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39–542 PDF 2007

SEC PROXY ACCESS PROPOSALS:

IMPLICATIONS FOR INVESTORS

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

SEPTEMBER 27, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–63

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

September 27, 2007 .......................................................................................... 1

Appendix: 

September 27, 2007 .......................................................................................... 33

WITNESSES 

THURSDAY, SEPTEMBER 27, 2007

Castellani, John J., President, Business Roundtable ........................................... 10

Kirshbaum, Donald A., Principal Investment Officer, Office of the Treasurer, 

State of Connecticut ............................................................................................. 6

Smith, Timothy, Senior Vice President–Director of Social Investing, Walden 

Asset Management ............................................................................................... 12

Stevens, Paul Schott, President and Chief Executive Officer, Investment Company Institute ....................................................................................................... 13

Yerger, Ann L., Executive Director, Council of Institutional Investors .............. 8

APPENDIX 

Prepared statements: 

Maloney, Hon. Carolyn B. ................................................................................ 34

Waters, Hon. Maxine ........................................................................................ 36

Castellani, John J. ............................................................................................ 39

Kirshbaum, Donald A. ...................................................................................... 44

Smith, Timothy ................................................................................................. 59

Stevens, Paul Schott ........................................................................................ 78

Yerger, Ann L. .................................................................................................. 94

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Neugebauer, Hon. Randy: 

Letter from the Business Roundtable to the SEC ......................................... 179

Statement of the U.S. Chamber of Commerce ............................................... 217

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SEC PROXY ACCESS PROPOSALS: 

IMPLICATIONS FOR INVESTORS 

Thursday, September 27, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Kanjorski, Maloney, 

Moore of Kansas, McCarthy, Baca, Scott, Cleaver, Davis of Tennessee, Klein; Pryce, Feeney, Hensarling, Neugebauer, and Campbell. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will come to order. This is a hearing on the question of 

proxy access, a matter of some interest to various members of the 

committee, on both sides of the aisle. 

The gentleman from California, Mr. Campbell, is someone who 

has raised this consistently, as have others. We touched on this in 

a couple of earlier hearings. It became relevant when we talked 

about executive compensation, because you can talk about shareholder involvement either issue-by-issue or in a more generic way. 

We are appreciative of the fact that the SEC has now promulgated some proposals. They are—I guess I’ve heard, as a lawyer, 

of pleading in the alternative; regulating in the alternative is a 

new concept to me, but as I have chaired this committee, I have 

learned some things. 

And it is an opportunity to have some input. It’s a matter on 

which this committee has a great deal of interest, and we have a 

panel that I think is fairly representative of the range of views, so 

we look forward to the hearing. And I’m going to get right to that. 

I’ll now turn—let me just announce that the ranking member 

was called back home to Alabama by some very important family 

business involving both his own family, and more sadly, the family 

of someone very close to him. He is going to be returning today, but 

the vice chair of the committee, Mr. Neugebauer, will be here in 

his absence, and I will now recognize the gentleman from Texas 

who has, I believe, a unanimous consent request to make. 

Mr. NEUGEBAUER. That’s correct. Mr. Chairman, I have a unanimous consent request that—I have some recorded testimony by the 

U.S. Chamber of Commerce and a letter from the Business Roundtable to the Securities and Exchange Commission on shareholder 

proposals relating to the election of directors, and would ask unanimous consent that— 

2

The CHAIRMAN. If there is no objection, those will be entered into 

the record. Let me, at this point, give general leave, if there are 

other statements that members would like—from any interested 

parties—to enter into the record, without objection, that will be 

granted. 

And the gentleman is recognized for his statement. 

Mr. NEUGEBAUER. Well, thank you, Mr. Chairman. I am actually 

reading this on behalf of Deborah Pryce who could not be with us 

again today. 

‘‘Thank you, Chairman Frank, for calling this morning’s hearing 

to review the Securities and Exchange Commission’s two very different proposals to amend the SEC’s rules governing shareholder 

proxy access. 

‘‘This hearing may be a little premature, however. With the comment period for both proposals ending in 4 days, the committee 

should allow the SEC time to review the comment letters and 

reach a thoughtful decision. I hope that the committee will have an 

opportunity to hear from Chairman Cox once the SEC reaches its 

decision. 

‘‘Earlier this year the committee considered executive compensation legislation, as the chairman just mentioned, with the premise 

that it would increase shareholder democracy. It is unclear what is 

undemocratic about the current structure of the proxy voting, 

though. Every publicly traded company has a nominating process 

that allows shareholders to recommend qualified candidates to 

serve on the board. 

‘‘The real question is whether including the outside nominees in 

the country’s own proxy statement rather than in separate proxy 

statements somehow improves the process. 

‘‘There are real questions about who pays for adding more candidates to the proxy statement and whether it actually weakens 

the quality of disclosure available to shareholders. Since SarbanesOxley, boards of directors are smaller and far more responsive to 

shareholders. Their independence from management is also increasing and CEO tenure is decreasing as boards are no longer beholden to management and more companies are adopting majority 

voting to elect directors. 

‘‘All of these governing changes are welcome and market driven, 

which is always a better solution. Successful companies are those 

who value and invite shareholder input and are able to balance 

companies’ competing constituencies. 

‘‘Open communications between boards and shareholders on a 

wide variety of corporate matters makes companies more responsive to all shareholders and not simply those who speak with the 

loudest voice. Shareholders already have the power to change the 

board. Large institutions like union pension funds and foundations 

mutual funds can easily afford to challenge the nominees put forward by the company. 

‘‘What special interest shareholders such as labor unions really 

want to do is circumvent the company’s nominating process and 

have direct access to the proxy statement. If this happens, the 

proxy statement will look like a preliminary parliamentary election 

ballot with potentially hundreds of names indistinguishable from 

one another. This will only cause confusion. 

3

‘‘The board’s role will diminish and along with it good governments. It is not the best way to run a company, increase shareholder value or add jobs. Allowing the politicization of the boardroom could very easily lead to concessions from boards that are not 

supported by a majority of the shareholders or as workers. 

‘‘In closing, I would like to thank the witnesses for their testimony and I yield the balance of my time.’’ 

The CHAIRMAN. Are there any other requests for opening statements? 

The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

What we’re talking about here today is that we have all seen 

over time that sometimes companies have been operated for the 

benefit of the executives rather than for the benefit of the shareholders. We have also seen companies that are operated poorly, it 

can happen, not getting good results; and in some cases where perhaps the company believes they’re operating well but the shareholders believe they’re not achieving the shareholders’ expectations 

based on the industry and the market at the time. 

So what can shareholders do? What are their remedies when 

they see one of these things happen where a company is not operated in what they believe is their best financial interest? 

There was a proposal earlier this year which passed this committee and this House which effectively was direct democracy within a corporation, that allowed shareholders to vote specifically on 

one specific thing, which was executive compensation. Now I happen to think that’s a very dangerous road to go down. 

If we have shareholders approve executive compensation do we 

have them approve union contracts, do we have them approve marketing budgets, do we have them approve every acquisition, do we 

have them approve other executives? You know, what do we have 

them approve? The correct way for shareholders to express their 

disapproval with a company is through the board rather than 

through direct democracy. 

But others would say that they have another remedy, that shareholders have another remedy, which is to sell the stock. And yes, 

that remedy, in fact, does exist. But that remedy has severe limitations. Some stockholders are semipermanent holders in companies. 

We have those that are large pension funds or large investment organizations or large mutual funds. There are certain companies in 

which they are just generally not going to disinvest. 

Or if someone is trying to replicate or hold either through a 

SPDR or directly the Dow industrials or the Fortune 100 or the 

S&P 500 then they also, unless they are removed from that list, 

have essentially a semi-permanent investment in that company. 

And furthermore, even individual investors, because of the Capital 

Gains tax, if they have a gain in a stock and they sell it, or a dollar, they are unlikely to be reinvesting a dollar. They may be reinvesting 99 cents or, in my State, if they’ve held the stock for a long 

time, they could be reinvesting as little as 75 cents. 

So to say the only remedy I have for a company that’s not being 

run in the way I think it should be run is to give up 5 or 10 or 

15 or 25 percent of my investment to reinvest in another company 

is, at best, a very imperfect solution. No, the correct solution or the 

4

best solution, I think, for shareholders who are displeased with 

what’s going on is to express that displeasure by changing the 

board. 

So what do we have now? Now we have a system under which 

the alternatives for board members are nominated only by the 

board. Now if you want to change something that’s going on in a 

company you don’t ask the people who you want to change to offer 

up that change. You generally would like to have some other alternative to that. 

So as you can probably tell by this I am someone who believes 

that having shareholders have the opportunity to nominate alternative directors to a board is something that shareholders in public 

companies ought to have the right to do. Now private companies 

are an entirely different matter, but when one goes public, and 

therefore submits themselves to the regulation of the SEC amongst 

other things, it seems that giving shareholders that opportunity is 

something that should be a part of being a public company. 

There are a few questions that I have that I hope that even 

though I obviously believe that having shareholders have opportunities to nominate directors is something which—I believe there 

are several questions I have, and I hope to hear from the panel 

today on some of these things. 

First of all, you don’t want, as was mentioned in the previous 

opening statement, a small percentage of the shareholders, whether it is 1 percent or 2 percent or 5 percent, to be able to dictate 

the operations of that company if the other 95 percent don’t want 

that to happen. 

That is no better than executives running a company for their 

own behalf and ignoring the interests of the shareholders. So I suggest that there be, in conjunction with proxy access, a majority vote 

requirement so that for anybody to be seated on a board you have 

to have over 50 percent of those voting shareholders vote for it or 

they don’t get on the board. If there are other remedies for that, 

I would appreciate hearing them. 

And what is the correct percentage? You certainly don’t want 

someone with one share or 100 shares or whatever to be able to 

make a nomination to the board. That would create the kind of 

chaos that was discussed in the previous opening statement, but 

what is the correct percentage? 

I know the SEC in one of their proposals has proffered up 5 percent. Is that right? Should it be less? Should it be more? 

