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55–479 PDF 2010

S. HRG. 111–315 

PROTECTING SHAREHOLDERS AND ENHANCING 

PUBLIC CONFIDENCE BY IMPROVING CORPORATE GOVERNANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITIES, INSURANCE, AND INVESTMENT 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

ON 

EXAMINING THE IMPROVEMENT OF CORPORATE GOVERNANCE FOR 

THE PROTECTION OF SHAREHOLDERS AND THE ENHANCEMENT OF 

PUBLIC CONFIDENCE 

JULY 29, 2009 

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

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND INVESTMENT

JACK REED, Rhode Island, Chairman 

JIM BUNNING, Kentucky, Ranking Republican Member 

TIM JOHNSON, South Dakota 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

MARK R. WARNER, Virginia 

MICHAEL F. BENNET, Colorado 

CHRISTOPHER J. DODD, Connecticut 

MEL MARTINEZ, Florida 

ROBERT F. BENNETT, Utah 

MIKE CRAPO, Idaho 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

BOB CORKER, Tennessee 

KARA M. STEIN, Subcommittee Staff Director 

WILLIAM H. HENDERSON, Republican Subcommittee Staff Director 

DEAN V. SHAHINIAN, Senior Counsel 

BRIAN FILIPOWICH, Legislative Assistant 

RANDY FASNACHT, GAO Detailee 

HESTER PEIRCE, Republican Counsel 

WILLIAM HENDERSON, Republican Legislative Assistant 

(II)
C O N T E N T S 

WEDNESDAY, JULY 29, 2009 

Page 

Opening statement of Chairman Reed ................................................................... 1 

Prepared statement .......................................................................................... 42 

Opening statements, comments, or prepared statements of: 

Senator Bunning ............................................................................................... 2 

Senator Schumer .............................................................................................. 3 

WITNESSES 

Meredith B. Cross, Director, Division of Corporation Finance, Securities and 

Exchange Commission ......................................................................................... 6 

Prepared statement .......................................................................................... 42 

Responses to written questions of: 

Senator Bunning ....................................................................................... 230 

John C. Coates IV, John F. Cogan, Jr., Professor of Law and Economics, 

Harvard Law School ............................................................................................ 8 

Prepared statement .......................................................................................... 45 

Responses to written questions of: 

Senator Bunning ....................................................................................... 232 

Senator Vitter ............................................................................................ 234 

Ann Yerger, Executive Director, Council of Institutional Investors .................... 9 

Prepared statement .......................................................................................... 50 

Responses to written questions of: 

Senator Bunning ....................................................................................... 235 

Senator Vitter ............................................................................................ 239 

John J. Castellani, President, Business Roundtable ............................................ 11 

Prepared statement .......................................................................................... 127 

Responses to written questions of: 

Senator Bunning ....................................................................................... 240 

J.W. Verret, Assistant Professor of Law, George Mason University School 

of Law .................................................................................................................... 13 

Prepared statement .......................................................................................... 224 

Responses to written questions of: 

Senator Bunning ....................................................................................... 244 

Senator Vitter ............................................................................................ 244 

Richard C. Ferlauto, Director of Corporate Governance and Pension Investment, American Federation of State, County, and Municipal Employees ...... 15 

Prepared statement .......................................................................................... 225 

Responses to written questions of: 

Senator Bunning ....................................................................................... 245 

(III)

(1) 

PROTECTING SHAREHOLDERS AND ENHANCING PUBLIC CONFIDENCE BY IMPROVING 

CORPORATE GOVERNANCE 

WEDNESDAY, JULY 29, 2009 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITIES, INSURANCE, AND

INVESTMENT, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Subcommittee met at 2:35 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Jack Reed (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN JACK REED 

Chairman REED. Let me call the hearing to order and welcome 

our witnesses. Thank you, ladies and gentlemen. We expect momentarily that the Ranking Member will arrive, and I thank Senator Corker and Senator Menendez for joining us. 

Today’s hearing will focus on corporate boardrooms and try to 

help us better understand the misaligned incentives that drove 

Wall Street executives to take harmful risks with the life savings 

and retirement income of so many people. This Subcommittee has 

held several hearings in recent months to focus on gaps in our financial regulatory system, including the largely unregulated markets for over-the-counter derivatives, hedge funds, and other private investment pools. 

We have also examined problems that resulted from regulators 

simply failing to use the authority they had, such as our hearing 

in March that uncovered defective risk management systems at 

major financial institutions. 

But although regulators play a critical role in policing the markets, they will always struggle to keep up with evolving and cutting-edge industries. Today’s hearing will examine how we can better empower shareholders to hold corporate boards accountable for 

their actions and make sure that executive pay and other incentives are used to help companies better focus on long-term performance goals over day-to-day profits. In this latter regard, this is a 

timely hearing based on the action yesterday of the House Financial Services Committee. 

Wall Street executives who pursued reckless products and activities they did not understand brought our financial system to this 

crisis. Many of the boards that were supposed to look out for shareholders’ interests failed at this most basic of jobs. This hearing will 
2 

help determine where the corporate governance structure is strong, 

where it needs improvement, and what role the Federal Government should play in this effort. 

I will ask our witnesses what the financial crisis has revealed 

about current laws and regulations surrounding corporate governance, including executive compensation, board composition, election 

of directors and other proxy rules, and risk management. In particular, we will discuss proposals to improve the quality of boards 

by increasing shareholder input into board membership and requiring annual election of and majority voting for each board member. 

We will also discuss requiring ‘‘say-on-pay,’’ or shareholder endorsements of executive compensation. We need to find ways to 

help public companies align their compensation practices with longterm shareholder value and for financial institutions overall firm 

safety and soundness. We also need to ensure that compensation 

committee members who play key roles in setting executive pay are 

appropriately independent from the firm managers that they are 

paying. 

Other key proposals would require public companies to create 

risk management activities on their boards and separate the chair 

and CEO positions to ensure that the CEO is held accountable by 

the board and an independent chair. 

I hope today’s hearing will allow us to examine these and other 

proposals and take needed steps to promote corporate responsiveness to the interests of shareholders, and I welcome today’s witnesses and look forward to the testimony. 

Now let me recognize Senator Bunning. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. Thank you, Mr. Chairman. I am sorry I am 

just a little late. Phone calls are a pain right now. 

This is a very important topic for us, but a hard one to deal with. 

While we may be able to make some reforms that will promote 

good long-term performance and responsible behavior, we will not, 

I say, be able to prevent bad decisions or failures. After all, we cannot legislate good judgment or ethics. And we already have the ultimate form of accountability through bankruptcy. 

In general, pay should promote good long-term performance, and 

shareholders must share in the gain, not just executives and traders. Boards must be more involved—I say that again: Boards must 

be more involved and be an effective check on management. Proxy 

access must benefit the majority of stockholders and encourage 

long-term values. If we are not careful, those changes could have 

the exact opposite effect by empowering a minority of shareholders 

to strip the company of value and encourage risky behavior in 

search of short-term profits. 

While we are right to be outraged at what has gone on in the 

financial sector, we must be careful that efforts to rein in Wall 

Street’s behavior do not put handcuffs on other businesses that 

have different needs and challenges. Corporate law for the first 

230-plus years of this country has been handled pretty well at the 

State level, and if we are going to change that, we should be sure 

of what we are doing. And I am sure looking forward to hearing 

what our panel has to say. 
3 

Thank you. 

Chairman REED. Thank you very much, Senator Bunning. 

Senator Corker, do you have any opening comments? 

Senator CORKER. As always, I prefer to listen to the witnesses 

and ask questions, but thank you all for being here. 

Chairman REED. Thank you, Senator. 

Senator Schumer has arrived, and I know he has taken a leadership role on this issue of corporate governance with his legislative 

proposals and his constant attention. In fact, it was Senator Schumer’s suggestion that we hold this hearing, so I want to recognize 

him for any comments that he might have. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Well, thank you, Senator Reed, and let me express my profound gratitude to you for holding this hearing and to 

Ranking Member Bunning for being here as well on such an important subject. 

As you acknowledged, Mr. Chairman, corporate governance is of 

great importance to me, and I introduced the Shareholder Bill of 

Rights with Senator Cantwell earlier this year. The bill was supported by 20 major pension funds, consumer groups, labor unions, 

and just yesterday, the House Financial Services Committee passed 

a ‘‘say-on-pay’’ bill similar to the ‘‘say-on-pay’’ we have in the 

Shareholder Bill of Rights. So I am glad to see Congress is moving 

forward in this process, and today’s hearing is a great opportunity 

to get a chance to explore these issues in more detail. 

In the last year-plus, we have talked a great deal about the failures of regulation and Government oversight in the financial system. But our dynamic economy and capital markets also depend on 

internal oversight by vigilant boards of directors who ensure that 

management is steering the ship in the right direction. 

Unfortunately, there are far too many cases recently where 

boards of directors, not just regulators, were asleep at the wheel, 

or even complicit in practices that caused great harm to our economy and shook public confidence in our capital markets. Executives 

who encouraged risk-taking that they did not understand were not 

checked by their boards. Compensation packages that rewarded 

short-term actions but not long-term thinking were not undone by 

their boards. 

Fundamentally, too many boards neglected their most important 

job: prioritizing the long-time health of their firms and their shareholders and carefully overseeing management. In other words, 

there was widespread failure of corporate governance that has 

proven disastrous not just for individual businesses but for the 

economy as a whole. 

And there are many in this room on both sides of the aisle who 

say, you know, the Government cannot get involved in the details 

of what a company does. And that is right. That is our free market 

system. But the place that there is supposed to be a check is in the 

board of directors, and when over the years in too many companies—there are many companies that have good boards and many 

companies that already have implemented many if not all the reforms in our bill. But in too many companies, the boards did not 

do the job. 
4 

And the damage. What if the board of AIG had checked some of 

its actions? What is the board of Bear Stearns had checked some 

of its actions? The taxpayers probably would have saved hundreds 

of billions of dollars. So it affects all of us. It is not just the 

internals of the company. 

And so Senator Cantwell introduced our bill. It makes corporate 

boards accountable to the shareholders whose interests they are 

supposed to protect. The Shareholder Bill of Rights will go a long 

way to making sure that these failures do not happen again, and 

as everyone knows, there are six key components in our bill. I am 

not going to read them. I am going to save that in the interest of 

time. 

Several elements of the bill have already been in place, as I said, 

by many corporations, and that is important to remember, because 

for many corporations, these are already best practices. Well-run 

companies do not fear their shareholders because they recognize 

that boards, management, and shareholders share the same interests: long-term growth and profitability. The greatest damage occurs not when boards are too active, but when they are not active 

enough. 

I think the Shareholder Bill of Rights will go a long way to ensuring that companies are responsive to their shareholders’ interests. I thank you and congratulate you, Chairman Reed, for putting 

together an excellent panel. I look forward to the hearing, the testimony of the witnesses, and I would ask that my entire statement 

be put in the record. 

Chairman REED. Without objection, all statements will be put in 

the record. 

Senator Corker, do you have a comment? 

Senator CORKER. Mr. Chairman, this is an unusual request. I do 

not really know what those six elements are, and I think since it 

sounds like—— 

Senator SCHUMER. Since you ask—— 

Senator CORKER. This has not been a highly debated bill. Since 

I sense this hearing has a lot to do with the fact that this bill is 

being introduced, it might be good for all of us to know what those 

six elements are? 

Senator SCHUMER. OK. May I read them, Mr. Chairman? It will 

take a minute. 

Chairman REED. Absolutely. This is—— 

Senator SCHUMER. Unusual. 

Chairman REED. Unusual. Usually, you do not need encouragement. 

[Laughter.] 

Senator CORKER. Let me say this. I want to, for the record, note 

that I usually do not like to hear any opening comments, but in 

this case, since—— 

Senator SCHUMER. Yes, well, thank you. And I was going to say, 

similar to what Jack Reed said, this is the first time that someone 

has asked Chuck Schumer to say more on a subject than he has 

said. Here they are. 

First, we require all public companies hold an advisory shareholder vote on executive compensation and obtain shareholder approval for golden parachutes. 
5 

Second, we instruct the SEC to issue rules allowing long-term 

shareholders with significant stakes in the company to have access 

to the company’s proxy form if they want to nominate directors to 

the board. If you are going to try to keep the board honest, you 

ought to have access to proxies. Now it is next to impossible for 

people to get. 

Third, it requires boards of directors to receive a majority of the 

vote in uncontested elections in order to remain on the board. It 

makes no sense for board members to be reelected if the majority 

of shareholders casting ballots vote against them. 

Fourth, it eliminates staggered boards which insulate board 

members from the consequences of their decisions by requiring all 

directors to face election annually. 

Fifth, it requires public companies to split the jobs of CEO and 

chairman of the board and requires the chairman to be an independent director. That one has gotten the most pushback from the 

corporate world. That surprised me, but that is the facts. 

And, sixth, and finally, requires public companies to create a separate risk committee containing all independent directors to assess 

the risks that the company is undertaking. 

Thank you, Mr. Chairman. Thank you, Senator Corker. 

Chairman REED. Thank you both. 

We have been joined by Senator Warner. I wonder if you have 

any opening comments, Senator. 

Senator WARNER. I will—have I missed testimony already? 

Chairman REED. No, you have not. 

Senator WARNER. I am anxiously looking forward to the testimony. 

Chairman REED. Thank you. Now let me introduce our witnesses. 

Our first is Ms. Meredith B. Cross, the Director of the Division 

of Corporation Finance at the U.S. Securities and Exchange Commission. Prior to joining the staff in June 2009, Ms. Cross was a 

partner at Wilmer, Cutler, Pickering, Hale & Dorr in Washington, 

DC, where she advised clients on corporate and securities matters, 

was involved with the full range of issues faced by public and private companies in capital raising and financial reporting. Prior to 

joining Wilmer Hale, Ms. Cross worked at the SEC from 1990 to 

1998 in various capacities, including chief counsel and deputy director of the division she now leads. 

Our next witness is Professor John C. Coates. Professor Coates 

is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. He joined the faculty in 1997 after practicing at 

the New York law firm of Wachtell, Lipton, Rosen & Katz where 

he was a partner specializing in mergers and acquisitions, corporate and securities law, and the regulation of financial institutions. He is a member of the Legal Advisory Committee of the New 

York Stock Exchange, and he is the author of a number of articles 

on corporate, securities, and financial institution law and for 7 

years coauthored the leading annual survey of development and financial institution M&A. 

Our next witness is Ms. Ann Yerger. She is the Executive Director of the Council of Institutional Investors, an organization of public, corporate, and Taft-Hartley pension funds. Ms. Yerger joined 
6 

the council in early 1996 as the Director of the Council’s Research 

Service before being named Executive Director in January 2005. 

Her prior experiences include work at the Investor Responsibility 

Research Center and Wachovia Bank. 

Our next witness is Mr. John J. Castellani. Mr. Castellani is the 

President of the Business Roundtable, an association of chief executive officers of U.S. companies. Mr. Castellani joined the Business 

Roundtable in May 2001 and had led the group’s efforts on public 

policy issues ranging from trade expansion to civil justice reform to 

fiscal policy. Prior to becoming President of the Business Roundtable, Mr. Castellani was Executive Vice President of Tenneco, Incorporated. 

Our next witness is Professor J.W. Verret. Professor Verret is an 

Assistant Professor of Law at George Mason University School of 

Law. He has written extensively on corporate law topics, including 

a recent paper cowritten with Chief Justice Myron T. Steele of the 

Delaware Supreme Court. Prior to joining the faculty at George 

Mason Law School, Professor Verret was an associate in the SEC 

Enforcement Defense Practice Group at Skadden Arps in Washington, DC, and also served as a law clerk for Vice Chancellor John 

W. Noble of the Delaware Court of Chancery. This forum is critical 

for disputes between shareholders and directors of Delaware corporations—which, by the way represents about 70 percent of the 

publicly traded corporations. 

Our final witness is Mr. Richard C. Ferlauto. Mr. Ferlauto is Director of Corporate Governance and Pension Investment at the 

American Federation of State, County, and Municipal Employees, 

AFSCME, where he is responsible for representing public employee 

interest and public retirement and benefit systems. Mr. Ferlauto is 

also the founder and chairman of ShareOwners.org, a nonprofit, 

nonpartisan shareholder education organization. Prior to joining 

AFSCME, Mr. Ferlauto was the Managing Director of Proxy Voter 

Services/ISS, which provides proxy advisory services to Taft-Hartley and publicly funded plan sponsors. 

I appreciate all of your appearance here today and let me recognize Ms. Cross. 

STATEMENT OF MEREDITH B. CROSS, DIRECTOR, DIVISION OF 

CORPORATION FINANCE, SECURITIES AND EXCHANGE COMMISSION 

Ms. CROSS. Good afternoon, Chairman Reed, Ranking Member 

Bunning, and Members of the Subcommittee. My name is Meredith 

Cross, and I am Director of the Division of Corporation Finance at 

the U.S. Securities and Exchange Commission. As you noted, I just 

rejoined the SEC staff in June of this year after more than 10 

years in private practice here in Washington. I worked at the SEC 

for most of the 1990s, and I am delighted to be back at the agency 

at this critical time in the regulation of our financial markets. I am 

pleased to testify on behalf of the Commission today on the topics 

of corporate governance and the agency’s ongoing efforts to assure 

that investors have the information they need to make informed 

voting and investment decisions. 

Good corporate governance is essential to investor confidence in 

the markets, and it cannot exist without transparency—that is, 
7 

timely and complete disclosure of material information. In responding to the market crisis and erosion of investor confidence, the 

Commission has identified and taken steps over the past months 

in a number of significant areas where the Commission believes enhanced disclosure standards and other rule changes may further 

address the concerns of the investing public. 

Two months ago, the Commission voted to approve proposals designed to help shareholders more effectively exercise their State 

law right to nominate directors. Under the proposals, shareholders 

who otherwise have the right to nominate directors at a shareholder meeting would, subject to certain conditions, be able to include a limited number of nominees in the company proxy materials that are sent to all shareholders whose votes are being solicited. Shareholders also would have an expanded ability to include 

in company proxy materials shareholder proposals addressing this 

important topic. In addition, the Commission recently proposed 

amendments to its proxy rules to enhance the disclosure that is 

provided to shareholders in company proxy statements, a key document in shareholders’ voting decisions on the election of directors. 

Under the proposals, shareholders would receive expanded information about the qualifications of directors and director candidates, the board’s leadership structure and role in risk management, and potential conflicts of interest of compensation consultants, in addition to enhanced disclosure concerning the company’s 

compensation policies and whether they create incentives for employees to act in a way that creates risks that are not aligned with 

the company’s objectives. The proposal also would improve the reporting of annual stock and option awards to company executives 

and directors and would require quicker reporting of shareholder 

vote results. 

The Commission also recently proposed amendments to the proxy 

rules to clarify the requirements consistent with the Emergency 

Economic Stabilization Act of 2009 for a ‘‘say-on-pay’’ vote at public 

companies that have received and not repaid financial assistance 

under the TARP and approved changes to the New York Stock Exchange rules to prohibit brokers from voting shares held in street 

name in director elections unless they have received specific voting 

instructions from their customers. 

Finally, the Commission has asked the staff to undertake this 

year a comprehensive review of other potential improvements to 

the proxy voting system and shareholder communications rules. 

The Commission looks forward to hearing from the public on the 

outstanding proposals and to carefully considering all views in 

moving forward over the coming months. 

Thank you again for inviting me to appear before you today and 

for the Subcommittee’s support of the agency in its efforts at this 

critical time for our Nation’s investors. The Commission will remain vigilant in its efforts to support strong corporate governance 

and disclosure practices and also stands ready to lend whatever assistance it can to the work that is going on outside the agency on 

these important topics. 

I would be happy to answer any questions you may have. 

Chairman REED. Thank you very much, Ms. Cross. 

Professor Coates. 
8 

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

Mr. COATES. Thank you, Senator Reed, thank you, Ranking 

Member Bunning, and the rest of the Members of the Committee 

who are. I very much appreciate the opportunity to talk about corporate governance. 

Good corporate governance is an essential foundation to economic 

growth, and so this could not be a more important time for the 

Congress to be focusing on it. 

There are a large number of reforms—six in Senator Schumer’s 

bill alone, and there are many others—that we could talk about. I 

am going to talk about a few. I am happy to talk about others that 

you may have questions about or want to explore. But before I talk 

about specifics, let me make two general remarks that I think 

should be kept in mind in thinking about any particular reform. 

First, and maybe a little controversially, I think it is fair to say 

that the academic perspective on corporate governance would view 

financial firms differently than other kinds of corporations, and not 

in the straightforward way that you might think; that is to say, 

shareholders of financial firms want financial firms to take risk 

and want them to take more risk than may be appropriate from the 

perspective of the taxpayer. That is because many of the large financial institutions are, as we have learned, too big, too complex 

to fail, so that from the shareholders’ perspective, if things go well 

with the risks that the companies take, they are on the upside; and 

if things go badly, then in the end it is the taxpayer who helps defray the costs to the shareholders. 

As a result of that, I do not think that it would be a good idea 

to give shareholders considerably more power in the governance of 

large financial institutions. I think, in fact, if anything, financial 

regulators should be given more authority to check the power that 

shareholders have, at least on particular issues—compensation 

being one. The compensation structures and incentives that shareholders, even if the boards are doing exactly the right thing for 

shareholder, that shareholders want of large banks are not the 

ones that are going to be the most safe and most sound from the 

perspective of the American public. So that is the first general remark. 

Second is across the board on this, I think it is fair to say that 

academic and scientific research more generally is quite weak. It 

is evolving. There is almost no nontrivial issue in corporate governance about which there is not fierce academic as well as political 

argument. That cautions against passing rules that are fixed, mandatory, and are hard to change over time. Instead, it cautions for 

giving shareholders the ability to adopt rules for their own companies, facilitating collective action by them—and that is an important role, I think, that regulation can play. Shareholders of public 

companies are dispersed, cannot easily act on their own, and often 

face entrenched boards who are unwilling to make changes when 

they are, in fact, the best thing for the companies. 

The caution about the weakness of the scientific evidence is also 

not a reason to do nothing because what I just said is one thing 

that there is general consensus on. Disperse shareholders have a 

hard time acting for themselves as the number of shareholders in-
9 

crease. And the other general consensus, I would say, across the 

board is that corporate governance in the United States in the last 

10 to 20 years has not performed terribly well at a large number 

of companies. And so there is need for change, and there is need 

for carefully considered moderate reforms of a kind that can be revised over time as learning on these subjects grows. 

So on the specifics, let me say quickly, I think the evidence that 

we do have is that ‘‘say-on-pay’’ is a good idea, and I am happy to 

expound on that beyond that bottom-line conclusion. 

I would say for large companies, splitting CEOs from chairmen 

has some evidence behind it that that is a good thing. Smaller companies, I am not so sure the evidence is there. But as long as the 

SEC is given appropriate authority to tailor any legislation in this 

area, I think that would be a good thing to pursue. 

I would say that staggered boards, the evidence, if anything, 

runs against eliminating them. They are an important option between, on the one hand, a fully contestable corporate governance 

structure where every director is up for election every year, and a 

governance structure where essentially the insiders have complete 

control, as in the case of Google, which is a reasonably successful 

company. In between, staggered boards have proven to be a type 

of governance structure that investors and new IPOs have been 

willing to put their money behind, and to ban them across the 

board I don’t think is supported by the evidence at the moment. 

On shareholder access, just to wrap up, frankly there is no evidence, and I think there is—that is a reason to proceed, but to proceed cautiously, to proceed through the SEC, and here I think the 

SEC already has adequate authority to pursue this topic. But the 

one thing Congress probably could clarify is exactly what their authority is in this area, and I think that would be a good thing. 

With that, thank you. 

Chairman REED. Thank you very much, Professor Coates. 

Ms. Yerger. 

STATEMENT OF ANN YERGER, EXECUTIVE DIRECTOR, 

COUNCIL OF INSTITUTIONAL INVESTORS 

Ms. YERGER. Good afternoon. Thank you very much for the opportunity to share the council’s views on the very important issues 

under consideration today. 

By way of introduction, council members are responsible for safeguarding assets used to fund the retirement of millions of individuals throughout the United States. They are capitalists, responsible for an aggregate portfolio of somewhere north of $3 trillion in 

assets. They have a very significant commitment to the domestic 

markets, on average investing about 60 percent of their portfolios 

in stocks and bonds of U.S. public companies. And they are longterm, patient investors due to their long investment horizons and 

their very heavy commitment to passive investment strategies. 

Council members have been very deeply impacted by the financial crisis, and they have a vested interest in ensuring that the 

gaps and shortcomings exposed by this crisis are repaired. Clearly, 

a review and restructuring of the U.S. financial regulatory model 

are necessary steps toward restoring investor confidence and protecting against a repeat of these failures. But regulatory reform 
10 

alone is insufficient. Corporate governance failures also contributed 

to this crisis, and as a result, governance reforms are an essential 

piece of the reform puzzle. 

Failures of board oversight, of enterprise risk, and executive pay 

were clear contributors to this crisis. In particular, far too many 

boards structured and approved executive pay programs that motivated excessive risk-taking and paid huge rewards, often with little 

or no downside risk, for short-term results. Current corporate governance rules also failed by denying owners of U.S. companies the 

most basic rights to hold directors accountable. The council believes 

governance reforms in four areas are essential, and, Senator Schumer, they will be familiar to you. 

First, Congress should mandate majority voting for directors of 

all U.S. public companies. It is a national disgrace that under most 

State laws the default standard for uncontested director elections 

is a plurality vote, which means that a director is elected even if 

a majority of the shares are withheld from the nominee. The corporate law community has taken baby steps to accommodate majority voting, and some companies have volunteered to adopt majority 

voting, but sometimes only when pressured by shareowners. 

But while many of the largest U.S. companies have adopted majority voting, plurality voting still dominates at small and midsized 

U.S. companies. This is a fundamental flaw in our governance 

model. Given the failure by the States, particularly Delaware, to 

lead this reform, the council believes that the U.S. Congress must 

legislate this important and most basic shareowner right. 

Second, Congress should affirm the SEC’s authority to promulgate rules allowing owners to place their director nominees on 

management’s proxy card. The council believes a modest proxy access mechanism would substantially contribute to the health of our 

U.S. governance model by making boards more responsive to 

shareowners, more thoughtful about whom they nominate, and 

more vigilant about their oversight responsibilities. 

The council commends the SEC for its leadership on this important reform, but, unfortunately, the SEC may face unnecessary, 

costly, and time-consuming litigation in response to any approved 

access mechanism. To ensure that owners of U.S. companies face 

no needless delays over the effective date of this critical reform, the 

council recommends congressional affirmation of the SEC’s authority. 

Third, Congress should pass legislation mandating annual advisory votes on executive pay, explore strengthening clawback standards, and support the SEC’s efforts to enhance executive pay disclosures. 

Council members have a vested interest in ensuring that U.S. 

companies attract, retain, and motivate the highest-performing employees and executives. But as highlighted by this crisis, they are 

harmed when poorly structured pay programs reward go-for-broke, 

short-term performance that ultimately harms the company’s long 

term. 

The council believes executive pay issues are best addressed by: 

first, requiring companies to provide full disclosure of key elements 

of pay; second, ensuring that directors can be held accountable for 

their pay decisions through majority voting and access mecha-
11 

nisms; third, by giving shareowners oversight of executive pay via 

annual nonbinding votes; and, fourth, by requiring disgorgement of 

ill-gotten gains. 

One technical suggestion. We recommend that legislation mandating annual advisory votes stipulate that these are a nonroutine 

matter for purposes of New York Stock Exchange Rule 452. 

Fourth, Congress should mandate that all corporate boards be 

chaired by an independent director. The council believes separating 

these positions appropriately reflects differences in the roles, provides a better balance of power between the CEO and the board, 

and facilitates strong, independent board leadership and functioning. 

In closing, empirical evidence from around the globe supports 

these reforms. The experiences in other countries and, where applicable, here in the United States are powerful evidence that these 

reforms are not harmful to the markets and, of note, these measures do not reward short-termism. On the contrary, they are tools 

to enable owners to think and act for the long term. 

Thank you for your consideration of these important issues, and 

I look forward to answering any questions. 

Chairman REED. Thank you very much, Ms. Yerger. 

Mr. Castellani. 

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS 

ROUNDTABLE 

Mr. CASTELLANI. Thank you. Good afternoon, Mr. Chairman, 

Ranking Member Bunning, Members of the Committee. I am John 

Castellani, President of the Business Roundtable. 

The Business Roundtable has long been at the forefront of efforts 

to improve corporate governance. We have, in fact, been issuing 

best practice statements in this area for more than three decades. 

All of those best practice statements are driven by one principle: 

To further U.S. companies’ ability to create jobs, product service 

benefits, and shareholder value that improve the well-being of all 

Americans. 

At the outset, I must respectfully take issue with the premise 

that the most significant cause of the current financial crisis was 

problems in corporate governance. The financial crisis likely 

stemmed from a variety of complex factors, including failures of the 

regulatory system, over-leveraged financial markets, a real estate 

bubble, as well as failures in risk management. 

The recently established Financial Crisis Inquiry Commission is 

just starting its work, and any attempt to make policy in response 

to the purported causes would seem premature. In fact, to do so 

could well exacerbate factors that may have contributed to the crisis, such as the emphasis on short-term gains at the expense of 

long-term sustainable growth. 

Moreover, the problems giving rise to the financial crisis occurred 

at a specific group of companies, financial institutions. Responding 

by enacting a one-size-fits-all corporate governance regime applicable to all 12,000 publicly traded companies really does not make 

much sense. This approach fails to consider a number of factors 

that I would like to spend the remainder of my time this afternoon 

discussing. 
12 

First, there has been sweeping transformation of corporate governance practices in the past 6 years, many of which have been 

proactively adopted by companies. For example, the average board 

independence of S&P 1500 companies increased from 69 percent in 

2003 to 78 percent in 2008. That same group of companies that 

have a separate chairman of the board increased from 30 percent 

in 2003 to 46 percent in 2008. Many companies have appointed an 

independent lead or presiding director who, among other things, 

presides over executive sessions of the independent directors. Companies have adopted majority voting standards for the election of 

directors. In fact, more than 70 percent of the S&P 500 companies 

have done so. And many companies have moved to the annual election of directors. 

Second, applying a single one-size-fits-all approach to corporate 

governance regardless of a company’s size, shareholder base, and 

other circumstances simply will not work. While there is a multitude of guidance about best practices in corporate governance, 

each company must periodically assess the practices that will best 

enable it to operate most effectively to create long-term shareholder 

value. 

In this regard, we share the concerns recently expressed by New 

Jersey Investment Council in the letter to SEC Chairman Schapiro, 

that it is, quote, ‘‘troubled by the proliferation of rigid, prescriptive 

responses which are costly, time consuming, unresponsive to individual fact settings surrounding specific companies and industries, 

and which may correlate only randomly with the creation of shareholder value.’’ 

Third, for more than 200 years, State corporate law has been the 

bedrock upon which the modern business corporation has been created and has thrived. It remains the most appropriate and effective 

source of corporate governance. In large part, this stems from the 

flexibility provided by its enabling nature and by its responsiveness 

in adjusting to current developments. The amendments to Delaware and other States’ laws over the past several years have facilitated majority voting and director elections, and the very recent 

amendments in Delaware law to facilitate proxy access and proxy 

reimbursement bylaws are examples of this responsiveness and 

flexibility. 

Fourth, to the extent that shareholders desire change in a particular company’s corporate governance, many avenues are available to them to make their views known and for companies to respond. For example, shareholders may seek to have their proposals 

included in company proxy statements. In recent years, many companies have responded to these proposals by adopting significant 

corporate governance changes, including majority voting for directors, special meetings called by shareholders, and the elimination 

of super-majority voting requirements. Recently, some companies 

have implemented an advisory vote on compensation, so-called 

‘‘say-on-pay,’’ in response to shareholder proposals. Shareholders 

often engage in withhold campaigns against particular directors. 

And further, shareholders can engage in proxy contests to elect 

their director nominees to a company’s board. 

Finally, the SEC has an important role in seeing that shareholders receive the disclosures that they need to make informed de-
13 

cisions. In this regard, the SEC has issued a number of corporate 

governance-related proposals that are aimed at improving disclosure about director experience, board leadership structure, oversight of risk management, executive compensation, and potential 

conflicts of interest with compensation consultants. The Business 

Roundtable generally supports those. 

