   Kumar, the influential report that helped persuade large

            14   shareholders to support Hewlett Packard's proposed purchase

            15   of Compaq, has resigned from his firm because of dispute over

            16   the credentials he presented to his employees.  Turned out he

            17   didn't have the JD and that he thought they -- so can we be

            18   in a position of saying we can credential who is going to be

            19   a good director?  Do we really know about human character

            20   issues?

            21             And I think in closing, I actually like the more

            22   broader principled approach of encouraging the dialogue that

            23   both Joe and I were talking about, about some higher triggers

            24   that would help lead to a debate and a discussion rather than

            25   necessarily confrontation and credentialing.




             1             MR. BELLER:  Ted?

             2             MR. WHITE:  At the risk of this table dominating

             3   the conversation, I'll be a little more brief.

             4             MR. SONNENFELD:  Well, nobody had their card up.  I

             5   was looking.

             6             MR. WHITE:  First to your question, does this

             7   define the right universe, our initial position is that we

             8   did not like the concept of triggers.  However, through

             9   conversations with the business community and with the SEC,

            10   we've come to recognize that it's likely to contain it.

            11             In that instance, we are interested in the right

            12   triggers to define the right universe.  And I'll tell you

            13   what we come from is an organization is that it's all about

            14   value.  Our interest is in getting at the universe in cases

            15   where companies are destroying value and the governance

            16   triggers that you have in here are linked to that and I think

            17   are appropriate and, you know, we've listed a few suggestions

            18   for defining those triggers, which I think we can talk about.

            19             On the cost issue, I think something that should be

            20   considered here is that the majority of the costs are likely

            21   to be variable and at the choice of the company.  The cost

            22   that's going to be hardwired into this if a shareholder were

            23   to use this are going to be minimal and are going to need to

            24   print a few more pages in the proxy.  To the degree that you

            25   want to defend this and turn it into an HP-Compaq, it's going




             1   to be costlier.

             2             And one point on social -- the social engineering

             3   and social dynamics comment, that is not what Ralph Whitworth

             4   meant.  I am certain of it.  Here is the issue.  Why we're

             5   interested in this rule is that we need a general tweak in

             6   accountability.  Boards need to recognize that they need to

             7   be more accountable to shareholders.  That's what the board

             8   dynamics is about.

             9             When Ralph Whitworth or Charles Elson or some other

            10   shareholder-oriented individual sit on boards, they bring

            11   that perspective, and that's what this rule is all about. 

            12   It's rather simple and straightforward.  I do not believe

            13   that the special interests are going to make it on boards and

            14   Commissioner Goldschmid has raised the point several times,

            15   very appropriately, you have to get 50 percent to get on the

            16   board.  And I have ultimate confidence in the market that the

            17   wrong people simply will lose, the wrong proposals will lose,

            18   and good people will make it through.

            19             MR. BELLER:  Mr. Batts?

            20             MR. BATTS:  First, I'd better stick to the NACD. 

            21   We just finished one of our efforts, Council of Institutional

            22   Investors, on a task force, trying to spell out what would be

            23   the best practices for shareholders and directors

            24   communication.  And through the directors, the shareholders

            25   seemed to come to a rational set of conclusions which are




             1   available on our web site, that I think maybe have a chance

             2   to work.

             3             If you think about it, most companies -- not most -

             4   - a large percentage of companies have been trying to be

             5   responsive to shareholders for a long period of time.  As

             6   chairman of one board committee or another for the last 10 or

             7   15 years, I've been standing up at annual meetings answering

             8   questions from people who are not particularly large

             9   shareholders but who had some shares, attended a meeting and

            10   asked a rational question.  And we were always willing to

            11   meet with shareholders before, after and any other time.

            12             I think this as the practice spreads and it becomes

            13   very apparent that if shareholders want to meet with

            14   directors, directors had better with the shareholders, I

            15   would at least give that process a chance to work.  As I --

            16   put that to one side for a moment.

            17             But just look at what is the problem this proposal

            18   is trying to address, and I've read it, I've listened as

            19   carefully as I could, being one of the non-33 lawyers or how

            20   many are here, not sure I understood everything that was

            21   being said.  It seems to me there are two issues that might

            22   be on the table.

            23             One, the company has not performed well for a long

            24   period of time, which is a good target for Ralph in this

            25   group to get on the board and help straighten it out.  The




             1   other is the company may be performing okay but has been

             2   indifferent or non-responsive to shareholders who want to

             3   talk to the directors about some issue.

             4             I would say in the first case boards in their

             5   subtle way, without beating drums and clashing cymbals, have,

             6   over the period of time I've been a director, have been

             7   reasonably effective of doing something slowly.  I went on

             8   the first public board in 1969, a small company.  I've

             9   progressively served on larger boards and now I'm at the end

            10   of the cycle I'm serving on small boards again.

            11             In the last 20 years, I've been through eight CEO

            12   successions.  Only two of those CEOs reached normal

            13   retirement age, and I was one of them.  The rest left early

            14   because of poor performance and yet there was not a lot of

            15   noise being made, there was not a lot of publicity, newspaper

            16   articles or what-have-you.  Boards -- in a very quiet way,

            17   boards tend to do their job in terms of trying to improve

            18   performance.

            19             Now, there is a hard core of CEOs surrounded by

            20   boards who are not very responsive, who are not doing very

            21   well, who will fight to the last ditch any effort to unseat

            22   them and put in a better management team.  I'm not so sure

            23   this issue -- this proposal will help in that regard.  I'd

            24   like to come back.

            25             For the boards that are simply not -- have not been




             1   responsive to directors -- to shareholders, the directors not

             2   responsive to shareholders, I think the proposals that we've

             3   made will help as that becomes a better understood and

             4   practiced process of actually meeting and discussing things. 

             5   Boards tend to get more active when faced with reality.

             6             When it comes to the issue of nominating directors,

             7   there is nothing, to my knowledge -- and I figured out about

             8   35 years I've been on public boards, have never -- and I've

             9   served on full boards or nominating committees for nearly all

            10   that time.  I don't think there's been a single incident of a

            11   responsible shareholder group proposing a candidate to stand

            12   for election on the board.  Not one.  

            13             There have been people who have nominated

            14   themselves who patently or after further examination would

            15   clearly not be qualified to serve on a particular board.  I

            16   was on the Sears board at the time that Mr. Monk ran for

            17   office.  As Nell and I have discussed -- Nell has helped

            18   teach my class -- as we have discussed, he was running for my

            19   seat.

            20             MS. MINOW:  Nothing personal.

            21             MR. BATTS:  Nothing personal.  Actually -- I

            22   actually had a discussion of should I step aside and let him

            23   have it.

            24             There had been a small minority of Sears directors

            25   who were trying very hard to get some corporate governance




             1   changes made and thank goodness Mr. Monks came along because

             2   all of a sudden management was interested in making those

             3   changes and we got one heck of a lot done in a very short

             4   period of time.

             5             Don Rumsfeld became chairman of our nominating

             6   committee.  We had a fairly responsible group and in 18

             7   months the company made the decision to break itself in

             8   different pieces.  So I'd give the man credit for being the

             9   catalyst to get something done.

            10             Had he come on the board, I don't think we would

            11   have gotten that much done in that period of time.  It would

            12   have been dropping a lot into quicksand, unless we'd made

            13   those corporate governance changes along with his election or

            14   before his election.

            15             So I would think that a cycle here where large

            16   shareholder groups actually meet with directors, make

            17   proposals of who they would like to see on that board, and

            18   give it a chance to work without coming up with another layer

            19   of complicated processes.  

            20             The one comment I'd make -- now I'm talking

            21   about  -- I've been CEO of four companies.  We won't discuss

            22   my ability to hold a job.  The ambiguity and the time frame

            23   of this proposal is in my view too long.  I would be much

            24   more inclined to go with something Howard Millstein or

            25   Professor Grundfest made today, something that's faster.




             1             You have in a company, an organization of human

             2   beings, you have a management team you're trying to hold

             3   together, you're trying to recruit, you have shareholders --

             4   employees at lower levels.  You have vendors, you have

             5   customers and you have debt holders.  And all of a sudden you

             6   put this cloud on top of this company for several years.  I'm

             7   not sure you're creating value in that process.  I think

             8   you'd tend to destroy it.

             9             Something needs to happen a lot faster than what

            10   this proposal seems to me to be geared for.  And with that, I

            11   would quit.

            12             MR. BELLER:  I would like to jump over you for one

            13   second and just ask -- there's one point that Mr. Batts

            14   raised which is your view of the history of larger or more

            15   responsible shareholders meeting with boards or with

            16   nominating committees or directors up for consideration and

            17   is it in fact the case that there's no history of that,

            18   should that be given an opportunity to work in the next year

            19   or so?  What can we learn?

            20             MS. YERGER:  I appreciate the opportunity.  I did

            21   want to comment immediately as co-authors of the report on

            22   improving shareowner-board communications, that the Council

            23   in no way believes that communication at this point should be

            24   a substitute for moving forward also with this reform.  We

            25   think they address two very different issues.




             1             We think this reform that's being discussed is

             2   something that has not been covered by any of the other

             3   reforms, whether it's under Sarbanes-Oxley or the stock

             4   exchange listing standards, and that's whether long term

             5   shareowners, and I stress the word owners here, we're not

             6   holders, we're not traders but we're owners in these

             7   companies, should have a meaningful ability to influence the

             8   director nomination process and indeed have a meaningful

             9   ability to actually elect the directors who are representing

            10   them on the board, not simply rubber stamping the candidates

            11   that are being advocated by the nominating committee and/or

            12   with the input of management.

            13             I think it's a good question about whether should

            14   we just allow there to be a process for a while where

            15   shareowners can make suggestions for candidates.  I think

            16   that process has been going on and at many companies,

            17   frankly, I think companies do ask candidates that have been

            18   suggested by shareowners.  But in some cases they simply

            19   don't and then owners are left with the decision of whether

            20   they should undertake the very significant expenses of

            21   running a proxy contest to put someone on the board.

            22             And speaking for our members who are fiduciaries, I

            23   think it's very difficult for them to justify the

            24   extraordinary expense of a proxy contest to get someone on

            25   the board.




             1             I think there's a general sense that at some

             2   companies, and unfortunately the companies probably in most

             3   need to have fresh blood on boards, these are the ones that

             4   are going to probably disregard the candidates suggested by

             5   shareowners.  So I think we look at this reform as really the

             6   last step.

             7             I mean, this is something that our members

             8   certainly aren't going to undertake unless they've already

             9   tried discussions and dialogue and it's failed.

            10             MR. BELLER:  Mr. Raines, I guess I'd ask you, in

            11   addition to your other remarks to address this issue.  The

            12   business roundtable comment letter makes clear that in its

            13   view the costs of this proposal would far outweigh any

            14   benefits.  I think that's a quote.  And I guess I'd like you

            15   to address the cost benefit issue and maybe in connection

            16   with that, one thing in particular, and that is -- I think it

            17   was Mr. White's point that the Commission and the world are

            18   thinking about costs and benefits, we should keep in mind

            19   that the bigger element of the costs that corporations have

            20   indicated they would incur are in fact costs corporations --

            21   they're not costs of compliance with the rule, they are costs

            22   that many corporations would voluntarily incur in deciding to

            23   fight either and not be in -- or a contest, small C --

            24             THE COURT REPORTER:  Could you open your

            25   microphone, please?




             1             MR. BELLER:  -- able to nominate -- 

             2             MR. RAINES:  Well, thank you.  And let me express

             3   my appreciation for the invitation to be here today to

             4   participate in this panel. 

             5             Let me start by just observing that the issue that

             6   I think we're dealing with here, this longstanding issue of

             7   how owners express their control of corporations, is one that

             8   is quite longstanding and quite difficult.  And it's one of

             9   the most important issues of corporate law and unfortunately

            10   there aren't a lot of levers in which to deal with it and it

            11   seems to me that the proposal before the Commission now is an

            12   effort to try to have a big impact on a big issue with a very

            13   narrow range of levers in which to operate and I think that

            14   causes some of the difficulties.

            15             Now, if this were a proposal that effectively

            16   targeted what have been called, I guess, several times, dead

            17   companies or unresponsive companies, I don't think we would

            18   be having this forum.  I don't think there would be a big

            19   disagreement that dead companies or companies that

            20   intentionally are not responsive to their shareholders should

            21   be shaken up.

            22             But that is unfortunately not the nature of this

            23   proposal and I don't see that as being intentional, it's just

            24   very hard to target what do you mean by dead companies, what

            25   do you mean by companies that have ignored their




             1   shareholders.  How do we know that?  What external evidence

             2   is there of it?

             3             And necessarily, this proposal, it seems to me,

             4   reaches well beyond that range of companies, even if we all

             5   could agree on what those companies were and what the

             6   criteria were and what the indicators were of their

             7   misbehavior.

             8             The -- it also raises another issue that's related

             9   to agency and that is control on behalf of whom.  And we've

            10   had a lot of discussions about comparing this to democracy in

            11   political process, governmental political process, and I

            12   think the comment earlier that corporations are not

            13   government, and that the kind of controls you want on

            14   governments is exactly the kinds of controls you don't want

            15   on enterprises that you seek to be risk-takers as opposed to

            16   enterprises that you seek not to be risk-takers, but also

            17   raises questions about other intermediaries.

            18             For example, if we really believe in corporate

            19   democracy, what role should there be, if any, for advisory

            20   firms where the entities who are employing the advisory firms

            21   expressly say I'm going to do no independent investigation,

            22   I'm solely going to go by what this advisory firm says?

            23             There are some who would say that's an abdication

            24   of the fiduciary responsibilities as opposed to an embracing

            25   of that fiduciary responsibility.  I don't know of any other




             1   case where a fiduciary can say I'm affirmatively refusing to

             2   become informed myself and I'm going to delegate my vote to

             3   someone else, and that they've met their fiduciary

             4   responsibility.

             5             But it's an unusual form of democracy that we're

             6   talking about here, if we're talking about a delegation of

             7   the most fundamental aspect.

             8             It's also an unusual form of democracy where in

             9   this case one of the triggers contemplates less than a

            10   majority of the shareholders being able to cause it to come

            11   into effect.  I don't know of a case where you equate

            12   democracy with a significant minority.  And there are many

            13   cases where there are minorities, significant or otherwise,

            14   who are disappointed in an election process, but it's the

            15   nature of elections that if you don't have a sufficient vote

            16   to win, it's not a failure of democracy that you didn't win. 

            17   It may just be a failure of your cause or of your candidacy,

            18   but you can't blame democracy because you didn't achieve your

            19   goal.  So that raises a number of questions in my mind about

            20   the breadth of the proposal.

            21             On the cost issue -- and let me try to deal with

            22   this directly because I think it is a very important issue. 

            23   I mean, first there is a question of cost based on how many

            24   companies, and I think the estimates that were included with

            25   the proposal had a tremendous underestimate of a number of




             1   companies who will have to pay even the most minimal cost, no

             2   matter how you define it simply because I think it's a

             3   foregone conclusion that there will be almost universal

             4   invocation, if possible, of the desire to be able to nominate

             5   directors if for no other reason than it's a good basis in

             6   which you have something to say at the annual meeting, it's a

             7   good basis to do organization, it's a good basis just to have

             8   your bets covered in case, but as Mr. Batts was saying, you

             9   want to speed the process up if you think maybe next year

            10   something might happen, better to have already voted and

            11   therefore you could put up a nominee right away.

            12             So there will be tremendous arguments made as to

            13   why this ought to be a routine item, always reenacted every

            14   couple of years, as a prophylactic, just in case you might

            15   need it.  This will cut out a year in the timing.  So I think

            16   there's a wide range of companies who are going to have to

            17   deal with this, even in the most narrow definition of cost.

            18             Second is the issue of the cost of elections.  And

            19   it's an interesting phenomena, this notion of voluntary

            20   expenditures.  If a board and a management did not act in

            21   what they believed to be the interest of the shareholders,

            22   they would justifiably be sued.  And if the board has

            23   determined that there are certain directors that they believe

            24   would be the best directors for the company and along come

            25   one or two other directors who may be perfectly good human




             1   beings but they're not the ones the board believes to be the

             2   best, isn't it their fiduciary responsibility to indeed try

             3   to elect the 10 directors who they think are the best?  And

             4   if they didn't do so, haven't they violated their fiduciary

             5   responsibility?

             6             So certainly I would expect companies to try to

             7   elect the board members that they've nominated.  Indeed, I'm

             8   not quite sure who would stand for election in a company if

             9   the company said we're going to nominate you but you're sort

            10   of on your own here, we're kind of indifferent as to whether

            11   you win, and we'll just put you in the proxy like everybody

            12   else.  And we'll be sure to say we prefer you but that's

            13   about all we're going to do on your behalf.  That would be a

            14   very odd world in trying to recruit people for corporate

            15   boards.

            16             The third kind of cost -- and this is where I think

            17   the majority of the costs will be.  I don't think it's going

            18   to be uncontested, the proxy fights.  It's going to be in the

            19   leverage issues.  My experience is that many of these efforts

            20   to become involved in corporate governance are less about

            21   corporate governance than they are about other causes.  And I

            22   won't characterize a cause as being good or bad causes

            23   because I believe in many of the causes that people are

            24   trying to advance through the corporate process, but they're

            25   causes.




             1             And the ability to push forward your cause is

             2   somewhat limited by the rules of the Commission and so people

             3   do whatever they can within those rules to advance their

             4   cause.  And I'll give you one example.

             5             One company that I'm aware of had a group that put

             6   forth a resolution and as most of these resolutions evolved,

             7   it produced a report because given the Commission's rules,

             8   you can't actually ask them to do something but you can ask

             9   for a report.

            10             So the company, rather than doing its normal well,

            11   here are all the reasons why we can't do a report -- you

            12   know, the whole company will be tied up for the next five

            13   years doing a report, they said okay, we'll do your report. 

            14   And the group said, oh no, no, no.  That's not enough.  You

            15   know, you can't just do the report.  What you have to do is

            16   do the things that we really want you to do and here's our

            17   list of 10 things that we think you need to do.

            18             Now, the leverage point I think is by far the most

            19   important point.  Regardless of how many of these -- the

            20   proposals actually come to fruition, they're all going to be

            21   used for leverage.  Everyone is going to say now I'm going to

            22   come forward with this unless you do X, unless you do Y,

            23   unless you do Z.  And the amount of time, effort and money

            24   that  will be spent in the negotiating process I personally

            25   believe swamps what will happen in this other process, and it




             1   will be across the board.

             2             No responsible advocate who seeks corporate action

             3   on any -- and I'm here now not talking about improving

             4   earnings.  I'm talking about solving human health problems or

             5   eliminating environmental issues, very important things, no

             6   responsible advocate will be able to resist the use of this

             7   lever.  And the cost of dealing with that in corporate times,

             8   and indeed maybe in fact in agreeing to do things, just to

             9   ensure you don't have the disruption I think is going to be

            10   the largest.

            11             The last thing I would say is this.  Anyone who

            12   thinks the corporations haven't had a kick in the pants in

            13   the last couple of years hasn't been paying attention.  There

            14   is no doubt that corporate management and corporate

            15   governance has improved substantially.  There's no doubt that

            16   there's been an incredible focus on this.

            17             Just ask any member of a corporate board.  They're

            18   spending two and three times as much time as they were doing

            19   before.  So I think it is folly not to recognize something

            20   has happened.  It's also, I think, folly not to recognize

            21   that much of the power of what I think is being suggested by

            22   the Commission's proposal is already taking place without the

            23   proposal being in place.

            24             Everyone has their own interpretation of what

            25   happened at the Disney Company, but one thing we know is that




             1   you had an effort to change the leadership of the board of

             2   the Disney Company that expressed itself through the election

             3   process and somehow the voters were able to do that without a

             4   massive proxy fight and they were able to get change.

             5             Now, was it exactly the change they wanted?  Was it

             6   a good change?  I don't take any position on that but clearly

             7   even without this proposal, for those who can in fact rally

             8   something approaching a majority of the shareholders, action

             9   did happen.

            10             And so I would just urge that we -- if we're going

            11   to use analogies to democracy, let's use democracy as we

            12   normally think of it and think about 50 percent as being sort

            13   of the minimum threshold to say I represent the majority.  If

            14   we're going to look at the issue of agency, let's look at all

            15   these issues of agency and whether in fact we're advancing

            16   democracy or whether we're really advancing interest group

            17   politics.

            18             And as we think of cost, let's think of all the

            19   costs because the leverage will only be possible because of

            20   the rule, so the rule is in fact creating the cost.  It's not

            21   a voluntary cost in that sense by the company.  It would be a

            22   cost that the company would not have to deal with in the

            23   absence of the rule.

            24             MR. BELLER:  Commissioner, I want to get through

            25   one round.  Ms. Wolf?




             1             MS. WOLF:  Thank you.  First, I'd like to just take

             2   a brief minute to compliment everybody involved in planning

             3   and organizing this meeting.  Those of us who are corporate

             4   secretaries know what a tremendous effort it is to pull off a

             5   full day like this.  We compliment you.

             6             The American Society of Corporate Secretaries

             7   agrees with the comments of our CEOs made by DRT, and we

             8   would welcome a cooling off period.

             9             MR. BELLER:  Could you get closer to the mike,

            10   please? 

            11             MS. WOLF:  Is that better?  Thank you.

            12             We would welcome a year or two to integrate the

            13   Sarbanes-Oxley requirements and the new nominating committee

            14   requirements before dealing with this.

            15             We also hear the sentiments from the institutional

            16   investors, and we sense that year may not be possible.  If

            17   it's not, we have several overarching concerns on how this

            18   applies to companies, and it's not just the impact on the

            19   company itself, but of course, all shareholders bear the cost

            20   of implementing these rules, and will suffer if there is some

            21   disconnect in the implementation.

            22             The first set of concerns we have are mechanical,

            23   and I will not take a long time to address them because I

            24   know that John Wilcox will do this later on the last panel.

            25             We are hearing from our experts, our proxy




             1   solicitors and our outside people who help us run the back

             2   room at meetings where the proxies are actually processed and

             3   the votes are counted, and then if there is any kind of a

             4   dispute, the votes are verified, are telling us that the

             5   current system may not be adequate to handle this rule,

             6   particularly if there is a large volume of votes that are

             7   close, either about the trigger or about a contested election

             8   or a run off election, if you will.