Should there be a difference in the percentage required for the 

market capitalization of a company? Obviously someone of any institutional holder or any other holder is considerably less likely to 

hold a large percentage of Google or General Electric or ExxonMobil than they are of some hundred million dollar small cap company where you could easily have shareholders, institutional or 

otherwise, owning 10 percent or 20 percent or so forth. And so 

should there be a different percentage there? 

And lastly, what disclosures and what procedures would be correct to make sure that this is done or can be done in the proper 

manner? 

5

I look forward to hearing from the panel on those issues, and 

also your opinions generally on the issue, and I yield back the balance of my time. 

The CHAIRMAN. Are there any further opening statements? If not, 

we will—oh, the gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

As we approach this very important subject, I hope that we will 

approach it with a certain amount of caution. I once again hope 

that as the SEC looks at this issue, as do we, that first we do no 

harm. 

I certainly believe that the corporate structure and our corporate 

governance laws have a lot to do with the creation of jobs, hope, 

wealth, and opportunity in America and the type of very systemic 

change that we are looking at with this particular issue. I’m concerned about the adverse consequences it might have on the wealth 

and job creation that we see coming out of our corporate structure 

in America today. 

I look at other countries, particularly in the European Union, 

that appear to have a system of proxy voting that is perhaps being 

contemplated today. I don’t think I see as much robust wealth creation as what I see in America, and I do think this is an issue that 

goes to the heart and the ability of corporations to remain profitable. I also note that this Nation has a long history of allowing our 

State law to govern the corporation’s ability in many respects to 

manage its own affairs. 

And so I think that although the issue is meritorious, it’s one 

that we should be very, very careful about how we proceed. It also 

may be somewhat premature as the SEC has yet to take action. As 

I listen carefully to my good friend from California there is also another option for people who are unhappy with corporate governance. They don’t only have the option to sell, they also have the option to buy, and they can always buy more stock and gain even a 

greater influence in the corporate affairs of that particular corporation. 

With that, Mr. Chairman, I look forward to hearing the testimony of our panelists, and I yield back. 

Mrs. MALONEY. Mr. Chairman. 

The CHAIRMAN. Yes, the gentlewoman from New York. 

Mrs. MALONEY. I, first of all, would like to thank you for following up on the June meeting we had with all five SEC Commissioners. There was a general agreement for a follow-up hearing on 

the issue of the proxy access; it is tremendously important. 

Since our hearing, the SEC has published for comment two proposals to amend its rules and the comment period on both of these 

proposals will end on October 2nd. I believe many Members of Congress and the public will be commenting on it and I’d just like to 

counter some of the statements saying that this is premature. 

I think it’s very important that we hear the perspectives of the 

witnesses on these proposals prior to the end of the comment period and have their judgment as we formulate possibly our own 

comments that we may want to put into the comment period. 

In any case I’m interested in what they have to say. I have an 

opening statement, but in the interest of time I’m going to put it 

in the record. Thank you. 

6

The CHAIRMAN. We will now begin with the testimony and let me 

start just on my left with Donald Kirshbaum, who is the principal 

investment officer in the Office of the Treasurer of the State of 

Connecticut. 

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

CONNECTICUT 

Mr. KIRSHBAUM. Thank you very much, Chairman Frank, and 

members of the committee. I’m Donald Kirshbaum, and as said, I 

am an investment officer in the Office of the Connecticut State 

Treasurer, Denise Nappier. Treasurer Nappier is the principal fiduciary of our $26 billion State pension fund, which manages the retirement assets of our 160,000 pension beneficiaries. 

I have a brief oral statement here and I have submitted a longer 

statement, which I— 

The CHAIRMAN. Without objection, all of the statements and supporting documents of all of the witnesses will be made part of the 

record. 

Mr. KIRSHBAUM. Great, thank you. 

Since taking office in 1999, Treasurer Nappier has been actively 

involved in corporate governance. She particularly believes that 

shareholder activism is a plan asset and uses communication with 

companies in which we invest, including proxy voting and shareholder resolutions, as a mechanism to protect and enhance the 

long-term value of pension fund assets. 

And again, pension funds by their nature are long-term investors, so we’re really talking about the long-term issue here. Today’s 

hearing addresses the two pending rules at the SEC. Our office has 

extensive experience working with and within these rules, and I’m 

pleased to share our experience with you today. 

There are essentially three issues in these rules. Proxy access we 

have talked about, and there also are some issues regarding advisory shareholder resolutions and electronic forums. I’ll spend most 

of my time on the first and then I’ll briefly touch on the other two. 

Now we’ve talked about shareholder access to the proxy, so I 

really won’t go into details of what that is, but the issue is for us 

that the board of directors is elected by the shareholders and oversee the management of the corporation on behalf of the shareholders who are the owners. 

Most board members and boards perform their job very well. 

However when shareholders believe the boards are not acting in 

the best interests of the shareholders there are some things we can 

do, but nominating directors on a company’s ballot is not one of 

them. 

The existing mechanism for replacing directors is to run a proxy 

contest on a challenge slate with a separate proxy card. So there 

is a mechanism right now where shareholders can nominate directors, but it is onerous and expensive. 

It’s a mechanism geared more toward corporate takeovers than 

to improving the performance of the existing board. SEC Chairman 

Cox agrees that a new mechanism is needed and has put forward 

the access to the proxy proposals. We support the concept here and 

also the—we continue to work with the SEC to come up with a rule 

7

that is actually workable for shareholders, and we’ll go into some 

details of that in a minute. 

Last year the second circuit court in AFSCME v. AIG ruled that 

the SEC had been improperly allowing companies to exclude access 

to the proxy resolutions. And we joined State pension funds in 

North Carolina and New York and the AFSCME employees pension fund filing such a resolution against Hewlett Packard. 

The resolution received broad shareholder support; 43 percent of 

shareholders supported this resolution. This is not a special interest or fringe—it’s not something that only special interests are interested in—that 43 percent represents the core investors. 

There were resolutions filed at two other companies which received 45 percent in a majority vote, so this is mainstream investors who are interested in access to the proxy. The large vote led 

us to continuing discussions with the company, which we are hoping will result in a productive conclusion. 

Now one of the SEC rules, note it’s a short rule, would close this 

avenue to shareholders to file access to the proxy resolutions. We 

believe that the adoption of this rule is not necessary or appropriate and we would oppose the implementation of this. With respect to the directors and goals on behalf of their owners, when it’s 

not happening this mechanism of access to the proxy is needed. 

There are two issues that have been highlighted in the SEC rule. 

One is the 5 percent rule and the other is the disclosure issues. As 

a pension fund investing for the employees, we’re a long-term investor. Also our asset allocation is spread over a number of asset 

classes, and with respect to investments in public equity we are 

very diversified and have a significant portion of assets in core 

index funds. 

This means that not only do we have long-term investments in 

the broad economy but we do not build up a large holding in any 

one specific company. Most public pension funds also have the 

same type of investment strategy, and it’s really mandated by the 

nature of what a public pension fund is. 

Because of that, the 5 percent ownership threshold really does 

not work for long-term investors. The fact that—for example, we 

hold over 3 million shares of Exxon-Mobil worth over $330 million. 

However, 5 percent of Exxon-Mobil’s outstanding stock right now 

is worth $25 billion. 

The 5 percent—we would have to invest our entire pension fund 

in Exxon-Mobil to reach the 5 percent level. As it is, we hold—even 

this large holding is only .07 of 1 percent. So we need a mechanism 

in terms of the 5 percent rule that really is workable, and that is 

one that we would hope that we can continue to work with the SEC 

and others on. 

The disclosure requirements in this rule also go far beyond anything that shareholders would find useful in voting proxy access 

proposal. As with the ownership threshold, it’s not clear that any 

additional disclosure is warranted, simply because the proposal 

concerns proxy access. 

The proposal itself would not change the board’s composition, 

which would only occur if the resolution were adopted by a majority of shareholders and then the ensuing year there would be the 

opportunity to nominate candidates for the board. 

8

So these disclosures are really overly onerous and really—we 

don’t see the benefit to the level of disclosure in the rule, and 

again, would be happy to work with others to try to come up with 

something that would be appropriate. 

Let me just quickly say that there are two other issues. One is 

the advisory shareholder resolutions. The SEC rule requests comments on possible changes to the advisory resolution process currently available under rule 14a-8. Without going into detail, Treasurer Nappier opposes any limitation to current shareholder rights 

to submit nonbinding proposals. 

This is—for 65 years these proposals have promoted effective 

communication between shareholders, management, and board 

members and I know that others will be testifying on this, so I will 

let my comments for the record talk about the detail on that. 

The other issue, quickly, is the electronic forums which are in the 

proposal. With regard to electronic forums we can support them as 

a potential enhancement to the existing avenues of communication. 

However were these electronic forums in any way to substitute for 

any shareholder rights currently in place, well, we would oppose 

those. 

In conclusion, on behalf of Treasurer Nappier, I would like to 

thank you for this opportunity to share our views with the committee on these important issues. I would be happy to answer questions and be of further assistance to the committee. 

[The prepared statement of Mr. Kirshbaum can be found on page 

44 of the appendix.] 

The CHAIRMAN. Thank you. 

Next we’ll hear from Ms. Ann Yerger, who is the executive director of the Council of Institutional Investors. 

STATEMENT OF ANN L. YERGER, EXECUTIVE DIRECTOR, 

COUNCIL OF INSTITUTIONAL INVESTORS 

Ms. YERGER. Good morning. Thank you for the opportunity to be 

here on behalf of the Council. 

By way of introduction, the Council of Institutional Investors is 

an association of more than 130 public, union, and corporate employee benefit plans with more than $3 trillion in assets. They are 

responsible for safeguarding the assets used to fund retirement 

benefits of millions of individuals throughout the United States. 

They have a very significant commitment to the U.S. capital 

markets with the average fund investing about 75 percent of its 

portfolio in the stocks and bonds of U.S. public companies, and they 

are long-term investors due to their heavy commitment to passive 

investment strategies. 

As a result, U.S. corporate governance issues are of great interest to members of the Council. The ability to file shareowner proposals is particularly important to Council members because they 

are unable to exercise the ‘‘Wall Street walk’’ and sell their shares 

when they are dissatisfied. 