Another more controversial SEC proposal seeks to amend the 

proxy rules to permit shareholders to nominate directors in a company’s proxy materials. We have serious concerns with this proposal, and we will share those concerns with the SEC in our comments. But briefly, we believe that the adoption of this proposal 

could promote short-termism, deter qualified directors from serving 

on corporate boards, and lead to the election of special interest directors, increase the influence of the proxy advisory services, and 

highlight voting integrity problems in the system. 

In closing, let me emphasize the Roundtable’s commitment to effective governance practices and enabling U.S. companies to compete globally, create jobs, and generate economic growth. However, 

we must be careful that in a zeal to address our current financial 

crisis, we do not adopt a one-size-fits-all approach that can undermine the stability of boards of directors and place companies under 

even greater pressure for short-term performance. We must be cautious that we don’t jeopardize the engine of American wealth and 

prosperity. 

Thank you. 

Chairman REED. Thank you very much, Mr. Castellani. 

Professor Verret, please. 

STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, 

GEORGE MASON UNIVERSITY SCHOOL OF LAW 

Mr. VERRET. Chairman Reed, Ranking Member Bunning, and 

distinguished Members of the Committee, I appreciate the opportunity to testify in this forum today. My name is J.W. Verret. I 

teach corporate law at George Mason Law School. I am a Senior 

Scholar with the Mercatus Center Financial Markets Working 

Group, and I also run the Corporate federalism Initiative, a network of scholars dedicated to studying the intersection of State and 

Federal authority in corporate governance. 

I will begin by addressing proxy access and executive compensation rules under consideration, neither of which address the current financial crisis and both of which may result in significant unintended consequences. Then I will close with a list of factors that 

did contribute to the present financial crisis. 

I am concerned that some of the corporate governance proposals 

recently advanced impede shareholder voice in corporate elections. 

This is because they leave no room for investors to design corporate 

governance structures appropriate for their particular circumstances and particular companies. Rather than expanding 

shareholder choice, the proxy reform and ‘‘say-on-pay’’ proposals before this committee actually stand in the way of shareholder choice. 

Most importantly, they do not permit a majority of shareholders to 

reject the Federal approach. 

The Director of the United Brotherhood of Carpenters said it 

best. Quote, ‘‘We think less is more. Fewer votes and less often 
14 

would allow us to put more resources toward intelligent analysis.’’ 

The Brotherhood of Carpenters opposes the current proposal out of 

concern about compliance costs. The proposals at issue today ignore 

their concerns, as well as concerns of many other investors. 

Consider why one might limit shareholders from considering alternative means of shareholder access. It can only be because a majority of shareholders at many companies might reject the Federal 

approach if given the opportunity. Not all shareholders share the 

same goals. Public pension funds run by State elected officials and 

union pension funds are among the most vocal proponents of the 

proposals before this committee. There are many examples where 

they used their power, their existing shareholder power, toward 

their own special interests. Main Street investors deserve the right 

to determine whether they want the politics of unions and State 

pension funds to take place in their 401(k)s. 

The current proposals also envision more disclosure about compensation consultants. Such a discussion would be incomplete without mentioning conflicts faced by proxy advisory firms like 

RiskMetrics, an issue the current proposals have failed to address. 

In addition, I will note that there is no evidence that executive 

compensation played a role in the current crisis. If executive compensation were to blame for the present crisis, we would see significant difference between compensation policies at those companies 

that recently returned their TARP money and those needing additional capital. We do not. 

Many of the current proposals also seek to undermine and take 

legislative credit for efforts currently underway at the State level 

and in negotiations between investors and boards. This is true on 

proxy access, the subject of recent rule making at the State level, 

and it is true for Federal proposals on staggered boards, majority 

voting, and independent chairmen. 

We have run this experiment before. The Sarbanes-Oxley Act 

passed in 2002 was an unprecedented shift in corporate governance, designed to prevent poor management practices. Between 

2002, when Sarbanes-Oxley was passed, and 2008, the managerial 

decisions that led to the current crisis were in full swing. I won’t 

argue that Sarbanes-Oxley caused the crisis, but this does suggest 

that corporate governance reform at the Federal level does a poor 

job of preventing crisis. 

And yet the financial crisis of 2008 must have a cause. I commend this Committee’s determination to undercover it, but challenge whether corporate governance is, in fact, the culprit. Let me 

suggest six alternative contributing factors for this Committee to 

investigate. 

One, the moral hazard problems created by the prospect of Government bailout. 

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

Three, regulatory failure by the banking regulators and the SEC 

in setting appropriate risk-based capital reserve requirements for 

investment in commercial banks. 
15 

Four, short-term thinking on Wall Street, fed by institutional investor fixation on firms making and meeting quarterly earnings 

predictions. 

Five, a failure of credit-rating agencies to provide meaningful 

analysis caused by an oligopoly in the credit-rating market supported by regulation. 

Six, excessive write-downs in asset values under mark-to-market 

accounting, demanded by accounting firms who refuse to sign off on 

balance sheets out of concern about exposure to excessive litigation 

risk. 

Corporate governance is the foundation of American capital markets. Shifting that foundation requires deliberation and a respect 

for the roles of States in corporate governance. Eroding that foundation risks devastating effects for capital markets. 

Thank you for the opportunity to testify and I look forward to answering your questions. 

Chairman REED. Thank you very much, Professor. 

Mr. Ferlauto, please. 

STATEMENT OF RICHARD C. FERLAUTO, DIRECTOR OF 

CORPORATE GOVERNANCE AND PENSION INVESTMENT, 

AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES 

Mr. FERLAUTO. Good afternoon, Chairman Reed and Members of 

the Committee. My name is Rich Ferlauto. I am Director of Corporate Governance and Pension Investment for AFSCME, the public employee union. 

Our union has a long-term abiding interest in the health of the 

capital markets. Our 1.6 million members are invested through 

public pension systems that have assets over $1 trillion. They depend on those assets for long-term retirement security. Those public pension systems have got time horizons of 20 to 30 years in 

which they need to pay out our member benefits so that we are a 

long-time, long-term investor with those types of time horizons. 

I might also mention that AFSCME and the AFSCME Pension 

Fund early on sued AIG over proxy access rights because we understood that the board had failed to do the type of risk disclosure 

that we felt was necessary and part of the responsibility of directors. 

I am also Chairman of Shareowners.org, a new nonprofit, nonpartisan social networking organization designed to give voice to 

retail shareholders who rarely have opportunities to communicate 

with regulators, policy makers, and companies in which they are 

invested. 

I am here today to urge your focus on corporate governance. We 

believe that corporate governance reform is essential to good performing capital markets, and, in fact, with greater corporate governance and shareholder rights, we could have avoided some of the 

$11 trillion in asset loss that was faced and felt dearly by our 

members and certainly the U.S. households. 

According to a recent public opinion survey by the Opinion Research Corporation conducted for Shareowners, investors want to 

see Congress take strong action to fix financial markets and to 

clean up Wall Street. Such action, we believe, is essential in order 
16 

for you to rebuild confidence in the markets. Capital markets will 

not work without investors. Investors will not come back if they 

don’t have confidence that the markets are running appropriately. 

Support for such action is strong across all age, income, and educational and political affiliations. Thirty-four percent of the investors that we surveyed used the term ‘‘angry’’ to describe their 

views. The number one reason for the loss of investor confidence 

in the market, we found, were ‘‘overpaid CEOs and/or unresponsive 

management and boards’’ at 81 percent. Six out of ten investors 

said that strong Federal action would help restore their confidence 

in the fairness of the markets. 

When we queried them about policy preferences, the survey 

found that four out of five American investors agreed that shareholders should be permitted to be actively involved in CEO pay. 

Eighty-two percent agreed that shareholders should have the ability to nominate and elect directors. And 87 percent of investors who 

lose their retirement savings to fraud and abuse should have the 

right to go to court to reclaim that money. 

Fully consistent with these findings, we think that the Committee should focus on fixing corporate governance. The core to fixing corporate governance is to focus on the directors and the responsibility between asset owners and their agents, directors on 

corporate boards. The most critical change to do that is to create 

a proxy access right so that shareholders, particularly long-term 

shareholders who own patient capital in the markets, so that they 

may cost effectively nominate candidates for election to boards. 

We are very encouraged that the SEC is in the process of rule 

making on this issue but also believe that this is such an important 

right that it should not become a political football for future commissions. There needs to be long-term consistency in securities 

laws and the Exchange Act is the appropriate place to clearly codify the authority that the Commission has to require disclosure of 

nominees running for board seats. Proxy access is fundamental to 

free and fair election for directors. 

Second, shareholders should have a right to ‘‘say-on-pay,’’ a vote 

on the appropriateness of CEO compensation. We are excited that 

we saw the vote in the House the other day, expect to see a full 

vote this week, and as Ann Yerger from CII said, we think it is absolutely essential that broker votes not be included in the total so 

that a change to 452, excluding broker votes on ‘‘say-on-pay,’’ would 

be a tremendous enhancement to see on the Senate side. 

I could make other comments, but let me wrap up by saying we 

thank you, Mr. Chairman, for the opportunity to testify today. Rebuilding investor confidence in the market depends on thoughtful 

policymaking that expands investor rights and authorizes the SEC 

to strengthen its advocacy role on behalf of all Americans and their 

financial security. 

I would be happy to answer any questions. 

Chairman REED. Thank you very much, Mr. Ferlauto. 

Let us do a 6-minute initial round with the intention of doing a 

second round so we can quickly get everyone to ask some questions. 

We are extremely fortunate your testimony collectively and individually has, I think, advanced this argument and debate significantly. 
17 

Ms. Cross, one of the issues here that has been alluded to by Professor Verret and others is the interaction between the SEC and 

States, primarily Delaware, since they have 70 percent of the public corporations. Can you comment upon this? In fact, I think I 

noted in your proposed rules that they are subject to the State corporate law, is that correct? 

Ms. CROSS. That is correct. Under the access proposal, you would 

have a right of access to include nominees in an SEC proxy—SECfiled proxy only if you have a State law right to nominate directors. 

So we start with the State law and then we enable shareholders 

to exercise their State law rights through the Federal proxy rules. 

Chairman REED. That raises the issue, really, of since the proxy 

rules are Federal rules and not required by any States, I don’t 

think, I think this is a principal sort of issue between whether or 

not there should be the ability of the SEC to require these rules 

even if the State doesn’t. Is that something that you can’t do now 

under present law or you choose not to do? 

Ms. CROSS. That is a good question. Under State law now, recent 

changes in Delaware include an ability for shareholders to decide 

to vote to require the proxy access. We have authority under our 

current rules, under the 34 Act, to also require companies to include nominees in their proxy statement and we believe these do 

coexist. The way we have done our proposal assures that shareholders would have immediate access to the proxy to nominate 

their holders if they satisfy our requirements. They still could vote 

under State law to have—to relax the standard so that more shareholders can do so. 

Chairman REED. Professor Verret, I think you are interested in 

this topic. Your comments? 

Mr. VERRET. Mr. Chairman, I would only offer that the SEC’s 

proposal does include references to State law, but specifically, the 

SEC’s proposal says, sure, you can adopt a bylaw that would describe how proxy access will work only if it complies with the SEC’s 

mandate. So it is very clear on that. It runs roughshod, I think, 

over State corporation law determining election rights, and so I 

think it expressly—you might find references in there to State law, 

but the references are intended to make clear that the SEC determines how proxy access is going to work and if there is any—you 

can certainly make up your own rules, only if they comply completely with the SEC’s rules on this essentially State corporate law 

matter. 

Chairman REED. Well, there are State corporate laws, but I think 

you recognize that the proxy process is a result primarily of Federal laws. 

Mr. VERRET. Well, the proxy process, sure, and the proxy process 

was intended mostly about issues of disclosure. And I would offer 

a quote from Justice Powell in CPS v. Dynamics. You don’t have 

to listen to me. Take Justice Powell’s word for it. No principle of 

corporate law is more firmly established than a State’s authority 

to regulate domestic corporations, including the voting rights of 

shareholders. So Justice Powell, at least, is with me on that one. 

Chairman REED. Do you agree with all of his opinions? 

Mr. VERRET. Well, no. No. I wouldn’t say that. 

[Laughter.] 
18 

Mr. VERRET. But I like that one. 

Chairman REED. Let me shift to Professor Coates and Mr. 

Castellani. You have described—in fact, you might comment on 

this issue, too, Professor Coates, and then I have another question. 

Mr. COATES. I think it is, as I said in my opening remarks, I 

think that if Congress were not to act, the SEC were to adopt proxy 

access, it is almost certainly the case that someone will challenge 

their authority to do so precisely along the lines that Professor 

Verret has suggested. I think that challenge will lose because I 

think the proposal is about communication. It is allowing shareholders to exercise rights that they clearly do have under State 

law. 

The SEC’s proposal would allow, contrary to what was suggested 

earlier, any State to change its law and make it clear that shareholders would not have the right to nominate directors in this fashion and then the SEC’s rules would not override that State law decision. So the proposal, at least the way I read it and the way I 

believe that a court would read it, would not, in fact, conflict with 

State law on this issue. 

Chairman REED. Let me follow up on one of the comments you 

made in your statement, and that is that we assume, I think, 

that—at least there is a general assumption that shareholder participation the way we describe would enhance the performance of 

the company. But you suggest in certain situations, financial institutions, for example, that it could have perverse effects. 

It seems to me that there are three or four different decisions 

here. You can pay dividends. You can pay the executives instead 

of paying dividends. Or you can reinvest and increase shareholder 

value, et cetera. The shareholders, I think, would be interested in 

dividends and maybe also, second, long-term value, but less interested in compensation for executives. But that is just a sort of prelude to the question of what are the—what specific disincentives do 

you see if shareholders can vote like this? 

Mr. COATES. I mean, there has been a longstanding economic 

theory about which there is a fair amount of evidence that suggests 

that in a company’s capital structure, there are conflicts between 

the shareholders who are entitled to all upside beyond the fixed 

payments that creditors are entitled to and the creditors. The U.S. 

Government, because it insures the deposits of all the banks that 

it insures, which is most of them, is fundamentally a creditor of the 

large banking institutions, and so there is, in fact, going to be on 

many occasions a conflict of interest between shareholder interests 

and the interest of the taxpayer with respect to insured depository 

institutions. That is the fundamental conflict. 

And to the extent that the proposals go toward increasing shareholder power, that simply makes the bank regulators’ jobs in restraining risk taking by those banks at the behest of shareholders 

and boards who are seeking to maximize share value, even if it is 

long-term share value, that much harder. So any effort in this area, 

I submit, should be accompanied by clear authority for the banking 

regulators to at least moderate the way these things play out for 

banking institutions. 

Chairman REED. Thank you. My time has expired. 

Senator Bunning. And we will do a second round. 
19 

Senator BUNNING. Thank you, Mr. Chairman. 

Professor Verret, if we are going to make proxy access easier for 

shareholders, what restrictions would you recommend to make sure 

that the SS benefit a majority of shareholders and the long-term 

value of the company and does not just benefit small groups of investors and lead to short-term profits? 

Mr. VERRET. Well, Senator Bunning, I would offer that the best 

person to make—the best group to make that assessment is the 

shareholders themselves. And so I would leave it to shareholders 

to determine how proxy access should work, how it should operate. 

And so for that reason, I think the innovations at the level of 

Delaware and in the Model Business Code, which forms the basis 

for 20 to 30 other corporate law codes of other States, are on the 

right track. And I think also Commissioner Paredes has offered a 

proposal to the SEC to help buttress this development, to permit 

access for shareholder election bylaws to the corporate ballot. 

So in other words, instead of saying this is how the elections 

should work, we say shareholders can put forward a bylaw that 

should say how the election should work. All the shareholders 

should determine how that election should work. In many ways, it 

is similar to the Constitutional Convention. Rather than choosing— 

the people got to choose the mechanism by—— 

Senator BUNNING. You are not suggesting we go back to a Constitutional Convention—— 

Mr. VERRET. No, no, but—— 

[Laughter.] 

Senator BUNNING. Not now. 

Mr. VERRET. But in effect, a ratification of a shareholder election 

bylaw is kind of like a Constitutional Convention for shareholders. 

I think that is an apt analogy. 

Senator BUNNING. Professor Coates, in your written testimony— 

written—you raised an interesting idea. Rather than forcing a 

structure on all companies, you suggested an opt out vote by shareholders every few years for some governance proposals. That idea 

could be applied to proxy access and advisory vote procedures as 

well, instead of Government deciding what the rules will be. 

I want to know what each of you think of that approach, of a 

mandatory opt in or opt out vote every few years to decide certain 

matters. Let us start with you, Professor Coates. Since you seem 

to have expressed this idea, now I would like to hear your comments on it. 

Mr. COATES. Sure. Thank you for the—obviously, I like my idea, 

but—— 

Senator BUNNING. Well, I hope so. 

Mr. COATES. ——to explain, I don’t think of it as necessary to 

prevent imposing Government regulation, because I don’t think 

that is actually the intent of any of the proposals that are currently 

being debated. I do think it would be a good idea to preserve flexibility in what sorts of corporate governance structures companies 

are either required or induced to adopt, and one way to achieve 

that is to let shareholders, who, after all, this is meant to be in the 

interest of shareholders, so if shareholders every 5 years are given 

the option of rejecting a particular idea on the ground that it is too 

expensive, for example, too cumbersome, or simply inapt for their 
20 

company, and here I would join Professor Verret in saying I think 

that is a reasonable approach. 

The key point, though, is it needs to be opt out, because as I alluded to in my opening remarks, shareholders on their own, despite 

the 20, 30 years of efforts by organizations like the one led by Ms. 

Yerger, have had a very hard time getting companies to be responsive. It has been 20 years since proxy access has been proposed by 

leading institutional shareholders and only now is it being taken 

seriously. So I have to, with all due respect, disagree with the Business Roundtable’s suggestion that, in fact, corporate boards are 

generally responsive to shareholder desires. Start with a good 

rule—— 

Senator BUNNING. Ms. Cross. 

Mr. COATES. Sorry. 

Ms. CROSS. Thank you, sir. It is an interesting idea and I think 

with respect to our proxy access proposal, which is the one that we 

have on the table right now, we include requests for comment in 

our proposal about whether or not you should be able to opt out 

and have the shareholders choose a different access mechanism, 

and we very much look forward to receiving comments on that. 

This is a proposal as we—— 

Senator BUNNING. How much more time do we have? 

Ms. CROSS. On the proposal? 

Senator BUNNING. No, to make suggestions or to comment. 

Ms. CROSS. The comment period runs through August 16 or 17, 

I believe. 

Senator BUNNING. Thank you very much. 

Ms. Yerger. 

Ms. YERGER. I have a couple of observations. First of all, I am 

not a lawyer, so I come at this from a different perspective—— 

Senator BUNNING. Good. I am very happy to hear that. 

[Laughter.] 

Ms. YERGER. Our belief is that the board of directors is the cornerstone of the corporate governance model and the primary rights 

assigned to owners, aside from buying and selling their shares, is 

to elect and remove directors. And the fact is that we do not have 

those tools here in the United States. And that is why we advocate 

majority voting and access to the proxy. We think these are two 

principled rules. They are applicable to all companies at all times. 

In terms of an opt out idea, I mean, I don’t see how an opt out 

would be relevant at all to majority voting for directors. I mean, 

I just believe fundamentally that if a director does not win support 

of a majority of the votes cast, that director should not stand—— 

Senator BUNNING. Thank you. 

Ms. YERGER. ——on the board. But one quick point on access. 

There is already a—— 

Senator BUNNING. I have only got 35 seconds, and I have got one 

more question. 

Ms. YERGER. OK, sorry. 

Senator BUNNING. That is OK. This is for Professors Coates and 

Verret. Several weeks ago, Professor Henry Hu raised an interesting problem before this Subcommittee. He pointed out that with 

derivatives, the voting rights of shares can now be separated from 

the economic right of the shares, setting up a situation where the 
21 

person voting has no interest in the long-term health of the company. What can and should be done about that? Take a shot at it, 

both of you. 

Mr. COATES. I have a negative 5 seconds. 

Senator BUNNING. Well, that is all right. 

Mr. COATES. That is all right. OK. 

Senator BUNNING. You get to answer. 

Mr. COATES. Henry’s issue is a serious one. It is one that has affected a number of companies in the past—in the recent years during the financial turmoil because it allows hedge funds’ short-term 

speculators who have distinctly different interests than the longterm shareholders represented at this table—— 

Senator BUNNING. They can have a negative interest. 

Mr. COATES. Exactly. Now, I believe that if the SEC is given time 

to address the issue adequately, they already understand that this 

is a significant problem. There are no simple fixes to this, just as 

there are no simple fixes to most problems in the market. 

Senator BUNNING. You have not made a suggestion yet. 

Mr. COATES. Well, disclosure is usually the place the SEC does 

and should start. That is the place where I would start on addressing the problem. 

Senator BUNNING. Disclosure. 

Mr. COATES. Yes, full disclosure of hedge fund positions. 

Mr. VERRET. I would echo that disclosure is—that sunlight is the 

best disinfectant and that the central mission of the SEC is disclosure. And, in fact, that is part of the reason why I am opposed to 

the SEC’s current proposal on proxy access, and it is proxy access 

through legislation so that it goes beyond the central mission of the 

SEC for disclosure. 

Senator BUNNING. Thank you. 

Chairman REED. Thank you, Senator Bunning. 

Senator Schumer, please. 

Senator SCHUMER. Thank you. I thank all the witnesses. Very informative testimony. I am going to make two comments—one to 

Professor Verret, one to Professor Coates—to which you can comment in writing, because I do not have much time and I want to 

ask other questions. 

To Professor Verret, ‘‘Let the shareholders decide,’’ as Ms. Yerger 

points out, is a tautology. Shareholders do not decide now, so just 

saying let us leave it up to the shareholders and whatever they decide happens happens, in too many instances they just do not have 

the ability to decide now. Our rules are supposed to let them decide, and you are sort of proposal, well, whatever they say is what 

they want—not under these rules. You can respond in writing. 

[Ed. note: Answer not received by time of publication.] 

Senator SCHUMER. To Professor Coates, this idea that financial 

firms, because they could be bailed out, the shareholders would 

have a different structure, I would like you to ask the shareholders 

of Citigroup or AIG, former, if they feel that they have done quite 

well because they have let risks go too far and they were bailed 

out. In other words, most companies, by the time they are bailed 

out, their shares are worth very, very little. And I do not think 

they would have a different structure, and I would argue that the 

recent history would undercut your argument even further, and 
22 

that is, allowing risk—because you are a financial firm and you 

might be bailed out allows you to take risk, and that is fine for the 

shareholders? They are going to be very wary of risk over the next 

5 years, whether they are bailed out or not, because shares went 

way down. 

You can respond in writing to that one, but I just do not think 

the facts, the recent history bears out that hypothesis. 

Response: One of the most basic and widely accepted principles of corporate finance is that shareholders—who are entitled to all of the upside if a company does 

well—would rather that the company take more risks than do the creditors, who are 

generally entitled only to receive back the principal and preset interest on their 

loans. See R.A. Brealey and S.C. Myers, Principles of Corporate Finance (5th ed. 

1996) at 492 (‘‘stockholders of . . . firms [with debt] gain when business risk increases. Financial managers who act strictly in their shareholders’ interests (and 

against the interests of creditors) will favor risky projects over safe ones. They may 

even take risky projects with negative [net present expected value]’’). Nothing in the 

recent crisis has affected that general conclusion. Higher risk generally means higher return for shareholders, but for creditors, whose return is fixed, risk-taking by 

corporate borrowers just increases the odds that they will not get repaid in full. 

Generally, creditors protect themselves against shareholders pressuring companies to take too much risk by negotiating for explicit restrictions in their contracts. 

For example, a bank loan may forbid a company from reducing its cash on hand 

below a set level, or from making large new investments without creditor approval. 

The U.S. Government, as back-stop creditor of all of the major commercial banks 

(and, as it turned out, AIG, too, even though AIG was not an insured bank), tries 

to protect itself against excessive risk-taking by setting capital requirements and 

imposing other forms of regulation on banks. Existing regulations have not proven 

effective, and many proposals under consideration would strengthen those regulations, and limit further the risks that banks may take with taxpayer funds. 

Strengthening the hand of shareholders of major banks may undercut those efforts. 

You are right that not all risks turn out to be good ones for shareholders, and 

that there are risks that turn out badly for shareholders as well as creditors, as has 

been the case in the recent crisis. But when the managers of large financial institutions are making decisions, they do not know how the risks will play out. Imagine 

a manager can choose between two investments, each to be financed partly with $5 

of shareholder money and partly with a $5 loan from the creditor. One investment 

will pay off $5 100 percent of the time—it has no ‘‘risk’’, but it also promises no 

return to the shareholders, since the whole return will go to creditors. The second 

investment will pay off $10 90 percent of the time, and will generate a loss of $100 

10 percent of the time. The second investment is clearly better for shareholders, 

since (in expectation) it is worth $5 90 percent of the time ($10 less the $5 loan), 

and -$5 10 percent of the time (loss of their $5 investment). But the second investment involves a risk to the creditors (e.g., the U.S. taxpayers) since it involves a 

potential loss and an inability by the company to pay back the loan, and is worse 

for society as a whole. Suppose the managers nevertheless choose the second investment, and it pays off badly—i.e., it generates a loss. With hindsight, shareholders 

have lost, too, along with the creditors. But that doesn’t mean that the investment 

was bad for the shareholders. It is only after the loss has appeared that the investment looks bad. If they had to do all over again, most diversified shareholders generally would have the managers choose the second investment. This example is stylized, but it is no different in kind than the investment decisions that financial institution managers make every day. 

Corporate governance rules are changed rarely—you will be writing legislation 

not for the next 5 years, but for decades, through recessions and boom markets 

alike, and will apply to a range of publicly held companies. If the managers are 

forced by strong corporate governance reforms to follow more closely the directions 

of shareholders, they will tend, on average, to take more risks than they would if 

shareholder power were weaker. For most companies, creditors can take care of 

themselves, through contract, and in principle, as the bank regulators can offset any 

general increase in risk-taking by managers caused by shareholders, by requiring 

higher capital ratios or imposing more restrictive regulations. But the tendency of 

bank regulators has been, unfortunately, to fail to impose strict enough regulations 

to cope with the pressure of incentive compensation and other techniques for tying 

managers’ interests to shareholder goals. General corporate governance changes of 

the kind being discussed should be written with that unfortunate fact in mind. 
23 

Senator SCHUMER. Ms. Cross, the SEC has proposed ‘‘say-on-pay’’ 

for TARP recipients but not for other public companies. If ‘‘say-onpay’’ is a good idea when the Government is a shareholder, why 

isn’t it a good idea for all shareholders? 

Ms. CROSS. Chairman Schapiro has indicated that she supports 

‘‘say-on-pay’’ for all public companies, and we do not have authority 

to require ‘‘say-on-pay’’ at public companies beyond the TARP companies. 

Senator SCHUMER. But you would be supportive of it. 

Ms. CROSS. I cannot speak for the Commission, and the Commission has not taken a position. 

Senator SCHUMER. OK. But Chairman Schapiro is supportive of 

it. 

Ms. CROSS. Chairman Schapiro has said she supports it, and we 

stand ready to implement it if Congress enacts it. 

Senator SCHUMER. OK, good. 

Mr. Castellani, you note that some of the proposals—and I think 

that is significant, and I appreciate that. You note that some of the 

proposals in the Shareholder Bill of Rights are already being adopted by your member companies and reflect an emerging consensus 

on best practices in corporate governance. Well, if that is the case, 

then what are you so afraid of? If this is the trend anyway, if you 

seem to indicate this is the right thing to do, what is wrong with 

pushing those—you know, I had a discussion with one of your 

members, and I will not reveal who it is, but he said, ‘‘Look, I am 

not’’—and then he named his predecessor. ‘‘You do not have to legislate for me.’’ I said, ‘‘That is my whole point. We are not legislating for you. You are a good CEO, and whether your shareholders 

made you be a good CEO or not, you would be. But what about 

your predecessor?’’ 

So, question: Doesn’t the Shareholder Bill of Rights create a competitive advantage for the companies that follow the best practices? 

And why does the Roundtable, most of whom comply, I think overwhelmingly, with some of our proposals, and many comply with 

just about all of our proposals, why are they going so far to defend 

the outlier companies for whom the laws are needed most? 

Mr. CASTELLANI. Senator, in fact, many of the Roundtable companies do and have adopted many of the practices that are in your 

proposal. The difference— 

Senator SCHUMER. And you cite that with pride. 

Mr. CASTELLANI. Yes, absolutely. The difference is those—— 

Senator SCHUMER. That is not a very good argument against my 

proposal. 

Mr. CASTELLANI. Well, those who have not have made—those 

who have and those who have not have made the determination 

that that is best for their company. Their directors have made that 

determination, that that is best for their company under their circumstances. 

For example, the issue that you cited in the separation of the 

chairman and the chief executive officer, in some instances it 

makes very good sense to separate the chairman and chief executive officer, particularly where it is a transition event. But in other 

circumstances, boards feel that it makes best sense to have both to-
24 

gether, but protect against the downside by having a presiding director or—— 

Senator SCHUMER. As I mentioned—and I am—— 

Mr. CASTELLANI. So the question is: Why require it? 

Senator SCHUMER. I do not have much time, and I cannot stay 

for a second round. I am going to have to ask you another question. 

I understand. I mean, the one, as I said, that got the most kickback 

and that I am open to listening to change on or proposals on is the 

CEO and the independent director. You noted that 75 percent of 

your member organizations, 70 percent of S&P 500 companies, 

have adopted majority voting, and roughly half of the S&P 500s 

now hold annual director elections. Yet you argue that the one-sizefits-all approach simply will not work. 

Can you give me one good reason that a director who gets only 

one vote at an annual meeting should be allowed to continue as a 

director? 

Mr. CASTELLANI. I cannot give you any good reason why any director who does not receive a majority vote of the shareholders 

should be seated, unless—unless—it jeopardizes the ability of that 

company to be able to operate and that board to operate. 

For example, many companies who have adopted majority voting 

put in a safeguard for their companies such that if they require 

that particular director—that may be the only director that has the 

financial expertise that is required on the audit committee, the 

only director that would have the compensation expertise that is 

required on the compensation committee. If that would force the 

company to be in noncompliance, then what companies do is—— 

Senator SCHUMER. How about take away that exception? Any 

other justification? Let us assume we wrote into the law—— 

Mr. CASTELLANI. Not as long as the board can function and the 

company can function. 

Senator SCHUMER. OK, thanks. Well, good, we have won you over 

on at least two-thirds of one of our proposals. 

Mr. VERRET. And, legally, Senator, I would offer that failure to 

seat a quorum could result in a wide variety of legal circumstances, 

including, for instance, it could be an event of default under the 

company’s debt obligation. 

Senator SCHUMER. I am sure we could deal with that, particularly with the quorum issue, in the interim until there was another 

election. 

Thank you, Mr. Chairman. My time has expired. 

Chairman REED. Thank you, Senator Schumer. 

Senator Corker, please. 

Senator CORKER. Thank you, Mr. Chairman, and to the Senator 

from New York, I appreciate you offering something to look at. 

I do want to observe the staggered board issue I think has not 

been universally accepted, and I think we have a body on the other 

side of the Capitol that does not have staggered boards, and sometimes things come out of there pretty hot, like the 90-percent tax 

on the AIG bonuses. So I think there is some merit in that and 

hope you might consider that particular piece evolving. But I want 

to say one other thing. 

Professor Coates, I know that to assume that the folks who own 

AIG today are the same folks who might have encouraged the risk 
25 

would not be a good assumption. I mean, those guys sold out high, 

and the folks that are left behind—so, again, I do not think you can 

make that assessment. So I hope we can look at some of those 

things, and I look forward to really trying to work with you on 

something that we both might consider to be improved. 

We talked to Carl Icahn on the phone some time ago—I shared 

this with Senator Schumer—and he is obviously someone who 

cares a great deal about corporate governance. He has written 

about this, or I would not relay our conversation. It is certainly 

something he publicly feels. But the whole issue of where companies are incorporated seems to be an issue that is maybe even bigger than anything that has been laid out today. And I wonder if 

a couple of you might respond to that. 

