0001
 1       UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 2   
 3   
 4   
 5   
 6   
 7               PROXY VOTING ROUNDTABLE
 8   
 9   
10   
11   
12   
13   
14             Thursday, February 19, 2015
15                     9:30 a.m.
16                 AMENDED: 3/17/2015
17                          4/08/2015
18                          5/18/2015
19   
20   
21   
22   
23        U.S. Securities and Exchange Commission 
24                 100 F Street, N.E. 
25                  Washington, D.C. 
0002
 1   PARTICIPANTS:
 2   
 3   KEITH HIGGINS, Director Division of Corporation Finance   
 4   MODERATORS:
 5   MICHELE ANDERSON, Chief Office of Mergers and
 6   Acquisitions, Division of Corporation Finance
 7   DAVID FREDRICKSON, Chief Counsel and Associate Director,
 8   Division of Corporation Finance
 9   
10   Commissioners of the Securities and Exchange Commission:
11   MARY JO WHITE, Chair
12   LUIS AGUILAR
13   DANIEL GALLAGHER
14   KARA STEIN
15   MICHAEL PIWOWAR     
16   
17   
18   
19   
20   
21   
22   
23   
24   
25   
0003
 1   PARTICIPANTS (CONT):
 2   
 3   PANEL 1 PANELISTS:
 4   Frederick H. Alexander, Counsel, Morris Nichols, Arsht &
 5   Tunnell, LLP and Advisor for Legal Policy, B-Lab
 6   Chris Cernich, Managing Director, M&A and Contested
 7   Elections, Institutional Shareholder Services
 8   Lisa M. Fairfax, Leroy Sorenson Merrifield Research
 9   Professor of Law, The George Washington University Law
10   School
11   Bruce H. Goldfarb, President and Chief Executive Office,
12   Okapi Partners
13   David A. Katz, Partner, Watchtell, Lipton, Rosen & Katz
14   LLP
15   Michelle Lowry, Ph.D., TD Bank Endowed Professor, LeBow
16   College of Business, Drexel University
17   Charles Penner, Partner, Chief Legal Officer, JANA
18   Parnters, LLC
19   Anne Simpson, Senior Portfolio Manager and Director of
20   Global Governance, CalPERS
21   Sarah B. Teslik, Senior Vice President-Communications,
22   Public Affairs and Governance, Apache Corporation
23   Steve Wolosky, Partner, Olshan Frome & Wolosky, LLP
24   
25   
0004
 1   PARTICIPANTS (CONT.):
 2   
 3   PANEL 2 PANELISTS:
 4   Donna Ackerly, Senior Managing Director, Georgeson, Inc.
 5   Reena Aggarwal, Robert E. McDonough Professor of Finance,
 6   McDonough School of Business, Georgetown University;
 7   Director, Georgetown Center for Financial Markets & Policy
 8   John Bajkowski, President, American Association of
 9   Individual Investors
10   Alan Beller, Senior Counsel, Cleary Gottlieb Steen &
11   Hamilton LLP
12   John Endean, President, American Business Conference
13   Lawrence Hamermesh, Ruby R. Vale Professor of Corporate
14   and Business Law at Widener Law Delaware's Institute of
15   Delaware Corporate and Business Law
16   Cornish F. Hitchcock, Principal, Hitchcock Law Firm PLLC
17   Niels Holch, Executive Director, Shareholder
18   Communications Coalition
19   James McRitchie, Publisher, CorpGov.net
20   Nell Minow, Co-Founder, The Corporate Library, Founder
21   and Former Board Member, GMI Ratings
22   Robert Schifellite, President, Investor Communication
23   Services, Broadridge Financial Solutions
24   Darla Stuckey, President and Chief Executive Officer,
25   Society of Corporate Secretaries & Governance Professionals
0005
 1                       C O N T E N T S 
 2   
 3   Opening Remarks                                       6
 4   
 5   Panel 1: Universal Proxy Ballots                     22
 6   
 7   Panel 2: Retail Participation in the Proxy Process   84
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 9   
10   
11   
12   
13   
14   
15   
16   
17   
18   
19   
20   
21   
22   
23   
24   
25   
0006
 1                     P R O C E E D I N G S
 2             MR. HIGGINS:  Good morning.  My name is Keith
 3   Higgins.  I'm the director of the Division of Corporation
 4   Finance here at the SEC.  Next to me is Michele Anderson,
 5   who is the chief of our Division's Office of Mergers and
 6   Acquisitions.  Later today, David Fredrickson, associate
 7   director and chief counsel in the Division of Corporation
 8   Finance will join me to co-moderate the second panel.
 9             It's our pleasure today to moderate a
10   roundtable on ways to improve the proxy voting process. 
11   Our first panel is going to focus on the state of
12   contested director elections and whether changes should
13   be made to the federal proxy rules to facilitate the use
14   of universal proxy ballots by both management and proxy
15   contestants.  Our second panel will focus on strategies
16   to increase retail shareholder participation in the proxy
17   process.
18             Before I go any further I need to, of course,
19   note that the views expressed by Michele, David and me
20   today as SEC moderators throughout the two panels are our
21   own and don't necessarily reflect the views of the
22   Commission or of any member of the staff of the
23   Commission.  In fact, as moderators today we may at times
24   ask questions and make statements that don't even reflect
25   our own views but we'll offer them up to see if we can
0007
 1   get some spirited debate among the participants, although
 2   looking at the panelists I'm not sure we'll really need
 3   that.  Anyway, we hope our questions will contribute to a
 4   meaningful and constructive discussion.
 5             We're happy today to have with us the entire
 6   Commission.  Chair Mary Jo White and Commissioners
 7   Luis Aguilar, Daniel Gallagher, Kara Stein and Michael
 8   Piwowar.
 9             Well, to begin with welcome to everybody in the
10   audience, both here in Washington as well as those who
11   are joining us via webcast and also welcome to our
12   distinguished participants.  Thank you, really, from the
13   bottom of our hearts for agreeing to join the roundtable
14   and lending us your experience and expertise to help us
15   go through these issues.