Shareowner proposals provide an opportunity to present their 

concerns to management and directors, to communicate with other 

investors, to encourage reforms, and to improve corporate performance. And over the past several decades, these resolutions have moVerDate 0ct 09 2002 17:28 Dec 20, 2007 Jkt 039542 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\39542.TXT HFIN PsN: TERRIE
9

tivated profound improvements to boardroom performance in particular and the U.S. governance model in general. 

Under debate today at the SEC is whether the shareowner proposal rule in general should be changed and in particular whether 

shareowners should have the right to file resolutions suggesting or 

mandating processes to include shareowner-suggested director candidates on company proxy cards. 

I’m going to tackle the second issue first. Because directors are 

the cornerstone of our U.S. corporate governance model, and the 

primary role of share owners is limited to electing and removing 

directors, the Council believes owners should have the ability to file 

access resolutions and the marketplace at large should have the opportunity to vote on whether those resolutions are in the best interests of the companies and the owners. 

The legality of any approved mechanisms ultimately and appropriately should be determined by State courts and not preempted 

by a new Federal mandate. 

The Council applauds the SEC for again taking up the very important issue of proxy access. We appreciate the many hours the 

SEC staff and the Commission have devoted to developing the two 

most recent proposals. Unfortunately, the Council strongly opposes 

both proposals as currently drafted. 

The Commission’s shorter proposal would obliterate the current 

rights of shareowners to submit binding or nonbinding access resolutions. The only circumstance in which the Council could possibly 

support the adoption of this flawed proposal would be if it was accompanied by the adoption of another rule that provided an alternative, meaningful approach to access. 

Unfortunately this hasn’t happened. The Commission’s longer 

proposal imposes such onerous requirements on proponents of access resolutions that the proposal is empty and unworkable. More 

specifically, the proposed 5 percent threshold for submitting a proposed bylaw amendment is too high a barrier for owners who routinely file resolutions. 

Even the 10 largest public pension funds combined would be unlikely to meet this threshold at a public company of any size, be 

it a large, mid-size, or small cap company. In addition, the proposed disclosures are unnecessary and overly burdensome, and for 

some inexplicable reason are far more expensive than currently required, even for shareowners planning a hostile takeover of a public company. 

Also inexplicable are the Commission’s reasons for imposing such 

excessive requirements on proposals that ultimately would have to 

face the test of the marketplace and be approved by a majority or 

even in some cases the super majority of the outstanding shares. 

The Council believes the end result of these onerous requirements would be that few if any shareowners would ever again have 

the ability to exercise what we believe is a fundamental right, the 

right to sponsor resolutions addressing the processes involving the 

election of directors. 

Speaking of fundamental rights, the Council strongly opposes 

any shift from the current SEC rules governing shareowner proposals in general to a State-by-State, company-by-company model. 

We believe the uniformity and consistency provided by the current 

10

Federal oversight model is in the best interests not only of Council 

members but of other owners, companies, and the capital markets 

at large. 

Notwithstanding our very strong opposition to both of the SEC’s 

proposals we stand ready to work cooperatively with the Commission, this committee, my fellow panelists, and other interested parties to develop meaningful proxy access reforms that best serve the 

needs of investors in the capital markets. 

Thank you. 

[The prepared statement of Ms. Yerger can be found on page 94 

of the appendix.] 

The CHAIRMAN. Thank you. 

Mr. John Castellani is next, the president of the Business Roundtable. 

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS 

ROUNDTABLE 

Mr. CASTELLANI. Mr. Chairman, and members of the committee, 

thank you for inviting me here to talk about this important topic. 

Business Roundtable has been a strong supporter of corporate 

governance reforms. We supported Sarbanes-Oxley. We supported 

the enhanced listing standards of the exchange, additional disclosures on executive compensation, and majority voting of directors. 

And as these reforms demonstrate, we are committed to the 

highest standards of transparency and governance. Similarly we remain committed to promoting the accountability and responsiveness of boards, enhancing the transparency so investors could make 

informed decisions, facilitating communications between companies 

and shareholders, and creating certainty and predictability for companies and their shareholders. 

As you know, the issue of proxy access has been debated over the 

years and previous Commissions have concluded that changing the 

current system is inconsistent with State law and unworkable from 

a practical standpoint. Currently the SEC is once again receiving 

comments about the two proposed rules whose issuance followed a 

lengthy process of testimony by experts from the legal, academic, 

corporate, and shareholder communities. 

The heart of these issues involved how corporate director elections are governed and how a company proxy is used. Director elections are governed by State law where the company is incorporated 

and the proxy is a management mechanism for shareholders to 

vote when not attending shareholder meetings. 

Shareholders do have the right to nominate directors and run 

campaigns but not on the company proxy. The SEC has consistently recognized this and excluded director election proposals from 

the company proxy. 

Proponents of proxy access want to turn the system on its head 

by creating a Federal rule which allows virtually any board candidate to be placed directly on the proxy. As you might expect, 

we’re concerned with this for several reasons. 

First and foremost, it represents a fundamental change to the 

successful corporate model that has produced enormous returns for 

all shareholders. Nominating committees of boards exist for a speVerDate 0ct 09 2002 17:28 Dec 20, 2007 Jkt 039542 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\39542.TXT HFIN PsN: TERRIE
11

cific reason, to identify qualified candidates with expertise in judgment who represent all shareholders, not one particular group. 

We believe the proxy access proposal will result in special interest board candidates and will politicize the director election process. In this day and age of short-term holdings, hedge funds and 

foreign government investment in U.S. corporations, the last thing 

shareholders need are fractured boards representing divergent constituencies or single-issue board members. 

Further, we believe such a process will discourage qualified independent directors from serving. And finally, as some proponents 

have suggested, we do not want the cost of the special interest 

nominees to shift to companies and ultimately to that company’s 

shareholders. 

Proponents of proxy access often cite the need for additional reforms in the boardroom. The fact is, however, that our companies 

have dramatically changed during the past 5 years. Indeed, we 

have seen more governance changes in the past 5 years than we 

have seen in the previous 50 years. 

Each year the Business Roundtable surveys its own members on 

governance practices, and the results this year speak for themselves: 90 percent of our boards are made up of at least 80 percent 

independent directors; 71 percent of our boards meet in executive 

sessions at every meeting; and 100 percent meet at least once a 

year. 

Seventy-four percent of our CEOs serve on no more than one 

board other than their own, and 82 percent of our boards have 

adopted majority voting for directors, coming up from zero in just 

2 years. Indeed that has been manifested, as was said earlier, in 

the fact that the average tenure of a chief executive officer is now 

down to 4 years, and 10 years ago, it was 8 years. 

These numbers demonstrate that company boards and executives 

have transformed themselves and are demanding greater accountability and exercising more oversight as they should. Shareholders 

now have a true ‘‘yes’’ or ‘‘no’’ vote on board candidates and these 

votes provide a meaningful voice in the director election process. 

And now there is enhanced dialogue. Board members regularly 

meet with shareholders, answering questions and discussing everything from compensation to mergers to capital expenditures. 

Companies desire to attract and retain shareholders because it 

is in their best interests to do so. In light of these reforms, the 

challenge now is to ensure that boards can attract and retain qualified directors and leaders who are able to innovate, increase revenues and profits, and ultimately increase shareholder value. 

Given the record of reforms and our belief that politics and narrow agendas have no place in the boardroom, we believe that the 

SEC is correct in reaffirming its exclusion of director election proposals from the proxy. Simply put, proxy access is a bad idea whose 

time has passed. 

Preserving the current balance between shareholders, boards, 

and management will allow corporate directors to continue on focused on what they are there to do, provide judgment and oversight 

and help create long-term value for all shareholders. 

Thank you, Mr. Chairman. 

12

[The prepared statement of Mr. Castellani can be found on page 

39 of the appendix.] 

The CHAIRMAN. Next we have Mr. Timothy Smith, who is the 

senior vice president and director of social investing at Walden 

Asset Management, and also the chair of the Social Investment 

Forum. 

Mr. Smith. 

STATEMENT OF TIMOTHY SMITH, SENIOR VICE PRESIDENT–

DIRECTOR OF SOCIAL INVESTING, WALDEN ASSET MANAGEMENT 

Mr. SMITH. Thank you, Mr. Chairman, and members of the committee. It is an honor to provide testimony today. As you have 

heard, I work with an investment firm in Boston, Walden Asset 

Management. I also serve as the chair of the board of the Social 

Investment Forum. But in my testimony today, I’m also going to 

refer to my 30 years of experience working for the Interfaith Center on Corporate Responsibility, which is a coalition of religious investors with approximately $110 billion in assets. 

Together we have decades of experience in addressing companies 

and have used the shareholder resolution process to good effect as 

an essential tool for over 35 years. 

My comments today are going to focus on the shareholder resolution process, part of the SEC concept releases rather than on the 

access issue. If you look at the three major parts of the SEC concept, if adopted, these concepts would either eliminate entirely or 

severely limit the ability of any investor to sponsor a shareholder 

proposal. The result would be a curtailment of shareholder rights 

and, I would suggest, the elimination of meaningful investor input 

to corporate boards and management. 

The SEC has proposed three things for us to think about, one 

they call the opt-out approach. 

The SEC asked for comments on whether companies should have 

the right to withdraw from the shareholder resolution process. An 

opt-out option would have significant negative consequences. The 

most unresponsive companies would be likely to opt out. 

Just imagine a scenario where a board is criticized for poor governance, irresponsible behavior for example, backdating of options 

that leads to legal action against the company. They simply decide 

they don’t like the criticism and decide to opt-out, a disaster. 

The second proposal the SEC offers is the electronic forum or 

chat room. Should the Commission provide a provision whereby the 

electronic forum exists instead of the shareholder resolution process? 

We strongly support new forms of electronic communication between investors and the board and management, not as a substitute for, but as a supplement to, the existing resolution process. 

The present proposal about the electronic forum has many unanswered questions. For example, what if you’re an institutional investor, as the State of Connecticut is; maybe you own 500 companies. How are you expected to monitor 500 electronic forums, and 

what if there is a vote of some sort or a poll? Who is really in the 

forum to participate and what does the poll result mean? So at 

13

present the idea of an electronic forum as a substitute for shareholder resolutions is fatally flawed. 