Obviously, companies incorporate in States in many cases that 

give them many protections and keep shareholders from being able 

to make huge changes. And I wonder, Professor Coates and Professor Verret, if you might both respond to that, and anybody else 

who might have something salient. 

Mr. VERRET. Well, I am aware that Mr. Icahn has funded North 

Dakota’s Business Incorporation Act. He hired a lawyer to write it 

for him, and he hopes to get companies to reincorporate to North 

Dakota. 

Having clerked for the Delaware Court of Chancery, I am a bit 

biased. I think Delaware is a very effective court for litigating corporate governance issues—mostly due to the intelligence and superior talent of their law clerks. But I would also offer that, to some 

extent, I think some of what is behind some of this effort is shorttermism, some of the short-termism that got us into this problem 

in the first place: Let us cash out on dividends rather than invest 

in R&D. 

And sometimes hedge fund activism is very effective in long-term 

growth and in sort of rattling the saber a little bit and getting 

things moving. And sometimes hedge fund activism, though, kills 

companies that should continue to survive and strips them of their 

assets. And so I think that is part of what is behind the approach. 

Also, I think we—— 

Senator CORKER. In essence, then, you are saying that you like 

some activism on behalf of shareholders, but not too much. 

Mr. VERRET. Absolutely, and I am a little bit suspicious of Mr. 

Icahn’s motives, at some of his activism in activism in favor of 

State incorporation. 

Senator CORKER. Thank you. 

Mr. Coates. 

Mr. COATES. So it has been true for a long time that shareholders cannot force a reincorporation from one State to another on 

their own. They need the board to go along with it. And the board 

cannot do it on their own; it has got to be a joint decision. And as 

a result, there is actually relatively little movement between States 

once they have chosen their initial State of incorporation. 

At the moment before they go public, that is really the crucial 

decision point, and for that reason I think that fact that Delaware 

has a 70-percent share of the market, so to speak, it reflects well 

on Delaware. I think it is actually a reasonably healthy sign that 
26 

Delaware is being responsive, as best it can, to balancing the interests of both shareholders and the managers that have to run them. 

One thing, however, I would note about Delaware and its permissiveness toward a little bit of activism is it only passed that enabling legislation in the past year, and it did it in response to the 

threat of Federal intervention coming from this body. And so I do 

not think you should think about Delaware acting on its own to 

help shareholders. I think you should think about Delaware acting 

in relationship to this body, and things that you do are going to 

very much impact it. 

Senator CORKER. Mr. Castellani, I have served on several public 

company boards, certainly not of the size of AIG or some of the 

other companies we have had troubles with. But I do not think 

there is any question that boards in many cases—not all, and 

yours, I am sure, is not this way. But it ends up being sort of a 

social thing. I mean, you are on the board because the CEO of this 

company and the CEO of that company is on the board, and, you 

know, it is sort of a status thing in many cases. The CEO in many 

cases helps select who those board members are. And most of the 

time these board—many of the times, these board members have 

their own fish to fry. They have companies that they run, they are 

busy with, and, for instance, a complex financial institution, there 

is no way, like no possible way that most board members of these 

institutions really understand some of the risks that are taking 

place. With the limited number of board meetings, even if they are 

on the audit committee, very difficult to do. 

So some of these things need to be addressed certainly by governance issues that we might address here, hopefully not too many. 

Some of them need to be addressed, obviously, internally at the 

companies. I know you have advocated that in the office. But that 

issue of sort of the culture of the way boards in many cases are. 

Not in every case. I wonder if you might have a comment there, 

and then add to that—I am familiar with a company that makes 

investments in large companies, and one of the rules they have is 

they do not allow the CEO himself to actually serve on the board. 

They report to the board. They are at the meeting. But they do not 

allow them to serve on the board. So I would love for you to respond to both of those inquiries. 

Mr. CASTELLANI. I think, Senator, for your first question, what 

you are reflecting may have been the experience when you served 

on the boards. But what I think it does not reflect is the tremendous change that has occurred in the boardrooms over the last 8 

years. 

We now see boards of directors, in the case of Business Roundtable companies, that are at least 80 percent independent, and that 

is, the directors are independent of the company management. 

Indeed, the governance committees or the nominating committees that nominate the directors by requirement of the listing 

standards and the SEC are made up entirely of independent directors. So the nomination of a board member, a prospective board 

member, is no longer—if it indeed every was—controlled by the 

chief executive officer. 

And then, third, I would point out particularly the amount of 

time that is involved and the amount of expertise that is involved. 
27 

It is not only the specific requirement of the expertise that is in 

the listing standards and the SEC requirements, but indeed what 

boards themselves are demanding and what companies and their 

shareholders are demanding has resulted in not only greater expertise in specific areas, but a tremendous increase in the amount of 

time. 

For example, I was recently talking to the chair of the audit committee of a large U.S. company. That chair spent 800 hours of, in 

this case, his time as the chair of an audit committee over the last 

year because of some very complex financial issues. So the board 

members are spending more and more time. So I would submit to 

you, sir, that it is very different than when you served on the 

boards. 

And in terms of the boards being able to have the CEO as a 

member of the board, the CEO as a member of a board, in fact, the 

CEO and chairman where companies choose it, is a very, very important nexus between the governance of a corporation and the 

management of a corporation. 

We have found and experience has shown over a long period of 

time that if you separate the governance from the management, 

you get precisely the kinds of problems that this Committee is trying to avoid. So having the CEO on the board is a very, very important nexus. In many cases, companies and boards believe that having the CEO as chairman of the board is also very important. 

Again, my point would be what I have said in my testimony: 

That is up to every company to decide, and their board of directors 

representing the shareholders to decide, rather than be prescriptive, because it is not always right, but it is always right for the 

company that makes the right decision, and they should be allowed 

to make that decision. 

Senator CORKER. Thank you. 

Chairman REED. Thank you very much, Senator Corker. 

Senator Menendez, please. 

Senator MENENDEZ. Thank you, Mr. Chairman. Thank you all for 

your testimony. 

Let me ask you, I understand that in a previous question, most 

of you—I understand just one or two objections, but most of you 

said that you support the SEC’s May 20th rule to allow certain 

shareholders to include their nominees and proxies that are sent 

to all the other shareholders. Do you think that goes far enough? 

Or is to too far? If you support it, I assume that it goes far enough, 

it is sufficient. But is there something that should be done than 

that? Does that embody what we want to see? 

Mr. FERLAUTO. Senator Mendendez, I think it is an appropriate 

use of rule making, which is purely disclosure-based, which is very 

important; that is that it leaves up to the States the creation of 

rights in terms of the nomination of directors, but it empowers 

shareholders to be informed through shareholder communications 

about the fact that those elections are indeed occurring, and then 

votes through the proxy materials on that right. So I think that is 

a good balance. 

In addition, something that we have not talked about, the rule 

goes further, and it empowers shareholders to make binding bylaw 

amendments to improve those shareholder rights for the election of 
28 

directors so that this disclosure right at 1 percent—or actually it 

is a tiered system that they have in the disclosure rule right now 

for comment—becomes a floor of disclosure, and then at the State 

level, through an election system based on a shareholder proposal 

or a board proposal, they can increase or tweak that right in an 

interesting way. 

For example, I talked about ShareOwners.org being interested in 

retail shareholders. They can never hope to get 1 percent. But as 

in the U.K., you might be able to get 100 shareholders, retail 

shareholders, each owning $5,000 or $10,000 worth together who 

might be an appropriate group to create different types of rights. 

So that there is flexibility, which I think is quite welcome. 

Mr. VERRET. Senator Menendez, I would offer that Commissioner 

Paredes of the SEC has offered a competing proposal to the Chairman’s proposal, and I think Commissioner Paredes’ proposal is 

much more reasonable in that it considers facilitation of State law 

rights rather than running roughshod over them and sort of keeping the lion’s share of the meat and leaving the table scraps for the 

States. And I think Commissioner Paredes’ proposal also strikes a 

balance in limiting the ability of special interests to hijack the corporate ballot. And so I would offer that for this Committee’s attention. 

Senator MENENDEZ. Does anyone else have any opinion on it? 

Mr. CASTELLANI. Yes, Senator, I was not one of the majority who 

supported that, and I just wanted to make sure that you knew 

that. 

Our concern is that what the SEC is proposing to give access to 

the shareholders does preempt what has been traditionally done in 

the States. And, quite frankly, we think that there is symmetry in 

the argument that says if we trust the shareholders to elect the 

boards of directors, which we do implicitly, then we ought to trust 

the shareholders to set the threshold at which shareholders can 

nominate those board of directors candidates. 

Ms. YERGER. I would just note that, as I said earlier, we think 

this is a core right that should be federalized. The States have 

failed investors too long, Delaware in particular, and it really only 

acted when it had to. And I think it is important that the SEC take 

action on this important reform. 

Senator MENENDEZ. Let me ask in a different context. In practice, a corporation serves multiple masters, right? It has shareholders, it has corporate management, its creditors, the public in 

general. There are many cases where what is best for corporate 

management may not necessarily be the best for shareholders. Or 

there are also cases where what is best for shareholders is not 

what is best for the general public or the financial institution as 

a whole. 

How do we reconcile those tensions? 

Mr. CASTELLANI. That is a very interesting question that has 

been discussed—I am the oldest on the panel, so I can say this— 

for at least most of my corporate career. 

Senator MENENDEZ. There is no one seeking to claim objection, 

I notice. 

[Laughter.] 

Mr. CASTELLANI. I am used to it. 
29 

Senator MENENDEZ. You have created compromise already. 

Mr. CASTELLANI. There was particularly a very important topic 

in the 1980s, particularly when there was as lot of activity related 

to hostile takeovers, and that is, to whom is a board of directors 

and a management responsible? And the argument was a stakeholder argument, that there were shareholders, there were employees, there were communities, there were suppliers, there were customers, all of which had a legitimate position in the decisions. 

I would think it is fair to say that in the 1990s and the early 

part of this decade, that balance switched more to the shareholders, but what happened is the nature of the shareholders has 

changed very, very considerably. And that is, the average holding 

period, for example, of a New York Stock Exchange-listed company 

is about 71⁄2 months. So if your management and your board—you 

are really dealing with share renters and traders as much, if not 

more, than shareholders. And I think what we are all discussing 

here and we all have a perspective on is: Going forward, what is 

the correct balance between those who have a very, very short-term 

interest in very quick gain out of a company and may want to do 

some of the things that have been discussed here? You give access, 

you give rights to small percentages of shareholders. We already 

know in many cases how they act. Some funds come in and say, 

‘‘We own 5 percent of your company. What we want you to do is 

leverage the company, buy back the shares, give us about a 10-or 

20-percent jump, and we are out of here, quickly.’’ As opposed to 

other shareholders who say, ‘‘I think there is a value-added.’’ 

I do not know that anybody is in the long term. I do not know 

that any of us know the right answer to that. But I think, quite 

frankly, that is the question that is at the crux of what this Committee should be looking at. Obviously—— 

Mr. FERLAUTO. And, Senator, I—interestingly enough for here, 

this is where the Business Roundtable and certainly AFSCME, and 

I think some members of CII agree. It is all about how you empower long-termism and long-term shareholders, which we believe 

that proxy access ultimately will do, so that the best interests of 

the company to achieve long-term shareholder value is achieved. 

And the way you do that, actually, in terms of this long-termism, 

is getting into the DNA of the board. How does the board become 

most effective by being diverse, by being able to absorb many different points of view, by being—to evaluate itself to make sure that 

it is focused on long-term strategic implementation and that CEO 

pay incentives are aligned with that long strategic vision? And 

when we see a company that fails, we see a failure in all of those 

areas, which is bad for the shareholders, which is bad for the employees, which is bad for management, and for all other stakeholders in the process. 

So we want proxy access to fix boards because they cannot selfevaluate, because they are not diverse enough to share the interests of their stakeholders, which ultimately they need in order to 

achieve long-term shareholder value, and because their DNA is 

warped enough that it only serves management or a minority of 

shareholders and not achieve value for the long term. And that is 

the very essence of why we want proxy access and we need it now. 

Senator MENENDEZ. Thank you. 
30 

Mr. VERRET. Senator, may I just also add quickly, I want to commend Senator Warner and Senator Corker for the introduction of 

the TARP Recipient Ownership Trust Act. Shareholders and boards 

are complicated enough. When Government becomes a shareholder, 

things become even more tricky, and I want to commend the introduction of that act as dealing with some—going down the road to 

dealing with those unique conflicts. 

Chairman REED. Thank you very much. Thank you, Senator 

Menendez. 

Senator Johanns. 

Senator JOHANNS. Mr. Chairman, thank you. To all the panel 

members, thank you very much for being here. 

What I am trying to figure out as I listened to this very interesting dialogue between the Senators and each of you, is this: I 

kind of look at this as maybe a little bit black and white. There 

are big players here, and there are small players here. But they are 

all affected by the decisions we make here. 

Now, Mr. Ferlauto, if I could start with you, how much money 

do you have under investment, say at this point in time? 

Mr. FERLAUTO. AFSCME itself is a rather small player. Our employee pension system itself has got less than $1 billion in it. But 

most importantly is that we are concerned about the retirement security of our members, and our members depend on well-functioning capital markets and boards to achieve value. In order for 

them to pay the benefits, all of our members want a market that 

will succeed, that has got the ability to achieve a value over time. 

We are not speaking and we are not active on the part necessarily 

of what is in our portfolio, but what is in the interests of not only 

our members, but all American families seeking to achieve longterm financial security. And those are the people that I speak on 

behalf of. 

Senator JOHANNS. Great. Well, I have never had $1 billion under 

management, so I see you as a big player. What if some institution 

out there who has $1 billion under investment or $10 billion, or 

whatever—let us say they are a big player, like I think you are. 

Let us say you decide that you think the worst possible course of 

action for a company is to be pro-trade, and there are some that 

very openly espouse that theory, that trade has really cost jobs and 

hurt America and this and that. 

If you have access to the proxy, you then have the right to elect 

somebody who espouses that view. Would that be correct? 

Mr. FERLAUTO. No, not necessarily. What we have the right to 

do is to potentially nominate somebody, but in order for somebody 

to be elected, they would have to be elected by a majority of everybody who is voting, and then presumably all the owners, as in a 

regular election, would assert their choices based on what is in 

their self-interests. So that I would assume that a minority player 

working on any—you know, any motivated self-interest would not 

be able to achieve victory. 

Senator JOHANNS. Here is what I am trying to get to, and I am 

not trying to be coy about this. I am trying to be very, very direct 

about this. I have got 100 shares; you have got $1 billion worth of 

shares. I am pro-trade, let us say, and whoever this institution is— 

I am not say AFSCME is this, but whoever this institution is, it 
31 

takes a very, very different view than I do that may not be in the 

best interest. 

Mr. FERLAUTO. It is actually a very good point, but who I am 

concerned about are actually the large financial intermediaries, 

particularly mutual funds, who are seeking to do business, you 

know, with other large companies to sell their investment products 

through their 401(k) plans so that they actually may cast their 

votes in a way that would be looked kindly on by the CEO because 

they are not voting against his compensation plan, rather than voting in the interests of all the small individual investors who put 

their money into that fund, you know, thinking that that is the 

way to achieve value. And those are the kinds of conflicts that are 

rife in this system that we are very concerned about. 

Senator JOHANNS. Yes, and I am going to be very direct again. 

You and I are going to have an easy time agreeing that there are 

a lot of ways to be self-interested. A lot of ways. So, Mr. Castellani, 

let me turn to you. Based on your corporate experience, what impact does that have on your company if there is, for lack of better 

terminology, ease of entry here? 

Mr. CASTELLANI. One of the things that we are concerned about 

is that it would politicize the board. The board is legally required 

to represent all shareholders. So each member of the board is to 

represent all shareholders, not a particularly constituency of shareholders. But, in fact, there are constituencies of shareholders, people who want short-term gains, people who want—you were giving 

an example, my company, Tenneco, owned Newport News Shipbuilding. We had a shareholder, a nice little group from Connecticut, a group of nuns who owned $2,600 of the company and 

wanted us to get out of the nuclear shipbuilding business. And 

every year, they would have that on the proxy. 

The point is that dissension first costs the shareholders money, 

because that is who pays for the proxy process. It doesn’t come out 

of the management’s pocket. It doesn’t come out of the Government’s pocket. The shareholders pay for the dissension. 

But second—directly, they pay for the proxy process—but second, 

boards best operate when they operate by consensus, when there 

is an agreement among the board of the strategic direction of the 

company and who should implement that strategic direction. It 

doesn’t mean there isn’t discussion. It doesn’t mean there isn’t 

questioning, that there isn’t dissension. But when they make a decision, companies operate best when you don’t second-guess, until 

there is reason to second-guess, the direction the company is going. 

Senator JOHNSON. I am out of time, and I won’t press that too 

much today because we have been given extra time today, but I 

want to offer one other thought on a totally different approach. I 

was on a panel yesterday in this room, and as I started my questioning, I said to the panelists, I said, I am going to warn you. I 

am a former Governor. It just astounds me how we have this philosophy here—and I am very new to this Senate job—it just 

astounds me how we think all of the best solutions are here in 

Washington with a Federal approach. This really does impact 

States in a very, very significant way. That in itself is a very, very 

profound issue. And yet we just kind of jump right in the middle 
32 

of it with this new approach that just casts aside 50 State corporate laws. 

And I will share this with you. When I started as Governor many 

years ago, I decided that I wanted to be a State that attracted business to my State. We needed jobs and we needed economic growth 

in the State of Nebraska and I decided I was going to take on Delaware to try to make that happen. You know what I realized about 

Delaware? They had one heck of a good start and they were doing 

more things right than they were doing wrong and it was going to 

be very, very difficult to dent that. 

And yet in this hearing, again, whether it is Delaware or Nebraska or Wyoming or California, whoever, we have a very, very 

profound impact on the history of corporate governance in this Nation and I just don’t think we should do that lightly. I think you 

would have 50 Governors in those seats back there ready to come 

to the table to chew on us about that, because it does have very 

significant consequences for the States where the jobs do exist, 

where the jobs are created, where hopefully the businesses grow 

and expand and create economic opportunities for the people out 

there who then pay the taxes that allow us to come here and do 

the social and other programs that we just love to do. 

So I just think it is really an important philosophical issue and 

that is my little sermonette at the end of the questioning. Thank 

you. 

Chairman REED. Thank you, Senator Johanns. 

Let us begin the second round. 

Ms. Yerger, what is the status of majority voting on Delaware 

law now? Is it—— 

Ms. YERGER. Under Delaware, and again, I am not a lawyer, it 

is not the default standard, but the laws do accommodate majority 

voting so companies can adopt it voluntarily. 

Chairman REED. They can adopt it voluntarily. But under the— 

and Ms. Cross, under the SEC’s proposal, that would not upset 

Delaware law if you were talking about majority voting. It would 

be optional. 

Ms. CROSS. We don’t have a proposal on majority voting. The 

way it would work with our proxy access is that if there were more 

people running than there were slots, you would usually revert to 

plurality voting because majority wouldn’t work. 

Chairman REED. OK. Thank you. 

Mr. Castellani, again, thank you for being here and for your testimony. I think the core of the issue is who knows best about the 

company, the directors or the shareholders. Under the present arrangement, and we have got enough lawyers who can criticize my 

legal analysis, is that the directors essentially control access in 

most companies to the proxy unless you want to mount a very expensive proxy fight. They decide in most cases and in most companies what will get on as an issue and what won’t get on as an 

issue. So the current practice, unless we do something, will leave 

sort of the directors with critical control of the process and then on 

both sides of this argument we are talking about empowering 

shareholders. So your comments, and then I will open it up to the 

panel. 
33 

Mr. CASTELLANI. Sure. First, for the record, let me state I am a 

scientist and engineer, not a lawyer. 

Chairman REED. Well, Senator Bunning, again, thank you on his 

behalf. 

Mr. CASTELLANI. I want to say that as often as I can. 

In fact, the directors do not control access to the proxy for all 

issues. In fact, the SEC controls. Therefore, companies like Tenneco 

get proposals. All companies get proposals related to social issues, 

governance issues, economic issues, labor issues, environmental 

issues. But I don’t think that is what you are talking about. 

What you are talking about is the access for the purposes of 

nominating directors and we have to talk about that in the context 

of any group of shareholders, any single shareholder has an ability, 

if they can afford it, and it is an expensive proposition—— 

Chairman REED. Yes. 

Mr. CASTELLANI. ——to nominate directors and run in competition to the directors that are nominated by the Nominating Committee. That is how we do takeovers and that is how the companies 

make sea changes, or investors make sea changes. 

What I am concerned about and what we are concerned about is 

we have, by majority vote, by and large, directors who are elected 

to represent all shareholders. Those directors are, by and large, 

elected every year. And so if the shareholders elect the directors 

and the shareholders can remove the directors under majority voting, then how does the company best operate on behalf of the 

shareholders? 

Is it best operated in letting those directors make, in their collective judgment, decisions about who should be on the board representing the shareholders, who should manage the company, or do 

we subject those directors or a portion of them—a significant portion, 25 percent of them—to a reelection challenge every year and 

turn them into essentially corporate politicians, because these are 

contested elections. They are somehow going to have to be run as 

contested elections. 

And what does that do to the director? Does that then distract 

her from the business that we all want her to do, which is overseeing the shareholders’ interests in that board room, or does she 

have to be more concerned because the conflicting nominee was 

elected because they didn’t want us to be in the nuclear shipbuilding business, in my case, or they didn’t want us to do business 

in a particular part of the world, or they wanted our product lines 

to change, or they wanted some practices to change. 

What our concern is is that boards should be free to do and responsible for doing what the shareholders want them to do, and 

that is be good stewards of their investment in the company. 

Chairman REED. Well, my sense is—and you are right to narrow 

down my focus to the directors’ election because social issues, they 

do get on the board because the SEC has required that and there 

is an argument they could require the directors also to be subject 

to proxy access. 

But the other side of the argument is there is a group of directors that essentially nominates the Nominating Committee. Usually the Nominating Committee is directors—— 

Mr. CASTELLANI. Right. 
34 

Chairman REED. ——who then choose other people they think 

are sympathetic to them and their views and the shareholders, unless they are not in a proxy fight, generally they either have to accept this board, and many times, as you pointed out, the board is 

not elected by a majority. In fact, there are many times where less 

than a majority of shareholders, a small number of shareholders 

even vote, and I think there has been a lot of discussion back and 

forth about motivation for voting, but most shareholders don’t 

know—it is not the politics as practiced elsewhere. Most shareholders are reflecting on their dividends, their share value, what 

they think the company should be doing economically for their benefit. It is quite self-interested. 

Mr. CASTELLANI. I think, Senator, another point I should make— 

two other points I should make is that good boards, and certainly 

I would include our companies, have means by which they communicate and allow shareholders to suggest directors. And in fact, 

that is something that all of our member companies do now. 

So small groups of shareholders—and let us not kid ourselves. I 

mean, any management, any board that is worth anything, that 

can wake up and make their own breakfast in the morning, when 

a large shareholder comes in and says, we want to talk to you 

about the make-up of the board, by God, we listen, because you forget, we are in the business of trying to sell our shares to members 

and convince investors that we are a good company to invest in. So 

we listen to investors. 

The problem that we have is that sometimes in these discussions, 

you are talking about individual investors and we have to be responsive to our largest investors, which are institutional investors. 

And so the desires of individuals come through intermediaries, the 

mutual fund and the fund managers, and that message is very different than what some of the things that you are describing. 

Chairman REED. This is a conversation that could go on at 

length, but I am going to stop and recognize Senator Bunning. 

Thank you. 

Senator BUNNING. Thank you very much. 

Professor Verret, there has been a lot of talk about giving shareholders a vote on pay packages but little discussion on the details. 

If we were to require such a vote, what specifically should we vote 

on and how often should we vote? 

Mr. VERRET. Well, notably, I think one thing I would draw out 

is that there is a big difference between ‘‘say-on-pay’’ and say on 

severance packages. I think those are two distinct issues. There is 

a healthy debate about both of them, but I think it is a mistake 

to lump them in together. I think the big difference between say 

on severance is that severance packages are used to facilitate efficient mergers and acquisitions. Basically, sometimes when a good 

M&A deal goes through, the CEO of the target has to go. It is, you 

have got to leave and here is some walking-away money. And those 

deals are great, and most of the—— 

Senator BUNNING. But that isn’t my question. 

Mr. VERRET. OK. So my first answer is, I would differentiate 

‘‘say-on-pay’’ and say on severance. 

With respect to ‘‘say-on-pay,’’ I think one of the details is how 

often would you approve ‘‘say-on-pay,’’ and I am aware that the 
35 

United Brotherhood of Carpenters, at least, wants it every 3 years. 

I think some groups prefer it every—— 

Senator BUNNING. Every 3 years? 

Mr. VERRET. Yes. They would prefer the pay package—— 

Senator BUNNING. By the time the second year came around, 

maybe the company would be in Chapter 11. 

Mr. VERRET. Well, perhaps, but what they propose is that typically, pay packages are negotiated over longer terms, so ‘‘say-onpay’’ should be negotiated over the longer term. You don’t necessarily reapprove the pay package every year. Sometimes they are 

longer term. Sometimes they are 5 or 10 years. 

So one of the things I would suggest is that you leave open the 

boards of directors and the shareholders to determine how they 

want ‘‘say-on-pay’’ to work. 

Senator BUNNING. Then you think they should be left open to the 

boards in negotiating with whoever they want as their CEO? 

Mr. VERRET. I worry about the effects of one-size-fits-all packages, and I think we have seen that effect in Britain with their 

‘‘say-on-pay’’ rules. 

Senator BUNNING. And you think the negotiations on golden 

parachutes should be different completely? 

Mr. VERRET. They should be, because sometimes you have to do 

them very quickly, not enough time to get approval for the package 

to deal with the specific merger. 

Senator BUNNING. Would you like to comment? 

Mr. COATES. Very briefly. ‘‘Say-on-pay’’ is advisory votes only. 

There is no need for speed. There is no need for prior voting. The 

U.K., the Netherlands, Australia have successfully implemented 

this for years, and in fact, the evidence from the U.K. suggests that 

it almost never has a bad effect on companies, that almost all of 

the time, shareholders approve the pay package as presented. 

There are a few outliers that get their pay packages voted down 

and the result of that has been a better alignment of shareholder 

and manager interests over the past 5 years in the United Kingdom. So I think the U.K. model is working and I think it is a reasonable place to start. 

Mr. VERRET. Although as I am sure Professor Coates might be 

aware, the shareholder electorate in the United Kingdom is very 

different from the United States— 

Senator BUNNING. No. This is not a discussion between—we have 

to ask the questions. 

Mr. VERRET. Sorry. He is my old professor and he gave me a ‘‘B’’ 

in corporate law, so I have to—— 

Senator BUNNING. A ‘‘B’’? That is pretty good. 

[Laughter.] 

Senator BUNNING. Unbelievable. I will give you a chance to talk 

again. 

As States respond to concerns about corporate governance issues 

with changes to their own laws, is there really a need to federalize 

business law? 

Mr. VERRET. Well, I would agree, and I think we haven’t even 

had time to see the effect of the State changes on proxy access operate after Delaware and the other States facilitated majority voting in 2006. From 2006 to 2007, we saw an increase in majority 
36 

voting at companies from 20 percent of the S&P 500 to 50 percent. 

So Delaware just amended its code in, I think, March, and the ABA 

is about to change the Model Business Code. So there hasn’t been 

enough time to see, I think, all the proxy access bylaws that I 

think we are going to see adopted by boards. 

Senator BUNNING. Ann, would you like to comment? 

Ms. YERGER. I firmly believe that the problem here are the problem companies and—— 

Senator BUNNING. Yes, we know about them. 

Ms. YERGER. ——and that is why I believe these issues should 

be federalized, frankly. 

Senator BUNNING. Yes, but they are at the trough every time 

they have a problem, whether they are a finance company or 

whether they are an insurance company, whether they are an auto 

company. If you think they are too big to fail, then the Federal 

Government is the backstop. And if they are a GSE, we are the 

backstop for sure. So do you have some other suggestions that we 

might not have to be the backstop? 

Ms. YERGER. Suggestions regarding specifically—I am sorry. I 

have lost the question here. 

Senator BUNNING. You lost the question. Well, about the laws 

being changed in the States on corporate governance. 

Ms. YERGER. I feel that majority voting, we have had plenty of 

experience and the fact is that there are many companies—in fact, 

most small companies have not adopted it. We think it is a core 

owner right and as a result it should be federalized. 

I also believe that proxy access should be federalized. The fact 

is, when council members invest in domestic companies, they are 

not doing a portfolio of Delaware companies or Nebraska companies. They are doing a portfolio of the U.S. companies, and we either make a decision that these are basic rights we should be offering to owners of any company here in the United States or not. 

And I think the Council firmly believes that—— 

Senator BUNNING. The fact that if I live in Kentucky, where I 

live, you want me to come in and say, the Federal Government 

should make the rules for every company in Kentucky. 

Ms. YERGER. Regarding access on majority voting—— 

Senator BUNNING. Yes. 

Ms. YERGER. ——yes, sir. 

Senator BUNNING. You do. 

Mr. FERLAUTO. If I may, another—— 

Senator BUNNING. It won’t sell. 

Mr. FERLAUTO. Another approach to this which I think might sell 

is that give shareholders the power to decide what State they will 

incorporate in, and therefore you can—— 

Senator BUNNING. Well, they do have the power. 

Mr. FERLAUTO. No, they don’t, actually, is that right now, it is 

the boards through the IPO—— 

Senator BUNNING. Oh, you mean beforehand, before they incorporate. 

Mr. FERLAUTO. Maybe every 5 years. You talked about one way 

to do this is to give them a right every four or 5 years, similar to 

Mr. Coates’s idea, that rather than opting in and opting out of a 

variety of laws, they actually have a right to decide on whether the 
37 

charter and powers of a particular State are appropriate for them 

at a particular moment and allow shareholders to decide on their 

own—— 

Senator BUNNING. You, as a billion-dollar investor, you as a person who controls $1 billion worth of investment, would say that to 

the shareholders after the fact, after they have already incorporated? 

Mr. FERLAUTO. I agree that there should be more—that the State 

of incorporation should be a greater factor when IPOs are made 

and that there is not enough emphasis or focus on corporate governance during the IPO process, and I think that would be something very interesting for the SEC to look at for perhaps new rule 

making. But if you are talking about empowering the States, one 

thing that you might consider to do is to give them real power and 

create real competition among Delaware and Nebraska and North 

Dakota and California and every other State by making State corporation real and let them compete. The only way you can let them 

compete is by giving shareholders, the owners of these companies, 

real power to make a decision about what laws are most appropriate to them. 

Senator BUNNING. It won’t sell. 

Mr. FERLAUTO. It is a market-based—— 

Senator BUNNING. It won’t sell. We can’t sell it, because we 

would have 50 Governors up here every day trying to tell us to 

mind our own business. 

Mr. FERLAUTO. Yes, but—— 

Senator BUNNING. Thank you. Thank you, Mr. Chairman. 

Chairman REED. Senator Corker. 

Senator CORKER. Thank you all for your testimony, and again, 

both of you, for having the hearing. 

I think what—well, based on backgrounds, Mr. Ferlauto and I 

might have a difference of opinion on many things. I think what 

you were trying to communicate is giving shareholders—you can 

domicile. You can change the corporate domicile at any time you 

wish. It doesn’t matter where you are incorporated. 

I actually think that Senator Johanns was referring to a race to 

the top and I do think that, while I realize my friend from Delaware may disagree, it actually does give shareholders the ability to 

influence things and I hope that we will—I am not sure it wouldn’t 

sell and I hope it is something we will understand. I am not sure 

I understand enough about it myself to support it, but I do know 

that it certainly would give shareholders much greater freedoms. 

I do want to say to you, Mr. Verret, that I think you were dead 

on in your opening comments that here we are talking about lots 

of things, but really what has driven this has been moral hazard, 

has been what happened with GSEs, and many of the policies we 

put in place here, the failure of regulators, short-term thinking, 

credit-rating agencies that didn’t do what everyone thought they 

were doing, and I am not sure about the mark-to-market issue. We 

might debate that some. 