             9             We would urge the Commission to do something

            10   similar to the Miner's Report that was recently done in the

            11   U.K. that ripped the process apart and identified strengths

            12   and weaknesses to help us all be confident that the process

            13   will work, and if there is not time before the new rule is

            14   implemented, then perhaps it would make sense to apply the

            15   rule to the largest companies first and going more slowly to

            16   the rest of the companies, so that we would have less volume

            17   for the first few years as the rule is implemented.

            18             Our second significant concern has been addressed

            19   very well by earlier panelists.  It is that the proposal we

            20   think will make things more adversarial rather than encourage

            21   the interactive consensus building behavior that is necessary

            22   to get everybody back on the same page and regain the trust

            23   of our institutional investors.

            24             We think that Professor Grundfest's alternative

            25   would be a good one that would produce much less




             1   controversial and adversarial interaction than the proposal.

             2             The last overarching concern of our members is

             3   there is this fear, particularly by the companies who have

             4   other kinds of business interactions with certain of the

             5   special interest institutional investors, that the leverage

             6   issue will get out of control.

             7             We have suggested in our comment letter some things

             8   we think will help diffuse the concern, such as very clear

             9   disclosure up front, if there is to be an initiative to try

            10   to trip the trigger, why they think that's needed, something

            11   company and board specific that deals with corporate

            12   governance concerns and concerns about the proxy process or

            13   shareholder value.

            14             We think that kind of disclosure and transparency

            15   would go a long way to allaying these concerns.

            16             Thank you.

            17             MR. BELLER:  Mr. Beese?

            18             MR. BEESE:  Thank you.  Let me start with Franklin

            19   Raines' comments, that things are indeed different in the

            20   board room.  I certainly can attest to that.  I would have

            21   liked to have been here this morning, but was at a board

            22   meeting, where we did discuss the director selection process.

            23             They are quite different.  Sarbanes-Oxley and the

            24   new standards by the Exchanges have made things quite

            25   different.  I do believe that while they may not specifically




             1   address some of the issues that others are concerned about,

             2   we should at least understand what has changed before we move

             3   to the next generation.  We don't know really what has

             4   changed yet.

             5             One thing that certainly has changed if you talk to

             6   the major head hunters, there is a 80 percent turn down rate,

             7   and they start with qualified candidates.  That is

             8   drastically different than say three to four years ago, and

             9   clearly, there has been a change in that selection process,

            10   as well as the way the process works in the board room today.

            11             The other thing that has changed certainly is the

            12   cost to companies.  There is a disproportionate cost that

            13   Sarbanes-Oxley, as legislated by the Congress, has placed on

            14   smaller public companies.  I do think we need to fully

            15   understand the ramifications of that and the ramifications of

            16   costs that we have unilaterally imposed on U.S. companies

            17   that are trying to compete in a very global and competitive

            18   world, before we impose additional costs on them, and

            19   understand the global economic consequences to what we are

            20   trying to do to U.S. companies and its effect on the U.S.

            21   economy.

            22             There has been, I believe, a significant

            23   accountability, and one that again, we don't know the full

            24   ramifications of.  If I read the press correctly, the next

            25   saga in the current drama is individual director liability. 




             1   I believe some members of the New York Stock Exchange Board

             2   may find out exactly what individual director liability may

             3   be, if I read the press correctly.

             4             I also believe a number of the other corporate

             5   cases, the major institutional shareholder of Hollinger that

             6   started this current debate at Hollinger, has talked about

             7   seeking redress from individual directors if they are not

             8   able to get satisfactory redress through the process that is

             9   currently going on.

            10             Lastly, let me just say that during my stay in this

            11   building, one thing I became increasingly conscious of was

            12   the law of unintended consequences, not having been here this

            13   morning, I would have liked to have heard some of the

            14   solutions, such as Professor Grundfest's suggestions.

            15             I do believe this rule in particular as proposed is

            16   very prone to that law of unintended consequences.

            17             Chairman Ruder talked about the Rube Goldberg

            18   nature of this law, and I think that is not an inaccurate

            19   description and one that clearly suggests it could easily

            20   move down that path of unintended consequences.

            21             Institutional shareholders have a way of asking for

            22   more redress in this whole area.  What I would like to know

            23   specifically about certain classes of institutional

            24   shareholders, what actions this could possibly procreate by

            25   certain types of institutional shareholders, namely hedge




             1   funds, which I think is a very amorphous term and covers way

             2   too broad of a segment of asset class of a market, but

             3   certainly I would like to see the Commission go further down

             4   their view of hedge funds, particularly a certain class of

             5   hedge funds that spend a lot of time gaming the market, and

             6   I'd like to know how that would play out with that group of

             7   investors and how this rule might enhance their, if you will,

             8   gaming of the corporate marketplace.

             9             I think there are more questions than answers now,

            10   and I do worry about that law of unintended consequences. 

            11             Thank you.

            12             MR. BELLER:  Commissioner Goldschmid?

            13             COMMISSIONER GOLDSCHMID:  I have two sets of

            14   questions.  One for you, Mr. Batts.  I do agree with you and

            15   with Franklin Raines and Mr. Beese.  Sarbanes-Oxley has made

            16   corporate governance much better.  I take it you would

            17   concede that there are situations in which there is my

            18   deadwood company, deadwood board, and don't you think there

            19   ought to be something out there to do something about that?

            20             The second part of my question, in addition to what

            21   we are suggesting, would you like to see a provision which

            22   would allow 10 or 20 percent of the shareholders to

            23   automatically trigger an election?  Would that help you in

            24   terms of speed?

            25             For Franklin Raines, I have several also.  I agree




             1   with you on the difficulty, but I think that's why we defined

             2   and developed that process and proposal as we did, to focus

             3   on process.  If shareholders twice over a two year period

             4   decide they need help, this is a company that needs help and

             5   responsiveness, isn't that a wonderful paradigm for a company

             6   that needs change, that needs corporate governance

             7   development, that needs some kind of new dynamic, rather than

             8   try to define it, put it in the hands of those people who

             9   care about efficiency and productivity and profitability.

            10             On leverage, I guess my question to you on that is

            11   why do you think it will happen?  If somebody comes to you

            12   with a self interest proposal or something that would harm

            13   the efficiency or productivity of the company, isn't it easy

            14   for you to say no, you are running a good company, you know

            15   the shareholders will support you, the institutions won't go

            16   along, what's the difficulty of getting rid of blackmail by

            17   saying we won't accept such nonsense?

            18             Those are my questions.

            19             MR. BATTS:  If I can remember the question, I would

            20   say that contrary to one point that you made today, my own

            21   observation, with due respect, shareholders by not voting

            22   vote against their own economic interests year after year

            23   after year.  I don't know the numbers, but I doubt 100

            24   percent of the Disney shares just voted.  

            25             Therefore, what we are talking about, we are




             1   talking about the numbers of people who did vote.  If the

             2   number not voting was 30 or 40 percent, did Mr. Eisner did

             3   not win, or had the possibility of not winning.

             4             The point is that something needs to be done to

             5   make sure the shareholders participate and get involved in

             6   the game.

             7             The question for the company that is hard core, we

             8   all have the same problem with that company.  If the

             9   shareholders in one year said no and voted against that board

            10   instead of not voting, or the rules were changed so that if

            11   you didn't vote, it's the same as a no vote, and assume the

            12   company had a staggered board, you would wipe out a third of

            13   the directors a year, and in two years, you would have a new

            14   board.

            15             If the shareholders want action, they have to sort

            16   of get off the duff and do it.

            17             I don't know that --

            18             COMMISSIONER GOLDSCHMID:  The footnote on that, and

            19   it was explained this morning, I think, clearly, it's

            20   extraordinarily hard to have a proxy contest.

            21             MR. BATTS:  All we have to do is vote no.

            22             COMMISSIONER GOLDSCHMID:  Without any information? 

            23   We are giving them that opportunity.

            24             MR. BATTS:  But they are not taking advantage of

            25   it.




             1             COMMISSIONER GOLDSCHMID:  Without the proposal,

             2   they may well.

             3             MR. BATTS:  I'm not so sure I would agree with

             4   that.  If you look at the current proxy a voter receives, it

             5   does not clearly define the interrelationship among the

             6   board.  It takes a wizard to figure out that the chairman of

             7   the compensation committee and the CEO serve on two other

             8   boards together and they fly around the company together.

             9             There is not enough information about the directors

            10   standing for election in a proxy.  The proxy card is not

            11   designed where you say yes/no, or pass on an individual

            12   director.  Some very simple changes could provide some more

            13   mechanisms.

            14             I think a man named John Bogle used to serve on the

            15   Board of Mead when I was CEO -- he mutual funds, a lot of

            16   large institutional investors, simply are not representing

            17   their shareholders well by not voting.  By letting that

            18   continue, a smaller minority of shareholders who are

            19   activists, can swing things maybe not in everybody's best

            20   interest.

            21             COMMISSIONER GOLDSCHMID:  Ten or 20 percent added

            22   to what we have would be able to get an immediate election.

            23             MR. BATTS:  I think that would be a mistake. I

            24   think it needs a larger number than that.

            25             COMMISSIONER GOLDSCHMID:  Thirty percent.




             1             MR. BATTS:  There, you would have to get into

             2   charter changes, a lot of different legal issues.  I'd be

             3   very uncomfortable of a relatively small minority of people

             4   being able to call a general election.  And then after

             5   calling it, a majority of shareholders not voting.  I think

             6   you have the worse of all worlds.

             7             COMMISSIONER GOLDSCHMID:  The Disney vote was a

             8   high percentage of shareholders voting and broker dealers

             9   voted for management, as I understand it in general, in the

            10   context of their shareholders hadn't voted.

            11             MR. RAINES:  I'm a little confused because your

            12   proposal it seems to me to be going in the wrong way.  If the

            13   idea here is the protection of the majority of the

            14   shareholders, why is it that empowering ten percent helps

            15   them?

            16             Your proposal you just put forward about the 10 to

            17   20 percent for a quick vote.

            18             COMMISSIONER GOLDSCHMID:  Because people are

            19   arguing for fast vote.  The question is do you really want to

            20   open it up to 10 or 20 percent.  That's why I asked it.  We

            21   didn't propose it.

            22             MR. RAINES:  My point is the company is owned by

            23   the shareholders.  It ought to be controlled by a majority of

            24   the shareholders.  For all the proposals that don't address

            25   the majority seem to me to be fatally flawed.  At least one




             1   of the triggers before the Commission does not involve two

             2   majorities.  It involves 35 percent and then a majority.

             3             The last time I looked, winning 65/35 was a

             4   landslide.  It wasn't a failure to succeed.  65 percent of

             5   the shareholders voting the other way should not be ignored

             6   in my view.  If we were really talking about majority and

             7   majority, I think it's a somewhat different conversation than

             8   the conversation about 35 percent or 10 percent or some other

             9   number.

            10             On the leverage point, I tried to state this fairly

            11   because sometimes this is stated unfairly, I'm not worried

            12   about people who would come in with patently bad ideas.  The

            13   problem isn't that.  It's the people come in and say we think

            14   your company should divert resources to stop AIDS.  That's

            15   not a bad idea.  The question is should the resources of this

            16   company, which may have nothing to do with that particular

            17   issue, be diverted from doing the best interest of the

            18   shareholders, to what I might personally agree to be a very

            19   important cause.

            20             It's not the people who come in with kooky ideas

            21   that's the problem.  It's people who come in with ideas that

            22   on the surface are good ideas, but they are not good ideas

            23   for your company.

            24             The CEO can say I will now choose to spend the next

            25   six months making this case that this is not a good idea for




             1   our company, or I'll sit down with them and see if we can cut

             2   a deal because the six months that I would otherwise have

             3   spent on an important issue could better be spent on trying

             4   to make the company a better company.

             5             Not because someone comes in with a stupid idea,

             6   and that has absolutely no merit.  These advocates are

             7   advocating things that they think are very important, and

             8   they would like everybody in the world to share their

             9   passion.  I can understand that, but they want to do it with

            10   other people's money.  

            11             The management is there to protect the interests of

            12   the shareholders, as much as we might agree with the passion

            13   of the advocates, and that's where the leverage issue comes

            14   in.  People with powerful ideas who say I want this to become

            15   your number one priority, even though in your calculus and

            16   the board's calculus and the shareholders' calculus, it is

            17   not the number one idea.

            18             I don't think the Commission ought to be providing

            19   another platform for that to be played out.  We have more

            20   than enough platforms now.

            21             COMMISSIONER GOLDSCHMID:  They can use 14(a)(8) to

            22   raise that issue, and if a majority of shareholders want to

            23   do it, are you sure you want to protect them?

            24             MR. RAINES:  These proposals have nothing to do

            25   with the majority.  35 percent vote against someone, 65




             1   percent agree --

             2             COMMISSIONER GOLDSCHMID:  We've got a proposal of

             3   50/50, two votes.  Our thinking was 35 percent, even the vote

             4   of broker dealers, was the equivalent of 50 percent.  

             5             MR. RAINES:  If there's a problem with the broker

             6   dealer, that ought to be fixed directly.  It shouldn't be

             7   dealt with indirectly by assuming in all cases that

             8   management always will get -- if we have a problem

             9   communicating -- 

            10             COMMISSIONER GLASSMAN:  Can I just clarify one

            11   thing in our proposal?  The 50 percent is not 50 percent of

            12   shareholders.  It's 50 percent of votes cast, which is not

            13   necessarily a majority of shareholders in any event.

            14             The question is why did the other people not vote. 

            15   We don't know why the other people didn't vote.  Maybe it's

            16   their ignorance.  Maybe they are comfortable with management. 

            17   I don't know.

            18             I just wanted to be clear, none of our proposals is

            19   50 percent of shareholders.

            20             MR. RAINES:  I couldn't agree with you more.  I

            21   believe it ought to be 50 percent of the shareholders because

            22   whether they vote or not, they have an economic interest. 

            23   That economic interest should not be ignored.  If they have

            24   made a choice that they have chosen not to cast that ballot,

            25   we shouldn't say we now know what their intention was in any




             1   way.

             2             MR. BELLER:  Mr. Raines, I don't want to just throw

             3   this one out to you, but it's really a follow up from

             4   Commissioner Goldschmid.

             5             Let's slip it around.  Let's take Ira Millstein's

             6   proposal.  What would happen if our proposal were triggered

             7   or anything else we have heard about today were triggered, if

             8   a director failed to receive 50.1 percent of the votes

             9   outstanding in the election?

            10             It seems to me if 50.1 percent is good, on the

            11   negative, we ought to at least consider whether it's good on

            12   the positive.

            13             Should a trigger occur if a director doesn't get

            14   50.1 percent of the votes outstanding?  That suggests that a

            15   majority of the shareholders have not voted for that person.

            16             As I say, I'm not addressing that entirely to you.

            17             MR. RAINES:  I think that's a very fair question

            18   you asked.  I think that once you get to 50 percent, you are

            19   headed more in the right direction.

            20             I would say there was one other fact you would

            21   probably want to know, and that was is that person being put

            22   up for re-election.  If the board reads that and says the

            23   shareholders, the majority, do not support this person, the

            24   board at least ought to have the opportunity to its

            25   nominating committee to respond to their own shareholders




             1   before, in my view, you would invoke a wholly new process.

             2             We just put in place an approach to nominating

             3   committees and independent directors.  We shouldn't ignore

             4   that whole process here in our effort to try to empower

             5   shareholders, but at least I think that raises the issue.

             6             I think once you are talking about the majority of

             7   the shareholders, then you are now, in my view, talking about

             8   the owners speaking, and not some number short of a majority

             9   of the shareholders and saying that the minority can be

            10   imputed to be speaking on behalf of the majority.

            11             MR. BELLER:  Mr. White?  You have been very

            12   patient.

            13             MR. WHITE:  Thank you.  I have a couple of points I

            14   just wanted to follow up on from earlier commentary.  First,

            15   you were looking for examples of external evidence where

            16   shareholders are dissatisfied.  There are several triggers

            17   that are proposed by the SEC or by other parties that

            18   demonstrate that very well, and none more than the majority

            19   vote issue, which is the supposed non-responsiveness.

            20             You have had several examples where companies

            21   ignore a majority vote, but I can't think of a better

            22   example.  We would propose that be in the final rule.

            23             I would just offer somewhat of an example.  How

            24   would the Commission feel if three or four of you voted to do

            25   something and your staff said no, and then you voted again,




             1   and your staff said no.  That's what happens to us as

             2   shareholders.  

             3             The issues that are passed are the issues that are

             4   legitimate.  

             5             MR. RAINES:  Happens all the time.

             6             (Laughter.)

             7             MR. WHITE:  The points that have been raised --

             8             MR. DUNN:  Ted, is your microphone on?

             9             MR. WHITE:  The points that have been raised about

            10   the number of public policy issues that are raised in the

            11   proxies, that's correct.  There are some very sensitive

            12   issues which quite frankly I'm not sure should be dealt with

            13   through the proxy process.  That's not the best medium, but

            14   it's there, whether you adopt this rule or not.

            15             Is this going to give additional leverage?

            16             In some ways, this rule may give boards more

            17   defense against special interest groups.  I strongly believe

            18   that the majority of shareholders are still driven purely by

            19   economics, and that if directors are held more accountable to

            20   that majority that are based on economics, when the special

            21   interest groups come through the door and want, whether it be

            22   environmental or other social issues, I think it's simply

            23   easier for them to say I'm going to be more susceptible to

            24   the shareholders saying you're not doing your job.

            25             It is also going to give the directors more ability




             1   to say you know what, my shareholders are going to fire me if

             2   I do that.

             3             One other comment, Mr. Batts raised, clearly, he

             4   wanted to see shareholders off their duffs.  I'd like to

             5   suggest that this is the type of rule that is a tool in our

             6   tool box that I think will help do that.  It is not an

             7   aggressive rule by any means.  I think it's been well thought

             8   out.  It's been massaged quite a bit.  There has been lots of

             9   great debate on it.

            10             Quite frankly, I think the descriptions of this

            11   being modest are right on.  This will help us in our job.  We

            12   are the owners of these corporations, our livelihood depends

            13   on them being successful.  If we thought this was going to

            14   ruin capitalism and they wouldn't take the right kind of

            15   risks in the money long term, we would be the first to say

            16   no.

            17             MR. BELLER:  Mr. Chairman?

            18             CHAIRMAN DONALDSON:  My problem is that we really

            19   haven't had -- first of all, I'd like to narrow the

            20   conversation down to what we are really talking about here,

            21   which is the election of directors.  We have a lot of

            22   peripheral stuff we are talking about.  We are talking about

            23   the slate for the election of directors.

            24             In effect, we have never really had an election

            25   because of the withhold vote nature.  If we have 100 shares




             1   voting and 99 withhold, the director gets elected.

             2             What we are talking about here is the frustration

             3   of certain shareholders that they haven't really been given

             4   an opportunity to vote.

             5             My question is, and whether it's 35 percent

             6   withhold or 50 percent withhold, what do you do about that

             7   situation, and it really doesn't make any difference how many

             8   amalgamations of dissatisfaction among the shareholder group,

             9   it doesn't make any difference so long as a total of 35 or 50

            10   or whatever want to withhold their vote.

            11             It's a frustration maybe on a whole series of

            12   things.  It's a frustration for not participating in a real

            13   voting situation.  It's a frustration, and to me, the real

            14   test of the independence of the board and the real test of

            15   what we are talking about here, and I throw this out as a

            16   question, what do you do about shareholders, 35 percent, 40

            17   percent, 50 percent of your shareholders who feel they have

            18   never participated in a real election?

            19             That obviates the need to make judgments on why

            20   they are disappointed.  They could be disappointed for lots

            21   of reasons.  If 35 or 40 or you name it say that they want a

            22   chance to vote, they want to have a real election, they want

            23   to have somebody on the board they can have a real election

            24   for, what do you do about that?  

            25             I think that's what we are talking about.




             1             MR. RAINES:  Mr. Chairman, I always thought it was

             2   kind of bizarre myself, this process, but it's a process that

             3   has been established by state law that creates this anomaly,

             4   and it can only really be solved in terms of having a real

             5   election, yes/no, for/against, by changing the corporate law.

             6             I think in effect in 99.9 percent of the cases,

             7   these votes are treated as no's.  They are treated as votes

             8   against.  In 99.9 percent of the cases, people who get a

             9   substantial negative vote tend not to be around.

            10             There may be some particular cases where that is

            11   not true, but that is not the case in the vast majority,

            12   indeed, even relatively small negative votes have led to

            13   substantial changes at companies.

            14             I know there are exceptions.  I know there are

            15   cases where there are these bad or dead or unresponsive

            16   companies.  It's a very small number.

            17             If we can find a way to change this with held

            18   versus no, I think that would be good, because the options I

            19   think are very bad.

            20             CHAIRMAN DONALDSON:  Let's assume we have to deal

            21   with that, which is what we do have to deal with.  We have to

            22   deal with a system that has withhold votes in it.  The result

            23   of that is that substantial majorities of shareholders have

            24   their dissatisfaction frustrated.  That's what we have to

            25   deal with.  We are not going to change the state laws.  We




             1   have to deal with that.

             2             MR. RAINES:  I think the suggestion that I put

             3   forward is nothing should occur until you know that is true

             4   for a majority.  As badly as I might feel for a minority who

             5   is frustrated, that happens.  You don't have the votes, you

             6   don't have the votes.  You live with the fact that it is a

             7   majoritarian system.

             8             I personally don't feel that there is a need to

             9   intervene on behalf of minority shareholders to ensure they

            10   are not frustrated.  There is nothing you can do, I think, to

            11   deal with that that is fair to the majority, who would

            12   otherwise have to bear the costs of all of these minorities

            13   having their right to --

            14             CHAIRMAN DONALDSON:  You would be satisfied with 50

            15   percent?

            16             MR. RAINES:  I don't think you can even begin to

            17   think about this until you are thinking about 50 percent of

            18   the shareholders, and then when you have done that, I think

            19   you always have to say what did the board did, what happened

            20   after the majority in fact had acted?

            21             In our system, if we are going to maintain this

            22   corporate fiction, shareholders should not get into running

            23   the company.  There always has to be operating through their

            24   board, otherwise we are reinventing the whole nature of

            25   corporations.