16             Proxy voting is very important both to
17   investors and to companies.  Very few shareholders ever
18   attend a shareholders meeting.  Our proxy system allows
19   investors to make their views known to the company's
20   management and to participate effectively at annual and
21   special meetings.  To enable that to occur, the proxy
22   voting process must be robust, effective and workable.
23             Today our panelists will discuss the proxy
24   voting process from the different perspectives of
25   issuers, activists, shareholders, state law experts,
0008
 1   academics, intermediaries and other interested observers
 2   who are integral to the voting process.
 3             I have little doubt that this group will take
 4   us through a lively and thought-provoking and informative
 5   discussion about the issues surrounding these very
 6   important topics in which there is a significant amount
 7   of public interest.
 8             Moreover, we hope the discussion today will be
 9   a catalyst for even more discussion and debate and we
10   urge everybody to join the debate by sending us your
11   thoughts in the form of comment letters.
12             As our press release indicated, we have both a
13   web intake form and an e-mail address.  That's Rule-
14   comments@sec.gov and we encourage everyone to use it.
15             With that I'd like to invite Chair White to
16   make some opening remarks after which each of the
17   Commissioners will get the opportunity to make a few
18   brief remarks.
19             Chair White.
20             CHAIR WHITE:  Thank you, Keith, very much and
21   good morning to everybody.
22             Let me just add my welcome to today's
23   roundtable and begin by thanking all of our panelists for
24   giving your thoughts and your time and for participating
25   today.  I look forward to hearing your views.
0009
 1             Proxy voting is obviously very important to
 2   shareholders and companies and to us at the SEC.  As you
 3   know, the Agency has over the years closely focused on a
 4   range of these issues and we must continue that focus as
 5   ideas evolve about how the proxy process should work and
 6   in light of technological advancements.
 7             This roundtable will further inform the
 8   Commission and the staff about some of the issues faced
 9   by participants in the proxy voting process and the ways
10   that the process might be improved.
11             The two issues you're tackling today have a
12   different scope and impact on the voting process but they
13   are both important.  The first, universal ballots, will
14   consider how our proxy rules should work for voting and
15   contested director elections, the second, facilitating
16   retail shareholder participation, is the broader issue
17   and one that we and market participants have struggled
18   with over the years.  Greater and more meaningful
19   participation by retail investors is of fundamental
20   importance and we're hoping that today's discussions can
21   spark ideas for not only what we can do but also ideas of
22   how market participants can identify steps that can be
23   taken on their own.
24             I want to thank Keith, Michele and David,
25   when he gets here, Fredrickson, and the entire staff who
0010
 1   have really worked very hard to plan today's program and
 2   assemble the very impressive group of speakers
 3   representing a variety of perspectives.
 4             So, again, I look forward to today's discussion
 5   and to the input from the public as well and I guess I
 6   would just emphasize, as Keith noted, we have set up a
 7   comment file on our website and I encourage the public to
 8   let us hear from you.  I think it is Rule-
 9   comments@sec.gov if I wrote that down right.
10             So thank you very much.
11             MR. HIGGINS:  Thank you, Chair White. 
12   Commissioner Aguilar.
13             COMMISSIONER AGUILAR:  Thank you, Keith, and
14   good morning to everyone.
15             Let me add my welcome to all of the roundtable
16   participants here today as well as to the audience who is
17   here with us today and all those that are listening to us
18   electronically.
19             Let me start by reiterating a theme that I've
20   articulated since I became a Commissioner seven years
21   ago.  Shareholders must be able to vote and exercise
22   their rights in a meaningful way.  It's important.  Let
23   me just repeat it.  Shareholders must be able to vote and
24   exercise their rights in a meaningful way.  This should
25   always be priority number one when we consider the proxy
0011
 1   process.
 2             I have a longer statement that I will publish
 3   on the SEC website later today but to get you started let
 4   me make a few brief statements.
 5             Today's first panel will discuss the universal
 6   proxy ballot.  The core issue to be addressed is whether
 7   shareholders should be afforded the ability to choose
 8   director candidates regardless of whether they are
 9   recommended by management or other shareholders.  This is
10   an ability they do not currently possess. 
11             Under today's proxy regime shareholders who
12   vote by proxy effectively are unable to pick and choose
13   among all eligible director candidates.  As a result, our
14   proxy rules effectively result in diminishing the
15   shareholder's rights by limiting voting choices during
16   contested elections, an unwelcome result at an important
17   time for shareholders to have their voices heard.
18             I look forward to a robust discussion of the
19   universal proxy ballot concept and a discussion of what
20   can be done to improve the ways that shareholders can
21   elect the directors that they want to run their
22   companies.
23             Today's second panel will discuss possible
24   approaches to address the drop in retail shareholder
25   participation in the proxy process.  Dismal retail
0012
 1   investor participation numbers persist despite
 2   technological advances that should have made it easier
 3   and more efficient for a widely dispersed group of
 4   shareholders to engage with other investors and their
 5   companies.  Perhaps, it's not just the use of new
 6   technology but, rather, how that technology is used that
 7   will result in greater shareholder participation.
 8             The end goal, of course, is not simply to
 9   increase retail shareholder participation in the proxy
10   process but, rather, to increase informed participation
11   in this process.
12             As today's panel has discussed various ways to
13   promote retail shareholder participation in the proxy
14   process the division should focus not only on how to get
15   a shareholder to technically cast their vote but, also,
16   on how best to protect the fundamental interest of
17   shareholders in making informed voting decisions.
18             Let me end by thanking each of you for being 
19   here today and we look forward to a robust discussion and
20   a lively discussion and I also would be remiss not to
21   thank the staff for their hard work in putting together
22   this roundtable.  It's never easy so my thanks to the
23   staff and thank you.