The third part of the proposal or concept rather that the SEC 

raises is increasing the thresholds for resubmitting resolutions. 

They suggested you needed to get a 10 percent vote the first year, 

15 percent the second year, and 20 percent the third year. It’s important to assess who is affected by the present shareholder resolutions and who needs relief. In the year 2007 there were fewer than 

1,200 resolutions filed at about under 1,000 companies, and this 

represents less than 20 percent of companies on the stock market. 

Clearly the business community is not burdened significantly by 

the resolution process. And let’s add to the fact that often when 

resolutions are sponsored, the companies negotiate dialogue, have 

discussions with the proponents and they’re withdrawn because 

agreements are reached. 

I would suggest, in summary, that the shareholder resolution 

process is not a burden on companies, but changing the thresholds 

would be a real burden on proponents. On issues over the years, 

as varied as apartheid in South Africa to corporate governance reforms like majority vote for directors or climate change, sometimes 

investors need a couple of years to study an issue before they start 

voting for it. If you raise the threshold, you will cut off many of 

these issues before they even get started. 

For example, the Institutional Shareholders Services reminds us 

that this last year only under 200 shareholder resolutions on social 

and environmental issues came to a vote but 81 percent of them 

got the votes to come back. With the new rule, only 36 percent of 

them would come back. This would negatively impact the ability to 

raise important social governance and environmental issues. 

So I conclude, Mr. Chairman, by saying the impact of these 

shareholder petitions, these resolutions, is demonstrable, it’s clear, 

it has a track record over close to 40 years, and it makes a difference in corporate thinking, in corporate behavior, in corporate 

policies. The SEC should not be allowed to take steps that would 

disadvantage the ability of investors to petition the companies in 

which they are owners through the shareholder resolution process. 

Thank you. 

[The prepared statement of Mr. Smith can be found on page 59 

of the appendix.] 

The CHAIRMAN. Next, Mr. Paul Schott Stevens, who is the president and chief executive officer of the Investment Company Institute. 

STATEMENT OF PAUL SCHOTT STEVENS, PRESIDENT AND 

CHIEF EXECUTIVE OFFICER, INVESTMENT COMPANY INSTITUTE 

Mr. STEVENS. Thank you, Chairman Frank, Congressman 

Neugebauer, and members of the committee. I’m pleased to be able 

to take part in today’s hearing. 

Mutual funds and other registered investment companies that 

are represented by the Investment Company Institute have a 

unique position in the debate over shareholder proxy access. Our 

members offer the investment vehicles of choice for millions of 

Americans saving for retirement, education, and other goals. They 

14

hold approximately 25 percent of the outstanding shares of U.S. 

companies and they have an obligation to vote those shares in the 

best interests of fund investors. 

But funds are also issuers of stock with their own shareholders, 

their own boards of directors, and their own proxies, so we understand the importance of the SEC striking the right balance when 

changing longstanding rules on shareholder access to and use of a 

company’s proxy. 

In considering this issue we asked, what is the right result here 

for the fund shareholders that our members serve and for other 

long-term investors? Our conclusion was that under prescribed circumstances, corporate shareholders should be able to place their 

proposals or bylaw amendments related to director nomination procedures on a company’s proxy. 

Nonetheless, the ability to piggyback on a company’s proxy 

should not be granted lightly. Care must be taken to ensure that 

the Federal securities laws do not inadvertently facilitate efforts to 

use a company’s proxy machinery at the company’s expense in the 

service of narrow interests or in a way that redounds to the detriment of the company and its shareholders as a whole. 

How can the SEC craft a rule that achieves this balance? We believe the Commission has rightly identified four areas in which 

standards must be set. Let me briefly give you the institute’s view 

on each. 

The first concerns the intent of the shareholders seeking access 

to the proxy. We strongly agree with the Commission that access 

should be limited to proponents who do not intend to change or influence control of the company. Shareholders seeking to challenge 

corporate management or to exert control over the company have 

recourse to the existing mechanisms for proxy contests. They 

should not be granted license to pursue their objectives at the companies’ and other shareholders’ expense. 

The second criterion involves the ownership threshold. It is entirely appropriate to limit the privilege of access to the proxy machinery to shareholders with a significant ownership interest. The 

SEC has proposed that proponents must be required to hold collectively a 5 percent stake. Our research shows it is not uncommon 

for even a single institution to hold 5 percent or more of a public 

company. 

In the fourth quarter of 2006, we estimate that 87 mutual fund 

complexes had a total of almost 1,900 holdings of 5 percent or more 

of U.S. companies, and mutual funds are not alone in this regard. 

Many kinds of institutional investors have holdings concentrated at 

this level, among them, some public pension funds. 

For example, based on its most recent 2007 filings with the SEC, 

it appears that the State of Wisconsin Investment Board has 5 percent or more of the stock of 28 U.S. public companies. All of them, 

I should note, small cap firms. 

Hedge funds very commonly seek to assemble large positions in 

public companies for their own ‘‘activist purposes.’’ We believe the 

Commission should study the shareholding patterns and establish 

a threshold sufficiently high, 5 percent or even more, to ensure that 

the process will be used to advance interests common to many 

shareholders. 

15

Third and similarly, access to the proxy machinery should be 

limited to long-term shareholders who meet a minimum holding period for their shares. The Commission has proposed that proponents be required to have held their shares for one year or 

longer. We believe that is a minimum acceptable threshold and expect to recommend that the SEC consider requiring a longer holding period. 

Again, the standard here should work to ensure that shareholder 

proponents are committed to the company’s long-term interests. 

Finally, we support the requirements of the SEC proposal that 

shareholder proponents disclose their background, intentions, and 

course of dealing with the company. This information will be highly 

material to other shareholders and to the marketplace in general 

in considering a proposed bylaw amendment. 

In sum, according shareholders access to a company’s proxy for 

these purposes is appropriate subject to the conditions I have described. Generally we believe the Commission’s proposed approach 

will advance the interest of investors, including millions of mutual 

fund shareholders. We stand ready to work with the Commission 

and this committee and the Congress on these important issues, 

and I thank you for the opportunity to present our views. 

[The prepared statement of Mr. Stevens can be found on page 78 

of the appendix.] 

Mr. KANJORSKI. There seems to be quite a clash as to the panel. 

Who would make the argument, just leave the status quo as it is 

and forget the two proposals by the SEC? 

Yes. 

Ms. YERGER. Certainly, I think from the Council’s perspective, 

and our members’ perspective, we would prefer the status quo to 

what has been proposed by the SEC. I sort of explained the key 

reasons why we oppose the proposals. 

The status quo would enable owners to continue to present proposals on and submit them for consideration by the owners at large 

and let the marketplace make a determination about what the appropriate access mechanism is. And indeed if it runs into a problem 

with State law constraints then the issue would be challenged in 

State court. 

Mr. KANJORSKI. Yes. 

Mr. SMITH. Yes, sir. We would also agree that the present situation is better than the two proposals as they are presented. The 

second longer proposal, even with the 5 percent access clause, takes 

away shareholder rights, as I described in my testimony. And we 

feel the 5 percent actually makes it a rather unworkable proposal. 

And of course the first, shorter proposal just doesn’t give the 

right of access at all, which we would disagree with. So both of 

them I think as presented have enough flaws that we hope they 

will not be passed. 

Mr. KANJORSKI. Is there any State in the union in their corporate 

law that allows no access for voters or do they all have methodologies in which to reach their— 

Mr. CASTELLANI. I’m not aware of one. I believe they all have 

some form of access. 

16

Mr. KANJORSKI. What are the most restrictive States? Is it reasonable to assume the great State of Delaware would be very restrictive or not? 

Mr. CASTELLANI. No. 

Mr. KANJORSKI. How—obviously this didn’t just come about. I’m 

rather surprised. I sort of thought the people’s argument would be 

on the side that you’re looking at greater access and a new rule, 

but apparently you’re looking at this as infringement upon the existing capacity to be heard. 

Mr. KIRSHBAUM. The issue of what is currently permitted based 

on the decision of the second circuit court of appeals that last year 

for the first time permitted—in a long time, the proxy access resolutions to appear. Previously the Securities and Exchange Commission had permitted companies to not put these resolutions on their 

proxy, granting them no actions. 

And so last year was the first year that there were these three 

shareholder resolutions on access to the proxy. We believe that 

process worked well during 2007 and also that there was very significant shareholder support for these resolutions, and we think 

that the—if the SEC just took no action at all this newly returned 

right to file these shareholder resolutions would be a good—good to 

continue next year. 

Ms. YERGER. And I should note that in 2003, the SEC did release 

a rule that would have mandated an access procedure at all companies, and the Council indeed would support such an approach. We 

believe, and we agree with fellow panelists it should be a limited 

tool. In fact, the Council’s policy is that access to the corporate 

proxy card to actually put someone on the card should be limited 

to 5 percent owners or groups who have held for at least 3 years. 

So we agree that this should be a tool for long-term owners. It 

should not be used for control purposes and it should be very limited in scope. But what’s on the table right now at the SEC isn’t 

an access proposal that would be mandated for every company. It’s 

an issue about whether owners can file proposals suggesting these 

mechanisms. 

During the past proxy season three such proposals, as John summarized, were presented. They were very limiting and I think restraining. I think they proposed 3 percent owners or groups could 

put one or a few candidates on a proxy card, and there was very 

strong market support for that. 

So I think the Council’s perspective is yes, we would love to see 

a rule that’s mandated that applies to all companies, but if we’re—

looking at the current situation, what we want is at least access 

to the card to submit proposals recommending different kinds of 

procedures and let the marketplace vote on those. 

The CHAIRMAN. Thank you. Apparently Mr. Campbell has been 

designated the Republican spokesman on this issue, which is fine 

with me, so I’ll recognize the gentleman from California. 

Mr. CAMPBELL. I can’t say, Mr. Chairman, that I speak for all 

Republicans on this committee necessarily on this issue, but— 

The CHAIRMAN. Do you meet the 5 percent threshold? 

Mr. CAMPBELL. Yes, I probably do meet—are there more than 20? 