             1             If you have majority and if the board has not

             2   acted, then I think you could probably find many mechanisms

             3   that people could agree to, that at that point, we now have a

             4   closer version of that case, that small number of

             5   unresponsive companies, because they didn't respond directly

             6   to the shareholders and the nominating process in the board,

             7   because you can now say was not representative of the

             8   majority.

             9             If you start designing at that stage, I think you

            10   will be more likely to find methods that don't raise all the

            11   kinds of issues that I've tried to raise here, that I think

            12   are the real world issues of how smart people will take a

            13   change in law and turn it to their advantage.  I believe they

            14   are very smart people.  Some of them are my friends.  I know

            15   exactly what they do.  I know exactly what I would do if I

            16   was in their shoes.  This is a God send for them in terms of

            17   greater leverage.

            18             If this is limited to that very rare case where you

            19   have a majority of the shareholders and the board hasn't

            20   acted, then that leverage is dramatically reduced, not

            21   eliminated, but dramatically reduced.

            22             CHAIRMAN DONALDSON:  I'm talking about the 35

            23   withhold vote part of the proposal.  Let's assume for a

            24   minute that 35 maybe isn't the right number.  Maybe it should

            25   be 50, but whatever.




             1             You said it depends upon what the board does, but

             2   the proposal sets up a procedure.  It's being taken out of

             3   the board's hands and it's being put up to a vote.  The

             4   candidate from the proposing group just goes on the ballot

             5   and has to compete with everybody else on the ballot.

             6             That's prescribed by the proposed rule, at least

             7   that part of it.

             8             MR. RAINES:  I agree with you, that is what is

             9   being set up, and I think that's the problem.  Look at how it

            10   could easily happen.  Today, many of these advisory groups

            11   are saying make this point but hold your vote.  Because we

            12   don't like the constitution of the executive pay or because

            13   we don't like this person on this board or this relationship,

            14   you can get the 35 percent for a variety of reasons.  It may 

            15   not be the same reasons.

            16             What happens here is if you get the 35 percent, or

            17   you get the 50 percent, I think 35 violates the majority rule

            18   provisions, and then the board undertakes to say we'd like

            19   you to resign because clearly you are not representative of

            20   the shareholders.  Under this proposal, you would still go

            21   forward with an election the next year, even though the board

            22   did exactly what you wanted them to do.

            23             MR. BELLER:  Let me broaden this out a little bit. 

            24   Professor Ruder?

            25             MR. RUDER:  I think we have had an interesting




             1   discussion.  What we are talking about is creating more

             2   effective boards of directors.  The way to get there, as I

             3   see it, is to improve the voting process, primarily through

             4   the use of institutional investors.

             5             I think, Mr. Chairman, if the Commission has the

             6   power to regulate the proxy system, you might well think a

             7   little bit farther outside the box, first of all, fix the

             8   brokers voting process so that the votes are real, and

             9   secondly, when there's an election for a director, treat a

            10   withhold vote as a no vote.  If the director doesn't 51

            11   percent of the vote, that director is not elected.  I would

            12   not deal with absolute majorities, but with the majority of

            13   the people voting.

            14             What I've said may sound a whole lot like the

            15   Grundfest/Millstein approach, but it seems to me it's much

            16   simpler and gets you out -- excuse me for saying it -- Rube

            17   Goldberg approach that you seem to making very complicated.

            18             I would like to see the institutional investors say

            19   do we want this board of directors or individual director,

            20   and let's vote up or down, and then the institutional

            21   investors can say all right, I've done my job, I don't have

            22   to hide underneath the question of whether we are dealing

            23   with a social question or dealing with an environmental

            24   question or a poison pill question.  That is to vote a

            25   director up or down.




             1             MR. BELLER:  Ms. Yerger?

             2             MS. YERGER:  There is so much to comment on, I'm

             3   going to limit mine to a few observations about the voting

             4   and issues that were raised.

             5             The first is I'm actually disappointed to hear

             6   suggestions that shareholder candidates or shareholder

             7   proposals have to be approved by majority of the outstanding

             8   shares.

             9             Currently, company directors don't have to be

            10   approved by a majority of outstanding shares.  The company

            11   proposed stock option plans don't have to be approved by a

            12   majority of outstanding shares.  I think it's an extremely

            13   high bar that should not have to be met by shareholders.

            14             I also agree with all the comments that the broker

            15   voting system absolutely has to be addressed.  It was evident

            16   last week at Disney, the difference between the withheld

            17   votes, with and without the broker votes, meant the no vote

            18   from 44 percent to over 50 percent.  That's a huge

            19   difference, and it's a problem that needs to be addressed.

            20             I also want to directly talk about the issue about

            21   the power of the proxy on voting advisory firms, because I

            22   think there is concern about that.  Frankly, I think the

            23   concern is overblown.

            24             The first is our members are fiduciaries and most

            25   institutional investors are.  They have an obligation to vote




             1   in the best interest of their plan participants,

             2   beneficiaries or their investors.  The fact is our members

             3   who may use the proxy advisory services to help them make

             4   their voting decisions, but most of them have proxy voting

             5   guidelines.  They do not blindly follow the recommendations,

             6   particularly the largest institutional investors.

             7             I think the number of funds setting up their own

             8   proxy voting guidelines is increasing, thanks in part to the

             9   new requirements that mutual funds have to disclose their

            10   proxy vote, a change we are very much in favor of, we are

            11   finding that more council members are also developing more

            12   proxy voting guidelines.

            13             I actually think that no votes or withhold votes,

            14   which currently right now are very symbolic, so there may be

            15   a number of reasons why people would withhold a vote from a

            16   director, that may change.  I think that if there are

            17   ramifications from a high no vote, I think that institutional

            18   investors are going to be even more careful about a decision

            19   to withhold votes.

            20             I think we would find the trends and the numbers,

            21   which frankly right now, even at the 35 percent vote level,

            22   show a very limited number of companies that would be subject

            23   or would trigger this vote.

            24             We did a random survey of 100 S&P 500 companies,

            25   mid cap, and 100 small cap companies, and we only found six




             1   companies that have one director with a no vote exceeding

             2   that.  I think that number actually might go down in the

             3   future if this rule were put in place.

             4             Second, there's more competition in the proxy

             5   voting advisory firms.  There is not just one provider.  I

             6   think that is going to make a huge difference.

             7             Finally, I just want to make an observation. 

             8   Everyone keeps talking about this power concentrated, there

             9   are a number of votes that are represented by institutional

            10   shareholders' services.  No one, I think, ever mentions the

            11   fact that there is a significant percentage of institutional

            12   assets that are held by corporate pension funds, insurance

            13   companies, trust companies, and to a certain extent, mutual

            14   funds, which I think in the past have tended to probably be

            15   fairly supportive of management.

            16             I think there has been a block of shares that has

            17   tended to probably pretty much vote in support of management.

            18             MR. SONNENFELD:  With everything we have stated

            19   here, do we really think we have gotten our job done?  If the

            20   debate of this last panel migrated back to the debate over

            21   triggers, and if we wave the magic wand and we agree to the

            22   triggers in the vote process, do we have what Mr. Ruder just

            23   referred to as more effective boards of directors?

            24             Maybe I'm the only one in the room who feels this

            25   way, but I don't see how we have ensured that in any way.  




             1   We have additional names coming from additional people.  What

             2   gives us the confidence to think that has fixed the problem?

             3             You say more effective, I guess it's more diligent.

             4             Other than monitoring, we have not made a lot of

             5   progress with Sarbanes-Oxley.  Boards have other roles, other

             6   roles that have to do with the linkage roles to other

             7   constituencies which are legitimate ways that boards are

             8   solicited to be attentive and represent the reputations, and

             9   boards have other roles that have to do with being advisory

            10   and partners with management.  It's not the adversarial,

            11   lower lip attitude all the time.  There needs to be some of

            12   that kind of partnership.  It is part of the role of a board.

            13             Granted all that, let's just go to diligence, who

            14   in this room thinks they know how to do better and why than

            15   an honest board of directors?  Based on what criteria are we

            16   going to use to decide now we are going to trigger these

            17   votes and we are going to do better.

            18             If you look at most of the proxy firms, they say if

            19   a director serves on a board, it's going to go bankrupt, they

            20   will be disqualified.  Do you realize who you are going to

            21   allow to be thrown out as directors now?  

            22             If you were some valiant person, and companies that

            23   could be on the edge of bankruptcy, we could all think of

            24   some good companies right now, I think it's really darn noble

            25   of people to go on those boards.  We will probably be




             1   disqualifying them by this.

             2             Financial literacy?  Come on.  That's a standard so

             3   often used, and we will start seeing that.  That has nothing

             4   to do with Enron or the New York Stock Exchange's challenges

             5   or Freddie Mac or anybody.  We have a lot of myths about what

             6   good governance will be.  All those myths will be used as our

             7   criteria, and I'm not so sure that okay, now we have made it

             8   to this stage, our job is done.

             9             We need to think through what would lead to

            10   credentialing and how do we do it.  You give an F to Health

            11   South's management.  ISS is given 94 percent.  GMI.  Moody's,

            12   but they are in the governance assessment business

            13   themselves.

            14             We have a lot of inconsistency to what good is. 

            15   How can we think that just because we now are going to have

            16   new people, throwing out new names, these names will be any

            17   better?

            18             Warren, when I went out 26 years ago and

            19   interviewed CEOs for price fixing, and senior management,

            20   yours was the only company in the industry that wasn't hit,

            21   and you were personally in charge at the time.  I wanted to

            22   find out what it was about Mead that you weren't in trouble. 

            23   You had only one lawyer, right?  One corporate counsel.  One

            24   person.  You set a model and you had all of your management

            25   and board grilled.  You had to bring in their expense




             1   accounts, I think, didn't you?

             2             (Laughter.)

             3             MR. SONNENFELD:  These have to do with practices

             4   rather than credentials.

             5             MR. BELLER:  The ASCS letter like the BRT letter is

             6   pretty clear that this proposal of the Commission targets too

             7   broad a group.  We have heard some play between the Chairman

             8   and Mr. Raines about how that could be different or could be

             9   narrower.

            10             I guess I'd like to hear your view as to if we

            11   don't have -- assuming that you agree there is some group of

            12   dead companies or companies that are deserving of

            13   improvement, how would we shape the Commission's proposal to

            14   more accurately identify those companies while leaving the

            15   good ones by the way side? 

            16             MS. WOLF:  It's a very hard question and I think

            17   the proposal did a very good first shot at it.  However, we

            18   think that if there is to be a trigger as opposed to a

            19   Grundfest alternative, it should be a very clear trigger, a

            20   proposal that articulates why the trigger should be tripped,

            21   what's wrong with the company, what's wrong with the board,

            22   and then that should get a majority vote, so that it's clear

            23   that the shareholders are all intending to cause the trigger

            24   to be tripped and that they are all in alignment as to why.

            25             As we pointed out in our comment letter, for




             1   example, if you use a broken company test, it has failed to

             2   keep up with its peers' performance, it has had certain kinds

             3   of legal troubles, you might catch some companies where the

             4   board has done the right thing, fired the CEO, brought in a

             5   new management team, is in the middle of a turn around.  We

             6   tend to think those very boards are the boards that need the

             7   disruption of perhaps having a dissident member added to the

             8   board in the middle of this very tenuous time the most.

             9             We think some kind of a very clear trigger such as

            10   a proposal that articulates why it should be tripped in this

            11   particular company would allow all the shareholders to fully

            12   consider whether it is in fact merited for this company and

            13   this board at the particular time.

            14             MR. BELLER:  Mr. White?

            15             MR. WHITE:  One further comment to follow up on

            16   Susan's point.  It's clear that you have put a tremendous

            17   amount of effort into this rule to mitigate the potential for

            18   abuses and concerns about applying to the right universe.

            19             This doesn't like me for some reason.

            20             MR. SONNENFELD:  It worked fine over here.

            21             (Laughter.)

            22             MR. WHITE:  I would also like to suggest that to a

            23   large degree, the Commission might not need to worry about

            24   that, and that the markets, as I've indicated, tend to have

            25   very strong economic forces that drive the ultimate result,




             1   and if we target a company that doesn't need to be targeted,

             2   they will not be successful at even passing the simplest of

             3   shareholder proposals, let alone putting a director on the

             4   board or getting one off.

             5             The markets work very well.  I'm on both sides of

             6   that issue.  I have sought support for our proposals and I

             7   have considered other people's requests for our support.  The

             8   market is very rigorous on that.  It's accurate, the stronger

             9   the impact of a potential proposal or a dissident slate, the

            10   more seriously the market tends to take it, deeper into the

            11   institutions analysis will go, the PMs and a lot of the

            12   mutual funds even, and it's a proportionate sort of drop in

            13   what are speared as the automatic support.

            14             These things have a huge economic impact on the

            15   individuals that are making the votes and on our

            16   beneficiaries, and they are taken very seriously.

            17             MR. BELLER:  We are running a little over.  There

            18   are a couple of very specific issues about targeting and

            19   appropriateness that I do want to get to before we break.

            20             There has been a lot of discussion and a lot of

            21   comment about special interests and single purpose directors.

            22   I guess I throw open for a couple of folks to answer, is

            23   there something -- the comment from the business community

            24   was notwithstanding the restrictions of separateness or

            25   independence from nominators, the nominees are possibly or




             1   likely or certainly going to be special interests.  I think

             2   the shareholder groups have generally said no separateness

             3   requirements at all, we shouldn't be subject to any more

             4   requirements than anybody else.

             5             Any thoughts as to how to square that circle?  I

             6   guess how to square that circle with one observation.  For

             7   those who say there is a great risk there is going to be

             8   special interests for the directors, why should the

             9   Commission believe that a director who is elected by 50

            10   percent of the shareholders isn't going to respect his or her

            11   fiduciary duty the same way any other director is, and is

            12   there something we can do to increase that assurance if you

            13   don't think it's enough?

            14             We will play Jeopardy here, anybody who wants to

            15   take that.

            16             MR. SONNENFELD:  I'd just like to advance this

            17   proposition.  Early in my career, I read the means of

            18   separation of ownership and control and control, and

            19   subsequently I had an exchange of correspondence with Adolph

            20   Burley, and I finally read his last book.  

            21             He ended up, although opposing the role of

            22   directors and criticizing it, he ended up saying he believed

            23   that once a person rose to a position of prominence and

            24   responsibility, that person would behave in a way which was

            25   responsible and would be able to shed prejudices that he or




             1   she had.

             2             I believe that would lead me to say don't put

             3   restrictions on persons nominated by a nominating group.  Let

             4   that person go on the board, if that person can be elected,

             5   and let that person behave in a responsible way.

             6             It seems to me that's an attitude that at least I

             7   hold with Professor Burley, that almost all the directors

             8   today are acting responsibly, and if we have new people on

             9   the board elected because there is a need for more

            10   responsible people, I would expect them to behave that way.

            11             MR. BELLER:  Ms. Wolf, any thoughts?

            12             MS. WOLF:  Yes.  I think we would be satisfied with

            13   the transparency as to relationships.  Perhaps meeting the

            14   same independence test with respect to the company, the

            15   auditors, et cetera, that the other directors have to meet,

            16   but then also disclosing with full transparency any

            17   relationships with the people who tripped the trigger and

            18   nominated them.  We think that disclosure would be adequate,

            19   rather than some other hurdles that would be a bar to

            20   serving.

            21             MS. YERGER:  We would support that, but we also

            22   believe there should be transparency about relationships

            23   between management or board recommended candidates, which

            24   currently we think the rules are lacking.  I think the best

            25   solution, in our opinion, is to make sure there is full




             1   transparency regardless of who is nominating the director,

             2   and then let the share owners decide who they want

             3   representing them.

             4             MR. RAINES:  I would just add, I'm more in the

             5   school of Dean Sonnenfeld on this issue.  I think this gets

             6   into social engineering to try to believe there is a process

             7   that will produce collegiality.  

             8             I think I'm one of the few people who actually

             9   lives with a stakeholder board.  I have five directors who

            10   were appointed by the President of the United States with

            11   quite a bit of turn over.

            12             Our experience with them has actually been quite

            13   good, because they have defined themselves as representatives

            14   of all the shareholders and not as special interest

            15   shareholders, but I'm also quite aware of companies where

            16   people have been on the board as special interest

            17   shareholders expressly, and it was a disaster.  The company

            18   boards no longer function as collegial bodies.

            19             I don't know that there is much the Commission can

            20   do to decide which group is going to end up there. You are

            21   going to have terrific people who view themselves as

            22   representing the shareholders, and you are going to have

            23   people there who are there for cause.

            24             I agree here with Dean Sonnenfeld that you ought to

            25   be quite cautious here about how likely you can engineer a




             1   good result.  At a minimum though I would suggest that on the

             2   independence issue, don't underestimate how stringent these

             3   independence requirements are now for the three major

             4   committees.  

             5             We are looking for every independent director we

             6   can find, and the definitions of "independence" are not just

             7   the ones that are created by the listing requirements but

             8   every group has their own definition of "independence."  Who

             9   will then vote based on whether or not you meet or don't meet

            10   that definition?  This becomes a very important issue.

            11             At a minimum, I think the independence question has

            12   to be dealt with, but I would take this as just another

            13   example of something to be cautious about.  You could set in

            14   motion a lot of forces that you didn't intend, and will look

            15   back and say how did that happen.  

            16             Why in the world did we end up with boards having

            17   dual meetings, one set of meetings for one group and another

            18   set of meetings for another group, and then all of a sudden,

            19   the board meetings all become very perfunctory, all in favor,

            20   aye, all in favor, aye, all in favor, aye, and then you are

            21   gone.  There is no discussion and there is no collegiality,

            22   no planning.  That was the only functional way you could have

            23   a meeting and get everybody out of there within a couple of

            24   days.

            25             The current rules, in my view, have doubled the




             1   amount of time directors have to spend on boards.  You bring

             2   in greater complexity, that time will go up even more.  The

             3   number of people willing to do it is going to decline.

             4             MR. BELLER:  I want to end this with one last

             5   question, which is very much on the Commission's mind, and I

             6   think we ought to get it on this panel.

             7             I am going to ask Mr. Beese and then anybody else

             8   who wants to chime in very briefly, may.

             9             If the Commission were to move forward with this

            10   rule, should it restrict it to some category of larger

            11   companies, accelerated filers, the Fortune 1000, whatever?

            12             MR. BEESE:  Certainly.  I think the earlier

            13   proposal about starting with the larger groups, the universal

            14   larger companies first and moving down is a very good

            15   suggestion.  

            16             I would echo Franklin Raines' comments.  Beware of

            17   consequences.  His assessment of what's taking place in board

            18   meetings is certainly something that I live.  Maybe I need to

            19   question why to still serve on boards in today's environment.

            20             The other thing that happens is not only do you get

            21   that type of perfunctory attitude in a board, but it shifts

            22   much more down to the committee levels, actually out of the

            23   board room and to other vehicles to be decided.  I'm not sure

            24   what we have accomplished by that.

            25             MR. BELLER:  Anybody else on the large




             1   company/small company point?

             2             MR. BATTS:  I would think the large companies could

             3   handle this issue with staff and funds, and be able to deal

             4   with it, and you would probably be able to learn a good deal.

             5             The Fortune 1000, if you look at the size of that

             6   1,000th company, it's pretty small.  You are getting to a

             7   very small audience.  Below that, they are tiny.  They are

             8   not equipped to deal with something as complex as this.

             9             I think when you get through with that, with some

            10   experience you will find it doesn't deal with your hard core

            11   cases in a time frame that is going to be satisfactory to

            12   anybody.

            13             MR. BELLER:  We are out of time.  I apologize to

            14   those of you who still want to speak.  We are going to change

            15   on the fly here for our next panel without a break.  

            16             We have a break.  I apologize.  If you could stay

            17   very near your seats, because I want to start again in less

            18   than ten minutes.

            19             (A brief recess was taken.)

            20             MR. DUNN:  If we could start getting everybody to

            21   their seats, that would be great.  Are we ready go to?  

            22             This is a half an hour panel, which we are actually

            23   going to try to stick to to get us back on track as we go for

            24   the rest of the day.

            25             For lack of a better title, it says "Retail and




             1   Other Investors."  I really don't know what that means.  We

             2   are going to ignore that for the time being.

             3             From our left, we have Denise Nappier, who is the

             4   Treasurer of the State of Connecticut.  Thank you for being

             5   here.

             6             We have Paul Neuhauser, who is retired from the

             7   University of Iowa Law School, I understand.

             8             Les Greenberg from the Committee of Concerned

             9   Shareholders, who has talked to us a great deal about all

            10   this.  

            11             Lance Lindblom, who is the CEO and President of The

            12   Nathan Cummings Foundation, who I think is an institutional

            13   investor when he's not able to scare people like Ms. Nappier,

            14   because she's from the government.

            15             Evelyn Davis is the Editor of Highlights and

            16   Lowlights.

            17             What we are going to try to do is try to figure out

            18   where we are with regard to this other world of folks  We

            19   have been talking all day about institutional investors.  

            20             I'd like to start out, because I might get killed

            21   if I don't, with Ms. Davis, which is in your letter, you very

            22   much oppose this because you oppose the notion of

            23   institutional shareholders should be given any special

            24   treatment at all.

            25             MS. DAVIS:  No.




             1             MR. DUNN:  One second.  Commissioner Glassman asked

             2   the question this morning, do they share the views of

             3   everybody, do they represent the views of everybody.  Do you

             4   feel that way?  Do you not feel that way?  Go ahead.

             5             MS. DAVIS:  I'm Evelyn Y. Davis.  I'm Editor of

             6   Highlights and Lowlights.  I have 40 years of practical

             7   experience with corporations, CEOs, and getting shareholder

             8   resolutions, and in about 95 companies, I would say only five

             9   are really bad and unresponsive.

            10             I also want to make it very clear, two things.  I'm

            11   not a lawyer and I personally have no interest in nominating

            12   a director, because I don't believe in it.  I think it's

            13   going too far.  You do things in a nice and amicable way,

            14   like I have over the years, and I've gotten more results.