But I hope that we don’t go overboard with what we do here because it is other factors—many other factors—that have created 

this. I do, on the other hand, think that boards are the final governance issue, and if you have good boards that actually under-
38 

stand the risk, especially at financial institutions, I think we might 

actually look at differentiating things that have to do with large 

companies, financial companies that offer systemic risk. We may 

look at those a little differently. 

But let us get down to this risk. Senator Schumer is close to our 

Chairman. My guess is that just knowing how things work around 

here, that he may to defer to him on some of these corporate governance issues. He laid out six things. My sense is that the shareholder ‘‘say-on-pay’’ issue as advisory was not particularly controversial amongst most here, is that correct, as an advisory issue. 

The shareholder input didn’t seem to be—— 

Mr. CASTELLANI. Why do it every year? Why require it for all 

companies? 

Senator CORKER. And maybe there is a size issue. By the way, 

I am not agreeing myself necessarily with all these. I am just asking you all. The independent chairperson seemed to be somewhat 

agreed by half and somewhat disagreed, especially Mr. Castellani, 

is that correct, thought that was a bad idea. 

Mr. CASTELLANI. We believe that it should be up to every board 

of directors and every company to decide what is best for them. 

Senator CORKER. Does anybody other than him disagree with 

what was put forth there? 

Ms. CROSS. If I could note, I am not—on behalf of the SEC, I am 

not expressing views. The Commission hasn’t expressed views on 

all these points. 

Senator CORKER. I understand. 

Ms. CROSS. By my silence, I am not commenting. 

Senator CORKER. I have got you. 

Ms. CROSS. Thank you. 

Ms. YERGER. We are believers in one-size-fits-all on this issue. 

Senator CORKER. You are believers in that. 

Ms. YERGER. Yes. 

Senator CORKER. The stagger board issue, I hope stays in place 

and is not eliminated, personally. The majority voting issue didn’t 

seem to be a big issue to anybody here. Mr. Castellani, since you 

represent—— 

Mr. CASTELLANI. Most of our members have majority voting. 

Senator CORKER. So not a big deal. So the risk committee is the 

one issue I think we haven’t touched on—— 

Mr. CASTELLANI. It is very important. 

Senator CORKER. ——and I just wonder if, since I think we have 

got pretty good input from you all in these other areas, what are 

your thoughts, in whatever order you want to give them, on the 

risk committee issue? 

Mr. CASTELLANI. Senator, if I might start, I think there probably 

is going to be pretty close to—well, I don’t know whether we would 

all be unanimous. The fundamental issue, which is whether or not 

a board of directors should regularly and thoroughly analyze the 

risks that face the company and its shareholders is not one on 

which there is any argument. That is one of the fundamental purposes of a board of directors. 

What Senator Schumer in his bill prescribes, however, is not appropriate, and that is that you create a separate committee to do 

that. Some companies choose to do it within separate committees, 
39 

but other companies think that it is better done within its audit 

committee because its greatest risk may be in its financial structures. Some companies do it, because of the nature of the products, 

in different committees because their greater risk may be either 

the products or the markets in which they serve as opposed to financial risk. 

So our suggestion is that it is done, but don’t specify that you 

create another committee, particularly where we have already run 

the risk of being so prescriptive to how many committees and what 

type of committees boards should have that we run the risk of 

being the best at governance compliance and the worst at governance implementation. 

Senator CORKER. I understand. Is there anybody that strongly 

disagrees with the position he just put forth? 

Mr. FERLAUTO. Let me just add one caveat to that. I think John 

is right that there needs to be some flexibility, but there also needs 

to be some very explicit disclosure about who is responsible for 

risk, what committee is responsible for it, what is their charter, 

what powers that they have, how they will review risk, and that 

needs to be disclosed much more heavily than it does right now. 

Senator CORKER. So you would moderate the bill in that way and 

specify that it doesn’t have to have a separate committee, but that 

function has to take place within the board—— 

Mr. FERLAUTO. And it needs to be disclosed to shareholders in a 

very precise way, OK. 

Senator CORKER. So, since I am the last questioner—— 

Chairman REED. Go ahead. 

Senator CORKER. ——let us go back to this issue of the State 

thing again, which longer-term advocates of shareholder rights 

have said, look, if we could just give shareholders the ability to 

race to the top, as Senator Johanns, I think was alluding to, I am 

not positive—I certainly asked the question earlier in the same 

light—Mr. Castellani, how do you feel about shareholders being 

able to say that you are not going to be domiciled in whatever 

State you are in but you are going to be in Texas because it gives 

great shareholder rights? 

Mr. CASTELLANI. Senator, if the majority of the shareholders 

want to change the logo to pink and make me stand on one leg, 

I change the logo to pink and stand on one leg. So it really is what 

the majority of the shareholders. But I think it is not a decision— 

I think we kid ourselves that this is a decision that is based on 

what Mr. Icahn is advocating, which is the ability of greater ease 

of change of control. 

One of the reasons why Delaware is very attractive to corporations is Delaware has an infrastructure, with all deference to my 

colleague here, that is very efficient in adjudicating issues between 

companies and shareholders, and shareholders and shareholders, 

prior to annual meetings or whenever they need to be adjudicated. 

Delaware is very, very good. They have—what have they got, ten 

judges and a couple hundred staff people that make decisions very, 

very quickly. So it is not just the structure of the law that is attractive but it is the ability of the State to implement its law and make 

decisions when issues are in contention very quickly and very efficiently. 
40 

Senator CORKER. But while you are selling Delaware, and I am 

sure the Chambers of Commerce up there like that—— 

Mr. CASTELLANI. Well, let me give equal. New Jersey is also very 

good. Ohio is very good—— 

[Laughter.] 

Mr. CASTELLANI. ——and I am sure—— 

Senator CORKER. Their pension funds must invest in your company. 

Mr. CASTELLANI. ——Tennessee is very good. 

Senator CORKER. But back to the issue of whether they are good 

or not, and my guess is some of those are not so good that you just 

mentioned, but giving the shareholders the ability to do that is, in 

your opinion—and, by the way, by law? You have no problem with 

that? 

Mr. CASTELLANI. Yes, I would. Why, again, prescribe for all 

shareholders of all companies something that they already have the 

right to do within the States where they are incorporated if the 

States allow it. 

Senator CORKER. Does anybody strongly disagree with that? 

Mr. COATES. Just so we are clear, currently, shareholders do not 

have the right—— 

Mr. CASTELLANI. Do not have the right. 

Mr. COATES. ——do not have the right to force a reincorporation 

over the objection of the board, and I actually think for once I am 

on sort of the management side of the Business Roundtable, at 

least if I heard his comment earlier. I don’t think that would be 

a good idea to introduce. It would be more powerful and more disruptive on behalf of shareholders than anything the SEC is proposing in the current environment. 

Senator CORKER. So you think that is a really bad idea? 

Mr. COATES. Well, I just—I think it would require a great deal 

of thought about how exactly it would be implemented, and I think 

to think of it as somehow a weaker version of shareholder proxy 

access is just descriptively a mistake. It would be actually more 

empowering—— 

Senator CORKER. No, I agree. 

Mr. COATES. OK. 

Senator CORKER. It is the most empowering thing, I think, 

that—— 

Mr. CASTELLANI. And I want to make very clear that I associate 

myself with those remarks, that that is—I can’t imagine what the 

benefit would be compared to the costs or the disruption. 

Senator CORKER. Do you want to make a comment? 

Mr. FERLAUTO. I was just going to say, I think that is true. I 

think the moderate form is establishing the disclosure right for 

proxy access. But to go all the way to keep Governors happy, if you 

will, is to create competition amongst the States by fully empowering shareholders. 

Ms. YERGER. As radical as the Council is, I have to tell you, this 

is not an issue we have endorsed at this point, is giving owners the 

right to reincorporate an entity. We are studying it, but I think 

that it is a complex issue that I would be very surprised the corporate community would support. 

Mr. FERLAUTO. This is the moderate version. 
41 

Mr. VERRET. I would also offer that proposals and changes of 

State of incorporation get introduced from time to time and the results are always there is pretty low shareholder interest in that. 

Senator CORKER. OK. Listen, I want to say that while I ask numbers of questions, I am going to give the same disclosure as the 

SEC. None of them necessarily represent my point of view. It is 

just the best way to sort of understand what a very diverse panel 

of six people think about an issue and I very much appreciate all 

of your input today. 

I hope that if we do anything on corporate governance, I hope 

that it is modest and we realize that at the end of the day, a lot 

of factors led to the failures that we have had today, much of 

which, candidly, was generated out of this body and those who 

came before. I hope that we don’t create a similar problem or another type of problem by over-legislating how the private sector 

governs itself. But I thank you all for your testimony. 

Chairman REED. Thank you, Senator Corker. 

I want to thank all the witnesses. This has been a very insightful 

panel, and I particularly thank you for the time and effort you put 

into this. It was quite obvious from the testimony and from your 

response to questions. 

Let me say for the record, witnesses’ complete written testimony 

will become part of the hearing record and we are happy to include 

supporting documentation for the record. The record will remain 

open for 1 week, until August 5, 2009, for Members to submit their 

own personal written statements or additional questions for the 

witnesses. We ask that witnesses respond to any written questions 

that are sent within 2 weeks and note that the record will close 

after 6 weeks in order for the hearing print to be prepared. 

With that, I thank you again and thank my colleagues. The hearing is adjourned. 

[Whereupon, at 4:38 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 
42 

PREPARED STATEMENT OF CHAIRMAN JACK REED 

I want to welcome everyone, and thank all of our witnesses for appearing today. 

Today’s hearing will focus on corporate boardrooms and try to help us better understand the misaligned incentives that drove Wall Street executives to take harmful risks with the life savings and retirement nest eggs of the American people. 

This Subcommittee has held several hearings in recent months to focus on gaps 

in our financial regulatory system, including the largely unregulated markets for 

over-the-counter derivatives, hedge funds and other private investment pools. We 

have also examined problems that resulted from regulators simply failing to use the 

authority they had, such as our hearing in March that uncovered defective risk 

management systems at major financial institutions. 

But although regulators play a critical role in policing the markets, they will always struggle to keep up with evolving and cutting-edge industries. Today’s hearing 

will examine how we can better empower shareholders to hold corporate boards accountable for their actions, and make sure that executive pay and other incentives 

are used to help companies better focus on long-term performance goals over dayto-day profits. 

Wall Street executives who pursued reckless products and activities they did not 

understand brought our financial system to its knees. Many of the boards that were 

supposed to look out for shareholder interests failed at this most basic of jobs. This 

hearing will help determine where the corporate governance structure is strong, 

where it needs improvement, and what role the Federal Government should play in 

this effort. 

I will ask our witnesses what the financial crisis has revealed about current laws 

and regulations surrounding corporate governance, including executive compensation, board composition, election of directors and other proxy rules, and risk management. In particular, we will discuss proposals to improve the quality of boards 

by increasing shareholder input into board membership and requiring annual election of, and majority voting for, each board member. 

We will also discuss requiring ‘‘say-on-pay,’’ or shareholder endorsements of executive compensation. We need to find ways to help public companies align their compensation practices with long-term shareholder value and, for financial institutions, 

overall firm safety and soundness. We also need to ensure that compensation committee members—who play key roles in setting executive pay—are appropriately 

independent from the firm managers they are paying. 

Other key proposals would require public companies to create risk management 

committees on their boards, and separate the chair and CEO positions to ensure 

that the CEO is held accountable by the board and an independent chair. 

I hope today’s hearing will allow us to examine these and other proposals, and 

take needed steps to promote corporate responsiveness to the interests of shareholders. I welcome today’s witnesses and look forward to their testimony. 

PREPARED STATEMENT OF MEREDITH B. CROSS 

DIRECTOR, DIVISION OF CORPORATION FINANCE, SECURITIES AND EXCHANGE

COMMISSION

JULY 29, 2009 

Introduction 

Good afternoon Chairman Reed, Ranking Member Bunning, and Members of the 

Subcommittee. My name is Meredith Cross, and I am the Director of the Division 

of Corporation Finance at the U.S. Securities and Exchange Commission. I just rejoined the SEC staff in June of this year after more than 10 years in private practice here in Washington. I worked at the SEC for most of the 1990s, and I am delighted to be back at the agency at this critical time in the regulation of our financial markets. I am pleased to testify on behalf of the Commission today on the topics 

of corporate governance and the agency’s ongoing efforts to assure that investors 

have the information they need to make educated investment and voting decisions. 

Investor confidence is critical to our securities markets. In the context of the 

issues that the Subcommittee is discussing today, investors need to feel confident 

that they have the information they need to make educated decisions about their 

investments, including whether to reelect or replace members of the board of directors. Good corporate governance is essential to investor confidence in the markets, 

and it cannot exist without transparency—that is, timely and complete disclosure 

of material information. In responding to the market crisis and erosion of investor 

confidence, the Commission has identified and taken steps over the past months in 
43 

1 ‘‘Facilitating Shareholder Director Nominations’’, Securities Exchange Act Release No. 34- 

60089 (June 10, 2009). The Commission’s vote was 3–2 in favor of the proposal, with Chairman 

Schapiro and Commissioners Walter and Aguilar voting to approve the staff’s recommendation 

to propose rules, and Commissioners Casey and Paredes voting not to approve the staff’s recommendation. For the Commissioners’ statements regarding the proposal at the Commission 

meeting at which the proposal was considered, see http://www.sec.gov/news/ 

speech.shtml#chair. 

a number of significant areas where the Commission believes enhanced disclosure 

standards and other rule changes may further address the concerns of the investing 

public. 

Shareholder Director Nominations 

A fundamental concept underlying corporate law is that a company’s board of directors, while charged with managerial oversight of the company, is accountable to 

its shareholders who have the power to elect the board. Thus, boards are accountable to shareholders for their decisions concerning, among other things, executive 

pay, and for their oversight of the companies’ management and operations, including the risks that companies undertake. While shareholders have a right under 

State corporate law to nominate candidates for a company’s board of directors, it 

can be costly to conduct a proxy contest, so this right is only rarely exercised. 

The Commission’s proxy rules seek to enable the corporate proxy process to function, as nearly as possible, as a replacement for in-person participation at a meeting 

of shareholders. With the wide dispersion of stock prevalent in today’s markets, requiring actual in-person participation at a shareholders’ meeting is not a feasible 

way for most shareholders to exercise their rights—including their rights to nominate and elect directors. Two months ago, the Commission voted to approve for notice and comment proposals that are designed to help shareholders to more effectively exercise their State law right to nominate directors. 1

Under the proposals, shareholders who otherwise have the right to nominate directors at a shareholder meeting would, subject to certain conditions, be able to 

have a limited number of nominees included in the company proxy materials that 

are sent to all shareholders whose votes are being solicited. To be eligible to have 

a nominee or nominees included in a company’s proxy materials, a shareholder 

would have to meet certain security ownership requirements and other specified criteria, provide certifications about the shareholder’s intent, and file a notice with the 

Commission of its intent to nominate a candidate. The notice would include specified 

disclosure about the nominating shareholder and the nominee for inclusion in the 

company’s proxy materials. This aspect of the proposals is designed to provide important information to all shareholders about qualifying shareholder board nominees so that shareholders can make a more informed voting decision. 

To further facilitate shareholder involvement in the director nomination process, 

the proposals also include amendments to Rule 14a-8 under the Exchange Act, 

which currently allows a company to exclude from its proxy materials a shareholder 

proposal that relates to a nomination or an election for membership on the company’s board of directors or a procedure for such nomination or election. This socalled ‘‘election exclusion’’ can prevent a shareholder from including in a company’s 

proxy materials a shareholder proposal that would amend, or that requests an 

amendment to, a company’s governing documents regarding nomination procedures 

or disclosures related to shareholder nominations. Under the proposed amendment 

to the shareholder proposal rule, companies would be required to include such proposals in their proxy materials, provided the other requirements of the rule are met. 

The proposing release seeks comments from the public on the rule proposals generally and also includes numerous specific questions. The comment process is a critical component of every rule making, and one that the Commission takes very seriously. We sincerely want to hear from all interested parties and truly believe that 

the rule-making process is better informed as a result of the comments that we receive. 

Proxy Disclosure Enhancements 

One of the key disclosure documents for shareholders in deciding how to vote in 

the election of directors is the proxy statement. This document, which includes information about the directors, certain board practices, executive compensation, related 

party transactions, and other matters, is a critical component of the U.S. corporate 

governance landscape. The Commission, on July 1, voted to propose a series of rule 
44 

2 ‘‘Proxy Disclosure and Solicitation Enhancements,’’ Securities Exchange Act Release No.34- 

60280 (July 10, 2009). 3 ‘‘Order Approving Proposed Rule Change, as modified by Amendment No. 4, to Amend 

NYSE Rule 452 and Corresponding Listed Company Manual Section 402.08 to Eliminate Broker 

Discretionary Voting for the Election of Directors, Except for Companies Registered Under the 

Investment Company Act of 1940, and to Codify Two Previously Published Interpretations that 

Do Not Permit Broker Discretionary Voting for Material Amendments to Investment Advisory 

Contracts with an Investment Company,’’ Securities Exchange Act Release No. 34-60215 (July 

1, 2009). The Commission’s vote was 3-2 in favor of the proposal, with Chairman Schapiro and 

Commissioners Walter and Aguilar voting to approve the rule change, and Commissioners Casey 

and Paredes voting not to approve the rule change. For the Commissioners’ statements regarding the proposal at the Commission meeting at which the rule change was approved, see http:// 

www.sec.gov/news/speech.shtml#chair. 

amendments that are designed to significantly improve proxy disclosures, thereby 

enabling shareholders to make more informed voting decisions. 2

One area that has garnered significant public attention and can drive investors’ 

investment and voting decisions is executive compensation. The Commission’s existing disclosure rules are designed to elicit comprehensive and detailed information 

about all elements of a company’s compensation practices and procedures with respect to its most senior executives. This information includes a ‘‘Compensation, Discussion and Analysis’’; detailed tables followed by related narrative disclosure; and 

a report from the Compensation Committee. Based on this information, investors 

can form opinions about a company’s executive compensation policies, including 

whether the board of directors has acted appropriately in setting incentives and rewards for management. 

Today, if material, a company must discuss the risk considerations of its compensation policies and decisions with respect to its ‘‘named executive officers.’’ 

(‘‘Named executive officers’’ generally include the chief executive officer, chief financial officer, and next three highest paid officers.) Some have argued, however, that 

the recent financial crisis has demonstrated that a company’s compensation practices beyond these five named executive officers can have a dramatic impact on its 

risk profile; the manner in which some trading arms of financial institutions have 

been compensated would be an example. Therefore, the Commission has proposed 

requiring disclosure about how the company incentivizes its employees—beyond the 

named executive officers—if its compensation policies may result in material risks 

to the company. This disclosure is intended to enable investors to gauge whether 

the company’s compensation policies create appropriate incentives for its employees, 

as opposed to creating incentives for employees to act in a way that creates risks 

not aligned with the risk objectives of the company. 

The Commission’s recent proxy enhancement proposals also would require expanded information about the qualifications of directors and director candidates, 

about the board’s leadership structure and role in risk management, and about potential conflicts of interests of compensation consultants. The proposals also would 

improve the reporting of annual stock and option awards to company executives and 

directors, and would require quicker reporting of shareholder vote results. The Commission believes that all of this information would enable shareholders to more intelligently exercise their proxy vote, thereby further enhancing corporate accountability. 

Broker Discretionary Voting 

Also on July 1, the Commission approved changes to New York Stock Exchange 

Rule 452, which governs broker discretionary voting, to prohibit brokers from voting 

shares held in street name in director elections unless they have received specific 

voting instructions from their customers. 3 NYSE Rule 452 generally allows brokers 

to vote such shares on behalf of their customers in uncontested director elections, 

as such elections are currently deemed to be ‘‘routine;’’ under the revised rule, such 

elections will no longer be deemed to be routine. This amendment, which the NYSE 

approved at least in part based on recommendations from the NYSE’s Proxy Working Group, will become effective on January 1, 2010. 

The Commission also has asked that the staff undertake—this year—a comprehensive review of other potential improvements to the proxy voting system and 

rules governing shareholder communications, including exploring whether issuers 

should have better means to communicate with street name holders. With over 800 

billion shares being voted annually at over 7,000 company meetings, it is imperative 

that our proxy voting process work well, beginning with the quality of disclosure 

and continuing through to the integrity of the vote results. 
45 

4 ‘‘Shareholder Approval of Executive Compensation of TARP Recipients,’’ Securities Exchange 

Act Release No. 34-60218 (July 1, 2009). 

Say-on-Pay for TARP Companies 

Also on July 1, the Commission proposed amendments to the proxy rules to set 

out the requirements for a ‘‘say-on-pay’’ vote at public companies that that have received (and not repaid) financial assistance under the Troubled Asset Relief Program. 4 Under the Emergency Economic Stabilization Act of 2009, these companies 

are required to permit an annual advisory shareholder vote on executive compensation. Consistent with the EESA, the Commission’s proposals would require public 

companies that are TARP recipients to provide a separate shareholder vote on executive compensation in proxy solicitations during the period in which any obligation 

arising from financial assistance provided under the TARP remains outstanding. 

These proposals are intended to clarify what is necessary under the Commission’s 

proxy rules to comply with the EESA vote requirement and help to assure that 

TARP recipients provide useful information to shareholders about the nature of the 

required advisory vote on executive compensation. 

Conclusion 

As governance and compensation practices continue to evolve, the Commission 

will remain vigilant in seeking to assure that our disclosure rules provide investors 

with the information they need to make informed investment and voting decisions. 

We know that there also is a great deal of thought and work outside the agency 

regarding corporate governance and executive compensation best practices, and we 

stand ready to lend whatever assistance we can in those efforts. 

Thank you again for inviting me to appear before you today and for the Subcommittee’s support of the agency in its efforts at this critical time for the Nation’s 

investors. I would be happy to answer any questions you may have. 

PREPARED STATEMENT OF JOHN C. COATES IV 

JOHN F. COGAN, JR., PROFESSOR OF LAW AND ECONOMICS, HARVARD LAW SCHOOL

JULY 29, 2009 

Introduction 

Chairman Reed, Ranking Member Bunning, and Members of the Subcommittee, 

I want to thank you for inviting me to testify. Effective corporate governance is a 

crucial foundation for economic growth, and I am honored to have been asked to 

participate. 

A. Are There Any General Lessons for Corporate Governance from the Financial Crisis? 

Some have described the ongoing financial crisis as reflecting poorly on U.S. corporate governance, as with the accounting scandals and stock market bubbles of the 

late 1990s and early 2000s that led to the Sarbanes-Oxley Act. Unlike those episodes, however, the ongoing financial crisis has not exposed new and widespread 

problems with the basic governance of most U.S. publicly held corporations. Outside 

the financial and automotive sectors, most companies have suffered only as a result 

of the crisis, and did not contribute to or cause it. Stock prices have fallen across 

the board, but most price declines have more to do with the challenges facing the 

real economy, and the spillovers from the financial sector on companies in need of 

new capital, and little to do with any general problem with corporate governance. 

As a result, we have learned relatively little about many long-standing concerns and 

debates surrounding the governance of publicly held corporations—and there are 

few if any easy lessons that can be drawn from the crisis for corporate governance 

generally. 

I do not mean to minimize those concerns and debates, or suggest lawmakers 

should remain passive in the field of corporate governance. To the contrary, the crisis makes reform more important and urgent than ever, because well-governed companies recover and adapt more readily than poorly governed firms. But the best reform path will need to attend to differences between governance across industries, 

and ways that corporate governance interacts with industry-based regulation—and 

in particular, financial industry regulation—if legal changes are not to make things 

worse, rather than better. Governance flaws at Citigroup differed dramatically from 

governance flaws at GM, and attempts to fix the problems at firms like GM through 

laws directed at all public companies could make things worse at firms like 

Citigroup. 
46 

One important problem at financial firms was excessive risk-taking, stemming 

from a so-called ‘‘bonus culture’’ of compensation practices strongly linked to share 

prices. But the risks that financial firms took on were harmful for the Nation as 

a whole because the financial firms were so important (and complex) and existing 

resolution authority so weak and poorly designed that those financial firms could 

not generally be allowed to fail. As a result, in economic terms, financial firms’ compensation practices did not take into account the external effects on taxpayers in 

the event of insolvency. In effect, financial firms were allowed to gamble with taxpayer money. This would have been true even if managers of those firms had been 

perfect stewards of shareholder wealth. The suggestion of my colleagues Holger 

Spamann and Lucian Bebchuk (2009)—praised by the New York Times editors earlier this week—that financial firms be required to link compensation to returns on 

their bonds as well as their common stocks reflects this point. Shareholders are not 

the only important corporate constituency to consider in setting corporate governance rules for banks. 

At most public companies, the diagnosis has not been the same. If anything, the 

conventional critique of the governance of nonfinancial companies is that boards and 

managers have tended (from the shareholder perspective) to be excessively resistant 

to change, and to have tied executive compensation too weakly with performance. 

When commentators attempt to link compensation at firms like AIG and claims 

about excessive executive compensation at public companies generally, they fail to 

acknowledge that most shareholders do not mind if executives make an enormous 

amount of money, as long as shareholders also gain. Efforts to increase shareholder 

power to encourage managers more strongly to pursue shareholder wealth could— 

at financial firms—undermine efforts by bank regulators to restrain risk-taking by 

those same firms. The most important practical lesson of the financial crisis is, then, 

this: whatever form general corporate governance reform takes, careful thought 

should be given to exempting—or at least allowing relevant financial regulatory authorities to exempt or override—financial firms from those reforms. 

B. Evidence on Policy Options 

Turning from the general lessons of the financial crisis to some of the specific governance reforms that have been discussed or proposed in the last few years, it is 

important to bear in mind that corporate governance is not rocket science—in fact, 

it is much more complicated than rocket science. Corporations are in their simplest 

sense large groups of people coordinating their activities for profit. Science has a 

hard enough task tracking inert matter moving through space; it has a harder time 

predicting the behavior of a single actual or typical human; and it has the hardest 

time of all attempting to describe or predict how large groups of people will act— 

if for no other reason than researchers cannot experiment on large groups of people 

in realistic settings. As a result, there are few consensus views among researchers 

about any nontrivial topic in corporate governance, and evidence tends to emerge 

slowly, is rarely uncontested, and is subject to constant (and often dramatic reevaluation). As a result, everything that you do in setting rules for corporate governance 

should keep the fragility of the evidence in mind: set rules that can be changed by 

delegating to regulatory agencies; direct those agencies to review and reassess their 

own rules regularly; and provide ‘‘opt outs’’ and ‘‘sunsets’’ to governance mandates 

that are expected to last indefinitely, as at many corporations. 

As one example, to my knowledge, there is no reliable large-scale empirical evidence—good or bad—on the effects of shareholder access to a company’s proxy statement, along the lines proposed by the SEC and mandated by S. 1074, H.R. 3269 

and H.R. 2861, because there has no been no significant observed variation in such 

a governance system within any modern developed economy. This does not mean 

that there is no information relevant to evaluating how such a system would operate 

in practice, or that there is no basis on which such a system could be recommended 

or adopted. Rather, the absence of observed variation means that there is no general 

body of data that is capable of revealing whether such a system would consistently 

have good or bad effects on shareholder welfare—and no such data will exist unless 

and until a large number of companies voluntarily adopt such a system or are required to by law. That is generally true of many corporate governance proposals, 

and to require such data before adopting rule changes would effectively freeze laws 

governing corporate governance in place indefinitely, preventing further inquiry or 

development of evidence. 

Nonetheless, there are some corporate governance topics about which evidence is 

better than others. Here I set out what is necessarily an abbreviated summary of 

the evidence on three topics addressed in one or more bills pending in the current 

Congress, including the Shareholder Bill of Rights Act of 2009 (S. 1074): (a) ‘‘say- 
47 

1Say-on-Pay legislation has also been adopted in Australia, Norway, Sweden, and the Netherlands. Deane (2007). 2The authors report that firms with the very weakest corporate governance ratings did not 

exhibit negative stock price reactions to steps toward to the passage of ‘‘say-on-pay’’ legislation, 

and plausibly suggest that this may be because such firms may not respond to advisory shareholder votes. 

on-pay,’’ (b) mandatory separation of the chairman and CEO positions, and (c) mandatory annual board elections. 

a. Say-on-Pay 

The proposed requirement that shareholders be given an advisory vote on executive pay has the advantage that it is very similar to a requirement adopted in another jurisdiction (the United Kingdom (U.K.)) that has capital markets and laws 

that are otherwise similar to those applicable in the United States. 1 This fact enables a research approach that is otherwise unavailable: a before-and-after test of 

board and shareholder responses, compensation practices, stock market reactions 

and shareholder returns, and other items of interest surrounding the adoption of 

‘‘say-on-pay’’ in the U.K.. Different researchers have conducted several investigations of this kind and the results published at least informally. Those researchers 

report that ‘‘say-on-pay’s’’ adoption in the U.K.: 

• improved the link between executive pay and corporate performance (Ferri and 

Maber 2007); 

• led firms (both before and after relatively negative shareholder votes) to adopt 

better pay practices (id.); 

• led activist shareholders to target firms with weak pay-performance links and 

those with higher-than-expected executive compensation levels (id.; Alissa 

2009); 

• did not reduce or slow the overall increase in executive compensation levels 

(Ferri and Maber 2007; Gordon 2008). 

Together, these findings suggest that ‘‘say-on-pay’’ legislation would have a positive 

impact on corporate governance in the U.S. While the two legal contexts are not 

identical, there is no evidence in the existing literature to suggest that the differences would turn what would be a good idea in the U.K. into a bad one in the 

U.S. 

Researchers have also exploited the introduction of earlier ‘‘say-on-pay’’ legislation 

in the U.S. to examine stock price reactions to the prospect of such a governance 

reform. Consistent with the U.K. findings, they report that stock investors appear 

to have viewed the proposed legislation as good for firms with higher-than-typical 

executive compensation, firms with weak pay-performance links, and firms with 

weak corporate governance measured in various ways (Cai and Walkling 2009). 2

They also report data showing that the market reacted positively at most sample 

firms to the proposed legislation. The same researchers also report that shareholdersponsored efforts to introduce ‘‘say-on-pay’’ rules at individual firms—particularly 

when sponsored by unions with low stock holdings in the targeted firms—were not 

well-received by the stock market, in part because they were not directed at firms 

with higher-than-typical executive compensation or firms with weak pay-performance links, but instead simply at companies that happen to be large. The researchers suggest that their findings show that one-size-fits-all ‘‘say-on-pay’’ legislation 

may be harmful, but this implication does not in fact follow from their findings. If 

anything, the U.K. evidence summarized above suggests that general ‘‘say-on-pay’’ 

legislation will weaken the ability of special interest shareholder activists to exploit 

executive compensation as an issue, and will lower the costs of the broad run of 

shareholders to use their advisory votes on pay to target firms that are most in need 

of pressure to improve pay practices. 

b. Mandatory Separation of Chairman and CEO Positions 

In comparison to research on ‘‘say-on-pay’’ rules, the evidence on the proposal to 

mandate the separation of the chair and the CEO of public companies is more extensive and considerably more mixed. At least 34 separate studies of the differences 

in the performance of companies with split vs. unified chair/CEO positions have 

been conducted over the last 20 years, including two ‘‘meta-studies.’’ Dalton et al. 

(1998) (reviewing 31 studies of board leadership structure and finding ‘‘little evidence of systematic governance structure/financial performance relationships’’) and 

Rhoades et al. (2001) (meta-analysis of 22 independent samples across 5,271 companies indicates that independent leadership structure has a significant impact on performance, but this impact varies with context). The only clear lesson from these 
48 

3 Ahn, Goyal, and Shrestha (2009) (finding that annual board elections reduces pay-performance sensitivity and investment efficiency in firms with low monitoring costs, while having the 

opposite effects on firms with high monitoring costs). 4Some suggest that the difference in firm value follows from the fact that annual board elections make hostile takeovers easier. See Bebchuk, Cohen, and Ferrell 2009. See also Bebchuk, 

Coates, and Subramanian 2001 (finding that staggered board elections reduce hostile bid completion rates, conditional on hostile bids being made). 5See data available at SharkRepellent.Net, which reported that despite general declines in 

takeover defenses at public companies in the 2000s, defenses at firms going public continued 

to increase, with almost 3⁄4s of newly public companies adopting staggered boards. See also 

Coates 2001. 

studies is that there has been no long-term trend or convergence on a split chair/ 

CEO structure, and that variation in board leadership structure has persisted for 

decades, even in the U.K., where a split chair/CEO structure is the norm. 