I may meet the 5 percent threshold. But let me ask—Mr. Stevens 

I think raised some very interesting points, that a number of these 

17

mutual funds have more than 5 percent holdings, but I also understand from the pension fund side that many of you have restrictions in order to have diversity where regardless of the market cap 

for the company you want to keep your interests at 1 percent or 

below. 

But it would seem to me that it would be unwise to have 5 percent if that means a Fidelity, for example, just to pick something 

out of the air, some big mutual fund has the opportunity to go on 

60 or 70 different companies and have access to that proxy for—

unilaterally without any other shareholders being involved. 

Do the rest of you agree with that? I sense that Mr. Stevens 

thinks the threshold should be higher than 5 percent. Do the rest 

of you agree with that and/or if so do you have an alternative idea? 

Mr. SMITH. Mr. Campbell, I think that you raise a very good theoretical question, but in fact we should be clear that the right of 

access to nominate directors is probably only going to happen in a 

company that is dysfunctional and whose board is not serving the 

share owners. 

I think proponents are only going to seek to nominate directors 

in such companies. Secondly, if there was a frivolous nomination, 

it wouldn’t pass because the vast majority of investors, the Fidelities of the world would say, ‘‘This has no meaning, I am voting 

against it.’’ It would go nowhere. 

So the third thing to say is that in theory you are right that the 

Fidelities of the world could be proactive, but they, in their corporate governance guidelines on their Web site, have not defined 

their role to be an active, engaged proponent, more an active proxy 

voter. And there’s a very real difference between a pension fund or 

a proponent who thinks that engagement of companies is an appropriate thing to do and a mutual fund who feels, as we heard Mr. 

Stevens say, it’s their fiduciary duty to vote the shares, but they 

don’t feel it’s appropriate to go further. 

Mr. CAMPBELL. Mr. Stevens, I think, and then we’ll go to Mr. 

Kirshbaum. 

Mr. STEVENS. Yes, I just respond that in the situation that Mr. 

Smith describes, if the company is truly dysfunctional, will it be so 

hard to get a group of shareholders that are like minded at a 5 percent level or so to say, ‘‘We need to fix this,’’ because the SEC’s proposal does not limit it to one shareholding. It’s a group of shareholders who can get together. 

In fact, the electronic forum is intended to extend to all shareholders an opportunity that now exists for institutional shareholders to communicate freely about matters affecting a company 

whose shares they hold. So it would facilitate that process. 

But the question we ask ourselves is, should a single institution 

at whatever level is chosen, be able to exercise that, and will there 

be the appropriate restraint. I hope that the proposal, if in fact it 

is adopted, would only be used in exceptional circumstances. But 

I agree with Mr. Castellani that it is a significant intrusion into 

the normal way in which corporations are and frankly should be 

managed. 

Mr. CAMPBELL. What do you think is the right solution? You are 

now chairman of the SEC, so what— 

18

Mr. STEVENS. Well, you know, I said in my testimony that I 

think we need to study the shareholding levels because I just don’t 

think that there is enough understanding about the aggregations 

at different market capitalization. And perhaps a refinement along 

the lines of what you suggested—very large companies, perhaps a 

smaller threshold, smaller ones, a different one. 

So I think that’s something that ought to be studied in the proposal process. Our instinct is that 5 percent is not an unreasonable 

threshold for this purpose. 

Mr. CAMPBELL. Mr. Kirshbaum, and then we’ll go to Mr. 

Castellani again. 

Mr. KIRSHBAUM. The 5 percent is a little confusing because we’re 

really talking about four different steps of a process here of which 

we’re sort of—we have to clarify the 5 percent on two of those 

steps. The first is that in the proposed SEC rule the 5 percent refers to the number of shareholders that would be necessary to file 

a resolution changing the bylaws of the company to permit access 

to the proxy. 

Under the previous rule put forth under Chairman Donaldson, 

the 5 percent had to do with how many shareholders would be necessary to actually nominate somebody. So the 5 percent in the current rule has to do with just getting the shareholder resolution out 

there. 

The second step is, of course, the shareholders themselves voting 

on that resolution where a majority would be needed to make that 

change to the bylaws. The third step would be the nomination 

itself. And again under the process in the proposed rule, that level 

would be determined in the actual bylaw amendment that was filed 

for access to the proxy. 

Again, under the Donaldson proposal that was more clearly set 

out in the rule. And then of course the fourth piece is the actual 

election itself. No one is going to be elected to the board unless the 

shareholders, all the shareholders pass the vote saying the majority of them support the nominee. 

So I think that the 5 percent rule needs to be, at least in terms 

of the putting the issue in front of all the shareholders, that level 

is too high. And because a majority of shareholders have to both 

support the change in the bylaws to put the access to the proxy in 

place and then the shareholders—again, the majority of them have 

to vote to elect new members of the board, we think that that addresses the issue that was raised about the narrowness or the special interests. You can’t be a narrow special interest candidate and 

get a 50 percent vote on either of these. 

Mr. CAMPBELL. My time is up, but Mr. Chairman, could Mr. 

Castellani and Ms. Yerger respond? Thank you. 

Mr. CASTELLANI. Just a point of information and two comments. 

One, information. Of the Business Roundtable’s 25 largest companies, 20 of them have a single shareholder that holds at least 5 percent. The remaining five companies would take two shareholders to 

meet the 5 percent threshold. 

Two comments. In my own corporate experience, certainly in my 

company and certainly with our members, if this is an issue of 

communications, we spend our time trying to get Mr. Stevens’s 

members and Ms. Yerger’s members to buy 5 or 10 percent of our 

19

companies. Indeed, anybody who owns that gets the attention—or 

could potentially own it gets the attention of the board and the 

management. We are trying to sell our shares to the members that 

are represented here. 

The second is that in the comments that came as a part of the 

roundtables that the SEC held in proposing these two alternative 

rules, a number of issues were raised about who the shareholders 

are, the voting process, what do you do with broker-dealer held accounts, which could represent a significant portion of the shares, 

and what is the role of the proxy advisory services? There are lots 

of things—what is the role, indeed, of the process by which we now 

count shares, which does indeed present some problems? 

There are lots of issues that have not been resolved that were 

raised in the hearings at the SEC, the roundtables of the SEC that 

bear on this election process, some of which can bear very significantly on them, so that it is not a very true and clean vote of all 

of the shareholders voting for or against any one of the proposals 

that are on the proxy. 

Ms. YERGER. I just want to note quickly that I’m not a lawyer, 

so maybe I’m naive when I think about rules and regulations, but 

I think they should be grounded in reality. And what we’re talking 

about here is again how many share owners need to be—to get together. What is the shareownership to actually file a proposal that 

people would end up voting on about a mechanism to then put a 

candidate on management’s proxy card? 

And the fact is that the 10 largest institutional money managers, 

and many of them are not just institutional money managers but 

also mutual fund companies, have never, at least in our research 

in the past 10 years, sponsored a shareowner resolution. So we 

need to be thinking practically about who actually would be filing 

these proposals. 

Even though Mr. Stevens’ members may be supporting these proposals when they come on management’s proxy card, they tend not 

to sponsor them. 

Mr. CAMPBELL. Thank you. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Mr. Stevens, the SEC proxy access proposal will also allow the 

establishment of electronic shareholder forums that could potentially greatly increase interaction among shareholders and make it 

easier for them to organize and to push management to pursue 

shareholder interests. 

Given the fact that so many investors today use the internet to 

monitor their portfolios and to make their investment decisions, I 

personally think this would be a useful tool, and you have testified 

in support of them. 

Do you think that investment companies would establish or take 

advantage of the electronic shareholder forums discussed in the 

SEC proposal? 

Mr. STEVENS. We’ve discussed the proposal with our membership 

and they are very supportive of it. It extends authority that has existed for some time for institutional investors to engage in a dialogue about matters that concern a company whose shares they 

hold. This would now extend it to rank and file investors so that 

20

there would be an even broader opportunity for an exchange of 

views. 

More generally we think the SEC’s rules should make the maximum possible use of the new technologies like the internet, and 

this is a good step in that direction. 

Mrs. MALONEY. Thank you. I’d like to ask all of the panelists this 

same question. Much of this debate centers around the rights of the 

minority versus the rights of the majority and looks at the 5 percent shareholder threshold and the one-year holding period, and I’d 

like each of you to comment on where you stand on those two proposals. 

I believe, Mr. Kirshbaum, you support, you think the 5 percent 

is too high. Do you support the 1-year holding period? Is that too 

long or too short? 

Mr. KIRSHBAUM. The 1-year holding period we do support and we 

do feel that the—as long-term investors and as—that the holding 

period is a more appropriate approach to this than the number of 

shares that you own, the long-term shareholders are really the 

ones who are looking for the long-term interests of the company. 

They are not in and out, they are not looking for a short-term gain. 

And if we’re looking for a measure of interest in the long-term interest of the company, the holding period is much more important 

than the number of shares. 

Mrs. MALONEY. Ms. Yerger, could you testify whether you think 

that 5 percent is too high or too low and the 1-year holding period? 

Ms. YERGER. Five percent level to file a shareowner proposal is 

too high in our opinion. We don’t think it’s too high to actually put 

a candidate on the proxy card. We think the one-year holding period is appropriate. 

Mrs. MALONEY. Okay. And Mr. Castellani, your position on the 

two proposals? 

Mr. CASTELLANI. We don’t feel that the proposal is necessary in 

light of the reforms in majority voting that are already in place and 

becoming more prevalent across publicly traded companies. 

So as to the holding period, it should be significant. Long-term 

shareholders are hard to find and come by these days. 

Mrs. MALONEY. And Mr. Smith? 

Mr. SMITH. I would also agree that at least a 1-year holding period, perhaps longer. We’re trying to act on behalf of long-term 

owners here, and I would reiterate what Ann Yerger said, to get 

5 percent of the shares to present an idea for a vote by shareholders that then has to be voted on and then nominating a director is plenty of safety valve, a 2-year period in the process. 

So I think a normal process for putting the resolution and then 

looking at a 3 percent, for example, group of shareholders to nominate the director would be appropriate. 