            15             In the last two years, I have had eight companies

            16   adopt proposals of mine.  If you look at the record, they are

            17   much more likely to adopt proposals of Evelyn Y. Davis as the

            18   proponent than anybody else because I do things in a nice

            19   way.  I also have a great sense of humor and a good sense of

            20   timing.  I know when to get things done.

            21             Now, the worst part here is the discrimination

            22   against the small stockholders.  When they say, yes, small

            23   stockholders can aggregate their holdings.  This is never

            24   going to work.  They say they won't support you in the annual

            25   meeting, they will do this and that, they never follow, so




             1   you would have to be a computer scientist.  Small

             2   stockholders are not going to practically work, and also the

             3   SEC really has no authority to make two classes of

             4   shareholders, and they have been very critical.

             5             Everybody knows here about the so-called mutual

             6   funds scandal, about the market timing and the other issue

             7   involved there.

             8             I have told the Chairman of the Bank of America,

             9   Ken Lewis, I spoke to him last week, and the Chairman of

            10   First Boston, not to pay the fines because the SEC has based

            11   the whole mutual fund thing on the basis that institutional

            12   shareholders were getting favors, not extended to small

            13   shareholders,yet they don't practice what they preach.

            14             This is outrageous what's going on, the

            15   discrimination.  The SEC has no authority to make two classes

            16   of shareholders, and the unreasonable demands about one

            17   percent or five percent.  This is not possible.  We have

            18   resolutions, and now under 14(8)(a), you have to have minimum

            19   and one year holding period.

            20             I have suggested that we should have a five year

            21   minimum holding period so we only get long term shareholders. 

            22   This is another point here.  Institutions under these

            23   proposed rules would just buy stock for the purpose of

            24   nominating a director and then move on and try the same thing

            25   at other companies.  This is just not going to work.




             1             I told these two chairmen not to pay the fines, and

             2   as we are talking now, their lawyers are actually seriously

             3   checking into it.  

             4             I have also talked to Steve Cutler about this two

             5   days ago.  I said, Steve, you may not get your fines because

             6   of your colleagues in the Division of Corporate Finance.

             7             MR. DUNN:  Thanks for that.

             8             MS. DAVIS:  Okay.  Just a few more points here. 

             9   Like I say, you have to do things in a nice way, and also if

            10   this is going to happen, this is going to be like a

            11   revolution, and the small stockholders are going to be hurt

            12   financially.  Here, they are going to hurt financially

            13   because they will have to concentrate on warding off these

            14   invaders and lawyers are going to benefit and consultants and

            15   a whole lot of people, but the small shareholders, you will

            16   see the stocks will go down, and frankly, some CEOs called me

            17   about this, and I'm not going to mention any names.  I'm very

            18   successful in 40 years because I also know when to speak up

            19   and I also know when to keep my mouth shut.  That's why I am

            20   a survivor.

            21             They have actually told me they are just going to

            22   quit or they are going to go private or they are going to

            23   have mergers.  It's going to be hell will break loose.  This

            24   is terrible.  The institutions will become a threat instead

            25   of a nuisance, and they will take this personally.  




             1             I've been around 40 years.  I don't go too far, I

             2   know when to stop.  I know how much you can do, how much

             3   patience you have to have.  There again, some of the people

             4   that may be nominated may be just funds for politicians.  You

             5   also will see requests and grants of substantial green mail

             6   to get rid of these people.

             7             In 1990, General Motors finally adopted after a

             8   three year resolution an anti-green mail resolution, for

             9   those who don't remember.  Ross Perot at that time was an

            10   undesirable director at General Motors.  Finally, after

            11   paying him $700 million, they got rid of him, which gave me

            12   the opportunity to write a shareholder resolution on anti-

            13   green mail.  I had some people trying to copy it.  

            14             You are going to see this and I heard some of the

            15   previous people talk about leverage.  The unions will use

            16   this as leverage and labor.  

            17             MR. DUNN:  Ms. Davis, let me interrupt you for a

            18   second.

            19             MS. DAVIS:  I have one more point.  Just a moment. 

            20   You didn't cut them short, you're not going to cut me short.

            21             MR. DUNN:  I'm sorry, but you are talking about --

            22             MS. DAVIS:  I'm almost finished.  Also, I'd like to

            23   suggest that the holding period should be five years, so that

            24   we do get long term shareholders and not people who buy stock

            25   for the purpose of electing a director.




             1             There again, one should work on incumbent

             2   directors.  They are human beings, too.  They listen to me,

             3   Evelyn Y. Davis.  They listen to me.  I'm sure they would

             4   listen also to other people.  They are reasonable.

             5             My advice is stop the whole thing, see what happens

             6   in three to five years, but this discrimination against small

             7   stockholders, and remember, I personally am not interested in

             8   nominating directors, but small stockholders should have the

             9   same privilege.

            10             A final comment here, the audacity to stick

            11   somewhere in the middle figuring nobody would read this, that

            12   you have as an additional trigger if a resolution is not

            13   adopted by a company, the shareholder has 60 percent of

            14   shares, and if they have one percent or more of the shares

            15   outstanding, that director could be elected.

            16             This is discrimination.  It should be on the merits

            17   of the resolution.  It doesn't matter who the proponent is,

            18   if they have the other shareholders supporting them, the 60,

            19   70, or even 80 percent, then the resolution should be

            20   adopted, but without having a special interest director.

            21             The SEC should make it mandatory for a resolution

            22   to be adopted if a shareholder, regardless of the proponent,

            23   if they get 60 percent for two consecutive years, then it

            24   should become mandatory, but without an outside special

            25   interest director.




             1             MR. DUNN:  I want to turn to exactly what you are

             2   saying, Ms. Nappier.  One of the questions is institutional

             3   investors, who are they, what do they do, what chances do

             4   they have.  You're much more of an institution than I am. 

             5   You've got, what is it, the 56th largest pension fund ever

             6   recorded.  Do you have any luck when you try to change things

             7   at a company?

             8             MS. NAPPIER:  Sometimes I do, sometimes I don't. 

             9   And I'll tell you that I -- first I want to express my

            10   appreciation to the Chairman, Chairman Donaldson, for his

            11   strong leadership on this issue and to the Commission and

            12   their staff for their dedicated work.

            13             This effort is -- goes to the heart of the most

            14   important and most basic right shareholders have, individuals

            15   and institutional investors, and that is why I believe that

            16   these deliberations are historic.  Yes, I am according to

            17   pension investments for the period September 30, 2003, we are

            18   ranked as the 56th largest pension fund by total asset size. 

            19   We are also in the top quartile relative to our long term

            20   fund performance and I want to keep it that way, and so

            21   that's why I'm so delighted to be here talking about

            22   enhancing shareholder access to the proxy ballot.

            23             I generally support the Commission's effort in this

            24   proposed rulemaking, however I am concerned that as it's

            25   currently drafted the rules set the bar too high to make it




             1   real or effective for funds of our size, including funds like

             2   the ones that are held by Ms. Davis.  I concur that the --

             3   with the Commission's approach that there be safeguards in

             4   the form of thresholds and triggers to ensure that the

             5   shareholder nomination is not pursued for frivolous purposes,

             6   but it is the degree of those safeguards and how they will be

             7   applied that could undercut its effectiveness and offset the

             8   likelihood that shareholders will indeed have an effective

             9   ability to participate in the director nomination process.  

            10             So I would say that -- I would urge the Commission

            11   to revise this rule in three critical ways.  One, at the

            12   point or at the initial point of entry to the process the 1

            13   percent ownership threshold should be eliminated and in its

            14   place we should be using the current threshold that one must

            15   meet to introduce any resolution for any purpose, and that is

            16   the -- that the shareholder must hold at least $2,000 in

            17   stock in a company for at least a year in order to file that

            18   resolution.  Proceeding with the 1 percent ownership

            19   threshold in my view is unnecessarily onerous, especially

            20   given the fact that this would be only the beginning of a

            21   multi-step process.

            22             Secondly, beyond the Commission's proposal that

            23   there be a 35 percent withhold vote I would add a third

            24   alternative and that alternative would utilize this initial

            25   point of entry for those companies either when they had




             1   failed to implement a majority vote resolution or in cases

             2   where there's evidence of serious management problems such as

             3   criminal indictment or restatement of earnings.

             4             Now, moving on to the next stage which is the 5

             5   percent ownership threshold, I would urge the Commission to

             6   roll back that recommended level down to 1 percent.  And I

             7   want to give you an example as to why I believe there are

             8   merits to reducing the 5 percent ownership threshold.

             9             The largest public equity holding within my

            10   portfolio is Pfizer, with approximately 5.4 million shares

            11   accounting for $197 million in market value.  It would take

            12   our fund aggregating with 17 other funds of similar size,

            13   with similar amounts of holding at Pfizer, to reach the 1

            14   percent ownership threshold.  Now, to reach the 5 percent

            15   ownership threshold it would take 72 funds of similar size

            16   with a holding that's similar in the amount of our holding

            17   which is .069 percent.

            18             So I am convinced that the 5 percent ownership

            19   threshold can be reduced without losing the safeguards and I

            20   believe that it can be argued that sustaining that 5 percent

            21   ownership threshold is or would be an unreasonable barrier

            22   for any investor, be it individual or institutional, to meet. 

            23   I know that there's been some arguments put forth by the

            24   opponents of reform that shareholder nominations would

            25   disruptive to board dynamics, well I'm a little puzzled by




             1   that because it is the current board dynamics and the lack of

             2   accountability to shareholders that is precisely the reason

             3   that shareholders are advocating for reform, and they view

             4   access, better access to the proxy ballot for the purposes of

             5   nominating directors as a means to protect if not increase

             6   the value of our sharthat when we do not pay attention to bad

             7   corporate behavior or punish it our pension fund

             8   beneficiaries lose their retirement savings.  

             9             And so we have a fiduciary responsibility to act in

            10   a manner that protects the beneficiaries' interest.  We're

            11   not ignorant shareholders.  We're mindful of the fact that we

            12   can be held liable to the extent that we do anything other

            13   than look out for the best interests of the beneficiaries of

            14   our pension fund assets. 

            15             So I would say to you that the Commission has done

            16   a great job thus far in getting us -- getting this issue in

            17   front of us.  We do need to have increased access to the

            18   proxy ballot.  I believe that a majority vote should prevail

            19   once the director's name is placed on that ballot and let

            20   the, you know, the best guy or gal win.  But I would urge the

            21   Commission to look at some necessary revisions to ensure that

            22   we are surely reading the intent of this nomination process,

            23   and that is to give us, shareholders, access to the proxy

            24   ballot.

            25             MR. DUNN:  Thanks.  I want to kind of just go down




             1   the line here for a second.  You -- over the years I've seen

             2   your name on more 14-8's than anyone else.  So you have more

             3   experience with folks trying to use --

             4             MR. GREENBERG:  She's cheap.

             5             MR. DUNN:  -- trying to -- he's good -- trying to

             6   use that process to effect change, and I was wondering if I

             7   could ask you two questions, both of which are pretty brief I

             8   think.  One is do you think it's successful, the process we

             9   have now, and the second is how do you think the proposal

            10   works for the folks that you usually see in this area?

            11             MR. NEUHAUSER:  It's hard to say whether you're

            12   successful because there are so many different events going

            13   on.  In a given year -- well, this year I think I've got 38

            14   letters to the SEC.  We will be successful on some, not at

            15   the SEC I mean but overall.  We will be successful on some. 

            16             By success, what does that mean?  It means that the

            17   company will either adopt or negotiate something close or

            18   approximating what the shareholders were asking for.  This

            19   doesn't mean that either side is ever going to be totally

            20   happy.  The company may think it's giving up more than it

            21   should.  The shareholder who doesn't get 150 percent may

            22   think they lost.  But it's been a very useful tool over the

            23   years and has I think its greatest systemic importance is

            24   that at least some of my clients have identified issues for

            25   several years before they become ones that are in the




             1   newspaper or that are pressing down extremely heavily on the

             2   corporate management, and it has gotten sometimes companies

             3   to think about it earlier than they might have otherwise.  

             4             So, yes, I think it has been successful.  It

             5   doesn't mean it has been perfect but I think on balance it's

             6   been a very useful thing both for management and for the

             7   shareholders. 

             8             On the second question the original handout said

             9   that retail investors, which I assume we're talking about,

            10   are individuals -- individuals and small institutions.  Some

            11   -- from time to time, including today, one hears the phrase a

            12   shareholder democracy.  I guess whenever I hear that I think

            13   of a conversation I had with Louie Loss about 30 odd years

            14   ago where I used that phrase and Louie Loss said, "What are

            15   you talking about.  It's Soviet democracy.  You have one

            16   slate and that's it and to think about in terms of any form

            17   of democracy is sort of crazy."  

            18             He didn't quite use those last phrases but that's

            19   the essence of what he was saying.

            20             I think that the proposal that is being considered

            21   is a step in the right direction.  It may not be a true

            22   shareholder democracy, but I would view it as -- for those --

            23   another problem with having a professor.  If you're

            24   interested in history in England, people could vote from the

            25   Middle Ages right on through until the 19th century if they




             1   had property.  The property classes voted prior to the Reform

             2   Act of 1832.  

             3             What we're basically moving to is the property

             4   classes have the rights.  The big institutions will be able

             5   to do things.  I can talk a little later about why I think

             6   that it would be virtually impossible for smaller

             7   institutions or individuals to do much, but that doesn't mean

             8   it's bad.  As I say, I think it's a step in the right

             9   direction.  

            10             In terms of two or three of the things that have

            11   been talked about, I think in my own view it would be better

            12   that instead of a two step procedure with triggers we talked

            13   -- did the kind of thing that was talked about I guess in the

            14   last panel.  Why not simply say when a certain percentage of

            15   shareholders get together they can put the proposal on the

            16   company's proxy statement?  Now, having said that I think

            17   that sounds better and I would be in favor of it.  I'm not

            18   sure how much any of this, putting it on the -- 5 percent --

            19   5 percent putting it on or without a trigger zone, putting it

            20   on, I'm not sure how much difference that will make in the

            21   real world.  

            22             What are the costs going to be?  The costs to the

            23   proponent of the nominee are not going to be the costs of

            24   getting -- going down and meeting with the management and

            25   sending in some names and so on.  There's no way that




             1   anything is going to happen without a proxy fight.  

             2             Now, it won't require that there be the filing of

             3   the proxy statement, but how are they going to get support? 

             4   They're going to have to go to the institutions.  They're

             5   going to have to talk with people, they're going to have to

             6   travel around the country.  

             7             How did Roy Disney and Mr. Gold get support against

             8   Mr. Eisner?  They had a private jet, which fortunately they

             9   owned, and flew around the country meeting with institutional

            10   investors.  The costs are still going to be extremely high

            11   and very few would be my prediction.  Very few people are

            12   ever going to undertake, even if they can get -- have the

            13   legal right to get a name in the company's proxy statement,

            14   very few people are going to undertake to do that because

            15   that's only the first step.  Getting the name in doesn't get

            16   any votes.  They're going to have to go out and get votes.

            17             So when we have a parade of horrors about all the

            18   things that are going to happen and how this is going to be

            19   happening time after time, I just don't believe it.  It just

            20   isn't going to be.  

            21             Going on from that, if we do have triggers I have a

            22   comment about the couple of triggers, if we are going to have

            23   that kind of a two step thing.  I agree with Ms. Nappier --

            24   sorry -- Nappier.  I'm sorry.  I was saying it too quickly. 

            25   That the numbers are going to be too high.  If we're talking




             1   about 5 percent to get on the proxy statement what does that

             2   mean in dollar terms?  

             3             I represented a group of shareholders this year in

             4   a submission to the SEC that had, what was it, 4.3 million

             5   shares of Wal-Mart, which was less than one-tenth of 1

             6   percent.  Getting 5 percent is very difficult dollar-wise

             7   with a big company.  It ought to be scaled.  The larger the

             8   company the less percent it really ought to be.  

             9             And once again at the risk of -- in this day and

            10   age one shouldn't be pro-French, but I did teach in France

            11   and the French system both for the 14(a)(8) and for putting a

            12   nominee on the proxy statement or on the election has a

            13   scaled system where it depends upon the size of the company

            14   as to how big the requirement is going to be and I think that

            15   that ought to be given serious consideration.

            16             On the other trigger, the 1 percent, I guess I

            17   agree with both Ms. Davis and Ms. Nappier that I don't quite

            18   understand what it is that we're trying to accomplish by

            19   this.  Why is it that for this purpose the retail shareholder

            20   is going to be excluded and the small investor, the small

            21   institution?  Even the moderate institution is effectively

            22   going to be excluded.  It doesn't make much sense to me.  

            23             I would go to the notion that if something gets a

            24   majority -- if a shareholder proposal of any kind gets a

            25   majority vote then that ought to be a sufficient trigger.  A




             1   majority of the shareholders have evidenced a disagreement

             2   with management's recommendation and have gone ahead and

             3   said, yes, we think you should do it even though we read your

             4   recommendation that we shouldn't.  I think that ought to be a

             5   sufficient trigger.  We shouldn't require that 1 percent of

             6   the shareholders have to be backing any particular thing.

             7             MR. DUNN:  Can I jump off of there for one second?

             8             MR. NEUHAUSER:  Sure.

             9             MR. DUNN:  At the risk of cutting everyone off and

            10   not giving everyone enough time I want to ask a question of

            11   Mr. Greenberg that follows off of that.  So let's see if we

            12   can get back or not. 

            13             In your area you push for no thresholds basically

            14   other than the 14(a)(8) in your letters.  What -- you know,

            15   based on our discussion that we've been having what success 

            16   -- say that there was no limit on the size of a shareholder

            17   who could nominate a candidate, what do you think their odds

            18   of success are?

            19             MR. GREENBERG:  I think it's all going to depend --

            20   let me start by thanking the Commission for inviting me here

            21   today.  It's a great honor.  

            22             As for the level of success that could be achieved,

            23   it's going to depend a lot upon what the institutional

            24   investors will do.  And the reason we propose that is to

            25   dovetail it with the idea that institutional investors as we




             1   see it in the -- will not nominate candidates for

             2   directorships.  They have not done in the past, at least 99

             3   9/10 percent have not, and they will not do it in the future.

             4             It's not a matter of money.  Our campaign which we

             5   ran as a group of individual investors who met on the

             6   Internet and we engaged in a proxy contest with a New York

             7   Stock Exchange listed company, the company had approximately

             8   $500 million in sales.  We had a special interest and our

             9   special interest was that we had large losses on our

            10   investments and the company was heading toward bankruptcy. 

            11   Our candidates won 24 percent of the votes cast.  Two of the

            12   shareholder proposals that we put forth got 60 percent of the

            13   vote and were never heard of again.  

            14             Our results were that the CEO departed from the

            15   company, the chairman of the board retired, and a white

            16   knight came in to save the company which we thought was

            17   spiraling toward bankruptcy.  We don't think that individual

            18   investors either have the time, the money or the know how to

            19   really do what we did.  And it's essentially -- it's a lot of

            20   legal issues involved, it's a lot of work, and we don't think

            21   that individual investors will do it.  What it's going to

            22   really require is that individual investors if we want to be

            23   protected, from a reality standpoint we're going to have to

            24   rely on the institutional shareholders.  

            25             But, you know, going to the threshold idea, one of




             1   the problems we have with it, if the objective is director

             2   accountability, then thresholds serve no purpose.  It's like

             3   being a little bit pregnant.  You're for it or -- you know,

             4   it exists or it doesn't exist.  You're for accountability of

             5   directors or you're not.  We don't need all these hurdles to

             6   step through.

             7             Also my wife came up with a theory.  It was called

             8   what's good for the goose is good for the gander, and what

             9   she says, and it made a lot of sense to me and I've

            10   plagiarized it since is, it doesn't matter if you have a 30

            11   percent threshold, a 25 percent threshold for ownership

            12   interests to nominate candidates for directorship at a public

            13   company as long as you have that same threshold for the

            14   nominators on the nominating committee of the corporation

            15   itself.  Why should they get off when in our case our

            16   candidates owned more stock than the entire board of

            17   directors and yet we were the outsiders?  They owned -- and

            18   many of them owned little or no stock whatsoever but they

            19   were the nominators, they were the board of directors. 

            20             We did a survey, and I'm not saying it was

            21   scientific, but it seems like the board of directors at most

            22   companies own about 1/10 of 1 percent of the stock

            23   outstanding.  So why not a 1/10 of the 1 percent ratio

            24   instead of 1 percent or 5 percent?  And also there's no

            25   proportional relationship between the stock ownership and the




             1   level of discontent of shareholders.  We owned 1/4 of 1

             2   percent of the stock of Luby's.  When we did our campaign we

             3   got 24 percent of the votes.  So what you're saying in effect

             4   is with a 1 percent or a 5 percent criteria you really want

             5   to take the voice away in our case of 24 percent of the

             6   shareholders.  

             7             Now, what I was alluding to with regard to

             8   institution, we feel that money has not been the issue for

             9   them not taking action.  I think they really want to legally

            10   distance themselves from candidates and one of the speakers

            11   in the morning mentioned multiple reasons why they want to

            12   put that distance there.

            13             We ran -- well, what we say is they can run a bare

            14   bones campaign by filing a bare bones proxy statement and

            15   calling up 30 of their favorite institutional friends and

            16   they can elect candidates.  But as I said, they want -- in

            17   our experience, with the $15,000 out-of-pocket expense, I

            18   think they can handle that expense.  And we solicited with

            19   that money 80 percent of the shareholders involved.

            20             So what I'm getting at is -- oh.  Also -- and I

            21   really agree with Ms. Nappier that it is -- there was an

            22   article in the L.A. Times about what it took to put together

            23   a pension fund group, this was 10 pension funds wanting to

            24   write a letter to UniCal and they got 1.6 percent of the

            25   outstanding shares to be able to write that letter.  They're




             1   not going to be able to hit the 5 percent level.  It is

             2   virtually impossible.

             3             And the reason I say that -- I just want to give

             4   you a little insight on how difficult it is to put together

             5   and maintain a group.  First of all, you have to decide on a

             6   constitution.  Then you have to decide on your strategies. 

             7   You're dealing with strangers.  There's paranoia about

             8   company spies and what information is getting back to the

             9   company.

            10             Getting money out of a group is like pulling teeth. 

            11   Deciding on candidates would be a really key issue.  In our

            12   case, there were four slots available for candidates but our

            13   groups had put up four nominees and we really had a problem

            14   and eventually it led to the splitting of the group.