One study provides evidence consistent with one explanation of the overall lack 

of strong findings: optimal board structures may vary by firm size, with smaller 

firms benefiting from a unified chair/CEO position, with the clarity of leadership 

that structure provides, and larger firms benefiting from the extra monitoring that 

an independent chair may provide given the greater risk of ‘‘agency costs’’ at large 

companies. Palmon et al. (2002) (finding positive stock price reactions for small 

firms that switch from split to unified chair/CEO structure, and negative reactions 

for large firms). If valid, this explanation would suggest that it would be a good idea 

for any legislation on board leadership to (a) limit any mandate to the largest firms 

and (b) permit even those firms to ‘‘opt out’’ of the requirement through periodic 

shareholder votes (e.g., once every 5 years). 

c. Mandatory Annual Board Elections 

The evidence on the last legislative proposal I will address—mandatory annual 

board elections (i.e., a ban on staggered boards)—is thinner and at first glance more 

compelling than that on board leadership structure, but on close review is just as 

mixed. There have been at least two studies that focus on the specific relationship 

between annual board elections and firm value (Bebchuk and Cohen 2005; Faleye 

2007), and a number of other papers that include annual board elections in studying 

the relationship between broader governance indices and firm value more generally 

(e.g., Gompers et al., 2003; Cremers and Ferrell 2009). Most (but not all 3) conclude 

that annual board elections (either on their own or in combination with other governance practices) are associated with higher firm value, as measured by the ratio 

of firms’ stock prices to their book values. 4 The governance-valuation studies, however, generally suffer from a well-known ‘‘endogeneity’’ problem—that is, it is difficult (and given data limitations, sometimes impossible) to know whether annual 

elections improve firm value, or firm value determines whether a company chooses 

to hold annual elections. While there are statistical techniques that can address this 

issue, none of the studies to date have presented compelling evidence that annual 

elections lead to better performance, at least in the last 20 years, during which time 

public companies rarely switched from annual to staggered elections. Moreover, the 

longer a given study of this type has been available for others to attempt to replicate, the more fragile the findings have appeared to be, suggesting that the bottom-line conclusions of more recent studies may not hold up in the face of continued 

research. 

Evidence on annual elections is further complicated by the fact that companies 

that ‘‘go public’’ for the first time continue to adopt staggered board elections at high 

rates, as late as 2007. 5 Since the evidence regarding the purported ability of staggered boards to improve firm value has been known for some time, and since shareholders have the ability to adjust the prices they pay for newly issued IPO shares 

to reflect governance practices, the fact of continued adoption of staggered board 

elections prior to IPOs suggests that there may be a social advantage to permitting 

these structures, at least when adopted before a company goes public. Other researchers have made a similar point about ‘‘dual class’’ capital structures, which 

give low or no votes to public investors, while letting founders or their family members retain high vote stock. SEC rules and stock exchange listing standards have 

for a long time permitted such structures to be adopted in the U.S. only prior to 

a company going public, and not once a company has gone public. Such structures, 

as with staggered board elections, have long been thought to reduce firm value, 

measured by reference to public stock prices. Yet, as with staggered boards, some 

companies continue to adopt dual class structures—and some have done quite well 

by their shareholders (e.g., Google Inc.—still up over 300 percent since its IPO despite the recent market meltdown). 
49 

The best explanation offered by academic researchers to explain the continued use 

of dual class structures and staggered board elections is that they provide founders 

assurance of continued control, which they value more than the stock price of their 

companies might reflect. Such private value may arise because of particular attachments the founders have toward the companies they have helped build from scratch, 

or because they hope to pass control of their companies to their children, or because 

they have developed ‘‘firm-specific capital’’ that they would lose if the company were 

acquired (and which would be hard to value by outsiders). Some evidence has been 

developed consistent with these explanations (see Coates 2004, reviewing prior research). This evidence is worth considering not only because dual class structures 

are analogous to staggered board elections—and interfere with hostile takeovers and 

shareholder voting rights even more than do staggered board elections—but also because any to mandate annual board elections would also require a ban on dual class 

structures, or else it would simply push companies to adopt the more restrictive 

dual class structure in lieu of staggered boards. 

C. Recommendations 

My recommendations flow from my review of the implications of the financial crisis and my review of evidence above: 

First, any corporate governance reform that attempts to shift power from boards 

or managers to shareholders should either not include financial firms, or should include a clear delegation of authority to financial regulators to exempt financial firms 

from these power shifts by regulation. Simply directing financial regulators to regulate the same governance practices (as in H.R. 3269) may not suffice to prevent 

shareholder pressure from encouraging firms to craft ways around those regulations. 

It would be better more generally to moderate the pressure of shareholders on financial firms to maximize short-term profit at the potential expense of the financial 

system and taxpayers. 

Second, ‘‘say-on-pay’’ legislation is likely to be a good idea. By enabling shareholders across the board to provide feedback in the form of advisory votes to boards 

on executive compensation, such a requirement would be likely to increase board 

scrutiny on one element of corporate governance that has the greatest potential for 

improving incentives and firm performance in the long run. At the same time, it 

should be recognized that ‘‘say-on-pay’’ is not likely to achieve general distributive 

goals—wealthy CEOs will continue to earn outsize compensation, as long as their 

shareholders benefit. If the goal of Congress is to reduce wealth or income disparities, ‘‘say-on-pay’’ is not the right mechanism, and executive compensation is only 

a relatively minor part of the picture. For that reason, efforts to use corporate governance practices—which after all only affect a subset of all U.S. companies, those 

that have dispersed shareholders—to force a linkage between CEO and employee 

pay seem to me misguided. It would be better to address pay disparities in the tax 

code. 

Third, while mandating a split between the chair and the CEO is not clearly a 

good idea for all public companies, it may well be a good idea for larger companies. 

Because shareholders of those same companies may find it difficult to initiate such 

a change, given the difficulties of collective action, a legislative change requiring a 

split leadership structure but permitting shareholder-approved opt outs may improve governance for many companies while imposing relatively minor costs on companies generally. Requiring that companies give shareholders a vote on such a 

choice episodically (e.g., every 5 years) would also be a way to help solve shareholders’ inevitable collective action problems without forcing a one-size-fits-all solution on companies generally. 

Fourth, mandating that all public companies hold annual elections for all directors is not clearly supported by evidence or theory. It perhaps bears mentioning that 

other important institutions (the SEC, the Fed, the Senate) permit staggered elections for good reason, and that any rule mandating annual elections would ride 

roughshod over State law—in Massachusetts, for example, companies are required 

to have staggered board elections unless they affirmatively opt out of the requirement. In prior writing, I have suggested it be left to the courts to review director 

conduct with a more skeptical eye at companies that adopted staggered boards prior 

to the development of the poison pill (Bebchuk, Coates, and Subramanian 2001), 

and I have also suggested elsewhere reasons to consider ‘‘re-opening’’ corporate governance practices put in place long ago (Coates 2004). Both approaches would be 

better than an across-the-board annual election mandate, which would be likely to 

lead new companies to adopt even more draconian governance practices without any 

clear net benefit. 

Finally, precisely because there is no good evidence on the potential effects of 

shareholder proxy access, it would seem to be the best course to move cautiously 
50 

in adopting rules permitting or requiring such access. For that reason, the most that 

would seem warranted for a hard-to-change statute to achieve is to mandate that 

the SEC adopt a rule providing for such access, and thereby to clarify the SEC’s 

authority to do so. Any shareholder access rule will need to address not only the 

length of the holding period and ownership threshold required to obtain such access, 

the ability of shareholders to aggregate holdings to obtain eligibility, rules for independence of nominees and shareholders using the rule, and the availability of the 

rule to those seeking control or influence of a company. Efforts to specify rules for 

such access at a greater level of detail will probably miss the mark, and be difficult 

to correct if experience shows that the access has either provided too much or too 

little access to accomplish the presumed goal of enhancing shareholder welfare. 

References 

Seoungpil Ahn, Vidhan K. Goyal, and Keshab Shrestha, ‘‘The Differential Effects of 

Classified Boards on Firm Value’’, Working Paper (June 27, 2009). 

Walid M. Alissa, ‘‘Boards’ Response to Shareholders’ Dissatisfaction: The Case of 

Shareholders’ Say-on-Pay in the U.K.’’, Working Paper (2009). 

Lucian A. Bebchuk, John C. Coates, and Guhan Subramanian, ‘‘The Powerful 

Antitakeover Force of Staggered Boards: Theory, Evidence and Policy,’’ 54, Stanford Law Review 887 (2002), available at ssrn.com/abstractlid=304388. 

Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell, ‘‘What Matters in Corporate 

Governance?’’, Review of Financial Studies 22, 783 (2009). 

Lucian A. Bebchuk and Holger Spamann, ‘‘Regulating Bankers’ Pay’’, Working 

Paper, forthcoming Georgetown Law Journal (2009). 

Jay Cai and Ralph A. Walkling, ‘‘Shareholders’ Say-on-Pay: Does It Create Value?’’, 

Working Paper (2009). 

John C. Coates IV, ‘‘Explaining Variation in Takeover Defenses: Blame the Lawyers’’, 89, California Law Review 1376 (2001). 

John C. Coates IV, ‘‘Ownership, Takeovers and EU Law: How Contestable Should 

EU Corporations Be?’’, In Reforming Company and Takeover Law in Europe, 

Guido Ferrarini, Klaus J. Hopt, Jaap Winter, and Eddy Wymeersch, eds., Oxford 

University Press, 2004, available at ssrn.com/abstractlid=424720. 

Martijn Cremers and Allen Ferrell, ‘‘Thirty Years of Corporate Governance: Determinants and Equity Prices’’, Working Paper (2009). 

Dan R. Dalton, Catherine M. Daily, Alan E. Ellstrand, and Jonathan L. Johnson, 

‘‘Meta-Analytic Reviews of Board Composition, Leadership Structure and Financial Performance’’, 19, Str. Mgt. J. 269 (1998). 

S. Deane, ‘‘Say-on-Pay: Results From Overseas’’, The Corporate Board, July/August 

2007, 11–18 (2007). 

Olubunmi Faleye, ‘‘Classified Boards, Firm Value, and Managerial Entrenchment’’, 

Journal of Financial Economics, 83, 501–529 (2007). 

Fabrizio Ferri and David Maber, ‘‘Say-on-Pay Vote and CEO Compensation: Evidence From the U.K.’’, Working Paper (2007). 

Paul Gompers, J. Ishii, and A. Metrick, ‘‘Corporate Governance and Equity Prices’’, 

Quarterly Journal of Economics 118, 107–155 (2003). 

Jeffrey N. Gordon, ‘‘ ‘Say-on-Pay’: Cautionary Notes on the U.K. Experience and the 

Case for Shareholder Opt-In’’, Working Paper (2008). 

O. Palmon and J.K. Wald, ‘‘Are Two Heads Better Than One? The Impact of 

Changes in Management Structure on Performance by Firm Size’’, 8, J. Corp. Fin. 

213 (2002). 

D.L. Rhoades, P.L. Rechner, and C. Sundaramurthy, ‘‘A Meta-Analysis of Board 

Leadership Structure and Financial Performance: Are ‘Two Heads Better Than 

One’?’’, 9, Corp. Gov.: An Int’l Rev. 311 (2001). 

PREPARED STATEMENT OF ANN YERGER 

EXECUTIVE DIRECTOR, COUNCIL OF INSTITUTIONAL INVESTORS

JULY 29, 2009 

Chairman Reed, Ranking Member Bunning, and Members of the Subcommittee: 

Good morning. I am Ann Yerger, Executive Director, of the Council of Institutional 

Investors (Council). I am pleased to appear before you today on behalf of the Council. 

My testimony includes a brief overview of the Council followed by a discussion of 

our views on the following issues that you informed me were the basis for this important and timely hearing: 
51 

1See Attachment 1. 2 Council of Institutional Investors, Asset Allocation Survey 2008 at 2, http://www.cii.org/ 

UserFiles/file/resource%20center/publications/2008%20Asset%20Allocation%20Survey.pdf. 

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

• What key legislative and regulatory changes should be considered to ensure 

shareholders are adequately protected and appropriate incentives exist for optimal long-term performance at companies? 

• What information exists about the potential impact of various approaches to improving corporate governance regulation? 

The Council 

Founded in 1985 the Council is a nonpartisan, not-for-profit association of public, 

labor and corporate employee benefit funds with assets exceeding $3 trillion. 1 Today 

the organization is a leading advocate for improving corporate governance standards 

for U.S. companies and strengthening investor rights. 

Council members are responsible for investing and safeguarding assets used to 

fund retirement benefits of millions of participants and beneficiaries throughout the 

U.S. They have a significant commitment to the U.S. capital markets, with the average Council member investing approximately 60 percent of its entire portfolio in 

U.S. stocks and bonds. 2

They are also long-term, patient investors due to their investment horizons and 

their heavy commitment to passive investment strategies. Because these passive 

strategies restrict Council members from exercising the ‘‘Wall Street walk’’ and selling their shares when they are dissatisfied, corporate governance issues are of great 

interest to our members. 

Council members have been deeply impacted by the financial crisis. As a result, 

they have a vested interest in ensuring that the gaps and shortcomings revealed by 

the financial crisis are repaired. 

What weaknesses has the financial crisis revealed about executive compensation, 

board composition, proxy rules, or other corporate governance issues? 

The Council believes the financial crisis has exposed some very significant weaknesses in the regulation and oversight of the U.S. capital markets. Gaps in regulation, inadequate resources at existing regulators and failures of regulatory will were 

key contributors. But so were failures in the corporate boardroom. 

Council members, U.S. citizens, and investors around the globe, have paid the 

price for these failures. Not only have they suffered trillions of dollars in investments losses, they have also lost confidence in the integrity of our markets and in 

the effectiveness of board oversight of corporate management. 

A comprehensive review and a meaningful restructuring of the U.S. financial regulatory model are necessary steps toward restoring investor confidence in our markets and protecting against a repeat of these failures. But regulatory reform alone 

is insufficient, because vigorous securities regulation on its own cannot solve many 

of the issues that led to the current crisis. The Council believes that many corporate 

governance failures contributed to this financial crisis. And as a result, the Council 

believes corporate governance improvements are a critical component of the necessary package of reforms. 

In some cases corporate boards failed shareowners. Some failed to adequately understand, monitor and oversee enterprise risk. Some failed to include directors with 

the necessary blend of independence, competencies, and experiences to adequately 

oversee management and corporate strategy. And far too many corporate boards 

structured and approved executive compensation programs that motivated excessive 

risk taking and yielded outsized rewards—with little to no downside risk—for shortterm results. 

Current rules and regulations also failed shareowners. Today, shareowners 

around the world—including in countries with far less developed capital markets 

than the U.S.—enjoy basic rights that shareowners of U.S. companies are denied. 

Rights such as requiring directors to be elected by majority vote, giving owners advisory votes on executive pay, and providing owners modest vehicles to access management proxy cards to nominate directors are noticeably absent in much of corporate America. Their nonexistence weakens the ability of shareowners to oversee 

corporate directors—their elected representatives—and hold directors accountable. 

The U.S. has long been recognized as a leader when it comes to investor protection, market transparency, and oversight. But the U.S. has fallen short when it 

comes to corporate governance issues. The Council believes that corporate govern-
52 

3See Attachments 2 and 3. 

ance enhancements are a long overdue and essential component of the bold reforms 

required to restore confidence in the integrity of the U.S. capital markets. 

What key legislative and regulatory changes should be considered to ensure shareholders are adequately protected and appropriate incentives exist for optimal 

long-term performance at companies? 

The Council believes a number of key corporate governance reforms are essential 

to providing meaningful investor oversight of management and boards and restoring 

investor confidence in our markets. Such measures would address many of the problems that led to the current crisis, and more importantly, empower shareowners to 

anticipate and address unforeseen future risks. These measures, rather than facilitating investors seeking short-term gains, are consistent with enhancing long-term 

shareowner value. 

More specifically, the governance improvements that the Council believes would 

have the greatest impact and, therefore, should be contained in any financial markets regulatory reform legislation include: 

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

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

• Executive Compensation Reforms: Recommended reforms include advisory 

shareowner vote on executive pay, independent compensation advisers, stronger 

clawback provisions and enhanced disclosure requirements. 

• Independent Board Chair: Corporate boards should be chaired by an independent director. 3

Majority Voting for Directors 

Directors are the cornerstone of the U.S. corporate governance model. And while 

the primary powers of shareowners—aside from buying and selling their shares— 

are to elect and remove directors, U.S. shareowners have few tools to exercise these 

critical and most basic rights. 

The Council believes the accountability of directors at most U.S. companies is 

weakened by the fact that shareowners do not have a meaningful vote in director 

elections. Under most State laws the default standard for uncontested director elections is a plurality vote, which means that a director is elected in an uncontested 

situation even if a majority of the shares are withheld from the nominee. 

The Council has long believed that a plurality standard for the election of directors is inherently unfair and undemocratic and that a majority vote standard is the 

appropriate one. The concept of majority voting is difficult to contest—especially in 

this country. And today majority voting is endorsed by all types of governance experts, including law firms advising companies and corporate boards. 

Majority voting makes directors more accountable to shareowners by giving meaning to the vote for directors and eliminating the current ‘‘rubber stamp’’ process. The 

benefits of this change are many: it democratizes the corporate electoral process; it 

puts real voting power in hands of investors; and it results in minimal disruption 

to corporate affairs—it simply makes board’s representative of shareowners. 

The corporate law community has taken some small steps toward majority voting. 

In 2006 the ABA Committee on Corporate Laws approved amendments to the Model 

Business Corporation Act to accommodate majority voting for directors, and lawmakers in Delaware, where most U.S. companies are incorporated, amended the 

State’s corporation law to facilitate majority voting in director elections. But in both 

cases they stopped short of switching the default standard from plurality to majority. 

Since 2006 some companies have volunteered to adopt majority voting standards, 

but in many cases they have only done so when pressured by shareowners forced 

to spend tremendous amounts of time and money on company-by-company campaigns to advance majority voting. 

To date, larger companies have been receptive to adopting majority voting standards. Plurality voting is the standard at less than a third of the companies in the 

S&P 500. However, plurality voting is still very common among the smaller companies included in the Russell 1000 and 3000 indices. Over half (54.5 percent) of the 

companies in the Russell 1000, and nearly three-quarters (74.9 percent) of the companies in the Russell 3000, still use a straight plurality voting standard for director 
53 

4 Annalisa Barrett and Beth Young, ‘‘Majority Voting for Director Elections’’, Directorship 1 

(Dec. 16, 2008), http://www.directorship.com/contentmgr/showdetails.php/id/33732/page/1. 5See Attachment 2, §3.2 Access to Proxy. 6 74 Fed. Reg. 29,024 (proposed June 18, 2009), http://www.sec.gov/rules/proposed/2009/33- 

9046.pdf. 

elections. 4 Statistics are not available for the thousands of additional companies not 

included in these indices; however, the Council believes most do not have majority 

voting standards. 

Plurality voting is a fundamental flaw in the U.S. corporate governance system. 

It is time to move the default standard to majority voting. Given the failure by the 

States, particularly Delaware, to take the lead on this reform, the Council believes 

the time has come for the U.S. Congress to legislate this important and very basic 

shareowner right. 

Shareowner Access to the Proxy 

Nearly 70 years have passed since the Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) first considered whether shareowners should be able to include director candidates on management’s proxy card. This reform, which has been 

studied and considered on and off for decades, is long overdue. Its adoption would 

be one of the most significant and important investor reforms by any regulatory or 

legislative body in decades. The Council applauds the SEC for its leadership on this 

important issue. 

The financial crisis highlighted a longstanding concern—some directors are not 

doing the jobs expected by their employers, the shareowners. Compounding the 

problem is the fact that in too many cases the director nomination process is flawed, 

largely due to limitations imposed by companies and the securities laws. 

Some boards are dominated by the CEO, who plays the key role in selecting and 

nominating directors. All-independent nominating committees ostensibly address 

this concern, but problems persist. Some companies don’t have nominating committees, others won’t accept shareowner nominations for directors, and Council members’ sense is that shareowner-suggested candidates—whether or not submitted to 

all-independent nominating committees—are rarely given serious consideration. 

Shareowners can now only ensure that their candidates get full consideration by 

launching an expensive and complicated proxy fight—an unworkable alternative for 

most investors, particularly fiduciaries who must determine whether the very significant costs of a proxy contest are in the best interests of plan participants and 

beneficiaries. While companies can freely tap company coffers to fund their campaigns for board-recommended candidates, shareowners must spend their own 

money to finance their efforts. And companies often erect various obstacles, including expensive litigation, to thwart investors running proxy fights for board seats. 

The Council believes reasonable access to company proxy cards for long-term 

shareowners would address some of these problems. We believe such access would 

substantially contribute to the health of the U.S. corporate governance model and 

U.S. corporations by making boards more responsive to shareowners, more thoughtful about whom they nominate to serve as directors and more vigilant about their 

oversight responsibilities. 

As such, Council members approved the following policy endorsing shareowner access to the proxy: 

Companies should provide access to management proxy materials for a 

long-term investor or group of long-term investors owning in aggregate at 

least three percent of a company’s voting stock, to nominate less than a majority of the directors. Eligible investors must have owned the stock for at 

least 2 years. Company proxy materials and related mailings should provide equal space and equal treatment of nominations by qualifying investors. 

To allow for informed voting decisions, it is essential that investors have 

full and accurate information about access mechanism users and their director nominees. Therefore, shareowners nominating director candidates 

under an access mechanism should adhere to the same SEC rules governing 

disclosure requirements and prohibitions on false and misleading statements that currently apply to proxy contests for board seats. 5

The Council is in the process of submitting a comment letter to the SEC on the 

Commission’s outstanding proposal, Facilitating Shareholder Director Nominations. 6 While we have some suggested enhancements, the Council by and large is 
54 

very supportive of the proposal. We firmly believe that a Federal approach is far 

superior to a State-by-State system. 

The Council believes Congress should support the SEC’s efforts by affirming the 

Commission’s authority to promulgate rules allowing shareowners to place their 

nominees for director on management’s card. The Council believes the SEC has the 

authority to approve an access standard. However others disagree, and the Commission is likely to face unnecessary, costly and time-consuming litigation in response 

to a Commission-approved access mechanism. To ensure that owners of U.S. companies face no needless delays over the effective date of this critical reform, the Council recommends Congressional affirmation of the SEC’s authority. 

Of note, the Council believes access to the proxy complements majority voting for 

directors. Majority voting is a tool for shareowners to remove directors. Access is 

a tool for shareowners to elect directors. 

Executive Compensation Reforms 

As long-term investors with a significant stake in the U.S. capital markets, Council members have a vested interest in ensuring that U.S. companies attract, retain, 

and motivate the highest performing employees and executives. They are supportive 

of paying top executives well for superior performance. 

However, the financial crisis has offered yet more examples of how investors are 

harmed when poorly structured executive pay packages waste shareowners’ money, 

excessively dilute their ownership in portfolio companies, and create inappropriate 

incentives that reward poor performance or even damage a company’s long-term 

performance. Inappropriate pay packages may also suggest a failure in the boardroom, since it is the job of the board of directors and the compensation committee 

to ensure that executive compensation programs are effective, reasonable, and rational with respect to critical factors such as company performance and industry 

considerations. 

The Council believes executive compensation issues are best addressed by requiring companies to provide full, plain English disclosure of key quantitative and qualitative elements of executive pay, by ensuring that corporate boards can be held accountable for their executive pay decisions through majority voting and access mechanisms, by giving shareowners meaningful oversight of executive pay via nonbinding 

votes on compensation and by requiring disgorgement of ill-gotten gains pocketed 

by executives. 

• Advisory Vote on Compensation: The Council believes an annual, advisory 

shareowner vote on executive compensation would efficiently and effectively 

provide boards with useful information about whether investors view the company’s compensation practices to be in shareowners’ best interests. Nonbinding 

shareowner votes on pay would serve as a direct referendum on the decisions 

of the compensation committee and would offer a more targeted way to signal 

shareowner discontent than withholding votes from committee members. They 

might also induce compensation committees to be more careful about doling out 

rich rewards, to avoid the embarrassment of shareowner rejection at the ballot 

box. In addition, compensation committees looking to actively rein in executive 

compensation could use the results of advisory shareowner votes to stand up to 

excessively demanding officers or compensation consultants. Of note, to ensure 

meaningful voting results, Federal legislation should mandate that annual advisory votes on compensation are a ‘‘nonroutine’’ matter for purposes of New York 

Stock Exchange Rule 452. 

• Independent Compensation Advisers: Compensation consultants play a key role 

in the pay-setting process. The advice provided by these consultants may be biased as a result of conflicts of interest. Most firms that provide compensation 

consulting services also provide other kinds of services, such as benefits administration, human resources consulting, and actuarial services. Conflicts of interest contribute to a ratcheting up effect for executive pay and should thus be 

minimized and disclosed. 

• Stronger Clawback Provisions: The Council believes a tough clawback policy is 

an essential element of a meaningful ‘‘pay for performance’’ philosophy. If executives are rewarded for ‘‘hitting their numbers’’—and it turns out that they 

failed to do so—they should not profit. While Section 304 of the Sarbanes-Oxley 

Act gave additional authority to the SEC to recoup bonuses or other incentivebased compensation in certain circumstances, some observers have suggested 

this language is too narrow and perhaps unworkable. The Council does not advocate a reopening of the Sarbanes-Oxley Act, but it does recommend that Congress consider ways to cover cases where performance-based compensation may 
55 

7 ‘‘Chairing the Board: The Case for Independent Leadership in Corporate North America’’ 17 

(2009), http://millstein.som.yale.edu/2009%2003%2030%20Chairing%20The%20Board.pdf 

[hereinafter ‘‘Chairing’’]. 8The Conference Board, Commission on Public Trust and Private Enterprise 19 (Jan. 9, 

2003),http://www.conference-board.org/pdflfree/SR-03-04.pdf. 

be ‘‘unearned’’ in retrospect but not meet the high standard of ‘‘resulting from 

misconduct’’ required by Section 304. 

• Enhanced Disclosures: Of primary concern to the Council is full and clear disclosure of executive pay. As U.S. Supreme Court Justice Louis Brandeis noted, 

‘‘sunlight is the best disinfectant.’’ Transparency of executive pay enables 

shareowners to evaluate the performance of the compensation committee and 

board in setting executive pay, to assess pay-for-performance links and to optimize their role of overseeing executive compensation through such means as 

proxy voting. The Council is very supportive of the SEC’s continued efforts to 

enhance the disclosure of executive compensation, including its recent proposal 

to require disclosures about (1) how overall pay policies create incentives that 

can affect the company’s risk and management of risk; (2) the grant date fair 

value of equity-based awards; and (3) remuneration to executive/director compensation consultants. We believe the disclosure regime in the U.S. would be 

substantially improved if companies would have to disclose the quantitative 

measures used to determine incentive pay. Such disclosure—which could be provided at the time the measures are established or at a future date, such as 

when the performance related to the award is measured—would eliminate a 

major impediment to the market’s ability to analyze and understand executive 

compensation programs and to appropriately respond. 

As indicated earlier in my testimony, the Council believes that a federally imposed standard for majority voting for directors and a SEC-approved access mechanism will be two of the most powerful tools for addressing executive pay excesses 

and abuses. Their absence in the U.S. corporate governance model effectively insulates directors from meaningful shareowner oversight. We believe enhancing director accountability via both mechanisms would help rein in excessive or poorly structured executive pay packages. 

Independent Board Chair 

The issue of whether the chair and CEO roles should be separated has long been 

debated in the U.S., where the roles are combined at most publicly traded companies. Interest in the issue renewed in recent years in the wake of Enron and other 

corporate scandals and, most recently, in response to the financial crisis. 

The U.S. approach to the issue differs from other countries, particularly the U.K. 

and other European countries which have comply-or-disclose requirements regarding 

the separation of the roles and/or recommend it via nationally recognized best practices. According to the Millstein Center for Corporate Governance and Performance 

at the Yale School of Management: 

Up until the early 2000s, the percentage of the S&P 500 companies with 

combined roles remained barely unchanged in the previous 15 years, at 80 

percent. Today, approximately 36 percent of S&P 500 companies have separate chairs and CEOs; this is up from 22 percent in 2002. However, only 

17 percent of S&P 1500 firms have chairs that can be qualified as independent and the incidence of independent chairs is concentrated on small 

and midcap firms. This is in sharp contrast to the landscape of other countries. 7

At the heart of the issue is whether the leadership of the board should differ from 

the leadership of the company. Clearly the roles are different, with management responsible for running the company and the board charged with overseeing management. The chair of the board is responsible for, among other things, presiding over 

and setting agendas for board meetings. The most significant concern over combining the roles is that strong CEOs could exert a dominant influence on the board 

and the board’s agenda and thus weaken the board’s oversight of management. 

The Conference Board Commission on Public Trust and Private Enterprise discussed the issue in its post-Enron corporate governance report. 8 The Commission 

suggested three approaches—including naming an independent chair—for ensuring 

the appropriate balance of power between board and CEO functions, and it recommended that ‘‘each corporation give careful consideration, based on its particular 
56 

9 Id. 

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

circumstances, to separating the offices of the Chairman and Chief Executive Officer.’’ 9

The Council believes separating the chair/CEO positions appropriately reflects the 

differences in the roles, provides a better balance of power between the CEO and 

the board—particularly when the CEO dominates the board, and facilitates strong, 

independent board leadership/functioning. 

What information exists about the potential impact of various approaches to improving corporate governance regulation? 

Empirical evidence from companies in the U.S. and countries around the globe 

support the reforms recommended by the Council. 

Majority Voting for Directors 

Majority voting for directors is not an alien concept. It is standard practice in the 

United Kingdom, France, Germany, and other European nations. And as discussed, 

it is also in place at some U.S. companies. The experiences in these countries and 

in the U.S. indicate that majority voting is not harmful to the markets and does 

not result in dramatic and frequent changes to corporate boards. 

Shareowner Access to the Proxy 

Shareowner access to the proxy is a common right in countries around the globe. 

According to Glass Lewis, the shareowners of companies in the following countries 

are provided an access mechanism (Country/Requirement): 

• Australia—Minimum of 5 percent 

• Canada—Minimum of 5 percent 

• China—Minimum of 1 percent 

• Finland—Minimum of 10 percent 

• Germany—Minimum of 5 percent of the issued share capital or shares representing at least ÷500,000 of the company’s share capital 

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

• Italy—Minimum of 2.5 percent of the company’s share capital 

• Russia—Minimum of 2 percent of the voting stock 

• South Africa—Minimum of 5 percent 

• United Kingdom—Minimum of 5 percent or at least 100 shareowners each with 

shares worth a minimum of £100 

In addition, a handful of U.S. companies—including Apria Healthcare and 

RiskMetrics—have voluntarily adopted access mechanisms. And Delaware recently 

revised its corporation code to allow corporate bylaws to require that a company’s 

proxy include shareowner nominees for director along with management candidates. 

The experiences in these countries and in the U.S. indicate that proxy access is not 

harmful to the markets. Indeed these mechanisms have rarely been used by owners 

in these markets—powerful evidence that the existence of the mechanism may enhance board performance and board–shareowner communications. 

Advisory Vote on Compensation 

According to the CFA Institute Centre for Financial Market Integrity, the following countries have some form of shareowner vote on executive compensation: 

• Australia 

• France 

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

• India 

• Italy 

• Poland 

• Switzerland 

• Taiwan 

• United Kingdom 10

Again, the experiences in these markets suggest that advisory votes on compensation are not harmful to the markets. And the fact that few compensation schemes 
57 

11 Chairing, supra note 7, at 17. 12 Id. 13See Attachment 4. 14 Id. at 22–23. 

are voted down suggests that shareowners are careful stewards of their voting responsibilities and that advisory votes do not require dramatic ‘‘rearview mirror’’ adjustments to pay. 

Independent Board Chair 

Nonexecutive chairs are common in many countries outside the United States. 

Some 79 percent of companies in the United Kingdom’s FTSE 350 index report that 

they have independent chairs. 11 Splitting the role of chair and CEO is the norm 

also in Australia, Belgium, Brazil, Canada, Germany, the Netherlands, Singapore, 

and South Africa. 12 Again, the experiences in these markets suggest that independent board chairs are not harmful to the markets. 