I would just add to your very good comment about the electronic 

forum; this is an electronic age. I think most of us would support 

the SEC moving in this direction and we’d be thrilled to have a discussion on, say, executive pay, online with companies. 

Mrs. MALONEY. I think the chairman would like to chair that discussion. 

21

Mr. SMITH. But as you know, the SEC proposal is to substitute 

the forum for the resolution process, and you’re getting across-theboard opposition by investors on that. 

Mrs. MALONEY. And Mr. Stevens, 5 percent and the year? 

Mr. STEVENS. We have not supported the notion, Congresswoman, of substituting the forum for the process that’s now in rule 

14a-8, just to be clear. But no, we believe that the SEC ought to 

carefully study the holding patterns. 

I do not believe 5 percent is an unreasonable threshold even for 

advancing a bylaws amendment of that significance to allow shareholders to put nominees on the corporate ballot. And I think that 

if there is a situation within a company that requires such a move, 

5 percent will not be difficult to achieve. 

Mrs. MALONEY. My time is up, but the one-year holding period, 

what is your position on that? 

Mr. STEVENS. We would support a minimum of one year. 

Mrs. MALONEY. Thank you. My time is up. Thank you. 

The CHAIRMAN. The gentlewoman from Ohio. 

Ms. PRYCE OF OHIO. Thank you, Mr. Chairman. I want to thank 

the panel. I’m very sorry that I missed your testimony. It has been 

summarized very adequately by my staff however, and so I appreciate the hard work that went into preparing for this. 

Let me ask a question that occurs to me. Boards composed of directors with fractious and conflicting interests is probably, currently the norm in Europe, and they have proven to be ineffective 

governance models that don’t really yield improved shareholder returns. Now the reforms that we made through Sarbanes-Oxley 

were designed to generate boards that are more independent, not 

beholden to management or any interests other than those of the 

shareholders. 

And so given that, why do you think the SEC should take a uturn from the board independence reforms that we so painstakingly 

enacted and open the door for this European-style special interestladen board structures that don’t seem to be having the desired effect in Europe. Does anybody have an opinion on that? 

Mr. KIRSHBAUM. I don’t think that we are looking toward a European model at all. What we’re looking toward here is just a way 

to add one or two additional board members to the ballot and to 

have them be elected with—on a slate with majority support from 

all of the shareholders. 

I think that the issue of having a fractious board based on small 

special interests is not going to happen here, again, because of the 

protections in place from the majority vote to elect the board members. 

In addition, we are not talking about turning independence on its 

head at all here. We are looking at an opportunity to nominate 

more independent board members for the board. The non-independent board members are usually those that either work for the 

company or have some financial relationship with the company. 

The access to the proxy rule I don’t think would result in any 

further nominees of insider directors. I think what we should be 

looking at, again, is a strengthening of the independent directors 

on the board. 

Ms. PRYCE OF OHIO. Does any panel member disagree with that? 

22

Mr. CASTELLANI. Boards operate best when they are independent, when they are informed, when they are inquisitive, when 

they are engaged, and when they are cohesive. 

Right now, State law which governs this area requires all directors to represent all shareholders, so it is a very different process 

than, for example, this body. Decisions in corporate boards are not 

made by split votes or votes along lines. They are generally made 

by discussion and consensus so that the company can move forward 

very clearly. Our concern is that if that was made to be the equivalent, functional equivalent of a legislative body, then they would be 

unable to take the kinds of risks and make the kinds of decisions 

that in fact create shareholder value. So we would be concerned 

about this turning it into a fractionated board that was divided 

similar to some of the European models, if you’re talking about codetermination in particular. 

Mr. SMITH. I’d love to respond to this. The words Mr. Castellani 

uses about a cohesive board and then a fractionated board is setting up a strawman here. In fact, a good board today should be a 

board that has vigorous debates. They should work together with 

the shareholder interests in mind, so I agree with him if that’s the 

benchmark for a cohesive board. But what we need is boards that 

are more independent, think independently, and are willing to 

challenge the CEO or the top management, not in a destructive 

way, but in a creative way. 

And those create good board decisions. The kinds of board members who are being discussed to be put on the Hewlett Packard 

board, which I think we admit has some degree of dysfunction, or 

the Home Depot board, which has changed; it has two new board 

members on it. This is not bringing in people who represent a ‘‘special interest’’ and are trying to push one issue. These are people 

who feel that the company needs to make some changes in its direction. The Home Depot board is responding very, very positively, 

under new management leadership by the way as well as new 

voices on the board. 

So we would support the idea of having a board that is working 

together for shareowners. But I think the great fear that the Business Roundtable brings up, that bringing in some independent, new 

voices on a board is somehow going to make a board dysfunctional 

is a myth. Some of our boards are dysfunctional already. Bringing 

in new people might be a breath of fresh air that would get a company going down a new track. 

Mr. CASTELLANI. Could I respond to that, because that is a 

mischaracterization of my position. Of course we want vigorous debate in boards. And the two examples that were cited, Hewlett 

Packard and Home Depot are examples of what I am saying is occurring across all of the large companies and across corporate 

America, and that is the boards responded in and of themselves 

after discussions with the shareholders, to improve their governance. 

Mr. SMITH. After discussions with the shareholders? 

Mr. CASTELLANI. After discussions with the shareholders, which 

we very much support. You know, communications with the shareholders are key to this and key to ensuring that the board is acting 

in all of the shareholders’ best interests. So no, we’re not asking 

23

for diminished communications; in fact, quite the opposite. And 

now we’re not saying boards shouldn’t have vigorous discussion 

about important issues for the company. But ultimately what 

boards need to do is act cohesively on behalf of all shareholders. 

Ms. PRYCE OF OHIO. My time has expired. Thank you, Mr. Chairman. 

The CHAIRMAN. I’m going to take off from there, Mr. Castellani, 

because I’m glad you clarified it, but I must say in your original 

statement there was one thing you said that did trouble me, which 

was that you didn’t like to see split votes. 

Now it’s one thing to say you don’t want people being representative of different issues, but split votes are a sign of rational thought 

going on. The absence of split votes means group think. I am 

struck by Warren Buffett’s note that he has now been excluded 

from the compensation committees of the boards that he was on. 

Mr. Buffett has written that he has been on 32 boards and after 

he dissented on one compensation committee he was never again 

on the compensation committee. 

So I am troubled by your dislike of split votes. People are—well, 

that’s what you said. 

Mr. CASTELLANI. No, my description is that boards operate. 

Boards don’t operate by votes and then move forward. Boards operate by discussion, disagreement but then ultimately the best 

boards operate by coming to a consensus and moving forward. 

The CHAIRMAN. Well, I just think that’s not the way human decisions go forward, and the notion that you never have a split vote 

is an invitation to group think. Now it is possible to have different 

votes without there being a dysfunction, and the notion—I really 

think—and it’s what Mr. Buffett seemed to me to be suggesting. 

The view that in the end we all have to vote the same, that’s not 

a requisite for anybody to function well. And a notion that a dissenting vote is somehow a bad thing or a sign of dysfunction really 

does trouble me. 

Mr. CASTELLANI. Well, Mr. Chairman, I’m certainly not trying to 

give that opinion, but I would point, for example, to an example 

that we—both sides of this issue use as a reason why you should 

take our position, which was what happened at the Hewlett Packard board. 

A very, very substantial portion of that dysfunction occurred 

when board members went outside the normal— 

The CHAIRMAN. Right, which is not what we’re talking about, so 

it’s irrelevant to whether or not you said split votes. Leaking outside is—no, Mr. Castellani, that’s simply not even remotely comparable. 

We’re talking about of course you shouldn’t then go and leak and 

distort other people’s vision and wiretap them, and if you think 

that when you vote ‘‘no,’’ you have to go out then and be wiretapped, that’s not any voting process I’ve ever seen. 

It’s your dislike of split votes. I think you make a grave error and 

you—but let me ask you this then. You say boards have gotten better? 

Mr. CASTELLANI. Absolutely. 

The CHAIRMAN. I have to say, and I am struck by the people—

I’ve been around this committee for a while, and the people who 

24

are now telling me that boards are much better, never acknowledged that they weren’t good before, so they went from good to perfect. 

And if you have any comments from the Business Roundtable or 

anybody else prior to the period of the last 5 years in which people 

acknowledge problems I’d be glad to see them. I don’t think they’re 

there, but the question would be what has made them better, why 

have they improved? 

Mr. CASTELLANI. Well, those boards—and again— 

The CHAIRMAN. You said that in general boards have gotten better. What’s been— 

Mr. CASTELLANI. Here are the fundamental things that we believe have improved the board process. 

The CHAIRMAN. No, I’m looking at the causality. I’m not talking 

about the examples of improvement. But when things are going 

along a certain way and then there’s a significant change I think 

it’s relevant to look at the causality. What caused those improvements in the last 5 years? 

Mr. CASTELLANI. Well, in large part the boards reexamining, 

companies reexamining how those boards operated in light of some 

of the scandals. Obviously no board, no company, no management 

wanted to be in a circumstance where shareholder value was destroyed because of improper behavior. So I think we learned from 

all of the scandals and went back and improved our processes, just 

as we daily improve our products and services based on what we 

see going wrong, to ensure that that wasn’t going to happen in the 

preponderance of the U.S. corporations. 

The CHAIRMAN. I understand, but was the increase a result of 

outside agitation of shareholder activism, of even politicians raising 

questions, did that have any impact in the change to the board? 

Mr. CASTELLANI. I’m sure it had an impact, but for example in 

our own companies, and within the Business Roundtable, it was 

the chief executive officers themselves right after the Enron scandals who stood up at our meeting subsequent— 

The CHAIRMAN. Because of the scandals. 

Mr. CASTELLANI. —and said, ‘‘That cannot happen to us.’’ 

The CHAIRMAN. Let me just say, and I’ll get to you in a second, 

Mr. Smith. But I was struck—Sarbanes-Oxley has not been the favorite act of a number of business people although you have cited 

your support for it. 

Mr. CASTELLANI. I do support it. 