24             MR. HIGGINS:  Thank you, Commissioner Aguilar.
25   Commissioner Gallagher.
0013
 1             COMMISSIONER GALLAGHER:  Well, thank you,
 2   Keith.
 3             No surprise, I, too, want to thank the Division
 4   of Corporation Finance and Keith for your efforts in
 5   putting together this roundtable today and to the
 6   panelists for their time and energies in preparing for
 7   and attending today's roundtable and as you, by now, are
 8   well aware this roundtable will address two topics;
 9   universal proxies and retail shareholder participation in
10   the proxy process.  I'll start with the latter and end
11   with the former.
12             I'm particularly interested to hear if there
13   are ways in which the Commission can improve retail
14   shareholder participation in the proxy process.  Retail
15   shareholders are famously rationally ignorant.  The cost
16   to an individual shareholder in time and effort to review
17   scores of pages of proxy disclosures and form a reasoned
18   view on how to vote the proxy and then undertake the
19   mechanics of casting the ballot tends to outweigh the
20   benefits of voting.  To be frank, I'm not sure we can
21   fundamentally alter this dynamic but we'd be remiss if we
22   did not try.
23             I'm hoping we can hear about ways to make it
24   less costly for individual shareholders to vote.  Could
25   we streamline our disclosures or make them less
0014
 1   intimidating for retail investors without the loss of
 2   informational content for institutional investors?  This
 3   is obviously not an easy feat but it is an important
 4   issue.  Could we explore ways to reduce the number of
 5   votes to be taken?  With annual director elections,
 6   potentially annual say on pay and increasing numbers of
 7   shareholder proposals, the number of votes to be cast
 8   continues to increase.  Is voting on all of these issues
 9   the best use of an investor's time?
10             Finally, could we be better using technology to
11   improve voting mechanics?  For example, could we allow
12   individuals to delegate the ability to cast their ballots
13   so long as they're cast consistently with certain voting
14   rules preset by the investor.
15             If any of these could induce more individual
16   holders to vote their shares, it would be a worthwhile
17   endeavor and the benefits may not be limited to
18   individuals.  Some solutions may also improve matters for
19   institutional investors and other participants in the
20   proxy process who are similarly burdened by today's
21   inefficiencies.
22             As for universal ballots, let's just say I'm
23   trying to keep an open mind.  The challenge is that
24   there's a lot going on right now in this area.  This
25   proxy season has seen the resurgence of proxy access as a
0015
 1   dominant theme, particularly given the New York
 2   Comptroller's board room accountability project targeting
 3   companies with proxy access proposals for contributing to
 4   global warming, lacking board diversity or having a
 5   negative say on pay vote and the Whole Foods no action
 6   dispute has not helped matters.  Moreover, we have
 7   shareholder activists that are becoming louder and more
 8   assertive by the day, demanding seats on company boards
 9   or launching proxy fights to replace board members.
10             In the meantime, we have growing bipartisan
11   sentiment that our current corporate governance framework
12   is driving companies towards excessive short-termism and
13   what does this mean for the SEC?  Our responsibility in
14   the corporate governance arena is a limited one. It is to
15   ensure that our rules establish a level playing field. 
16   I'm therefore interested in hearing from our panelists
17   about the pros and cons of universal ballots and one
18   stand alone option in this area including how they may
19   affect the relationship between shareholders and
20   management.  It will then be up to the Commission to
21   determine whether universal ballots have a role to play
22   in ensuring that the aforementioned playing field is, in
23   fact, balanced.
24             To that end, I found quite interesting a recent
25   article in The Harvard Business Review by Professor Guhan
0016
 1   Subermanian calling for what he calls a "Corporate
 2   Governance 2.0."  In this grand bargain approach to
 3   corporate governance he would, among other things, bring
 4   back a variant of staggered board, adopt proxy access and
 5   tighten disclosures of activist positions in companies. 
 6   I'm not sure whether this is the right balance, but I like
 7   the approach of putting all the issues on the table and
 8   seeking to reach a compromise on the right combination of
 9   policies -- much as I've called for holistic reviews in
10   other areas -- rather than an incrementalist approach of
11   considering each policy change in isolation.
12             This approach would require the Commission to
13   study and bring to the table the constituents involved in
14   each of the various pieces of the puzzle under the
15   Commission's control to determine how the Commission's
16   rules as a whole promote the right solution for the U.S.
17   capital markets.
18             To the extent that today's roundtable helps
19   move us in that direction by giving us better information
20   about one potential piece of the puzzle that would be at
21   issue in a broader study, that can only be to the good.
22             Thanks very much for being here today and I
23   look forward to the conversation.
24             MR. HIGGINS:  Thank you, Commissioner
25   Gallagher.
0017
 1             Commissioner Stein.
 2             COMMISSIONER STEIN:  I wanted to welcome
 3   everyone to our roundtable this morning and I especially
 4   want to thank the panelists because you've taken time out
 5   of very busy schedules, pro bono, to come talk to us so
 6   we appreciate it.
 7             I also want to thank the Chair and the Division
 8   of Corporate Finance for all the hard work in setting
 9   this up; Keith, Michele, David and Jenny Riegel, who, I
10   heard was integral to actually, the boots on the ground
11   work.
12             Essentially, as Chair White mentioned, today's
13   roundtable is about sparking ideas about how we can
14   improve an investor's vote, make it more meaningful, more
15   effective in 2015.
16             As we know, shareholders who attend shareholder
17   meetings now and in person can receive a universal ballot
18   that includes the names of all the candidates who have
19   been nominated for the board regardless of whether the
20   nominees were put forward by management or by the
21   shareholders.  However, shareholders who do not attend
22   the meetings in person typically do not receive a
23   universal ballot.  These shareholders in general are
24   limited to choosing from among either the company
25   nominees or the shareholder proponent nominees but may
0018
 1   not choose among all of the nominees.
 2             One basic question here is should investors be
 3   treated differently based upon whether they are able to
 4   attend a meeting in person or vote by proxy, especially
 5   with advances in technology and communications?