Conclusion 

The Council is not the only group advocating corporate governance reforms. The 

Investors’ Working Group, an independent task force cosponsored by the Council 

and the CFA Institute Centre for Financial Market Integrity, issued July 15 a report recommending a set of reforms to put the U.S. financial regulatory system on 

sounder footing and make it more responsive to the needs of investors. 13 Noting 

that ‘‘investors need better tools to hold managers and directors accountable,’’ its 

recommendations include six corporate governance reforms: 

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

• Shareowners should have the right to place director nominees on the company’s 

proxy. 

• Boards of directors should be encouraged to separate the role of chair and CEO 

or explain why they have adopted another method to assure independent leadership of the board. 

• Securities exchanges should adopt listing standards that require compensation 

advisers to corporate boards to be independent of management. 

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

• Federal clawback provisions on unearned executive pay should be strengthened. 14

The Administration, legislators, and regulators have also recognized the need for 

corporate governance enhancements. The Council commends the SEC for its bold efforts to date, and it applauds the Obama administration and leaders on Capitol Hill 

for evaluating corporate governance issues and, in some cases, proposing formal reforms. Many of these proposals would address the key governance shortfalls identified by the Council. 

Thank you, Mr. Chairman for inviting me to participate at this hearing. I look 

forward to the opportunity to respond to any questions. 

Attachments 

1. Council of Institutional Investors (Council) General Members 

2. Council Corporate Governance Policies 

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

4. U.S. Financial Regulatory Reform: The Investors’ Perspective, a Report by the Investors’ Working Group 
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1See Lawrence Mitchell, ‘‘Protect Industry From Predatory Speculators’’, Financial Times, 

July 8, 2009. Professor Mitchell, a George Washington University law professor, argues that it 

is ‘‘hyperbolic’’ to suggest that inattentive boards had anything significant to do with the current 

recession. 2See Robert G. Wilmers, ‘‘Where the Crisis Came From’’, The Washington Post, July 27, 2009. 3 Ben S. Bernanke, ‘‘Four Questions About the Financial Crisis’’ (Apr. 14, 2009), available at 

http://www.federalreserve.gov/newsevents/speech/bernanke20090414a.htm. 4Stephen Labton, ‘‘A Panel Is Named To Examine Causes of the Economic Crisis’’, N.Y. 

Times, July 16, 2009, at B3. 5See Lawrence Mitchell, ‘‘Protect Industry From Predatory Speculators’’, Financial Times, 

July 8, 2009. 

PREPARED STATEMENT OF JOHN J. CASTELLANI 

PRESIDENT, BUSINESS ROUNDTABLE

JULY 29, 2009 

Introduction 

Business Roundtable (www.businessroundtable.org) is an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees. Member companies comprise nearly a third 

of the total value of the U.S. stock markets and pay nearly half of all corporate income taxes paid to the Federal Government. Annually, they return $133 billion in 

dividends to shareholders and the economy. Business Roundtable companies give 

more than $7 billion a year in combined charitable contributions, representing nearly 60 percent of total corporate giving. They are technology innovation leaders, with 

$70 billion in annual research and development spending—more than a third of the 

total private R&D spending in the United States. 

We appreciate the opportunity to participate in this hearing on ‘‘Protecting Shareholders and Restoring Public Confidence by Improving Corporate Governance.’’ 

Business Roundtable has long been at the forefront of efforts to improve corporate 

governance. We have been issuing ‘‘best practices’’ statements in this area for three 

decades, including Principles of Corporate Governance (November 2005), The Nominating Process and Corporate Governance Committees: Principles and Commentary 

(April 2004), Guidelines for Shareholder–Director Communications (May 2005), and 

Executive Compensation: Principles and Commentary (January 2007) (attached as 

Exhibits I through IV). More recently, Business Roundtable became a signatory to 

Long-Term Value Creation: Guiding Principles for Corporations and Investors, also 

known as The Aspen Principles, a set of principles drafted in response to concerns 

about the corrosiveness that short-term pressures exert on companies. The signatories to The Aspen Principles are a group of business organizations, institutional investors and labor unions, including the AFL–CIO, Council of Institutional Investors, 

and TIAA–CREF, who are committed to encouraging and implementing best corporate governance practices and long-term management and value-creation strategies. In addition, Business Roundtable recently published its Principles for Responding to the Financial Markets Crisis (2009) (attached as Exhibit V), and many of our 

suggestions have been reflected in the Administration’s proposal to reform the financial regulatory system. 

At the outset, we must respectfully take issue with the premise that corporate 

governance was a significant cause of the current financial crisis. 1 It likely stemmed 

from a variety of complex financial factors, including major failures of a regulatory 

system, over-leveraged financial markets and a real estate bubble. 2 But even experts disagree about the crisis’s origins. 3 Notably, with the support of Business 

Roundtable, Congress recently established the Financial Crisis Inquiry Commission 

to investigate the causes of the crisis. 4

Because the recently established Financial Crisis Inquiry Commission is just 

starting its work, any attempt to make policy in response to those purported causes 

would seem premature. In fact, a legitimate concern is that many of the proposals 

currently being suggested could even exacerbate factors that may have contributed 

to the crisis. For example, commentators have asserted that the emphasis of certain 

institutional investors on short-term gains at the expense of long-term, sustainable 

growth played a role in the crisis. 5 Some of the current corporate governance proposals, including a universal ‘‘say-on-pay’’ right and the Securities and Exchange 

Commission’s recent proposal for a mandatory process access regime, may actually 

exacerbate the emphasis on short-term gains. One large institutional investor, the 

New Jersey State Investment Council, recently expressed this concern, stating that, 

‘‘we do not want a regime where the primary effect is to empower corporate raiders 
128 

6Letter from Orin S. Kramer, Chair, New Jersey State Investment Council to Mary Schapiro, 

Chairman, Securities and Exchange Commission re: comments on File S7-10-09 (July 9, 2009). 

with a short-term focus.’’ 6 Thus, we must be cautious that in our zeal to address 

the financial crisis, we do not jeopardize companies’ ability to create the jobs, products, services and benefits that improve the economic well-being of all Americans. 

Moreover, the problems giving rise to the financial crisis occurred at a specific 

group of companies in the financial services industry. Having the Federal Government impose a universal one-size-fits-all corporate governance regime on all public 

companies based on the experience at a small subset of companies could undermine 

the stability of boards of directors and place corporations under even greater pressure for short-term performance. 

We also cannot ignore the sweeping transformation in corporate governance practices in the past 6 years, many of which have been adopted voluntarily by corporations, sometimes in response to shareholder requests. Similarly, State corporate law 

has been the bedrock upon which the modern business corporation has been created 

and it remains the appropriate and most effective source for law as it applies to corporate governance. It has been responsive to developments in corporate governance, 

most recently to majority voting for directors, proxy access, and proxy contest reimbursement. Further, the SEC plays an active role in seeing that shareholders receive the information they need to make informed voting decisions, and, in this regard, recently has issued a number of proposals designed to provide shareholders 

with additional corporate governance information. 

Recent Developments in Corporate Governance 

The past few years have seen a sea change in corporate governance through a 

combination of legislation, rule making by the SEC and the securities markets and 

voluntary action by companies. As long-time advocates for improved corporate governance, Business Roundtable has supported and helped effect many of these 

changes while simultaneously working to ensure that they provide necessary operational flexibility and avoid unintended negative consequences. 

Board Independence 

In the past several years, public companies have taken a number of steps to enhance board independence. First, there has been a significant increase in the number of independent directors serving on boards. A 2008 Business Roundtable Survey 

of member companies (attached as Exhibit VI) indicated that at least 90 percent of 

our member companies’ boards are at least 80 percent independent. According to the 

RiskMetrics Group 2009 Board Practices, average board independence at S&P 1,500 

companies increased from 69 percent in 2003 to 78 percent in 2008. According to 

the same study, in 2008, 85 percent of S&P 1,500 companies, and 91 percent of S&P 

500 companies, had boards that were at least two-thirds independent. 

Second, directors increasingly meet in regular ‘‘executive sessions’’ outside the 

presence of management and 75 percent of our member companies hold executive 

sessions at every meeting, compared to 55 percent in 2003. Moreover, the NYSE listing standards require a nonmanagement director to preside over these executive 

sessions and require companies to disclose in their proxy materials how interested 

parties may communicate directly with the presiding director or the nonmanagement directors as a group. 

Third, there has been a steady increase in the number of companies that have 

appointed a separate chairman of the board. According to the RiskMetrics Group 

2009 Board Practices survey, from 2003 to 2008, the number of S&P 1,500 companies with separate chairmen of the board increased from 30 percent to 46 percent. 

Moreover, many companies without an independent chair have appointed a lead or 

presiding director in order to provide for independent board leadership. A 2007 

Business Roundtable survey of member companies indicated that 91 percent of companies have an independent chairman or an independent lead or presiding director, 

up from 55 percent in 2003. According to the 2008 Spencer Stuart Board Index, by 

mid-2008, 95 percent of S&P 500 companies had a lead or presiding director, up 

from 36 percent in 2003. Lead directors’ duties are often similar to those of an independent chairman and include: presiding at all meetings of the board at which the 

chairman is not present, including executive sessions of the independent directors; 

serving as liaison between the chairman and independent directors; approving information sent to the board; approving meeting agendas for the board; approving meeting schedules to assure that there is sufficient time for discussion of all agenda 

items; having authority to call meetings of the independent directors; being available for consultation and direct communication with major shareholders; and serving as interim leadership in the event of an emergency succession situation. Many 
129 

7Melissa Klein Aguilar, ‘‘Shareholder Voice Getting Louder, Stronger’’, Compliance Week (Oct. 

21, 2008) available at http://www.complianceweek.com/article/5113/shareholder-voices-gettinglouder-stronger (quoting Claudia Allen, author of Study of Majority Voting in Director Elections). 8See Claudia H. Allen, Study of Majority Voting in Director Elections (Feb. 5, 2007) available 

at http://www.ngelaw.com/files/upload/majoritystudy111207.pdf. 

9See RiskMetrics Group, Board Practices: The Structure of Boards of Directors at S&P 1,500 

Companies (2008). 

companies provide information about their board leadership structures in their corporate governance guidelines, their proxy statements or both, and the SEC recently 

has proposed to require disclosure about a company’s leadership structure and why 

that structure is appropriate for the company. 

Finally, various organizations are focusing on voluntary steps that companies can 

take to enhance independent board leadership. In the spring of 2009, the National 

Association of Corporate Directors, with the support of Business Roundtable, issued 

a set of Key Agreed Principles To Strengthen Corporate Governance for U.S. Publicly Traded Companies. One ‘‘key agreed principle’’ states that boards should have 

independent leadership, either through an independent chairman or a lead/presiding 

director, as determined by the independent directors. The principles further recommend that boards evaluate their independent leadership annually. In March 

2009, the Chairman’s Forum, an organization of nonexecutive chairmen of U.S. and 

Canadian public companies, issued a policy briefing calling on companies to appoint 

an independent chairman upon the succession of any combined chairman/CEO. The 

policy briefing recognizes, however, that particular circumstances may warrant a 

different leadership structure and recommends, in these instances, that companies 

explain to shareholders why combining the positions of chairman and CEO represents a superior approach. 

Majority Voting and Annual Elections 

Companies also have taken steps to enhance accountability through the adoption 

of majority voting standards for the election of directors and the establishment of 

annual elections for directors. Historically, most U.S. public companies have used 

a plurality voting standard in director elections. Under plurality voting, the director 

nominees for available board seats who receive the highest number of ‘‘For’’ votes 

are elected. In a typical annual election, the number of nominees equals the number 

of available Board seats, so if at least one share is voted ‘‘For’’ the election or reelection of a nominee, the nominee will gain or retain a seat on the Board. Accordingly, 

director nominees in uncontested elections are assured election. Under a majority 

voting regime, a candidate must receive a majority of votes cast in order to retain 

his or her board seat. Majority voting thus increases shareholder influence and encourages greater board accountability. 

In 2004, several labor unions and other shareholder groups began to broadly advocate that companies adopt a majority vote standard in uncontested director elections, in order to demonstrate directors’ accountability to shareholders. Companies 

and shareholders alike recognized the merits of a majority voting standard and this 

corporate governance enhancement was quickly adopted by many companies. According to our 2008 Survey of Corporate Governance Trends, 75 percent of our member companies have adopted some form of majority voting for directors. According 

to the leading study on majority voting, as of October 2008, more than 70 percent 

of S&P 500 companies had adopted some form of majority voting, as compared with 

only 16 percent in 2006, 7 and mid- and small-cap companies increasingly are adopting majority voting as well. 8

A growing number of companies have moved to annual director elections too. According to the RiskMetrics Group 2009 Board Practices survey, 64 percent of S&P 

500 companies held annual director elections in 2008 as compared to only 44 percent in 2004. Likewise, 50 percent of S&P 1,500 companies held annual director 

elections in 2008, and the number of S&P 1,500 companies with classified boards 

had decreased to 50 percent in 2008 from 61 percent in 2004. The decrease in the 

prevalence of classified boards is reflected across mid- and small-cap companies as 

well. 9 However, as discussed below, there are reasons why some companies believe 

it is in the best interests of their shareholders to retain their classified boards. 

One Size Does Not Fit All 

While Business Roundtable consistently has worked toward enhancing corporate 

governance practices, we strongly believe that with respect to many of these practices a ‘‘one-size-fits-all’’ approach simply will not work. Companies vary tremendously in their size, shareholder base, centralization and other factors that can 

change over time. Attempting to shoehorn all companies, whether it is a Fortune 

50 company or a small company with a single significant shareholder, into the same 
130 

10Letter from Orin S. Kramer, Chair, New Jersey State Investment Council to Mary 

Schapiro, Chairman, Securities and Exchange Commission re: comments on File S7-10-09 (July 

9, 2009). 11See,, e.g., M. Sinan Goktan, et al., ‘‘Corporate Governance and Takeover Gains’’ (Working 

Paper 2008) available at http://www.fma.org/Texas/Papers/ 

corpgovltakeovergainslfma2008.pdf; Lucian A. Bebchuk, et al., ‘‘The Powerful Antitakeover 

Force of Staggered Boards: Theory’’, Evidence and Policy, 54 Stanford L. Rev. 887–951 (2002). 12See Shareholder Bill of Rights Act of 2009 S. 1074, 111th Cong. §3 (2009). 13See Shareholder Bill of Rights Act of 2009 S. 1074, 111th Cong. §5 (2009) and Shareholder 

Empowerment Act of 2009 H.R. 2861, 111th Cong. §2 (2009). 14Delaware General Corporations Law §216 (2009). 

corporate governance regime deprives companies and their shareholders of choices 

about the practices that will enable them to operate their businesses in a way that 

most effectively creates the jobs, products, services, and benefits that improve the 

economic well-being of all Americans. In this regard, corporate governance initiatives intended to improve corporate functioning and protect shareholders can actually end up harming companies and the interests of the shareholders they were 

meant to protect. This realization has been echoed by others including the New Jersey Investment Council, which oversees the New Jersey $63 billion public pension 

system. The Council recently stated in a letter to SEC Chairman Mary Schapiro 

that it is ‘‘troubled by the proliferation of rigid prescriptive responses. which are 

costly, time-consuming, unresponsive to the individual fact settings surrounding 

specific companies and industries, and which may correlate only randomly with the 

creation of shareholder value.’’ 10

For instance, despite the increasing trend of annual director elections, some companies have concluded that it is in the best interest of their shareholders to retain 

a classified board. In this regard, some economic studies have found that a classified 

board can enhance a board’s ability to negotiate the best results for shareholders 

in a potential takeover situation by giving the incumbent directors additional opportunity to evaluate the adequacy and fairness of any takeover proposal, negotiate on 

behalf of all shareholders and weigh alternative methods of maximizing shareholder 

value. 11 In addition, classified boards can have other advantages, including greater 

continuity, institutional memory and stability, thereby permitting directors to take 

a longer-term view with respect to corporate strategy and shareholder value. Some 

recent proposed legislation, however, would deprive boards of directors and shareholders of this choice. 12

Likewise, Business Roundtable believes that it is critical for boards of directors 

to have independent board leadership, but a single method of providing that leadership is not appropriate for all companies at all times. While some companies have 

separated the position of chairman of the board and chief executive officer, others 

have voluntarily established lead independent or presiding directors. This illustrates 

the need for, and advantages of, an individualized approach and demonstrates that 

a universally mandated approach is neither necessary nor desirable. 13 It would, in 

fact, deprive boards of directors, and indeed shareholders, of the flexibility to establish the leadership structure that they believe will best equip their companies to 

govern themselves most effectively for long-term growth and value creation. 

State Law Is the Bedrock for Effective Corporate Governance 

Historically, for more than 200 years, State corporations statutes have been the 

primary source of corporate law and have enabled thoughtful and effective corporate 

governance policies and practices to be developed. In large part, this stems from the 

flexibility and responsiveness of State corporate law in responding to evolving circumstances. In this regard, State corporate law is described as ‘‘enabling’’ because 

it generally gives corporations flexibility to structure their governance operations in 

a manner appropriate to the conduct of their business. It also preserves a role for 

private ordering and shareholder choice by permitting shareholder proposed bylaws 

to address corporate governance issues. 

Where a corporation and its shareholders determine that a particular governance 

structure—such as a majority voting regime—is appropriate, enabling statutes permit, but do not mandate, its adoption. And when changes in State corporate law 

are determined to be necessary, such as to facilitate changes to a majority voting 

standard, States responded by amending their statutes. For example, Delaware 

amended its corporate law to provide that, if shareholders approve a bylaw amendment providing for a majority vote standard in the election of directors, a company’s 

board of directors may not amend or repeal the shareholder-approved bylaw. 14

Other States have also amended their corporations statutes to address majority vot-
131 

15See California Corporations Code §708.5 (2009); Nevada General Corporation Law §330 

(2009); North Dakota Century Code §10-35-09 (2009); Ohio General Corporation Law §1701.55 

(2009); and Utah Revised Business Corporation Act §728 (2009). 16Model Business Corporation Act §10.22 (2006). 17Delaware General Corporation Law §§112 and 113. 18See Press Release, American Bar Association Section of Business Law, ‘‘Corporate Laws 

Committee to Address Current Corporate Governance Issues’’ (Apr. 29, 2009). 19See Shareholder Bill of Rights Act of 2009 S. 1074, 111th Cong. §5 (2009). 20See Shareholder Empowerment Act of 2009 H.R. 2861, 111th Cong. §2 (2009). 21Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, Release No. 33-8340, 68 Fed. Reg. 69,204 (Dec. 11, 

2003). 22 NYSE Listed Company Manual §303A.03. 23 Electronic Shareholder Forums, Release No. 34-57172, 73 Fed. Reg. 4450 (Jan. 25, 2008). 

See also Jaclyn Jaeger, ‘‘The Rise of Online Shareholder Activism’’, Compliance Week (Mar. 11, 

2008), available at http://www.complianceweek.com/article/4007/the-rise-of-online-shareholderactivism (providing examples of successful online shareholder activism). 24Spencer Stuart Board Index at 28 (2008), available at http://content.spencerstuart.com/ 

sswebsite/pdf/lib/SSBI-2006.pdf. 

ing as well, including California, Nevada, North Dakota, Ohio, Utah, and others. 15

In addition, the American Bar Association approved amendments to the Model Business Corporation Act, which 30 States have adopted, permitting a company’s board 

or shareholders to adopt majority voting in director elections through bylaw amendments rather than through a more cumbersome process. 16

Most recently, in April of this year, Delaware amended its corporate law to clarify 

the ability of companies and their shareholders to adopt proxy access bylaws, as 

well as bylaws providing for the reimbursement of expenses incurred by a shareholder in connection with the solicitation of proxies for the election of directors. 17

New Section 112 of the Delaware General Corporation Law permits a company to 

amend its bylaws to provide that shareholders may include in the company’s proxy 

materials shareholder nominees for director positions. The bylaws may condition the 

obligation to include shareholder nominees on the satisfaction of eligibility requirements and/or compliance with procedures set forth in the bylaws. New Section 113 

permits shareholders to adopt bylaws that require the company to reimburse expenses incurred by a shareholder in connection with the solicitation of proxies for 

the election of directors. The American Bar Association is considering similar 

amendments to the Model Business Corporation Act. 18 Like the majority voting enabling legislation described above, these reforms will allow companies and their 

shareholders to determine whether the costs of proxy access and proxy reimbursement outweigh the benefits for a particular company. 

In contrast to the enabling approach of State corporate law, some recently proposed Federal legislation in response to the financial crisis, the Shareholder Bill of 

Rights Act of 2009 19 and the Shareholder Empowerment Act of 2009, 20 would mandate specific board structures. Such Federal Government intrusion into corporate 

governance matters would be largely unprecedented as the Federal Government’s 

role in corporate governance traditionally has been limited. The Sarbanes-Oxley Act 

of 2002 did not change the role of the States as the primary source of corporate law; 

rather, it was a rare instance of Federal action in the area of corporate governance. 

Shareholders Have Effective Means of Influencing Corporate Governance 

Under the existing corporate governance framework, shareholders have the ability 

to make their views known to the companies in which they invest through a variety 

of methods. First, many companies provide means for shareholders to communicate 

with the board about various matters, including recommendations for director candidates and the director election process in general. In this regard, in 2003 the SEC 

adopted rules requiring enhanced disclosure about companies’ procedures for shareholder communication with the board and for shareholders’ recommendations of director candidates. 21 In addition, companies listed on the New York Stock Exchange 

must have publicized mechanisms for interested parties, including shareholders, to 

make their concerns known to the company’s nonmanagement directors. 22 The 

SEC’s 2008 rules regarding electronic shareholder forums also provided additional 

mechanisms for communications between the board and shareholders. 23 According 

to a 2008 survey, board members or members of management of nearly 45 percent 

of surveyed S&P 500 companies reached out to shareholders proactively. 24

Second, shareholders can submit proposals to be included in company proxy materials. These proposals have been an avenue for shareholders to express their views 

with respect to various corporate governance matters. For example, the CEO of 

Bank of America stepped down as chairman of the board this year after a majority 

of shareholders approved a binding bylaw amendment requiring an independent 
132 

25Dan Fitzpatrick and Marshall Eckblad, ‘‘Lewis Ousted as BofA Chairman’’, Wall St. J., Apr. 

30, 2009, at A1. 26 Edward Iwata, ‘‘Boardrooms Open Up to Investors’ Input’’, USA Today, Sept. 7, 2009, available at http://www.usatoday.com/money/companies/management/2007-09-06-shareholdersfightlN.htm. 27Thus far, in 2009, shareholders have submitted shareholder proposals to over 100 individual companies requesting an advisory vote on executive compensation. In response to previous years’ shareholder proposals, many companies are providing shareholders with such a 

vote, including Aflac Incorporated, H&R Block, Inc., Jackson Hewitt Tax Service, Inc., Littlefield 

Corporation, RiskMetrics Group, Inc. and Zale Corporation. At least 25 other companies including Intel Corporation, Motorola, Inc. and Verizon Communications, Inc. have agreed to hold an 

annual advisory vote voluntarily or in response to their shareholders’ concerns. 28 A 2007 Business Roundtable survey of member companies indicated that in 2007, board 

members of 28 percent of companies met with shareholders. Another survey indicates that in 

2008, board members or members of management of nearly 45 percent of S&P 500 companies 

reached out to shareholders proactively. Other companies have established e-mail links on their 

Web site for investors to provide feedback to the compensation committee. And in April 2009, 

Schering-Plough Corp. submitted a survey to its shareholders to obtain their views on a variety 

of compensation issues. 29See Joseph A. Grundfest, ‘‘ ‘Just Vote No’: A Minimalist Strategy for Dealing With Barbarians Inside the Gates’’, 45 Stan. L. Rev. 857 (1993). 30 RiskMetrics Group 2008 Post-Season Report, at 10 (October 2008). 31Diane Del Guercio, et al., ‘‘Do Boards Pay Attention When Institutional Investor Activists 

‘Just Vote No’ ?’’, Journal of Financial Economics, Oct. 2008. 32 Chris Cernich, et al., ‘‘Investor Responsibility Research Center Institute, Effectiveness of 

Hybrid Boards’’, at 4 (May 2009), available at http://www.irrcinstitute.org/pdf/ 

IRRCl05l09lEffectiveHybridBoards.pdf. 33 Id. at 4, 13 (noting that 76 percent of dissidents gaining representation were able to do 

so through settlement). 

chair for the company’s board. 25 In addition, predatory shareholder proposals can 

engender dialogue between companies and shareholder proponents about corporate 

governance issues. 26 In this regard, an advisory vote on compensation has been implemented at several companies that received shareholder proposals on this topic. 27

Moreover, as advocates of such votes have suggested that it is a way to enhance 

communication between shareholders and their companies about executive compensation, many companies have responded by employing other methods to accomplish this goal. These include holding meetings with their large shareholders to discuss governance issues, as well as using surveys, blogs, webcasts and other forms 

of electronic communication for the same purpose. 28

Third, the proliferation of ‘‘vote no’’ campaigns in recent years has provided shareholders with another method of making their views known and effecting change in 

board composition. In these low-cost, organized campaigns, shareholder activists encourage other shareholders to withhold votes from or vote against certain directors. 

Although ‘‘vote no’’ campaigns do not have a legally binding effect where the targeted company uses a plurality voting regime in an uncontested election, evidence 

indicates that such campaigns are nonetheless successful in producing corporate 

governance reform. 29 For example, following a 2008 ‘‘vote no’’ campaign at Washington Mutual in which several shareholder groups called for shareholders to withhold votes from certain directors, the finance committee chairman stepped down 

upon receiving 49.9 percent withheld votes. 30 In addition, a recent study of ‘‘vote 

no’’ campaigns found that targeted companies experienced improved post-campaign 

operating performance and increased rates of forced CEO turnover, suggesting that 

‘‘vote no’’ campaigns are effective. 31 At companies that have adopted majority voting 

in director elections, ‘‘vote no’’ campaigns are likely to have an even greater impact. 

Fourth, the existing framework allows shareholders to make their views known 

through nominating their own director candidates and engaging in election contests. 

In fact, they have done so recently at companies including Yahoo! Inc. and Target 

Corporation. ‘‘Short slate’’ proxy contests in which dissidents seek board representation but not full board control, have been very successful in recent years. According 

to a recent study conducted by the Investor Responsibility Research Center Institute, during a 4-year period, short slate proxy contest dissidents were able to gain 

representation at approximately 75 percent of the companies they targeted. 32 Significantly, in the majority of these cases, dissidents found it unnecessary to pursue 

the contest to a shareholder vote; instead, they gained board seats through settlement agreements with the target companies. 33 Clearly the threat of proxy contests, 

to say nothing of the contests themselves, is an effective mechanism for shareholder 

nomination of directors. Moreover, the SEC adopted ‘‘e-proxy’’ rules in 2007 that 

permit companies and others soliciting proxies from shareholders to deliver proxy 

materials electronically, which has streamlined the proxy solicitation process and 
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34 Internet Availability of Proxy Materials, Exchange Act Release No. 34-55146, 17 Fed. Reg. 

240, 249 and 274 (March 30, 2007). 35Data provided by SharkRepellent.net (S&P 500) and RiskMetrics Group, Inc. (S&P 1,500) 

as of June 2009. 36 Based on data from RiskMetrics Group, Inc. as of July, in 2009, shareholders have submitted special meeting shareholder proposals to 74 individual companies. The average support 

for these votes has been 52.3 percent, and 26 companies have received majority votes in support 

of the proposal. 

greatly reduced the costs of printing and mailing proxy materials. 34 All of this has 

made it easier and less costly for shareholders to nominate directors themselves. 

Finally, increasing numbers of companies have been amending their governing 

documents to allow shareholders to call special meetings of shareholders or, for companies that already allow shareholders to call meetings, to lower the thresholds required to call those meetings. Currently 45 percent of S&P 500 and 46 percent of 

S&P 1,500 companies 35 permit their shareholders to call special meetings, the majority of which require either 25 percent or a majority of the outstanding shares to 

call a special meeting. Beginning in 2007, shareholder proponents began submitting 

a large number of shareholder proposals requesting that 10 percent–20 percent of 

outstanding shares be able to call special meetings. The number of such proposals 

has increased dramatically since 2007 and these proposals have been receiving high 

votes. 36

Clearly, there currently are numerous and potent methods that shareholders can 

use to see that their voices are heard and their views made known to the companies 

in which they invest. Accordingly, proposals to increase shareholder rights must be 

considered in the context of existing shareholder leverage and the manner in which 

shareholders vote their shares. In this regard, the extensive reliance of many institutional investors on the recommendations of the proxy advisory services must be 

considered. Unfortunately, these services often do not engage in company-by-company analysis when making their recommendations, applying a one-size-fits-all approach to important corporate governance decisions at individual companies. 

The SEC Is Addressing Corporate Governance Matters 

While, as noted above, State corporate law is central to corporate governance, the 

SEC plays a role in assuring that shareholders receive the information they need 

to make informed voting decisions, including about corporate governance matters. 

In this regard, earlier this month, the SEC proposed several rule changes intended 

to provide shareholders with additional disclosure concerning individual director experience and qualifications, board leadership structure and oversight of risk management, compensation practices and potential conflicts of interest with compensation consultants and compensation matters. 

The proposed amendment relating to individual directors would require companies 

to provide disclosure about (1) the experience, qualifications, attributes and skills 

of directors and director nominees that qualify them to serve as a director and as 

a member of each committee on which they serve, (2) all public company directorships held by directors and director nominees during the past 5 years, as opposed 

to just current directorships (as required under the current rules), and (3) the involvement of directors, director nominees and executive officers in legal proceedings 

during the prior 10 years. 

With regard to board leadership, the proposal would require disclosure about a 

company’s board leadership structure and why the structure is appropriate for the 

company. The proposed disclosure would need to include a discussion of whether the 

company separates or combines the roles of the chairman and chief executive officer, 

whether the company has a lead independent director, and the board’s role in the 

company’s risk-management process and the effects, if any, that this role has on the 

company’s board leadership structure. 

Finally, the proposal relating to compensation consultant disclosures would require enhanced disclosure of potential conflicts of interest involving compensation 

consultants that provide advice to the board or compensation committee regarding 

executive or director compensation and also provide other services to the company. 

Specifically, this disclosure would need to include a discussion of (1) any other services that the compensation consultant or its affiliates provide to the company and 

the fees paid for such services, (2) the aggregate fees paid for advising on executive 

and director compensation, (3) whether the consultant was engaged for these other 

services by or on the recommendation of management, and (4) whether the board 

or compensation committee approved these other services. 

We believe that this disclosure approach to matters relating to board leadership 

and risk oversight is far superior to the one-size-fits-all approach in proposed legislation that would mandate the separation of the chairman and CEO position and 
134 

37See Shareholder Bill of Rights Act of 2009 S. 1074, 111th Cong. §5 (2009) and Shareholder 

Empowerment Act of 2009 H.R. 2861, 111th Cong. §2 (2009). 38 Note that this amendment moots part of section 2 of the Shareholder Empowerment Act 

of 2009. See Shareholder Empowerment Act of 2009 H.R. 2861, 111th Cong. §2 (2009) which 

would require that a broker not be allowed to vote securities on an uncontested election to the 

board of directors of an issuer to the extent that the beneficial owner of those securities has 

not provided specific instructions to the broker. 

require all public companies—no matter what size of industry—to establish a risk 

committee of the board. 37 Companies and their shareholders should have the choice 

to determine the structures that will best enable them to grow and prosper. 

In addition to the corporate governance disclosure enhancements described above, 

the SEC also approved an amendment to NYSE Rule 452, which will prohibit brokers from voting uninstructed shares in director elections. 38 This rule amendment, 

which will be effective for annual meetings after January 1, 2010, is likely to have 

a considerable impact on the director election process, particularly for companies 

that have adopted a majority voting standard. 

Another significant recent SEC action is the proposal to amend the proxy rules 

to permit shareholders to nominate directors in a company’s proxy materials. If 

adopted, the proposed rules would establish a Federal proxy access right and permit 

proxy access shareholder proposals. The Federal process right would permit a shareholder or group of shareholders to nominate one or more directors and have those 

nominees included in a company’s proxy materials contingent on the shareholder or 

group beneficially owning a certain percentage of the company’s voting shares 

(which varies depending on a company’s size) for at least 1 year prior to submitting 

the nomination. Shareholders meeting the proposal’s requirements would be allowed 

to have their proposed nominees (up to 25 percent of the board) included in the company’s proxy statement, on a first-come first-served basis. 