The CHAIRMAN. But I was struck that we did get a letter from 

the Chamber of Commerce of the United States in which they gave 

Sarbanes-Oxley a lot of the credit for the improvement in board 

performance. They did it in a context of saying that therefore we 

didn’t have to do anything about executive compensation, but the 

Chamber did give Sarbanes-Oxley some of that credit. 

Mr. Smith, you wanted to say something? 

Mr. SMITH. I do, Mr. Chairman. Certainly Mr. Castellani is absolutely right that the scandals woke up boardrooms but also woke 

up investors, investors who lost virtually trillions of dollars as the 

market started losing confidence, woke up, became more active 

owners, became more engaged owners, and became much more actively involved in pressing for certain forms of board accountability. 

25

Now often, as Mr. Castellani and I would agree, boards readily 

responded positively to those calls, for example, majority vote for 

directors or even some companies that were expensing stock options before it was required. So it’s not always a confrontation 

when there’s a disagreement, but certainly the input—I wouldn’t 

necessarily always call that agitation, but the input from investors 

has been key from our point of view in fertilizing this process and 

sometimes stimulating it. 

And on other occasions when companies don’t seem to get it, 

when resolutions are sponsored on issues like majority vote for directors and get a 50 percent vote, to their credit the Exxon board, 

the Exxon-Mobil board and the Home Depot board, within 3 or 4 

months puts that reform in place. 

Now we needed to have shareholder leverage there to encourage 

the board to take a stand. And I’d just get on my soapbox again 

and say without the right to file shareholder resolutions that the 

shareholder— 

The CHAIRMAN. I appreciate that. I would just say you took a little exception to my saying ‘‘agitation’’ but you substituted ‘‘fertilization.’’ I think I’d rather have my activity characterized as agitation 

than as fertilizer. 

The gentleman from Kansas. 

Mr. CAMPBELL. Mr. Chairman, if I can just comment, I am 

pleased to know that split votes can represent rational thought, because you’re likely to see a lot of rational thought relative to the 

flood insurance bill later today. 

The CHAIRMAN. Oh, I have never tried not to have split votes. I 

think they are a very good idea. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. Mr. Stevens, 

in your written testimony, you have discussed the uniqueness of 

mutual funds as institutional investors being subject to disclose 

their proxy votes. Today we’re talking about access to the corporate 

proxy, but I’m also interested in your views as to whether other institutional investors should disclose proxy votes as well. Would 

shareholders and companies benefit from those disclosures by the 

others? 

Mr. STEVENS. Thank you for the question. It is true we had reservations about the SEC uniquely applying regulations to us. They 

went into effect several years ago. We have learned to live with 

them, and every vote we cast with respect to every company whose 

shares we own in our portfolios across our industry are now there 

for all the world to see. 

I think it would be very beneficial for other institutional investors, particularly those in a fiduciary relationship to their customers, to be required to make a similar disclosure. 

Mr. MOORE OF KANSAS. Thank you, sir. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from New York. 

Mrs. MCCARTHY. Thank you, Mr. Chairman. I’m sitting here and 

I’m wondering, when you were starting to talk about dysfunctional 

boards, what is your opinion on some of the boards that did not 

react fast enough or didn’t know it was coming when we had the 

mortgage crisis? Did those boards know that what their CEOs were 

26

doing as far as putting the monies out to people who shouldn’t have 

been getting mortgages? I’m just curious. 

I mean, obviously, the proxy voters wouldn’t have known anything about it, because a lot of people didn’t know about it until 

it hit the fan. And then obviously it affected the whole stock market, so that had to have a trickle-down effect. And I was just curious if you had any thoughts on that. I mean, it was going on. It 

didn’t hit one company; it hit many companies. Germany, from 

what I understand, the German bank was the one that really started it rolling. 

Mr. CASTELLANI. Certainly any board, any board member should 

know the breadth and extent of the company’s activities, and the 

consequences of the activities. 

Mrs. MCCARTHY. Do they actually, though? I mean, do a lot of 

the board members actually—they meet how many times a year? 

Mr. CASTELLANI. Indeed. Board meetings vary, but typically—

well, some meet every month. Typically, it’s 8 or 10 times a year. 

Though what we’ve seen also in our data consistently through the 

years that board members and board meetings are taking more 

time, getting more information. Committees are meeting more and 

more often for greater periods of time getting in more and more information about the company, so. 

Mrs. MCCARTHY. Who gives them the information to make the 

decisions when they’re meeting? 

Mr. CASTELLANI. It comes from a variety of sources. It depends 

on the committees and depends on the activity. But typically, it 

comes from the company, committees, particularly audit committees and compensation committees, but any committee of a board 

is free and does avail themselves of outside information, particularly those sensitive areas. For example, the audit committee, the 

auditors report to the audit committee, not to the management of 

the company. 

Mrs. MCCARTHY. Again, I’m going to follow up with a curiosity. 

Because when we saw a number of hedge funds get in trouble, certainly mortgage companies getting in trouble, which was a chain 

reaction, if the accountants, you know, when times were good, they 

were making a lot of money, but didn’t anybody, you know, put forward or is it not the responsibility of the board or the CEO to put 

forward, you know, we’re making good money, but we’re taking a 

lot of risks here? I’m just— 

Mr. CASTELLANI. Oh, absolutely. I mean, risk assessment, having 

had the responsibility for risk management in my company, risk 

assessment is an important part of a board’s function. Absolutely. 

Mrs. MCCARTHY. So they all failed? 

Mr. CASTELLANI. Well, you know, if they understood the consequences of it and understood that it was coming forward, I can’t 

comment on the specifics of it because I’m not knowledgeable about 

the industry in and of itself. But I would make the general comment is that in some cases, companies will fail with their products, 

with their services, and we want them to fail. Because if there 

aren’t failures, there aren’t risks being taken. 

Now clearly that doesn’t mitigate the impact of the consequences 

of the failure in the case that you’re describing, but we want boards 

and we want companies to take risks. Otherwise, they’re not going 

27

to develop new products, new services, and greater shareholder 

value. I don’t think anyone here would— 

Mrs. MCCARTHY. I understand that, but it seems from the Enron 

episode that we went through, then the mortgage bankers, it’s the 

little guy who has actually gotten hurt more than anybody else. 

And I think that is something that should be a concern to every 

corporation. 

Mr. CASTELLANI. Well, it is a concern, and I would point out that 

it is the exception and not the rule. I mean, all the scandals that 

we are talking about, Enron, whatever, however many you want to 

mention, are horrible, and that they affected a lot of people and 

caused trillions of dollars of damage. 

They affected all of us, every other corporation, because we exist 

to—and we prosper when we have an environment of investor trust 

and public trust in what we do, and we suffered when that trust 

was eroded. However, those are still a handful companies against 

the 15,000 publicly traded companies that— 

Mrs. MCCARTHY. Well, I agree with you, and I was the first one 

defending a lot of companies, but I still think we on this committee 

handled it in a fair-minded way. Mr. Smith? 

Mr. SMITH. Mrs. McCarthy, I think this is a case where a cohesive board from 5 or 10 years ago who played by the rules of the 

game then on subprime lending and didn’t ask hard questions, 

therefore didn’t serve the company and the shareholders well in the 

long term. 

So how do you get voices from the outside who are canaries in 

the coal mine or just raising a different point of view? Shareholders 

actually were sponsoring resolutions with companies like Countrywide, raising questions about subprime lending before it was considered—well, unfortunately, the disaster we see today. 

Or the issue that’s very much on the front pages today on climate change; 10 or 15 years ago, investors began knocking on companies’ doors and raising questions about the risk related to climate change. Happily, today you’ll see hundreds of companies acknowledging that risk, speaking out about it, and day-by-day 

changing their policies. 

But the boards had to be stimulated, activated to think outside 

the box, whether you were an insurance company, whether you’re 

British Petroleum or not. That’s not to say that the boards did a 

bad job. It’s just to say they played by the expected rules of the 

road in their board meetings. And when you have outsiders 

through the shareholder resolution process saying why don’t you 

think about it this way, it does—that agitation does pay off. 

Mrs. MCCARTHY. Thank you. I yield back the balance of my time. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. Mr. Castellani, thank 

you very much for being here. Thank all of you for being here 

today. In your prepared remarks, you said, given the strong record 

of reforms and our belief that politics and narrow agendas have no 

place in the boardroom, what do you—can you break that down? 

What—I mean, politics and what narrow agendas? Give me some 

examples. 

Mr. CASTELLANI. Sure. There are a number of narrow agendas 

that exist, and in fact, one of the things that Mr. Smith has adVerDate 0ct 09 2002 17:28 Dec 20, 2007 Jkt 039542 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 K:\DOCS\39542.TXT HFIN PsN: TERRIE
28

dressed is a good example of them. When you talk about various 

proxy proposals, they range in their attention from things that are 

directly related to the governance of the company—how is the 

board structured? Is it an annually elected board or is it a staggered board? How are nominees brought forth? Does the board 

have change of controls, circumstances, and thing that relate to 

governance. 

And then you get at the other end of the spectrum, well meaning 

shareholders who have specific interests that may have been frustrated somewhere else. For example, in my own company, we had 

a group of shareholders who every year asked us to get out of the 

nuclear shipbuilding business. Well, that was fine. But it was 40 

percent of our cashflow and of substantial value to our shareholders. 

Mr. CLEAVER. Okay. But— 

Mr. CASTELLANI. Because they were against nuclear power. 

Mr. CLEAVER. Okay. What about the politics? 

Mr. CASTELLANI. Well, if those particular interests and specific 

interests are represented on the board and that is the only purpose 

of a board member to come to, for example, I’ve used my company, 

which doesn’t exist any more. We took it apart—to come to every 

board meeting and say I’m not going to support investment in the 

shipbuilding business because it is nuclear powered shipbuilding, 

we should get out of it and push that agenda, then it would be to 

the detriment of the shareholders because they were benefitting 

greatly from the profitability and the cashflow of that operation. 

Mr. CLEAVER. Now, I’m a United Methodist pastor, and we 

own—the Methodist Church owns substantial stock in Coca-Cola. 

And we went through the very same process you did by getting—

some years back—by trying to force Coca-Cola to divorce itself from 

South Africa. And so you’re saying that if—in a situation like that, 

those individuals who are single-minded should not have access? 