 6             One of our roles in the proxy process is to
 7   help ensure that shareholders can intelligently exercise
 8   their right to vote.  We actually stated this in our
 9   tenth annual report of the Securities and Exchange
10   Commission fiscal year ended June 30, 1944.
11             Additionally, the Commission has the
12   responsibility to make sure the proxy process functions
13   as nearly as possible as a replacement for an actual in
14   person meeting of shareholders.
15             As we move into our first panel today, the
16   universal proxy, not to be confused with proxy access, it
17   is important to ask why if shareholders at meetings are
18   able to pick and choose from the full pool of candidates
19   and the proxy card is supposed to replace in person
20   attendance, shouldn't we have universal proxy cards?  A
21   universal proxy card would list both sides' nominee list
22   which would achieve this goal of approximating an in
23   person meeting and allow shareholders to vote for the
24   candidate of their choice.  If it can be done why isn't
25   it done?  Is the Commission doing its part to ensure that
0019
 1   investors are able to fully exercise their right to vote? 
 2   From there, I think it's important to consider if
 3   universal proxy cards have been effective elsewhere.
 4   Have any of the concerns posed in response to universal
 5   proxies come to fruition internationally?  Then from a
 6   more technical side, would it be optional or mandatory
 7   for companies and shareholder proponents to include the
 8   opposing party's candidates on their materials?  Should
 9   the rules vary depending on whether this is a short
10   slate, a majority slate or a full slate?  What should
11   that card or ballot look like?  What type of information
12   or disclosures should be included on it?  What order
13   should candidates appear on the card?
14             Those are some of the important questions I
15   hope we start to discuss this morning.
16             Our second panel today will be focused on
17   retail participation in the proxy process.  It is
18   interesting to note that there's limited data available
19   regarding proxy voting decisions of retail shareholders. 
20   However, as you could hear from everyone so far, it's
21   commonly accepted that retail investor participation is
22   relatively low.  This is concerning given that the right
23   to elect and remove directors is at the heart of
24   corporate governance.  So one basic question is why is
25   retail participation so low and can it be improved? 
0020
 1   Would investor testing be a way to get insight into this
 2   area?  How informed are shareholders who are voting?  Are
 3   there new approaches to the proxy process that would
 4   increase participation?  For example, what role could
 5   technology play to make the process more informed or to
 6   encourage more shareholders to participate?  What should
 7   the Commission do to better empower retail investors to
 8   exercise their franchise?
 9             As the Supreme Court emphasized, citing 1934
10   legislative history, "Fair corporate suffrage is an
11   important right that should attach to every equity
12   security bought on a public exchange."  That's
13   essentially what both of our panels are about today and I
14   look forward to the discussion, and I also, like my
15   colleagues, encourage you to submit additional comments
16   after the close of the roundtable to continue that
17   discussion.
18             Thank you.
19             MR. HIGGINS:  Thanks, Commissioner Stein.
20             Commissioner Piwowar.
21             COMMISSIONER PIWOWAR:  Thank you, Keith.
22             I also want to thank the participants for
23   joining us today on both panels.  Your knowledge,
24   experience and insights on the subject matter are greatly
25   appreciated as we consider two distinct issues related to
0021
 1   proxy voting. The first issue is universal ballots.
 2             In July 2013 our Investor Advisory Committee
 3   made a recommendation on universal ballots.  I commend
 4   Commissioner Stein for her subsequent efforts that led to
 5   today's roundtable.  I look forward to the panel
 6   discussion and I'm particularly interested in hearing a
 7   clear articulation as to the problem that universal
 8   ballots are intended to address.  I'm also interested in
 9   hearing about the potential positive and negative effects
10   that universal ballots could have on board performance
11   and shareholder value.
12             The second issue is proxy voting by retail
13   investors.  It is an intriguing question as to whether
14   our own electronic delivery rules for proxy materials may
15   have unintentionally depressed retail investor
16   participation.  When the electronic proxy rules were
17   initiated -- initially adopted in January 2007 the rules
18   were voluntary.  The Commission at that time could have
19   studied the effects of the electronic proxy rules on
20   investors, however, only six months later, without even
21   the passage of a full proxy season under the voluntary
22   rules, the Commission chose to make the electronic proxy
23   rules mandatory for all issuers in July 2007.  I believe
24   that a retrospective review of our electronic proxy rules
25   is long overdue.
0022
 1             Finally, I want to acknowledge the efforts of
 2   our staff especially in the Division of Corporation
 3   Finance and the Division of Economic and Risk Analysis in
 4   organizing this roundtable.
 5             Thank you.
 6             MR. HIGGINS:  Thanks, Commissioner Piwowar.
 7             Now, I'd like to turn it over to Michele but
 8   before I do there are some people standing in the back
 9   and I think if we can fill in and make room that would be
10   great.
11             Well, I mean you're welcome to stand if you'd
12   like, of course, but we want everybody to have a seat if
13   he or she wants one.
14             Anyway, with that let me turn it over to
15   Michele Anderson to introduce the first panel and get us
16   started.
17               PANEL 1: UNIVERSAL PROXY BALLOTS
18             MS. ANDERSON:  Thank you, Keith.  Good morning.
19             I am pleased to get us started today with our
20   first panel on contested director elections and universal
21   proxy ballots.
22             The election of directors is one of the most
23   important matters on which shareholders can vote and a
24   contested election can carry even greater weight.  As
25   you've heard from some of the Commissioners already this
0023
 1   morning, generally, shareholders cast their votes in a
 2   contested director election by returning either
 3   management's or the shareholder proponent's proxy card. 
 4   By operation of the federal proxy rules, state law
 5   requirements and practical considerations, shareholders
 6   cannot vote for a mix of the company's or the proponent's
 7   nominees unless they attend and vote in person at the
 8   meeting.