In contrast to our support for the SEC’s disclosure proposals, we believe that the 

proposed Federal proxy access right could result in serious, harmful consequences, 

as well as being beyond the SEC’s authority to adopt. First, widespread shareholder 

access to company proxy materials will promote a short-term focus and encourage 

the election of ‘‘special interest’’ directors who will disrupt boardroom dynamics and 

jeopardize long-term shareholder value. Second, the proposed rules will enhance the 

influence of proxy advisory firms and institutional investors, which may use the 

rules as leverage for advancing special interest causes and promoting policies to encourage short-term gains in stock price. Third, the increased likelihood of divisive 

and time-consuming annual election contests could deter qualified directors from 

serving on corporate boards. Fourth, shareholder-nominated directors could impede 

a company’s ability to satisfy board composition requirements. Finally, serious questions have been raised about the ability of the current proxy voting system to handle the increasing number of proxy contests that would result from the implementation of the proxy access proposal. While the Commission’s proposing release touches 

upon some of these issues, it fails to seriously address them. We currently are preparing a comment letter to the SEC on these proposals which will expand upon our 

concerns. 

Conclusion 

Business Roundtable is committed to enhanced corporate governance practices 

that enable U.S. companies to compete globally, create jobs and generate long-term 

economic growth. We are concerned, however, that in a rush to respond to the financial crisis, Congress, and the SEC, are considering hastily prepared and universally 

applicable legislation and regulation that will exacerbate some of the factors that 

led to the crisis. In particular, an advisory vote on compensation and proxy access 

could well increase the pressure on short-term performance to the detriment of longterm value creation. The flexible approaches of State corporate law, SEC disclosure 

and shareholder and company choice that have produced the engine of economic 

growth that is the American corporation should not be ignored. 

Attachments 

Exhibit I—Principles of Corporate Governance (November 2005) 

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

Exhibit III—Guidelines for Shareholder–Director Communications (May 2005) 

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

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

Exhibit VI—2008 Business Roundtable Survey 
135 

EXHIBIT I 

PRINCIPLES OF CORPORATE GOVERNANCE (NOVEMBER 2005) 
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EXHIBIT II 

THE NOMINATING PROCESS AND CORPORATE GOVERNANCE COMMITTEES: PRINCIPLES

AND COMMENTARY (APRIL 2004) 
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EXHIBIT III 

GUIDELINES FOR SHAREHOLDER-DIRECTOR COMMUNICATIONS (MAY 2005) 
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EXHIBIT IV 

EXECUTIVE COMPENSATION: PRINCIPLES AND COMMENTARY (JANUARY 2007) 
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EXHIBIT V 

PRINCIPLES FOR RESPONDING TO THE FINANCIAL MARKETS CRISIS (2009) 
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EXHIBIT VI 

2008 BUSINESS ROUNDTABLE SURVEY
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PREPARED STATEMENT OF J.W. VERRET 

ASSISTANT PROFESSOR OF LAW, GEORGE MASON UNIVERSITY SCHOOL OF LAW

JULY 29, 2009 

The Misdirection of Current Corporate Governance Proposals 

Chairman Reed, Ranking Member Bunning, and distinguished Members of the 

Subcommittee, it is a privilege to testify in this forum today. 

My name is J.W. Verret, and I am an Assistant Professor of Law at George Mason 

Law School, a Senior Scholar at the Mercatus Center at George Mason University 

and a member of the Mercatus Center Financial Markets Working Group. I also direct the Corporate Federalism Initiative, a network of scholars dedicated to studying 

the intersection of State and Federal authority in corporate governance. 

I will begin by addressing proxy access and executive compensation rules under 

consideration and close with a list of contributing causes for the present crisis. 

I am concerned that some of the corporate governance proposals recently advanced impede shareholder voice in corporate elections. This is because they leave 

no room for investors to design corporate governance structures appropriate for 

their particular circumstances. 

Rather than expanding shareholder choice, these reforms actually stand in the 

way of shareholder choice. Most importantly, they do not permit a majority of shareholders to reject the Federal approach. 

The Director of the United Brotherhood of Carpenters said it best, ‘‘we think less 

is more, fewer votes and less often would allow us to put more resources toward 

intelligent analysis.’’ The Brotherhood of Carpenters opposes the current proposal 

out of concern about compliance costs. The proposals at issue today ignore their concerns, as well as concerns of many other investors. 

Consider why one might limit shareholders from choosing an alternative means 

of shareholder access. It can only be because a majority of the shareholders at many 

companies might reject the Federal approach if given the opportunity. 

Not all shareholders share similar goals. Public Pension Funds run by State elected officials and Union Pension Funds are among the most vocal proponents of shareholder power. Main street investors deserve the right to determine whether they 

want the politics of Unions and State Pension funds to take place in their 401(k)s. 

The current proposals also envision more disclosure about compensation consultants. Such a discussion would be incomplete without mentioning conflicts faced by 

proxy advisory firms. Proxy advisory firms advise institutional investors on how to 

vote. Current proposals have failed to address this issue. The political clout enjoyed 

by these firms is evidenced by the fact that the CAO of RiskMetrics, the dominant 

firm in the industry, was recently hired as special advisor to the SEC Chairman. 

To close the executive compensation issue, I will note that if executive compensation were to blame for the present crisis, we would see significant difference between compensation policies at those financial companies that recently returned 

their TARP money and those needing additional capital. We do not. 

Many of the current proposals also seek to undermine, and take legislative credit 

for, efforts currently underway at the State level and in negotiations between investors and boards. This is true for proxy access, the subject of recent rule making at 

the State level, and it is true for Federal proposals on staggered boards, majority 

voting, and independent Chairmen. 

The Sarbanes-Oxley Act passed in 2002 and was an unprecedented shift in corporate governance designed to prevent poor management practices. Between 2002 

and 2008, the managerial decisions that led to the current crisis were in full swing. 

I won’t argue that Sarbanes-Oxley caused the crisis, but this suggests that corporate 

governance reform does a poor job of preventing crisis. 

And yet, the financial crisis of 2008 must have a cause. I salute this Committee’s 

determination to uncover it, but challenge whether corporate governance is the culprit. Let me suggest six alternative contributing factors for this Committee to investigate: 

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

ii. The market distortions caused by subsidization of the housing market through 

Fannie Mae, Freddie Mac, and Federal tax policy; 

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

banks; 

iv. Short-term thinking on Wall Street fed by institutional investor fixation on 

firms making, and meeting, quarterly earnings predictions; 
225 

v. A failure of credit-rating agencies to provide meaningful analysis, caused by an 

oligopoly in that market supported by regulation; 

vi. Excessive write downs in asset values under mark-to-market accounting, demanded by accounting firms who refused to sign off on balance sheets out of 

concern about exposure to excessive securities litigation risk. 

Corporate governance is the foundation of American capital markets. If this Committee tinkers with the American corporate governance system merely for the appearance of change, it risks irreparable damage to that foundation. 

I thank you for the opportunity to testify, and I look forward to answering your 

questions. 

PREPARED STATEMENT OF RICHARD C. FERLAUTO 

DIRECTOR OF CORPORATE GOVERNANCE AND PENSION INVESTMENT, 

AMERICAN FEDERATION OF STATE, COUNTY, AND MUNICIPAL EMPLOYEES

JULY 29, 2009 

Good Afternoon, Chairman Reed and Members of the Subcommittee. My name is 

Richard Ferlauto, Director of Corporate Governance and Investment Policy at the 

American Federation of State, County, and Municipal Employees. AFSCME is the 

largest union in the AFL–CIO with 1.6 million members who work in the public 

service. Our members have their retirement assets invested through public retirement systems with more than one trillion dollars in assets. They depend on the 

earnings of these systems to support their benefits in retirement. Large public pension system investments in the public markets are diversified, largely owning the 

market, and heavily indexed, which operate with time horizons of 20 years or more 

to match the benefit obligations they have to their plan participants. Indeed, public 

pension systems are the foundation of patient capital investment in this economy, 

which seeks long-term shareholder value creation. 

AFSCME places strong emphasis on improving corporate governance through direct company engagement, regulation, and legislation as a way to achieve long-term 

shareholder value. As an active shareowner, we have been a leading advocate for 

a shareholder advisory vote on CEO compensation and shareholder proxy access to 

nominate directors on company proxy materials. 

I am also chairman of ShareOwners.org, a new nonprofit, nonpartisan social network designed to give a voice to retailers or individuals who rarely have opportunities to communicate with regulators, policy makers, and the companies in which 

they are invested. 

We urge the Committee to create better protections for the average American investor in the financial marketplace. The severe losses suffered by tens of millions 

of Americans in their portfolios, 401(k)s, mutual funds, and traditional pension 

plans all point to the need for a new emphasis on shareowner rights and meaningful 

regulation in order to ensure the financial security of American families. 

America has tried going down the road of financial deregulation and reduced corporate accountability. That path has proven to be a dead end that is now imperiling 

the financial well-being of millions of long-term shareowners. Unfortunately, shareholders in America’s corporations—who actually should more correctly be thought 

of as ‘‘shareowners’’—have limited options today when it comes to protecting themselves from weak and ineffectual boards dominated by management, misinformation 

peddled as fact, accounting manipulation, and other abuses. 

Under the disastrous sway of deregulation and lack of accountability, corporate 

boards and executives either caused or allowed corporations to undertake unreasonable risks in the pursuit of short-term financial goals that were devoid of real economic substance or any long-term benefits. In most cases, it is long-term 

shareowners—not the deregulators and the speculators—that are paying the price 

for the breakdown in the system. 

According to a recent scientific survey that the Opinion Research Corporation conducted for ShareOwners.org of 1,256 U.S. investors, ‘‘American investors clearly 

want to see tough action taken soon by Congress to reform how our financial markets work and also to clean up abuses on Wall Street. Support for such action is 

strong across all groups by age, income, educational achievement and political affiliation. It is particularly noteworthy that such a high percentage of investors (34 percent) would use a term as strong as ‘angry’ to describe their views about the need 

for such action. And, even though they are not angry, the additional nearly half of 

other investors (45 percent) who want to see strong clean-up action taken sends an 

unmistakable message to policy makers. This is particularly true when you look at 
226 

that data alongside the finding that nearly 6 out of 10 investors (57 percent) said 

that strong Federal action would help to restore their lost confidence in the fairness 

of the markets.’’ The full survey from ShareOwners.org is attached as an addendum 

to this testimony [Ed. note: not included, please see http://www.shareowners.org/ 

profiles/blogs/read-all-about-it], but I would like to point out the following findings: 

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

• More than four out of five investors (82 percent) agree that ‘‘shareholders 

should have the ability to nominate and elect directors of their own choosing 

to the boards of the companies they own.’’ Only 16 percent of Americans say 

that ‘‘shareholders should NOT be able to propose directors to sit on the boards 

of the companies they own.’’ 

• Nearly nine out of 10 investors (87 percent) say that ‘‘investors who lose their 

retirement savings due to fraud and abuse should have the right to go to court 

if necessary to recover those funds.’’ Only one in 10 American investors think 

that ‘‘investor lawsuits clog up the courts and make it more expensive for companies to run their businesses.’’ 

• The number one reason for loss of investor confidence in the markets: ‘‘overpaid 

CEOs and/or unresponsive management and boards’’ at (81 percent). 

It is time for America to get back on the road of prudent financial regulatory oversight and increased corporate accountability. We urge you to recognize the devastating impact that a lack of appropriate regulation and accountability has had on 

our economy. In order to restore the confidence of investors in our capital markets, 

it is now necessary to take the following steps: 

I. Strengthen the regulation of the markets. Key reforms needed to protect the interests of shareowners include the following: 

• Beef up the Securities and Exchange Commission (SEC). Congress should assess the funding needs of the SEC and take steps to bring the agency as quickly 

as possible to the point that it can fully carry out its mission of oversight of 

the markets and financial professionals in order to protect and advocate for investors. Among other priorities, the SEC should impose requirements for the 

disclosure of long and short positions, enhance disclosures for private equity 

firms bidding for public companies, and require both the registration of hedge 

fund advisors with the Commission as investment advisors and additional disclosures of the underlying hedge fund. Following the request of the Administration, the SEC should be given additional authority to create a full-fledged fiduciary standard for broker dealers, so that the interests of clients who purchase 

investment products comes before the self interest of the broker. The SEC Division of Enforcement should be unshackled to prosecute criminal violations of the 

Federal securities laws where the Department of Justice declines to bring an 

action. 

• Clear the way for forfeiture of compensation and bonuses earned by management in a deceptive fashion. Legislation should be adopted to allow for the 

‘‘clawing back’’ of incentive compensation and bonuses paid to corporate executives based on fraudulent corporate results, and should provide for enforcement 

through a private right of action. There is no reason why directors and executives should not give back ill-gotten gains when innocent shareowners are victimized by crippling losses. The outrageous bonuses at AIG, Morgan Stanley, 

and other banks responsible for our financial meltdown were not deserved and 

should not be allowed to stand. If they know their compensation is on the line, 

corporate managers and directors will be less likely to engage in or turn a blind 

eye toward fraud and other wrongdoing. 

• Strengthen State-level shareowner rights. Corporation structures and charters 

are regulated under State law. The corporate law in most States has not clarified the rights, responsibilities and powers of shareholders and directors or 

ways that they should communicate outside of annual general meetings. If regulation to strengthen shareholder rights does not occur at the Federal level, it 

will be up to the States to move forward. State corporate law should require 

proxy access, majority voting and the reimbursement of solicitation expenses in 

a board challenge. We would encourage robust competition among States for 

corporate charters based on a race to the top for improved shareowner rights. 

If necessary, Federal law should be changed to allow for shareholders to call 

a special meeting to reincorporate in another State by majority vote, in order 
227 

to avoid being shackled by the corporate State laws that put the interests of 

management ahead of shareowners. 

• Protect whistleblowers and confidential sources who expose financial fraud and 

other corporate misconduct. Confidential informants—sometimes called ‘‘whistleblowers’’—are of immeasurable value in discovering and redressing corporate 

wrongdoing. The information provided by these individuals may be crucial to 

victims’ ability to prove their claims. Often, these individuals only come forward 

because they believe their anonymity will be preserved. If their identities were 

known, they would be open to retaliation from their employers and/or others 

with an interest in covering up the wrongdoing. Whistleblowers might lose their 

job or suffer other harm. Legislation is needed to clearly state that the corporate whistleblowers and other confidential informants will be protected when 

they step forward. 

II. Increase the accountability of boards and corporate executives. Key reforms needed 

to protect the interests of shareowners include the following: 

• Allow shareowners to vote on the pay of CEOs and other top executives. Corporate compensation policies that encourage short-term risk-taking at the expense of long-term corporate health and reward executives regardless of corporate performance have contributed to our current economic crisis. 

Shareowners should have the opportunity to vote for or against senior executive 

compensation packages in order to ensure managers have an interest in longterm growth and in helping build real economic prosperity. The recently enacted 

stimulus bill requires all companies receiving TARP bail-out funds, nearly 400 

companies, to include a ‘‘say-on-pay’’ vote at their 2009 annual meetings and 

at future annual meetings as long as they hold TARP funds. It is now time for 

Congress to implement Treasury Secretary Geithner’s plan for compensation reform by passing ‘‘say-on-pay’’ legislation for all companies and to make it permanent as the center piece of needed reforms to encourage executive accountability. 

A key item to making the advisory vote meaningful will be not to permit brokers to cast votes on management sponsored executive compensation proposals 

as was recently done by the SEC in support of changes to NYSE Rule 452 in 

board elections. Stockbrokers who hold shares in their own name for their client 

investors have no real economic interest in the underlying corporation but can 

cast votes on routine items on the proxy. These pay votes are not routine items 

and should not be treated as such by investors, issuers or the regulators and 

we do not believe would be the intent of Congress if they give authorization to 

the SEC to require advisory votes on pay. Brokers almost universally vote for 

management’s nominees and proposals and, in effect, interfere with shareowner 

supervision of the corporations they own. 

• Empower shareowners to more easily nominate directors for election on corporate boards through proxy access. The process for nominating directors at 

American corporations is dominated today by incumbent boards and corporate 

management. This is because corporate boards control the content of the materials that companies send to shareholders to solicit votes (or ‘‘proxies’’) for director elections, including the identification of the candidates who are to be considered for election. The result is that corporate directors often are selected based 

on their allegiance to the policies of the incumbent board, instead of their responsiveness to shareowner concerns. Unless they can afford to launch an expensive independent proxy solicitation, shareowners have little or no say in selecting the directors who are supposed to represent their interests. The solution 

is to enable shareowners, under certain circumstances, to require corporate 

boards to include information about candidates nominated by shareowners in 

the company’s proxy materials. 

We are very encouraged that the SEC is in the process of rule making on the 

issue but this is such an important right that we believe that it should not become a political football for future commissions. There needs to be long-term 

consistency in securities law and the Exchange Act is the appropriate place to 

clearly codify the authority that the Commission has to require the disclosure 

of nominees running for board seats. And to further enunciate that access to 

the proxy is fundamental to free and fair elections for directors. 

• Require majority election of all members of corporate boards at American companies. Corporate directors are the elected representatives of shareowners who 

are responsible for overseeing management. Under the default rule applicable 

to virtually every corporation in the United States, however, corporate directors 

can be elected with just a single affirmative vote, even if that director’s can-
228 

didacy is opposed by the overwhelming majority of shareowners. While a few 

corporations have adopted policies that would require a director to receive support of the majority of shareowners in order to be elected, most corporations— 

particularly those not in the S&P 500—have not. True majority voting should 

be mandatory in every uncontested director election at all publicly traded corporations. 

• Split the roles of chairman of the board and CEO in any company. (1) receiving 

Federal taxpayer funds, or (2) operating under Federal financial regulations. It 

already is the practice in most of the world to divide these two key positions 

so that an independent chairman can serve as a check on potential CEO abuses. 

Separation of the CEO and board chair roles helps to ensure good board governance and fosters independent oversight to protect the long-term interests of private shareowners, pension funds and institutional investors. A strong independent chair can help to address legitimate concerns raised by shareowners in 

a company. Splitting these roles and then requiring a prior shareowner vote to 

reintegrate them would be in the best interests of investors. 

• Allow shareowners to call special meetings. Shareowners should be allowed to 

call a special meeting. Shareowners who own 5 percent or more of the stock of 

a company should be permitted, as they are in other countries, to call for a special meeting of all shareowners. They also should be given the right to call for 

a vote on reincorporation when management and corporate boards unduly use 

State laws detrimental to shareowner interests to entrench themselves further. 

III. Improve financial transparency. Key reforms needed to protect the interests of 

shareowners include the following: 

• Crackdown on corporate disclosure abuses that are used to manipulate stock 

prices. Shareowners in securities fraud cases have always had the burden of 

proving that defendants’ fraud caused the shareowners’ losses. When corporate 

wrongdoers lie to shareowners and inflate the value of publicly traded stock 

through fraudulent and misleading accounting statements and other chicanery, 

those culpable parties should be held responsible for the damage wrought on 

the investing public that is caused by their fraud. Defendants should not be allowed to escape accountability to their shareowners for fraudulent conduct simply by cleverly timing the release of information affecting a company’s stock 

price. 

• Improve corporate disclosures so that shareowners can better understand longterm risks. To rebuild shareowner confidence regulators should emphasize 

transparency by creating more mechanisms for comprehensive corporate disclosure. The SEC should devote particular attention to the adequacy of disclosures 

concerning such key factors as credit risk, financial opacity, energy and climate 

risk and those reflecting the financial challenges to the economy as identified 

by the transition team and the new Administration. The SEC should develop 

internal expertise on issues such as environmental, social, and governance factors that pose material financial risks to corporations and shareowners, and 

also to require disclosure of these types of risks. 

• Protect U.S. shareowners by promoting new international accounting standards. 

Our current financial crisis extends far beyond the borders of the U.S. and has 

affected financial markets and investors across the globe. Part of the problem 

has been a race to the bottom in favor of a more flexible international accounting standard that would decrease disclosure protection for the average investor. 

The current crisis makes a compelling case for why we need to slow down the 

movement toward the use of international accounting standards that could provide another back door route to financial deregulation and further erode confidence in corporate book keeping. A slower time frame is necessary to protect 

shareowners and allow the Administration to reach out to other governments 

that share a commitment to high accounting and transparency standards. 

IV. Protect the legal rights of defrauded shareowners. Key reforms needed to protect 

the rights of shareowners include the following: 

• Preserve the right of investors to go to court to seek justice. Corporate and financial wrongdoers in recent years have effectively denied compensation to victims of fraud by requiring customers to sign away their rights to access Federal 

courts as individuals and participate with other victims in class actions when 

their individual claims are small. Absent the ability to proceed collectively, individuals have no means of redress because—as the wrongdoers know—it is frequently economically impossible for victims to pursue claims on an individual 

basis. The ability of shareowners to take civil actions against market wrong-
229 

doers provides an effective adjunct to securities law enforcement and serves as 

a strong deterrent to fraud and abuse. Shareowners should have the right to 

access Federal courts individually or as a member of a class action. 

• Ensure that those who play a role in committing frauds bear their share of the 

cost for cleaning up the mess. What is known as private ‘‘aiding and abetting’’ 

liability is well established in criminal law, and private liability for engaging 

in an unlawful and fraudulent scheme is widely recognized in civil law. In cases 

of civil securities fraud, however, judicial decisions effectively have eliminated 

private liability of so-called ‘‘secondary actors’’—even when they knowingly participated in fraud schemes. Eliminating the private liability of such ‘‘secondary 

actors’’ as corporate accountants, lawyers and financial advisors has proven disastrous for shareowners and the economy. Most recently, in the subprime mortgage-backed securities debacle, bond rating agencies—who were paid by the 

very investment bankers who created the securities they were asked to rate— 

knowingly gave triple-A ratings to junk subprime debt instruments in order to 

generate more business from the junk marketers. The immunity from private 

liability that these culpable third parties currently enjoy should be eliminated. 

• Allow State courts to help protect investor rights. The previous decade saw the 

greatest shift in governmental authority away from the States and to the Federal Government in our history. The effect of this shift was to deny individuals 

their legal rights under State laws and to protect corporate defendants. Corporate interests and an Administration devoted to the ideology of deregulation 

used the ‘‘doctrine of preemption’’ (that Federal law supersedes State law) to 

bar action at the State level that could have stopped many of the abuses in 

subprime mortgage lending that are now at the heart of our economic crisis. Indeed, State attorneys general were blocked from prosecuting subprime lenders 

who violated State laws. The integrity of State law should be restored and both 

State officials and shareowners should be allowed to pursue remedies available 

under State law. Federal policy should make clear that State law exists coextensively with Federal regulations, except where State law directly contradicts Federal law. 

In conclusion, I would like to thank the Chairman for the opportunity to testify 

today. Rebuilding investor confidence in the market depends upon thoughtful policy 

making that expands investor rights and authorizes the SEC to strengthen its advocacy role on behalf of all Americans’ financial security. I would be pleased to answer 

any questions. 
230 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM MEREDITH B. CROSS 

Q.1. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 

A.1. As you noted, this topic has been widely discussed, and a number of issues have been raised. One issue relates to what precisely 

the shareholders would vote on if given a vote. Shareholders could 

cast a nonbinding vote on the compensation of executives, as disclosed pursuant to the Commission’s compensation disclosure rules. 

This is what Section 111(e) of the Emergency Economic Stabilization Act of 2008 requires for TARP recipients. Alternatively, shareholders could be asked to cast a nonbinding vote on the company’s 

compensation philosophy, policies and procedures, as described in 

the Compensation Discussion and Analysis. As you note, another 

issue to consider would be the frequency of any such vote, which 

some have suggested either be annually or once every 2–3 years. 

While these are just a few of the many issues that would need to 

be considered with regard to shareholder advisory votes on pay, the 

Commission has not expressed a view about this topic. 

As you may know, the Commission recently proposed rules to implement the ‘‘say-on-pay’’ requirement in Section 111(e) of the 

Emergency Economic Stabilization Act of 2008. The proposed rule 

would require TARP recipients to provide a separate shareholder 

vote to approve the compensation of the company’s executives in 

proxies solicited during the period in which any obligation arising 

from Federal assistance provided under the TARP remains outstanding. In the proposing release, the Commission requested comment about whether the proposed rule should include more specific 

requirements regarding the manner in which TARP recipients 

should present the shareholder vote on executive compensation. 

Any information received in response to that request for comment 

will be instructive for the proposed rule for TARP companies. 

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

management? 

A.2. The recent market crisis has led many to raise serious questions and concerns about the accountability and responsiveness of 

companies and boards of directors, including questions about 

whether boards are exercising appropriate oversight of management. State corporate law and stock exchange listing standards 

play an important role in addressing this question. As for the Commission, in recent months, it has worked diligently to address those 

questions and concerns. As Chairman Schapiro has said, one of the 

most effective means of providing accountability is to give shareholders a meaningful opportunity to exercise the rights they have 

under State law to nominate directors. The Commission’s proposed 

rules to facilitate the ability of shareholders to exercise their rights 

to nominate directors would provide shareholders a greater opportunity to hold directors accountable. The possibility that shareholders may take advantage of the rules, if adopted, may encourage 

directors to take a more active role in the oversight of management. 
231 

The Chairman also has stated that shareholders should also be 

informed about how compensation structures and practices drive 

an executive’s risk-taking. In an effort to improve the information 

provided to shareholders on this topic, the Commission recently 

proposed rules to require greater disclosure about how a company 

and its board manage risks, particularly in the context of setting 

and overseeing compensation. Requiring companies to provide enhanced disclosure in proxy statements about the relationship of a 

company’s overall compensation policies to risk would enable shareholders to make more informed investment and voting decisions. 

Q.3. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

A.3. The Chairman believes that directors must be sufficiently 

independent of management so that they will ask the difficult questions; directors also must be skilled enough to know what questions 

need to be asked. A qualified and independent board is the best 

means of ensuring that management is fully engaged. While the 

Commission generally does not prescribe these governance rules, 

the Commission’s disclosure rules are designed to provide investors—who elect directors—with information about director independence and qualifications. 

Q.4. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

A.4. I can assure you that the Commission understands the concerns raised, in light of the recent turmoil in our markets, about 

board and management oversight of companies; however, determinations regarding the appropriate size and scope of companies is 

probably best left to markets and shareholders. While we will continue to consider ways that we can enhance our disclosure rules to 

provide meaningful additional information to investors, we know 

that Congress is also taking steps to address corporate governance 

reforms. We look forward to working with you as you move forward, and lending our expertise where appropriate. 

Q.5. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 

A.5. The Commission recently proposed changes to the proxy rules 

to facilitate shareholder director nominations, which is often referred to as ‘‘proxy access.’’ Proposed Rule 14a-11 under the Exchange Act would require, under certain circumstances, a company 

to include shareholder nominees for director in the company’s 

proxy materials. Under the proposed rule, a nominating shareholder or group would be eligible to have a nominee included in a 

company’s proxy materials if the nominating shareholder or group 

beneficially owns, as of the date of the shareholder notice regarding 

the nomination, a certain percentage of the company’s securities 

entitled to be voted on the election of directors, which range from 

1 percent to 5 percent depending on the size of the company. The 

proposal would require a nominating shareholder to have held the 

securities for at least 1 year. The staff will consider carefully the 

comments submitted regarding ownership thresholds and other re-
232 

quirements when making a recommendation to the Commission as 

to the appropriate threshold for any final rule adopted. 

Q.6. What are issues that shareholders should have an opt out or 

opt in vote on? 

A.6. The idea of an opt in or opt out vote has been discussed regarding a number of governance proposals. With respect to our 

pending proposal to facilitate shareholder director nominations, the 

Commission requested comment about whether or not shareholders 

should be able to vote to opt out of the proposed mechanism for 

shareholder director nominations, or vote to choose a different 

mechanism to nominate directors. We are currently considering the 

responses to our request for comment on this issue, which reflect 

a wide range of views. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM JOHN C. COATES IV 

Q.1. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 

A.1. I would suggest following the U.K. model, as in S. 1074: The 

shareholder advisory vote would be on the disclosure of compensation to top executives as disclosed in the annual proxy statement, 

as required by current SEC rules on compensation disclosure and 

analysis, which calls for a specific report on executive compensation. 

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

management? 

A.2. Making boards effective checks on management is one of the 

central goals of corporate governance—and as I emphasized in my 

testimony, much uncertainty persists about how to best achieve 

that goal, even among academic specialists who generally agree on 

both that goal and how to study progress toward that goal. In general, making sure that shareholders have sufficient information 

and tools to nominate and elect effective board members is a key 

first step. A second is to make sure that boards themselves have 

effective access to information (see answer to Question 3 below). A 

third is to make sure that boards themselves have the incentives 

and resources to take action when needed. Each of the steps I 

favor—‘‘say-on-pay’’; making a split chairman/CEO split a default 

rule for large operating companies, subject to opt out by shareholders; and shareholder access of the kind proposed by the SEC 

(subject to modifications that were suggested by a number of professors at the Harvard Law and Business Schools, including myself, 

available here: http://blogs.law.harvard.edu/corpgov/files/2009/ 

08/hbslhls-letter-to-secl0946.pdf—would be helpful steps, as they 

would represent what are likely to be modest improvements that 

do not impose irrevocable mandatory rules or high costs on most 

companies. Still, it should be recognized that ideal corporate governance is not likely to ever be fully achieved, but is something 

that must be continually pursued. 
233 

Q.3. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

A.3. As firms grow in size in complexity, it may not be a practical 

goal to expect boards or even top management to always know everything is going on inside the firms they run, any more than it 

is practical for officials in the U.S. Government to know everything 

that is going on inside the organization they oversee. What is important is enable shareholders most effectively to choose and over 

time modify a system of governance that provides both them and 

boards with ready access to information about their companies, and 

with the right incentives and tools to focus on the most important 

activities their companies undertake, and the most important risks 

their companies face. What has been disheartening about the recent crisis is that well-regarded boards at prominent financial companies did not seem to be aware of some of the largest risks that 

their companies faced. This may suggest that there may be natural 

limits to the size and complexity of an organization that can be 

safely managed by fallible humans. But if that is true, it would be 

better, in my view, to let investors provide the feedback to boards 

about that fact, as they raise the cost of capital for increased 

growth, or use their rights as investors to control their companies, 

than for such limits to be pursued directly as a matter of public 

policy, as some have suggested (other than pursuant to existing 

antitrust policy, which limits the concentration of any given industry, and thus the size of firms operating in those industries). 

Q.4. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

A.4. See answer to Question 3. 

Q.5. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 

A.5. See http://blogs.law.harvard.edu/corpgov/files/2009/08/ 

hbslhls-letter-to-secl0946.pdf, where others and I suggest a limit 

of 5–10 percent. However, as noted in my testimony, I do not believe that this kind of detail in implementing proxy access is something that should be done in legislation—but rather, through SEC 

rule-making. The most important thing the Congress can and 

should do on proxy access is to affirm in clear terms that the SEC 

has the authority to adopt rules in this area, and perhaps to mandate that the SEC revisit its rules after some period of time, and/ 

or report on the effects of proxy access, perhaps with a statutory 

opt out right for shareholders that do not want their companies to 

be subject to such rules. 

Q.6. What are issues that shareholders should have an opt out or 

opt in vote on? 