            15             Also, the situation you're going to have is say you

            16   have 5.2 percent of the shareholders aligned to do a

            17   campaign.  The companies are not going to sit back.  What

            18   they're going to do is as they did in our case.  They're

            19   going to pick one group, focus on them, promise them anything

            20   that they want -- they may not get it in the future, but it

            21   will split the group.

            22             Our group split -- the day before we were ready to

            23   file our definitive proxy statement, I got a call and half of

            24   the group says we're leaving.  And they did.  But we went

            25   ahead anyway.




             1             So what could happen is say you have 5.2 percent of

             2   the vote, one of your subgroups has .3 percent, the day

             3   before, that group with 5.2 percent is going to get a

             4   telephone call and boom, they don't qualify.  And that's the

             5   way the game in reality is going to be played.

             6             Also, then another hurdle about forming groups is

             7   that they will -- oh.  What will happen is again you'll be

             8   put -- when they leave, they go out and they'll solicit your

             9   candidates to leave, too, and they'll try to get other

            10   support to drop off.

            11             Very quickly, we have -- on August 1, 2002, we

            12   filed formally with the corporate net.gov group, James

            13   McRitchie in Sacramento, we filed a petition for rulemaking,

            14   4.4.61.  We asked that the shareholder proposal procedure be

            15   used in nominating, cut out all the other hurdles.  We had

            16   hundreds of letters of positive support that are published on

            17   the SEC's bulletin board, had 125,000 hits on our web site.

            18             It's a well-tested procedure and one thing we

            19   didn't add that we came up with later, people will say well,

            20   there will be hordes of candidates coming out of the woodwork

            21   on this and one way we have suggested that that can be dealt

            22   with is like a lead nominator, like a lead plaintiff in a

            23   class action suit, the one with the most shares gets to make

            24   the nominations.  And in that way it will cut down on the

            25   numbers.  If somebody wants to be the lead nominator, they'll




             1   just have to buy more securities.

             2             And one other thing.  It will have an impact on the

             3   14,000 other corporations that many individual investors are

             4   shareholders of that the people on the prior panels don't

             5   have anything to do with.

             6             Thank you.

             7             MR. DUNN:  Wonderful.  Mr. Lindblom, I get to let

             8   you play us out here.  I want you to respond to all that

             9   we've had and tell us about your experience, but I also want

            10   to address the notion of how large is your fund, how --

            11             MR. LINDBLOM:  As of yesterday -- there's no market

            12   today -- $430 million.

            13             MR. DUNN:  Talk about how large that is with any

            14   particular company and how many folks you have to get

            15   together and whether you think our proxy rules keep you 

            16   from --

            17             MR. LINDBLOM:  Well, I mean, it really varies.  The

            18   issues that Denise and Paul brought up are very real issues. 

            19   The bar is very high.  And in trying to put together those

            20   groups, there are lots of transactions costs because even the

            21   institutional investors are really different entities with

            22   different purposes.  But the fact is we all speak a common

            23   language, which is long-term shareholder value and that's

            24   really the basis on which those coalitions are built.

            25             We feel perfectly confident working with people




             1   like the treasurer of North Carolina, the treasurer of

             2   Connecticut, et cetera, because their universal holdings

             3   really lead them to take a look at that long-term value.  So

             4   in a lot of ways, we're allowed to kind of surf off some of

             5   the work that they've done and in putting together those

             6   coalitions, there are individual holdings that we have

             7   because we're active investors, in which we can supply a

             8   substantial amount in building that coalition.

             9             I think the issues that we're less concerned about,

            10   especially with the larger institutional holders, are the so-

            11   called special interest issues or the danger of getting

            12   special interest people on the board.  I think the fact that

            13   they have to be elected by 50 percent of the stockholders is

            14   in itself a lens and a sieve to deal with that issue.

            15             But I have to say in listening to the testimony of

            16   the -- or the panels this morning, the more I heard, the more

            17   I realized how much we really need a rule like this because I

            18   heard managements and directors and their lawyers telling us

            19   that they knew what was best for the stockholders and also

            20   that they knew what a special interest was and what a special

            21   interest wasn't.

            22             I think I admire their prescience and their

            23   ability.  However, it was really interesting to see that

            24   those views were not necessarily congruent with our actual

            25   stockholders' and that's really the important issue here. 




             1   The question is that Sarbanes-Oxley, et cetera, was a very

             2   important step and we applaud that step.

             3             What that allowed is that certain board members be

             4   put on who are, quote, independent.  That deals with interest

             5   issues.  That doesn't mean that they're going to act

             6   independently or when the time comes that they speak truth

             7   power or raise those difficult questions.  

             8             I don't call that social engineering.  I call that

             9   governing, and that's what the issue is about here, is the

            10   ability that in the last resort -- and, believe you me, to

            11   put these coalitions together or directors is a last resort. 

            12   It's because you can't get in the door at all.

            13             And I have to say that we've had lots of

            14   discussions with managements and some are incredibly

            15   cooperative.  We disagree or we agree to disagree but there's

            16   a serious discussion.  We're talking about the people who

            17   slam the door here and are really not responsive at all, and

            18   this is the sort of last report that allows that possibility

            19   that the stockholders can act.

            20             Remember, when we take a look at that proxy card,

            21   we vote for or withhold.  We can't vote against.  We have no

            22   voice in dealing with specific directors in that way.  It's

            23   so indirect.  And this in itself is also an indirect way

            24   because we have to go through the triggering events, but it

            25   is a good way to start.  It's the first step.




             1             MR. DUNN:  Wonderful.  We've taken our half hour

             2   panel and of course gone 40 minutes, which is kind of the

             3   norm for today.  So I think this is very important because

             4   the actual reality of where this hits the road is -- you can

             5   only get by talking to folks, and so I really appreciate

             6   that.

             7             I'd like to thank Ms. Nappier, Professor Neuhauser,

             8   Mr. Greenberg, Mr. Lindblom and Ms. Davis.  Thank you all

             9   very, very much for getting us almost back on time for Alan

            10   here, and we'll turn it back over.

            11             MR. BELLER:  Thank you.  We're going to change here

            12   on the fly, no break, and go to the legal issues panel.

            13             This panel is about legal issues.  Morty, having

            14   tried to get us close to on time, we're going to try to keep

            15   this one to the allotted time.

            16             Before we start, our panelists, starting again from

            17   my left, Jack Coffee, a professor at Columbia Law School,

            18   Donald Langevoort, a professor at Georgetown University Law

            19   Center, Norman Veasey, the Chief Justice of the Delaware

            20   Supreme Court, David Katz, partner at Wachtell, Lipton, Rosen

            21   & Katz, I think a different Katz but so be it, Todd Lang, a

            22   partner at Weil, Gotschal & Manges, and finally Jill Fisch, a

            23   professor at Fordham University Law School.

            24             I'd like to kick this off by asking Professor

            25   Coffee to give us sort of the law school exam issue spotting




             1   approach, if you will, if we are the Commission and it's a

             2   general counsel -- incidentally -- and I should probably --

             3   I'm sorry -- introduce, to my right Giovanni Prezioso who is

             4   the general counsel of the Commission who is going to help

             5   moderate this panel.

             6             If you are the Commission or if you're Giovanni or

             7   if you're even I thinking about the legal issues in crafting

             8   the Commission's proposed rule or something like it, what are

             9   the things we should be thinking about?

            10             MR. COFFEE:  Well, I think in asking me that

            11   question you're inviting me to be a little less of an

            12   advocate than I might have been and more of a somewhat

            13   slightly neutral objective overviewer.

            14             MR. BELLER:  You get the advocate shot later on.  I

            15   think we just want to start with the landscape.

            16             MR. COFFEE:  The legality of proposed rule

            17   14(a)(11) really depends on where courts will draw the line

            18   between the realm of state corporate governance, which is

            19   primarily regulated by state law, and the realm of securities

            20   regulation, which is primarily regulated by the SEC.

            21             There is no simple bright line that's recognized by

            22   all between those two realms.  Some will tell you that

            23   securities regulation simply addresses disclosure and state

            24   law addresses voting rights and other kinds of powers of

            25   shareholders.  But I think that's over-simple.




             1             If you look at the federal securities laws, you see

             2   a number of very specific rights they accord to shareholders

             3   that are not related to disclosure.  An example would be the

             4   Williams Act where there is a best price rule that gives you

             5   the right to the highest price paid to anyone else.  

             6             Indeed, there are a number of very specific rights

             7   under section 14(a) which regulates the proxy process.  Since

             8   at least 1947 or earlier, the Commission has had specific

             9   rights there relating to access to a shareholder list,

            10   relating to shareholder proposals under 14(a)(8), relating to

            11   unbundling the vote and relating to the special right to

            12   withhold consent and express at least a kind of symbolic

            13   disapproval.

            14             The issue that gets triggered by this new

            15   opposition to proposed 14(a)(11) is whether all of those

            16   rights might be invalidated by a very broad judicial decision

            17   that 14(a) only permits disclosure.  And what I want to

            18   assess for a moment with you is what the arguments would be

            19   on that kind of issue.

            20             The simplest way to begin the analysis is to look

            21   at the structure of section 14(a).  It's not your typical

            22   statute.  It doesn't look at all like the disclosure-

            23   regulating provisions that are littered throughout the

            24   federal securities laws, where you're just told not to

            25   disclose material information in a variety of contexts.  




             1             Nor does its look like your anti-fraud rule that

             2   says don't use any manipulative or deceptive devices. 

             3   Rather, on the face of the statute, it gives the SEC more

             4   authority.  It says no one can solicit proxies without

             5   complying with the rules and regulations adopted by the

             6   Commission.

             7             I think, and commentators for roughly 60 years have

             8   thought, that that was intended to give the Commission at

             9   least some power to realize a right of fair corporate

            10   suffrage.  Now, that right is most easily implemented through

            11   procedural rules and since 1947, when the Commission adopted

            12   rule 14(a)(8) which entitles shareholders to put an issue

            13   onto the corporation's agenda for a vote at the annual

            14   shareholders' meeting, there has been some right of

            15   shareholder initiative at shareholder annual meetings

            16   pursuant to the federal proxy rules.

            17             I want to stress the continuity here because I

            18   think your proposed rule, 14(a)(11), is really a kind of

            19   giant footnote to rule 14(a)(8) that's been around since

            20   1947.  It essentially expands the kind of issues you can put

            21   on the corporation's agenda at the annual meeting by putting

            22   it on a director nomination as opposed to say a bylaw

            23   amendment or some precatory proposal.

            24             There is obviously some limitation on the

            25   Commission's authority under 14(a) and the leading skeptical




             1   decision is the business roundtable decision versus the SEC

             2   in 1994.  We'll hear more about that later from others, but I

             3   would point out that even that decision recognizes that the

             4   Commission's authority is not limited to disclosure.  It

             5   knows that the Commission has some power over procedure as

             6   well as over disclosure underneath 14(a).

             7             Now, how far does that power over procedure go? 

             8   Let me just acquaint you with what the commentary has been

             9   over sort of 60 years, very briefly.  The very first article

            10   on this whole topic appeared in 1940 in the University of

            11   Chicago Law Review where the idea was expressed that the key

            12   procedural goal underlying section 14(a) was to place the

            13   absent shareholder in the same position as the shareholder

            14   who attended the shareholder meeting.

            15             In other words, the SEC has created this new proxy

            16   statement that we want people who are not going to the

            17   meeting to have the same rights as those who go to the

            18   meeting.  Applying that to the rule or to the context of

            19   proposed rule 14(a)(11), I think it follows from that very

            20   logically that if you can nominate directors at the annual

            21   meeting as someone present at the annual meeting, you should

            22   be able to nominate directors pursuant to the proxy statement

            23   without going to the annual meeting because the procedural

            24   goal here is to prevent discrimination against absent

            25   shareholders, equalize their position but only equalize their




             1   position with the rights that a shareholder would have at the

             2   annual meeting.

             3             That now brings us to the big contested area. 

             4   Since 19 -- well, since actually the early 1950s when the

             5   Commission amended Rule 14(a)(8), the Commission has said the

             6   only thing you can vote on under Rule 14(a)(8) is something

             7   that's a proper subject for shareholder action pursuant to

             8   state law.  So there is a state law clause.  And in looking

             9   at that, I think you picked that up in 14(a)(11) by looking

            10   at whether or not you would be entitled to nominate

            11   shareholders under state law as a condition, as a trigger,

            12   for 14(a)(11) rights.

            13             But there's some ambiguity in what you've said and

            14   some dissension in the case law as to what state law really

            15   means, how far it goes.  I think that state law essentially

            16   here means not only the narrow state law of the mandatory

            17   rules but the broader more permissive state law, and Norm

            18   Veasey will speak to this because the hallmark of Delaware

            19   law is the permissive authority it gives to shareholders, to

            20   design any kind of corporate structure, including any kind of

            21   voting structure, under state law.

            22             Thus -- let me give you an example.  There's a

            23   well-known decision in the Delaware Supreme Court during

            24   Chief Justice Veasey's tenure, but probably not one written

            25   by him, called Stroud versus Grace.  And in Stroud versus




             1   Grace, the shareholders of a Delaware corporation adopted a

             2   charter position by a 75 percent vote that said the only

             3   people eligible to be directors of this corporation were

             4   director candidates who had substantial experience in line

             5   rather than staff positions in substantial private

             6   institutions.

             7             Now, that may be a crazy provision that was

             8   basically intended to keep investment bankers and lawyers off

             9   the board, which may be a worthy goal but a debatable one. 

            10   Nonetheless, the Delaware courts upheld that.

            11             MR. BELLER:  Dean Sonnenfeld would tell you it was.

            12             MR. COFFEE:  I would think that that broader view

            13   of what state law means would have to recognize that charter

            14   provisions and bylaws that limited who was eligible to be a

            15   director or who could make a nomination would have to be

            16   respected by Rule 14(a)(11), subject to one proviso.  I do

            17   think that Rule 14(a)(11) insists upon -- Rule 14(a) insists

            18   upon equalizing the absent shareholder and the present

            19   shareholder.  So you couldn't have a rule that said people

            20   who were present could do this but people could not do it by

            21   the proxy statement.

            22             Now, having said that's the law, I think the way

            23   the business roundtable case reads -- I should tell you

            24   there's one other major decision, the impact of which has to

            25   be balanced.  In about 1947 also, the Third Circuit in SEC




             1   versus TransAmerica gave the Securities and Exchange

             2   Commission a major victory in finding that a bylaw that

             3   precluded bylaw amendments was invalid and could not be used

             4   to frustrate your federal right under 14(a)(8).  There,

             5   TransAmerica had established a bylaw saying no bylaw could be

             6   voted on unless it had earlier appeared in the notice of

             7   meeting and because management had left the insurgence bylaw

             8   amendment out of the notice of meeting, there was no way he

             9   was eligible to vote on it at the meeting.

            10             So they ruled, the Third Circuit reversed.  The

            11   Third Circuit said broadly, and this is sort of the real

            12   tension, that you can't use any kind of state law provision

            13   to frustrate a federal right; federal supremacy applies. 

            14   Alternatively, the business roundtable decision seems to say

            15   that you cannot have federal law in franchise shareholders

            16   and give them greater voting rights than they have under

            17   state law.

            18             There is some tension between those two decisions. 

            19   I would suggest to you that consistent with what you've

            20   already done under 14(a)(8), you probably need to recognize

            21   that only nominations that are proper under state law can

            22   really be protected and implemented by Rule 14(a)(11), but

            23   I'm sure we'll hear some debate from others on that.

            24             MR. BELLER:  Thank you very much.  I think I'd like

            25   to turn next to Mr. Lang and the ABA comment letter certainly




             1   casts some doubt on the Commission's -- or expresses some

             2   doubt on the Commission's authority to adopt 14(a)(11) in the

             3   proposed form and I guess I'd like you to elaborate on that,

             4   I guess particularly in light of what Professor Coffee just

             5   said.

             6             MR. LANG:  Okay.  First of all, I'd like to join

             7   others in thanking everybody, particularly the Staff, for

             8   really a prodigious effort here.  This is a tough,

             9   controversial subject and I think it's been handled with

            10   depth and however it turns out, I think that it's a credit to

            11   the institution.  I also feel that at this stage of the

            12   afternoon, I'm going to run into some repetition and some

            13   redundancy so I'll try and avoid some of that.  But I would

            14   like to say this; that, however this turns out, I think

            15   there's a lot of good coming from it.

            16             One of the things that appeals to me, without

            17   authority -- and I'll jump into that in a moment -- is that

            18   it demonstrates what I hope the next panel will discuss, that

            19   is, the proxy machinery needs to be updated.  The voting

            20   rights of shareholders has be to reexamined.  Vote formation

            21   has to be examined, and I would suggest the Commission, which

            22   as nothing on its plate, should take this as a very important

            23   task in the near future.  If nothing else happened as a

            24   result of this, I think that would be highly productive and

            25   also very much in the interest of shareholders.




             1             Now, I've heard Jack's comments and it may not

             2   surprise you that I'm not in total agreement with him.  The

             3   way I read the proposing release and all the other materials,

             4   since as Alan and I were talking earlier we've been doing

             5   this now almost a year and ABA has put in four separate

             6   pieces of paper down the line here.

             7             It seems to me that the Commission has asserted its

             8   authority based upon the fact that if there's a nomination

             9   right under state law which is not barred by organizational

            10   documents of the company, that it now becomes essentially a

            11   matter of disclosure and therefore Rule 14(a)(11) could be

            12   enacted for that purpose.

            13             I suggest, and the task force which I co-chair has

            14   written extensively, that what's really happened here,

            15   cutting through it, is that there's a new federally created

            16   right granted to stockholders that does not exist under state

            17   law and therefore constitutes substantive, not procedural,

            18   rulemaking by the Commission.  I mean, that's the bottom line

            19   of what our position and our concern is.

            20             Assuming that the SEC's authority is limited to

            21   disclosure and voting procedures, the business roundtable

            22   decision, which Jack has discussed earlier, makes it clear

            23   that these are plain English definitions.  The SEC has no

            24   power-defined authority by interpretation or indirection.  If

            25   Congress wants to preempt state law, Congress has the power




             1   to do that.  And, indeed, since that decision in Sarbanes

             2   we've certainly seen some specific preemption, notably in

             3   audited committees and on insider loans.  But you can't

             4   interpret it in by saying we have broad powers, protect

             5   investors, public interests.  Those are called by that court

             6   too tenuous a standard, I think that was the phrase, in order

             7   to sustain SEC authority in that area.

             8             And the same thing would go with disclosure and the

             9   same thing goes with the possibility under that decision of

            10   using voting procedures.  I think that has a plain English

            11   definition also.

            12             So against that background, which my task force

            13   believes and I believe, let's take a look at some of the

            14   consequences that come from the position which the Commission

            15   has taken.  First of all, look at the construct of the rule. 

            16   First of all, not only could there be proxy contests and

            17   likely to be in the election of directors, but bi-annually

            18   this is up for review.  So you're going to have another round

            19   of fighting over whether access under the SEC rule is going

            20   to be there.  And assuming that there are triggering events,

            21   since stockholders have no state law access right for such

            22   purposes, this has got to be new and federally created but it

            23   is going to have and generate a lot of controversy.

            24             To me, when you give stockholders that right and

            25   take it away from the directors, you're creating massive




             1   change, potentially, in the structure of state corporate law

             2   which is exactly what the roundtable decision addresses.

             3             Now, Rule 14(a)(11) alters this relationship in a

             4   number of ways.  The most important part, and this is what

             5   strikes me in all the dialogue I read and heard is that no

             6   one ever talks about the fact that the proponent stockholders

             7   are not fiduciaries and are not accountable as distinguished

             8   from the directors.  It seems to me if they're going to have

             9   that kind of influence, there should be some level of

            10   accountability and some level of fiduciary responsibility. 

            11   You can't have it both ways.  If the directors are

            12   responsible, it's their proxy statement, they should be

            13   dealing with it.  

            14             And the other thing that's important is that the

            15   role of the directors is eliminated in this process, both in

            16   nominations and ultimately on these renewals.  The process

            17   that's been set up by the SEC and the markets on nominating

            18   committees I think is a very positive, powerful measure and I

            19   think it's going to produce a good many changes as I think

            20   there should be.

            21             But that is totally end run in the way the

            22   Commission has proposed the rules.  In other words, anybody

            23   who has this federally created right has a perfect right to

            24   go ahead and put up whoever they want, provided they meet the

            25   independence and no control test under the rule, and that's




             1   the end of it.  And the nominating committee has no power,

             2   they can't inquire, they don't -- so the procedure for the

             3   nominating committee seems to be set up for small

             4   shareholders and insiders.

             5             Why do we have a nominating committee process which

             6   this Commission has deemed to be extremely important -- and I

             7   must say I agree with that.  Other consequences which flow

             8   from this, which can affect the authority issue, is this

             9   process facilitates the proxy contest and which can be

            10   disruptive and not in the interest of shareholders as a

            11   group.

            12             Second of all, divided boards of directors -- well,

            13   some people who are proponents for this change have said we

            14   want to get people on the board so they'll challenge the rest

            15   of the board.  Is that really a purpose that this Commission

            16   wants to get behind, that we're going to put people on who

            17   are actively against the board?  That doesn't make a lot of

            18   sense to me as a matter of governance.

            19             The next thing is the likelihood of proponents and

            20   their candidates serving special interest, which I won't

            21   be  -- some people say it's going to happen, some people say

            22   it won't, I say human nature says it must happen and that's

            23   the way it is, and finally there are questions for proponents

            24   which have not been addressed here particularly on

            25   transparency, filing obligations, whether you can use 13(g)




             1   or whether you're going to have to go to 13(d), when you

             2   start to influence, and other issues which I think are going

             3   to have a very important part of this process.

             4             Now, two other points I'd like to make, Alan, and

             5   then I'll be quiet.  The first is that the process of

             6   facilitating contests I think is dubious as a corporate

             7   governance matter.  By giving some stockholders these rights,

             8   controversy and division are likely.  My suggestion is, and I

             9   think others support this, that we ought to be looking for a

            10   model which would allow management and the directors and the

            11   shareholders to work things out on an amicable basis and

            12   align their interests as much as possible, and the new

            13   nominating committee process I think holds great potential

            14   for that.  