 9             Some, as you've already heard this morning from
10   some of our Commissioners, have expressed concern about
11   this limitation on voting options.  In 2013 the SEC's
12   Investor Advisory Committee made a recommendation to the
13   Commission to explore revising the proxy rules to provide
14   proxy contestants with the option to list both the
15   company's and the contestant's nominees on one proxy card
16   in connection with short slate director nominations and
17   last year the Council of Institutional Investors
18   submitted a rule-making petition requesting that the
19   Commission amend the proxy rules to mandate the use of
20   universal proxy in all contested elections.
21             This isn't the first time that the Commission
22   has been asked to consider universal proxy ballots.  When
23   the Commission adopted comprehensive changes to the proxy
24   rules in 1992 it considered but did not mandate a
25   universal ballot, stating that such a requirement would
0024
 1   represent a substantial change in the Commission's proxy
 2   rules.  Now, more than twenty years later, we believe it
 3   is appropriate to assess the current market, see how the
 4   system is working for companies, for activists and for
 5   shareholders.
 6             We will begin today by discussing the mechanics
 7   of voting in a contested election under the current proxy
 8   rules and by defining what we mean by the term "universal
 9   proxy ballot."  We will examine the arguments for and
10   against the use of universal ballots, including
11   alternatives that could improve the proxy voting process.
12   We will address whether the use of universal ballots may
13   change the outcome of contested elections for directors.
14   Also, our panel will explore the potential state law,
15   logistical and disclosure issues associated with the use
16   of universal ballots.
17             Before we begin I would like to introduce our
18   distinguished panelists starting across from me and to my
19   left.  First, we have Frederick Alexander, counsel at
20   Morris, Nichols, Arsht & Tunnell and advisor for legal
21   policy at B-Lab.  Then to his right we have Chris
22   Cernich, Managing Director of M&A and Contested Elections
23   at Institutional Shareholder Services.  Lisa Fairfax, the
24   Leroy Sorenson Merrifield Research Professor of Law at
25   The George Washington University Law School.  To her
0025
 1   right, Bruce Goldfarb, President and CEO of Okapi
 2   Partners.  Next, we have David Katz, partner at
 3   Watchtell, Lipton, Rosen & Katz.  Then proceeding on my
 4   right, Dr. Michelle Lowry, the TD Bank Endowed Professor
 5   at LeBow College of Business at Drexel University.  Then
 6   we have Charles Penner, partner and chief legal officer,
 7   JANA Partners.  Next is Anne Simpson, senior portfolio
 8   manager and director of global governance at the
 9   California Public Employees Retirement System.  Next is
10   Sarah Teslik, senior vice president, communications,
11   public affairs and governance at Apache Corporation and
12   last but not least, Steve Wolosky, partner at Olshan,
13   Frome & Wolosky.
14             As you can see, these panelists represent a
15   variety of viewpoints on the issues that we will discuss
16   today.
17             Thank you for joining us and now let's begin
18   our discussion.
19             Just a reminder to our panelists, when you're
20   ready to speak please turn on your microphone and when
21   you're finished turn it off otherwise we will crash the
22   whole system.
23             I'd like to ask Lisa, please, to kick off the
24   panel by giving us her perspective on the state of proxy
25   contests today and the mechanics of voting in a contested
0026
 1   election under the current proxy rules.
 2             Lisa.
 3             MS. FAIRFAX:  Thank you.  I would like to add
 4   that you'll probably get a thank you also from my
 5   students.  I teach a course on shareholder activism and
 6   participation and actually, today, we were supposed to
 7   talk about proxy contests.  So they're happy to not be
 8   called on but I'm happy that you've expanded my classroom
 9   in a sense to include all of us here at the SEC.
10             I also thank the SEC for this opportunity to
11   talk about a topic that I believe is increasingly
12   important. And it's important because I think as, Michele,
13   you rightly put your finger on it and I think as other 
14   Commissioners have said, we're in an environment where
15   proxy contests are increasing and where in many of those
16   proxy contests shareholders are asked to choose a mix of
17   candidates. And so the problem, I think, that the
18   universal ballot is trying to address is the fact that
19   when shareholders are asked to choose amongst a mix of
20   candidates, they actually don't have the ability to freely
21   choose.  
22             Their choices are at best constrained because
23   they are choices that are imposed upon them generally by
24   the activist camp who are allowed, at least in some
25   circumstances, to kind of round out their slate but to
0027
 1   round them out in a way that's based on their own
 2   preferences and not the preferences of the shareholders.
 3             So when you think about kind of what's
 4   happening in the proxy world, what's happening is we're
 5   having a rise in shareholder fights which inevitably
 6   means usually a rise in short slate campaigns and, of
 7   course, what we mean by that are campaigns where the
 8   activists are not looking to nominate an entire board or
 9   even a control but rather are looking for a minority
10   number of seats.  
11             We're also seeing, I think, a rise in a change
12   in control contest as well.  Shark Repellant additionally
13   reports that we are seeing a rise in successes by
14   activist campaigns and that at least in seventy percent
15   of the times these activists are getting at least one of
16   their members on the board.  What that means is that
17   increasingly shareholders are asked to actually create
18   boards that include a mix of candidates but because of a
19   combination of both state law rules, you're right,
20   federal law rules and practical considerations, those
21   choices that shareholders make are severely constrained
22   and not in many cases reflective of what they may
23   potentially do if they had the opportunity to choose
24   among an entire slate. And that's because on the one hand
25   you have state laws that essentially restrict
0028
 1   shareholders to voting on one, single proxy card, that is
 2   they're either going to have to submit the proxy card of
 3   management or the proxy card of the activists and all of
 4   their choices, therefore, have to be reflected on that
 5   particular card.  
 6             The overlay of that with the federal proxy
 7   rules is that the federal proxy rules restrict nominees
 8   who can be named on a single proxy card and that's as a
 9   result of, of course, Rule 14a-4 which is the bona
10   fide nominee rule which essentially provides that, in
11   order for a name to appear on a proxy card, the person
12   whose name is on the proxy card has to consent to that
13   appearance.