A.6. Nearly all rules of internal governance at public companies 

should be subject to an opt out or an opt in by shareholders. The 

only exceptions would be (a) where there is some nonshareholder 

constituency that might be directly affected by the decision to opt 

out, (b) where the rules concern disclosure—which is the predicate 

for investors to exercise their powers (including the power to opt 

out of default governance provisions), or (c) where the rule is de-
234 

signed to protect minority shareholders from majority or control 

shareholders, as opposed to insure that managers serve the interests of all shareholders. In general, I favor opt outs where the evidence suggests that the rule in question is beneficial for most companies, as with ‘‘say-on-pay’’ advisory shareholder votes, or where 

the difficulty (legal and/or financial) of opt ins is sufficiently high 

that shareholders have a difficult time acting collectively to change 

the governance rules at their companies, as with proxy access 

(where a combination of costs and legal obstacles—such as past decisions of the SEC itself—have long stymied efforts by shareholders 

to implement their own rules requiring proxy access). I favor opt 

ins where the rule is either best for a minority of companies, or 

where evidence does not support any particular rule as the best for 

most companies, as long as the ability of shareholders to pursue 

their own governance systems have not been effectively blocked by 

costs or legal impediments. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM JOHN C. COATES IV 

Q.1. Professor, in your testimony you support the idea of a Government-mandated shareholder vote on compensation or a ‘‘say-onpay.’’ You sight the ‘‘improved link between executive pay and corporate performance in the U.K.’’ after its adoption there even 

though only five companies in England have lost shareholder votes 

on executive pay this year. Does it occur to you that this ‘‘say-onpay’’ model no longer works? The vast majority of shares in the 

U.S. aren’t held by an average investor sitting at home. If it is true 

that shares are primarily held by mutual funds and the ownership 

of the stock is a derivative instrument. How does a Governmentmandated ‘‘say-on-pay’’ vote get the participation that the 23 companies in the U.S., who have already offered ‘‘say-on-pay’’ votes on 

their own, not get? 

A.1. The fact that few U.K. firms have lost ‘‘say-on-pay’’ votes is 

not a sign of ‘‘say-on-pay’s’’ ineffectiveness. It only takes a few 

high-profile losses for incumbent managers to get the message. 

That is what the evidence suggests has happened in the U.K. As 

I noted in my testimony, the best evidence suggests that ‘‘say-onpay’’ tightened the link between pay design and performance, and 

that many firms improved their pay practices both before and after 

‘‘say-on-pay’’ votes, including votes that were technically ‘‘won’’ because they received bare majorities in favor. 

You are right that most stock is now held by institutions, and 

only indirectly by individuals. Institutions such as mutual funds, 

however, owe a responsibility to their investors to use their voting 

power responsibly, and generally do so, in my view. In effect, institutional investors are representative bodies, as is the Senate. If institutional investors use their ‘‘say-on-pay’’ vote powers irresponsibly, they will be disciplined by market forces in many instances, 

and where markets do not effectively control institutional investors, there may need to be regulation or reform of those institutions 

through the political process—as may be the case, for example, 

with public pension funds. But potential problems with institutional shareholders have nothing to do with ‘‘say-on-pay’’—if there 
235 

are problems with institutions, they also extend to ordinary voting 

rights that they already possess, to vote for and against mergers, 

for example. 

Finally, you ask why not continue to shareholders of companies 

effectively opt in to ‘‘say-on-pay,’’ as a small number of companies 

have done, rather than mandate ‘‘say-on-pay’’ for all companies? To 

be clear, I believe that any ‘‘say-on-pay’’ rule should permit shareholders to opt out of the rule, and I would expect shareholders at 

some companies to do so. The rule is thus not a ‘‘mandate’’ in the 

sense of uniformly mandatory. Thus, the difference between the 

status quo and the rule I would support boils down to whether one 

thinks that most (not all) companies would be better off with ‘‘sayon-pay.’’ As my testimony suggests, the best evidence is that ‘‘sayon-pay’’ advisory votes—which, after all, are only advisory, and 

have no binding effect on companies—improve pay practices generally, and thus would be good for most public companies. What 

the adoption of ‘‘say-on-pay’’ would achieve is to speed up the process of reform, and to eliminate the costs associated with shareholder efforts to adopt the rules that a small but growing number 

of companies have already adopted. Those costs are substantial— 

to wage a proxy contest to pressure managers to adopt ‘‘say-on-pay’’ 

rules requires expensive lawyers and regulatory filings, all paid for 

by shareholders, while incumbent managers use company (i.e., 

shareholder) funds to oppose those efforts, even (at times) when 

managers know or expect most shareholders support the rules. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM ANN YERGER 

Q.1. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 

A.1. There is broad agreement among Council members on the inherent value of an advisory shareowner vote on executive compensation as a feedback mechanism and dialogue tool, but opinions 

differ on the frequency and type of votes. Many investors, such as 

the AFSCME Employees Pension Plan, favor one vote every year 

on the pay of the ‘‘named executive officers (NEOs) set forth in the 

proxy statement’s Summary Compensation Table (the ‘‘SCT’’) and 

the accompanying narrative disclosure of material factors provided 

to understand the SCT (but not the Compensation Discussion and 

Analysis).’’ 

Annual, advisory shareowner votes on executive compensation 

are required in Australia, Sweden, and the United Kingdom. In 

fact, U.K. regulations requiring such votes went into effect in 2002, 

and are held on ‘‘remuneration reports’’ covering both the quantitative and qualitative aspects of executive compensation, including the nature of and rationale for performance conditions tied to 

incentive payouts. ‘‘Say-on-pay’’ votes in the U.K. have resulted in 

‘‘better disclosure, better and more dialogue between shareholders 

and companies, and more thought put into remuneration policy by 

directors,’’ according to David Paterson, research director of U.K.- 

based Research, Recommendations and Electronic Voting, a proxy 
236 

advisory service. British drugmaker GlaxoSmithKline (GSK) is a 

case in point. In 2003, 51 percent of GSK shareowners protested 

the CEO’s golden parachute package by either voting against or abstaining from voting on the company’s remuneration report. 

Stunned, the GSK board held talks with shareowners and the next 

year reduced the length of executive contracts and set new performance targets, muting investor criticism. Other U.K. companies 

got the message and now routinely seek investor input on compensation policies. 

The annual-vote aspect of the AFSCME resolution and the U.K. 

vote aligns with the Council’s own policy on the subject, which 

reads, ‘‘All companies should provide annually for advisory 

shareowner votes on the compensation of senior executives.’’ As 

mentioned in the background material to the Council’s policy, an 

annual vote would allow shareowners to provide regular, timely 

feedback on the board’s recent executive pay decisions. And annual 

votes would allow companies and their shareowners to gauge the 

trend in support for pay decisions. So we do specify that the ‘‘sayon-pay’’ vote should be annual and should be on senior executive 

compensation. But our policy gives boards the flexibility to determine exactly what disclosures should be covered by the vote (i.e., 

the Summary Compensation Table by itself vs. the SCT plus accompanying qualitative disclosures in the CD&A). 

This was discussed in the background statement to our ‘‘say-onpay’’ policy: ‘‘While the push by investors for shareowner votes on 

pay has made significant headway in a short time, thoughts are 

still evolving on how best to implement the reform. Therefore, the 

Council’s draft updated policy endorses the concept of advisory 

shareowner votes on executive compensation, but stops short of dictating the precise contents of such a vote.’’ 

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

management? 

A.2. As noted by renowned corporate governance expert Nell 

Minow, ‘‘Boards of directors are like subatomic particles. They behave differently when they are observed.’’ The Council of Institutional Investors believes boards would be a more effective check on 

management if an overwhelming number of directors are independent of management and if shareowners could hold directors accountable for their performance. As a result, the Council strongly 

supports mechanisms—including majority voting for directors, advisory votes on executive compensation and access to the proxy— 

that empower shareowners to truly exercise their rights to elect 

and remove directors. 

We believe federalization of these standards is appropriate and 

indeed essential to the investing public. While the Council appreciates that 50 governors, and likely many other self-interested parties, oppose federalization of these basic rights, the Council believes 

their opposition would be overwhelmed by the support of the millions of U.S. citizens and investors who have suffered profound 

losses from the many market disruptions that have occurred in recent years, including the dot-com bubble, the corporate scandals of 

the early part of this decade, and most recently, the financial crisis. 
237 

Q.3. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

A.3. Robust, timely public disclosures are essential for providing 

outside parties insights into the performance of boards and management of large and small companies. 

Since audited financial statements are a primary sources of information available to guide and monitor investment decisions, tough 

audit standards and strong accounting standards are critical to ensuring that financial-related disclosures are of the highest quality. 

Auditors, financial analysts, credit-rating agencies and other financial ‘‘gatekeepers’’ play a vital role in ensuring the integrity and 

stability of the capital markets. They provide investors with timely, 

critical information they need, but often cannot verify, to make informed investment decisions. With vast access to management and 

material nonpublic information, financial gatekeepers have an inordinate impact on public confidence in the markets. They also exert 

great influence over the ability of corporations to raise capital and 

the investment options of many institutional investors. Given their 

power, the Council of Institutional Investors believes financial 

gatekeepers should be transparent in their methodology and avoid 

or tightly manage conflicts of interest. Robust oversight and genuine accountability to investors are also imperative. Regulators 

should remain vigilant and work to close gaps in oversight. Continued reforms are needed to ensure that the pillars of transparency, 

independence, oversight and accountability are solidly in place. 

Q.4. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

A.4. The Council of Institutional Investors has no formal position 

on this issue. Regarding entities that may pose a systemic risk to 

the financial system at large or the economy at large, an independent task force, the Investors’ Working Group (IWG), cosponsored by the CFA Institute Centre for Financial Integrity and the 

Council of Institutional Investors, recommended that policy makers 

consider the following: 

• Designating a systemic risk regulator, with appropriate scope 

and powers. 

• Adopting new regulations for financial services that will prevent the sector from becoming dominated by a few giant and 

unwieldy institutions. New rules are needed to address and 

balance concerns about concentration and competitiveness. 

• Strengthening capital adequacy standards for all financial institutions. Too many financial institutions have weak capital 

underpinnings and excessive leverage. 

• Imposing careful constraints on proprietary trading at depository institutions and their holding companies. Proprietary 

trading creates potentially hazardous exposures and conflicts 

of interest, especially at institutions that operate with explicit 

or implicit Government guarantees. Ultimately, banks should 

focus on their primary purposes, taking deposits and making 

loans. 
238 

• Consolidating Federal bank regulators and market regulators. 

Regulation of banks and other depository institutions may be 

streamlined through the appropriate consolidation of prudential regulators. Similarly, efficiencies may be obtained through 

the merger of the SEC and the Commodity Futures Trading 

Commission (CFTC). 

• Studying a Federal role in the oversight of insurance companies. 

IWG members strongly believed that all firms should be able to 

fail. As a result, it recommended that ‘‘Congress should give regulators resolution authority, analogous to the Federal Deposit Insurance Corporation’s authority for failed banks, to wind down or restructure troubled, systemically significant nonbanks.’’ 

Q.5. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 

A.5. The Council endorses the following policy regarding 

shareowner access to the proxy: 

Companies should provide access to management proxy materials 

for a long-term investor or group of long-term investors owning in 

aggregate at least 3 percent of a company’s voting stock, to nominate less than a majority of the directors. Eligible investors must 

have owned the stock for at least 2 years. Company proxy materials and related mailings should provide equal space and equal 

treatment of nominations by qualifying investors. 

To allow for informed voting decisions, it is essential that investors have full and accurate information about access mechanism 

users and their director nominees. Therefore, shareowners nominating director candidates under an access mechanism should adhere to the same SEC rules governing disclosure requirements and 

prohibitions on false and misleading statements that currently 

apply to proxy contests for board seats. 

Q.6. What are issues that shareholders should have an opt out or 

opt in vote on? 

A.6. The Council has no position on opt in/opt out votes for 

shareowners. Council policies state that ‘‘shareowners should have 

meaningful ability to participate in the major fundamental decisions that affect corporate viability, and meaningful opportunities 

to suggest or nominate director candidates and to suggest processes 

and criteria for director selection and evaluation.’’ 

In addition, the Council believes a majority vote of common 

shares outstanding should be sufficient to amend company bylaws 

or take other action that requires or receives a shareowner vote. 

Supermajority votes should not be required. A majority vote of common shares outstanding should be required to approve: 

• Major corporate decisions concerning the sale or pledge of corporate assets that would have a material effect on shareowner 

value. Such a transaction will automatically be deemed to have 

a material effect if the value of the assets exceeds 10 percent 

of the assets of the company and its subsidiaries on a consolidated basis; 
239 

• The corporation’s acquisition of 5 percent or more of its common shares at above-market prices other than by tender offer 

to all shareowners; 

• Poison pills; 

• Abridging or limiting the rights of common shares to: (1) vote 

on the election or removal of directors or the timing or length 

of their term of office or (2) nominate directors or propose other 

action to be voted on by shareowners or (3) call special meetings of shareowners or take action by written consent or 

change the procedure for fixing the record date for such action; 

and 

• Issuing debt to a degree that would excessively leverage the 

company and imperil its long-term viability. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM ANN YERGER 

Q.1. One of the proposals you support, which is supported by the 

Administration, is to allow advisory shareowner votes on executive 

pay. How would a Government-mandated ‘‘say-on-pay’’ vote have 

prevented the current financial turmoil? How would a government 

mandated ‘‘say-on-pay’’ vote prevent future financial turmoil when, 

according to the American Federation of State, County, and Municipal Employees, 23 companies have allowed ‘‘say-on-pay’’ provisions 

to proceed to a vote and shareholders have yet to vote down a single executive pay plan in the U.S.? 

A.1. The Council believes annual advisory shareowner votes on executive compensation would efficiently and effectively provide 

boards with useful information about whether investors view the 

company’s compensation practices to be in shareowners’ best interests. Nonbinding shareowner votes on pay would serve as a direct 

referendum on the decisions of the compensation committee and 

would offer a more targeted way to signal shareowner discontent 

than withholding votes from committee members. 

While advisory votes might not have prevented the current financial crisis nor might they prevent future financial turmoil, they 

might induce compensation committees to be more careful about 

doling out rich rewards, to avoid the embarrassment of shareowner 

rejection at the ballot box. In addition, compensation committees 

looking to actively rein in executive compensation could use the results of advisory shareowner votes to stand up to excessively demanding officers or compensation consultants. 

Historically, early ‘‘volunteers’’ for corporate governance reforms 

tend to be companies with the best practices and hence, nothing to 

fear from the reforms. As a result, I am not surprised that 

shareowners supported the compensation proposals of the 23 companies identified by AFSCME. Of the thousands of other public 

companies, I expect some would find that their owners do not support their compensation programs, and that this vote will provide 

meaningful information to board and compensation committees. 

In addition to the 23 companies identified by AFSCME, hundreds 

of financial firms receiving aid under the U.S. Troubled Assets Relief Program (TARP) were required to put their executive pay pack-
240 

ages to an advisory shareowner vote. And while some received 

large ‘‘no’’ votes, ‘‘on average 88.6 percent of votes cast at 237 firms 

that have disclosed results were in favor of management, according 

to an analysis by David G. Wilson, a securities lawyer at Waller 

Lansden Dortch & Davis who focuses on corporate governance matters,’’ according to a September 26, 2009, article in The Washington 

Post. While some might attribute the high support votes to a failure of the advisory vote concept, others might attribute the support 

levels to the pay restrictions imposed on these firms by the U.S. 

Department of Treasury and the 2009 Economic Stimulus Act. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM JOHN J. CASTELLANI 

Q.1. Professor Coates raised an interesting idea in his written testimony. Rather than forcing a structure on all companies, he suggests an opt out vote by shareholders every few years for some governance proposals. That idea could be applied to proxy access and 

advisory vote procedures as well instead of the Government deciding what the rules will be. I want to know what you think of that 

approach, of a mandatory opt in or opt out vote every few years to 

decide certain matters. Please also comment on whether such a 

vote should be an opt in or opt out vote. 

A.1. Business Roundtable believes that shareholders and companies should have the ability to make choices about the governance 

practices that are most appropriate for their circumstances. However, we do not believe that an ‘‘opt in’’ or ‘‘opt out’’ vote on different governance practices is necessary. Shareholders already 

have the ability to communicate their views on whether to adopt 

particular practices. They can do this through the shareholder proposal process as well as procedures that companies have implemented for shareholders to communicate with the board as a whole 

and with particular directors. For example, shareholders who believe an advisory vote is necessary at their company can submit 

shareholder proposals requesting such a vote. If other shareholders 

agree, they can vote in favor of these proposals, and several companies have implemented advisory votes after proposals on this subject received significant shareholder support. Other companies have 

taken different approaches to obtaining shareholder views on executive compensation, such as holding meetings with their large 

shareholders or obtaining shareholder feedback through procedures 

that allow shareholders to communicate with the board. 

If Congress considers an ‘‘opt in’’ or ‘‘opt out’’ vote, we believe 

that an ‘‘opt in’’ vote would be preferable. An ‘‘opt in’’ vote would 

require shareholders to take the affirmative step of voting ‘‘for’’ a 

specific governance practice before a company adopts it, which in 

turn, would provide a more accurate indication that a critical mass 

of shareholders favors the practice. 

Q.2. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 
241 

A.2. If Congress requires an advisory vote on executive compensation, Business Roundtable believes that it should give companies 

flexibility to structure the vote based on their individual compensation programs and packages. There are a number of approaches 

companies could use, and that companies have taken to date, to 

seek input on executive compensation through an advisory vote. 

For example, companies could ask shareholders to vote on: (a) the 

executive compensation tables in the annual proxy statement; (b) 

the company’s compensation philosophy and procedures as described in the Compensation Discussion and Analysis section of the 

proxy statement; and/or (c) particular aspects of a company’s compensation program, such as post-retirement benefits or long-term 

incentive plans. In addition, there are different approaches companies could take with respect to the frequency of advisory votes. Although many have suggested an annual vote, other practices are 

likely to emerge. For example, the United Brotherhood of Carpenters Pension Fund has proposed that companies hold advisory 

votes once every 3 years. Accordingly, Business Roundtable does 

not believe that a ‘‘one-size-fits-all’’ Federal legislative approach to 

advisory votes on executive compensation is appropriate. 

As an alternative to allowing companies and shareholders to determine the specifics of advisory votes, Business Roundtable believes that Congress should give the Securities and Exchange Commission (SEC) authority to adopt rules addressing matters such as 

the frequency of the vote requirement, its applicability to particular 

businesses or types of businesses, and the matter(s) to be voted on. 

This administrative flexibility would allow the SEC to tailor the 

application of voting requirements based on a range of factors and 

to make changes over time. For example, the SEC proposed rules 

in July 2009 to help implement the advisory vote requirement in 

the Emergency Economic Stabilization Act of 2008 applicable to 

companies receiving funds under the Troubled Asset Relief Program. As the SEC noted in proposing these rules, their purpose is 

to provide clarity about how to comply with the advisory vote requirement while at the same time affording companies adequate 

flexibility in making relevant disclosures about the vote. 

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

management? 

A.3. Business Roundtable believes that an engaged and diligent 

board of directors is the most effective mechanism for overseeing 

management. One of the guiding principles in our Principles of 

Corporate Governance (2005) states that ‘‘the paramount duty of 

the board of directors is to select a chief executive officer and to 

oversee the CEO and senior management in the competent and 

ethical operation of the corporation on a day-to-day basis.’’ 

We believe that the best way to provide for effective board oversight is to continue to foster the long tradition of addressing corporate governance matters at the State level through private ordering by shareholders, boards and companies acting within the 

framework established by State corporate law. In this regard, the 

corporate governance landscape has undergone a sea change over 

the past 6 years. Many of the corporate governance practices implemented during this time—such as greater independent board lead-
242 

ership and majority voting in director elections—have occurred as 

a result of voluntary reforms adopted by companies and their 

shareholders under the auspices of enabling State corporate law 

provisions, rather than through legislative or regulatory fiat. Moreover, under State corporate law, directors have fiduciary duties requiring them to act in good faith, in the corporation’s best interests, and to exercise appropriate diligence in overseeing the management of the corporation, making decisions and taking other actions. In this regard, there are consequences under State corporate 

law, as well as the Federal securities laws, for directors who fail 

to perform their responsibilities. 

Q.4. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

A.4. Business Roundtable believes that the most effective way for 

a company’s board and management to remain informed is for the 

company to have effective processes for communicating complete, 

accurate, and timely information to the attention of the board and 

management. Information flow between the board and senior management is critical, and well-functioning boards foster an environment that promotes candor and encourages management to bring 

potential issues to the board early so that there are ‘‘no surprises.’’ 

Moreover, as we recommend in our Principles of Corporate Governance (2005), a company’s nominating/governance committee should 

assess the reporting channels through which the board receives information and see that the board obtains appropriately detailed information in a timely fashion. In situations where specialized expertise would be useful, the board and its committees should seek 

advice from outside advisors who are independent of the company’s 

management. In addition, it is senior management’s responsibility—under the direction of the CEO and CFO—to establish, 

maintain and periodically evaluate the corporation’s: (a) internal 

controls (controls designed to provide reasonable assurance about 

the reliability of the company’s financial information) and (b) disclosure controls (controls designed to see that a company records, 

processes and reports information required in SEC filings in a 

timely manner). In accordance with applicable law and regulations, 

the CEO and CFO also are responsible for certifying the accuracy 

and completeness of the financial statements and the effectiveness 

of the company’s internal controls and disclosure controls. 

Q.5. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

A.5. Business Roundtable does not believe that this is a better approach, nor is it consistent with the traditional U.S. approach to 

encouraging a vibrant private sector. Well-structured and well-governed companies have the ability to deal with the size and scope 

of their businesses because they have solid information flow between the board and management and they maintain effective internal controls. 

Q.6. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 
243 

A.6. Business Roundtable believes that a Federal proxy access 

right is unnecessary and would have serious adverse consequences, 

including promoting an unhealthy emphasis on short-termism at 

the expense of long-term value creation, facilitating the election of 

‘‘special interest’’ directors, increasing the frequency of contested 

elections and discouraging qualified directors from serving on corporate boards. Therefore, we do not support a Federal proxy access 

right. If Congress moves forward in this area, Business Roundtable 

believes that proxy access should be available only to holders of a 

significant, long-term interest in a company. Accordingly, we believe that the stock ownership threshold for individual shareholders seeking to place nominees on company proxy statements 

should be 5 percent of a company’s outstanding voting stock and 

that the threshold for shareholders aggregating their shares should 

be 10 percent. In either case, a ‘‘net long’’ ownership position—that 

is, full voting and investment power with respect to the shares in 

question—should be required. 

In addition, we believe that proxy access should be available only 

to shareholders who have demonstrated a commitment to a company and its business. Accordingly, we believe that shareholders 

should have to satisfy the relevant stock ownership threshold for 

a period of at least 2 years before they can nominate a director for 

inclusion in the company’s proxy statement. Any shorter holding 

period would allow shareholders with a short-term focus to nominate directors who, if elected, would be responsible for the creation 

of long-term shareholder value. In addition, we believe that shareholders should have to continue to satisfy the relevant ownership 

threshold not just through the annual meeting at which their nominees are elected, but for the duration of the nominees’ service on 

the board or at least through the term for which they nominated 

the director. 

Q.7. What are issues that shareholders should have an opt out or 

opt in vote on? 

A.7. As discussed above in the answer to Question 1, we do not believe that an ‘‘opt in’’ or ‘‘opt out’’ vote on different governance practices is necessary because shareholders already have the ability to 

communicate their views on whether to adopt particular practices. 

As an alternative to this approach, Business Roundtable supports 

enhanced disclosure about companies’ corporate governance practices. For example, the SEC recently proposed rules that would require annual proxy disclosure about a company’s leadership structure and why the company believes it is the best structure for the 

company, including discussion about whether the company combines or separates the roles of chairman of the board and CEO and 

whether the company has a lead independent director. Similarly, 

Business Roundtable would support a ‘‘comply or explain’’ approach, which some non-U.S. markets already follow, that would 

require companies to disclose whether they have adopted specific 

governance practices, and if not, why not. Either of these alternatives would allow companies and shareholders flexibility in determining the practices that are most appropriate for them, provide 

transparency to shareholders and avoid a ‘‘one-size-fits-all’’ approach. 
244 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM J.W. VERRET 

Q.1. Professor Coates raised an interesting idea in his written testimony. Rather than forcing a structure on all companies, he suggests an opt out vote by shareholders every few years for some governance proposals. That idea could be applied to proxy access and 

advisory vote procedures as well instead of the Government deciding what the rules will be. I want to know what you think of that 

approach, of a mandatory opt in or opt out vote every few years to 

decide certain matters. Please also comment on whether such a 

vote should be an opt in or opt out vote. 

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

Q.2. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 

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

Q.3. Are States responding to concerns about corporate governance 

issues with changes to their own laws? Is there really a need to 

federalize business laws? 

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

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

management? 

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

Q.5. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

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

Q.6. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

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

Q.7. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 

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

Q.8. What are issues that shareholders should have an opt out or 

opt in vote on? 

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

Q.9. Please provide any comments you may have on the proposed 

Shareholders Bill of Rights Act, S. 1074, or otherproposed legislation. 

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

RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM J.W. VERRET 

Q.1. Professor, in your testimony you suggest alternative contributing factors for the Committee to investigate to determine the 

‘‘culprit’’ of the financial crisis. The first factor you suggest to investigate is the moral hazard problems created by the prospect of 
245 

1 I acknowledge that there are some who argue that section 14(a) of the Exchange Act does 

not authorize the Commission to propose a proxy access procedure. Although I believe that the 

Commission’s authority is clear in this regard, an explicit legislative grant of authority would 

be useful in order to avoid unnecessary litigation and provide some measure of stability in this 

area. 

the Government bailout. Do you think that moral hazard problem 

is stronger cause of the than corporate pay structure? Do you think 

the distortions to the housing market cause by Fannie Mae and 

Freddie Mac played a larger role in causing the financial crisis of 

2008 than how a company pays its CEO? 

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

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM RICHARD C. FERLAUTO 

Q.1. Professor Coates raised an interesting idea in his written testimony. Rather than forcing a structure on all companies, he suggests an opt out vote by shareholders every few years for some governance proposals. That idea could be applied to proxy access and 

advisory vote procedures as well instead of the Government deciding what the rules will be. I want to know what you think of that 

approach, of a mandatory opt in or opt out vote every few years to 

decide certain matters. Please also comment on whether such a 

vote should be an opt in or opt out vote. 

A.1. The proxy access procedure that has been proposed by the 

SEC aims to remove regulatory barriers to shareholders’ exercise 

of their existing rights to nominate director candidates. It facilitates shareholders’ use of their nomination rights by recognizing 

that in the modern system of proxy voting, the proxy statement 

itself is the forum that used to occur at the shareholder meeting. 

Accordingly, the proxy access procedure is a disclosure measure, 

rather than a new substantive right. 1

For that reason, I don’t believe it would be appropriate for companies to opt in or opt out of the proxy access procedure. In the 

same way that companies are not permitted to opt out of the application of the SEC’s shareholder proposal rule or the executive compensation disclosure requirements, they should not be allowed to 

opt out of the proxy access procedure. 

Of course, a company should be able to provide its shareholders 

with a more shareholder-friendly form of access procedure than 

that established by the SEC’s proposed rule. For example, a company could provide that holders of a lower percentage of outstanding shares are entitled to invoke the proxy access procedure, 

or it could allow nominating shareholders to include longer supporting statements than the SEC’s rules contemplate. 

The shareholder advisory vote on executive compensation does 

not primarily address disclosure, and thus stands on different footing. My main concern about a regime in which ‘‘say-on-pay’’ would 

not apply to companies for some period of time is that it imposes 

significant delay on the process of obtaining shareholder voice, 

should shareholders believe that such voice is needed to safeguard 

shareholder value. 

For instance, one could imagine a regime that would provide for 

a vote of one kind or another every 3 years. At a company without 
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2See ‘‘The Debate on Shareholder Access to the Ballot, Part I’’ (transcript of symposium at 

Harvard Law School in October 2003), at 46 (available at http://www.law.harvard.edu/programs/olinlcenter/corporatelgovernance/papers/03.bebchuk.debate-1.pdf). 3See, id. at 41. 

‘‘say-on-pay’’ where performance begins to suffer shortly before the 

scheduled vote, but it does not become apparent that the pay-performance relationship has been severed until shortly after the vote, 

shareholders might have to wait almost 3 years to vote in favor of 

applying or reinstating ‘‘say-on-pay.’’ As Bob Pozen, formerly of Fidelity, stated in criticizing the triggering requirements of the SEC’s 

2003 proposed proxy access procedure, ‘‘two years is an eternity in 

this game.’’ 2

In any event, the collective action problem facing shareholders, 

which has been exhaustively analyzed in the academic literature, 

argues in favor of an opt out procedure rather than an opt in procedure. The weight given to management’s recommendations on 

proxy issues—the opt in or opt out proposal would be a management proposal, presumably—the well-documented expense and difficulty attendant to shareholder communication and the vote-boosting effect of the New York Stock Exchange’s ‘‘broker-may-vote’’ rule 

on management proposals all argue in favor of making applicability 

of a governance feature the default, and requiring management to 

convince shareholders that the company is so well-governed that 

the governance feature would not be value enhancing. 

Q.2. There has been a lot of talk about giving shareholders a vote 

on pay packages, but little discussion of the details. If we were to 

require such a vote, what specifically should be voted on, and how 

often? 

A.2. As proposed in H.R. 3269, the Corporate and Financial Institution Compensation Fairness Act of 2009, shareholders should be 

given the opportunity to vote on ‘‘the compensation of executives as 

disclosed pursuant to the Commission’s compensation disclosure 

rules for named executive officers (which disclosure shall include 

the compensation committee report, the compensation discussion 

and analysis, the compensation tables, and any related materials, 

to the extent required by such rules).’’ This vote should occur annually. 

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

management? 

A.3. Many factors have an impact on board effectiveness, including 

the skills, qualifications, and experience of directors; the independence and vitality of the board’s leadership; and the quality of the 

information and advice provided to the board. However, the single 

most important factor determining whether the board can and will 

effectively oversee management is whether board members feel 

they work for the shareholders. If shareholders do not have a 

meaningful role in nominating and electing directors, they will not 

engage in robust monitoring. As Relational Investors’ Ralph Whitworth has said, ‘‘you dance with who brought you.’’ 3 Accordingly, 

measures such as proxy access that enable shareholders to more 

fully exercise their State-law right to nominate directors would be 

very useful in improving board effectiveness. 
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Q.4. How do we make sure boards and management know what is 

going on inside the large firms they are supposedly running? 

A.4. Keeping boards and managements informed enough to do their 

jobs well requires different strategies. Members of management are 

employees of the company and devote themselves full-time to its 

management. The right reporting and information structures to ensure that senior managers are aware of what is happening will 

vary tremendously from one company to another, depending on the 

nature of the company’s business, the geographical reach of its operations and other factors. As a result, it is not possible to prescribe a single structure that works well for all companies. 

Boards of directors, by contrast, are composed primarily of people 

from outside the company and they meet to work on company business only periodically. Many board members have demanding day 

jobs; those who do not are often members of multiple boards or engage in philanthropic or other pursuits that take significant time 

and attention. Accordingly, information must be collected and synthesized before presentation to the board, in order to use directors’ 

time efficiently. 

It is important that a company’s senior management not have a 

monopoly on the flow of information to the board; if it does, the 

board functions more as a rubber stamp than as an effective monitor and resource. Independent board leadership is the best way to 

ensure that directors have access to all the information they need 

to do their jobs well. An independent board chairman sets the 

agenda and provides relevant information to directors; he or she 

will include material furnished by members of senior management 

but will also be able to provide outside perspectives. Where the 

chairman is also the CEO, by contrast, his or her perspective will 

dominate and outside information is less likely to be provided to 

board members. 

Q.5. Is a better approach to making sure boards and management 

understand what is going on inside their companies to shrink the 

size and scope of the companies? 

A.5. It is possible that a company’s operations may become too 

large, varied, and dispersed for adequate monitoring to be cost-effective. In the vast majority of cases, however, I believe that the 

mechanisms discussed in response to Questions 3 and 4 will address the problem of ensuring robust oversight. 

Q.6. For proxy access, how large of a block of shareholders should 

have to request that the item be included? 

A.6. The thresholds proposed by the SEC in its current rule making strike the right balance between ensuring that the access procedure is available only to shareholders with a substantial stake in 

the company and fulfilling the objective of removing obstacles to 

the exercise of shareholders’ State-law director nomination rights. 

Q.7. What are issues that shareholders should have an opt out or 

opt in vote on? 

A.7. I do not favor, in the first instance, an opt in or opt out regime 

for the governance reforms discussed at the hearing. As discussed 

in the answer to Question 1, an opt in or opt out process is not appropriate for disclosure measures. For other reforms, my support of 
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an opt out regime would depend on how often the vote was held 

and whether shareholders could quickly trigger an earlier vote if 

circumstances warranted.