            15             And if anybody thinks that's a band-aid, it is not. 

            16   It's a very powerful mechanism where institutional

            17   shareholders, without getting into a proxy fight, are going

            18   to exert a great deal of influence, I think, on nominating

            19   committees and boards.

            20             The second thing is that I've read and re-read the

            21   proposing release and the related literature very carefully

            22   and repeatedly.  And I still can't figure out what the

            23   specific reasons are for this imitative.  If the purpose is

            24   to grant access to shareholders and that's what you want to

            25   do, then this becomes by definition a new right. 




             1             Now, there are an awful lot of reasons that have

             2   been advanced both in the literature and today as to why this

             3   is a good thing or may be a good thing, but I still haven't

             4   heard it from the Commission and I think one thing I would

             5   recommend, whatever you do, should you go forward with this,

             6   it would be a good idea to tell us why these rules should be

             7   adopted.

             8             MR. BELLER:  Thank you.  Professor Fisch, do you

             9   agree with Mr. Lang?

            10             MS. FISCH:  We've been talking about it all day,

            11   trying to negotiate agreement.

            12             First of all -- and it's a great pleasure to be

            13   here.  Thank you for inviting me.

            14             I disagree with the characterization of this right

            15   as a new right.  I think proposed rule 14(a)(11) is quite

            16   explicit in grounding this right in state law.  State law is

            17   the source of shareholder voting rights, state law is the

            18   source of shareholder nominating rights.  And if you look to

            19   Delaware law, there is case law, there are statements not

            20   just in law review articles but in cases by vice chancellor

            21   Leo Strine, by former vice chancellor, now Delaware Supreme

            22   Court Justice Jack Jacobs, saying that shareholders have a

            23   right to nominate directors.

            24             And I think that that is key because all of the

            25   federal proxy rules are grounded on rights and powers that




             1   are defined by reference to state law.  The fact that

             2   stockholders nominate -- elect directors to begin with, the

             3   fact that the quorum requirements and the annual meeting

             4   requirements make it necessary for the company to solicit

             5   proxies to replicate the annual -- the individual attendance

             6   at an annual meeting, that's what drives the federal proxy

             7   rules.

             8             And so without that, you wouldn't have this whole

             9   body of federal law and federal law is heavily dependent on

            10   the pre-existing state law rights.  I think that's the first

            11   thing.

            12             The second thing, with respect to the business

            13   roundtable decision, I think that within the text of the D.C.

            14   Circuit's opinion, it is quite clear that regulation of proxy

            15   solicitation is different from regulation of voting rights,

            16   one share, one vote rule.  And I think there's an awful lot

            17   of room in which the D.C. Circuit makes it clear that it's

            18   not addressing that question.

            19             Why is it different?  Well, for one thing, the text

            20   of the statute, Section 14(a), is much broader than the

            21   authority that the Commission has to regulate exchanges.  The

            22   text of the statute, it says you can't solicit proxies

            23   without complying with SEC rules.  It doesn't say you can't

            24   solicit proxies without complying with the Commission's

            25   mandated disclosure.  




             1             It would be easy to have a disclosure-oriented

             2   statute.  In fact, the Supreme Court has focused on that in

             3   its interpretation of Section 10(b).  This statute doesn't

             4   have that language.

             5             Second, if you look at the legislative history and

             6   looking at the legislative history and the purposes of 14(a)

             7   I think is particularly telling in light of some of the

             8   comments this morning.  There were a lot of comments this

             9   morning that suggest that this is a new issue, it's a

            10   response to Enron, why do this now, and in fact if you look

            11   at the legislative history, you see that the concern about

            12   insider domination and particular insider control of the

            13   proxy machinery was one of the issues that was raised in the

            14   hearings in 1933 and 1934.  That's one of the things that

            15   Congress was focusing on.  

            16             It was one of the problems to which the Exchange

            17   Act was addressed and Congress responded specifically to that

            18   problem with the adoption of Section 14(a).  In addition, the

            19   idea of shareholder access or disclosure of shareholder-

            20   nominated director candidates, that's been on the table since

            21   1942 when the SEC proposed a rule to that effect.

            22             And you might ask well, why hasn't it happened if

            23   it's been on the table for so many years.  And I guess the

            24   answer is partly political, but I think more a matter of the

            25   SEC really trying to focus, as Joe Grundfest suggested, on




             1   getting the rule right.  And I think that's perhaps part of

             2   the problem.

             3             It's very hard to predict the effect that proposed

             4   rule 14(a)(11) is going to have.  It's very hard to know is

             5   this going to open the floodgate, is it not going to make a

             6   difference at all, what's the right threshold and so forth. 

             7   And then although it's a commendable effort to try, I think

             8   at some point the idea to try and get it exactly right is

             9   causing a certain degree of administrative gridlock.

            10             It also is problematic because the more fine-

            11   tailored the rule becomes, the more you start to get into a

            12   problem, is this really disclosure or disclosure plus

            13   procedure.  Now, I've looked at the legislative history of

            14   section 14(a) and I think you can make a pretty good argument

            15   that section 14(a) authorizes the SEC to do more than

            16   disclosure and perhaps more than disclosure plus procedure.

            17             There's an idea in fair corporate suffrage that

            18   fair corporate suffrage, at least in the context of access to

            19   the proxy machinery, something that was on the table, means

            20   making sure that stockholders do have rights that they didn't

            21   have under then-existing state law, although I don't think

            22   that's what this rule does.

            23             But the obvious or at least one obvious response is

            24   to back off, to have a simpler rule and to a certain extent

            25   for the Commission to get out of the way of state law and




             1   company-specific experimentation in this area.  We have a

             2   system of proxy regulation in which the Commission has

             3   essentially occupied the field for the last 60-plus years.

             4             There is I think a reluctance on the part of state

             5   courts and a reluctance on the part of individual

             6   corporations to experiment with different corporate

             7   governance mechanisms, with different ways of creating a

             8   dialogue or creating access to the proxy because in part of

             9   the effect of Commission rules, including the rules that

            10   limit the ability to use 14(a)(8) to propose changes to the

            11   nominating mechanism as well as proposing individual director

            12   candidates.

            13             So if the -- whatever the form of 14(a)(11) that

            14   the Commission adopts, I think one clear value and one clear

            15   way to address this gridlock going forward is to explicitly

            16   provide a little more flexibility.  In other words, it

            17   already says in the proposed rule that this is subject to

            18   state law, which means that if the critics of the rule are

            19   right and this opens the floodgates, a state legislature, a

            20   state court can respond and say okay, there's not going to be

            21   this broad right of shareholders to nominate or we're going

            22   to put in additional conditions.

            23             I think Jack Coffee is right that it would be

            24   useful to make explicit that individual companies could do

            25   this in their charters, and I also think it would be valuable




             1   to make the reverse explicit, that companies and states could

             2   go farther without going into conflict with the rule so that

             3   if the advocates of greater shareholder access are right,

             4   there's at least a possibility for company-specific

             5   experimentation to demonstrate that that is the case.

             6             MR. BELLER:  Thanks very much.  Professor

             7   Langevoort, I guess first, generally, is there -- do you have

             8   anything to add to the debate so far?  Then I have a followup

             9   question for you.

            10             MR. LANGEVOORT:  Okay.  I'll be brief.  Not fun to

            11   go after Jack and Jill on this question.

            12             (Laughter.)

            13             MR. BELLER:  That's why we set it up that way.

            14             MR. LANGEVOORT:  I probably feel a bit more

            15   strongly than Jack that the Commission's authority under

            16   section 14(a) reflects a statutory dissatisfaction with

            17   leaving questions of shareholder suffrage to the states and

            18   that the interest of federal uniformity and the promotion of

            19   shareholder opportunity in publicly traded corporations is an

            20   area that the Commission can move in without having to

            21   apologize to the states, and indeed with the ability to

            22   preempt, should there be a discrete conflict.

            23             I would be less inclined than Jill to signal in the

            24   adoption of any such rule that a state can opt out from this. 

            25   Yes, states can decide that shareholders cannot nominate but




             1   short of that, I would not want states to say we can adopt a

             2   rule different from 14(a)(11), for example, one that says it

             3   has to be 20 percent or 5 years or whatever, and have that

             4   supercede the Commission's rule.

             5             But beyond that, I suspect I am much closer to

             6   agreement with what they said than disagreement.

             7             MR. BELLER:  Thank you.  The followup, if the

             8   Commission were to look at adopting a rule that was slightly

             9   different from the proposed rule, for example, if it were to

            10   get rid of the triggering events and simply say a shareholder

            11   who held X percent for Y months or Y years had a right to get

            12   its -- and that was consistent -- and that rule was not

            13   prohibited by state law, would have a right to get into the

            14   company's proxy materials, I assume that would be no harder

            15   and maybe an easier case than the current one.

            16             MR. LANGEVOORT:  I agree.  I think we ought to say

            17   what in effect anybody who knows administrative law should

            18   acknowledge up front.  We can all quote snippets from case

            19   law one way or the other, or snippets from legislative

            20   history.  It's going to be the strength of the rulemaking

            21   record and the Commission's articulation of a need for this

            22   rule that ultimately is going to drive the outcome on whether

            23   the rule is upheld.

            24             Show me a strong recognition in the rulemaking

            25   record that the rule you described is necessary and




             1   appropriate, I do think it's an easier case.

             2             MR. BELLER:  How about if the Commission included

             3   either additional or different triggering events from the

             4   ones in the proposal, and I guess in particular triggering

             5   events that were tied to corporate performance or triggering

             6   events that were tied to events of alleged or proven

             7   corporate wrongdoing, such as indictments or convictions or

             8   enforcement actions or the like.  How would that affect, if

             9   at all, the analysis we've been discussing?

            10             MR. LANGEVOORT:  putting aside -- obviously those

            11   are hard questions and you have to begin with, as you know

            12   very well, the definition of any of those triggering 

            13   events --

            14             MR. BELLER:  Assume I've already defined them.

            15             MR. LANGEVOORT:  -- and create a record problem in

            16   articulating the need, because you have to tie your

            17   particular structure of the rule to the claim for its

            18   validity.  The image I use in my head for where that blurry

            19   line is between where the Commission can go and where it

            20   can't has to do with -- the Commission clearly has the

            21   ability to step in in order to promote their corporate

            22   suffrage.  I emphasize not the words corporate or suffrage

            23   but fair, even playing field.  As Jack mentioned, that

            24   wonderful phrase that Louie Loss repeated so many times, the

            25   Commission's objective is designed to make the proxy process




             1   the closest practicable substitute for attendance at the

             2   meeting.

             3             I think you ought to tie, and to maintain the

             4   validity of the rule need to tie, all the exceptions, all the

             5   triggers to a notion of promoting fair corporate suffrage. 

             6   Once you start provisions like well, the company didn't do so

             7   well, therefore these rights are triggered, it comes a lot

             8   closer to merit regulation and I think that's where problems

             9   are going to be raised with respect to the validity of the

            10   rule.

            11             That question of who should be a director or what

            12   kinds of companies are on our blacklist is too far distant

            13   from questions of are shareholders being heard and that would

            14   become problematic.

            15             MR. BELLER:  Thank you.  Professor Coffee, any on

            16   that last point?

            17             MR. COFFEE:  Well, I think just as a matter of sort

            18   of defensive advice, your position is stronger.  You are more

            19   safely within your bunker the more this looks like a

            20   procedural rule.  I understand that Todd Lang disagrees with

            21   me and says it's substantive, but most of his criticisms seem

            22   to be more policy arguments.

            23             I think the more you make it look procedural, the

            24   more you're in the narrow core of a series of concentric

            25   circles that might define your authority.  You clearly have




             1   procedural power.  It is arguable, as Don says, that you

             2   might have somewhat greater power than that, but the more you

             3   can cast it as a procedural rule, the safer it is.

             4             MR. BELLER:  I'd like to turn to state law issues,

             5   particularly Chief Justice Veasey.  What issues -- if the

             6   Commission were to adopt this rule, what issues does it raise

             7   under Delaware law and would the rule as proposed, if

             8   adopted, conflict with Delaware law?  And I suppose I want to

             9   hold for a second the ambiguity that Professor Coffee raised

            10   about the charter or shareholder adopted bylaw provision.  If

            11   we could leave that aside and attack that separately.

            12             JUSTICE VEASEY:  Well, I want to thank the

            13   Commission for the opportunity to be here and I agree with

            14   Todd Lang that this discussion is a very helpful discussion,

            15   the process in itself is a very helpful discussion and I'm

            16   glad you turned to me for state law and didn't ask me to get

            17   into the thicket of whether the SEC has power to adopt this

            18   rule.

            19             Whether as a matter of policy you should adopt it

            20   is a different issue because the -- one looks to state law to

            21   govern the internal affairs of corporations and then there's

            22   that blurred line of whether you should or should not do it,

            23   but there are some potential problems here that -- for

            24   example, the idea that if the state does not prohibit

            25   shareholder nomination, perhaps could invite states to




             1   prohibit and opt out and lead the race to the bottom.  That's

             2   sort of an interesting irony in the rule as proposed, raising

             3   some questions about whether it's good policy to do it.

             4             And other conflict questions involve a feature of

             5   the dispute about small stockholders versus large

             6   stockholders and whether you should discriminate between

             7   small stockholders and large stockholders with respect to the

             8   opportunity to take advantage of this right.  And I think it

             9   is a substantive right that's being granted here.

            10             That said, I think there's something to be said for

            11   changing state law in this area that might obviate a lot of

            12   these problems with a procedure that some see as flawed.

            13             First of all, let me say that the Delaware

            14   judiciary as an institution doesn't really have a dog in this

            15   fight.  There is, of course, an interest on the part of the

            16   state of Delaware, the executive and the legislative

            17   branches, that internal affairs not be interfered with, but

            18   the Delaware judiciary, as an institution, is the third

            19   branch of government. 

            20             Our mission is to decide our cases fairly and

            21   swiftly and in a balanced way for stockholders and directors

            22   and to try to be predictable and clear going down the road. 

            23   And I think that our fiduciary duty decisions have been very

            24   responsible in this area. 

            25             For example, there is a strong view in Delaware law




             1   that the franchise of the stockholders, the right of

             2   stockholders to vote, is something that should not be

             3   interfered with, and the Blazius case stands for that

             4   proposition.  So the Delaware courts certainly are out there

             5   to protect the stockholders at the same time to make sure

             6   that the business judgment role is not compromised or watered

             7   down in any way. 

             8             And what you've seen in recent decisions, I think,

             9   has been a look at the processes of directors and the whole

            10   issue of good faith, and the like that have been, I think,

            11   pointed up a little bit more dramatically in recent years by

            12   better pleading and taking advantage of books and records

            13   before derivative suits are brought. 

            14             So I'm very proud of what the Delaware judiciary

            15   has done in this respect, and I particularly appreciate

            16   Richard Breeden's comments about the service that the

            17   Delaware judiciary has providing. 

            18             Now, all that said I think that there is a lot to

            19   be said for Ira Millstein's point this morning that the core

            20   of the problem is the fact that this withhold vote and the

            21   plurality provision means that stockholders really don't have

            22   a strong say in the election of directors.  

            23             So his proposal that would, essentially, leave it

            24   to the exchanges to have an exchange rule on the majority of

            25   those voting being necessary to elect directors creates




             1   another federalism problem in itself, but if it were state

             2   law, if state law were amended to do that or if corporations

             3   adopted a bylaw or certificate of incorporation -- and there

             4   is a little unsettled problem there in Delaware law that I

             5   don't want to talk about because it may come before the

             6   courts. 

             7             But if state law provided this majority of the

             8   voting in order to be elected or the certificate of

             9   incorporation or possibly the bylaws so provided, I think it

            10   would go a long way forward getting that done. 

            11             And perhaps the Commission would want to consider

            12   if you want to adopt the provision you have on the table to

            13   create an exception for any state law that allows the

            14   majority of the voting, for example, or any organic document

            15   of a corporation like the certificate of incorporation or

            16   bylaws be effective, to allow that, then this provision

            17   wouldn't apply to any such situation as that. 

            18             I think it would be an interesting proposal for the

            19   Delaware legislative branch to consider through the good

            20   offices of the counsel of the Delaware State Bar Association

            21   Corporate Law's Committee, and there are others. 

            22             Joe Grundfest's proposal and Charles Elson's

            23   proposal on the proportionate sharing are something that

            24   could be done with state legislative law, and I would be very

            25   interested in that. 




             1             And finally, my final point is, and I guess this

             2   gets to alternatives that you hadn't asked me about, but I'll

             3   answer it anyway.  I have answers for which there are no

             4   questions.  I was over in England, and they were quite proud

             5   of their Higgs report and the Smith report and the Combined

             6   Code and the success that they've had in England about comply

             7   or disclose. 

             8             And the Commission, of course, has a number of

             9   provisions about comply or disclose in certain other areas,

            10   and this might be an area where that might be effective,

            11   although I haven't thought that through.  I thought that the

            12   UK experience was particularly interested on comply and

            13   disclose generally. 

            14             And finally, let me say that our courts have

            15   encouraged these best practices of corporate governance,

            16   independence of directors, executive sessions, and the

            17   nominating and corporate governance committee I think is

            18   really the conscience of the corporation. 

            19             And I think there has been an increased improvement

            20   in the behavior of corporations, and there's a lot of focus

            21   now on the importance of this nominating committee being

            22   independent and operating with a good process just like good

            23   processes have to be used with all of the committees. 

            24             MR. BELLER:  I guess one specific Delaware law

            25   question, which I think is important given the proposal and




             1   given the ambiguity that Professor Coffee noted, if a

             2   Delaware corporation were to adopt a charter provision -- and

             3   I guess I'd like to know about a shareholder adopted bylaw

             4   provision as well -- that prohibit shareholders from

             5   nominating directors, would that be a valid bylaw, charter

             6   bylaw provision under Delaware law?  Is that a question I can

             7   fairly ask you? 

             8             JUSTICE VEASEY:  Well, I'm not going to be a judge

             9   forever.  I think it would be. 

            10             MR. BELLER:  You think it would be? 

            11             JUSTICE VEASEY:  Yeah. 

            12             MR. PREZIOSO:  One question I might ask, which is

            13   you were talking about some of the states and things they

            14   might do.  Do you have any sense as to what some states may

            15   be considering in that vein at this time? 

            16             MR. BELLER:  Well, I think David Katz --

            17             JUSTICE VEASEY:  No.  I really don't. 

            18             MR. BELLER:  David has done a lot of work in that

            19   area. 

            20             JUSTICE VEASEY:  Because I'm busy deciding cases. 

            21   Sorry. 

            22             MR. BELLER:  Mr. Katz is busy looking at this

            23   because I think he has got some folks who are very interested

            24   in it.  I think that's a great question. 

            25             MR. KATZ:  I'll try to answer it as well as I can. 




             1   We spent a lot of time on behalf of the American Society of

             2   Corporate Secretaries and some other organizations really

             3   looking at the law of all 50 states, and I think there is a

             4   couple of important points that come out. 

             5             There are several states where there are either

             6   judicial decisions or some statutory language that would

             7   bring into question some issues under 14(a)(11) as drafted,

             8   although I don't think there's any state where we can clearly

             9   stay there's a contradiction that it would be very clear that

            10   it would be prohibited. 

            11             And I'm not aware of any action in any specific

            12   states right now to, sort of, amend corporate laws to take

            13   care of this type of issue, although I do note that some of

            14   the bar associations that make the proposals in certain

            15   states are looking at the issue to see if some type of change

            16   is required. 

            17             I do think that it's important to note, though,

            18   that in a variety of situations on a state-by-state basis

            19   corporations clearly have the right to adopt provisions that

            20   would allow them to opt out of 14(a)(11) either -- I think,

            21   for the most part, it's going to be very difficult in this

            22   day and age for a corporation to simply adopt an amendment to

            23   its charter or decide to put in a bylaw amendment that would

            24   cause an issue here. 

            25             But I think there are bylaw amendments -- there are




             1   bylaws that exist today.  There are certainly charter

             2   provisions that exist today that would be contrary to

             3   14(a)(11).  

             4             There would also be situations where companies

             5   going public for the first time where they can write their

             6   charters how they decide to write them, and then the market

             7   attaches a discount or measures it however they want where,

             8   if the rule is adopted, that clearly could be done as well,

             9   which would be a matter of state law. 

            10             I understand Jill's point that you may want to be

            11   specific on this.  I don't think you have to be.  I think

            12   under the language of 14(a)(11) as it's drafted you do limit

            13   it to situations where state law would allow it.  And by

            14   definition, since the charter is a state law granted right,

            15   that would be sufficient. 

            16             I think there are some questions in certain

            17   jurisdictions about simply if it was done in the bylaws, as

            18   opposed to the certificate, whether that would be sufficient. 

            19   I do think, though, that there are certainly a number of

            20   states where shareholders on their own can adopt bylaws that

            21   would go further than 14(a)(11) or could have some form of

            22   14(a)(11), if shareholders felt strongly about taking that

            23   approach. 

            24             In most states, they couldn't adopt charter

            25   amendments, obviously, because in most states you need board




             1   of directors to approve the charter amendment.  But bylaw

             2   provisions can be done that I think would be effective in a

             3   number of situations. 

             4             I think one thing that has been missed in the

             5   debate, and I think it's something that I think people have

             6   hinted at all day, is that really some of the Commission's

             7   new rules and some of what the exchanges have done

             8   specifically with nominating committees, the disclosure

             9   requirements that now surround nominations I think you really

            10   need to let those have a chance to work and to see what

            11   nominating committees do when they're presented with

            12   nominations. 

            13             I can tell you that having represented people that

            14   are in proxy fights or are looking to avoid proxy fights or

            15   are simply looking to expand boards of directors have

            16   recently gone to a number of their institutional investors

            17   and asked them to suggest directors.  And to this day, we

            18   have not been successful in getting an institution to

            19   designate a director, to make a suggestion about a director. 

            20             So I question whether some of what's being done

            21   here is more a point of giving people leverage or power and

            22   how much the rule will be used if it's adopted.  That's an

            23   open question that certainly nobody can determine now. 