14             So what does that mean in the realm of proxy
15   contests and I'll just talk about it because people
16   mentioned different types of contests.  I'll talk about
17   what it means in each context.
18             In a full slate campaign -- and this is very
19   similar, of course, to a change of control campaign -- it
20   essentially means the shareholders are either given the
21   choice of voting for a slate that includes only all of
22   the director or management nominated candidates or only
23   all of the activist nominated candidates and that is
24   because from a practical perspective no one really wants
25   to consent to have their name being listed on the
0029
 1   opposing person's card.  So that's essentially the state
 2   of play when we're talking about either the full slate or
 3   the control slate.
 4             The short slate, of course, works a little bit
 5   differently and that's because the SEC modified the rules
 6   with regard to bona fide nominees when it comes to short
 7   slate campaigns and that modification means that
 8   dissident campaigns are allowed to kind of round out
 9   their short slate campaigns.  The rounding out means that
10   they can include obviously the names of the candidates
11   that they want to support but they can also indicate the
12   names of candidates that they will not support which --
13   and then indicate their willingness to support whoever
14   else is left.  So in a roundabout fashion, the SEC has
15   allowed a rounding out in the dissident campaign.
16             What does that mean?  It means that
17   shareholders do have some greater choice in terms of the
18   mix and match but, once again, it's a mix and match
19   that's dictated by the activists.  So that means whether
20   or not you're talking about a control slate, a full slate
21   or a short slate you have a situation where shareholders
22   are not allowed to pick and choose amongst the full range
23   of candidates and to make a selection that's based solely
24   on what they would like to see in terms of the directors
25   -- who they want elected.
0030
 1             So what does that mean?  I think it means
 2   precisely as Commissioner Stein suggested it means, it
 3   means that there is a sharp contrast between what would
 4   happen if a shareholder is voting by proxy and what would
 5   happen if a shareholder came to the meeting where they're
 6   supposed to at least get a ballot and be able to vote for
 7   the full range of people whose names are up in a
 8   particular election.  
 9             As many have pointed out, that creates a
10   picture of unfairness. It also can become very confusing
11   for shareholders as they try to exercise their choice and
12   sometimes that confusion can result in disenfranchisement
13   and that's because if you basically try to write a
14   candidate in or otherwise try to submit two different
15   ballots that reflect different choices, generally, one of
16   those ballots is going to be invalidated.  The write-in
17   process also could potentially be invalidated and so
18   you're faced with either, I choose a slate of candidates
19   that I might not necessarily want or I run the risk that
20   my vote will not be counted at all.
21             So that is, of course, the problem if you will
22   that the universal ballot is trying to address and I'll
23   leave it to others to talk about what exactly that ballot
24   could look like.
25             MS. ANDERSON:  Thank you, Lisa.
0031
 1             David, being a frequent legal advisor to
 2   issuers in proxy contests, I'm wondering if we could get
 3   your perspective on the state of contests today and if
 4   there is, indeed, a problem that needs to be addressed.
 5             MR. KATZ:  Thank you and thanks for the
 6   Division of Corporation Finance and the Commission for
 7   putting this on today.
 8             I think that there is an issue that's there and
 9   I think that from an issuer perspective, issuers don't
10   like the current model with the short slate, but it's
11   something that they've grown to live with.
12             The difficulty is that I'm not sure that
13   extending the universal ballot for the short slate is --
14   even though that's what was proposed by the panel -- is
15   really the right answer.  The real concern I have is in
16   the control situation and I also think that we also have
17   to think about what the unintended consequences of
18   putting out a universal ballot are.
19             In a control circumstance, unlike the
20   circumstance where you have a short slate and you can
21   round out the ballot, you don't have that option in a
22   control context. So by voting on one card for the nominees
23   you want you are actually not voting for anybody else and
24   so your vote -- you can't pick and choose and that's had
25   real life consequences as we've seen more and more
0032
 1   control contests as a result of the elimination of
 2   staggered boards with dissidents getting either control
 3   of a board -- and that's happened in several instances --
 4   or getting a much larger number of candidates because it
 5   makes sense for them to game the system in the control
 6   context by going for control and forcing people to choose
 7   one card or another and we've seen that happen in several
 8   instances.
 9             The other issue that I do worry about that we
10   need to take into account though is, there's a cost to the
11   system of simply doing a universal ballot, which is to the
12   extent that you will open it up it's one thing when you
13   have one activist that's looking at something but when
14   you have several activists in a company and you could
15   conceivably put a universal ballot together it could
16   become extremely confusing.  You also -- when you combine
17   that with a concept of proxy access and what you're
18   opening up there, you're basically eliminating the costs
19   for anybody by putting a universal ballot, somebody
20   doesn't have to go out and actually solicit and you still
21   are allowing somebody to game the system by voting on a
22   universal ballot for only their candidate and then simply
23   voting a single share for the other candidates and that
24   can have some real consequences too. 
25             So my concern is that if we simply jump in with
0033
 1   both feet into the universal ballot without considering
 2   all these issues, we may end up with a much worse result
 3   and further empower many of the activists and the results
 4   that can be achieved.
 5             I would say there are self-help remedies out
 6   there.  There are some situations where a company can put
 7   a blank spot up, for example, with a seven person board. 
 8   It can choose to run five candidates and which will mean
 9   that the activists will have two spots on that board. 
10   That's a very powerful tool that the company has.  By the
11   same token, I think you need to take into account the
12   impact that the proxy advisory services have here because
13   if the proxy advisory services even recommend voting two
14   candidates on the dissident slate in a control contest,
15   those candidates can get the votes there but, again, it
16   has the impact of voting against all of the other
17   candidates and we've tried to deal with some of those
18   situations, but effectively by recommending that you vote
19   on the dissident's card in that circumstance even if it's
20   for a small number of candidates it's a no vote, or no
21   recommendation on the other candidates and that has to be 
22   taken into account as well.