Mr. CASTELLANI. No. Because you did it from the standpoint of 

a shareholder. What I’m saying is if the director, if a director had 

that as his or her only— 

Mr. CLEAVER. Yes. 

Mr. CASTELLANI. —and disrupts all of the other operations, then 

that’s the concern we have. 

Mr. CLEAVER. But that’s the whole point I’m making. You don’t 

want them to be directors, right? 

Mr. CASTELLANI. We want voices— 

Mr. CLEAVER. I know. But you don’t want them to be directors, 

right? 

Mr. CASTELLANI. We want diverse voices in the directorship, but 

we want boards ultimately to reach consensus in operation. 

Mr. CLEAVER. Okay. So, if the wolfman and his friends are on 

the board and people are investing in the silver bullet factory, you 

don’t want them on the board because—I mean, they want the silver bullets produced at a much higher rate, because they have a 

direct interest. 

Mr. CASTELLANI. If they hurt the interests of the other shareholders of the company— 

Mr. CLEAVER. You don’t want them on the board. 

29

Mr. CASTELLANI. —the majority of the shareholders, then, no, 

they should not be on there. 

Mr. SMITH. Mr. Cleaver, Mr. Castellani and I are not too far 

apart on this. 

Mr. CLEAVER. Well, we are. He and I are. 

Mr. SMITH. And I just wanted to explain that if the person only 

had one issue and was on the board, that would be disruptive. But 

as you know, sir, Dr. Leon Sullivan— 

Mr. CLEAVER. Yes. 

Mr. SMITH. —and Clifton Wharton were on General Motors and 

Ford boards. They spoke out strongly on the South Africa issue, 

and they were convincing. In the end, they helped bring the board’s 

decision around to the position held by the United Methodist 

Church. 

Mr. CASTELLANI. Clifton Wharton was on our board. 

Mr. SMITH. That’s right. And this is creative discussion within 

the boardroom rather than— 

Mr. CLEAVER. My problem is—and maybe these are just words 

that were not—that were put in your—that you wrote into your report, and I shouldn’t focus in on it. You said we believe proxy access will result in special interest board candidates and will politicize the director election process. 

And I’m not saying people, you know, who purchase stock 2 

weeks before a board meeting, and I think all of you agree that 

they should be long term. But, I mean, I’m wondering when you 

say special interest, are you talking about organized labor? Are you 

talking about—I’m sorry? 

Mr. CASTELLANI. Could be. Could be. Any shareholder— 

Mr. CLEAVER. I mean, since AFSCME— 

Mr. CASTELLANI. Any shareholder who comes with a single agenda that would be to the detriment of the other shareholders of 

the— 

Mr. CLEAVER. Who determines whether they have a single agenda? 

Mr. CASTELLANI. They do. 

Mr. CLEAVER. No, no, no, no. They may be speaking to an issue, 

but they may have other reasons for being on the board, and so, 

the board members—I mean, so you’re saying that the people on 

the board decide whether or not you are a single agenda stockholder? 

The CHAIRMAN. Would the gentleman yield? 

Mr. CLEAVER. Yes. 

The CHAIRMAN. Because it’s very relevant to two bills that have 

come out of this committee. We’ve authorized and we talked to the 

ICI about this as well as others, the Council of Institutional Investors—we have authorized a suspension of the potential of a lawsuit 

on fiduciary responsibility with regard to Darfur and Iran. We have 

in this committee, and overwhelmingly in the House, gotten more 

than 400 votes for each bill. This made it easier for people to push 

for divestiture either from Darfur in connection with their activity, 

or the nuclear weapons in Iran. Would you characterize people 

seeking to push for any kind of disengagement in either Iran or 

Darfur, would they be in the special interest category? 

30

Mr. CASTELLANI. Not if it was determined to be in the best interest of all shareholders. 

The CHAIRMAN. Well, but no. Excuse me. The ‘‘if’’ doesn’t work 

for now, Mr. Castellani. We’re not in a hypothetical. If resolutions 

were now put forward saying, cut off your activities with the companies doing business in Darfur, cut off Iran, would you characterize those as special interests? 

Mr. CASTELLANI. Boards have, boards and management have the 

utmost responsibility to comply with the laws of the United States. 

They will comply. If you make a law— 

The CHAIRMAN. Well, Mr. Castellani—please answer the question. I don’t mean to be rude. 

Mr. CASTELLANI. No, I— 

The CHAIRMAN. You’re not answering the question. If it were the 

law—we’re not—there are things that people can be doing that are 

investing that don’t violate the law. Yes, I’m not accusing people 

of breaking the sanction. But there are people who want to go beyond the sanctions and say, yes, it’s illegal to do this. But we want 

to go beyond that. I’m not talking about the sanctions bill. I’m talking about legislation that allows people to say, I don’t want my 

money being used to deal with—to help these people in Darfur who 

are in power or Iran where it’s not legally required. And the question is—it seems to be a fair question—would people seeking to get 

companies to divest beyond what the law absolutely required with 

regard to Darfur or Iran, be in that special interest category? 

Mr. CASTELLANI. If the board of directors determined it was in 

the interest of all of the shareholders. If it— 

The CHAIRMAN. You’re not answering the question, Mr. 

Castellani. I didn’t ask you what the board—I’m asking your characterization. You say there are these special interests. It’s an intellectual issue. You’re just dodging the question. 

Mr. CASTELLANI. There are— 

The CHAIRMAN. Do you characterize people who come and say 

look—there’s no if’s here—I don’t want my company, I don’t care 

how profitable it is. I don’t want my company making money off 

genocide. I don’t want my company helping nuclear weapons. Is 

that a special interest or not? 

Mr. CASTELLANI. Is it a special interest if I come forward and I 

say I don’t want my company investing in Massachusetts because 

I don’t like the Boston Red Sox? I’m a Yankees fan. 

The CHAIRMAN. I would say that that was kind of silly. Having 

answered your question, will you answer mine? I mean, why do you 

refuse to answer the question? And do you really—excuse me, Mr. 

Castellani, you know what? And I understand this is off the top of 

your head, but equating dislike of the Red Sox to equating a dislike 

of genocide, really it doesn’t advance serious discussion. 

Mr. CASTELLANI. No, sir, I— 

The CHAIRMAN. I’m asking you the question and your refusal to 

answer it frankly is more revealing than your answer. 

Mr. CASTELLANI. I can’t answer a question that can’t be answered in the context of what is in the best interest of all of the 

shareholders. 

The CHAIRMAN. Here is the context. 

Mr. CASTELLANI. The board of directors makes that decision. 

31

The CHAIRMAN. You know—I’m not—it isn’t hypothetical. It’s 

Darfur today. In other words, you think it would be a special interest and you’d be embarrassed to say so in your characterization. 

Mr. CASTELLANI. No, sir. 

The CHAIRMAN. Yes. 

Mr. CASTELLANI. There are specific issues that come before any 

board of directors. A board of directors’ deliberation is to ensure 

that those specifics, whether it’s an individual product or an individual market or an individual political circumstances are in the 

interest of all shareholders. That is their fiduciary responsibility. 

The CHAIRMAN. That’s not the question I asked you. Mr. Smith, 

did you want to— 

Mr. SMITH. Well, I’ll try to answer it, not for Mr. Castellani, but 

indeed the U.S. Chamber of Commerce says this all the time about 

advocates who are raising questions about subprime lending, about 

climate change, about diversity, about corporate governance— 

The CHAIRMAN. They say what all the time? 

Mr. SMITH. We are special interest groups who have no interest 

in shareholder value. And it’s a transparent myth used of course 

to marginalize proponents. Mr. Castellani has not said that today, 

but the business community too easily falls into, I don’t like the position you’re raising, therefore, you’re a special interest group, rather than I just disagree with the position you’re raising. 

The CHAIRMAN. Let me go back to the gentleman from Missouri. 

I captured his time, and I apologize. 

Mr. CLEAVER. That was the point I was trying to make. You said 

it perhaps more articulately. The problem I have is, you know, 

somebody sitting on a board has the distinct and exclusive power 

to determine what a special interest is, and that troubles me. 

Let me ask my final question. Has there been any evidence—this 

is for anybody—any evidence in the United States or anywhere else 

that would indicate that direct shareholding—shareholder voting 

has destroyed a corporation? 

Mr. CASTELLANI. No, because it doesn’t exist. 

Mr. CLEAVER. I’m sorry? 

Mr. CASTELLANI. No, because it doesn’t exist. 

Mr. CLEAVER. You are absolutely right. We now agree. And so 

since it doesn’t exist, how do you know that it’s evil? 

Mr. CASTELLANI. We’re making our best judgment based on— 

Mr. CLEAVER. But your best judgment is prejudiced. 

Mr. CASTELLANI. On a model that works pretty darn well. 

Ms. YERGER. If I can make one comment, I think that we don’t 

want to lose sight of the fact that when it comes to the board of 

directors, they are elected by the owners. And anyone who is sitting in the boardroom has been elected by the owners. I have a lot 

of confidence in our marketplace. I have a lot of confidence in the 

sophistication of our institutional investors and our investors, and 

I don’t think they would elect anyone with a special interest only 

to represent them on a board. And once they’re sitting in the boardroom, they have a fiduciary duty to represent all share owners. So 

I think we should remember that this is about giving owners the 

power they actually have, which is to elect directors. 

The CHAIRMAN. Let’s finish up with Mr. Kirshbaum. 

32

Mr. KIRSHBAUM. Thank you. In terms of the special interests, I 

think that anybody on the board, if someone happens to be a member of a union, doesn’t mean that they represent the union. If they 

are a lawyer, it doesn’t mean they represent all lawyers. If they’re 

a university president, it doesn’t mean that they’re only there representing universities. 

I think that picking out somebody just because of what their 

background is, and saying that they have a special interest, is just 

a false way of addressing this issue. Everybody comes from some 

background, but they’re all elected by the majority of the shareholders to serve the interests of all of the shareholders, and they 

act accordingly. 

The CHAIRMAN. The hearing is adjourned. 

[Whereupon, at 11:39 a.m., the hearing was adjourned.] 

(33)

A P P E N D I X

September 27, 2007

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