            24             I guess the last point I would make is that there

            25   are nominating provisions under most significant size public




             1   companies that certainly tell people when they have to have

             2   their nominations in by.  They provide sufficient time so

             3   that if somebody wants to run a proxy fight the market can be

             4   any informed. 

             5             But there is nothing that stops any investor, be it

             6   a small shareholder or a large shareholders, from mounting

             7   their own slate and trying to convince people to elect their

             8   directors.  And what the new rule does is it specifically

             9   empowers a subset of shareholders and gives them specific

            10   rights to use the corporate mechanics. 

            11             I think the points that were made this morning that

            12   if it's in everybody's economic interest to run a proxy fight

            13   and replace bad management or a bad board, certainly the

            14   costs of the proxy fight in the scheme of things for large

            15   companies is going to be very small when compared to what

            16   people view as the benefits from improving management. 

            17             And that process has worked for years.  I think

            18   there are many more proxy fights that are out there than

            19   people were giving credit to this morning.  There are a lot

            20   of different situations.  And frankly, the threat of the

            21   proxy fight in and of itself often spurs change, and I think

            22   that boards respond to that. 

            23             I don't think you need to do some of the changes --

            24   especially in light of some of the recent corporate

            25   governance changes growing out of Sarbanes-Oxley I don't




             1   think you need to grant an extra right on top of that to give

             2   people the leverage and to give people the power to force

             3   change.  Boards listen. 

             4             MR. PREZIOSO:  Thank you. 

             5             MR. BELLER:  Commissioner?

             6             COMMISSIONER GOLDSCHMID:  Let me make a few points. 

             7   Number one, I just wanted to complement what Chief Justice

             8   Veasey was really suggesting.  The Delaware courts have been

             9   terrific on corporate governance and suffrage in the last

            10   years, and nothing we're thinking about is meant to be anti-

            11   state or anti-Delaware. 

            12             And I fully share, as you know, an enormous regard

            13   for the Delaware judiciary.  And I think the idea of thinking

            14   in our rule-making of carving out certain areas to encourage

            15   the Delaware legislature and other state governments is a

            16   very interesting idea at least in terms of creating

            17   incentives that we certainly think about. 

            18             As everyone knows, too, I think I have a certain

            19   bias in favor of law professors and so find myself easily in

            20   agreement with Jack Coffee, my colleague at Columbia, and Don

            21   Langevoort and Jill Fisch.  Some there's some difference

            22   among the three of you, but I take it all three of you would

            23   agree that we clearly, as you read it, have the power now to

            24   do the kind of thing we're suggesting. 

            25             Is that fair, Jack? 




             1             MR. COFFEE:  I think that's what I'm saying, yes. 

             2             COMMISSIONER GOLDSCHMID:  Don? 

             3             MR. LANGEVOORT:  Yes. 

             4             COMMISSIONER GOLDSCHMID:  Jill? 

             5             MS. FISCH:  Yes. 

             6             COMMISSIONER GOLDSCHMID:  Now, Todd, I noticed you

             7   may slightly disagree, and you're a colleague, too.  Do you

             8   really read the roundtable cases over all the enormous

             9   authority we get under 14(a) and Chevron?  And I'll even

            10   leave TransAmerica aside. 

            11             But also, if I understand your reading, do we have

            12   to get rid of now 14(a)(8) and shareholder proposals? 

            13             MR. LANG:  We'll leave that for the moment, Harvey.

            14             COMMISSIONER GOLDSCHMID:  No, no.  Don't leave it. 

            15   I mean, how can you possibly --

            16             MR. LANG:  I'll tell you why.  I and lots of others

            17   who are not on this dias today read business roundtable

            18   differently.  We read it that says when we talk about

            19   disclosure and procedure we're talking about the plain

            20   English use of those words.  You cannot by interpretation

            21   take authority when it gets into the internal affairs of a

            22   corporation. 

            23             Number two, the roundtable decision says you can't

            24   use the broad standards which I said about protecting the

            25   public investors and public interest as a means of gaining




             1   jurisdiction.  And therefore, our analysis is -- and I say

             2   "ours."  There's a lot of people involved in this.  I'm just

             3   the messenger in this case -- who take a very strong position

             4   that if the roundtable decision is valid, and it's one of a

             5   kind, so I'm not suggesting that it has been cited a lot,

             6   that you simply can't adopt these rules without getting into

             7   the affairs under state law, which I talked about before. 

             8             And if somebody misunderstood that I didn't dwell

             9   on procedure -- I mean, procedure means procedure.  There's

            10   lots of them under the proxy rules, and that's fine, but I

            11   don't see where this becomes procedure at all.  This gives

            12   somebody rights to do things that they simply never had

            13   before, couldn't have before, and they've turned to the SEC

            14   and said you give it to us.  That's fundamentally what has

            15   happened here. 

            16             Now, as far as 14(a)(8) is concerned, 14(a)(8) has

            17   13 exclusions led by the director exclusion, and while that's

            18   there nobody has challenged that, and I think the lower

            19   courts at least have always sustained 14(a)(8) as a general

            20   matter. 

            21             If the Commission decided we're going to get rid of

            22   the director election exclusion, for example, or modify it

            23   significantly, that may raise an issue.  It may raise an

            24   issue even under 19(b) when the Commission gets to pass upon

            25   some of these things.  So I say that's not a bridge we have




             1   to cross today because that isn't is issue. 

             2             COMMISSIONER GOLDSCHMID:  But doesn't it set up the

             3   same kind of process we're talking about here? 

             4             MR. LANG:  Not at all. 

             5             COMMISSIONER GOLDSCHMID:  Well, how would

             6   shareholders -- vote on a proposal that the states have said

             7   is proper under state law to give advice to management? 

             8             MR. LANG:  But 14(a)(8) is used, basically, for

             9   precatory proposals and a few bylaw amendment very

            10   occasionally diagnose on state law.  It does not get into

            11   proxy contests.  That's a separate set of rules which you've

            12   said up a long time ago and which work. 

            13             All of a sudden, if you're going to convert this

            14   into proxy contests, that's not what it was designed for, and

            15   it will raise some issues, yes. 

            16             COMMISSIONER GOLDSCHMID:  Good minds can agree to

            17   disagree. 

            18             MR. LANG:  I think that may happen. 

            19             MR. BELLER:  On that note, I think we'll round this

            20   panel up.  Thank you very much.  I'm going to ask one

            21   question of the Commission hear, which is we are running at

            22   the point where if we don't take a break here we can be done

            23   by 5:30.  Is that something that you can put up with? 

            24             MR. LANG:  I'm strong. 

            25             MR. BELLER:  Okay.  Then let's change on the fly to




             1   the voting mechanics panel and go from there. 

             2             I think I'd like to roll right into this, if we

             3   could, moderator's prerogative.  Before we start this last

             4   panel, I want to take a moment.  I certainly want for the

             5   Commission and for the people who are listening to this this

             6   roundtable wouldn't have been possible without the help of

             7   several people on the staff of the Commission in the

             8   Facilities area. 

             9             This room at 4:30 yesterday afternoon looked

            10   completely different.  It has been configured for something

            11   that I think has been really well set up and very successful,

            12   and without the help of a number of people in the Division of

            13   Corporation Finance -- and I do want to recognize them for

            14   the record -- my deputy, Marty Dunn, who is gone because he's

            15   off to the airport to fly off to speak at another conference

            16   tomorrow, on my right right now, Betsy Murphy, who is the

            17   head of our Office of Rulemaking. 

            18             But more important for the panel, we're about to do

            19   the resident expert on voting and proxy mechanics, and the

            20   like.  I'd like to thank Giovanni for helping me moderate the

            21   last panel but also and very particularly Lillian Brown and

            22   Consuelo Hitchcock of Corp Fin who have been carrying the

            23   laboring oar on this proposal and this roundtable and

            24   organizing it and Andrew Brady and Iona Howard who helped us

            25   today in making this such a successful event.  Thank you all.




             1   And with that I'm going to turn this over to Betsy. 

             2             MS. MURPHY:  I'd like to introduce our four

             3   panelists.  We have Richard Daly, who is the co-president of

             4   ADP's Brokerage Services Group.  Next, we have Jamie Heard,

             5   CEO of ISS, Institutional Shareholder Services.  Then we have

             6   John Wilcox, vice president of Georgeson Shareholder

             7   Communications.  And we also have Greg Taxin, who is the CEO

             8   of Glass, Lewis. 

             9             And I wanted to start with a question for Jamie. 

            10   Jamie, the first thing I wanted to ask you is what are the

            11   factors that go into an ISS determination to recommend a

            12   withhold vote from a particular director or the entire board?

            13             MR. HEARD:  I will answer that question, Betsy, but

            14   Is want to thank the staff, Alan in particular and members of

            15   the Commission.  And since we're last today probably

            16   everything has been said and said many times. 

            17             I do, though, want to go on record as saying that

            18   we support this proposal.  We don't think it's perfect, but,

            19   as I think was said earlier in the day, it's a fair

            20   compromise, and it does give shareholders, longer substantial

            21   shareholders, meaningful access to nominate and elect

            22   directors.  And we think that is important.  It in no way

            23   contradicts or undermines the other reforms that have been

            24   made.  In fact, we think it complements them. 

            25             To answer your question, when ISS looks at




             1   directors, thereby a number of reasons why we might consider

             2   withholding votes for directors.  In the past, the principal

             3   reason has been lack of independence, directors who don't

             4   immediate our standards of independence who serve on

             5   committee committees of the board -- audit, compensation,

             6   governance, nominating committee. 

             7             We think we'll see less of that this year and going

             8   forward because of the new listing standards.  The ISS

             9   standards and the exchange standards are not identical, but

            10   they are converging.  But that is one reason why we would

            11   recommend no votes or withhold votes for director. 

            12             A second reason would be directors who attend less

            13   than 75 percent of the meetings and don't have a good reason. 

            14   We don't see that as much as we used to.  Being busy is not a

            15   good reason.  Being ill is or some type of family emergency

            16   is. 

            17             A new proposal or a new, I would say, standard that

            18   we put if place this year is that directors who serve on more

            19   than six boards are what we call over-boarded, and we would

            20   withhold from directors who serve on more than six boards. 

            21   We haven't seen very many of those this year, and we don't

            22   expect to see very many. 

            23             In fact, we've had quite a few directors come to us

            24   who are on more than six boards and say, "I just want you to

            25   know I'm getting off of one or two words, and I'm only going




             1   to be on six," and we think that's a good thing. 

             2             At reason we might withhold for directors, if for

             3   two years consecutively a shareholder resolution has received

             4   a majority vote, and the board has failed to take action. 

             5   Typically, these are shareholder resolutions asking companies

             6   to declassify the board and elect all directors annually or

             7   asking companies to submit their shareholder resolutions for

             8   ratification. 

             9             So those would be the major reasons why we would

            10   recommend a withhold.  Most recently and on a very high

            11   profile case at Walt Disney we recommended a withhold vote

            12   for Michael Eisner.  We made it clear in our analysis that we

            13   thought in view of the problems over the years with respect

            14   to performance and with respect to governance we thought the

            15   positions of chairman and CEO should be separated at Disney. 

            16             And so you could view our withhold vote at Disney

            17   as really a message to the company that it was time to

            18   separate those two positions. 

            19             MS. MURPHY:  Greg, I wanted to ask you a question

            20   along the same lines.  Do you think that the background

            21   information that is required to appear in the proxy statement

            22   about director candidates is sufficient for your purposes in

            23   making decisions about whether to recommend support for a

            24   director? 

            25             MR. TAXIN:  Let me again thank the Commission for




             1   holding these hearings and say that when Glass, Lewis makes

             2   recommendations to withhold from directors we use many of the

             3   same criteria that ISS uses.  We would many additional and

             4   some different definitions along the way. 

             5             So the information in the proxy statement is a good

             6   start.  We do a lot of other work on people's backgrounds. 

             7   For example, we do work on paper performance.  We try to

             8   understand the financial transparency in the accounting

             9   statements.  One of your own, Len Turner, helps us understand

            10   whether the accounting policies themselves are overly

            11   aggressive. 

            12             So we look at some other substantive things that

            13   really aren't today in the proxy statement, but they're

            14   available publicly elsewhere, and we get along.  I would say

            15   there are some areas that, frankly, could be enhanced in a

            16   proxy statement that I think our clients, institutional

            17   investors, tell us are important to them, things like

            18   interlocking boards, which today you can with enough work

            19   discover, but it's not as obvious or apparent as it could be

            20   in a proxy statement. 

            21             I think CVs and resumes which go back five years,

            22   which I think is the rule, are nice, but we often now go back

            23   and try to look back farther.  That's especially true for

            24   audit committee members, for example, where someone is deemed

            25   a financial expert.  It's nice to actually see more of their




             1   resume and understand how expert, in fact, they are. 

             2             So there are some other elements that, you know, I

             3   think could be enhanced in the disclosure regime.  As I say,

             4   we get along reasonably well by hunting them down elsewhere. 

             5   It would be more convenient if they were in the proxy, I

             6   suppose. 

             7             MS. MURPHY:  And would you have any need to have

             8   different information about a shareholder candidate than you

             9   get about the management candidates? 

            10             MR. TAXIN:  Well, I think the -- and I think the

            11   rule, sort of, addresses this with a 500 word statement and a

            12   reference to a web site.  I think the burden really ought to

            13   go on the shareholder nominated director to demonstrate that

            14   there's a problem at the company that the current directors

            15   have ignored or failed to solve either in attention to

            16   shareholder interest, a performance problem, whatever the

            17   case may be. 

            18             But I think the burden falls squarely on the

            19   shareholder nominated director not only to prove that case

            20   but then to demonstrate why their addition would be useful

            21   and incremental to the directors who are there.  I'm not sure

            22   one can do that effectively in 500 words, frankly, but I

            23   think the reference to a web site, you know, would certainly

            24   permit someone to create as long a record as they wanted. 

            25             My guess is if limited to 500 words a shareholder




             1   nominee would have trouble making their case persuasively and

             2   carrying what I think will be regarded as their burden to

             3   demonstrate why they ought to be put into a spot that today

             4   is occupied by someone else. 

             5             MR. HEARD:  Presumably, there would not be any

             6   prohibition against the shareholder nominee providing

             7   additional information either on a web site or in newspaper

             8   ads are through direct mail so long as they were consist end

             9   with the antifraud provisions of the Commission's rules. 

            10             MR. BELLER:  That's certainly what we contemplated. 

            11   I guess I have a question for both Mr. Heard and Mr. Taxin

            12   following up on what Betsy asked.  And that is if the

            13   Commission were to adopt a rule that had a withhold vote

            14   trigger would you, as a result, change -- or maybe I should

            15   ask you instead would you think you would review whether you

            16   should change the standards you use for deciding whether or

            17   not to recommend a 4(a) withhold vote? 

            18             MR. HEARD:  That's a great question, Alan.  I think

            19   up until now we've looked at withhold votes as being largely

            20   symbolic, although the Disney vote would suggest that they

            21   can be consequential.  If you adopt this rule, I think a

            22   wholly vote does clearly become much more consequential, and

            23   I think we would have to look at our policies and say do we

            24   really want to tighten up here on what we are going to

            25   consider is grounds for withholding given the consequences of




             1   a withhold vote. 

             2             Now, having said that, we've looked at some numbers

             3   to see how many withhold votes, say, last year got anywhere

             4   near the 35 percent level.  We were able to identify nine

             5   companies of which the percentage was approximately in the 30

             6   percent area. 

             7             So even if ISS or Glass, Lewis or others were

             8   recommending withhold votes in a large number of cases,

             9   unless you have an organized campaign on the part of unhappy

            10   shareholders I don't think you're going to get anywhere near

            11   that 35 percent. 

            12             MR. BELLER:  Of course, one of the open questions

            13   is how turning a no vote into a trigger will affect behavior

            14   of that sort as well, which is why I think people are so

            15   interested in how your two organizations and your competitors

            16   are going to think about withhold votes in that context. 

            17             MR. TAXIN:  Well, I think one of the keys to this

            18   is that both ISS and Glass, Lewis are in the recommendation

            19   business.  We advise, but we certainly don't control the

            20   votes that get lodged by our clients.  And by the way, we

            21   have lots of joint clients, people who read both of our

            22   opinions, and we often differ in our opinions, and

            23   institutions make up their own minds as fiduciaries. 

            24             So I'm not certain that whatever we do will impact

            25   very much.  I'd actually point you to the recent Disney case




             1   as an example where the withhold votes, for example, on

             2   Mr. Mitchell were substantial, 24 percent, I think, 24, 25

             3   percent despite ISS recommending in favor of him. 

             4             So lots of institutions making up their own mind

             5   and similarly on Esterin and Bryson and some other directors

             6   there who had substantial withhold votes despite a

             7   recommendation, you know, in favor.  I think, obviously, you

             8   know, we hope our advise is sound, and we hope it makes a

             9   difference in people's judgments, but we certainly don't

            10   control how people vote. 

            11             And I might suggest as well -- I think Ann Yerger

            12   said earlier today that she thought that the number of

            13   withhold votes might go down with the adoption of this rule. 

            14   I'm not certain that's going to be the case.  One thing I

            15   know is that institutions will pay much closer attention to

            16   their proxy voting for directors, and I think we saw that in

            17   Disney. 

            18             We saw an incredible turnout among institutional

            19   investors.  People took it very seriously, ran it through

            20   their organizations and thought long and hard about it, and I

            21   think part of the reason is that the proposed rule here

            22   would, if adopted as written, would go back to meetings as of

            23   January 1, 2004. 

            24             So people were interested and concerned about

            25   whether that would be a triggering event, and I think that's




             1   healthy for the capital markets.  I think it's healthy that

             2   institutions will watch these votes much more carefully.  One

             3   of the things we've found as we've gone out to talk to

             4   institutions is people said, well, there is a requirement for

             5   a mutual fund now to disclose votes, so we, sort of, pay

             6   attention, but we feel like these board votes are

             7   meaningless, and they're not a good use of our time and

             8   intellectual energy. 

             9             Well, I think if we make those votes actually

            10   meaningful even if only as a triggering event that will cause

            11   people to spend significantly more energy focused on

            12   critiques of the board and their processes and their people,

            13   and that has got to be good for the capital markets to send a

            14   better signal to those boards. 

            15             MR. HEARD:  If I could just add, Greg stole my

            16   number there because I was going to cite the Mitchell vote as

            17   a clear indication that clients really do decide for

            18   themselves.  We recommended that Senator Mitchell be

            19   reelected.  Notwithstanding the ISS recommendation that

            20   Senator Mitchell be reelected about 25 percent of the votes

            21   were cast against Senator Mitchell. 

            22             So ultimately, the clients do decide for themselves

            23   particularly on these very important high-profile issues. 

            24   There were three clients of ours, and they may be clients of

            25   Greg's who would testify before you today, CalPERS, Fidelity




             1   and TIAA-CREF, every one of those institutions I think reads

             2   ISS's analysis and our recommendations, but I can assure you

             3   they make up their own minds about how they want to vote.  

             4   Another one of our clients was publicly quoted in the Wall

             5   Street Journal, T. Rowe Price, by saying they were going to

             6   withhold votes for the entire slate of directors at Disney. 

             7   That's not what we did.  We recommended withhold for only one

             8   person at Disney. 

             9             The institutional investors today, particularly the

            10   large ones and particularly those who have a longer-term

            11   perspective, are really stepping up, are really paying tanks. 

            12   They're taking input from ISS, from Glass, Lewis and from

            13   others, but they are making their own decisions. 

            14             MS. MURPHY:  Commissioner Atkins, we'll take your

            15   question, and then we'll get to you, John. 

            16             COMMISSIONER CAMPOS:  Thank you.  I just had a

            17   couple of things.  I'm not exactly familiar with your

            18   procedures and how you arrive at recommendations, so I was

            19   wondering what sort of internal procedures do you have?  How

            20   transparent are they to people outside?  And then, in

            21   particular, one part of our -- we have between prongs to our

            22   proposal. 

            23             One prong is very broad and wide-ranging, this opt-

            24   in shareholder proposal basis by which the shareholders would

            25   opt into this new regime.  How would you approach that




             1   particular prong of this?  Because to me it sounds like it

             2   might be the same for every company. 

             3             MR. HEARD:  It wouldn't be the same for us,

             4   Commissioner.  First, to your question of how do we decide,

             5   ISS has a set of policies that are in a manual that's given

             6   to all of our clients.  Anybody else who wants to buy it can

             7   buy it.  The manual has been refined, expanded and updated

             8   over 15 years. 

             9             We try and use empirical evidence wherever we can

            10   find it to buttress our policies.  The guiding principles in

            11   our policies is we want to protect and promote shareholder

            12   rights and corporate accountability, and we want to do

            13   everything we can to ensure that we preserve and protect

            14   long-term shareholder value. 

            15             We have a research staff that depending on the

            16   nature of the issue can spend days looking not only at

            17   documents but also meeting with parties.  In the condition

            18   test, for example, in the Disney vote, which was in all

            19   respects a proxy contest, we met with management, including

            20   Mr. Eisner.  We met with the dissident directors.  We met

            21   with advisors to both sides.  So we spend a lot of time

            22   particularly where we know there's tremendous controversy

            23   trying to get it right.  

            24             As to the shareholder resolutions that we might

            25   see, if that is part of what you adopt, we would propose --




             1   and we said this in our letter to the Commission in

             2   December -- we would look at each of these issues on a case-

             3   by-case basis.  So if there is a shareholder resolution

             4   saying we'd like to have access to nominate directors, we'll

             5   look at those on case-by-case basis. 

             6             If there were actual candidates, when you get over

             7   the thresholds, we'll look at those on a case-by-case basis. 

             8   We'll treat it almost like a proxy contest. 

             9             COMMISSIONER CAMPOS:  What criteria would you use? 

            10             MR. HEARD:  Let's look at the shareholder

            11   resolution.  We would look at the reasons that are being put

            12   forward by the proponent in support of it.  Why are they

            13   doing this?  What are their stated reasons?  What problems

            14   exist at the company, governance problems, strategy problems,

            15   performance problems?  What is the company' response to the

            16   proposal?  Have they been willing to consider alternative

            17   nominees to the board? 

            18             When you get down to the actual candidates

            19   themselves, if you get that far, as I said, it's almost like

            20   a proxy contest.  You're looking performance of the company. 