23             MR. HIGGINS:  Thanks, David.
24             Sarah, I wanted to address the same question to
25   you.  I'm sorry, not Sarah.  Anne, from the institutional
0034
 1   investor perspective, what problems if any do you
 2   encounter in this current environment? And I'm also
 3   wondering if you could get into the concept of split
 4   voting a little bit and if CalSTERS does that at all --
 5   sorry, CalPERS -- oh boy.
 6             MR. SIMPSON:  Our sister pension fund would be
 7   delighted for me to speak for them.  We share views on
 8   many things.
 9             Well, first of all, let me echo the thanks of
10   all concerned that this roundtable has been convened.
11             Once we're in the Byzantine world of rules, we
12   should step back a bit and remember how important this
13   issue of corporate accountability is.
14             For CalPERS, we're a $300 billion or so fund
15   but we rely -- for every dollar that we pay out in
16   benefits, seventy cents comes from investments.  We push
17   out $20 billion a year to our members to pay pensions and
18   retirement and health benefits so it's absolutely
19   critically important that we have prosperity, we have
20   functioning companies with long-term strategies that are
21   effective.
22             Now, our best and our first defense in
23   protecting these assets and ensuring this long-term,
24   sustainable value creation is a competent, independent,
25   diverse board of directors.  So we take a very keen
0035
 1   interest in our ability to select directors.  This is why
 2   the panoply of shareowner rights to hire, to fire, to
 3   select, to propose board candidates is the single, most
 4   useful thing we can pay attention to as a provider of
 5   capital.  It's not just important for us, it's important
 6   for the wider economy.  If there's a collapse or a
 7   failure in corporate accountability, we have rot that can
 8   erode overall performance and stability and safety and
 9   soundness and we saw that in the run up to the financial
10   crisis, particularly in the banking sector.  So let's not
11   forget that the purpose of this is economic well-being
12   and that's vitally important for us as an investor.
13             So, now to the practicalities.  We are aware
14   that if we as CalPERS were to attend every U.S. annual
15   general meeting where we are an owner we would have the
16   ability to vote upon the mix of candidates who we feel
17   will best represent our long-term interests.  This may be
18   management-proposed candidates, it may be one, some or
19   all of a shareowner proposed pool of candidates, but we
20   need to be able to select the best team for that long-
21   term job which is very challenging.
22             If we were at the meeting we would be able to
23   use the famed "universal ballot."  The problem is the way
24   the rules have been designed, something essentially very
25   simple has been turned into something fiendishly
0036
 1   complicated and we don't have a proxy which reflects that
 2   universal ballot. So our goal here would be to say, let's
 3   find a way in which the federal rule-making and the SEC's
 4   very important role overseeing the proxy, make sure that
 5   these rules facilitate and they don't frustrate that
 6   important exercise of ownership rights.
 7             So I don't know, Michele, if you'd like me to
 8   address anything about the split ticket.
 9             The split ticket is a pain in the neck.  I
10   mean, really, we're talking about confusion and
11   confounding commonsense.  If we had a universal proxy
12   which would reflect our rights that we would have on the
13   universal ballot, the only difference here is, you know,
14   if CalPERS could forget about investing money and its day
15   job and send our staff around the country on Greyhound
16   busses or Uber taxi fares and flying to attend every
17   single annual general meeting we'd have what we want. But
18   the whole concept of the proxy was so that you didn't
19   say, you can have this right if you can afford to attend
20   and you have the bus fare and the train fare and the
21   staff.  We actually need a system that's going to work
22   without that physical presence which is a rather
23   Victorian concept in the first place.
24             So I'm happy to elaborate on any of that as is
25   helpful.
0037
 1             MS. ANDERSON:  I think that that gave a good
 2   lay of the land and just to kind of round things out,
 3   Rick, I wanted to turn it to you very briefly.  If you
 4   could talk about the last in time provision in Delaware
 5   law that essentially would prevent people from mailing in
 6   two proxy cards, one from each side.
 7             MR. ALEXANDER:  So the last in time concept is
 8   simply that the last card that comes in from a
 9   stockholder is the one that counts.  Now, I'll remind
10   people that a lot of the rules within proxy contests
11   aren't really state law because so much of the share
12   ownership is through the cede system and, you know, what
13   we're really talking about, especially at the retail
14   level, is voting instruction cards and that's not
15   strictly governed by Delaware law, although the rules
16   often operate the same way. And what you'll see on a proxy
17   card or instruction card typically is language that says,
18   "This proxy" -- let's just use the proxy language --
19   "This proxy revokes all prior proxies" and as a result,
20   the last card that comes in is the card that counts and
21   proxy inspectors have developed very sort of arcane rules
22   about how to deal with that and you can look at postmarks
23   and all those sorts of things although, of course, all of
24   that has been updated since the days of lots of cards and
25   snake pits and, you know, five days of reviewing cards in
0038
 1   proxy contests.
 2             I would say that there's not really -- and I
 3   think, generally, under Agency law principles people have
 4   looked at for the last Agency instrument to come in as
 5   sort of imposing that rule. I don't really, though, at the
 6   end of the day think that there's a state law bar to
 7   having some sort of system where you could give people
 8   limited proxies that said "This is a proxy for four of the
 9   directors and this is a -- and someone else could get a
10   proxy from you for another four seats. I think there are
11   probably practical and confusion issues that would make
12   that a very difficult way to go and there's a reason that
13   the law and the lore, you know, with inspectors has
14   evolved in the direction it has and I think trying to
15   address this issue through allowing people to vote on
16   multiple cards would probably create a great deal of
17   confusion.
18             MS. ANDERSON:  Before we get into the real
19   meaty arguments for and against using universal
20   ballots, I want to make sure we're all on the same page
21   as to what we even mean by a universal ballot.
22             Steve, I was hoping that maybe you can go
23   through that a little bit because when I think of
24   universal ballot I think of just one card that is sent by
25   one party that everyone can use but certainly the CII
0039
 1   rule-making petition seems to contemplate that each side
 2   would send out its own version of a universal ballot
 3   which doesn't necessarily seem so universal so I'd like
 4   to get your views on that.