            21   You're looking who the nominees are.  You're looking what's

            22   the case that they're making.  And each one of these I think

            23   is very fact specific.  But the idea that we would across the

            24   board always be for them I can assure you that that's not our

            25   intention. 




             1             MR. TAXIN:  I would say as to the resolution

             2   itself, if one were offered up -- we, obviously, haven't

             3   developed standards for it yet, because it hasn't happened --

             4   we set our policies based on our clients overall viewpoints. 

             5   We don't pretend to be a beacon of truth.  We try to

             6   understand from our clients the type of analysis that they'd

             7   like assistance with. 

             8             So what we would do is do what we do for all of our

             9   policies, which is reach out to our clients and ask them what

            10   do they think the right criteria is, and then we try to, you

            11   know, do some of the hard work of assessing that at any given

            12   instance. 

            13             My guess is given our focus we would certainly not

            14   have a blanket rule here.  We would instead end up with

            15   something that looks like poor performance over a long period

            16   of time and an unwillingness on the part of a board to engage

            17   with shareholders. 

            18             Now, as I say, that's a guess on my part.  I would

            19   want to talk to our clients to see what the analysis is

            20   they'd be looking for.  But I guess, in short, we would

            21   perform whatever work, you know, they thought was most

            22   appropriate to try to determine whether such a shareholder

            23   resolution should be adopted. 

            24             In terms of dealing with the candidates themselves,

            25   I think both ISS and our firm have some experience in dealing




             1   with proxy contests, and we each have our own criteria.  But

             2   it involves even in the current system some assessment of

             3   competing people and business plans and strategies maybe for

             4   the company, and some assessment needs to get made and laid

             5   out. 

             6             I'll suggest to you as well, in the Disney

             7   situation, which was essentially a proxy contest, we wrote 21

             8   pages on why we thought people ought to go with our

             9   recommendation.  So it's not a vote this way.  We don't have

            10   any reasoning or explanation behind it for people to

            11   consider.  We're trying to, sort of, lay out the case in

            12   these very difficult situations so that people can make their

            13   own decisions based on the facts and the factual record.  I

            14   think we try to do something like that in these situations. 

            15             Let me just add another word about transparency,

            16   which I think is really important as well.  We're big

            17   believers in transparency.  Unlike ISS, we have a slightly

            18   different approach to learning information from contestants. 

            19   We believe in making sure that all of that's done, sort of,

            20   on the record. 

            21             So when we meet with people and talk to them, we

            22   try to create a transcript and make sure that's available for

            23   shareholders so they can listen to it and make their own 

            24   judgments.  We're not trying to fiat in our own conclusion. 

            25   We want to help people with their decision-making process. 




             1             MR. HEARD:  Just one other point I'd like to make

             2   about our policies.  We do review and vet our policies every

             3   year with our clients to make sure that the changes that

             4   we're making, the updates that we're making, and so on,

             5   really are consistent with what they think we should be

             6   doing, too.  So we're looking to our institutional investor

             7   clients to give us their feedback on policies. 

             8             We probably will see -- it looks like after Qwest's

             9   no-action letter we will see at least one and maybe more

            10   shareholder resolutions in 2004 in which both of our firms

            11   are being asked to make a recommendation on proposals that

            12   are not dissimilar from what you're going to have in the

            13   rule, if you adopt the rule. 

            14             MR. BELLER:  I'm sorry to belabor these points, but

            15   they really are, I think, important in the context of the

            16   proposal and the comment file.  There are a number of

            17   comments from critics of the proposal, and we heard I think

            18   on a couple of occasions in prior panels this notion that

            19   institutional shareholders would view either an opt-in

            20   resolution or a withhold campaign as, in effect, a free

            21   option that would give them the right to seek access next

            22   year, if they wanted it, sort of a just in case if they were

            23   concerned about the corporation tipping, or whatever. 

            24             Is that in your experience -- and I know this is

            25   predictive and not historical, so based on your experience




             1   would you predict that to be the case?  And I guess secondly,

             2   would you anticipate that your own policies would take the

             3   free option theory into account in deciding how to evaluate

             4   those resolutions, either the withhold vote or an opt-in

             5   proposal? 

             6             MR. HEARD:  We certainly wouldn't take an approach

             7   that people should have a free option.  We think they ought

             8   to have a good reason, and we would look for a good reason

             9   either to withhold votes for directors or to support a

            10   shareholder resolution. 

            11             I couldn't speak to what others might do.  I

            12   couldn't speak to what a very diverse group of institutional

            13   investors might do.  There may be some hedge funds out there

            14   that might think this is a great idea to have a free option. 

            15             I would tell you from experience, though, of more

            16   than 20 years in this field the institutional investors who

            17   time and time again have spoken out for good corporate

            18   governance -- and you've heard from them here today -- they

            19   are serious long-term investors.  They're not playing games. 

            20   They're not gaming the system.  So at least from that

            21   component of the market I don't think you'll see that

            22   happening. 

            23             MS. MURPHY:  John, did you want to respond to the

            24   earlier discussion? 

            25             MR. WILCOX:  Actually, I just wanted to say to Alan




             1   that I wish he had asked that question of the institutional

             2   shareholders that we had up here in the earlier panels,

             3   because I think it is a very important question, particularly

             4   about the free option. 

             5             I know there's a lot of discussion about whether

             6   the vote in the Disney situation was increased.  The withhold

             7   vote was larger because of the opportunity that may be

             8   presented if this rule is put into effect for the annual

             9   meeting next year. 

            10             MS. MURPHY:  John, I also wanted to ask a question

            11   of you about your concern that you've expressed -- if you

            12   would explain what some of your concerns are -- that there

            13   are little problems in the current mechanics of the proxy

            14   process that if these proposals got adopted could be

            15   exacerbated.  Would you talk about that? 

            16             MR. WILCOX:  Sure.  Well, most of what we've been

            17   hearing today is about how this rule ought to be designed and

            18   what its impact will be, but I have a very simple point to

            19   make, and that is you can have the best designed rule, the

            20   most legal rule in place, but if it's not going to work in

            21   practice it's of no use. 

            22             And I would urge the Commission to think about how

            23   this is going to work in practice.  I believe that the

            24   current proxy system that we have is inadequate to handle

            25   this rule.  There's a lot of discussion about how much it




             1   will be used, whether it will just be there as a threat or

             2   whether there will actually be many proxy fights waged under

             3   this rule, whether there will be a lot of campaigns because

             4   of the free option. 

             5             I don't think you should address that question.  I

             6   think you have to, as an agency, think about how this rule

             7   would work if it were used optimally, if it were used

             8   aggressively by shareholders.  I don't think it's right to

             9   create a rule and then hope that it's going to slip through

            10   because it isn't used very much. 

            11             The concerns that I have about the proxy system are

            12   that it lacks transparency.  There is no clear audit trail of

            13   a vote, and I know we as proxy solicitors are trying to fill

            14   in for many of these deficiencies, but there's only so much

            15   that we are able to do.  I think it is operationally quite

            16   inefficient, it is certainly a very expense system as well. 

            17             From the viewpoint of shareholders, what they would

            18   like to see is transparency.  The shareholders -- in our job

            19   as proxy solicitor, we are paid generally by either the

            20   corporation who is soliciting votes or by a dissident

            21   shareholder if we're working on a proxy fight, but we often

            22   find ourselves working both for the corporation and also for

            23   the institutional shareholders particularly who are concerned

            24   that their voting instructions are not going to make their

            25   way through the back office and into the count. 




             1             And the things that they would like to see, first

             2   of all, are greater transparency of the system so that they

             3   could be sure that their voting instructions make it into the

             4   count.  They would like to have an audit trail.  They would

             5   like to have end-to-end vote confirmation. 

             6             The corporations themselves suffer because they

             7   cannot identify who the ultimate beneficial owners are from

             8   whom they have to seek voting instructions.  We have a, kind

             9   of, schizophrenia in our proxy system and in our securities

            10   regulations, really, in which we, on the one hand, are urging

            11   corporations and really requiring corporations to disclose

            12   everything to the shareholders and make everything available

            13   to them and to be themselves transparent, and, on the other

            14   hand, we have rules that allow these shareholders to keep

            15   their identity a secret from the corporation with the result

            16   that very often the corporation doesn't know who its ultimate

            17   owners are. 

            18             And as we've seen today there are lots and lots of

            19   different shareholders in corporations.  You have the small

            20   registered holders who are known to the company.  You have

            21   the big institutional shareholders.  Those are mostly known

            22   to the company as well through 13(f) filings. 

            23             But you also have hedge funds, and you have

            24   arbitrageurs.  You have the individuals and others who hold

            25   in street name whose identity is hidden from the corporation. 




             1   When we go to work with a corporation on an annual meeting,

             2   helping them analyze whether they can get the vote for a

             3   particular proposal, part of our job at the start is to help

             4   them identify who the owners are, identify what their voting

             5   criteria are so that they can have a sense as to for their

             6   particular audience whether what they are proposing will be

             7   approved or whether it will meet resistance and needs to be

             8   adjusted. 

             9             Well, it's very hard to do that under a system in

            10   which the identity of the shareholders is not readily

            11   available.  So I have recommended in my Comment Letter --

            12   I've gone through a lot of the issues. 

            13             Another concern I have is if we have vote

            14   thresholds, a 35 percent threshold or a 50 percent threshold,

            15   a corporation and its legal counsel are going to want to be

            16   absolutely sure that that 35 vote is authentic, and it has,

            17   in fact, been achieved, particularly if it's close, or the 50

            18   percent vote.  We cannot do that now.  

            19             Only in full proxy fights do we have arrangements

            20   in which through all sorts of extra efforts that are made at

            21   quite an expense to the corporation and to dissident

            22   shareholders.  We have special inspectors of election brought

            23   in.  We have, of course, much more role for the staff as well

            24   in a full proxy fight, and then we have the review and

            25   challenge. 




             1             I think you could argue that you may have to

             2   implement all those procedures in order to verify that these

             3   trigger vote requirements have, in fact, been achieved or

             4   that the shareholder candidate has, in fact, been elected. 

             5   We run our proxy system now with a great deal of leeway as to

             6   the accuracy of the share records that are used. 

             7             They don't add up.  If you look at a DTC listed on

             8   record date, it invariably is different from the DTC position

             9   on the books of the company.  We live with those things.  I

            10   question whether we are going to be willing to live with

            11   those, with this kind of loose system if a seat or two on the

            12   board is riding on it or if the availability of these kinds

            13   of rights is riding on the vote. 

            14             We're going to want the vote to be much more

            15   accurate.  We are able to be accurate in these back office

            16   arrangements when we're dealing with corporate actions --

            17   there's extreme accuracy there -- or any sort of financial

            18   issue, money transfers, and so forth, but we have not that

            19   degree of accuracy with respect to votes. 

            20             I think that tells us something about our ability

            21   to do this.  So I've made some suggestions with respect to

            22   direct access, getting rid of the nobo ovo rule which I don't

            23   think we need anymore, allowing companies to have greater

            24   access to their shareholders. 

            25             I think you should look very closely at these




             1   suggestions, take this opportunity to -- which you're rule

             2   really opens up to rethink our proxy operations and to do an

             3   overhaul.  And I'd recommend that you read the Minors' report

             4   which Susan Wolf mentioned that was published earlier this

             5   year in the UK.  Paul Minors came up and did a report based

             6   on the work of the shareholder voting working group in the

             7   UK. 

             8             Much of what is said there is very relevant to what

             9   we are talking about here, what I'm talking about in terms of

            10   the operations.  I think we could do a much better job and

            11   have a much more transparent proxy system. 

            12             MS. MURPHY:  Rich. 

            13             MR. DALY:  Thank you I'll be the last of the day to

            14   thank the Commission for the invitation.  My comment on

            15   behalf of ADP are that from a processing perspective and

            16   purely from the point of view of the ability to do it, to

            17   implement the new rules, as well as to do it accurately. 

            18             What I'd like to do is first address John's concern

            19   about the inadequacy of the current process and then address

            20   the ability to implement the new rules.  Just a very quick

            21   perspective.  At ADP, we represent -- we act as agent for

            22   about 800 brokers and banks.  And using a round number, we

            23   process about 75 percent of all outstanding shares in the

            24   14,000 meetings that are processed each year. 

            25             Regarding the accuracy, I actually think the




             1   Commission's job here has got a very, very good start.  At

             2   the encouragement of the Commission in 2001 under then the

             3   director of Corp Fin, David Martin, he encouraged a private

             4   initiative that would look at the adequacy of the current

             5   system. 

             6             And a number of issues that had been raised over

             7   the years by one constituency over another were addressed,

             8   but this time uniquely they were addressed by having the

             9   constituencies in the room at the same time.  So there were

            10   eight or nine meetings over a period of eleven months. 

            11             Rich Copus acted as facilitator of this committee. 

            12   Steve Norman acted as chair.  Steve Norman from American

            13   Express acted as share of this committee.  I included in my

            14   comments, which are included in the package, the findings of

            15   this committee, but I do want to highlight one thing here. 

            16             In the summary of the findings, which go on for

            17   several pages, the first finding was that institutional

            18   investors require that the highest level of service be

            19   maintained and that technological investments be made to

            20   ensure the accuracy and reliability of the proxy systems. 

            21             Institutions had significant concerns around the

            22   proposed idea to allow issuers to control the beneficial

            23   process.  It was indeed David Smith on behalf of the American

            24   Society of Corporate Secretaries I believe along with Brian

            25   Borders at the time representing the Association of Publicly




             1   Traded Company proposed the direct access capabilities. 

             2             David withdrew that proposal based on the

             3   institutional response about concerns for the process at that

             4   point in time.  So indeed, although I recognize no system as

             5   perfect, it was indeed this committee that represented that

             6   the street side of this process was improving from all

             7   aspects.  They used the word "near flawless," and they used

             8   the word the efficiencies that were being driven by the

             9   technology on that side were exceptional and far more

            10   efficient than that of the registered side. 

            11             Indeed, there's a lot more that take place on the

            12   street side because you have a number of variant investors

            13   that require special handling, whether it be institutions,

            14   whether it be trustee laws in various states, whether it be

            15   special handle for various beneficial owners that require

            16   different needs to participate efficiently, but particularly

            17   institutional investors given the volume they have need a

            18   sufficient technological solution.  So again, I'll leave that

            19   to the document. 

            20             I'd like to now move to the comment about the

            21   ability to implement these rules.  Right now our system has

            22   just over 1,750 programs and just over 2 million lines of

            23   code to process the current system.  We would need to make

            24   changes to 29 percent of the mainframe programs and 40

            25   percent of the internet related activities. 




             1             We estimate that that would be just over 21,000 man

             2   hours, and it would require just over 60 of the 150

             3   professionals, systems professionals we have that are

             4   employed to maintain and enhance the proxy processing system. 

             5   We believe that would be a six- to seven-month effort. 

             6             And therefore, we would hope that if this is to be

             7   implemented for the 2005 proxy season that we would have

             8   clear direction by June 1 of this year.  I am highly

             9   confident that we have the ability to make the changes given

            10   the time and direction to have the system continue to act in

            11   an accurate and very, very efficient manner. 

            12             But we would need clearer direction on things like

            13   the card itself --

            14             MS. MURPHY:  There was some direction in the

            15   proposing release.  Specifically, we said in the card that

            16   the candidates would have to be presented in an impartial

            17   manner and that companies no longer would be able to include

            18   the check box where shareholders just vote for all management

            19   candidates as a group. 

            20             But you would like additional guidance about actual

            21   presentation of the card? 

            22             MR. DALY:  Well, the current procedure is that we

            23   do the best we can with our generic card to mirror the

            24   standard issuer's card.  If we were implementing live with

            25   the issuer, what we would do is we would form our own focus




             1   group source during committee to identify the best way to

             2   reflect the card as accurately as possible. 

             3             Given that there is a possibility that until a rule

             4   is issued in its finality that there will be changes we've

             5   been somewhat hesitant to begin programming only to then

             6   begin the programming efforts again.  So again, ideally, in

             7   our definition of a perfect world, six to seven months prior

             8   to the enactment of the requirement of the rule. 

             9             Now, we don't need -- we can right now identify any

            10   companies that fit into any threshold, whether it be 30

            11   percent, 35 percent, et cetera.  When we actually get into

            12   the processing, the next round or year two of that activity

            13   is what we need to make the programming and systems changes

            14   for. 

            15             Betsy, if you'd like, the last thing I could

            16   address is the comments made regarding over-voting. 

            17             MS. MURPHY:  Sure. 

            18             MR. DALY:  Okay.  I've been involved with this

            19   industry now for 25 years.  When I first got involved with

            20   the industry, over-voting had already been here.  It's

            21   something that can be generated through stock loan

            22   activities, through other reconciliation activities, et

            23   cetera. 

            24             From my point of view, the handling of this has

            25   always been relatively clear in that for the broker vote the




             1   issuer or tabulator in question should reduce the "for" vote,

             2   and if it's not involving the discretionary vote, then they

             3   should come back to the process or to the broker in question,

             4   nominee in question, and ask for a reconciliation, which we

             5   will always provide in conjunction with our client. 

             6             And the bank vote, if for some reason the bank vote

             7   is over the ability to cast that number of shares, we would

             8   expect people to come back regularly and ask for a

             9   reconciliation. 

            10             Now, this has just become a new topic.  Now, again,

            11   it may be because of increased short selling, or it may be

            12   for other reasons.  We are now part of an SIA committee,

            13   Securities Industry Association committee, which will likely

            14   be issuing a white paper to create more clarity around this. 

            15             Regardless, even though I think the industry

            16   practice has been clear certainly for the 25 years I've been

            17   involved, going forward we will issue with you are vote clear

            18   directions in terms of if there is an over-vote, how that

            19   over-vote is to be treated so that there will be no

            20   possibility that anybody can mistakenly are otherwise post a

            21   higher vote for management than is possible or intended. 

            22             MR. BELLER:  Just for the Commission's benefit, an

            23   over-vote is when the same share gets voted twice, in effect,

            24   as a result, for example, of a share-lending transaction

            25   where both the beneficial owner and the borrower send in




             1   proxy.  There are lots of other permutations, but that's the

             2   concept. 

             3             MR. WILCOX:  If I could just make a comment for the

             4   record, I don't want my comments about the proxy system to be

             5   interpreted as in any way expressing a dissatisfaction with

             6   the role of ADP.  They have, in fact, been leaders in the use

             7   of electronic technology and bringing it into the system. 

             8             The issues that I am addressing are larger issues

             9   which really are issues for the Commission which have to do

            10   with the whole relationship between shareholders and

            11   corporations, the way that they communicate, whether or not

            12   they be known to each other, how quickly, for example, 13(f)

            13   information ought to be filed.  Is it still suitable to wait

            14   45 days or two months plus 45 days after the end of the

            15   calendar quarter to make that information available? 

            16             These are larger issues.  I don't want this to look

            17   at if it's something as wrong with the way ADP has done its

            18   job because, in fact, as I've said, they have led in the

            19   introduction of technology into this process, and we would

            20   hardly be able to do it at all without them. 

            21             MS. MURPHY:  Thanks.  Jamie. 

            22             MR. HEARD:  If the Commission goes forward with

            23   this rule and clearly votes on directors are no longer

            24   routine votes -- we don't think they're routine votes today. 

            25   We don't treat them as such.  We treat them as important




             1   votes.  We look very carefully at the qualifications of

             2   directors, how many boards they serve on.  Do they take

             3   consulting fees from the company?  There are a variety of

             4   other things that we look at. 

             5             And in a case like Disney, we look at the

             6   performance of the board overall.  So we already think it's a

             7   pretty important vote, but if you're going to go forward with

             8   this rule, clearly it's an important vote.  I believe you've

             9   got to do something simultaneously about broker voting. 

            10             You cannot permit brokers to continue to vote on

            11   behalf of their clients where they don't have an instruction

            12   where anywhere from 10 to 20 percent of the vote is going to

            13   be right down the line for management's nominees.  I think if

            14   you want brokers to vote and they need to vote for quorum

            15   purposes, that's fine, but I don't believe they should be

            16   allowed to vote for anything else and certainly not for

            17   directors. 

            18             MS. MURPHY:  John, I think it's about time to wrap

            19   up. 

            20             MR. WILCOX:  Right.  I was just going to say on the

            21   broker vote my own view is that the NYSE could not find a way

            22   to continue to allow discretionary broker voting if you had

            23   one of these director campaigns, and, if that happens, I

            24   think that the Commission needs to think about the

            25   educational responsibility and particularly if this leads




             1   ultimately to the end of discretionary broker voting all

             2   together, there will be a need to educate those shareholders

             3   who have been living under that rule. 

             4             These are the street name customers who have for

             5   years actually even misinterpreted the way the rule currently

             6   operates.  I have spoken many times with street name

             7   customers who think that their shares are always and

             8   automatically voted on their behalf by their broker.  They

             9   just don't understand how the rule operates. 

            10             And if the rule changes, I think there's a need for

            11   a real educational system or a process to go through to

            12   inform shareholders so that they are not simply

            13   disenfranchised. 

            14             MS. MURPHY:  Thanks, John.  I think it's time to

            15   wrap up.  Alan, do you want to make some closing remarks? 

            16             MR. BELLER:  Only about one or two sentences worth. 

            17   I think first I'd like to ask the chairman or the

            18   Commissioners whether they had anything to say in closing. 

            19             COMMISSIONER GOLDSCHMID:  Thank you. 

            20             MS. MURPHY:  Absolutely.  This was very valuable. 

            21             CHAIRMAN DONALDSON:  The hour is late, but I want

            22   to say once again how much we appreciate you all coming here

            23   and giving us the benefit of your thoughts.  I think this has

            24   been a very interesting day and very, very helpful to the

            25   Commission.  And I thank you. 




             1             MR. BELLER:  And I thank this panel as I change all

             2   of the preceding panels for giving of their time and effort. 

             3   Everybody who has been here today is extraordinarily busy,

             4   and we really appreciate it. 

             5             The last official thing I want to say is that we

             6   are reopening the comment period for comments related to the

             7   subjects discussed today and I suppose any other subjects

             8   related to the proposed rule starting today until March 31st. 

             9   And with that I declare the roundtable closed and over. 

            10             Thank you very much. 

            11             (Whereupon, the roundtable was concluded.) 

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