 5             MR. WOLOSKY:  Great.  I just want to address
 6   one other issue before that was spoken about and David
 7   and I are actually in agreement on, you know, concerns
 8   about universal ballot.
 9             There's one issue that didn't focus on the
10   terms of majority slates which is if there are nine seats
11   up and a shareholder nominates five directors and asks
12   institutions to vote on it that institution can only vote
13   for five seats and effectively they've lost the right to
14   vote for four seats.  So in a majority but not running
15   for the entire board, from the point of view of
16   representing activists and shareholders, there is a
17   disadvantage and everyone focuses just on the short slate
18   rule but I think we can't lose fact that there is a
19   majority but not a hundred percent slate rule that does
20   come into effect and the second thing is there's also
21   cumulative voting.  
22             When you start thinking about all the
23   implications here and you start thinking about state laws
24   we're assuming, you know, one director, one vote, but in
25   many states there is cumulative voting so if there are
0040
 1   seven seats up you can vote, you know, your one share for
 2   one director seven times or you can vote your one share
 3   for seven different directors. So there are a lot of
 4   issues that sort of come into play.
 5             When I think of "universal ballot" -- and we'll
 6   put the form aside until later -- each side is going to
 7   want to have their own universal ballot because you still
 8   want to go out there and solicit shareholders, you're
 9   still going to want to have materials and you're going to
10   want to know how a shareholder votes as soon as possible
11   whether it's a record shareholder or whether it votes
12   through Broadridge and there are differences between a
13   recordholder and Broadridge and so I don't see that
14   changing. Both sides will be out there soliciting
15   proxies, the last executed proxy will control and those
16   same issues will be there but when I view a universal proxy
17   as putting all candidates on the same ballot and, you
18   know, what order?  Alphabetical?  What size?  All those
19   things come into play but I don't think it will change
20   both sides soliciting universal ballots and ballots.
21             MS. ANDERSON:  Does anyone else have a
22   competing view on what the "universal ballot" would be?
23             MR. CERNICH:  Michele, thank you by the way for
24   having me today.
25             I don't disagree with what Steve would have to
0041
 1   say but from an investor perspective I think what's key
 2   about a universal ballot is that you could execute any
 3   voting permutation on it; whether there's one or two is
 4   probably less important to an investor than the ability
 5   to vote exactly how you see things lining up.  The
 6   problem with the two cards today is as many people said
 7   is exactly that you cannot do that.
 8             MR. HIGGINS:  I have a question.  Would the
 9   universal ballot include any nominee who had met the
10   company's by-laws for nomination as a director? Whether or
11   not -- or how the solicitation was taking place? Or if a
12   solicitation was taking place?
13             MR. KATZ:  Well, I have a real concern that you
14   can't differentiate between if you're going to say that
15   you have a universal ballot. One of the things a universal 
16   ballot does, much like the Electronic Voting Rule which, I 
17   think, was an unintended consequence is it significantly lowers 
18   the cost for somebody to run an election. So that's one of the
19   reasons we have a lot more elections today and I think
20   that if you lower the cost even further by saying
21   somebody doesn't have to do their own proxy card but can
22   simply have it included on a universal ballot, you're
23   going to see many more people try to use that ability to
24   at least nominate somebody for a spot if they can do that
25   under whatever the by-laws or the relevant provisions are
0042
 1   going to be. 
 2            And so that is a real concern because as I
 3   said earlier, you also have the issue of multiple --
 4   there are situations where you have multiple activists
 5   who are seeking different nominees for a company and you
 6   can have a situation where, you know, are you going to be
 7   able to differentiate between them?  Some of these issues
 8   have been thought about in the proxy access debate; if
 9   you're limited on the number of directors that they're
10   going for then how do you deal with that but if you can
11   put all of them on the same ballot I'm not sure how you
12   differentiate between them, either it's universal or you
13   force people to do something more on their own and I
14   think that by taking it to universal you're automatically
15   lowering the bar for what people you're going to see.
16             MS. ANDERSON:  Well, I think that we're jumping
17   a little bit ahead in the agenda but we might as well go
18   there because I think it's a very good issue.
19             Should we have some sort of eligibility
20   requirement in order to be able to take advantage of
21   universal ballot, be it full, complete mailing just like
22   the issuer has to do which isn't technically a
23   requirement currently under the proxy rules?
24             Other eligibility ideas?
25             MR. ALEXANDER:  Michele, I don't want to answer
0043
 1   the substance of what you're saying but I do want to make
 2   the point that, you know, were you to sort of remove the
 3   consent requirement and sort of enable but not mandate
 4   the universal ballot you'd be in a position where, I
 5   think, under recent state law it's pretty clear that
 6   companies whether by director action or stockholder
 7   action have broad power to amend their by-laws to
 8   regulate this very type of thing and I think something 
 9   you might see happen is the same -- in a way access is a
10   form of universal ballot and I think you might see
11   private ordering in this area and you might quickly reach
12   -- you know, I think we are coming to an equilibrium
13   quickly on proxy access and I think what you might see
14   rather than a one size fits all -- rather than
15   necessitate your coming up with a one size fits all,
16   here's the universal ballot, were you to remove consent, I
17   think there might be a quick movement to avoiding the
18   types of real problems that David is talking about where
19   there's just too much choice and come to something that's
20   reasonable.
21             MS. ANDERSON:  Yes, Anne from CalPERS.
22             MS. SIMPSON:  Yes, thank you.
23             I want to respectfully but fully agree with
24   David Katz that this would facilitate a higher degree of
25   shareowner engagement and more candidates coming forward. 
0044
 1   We would regard that as an entirely healthy and desirable
 2   outcome because boards which are engaged with their
 3   owners disclosing well, performing well, focused on the
 4   long-term, attending to the importance of competence,
 5   independence, diversity on the board, this is not where
 6   this arena lies.  This is a situation where change needs
 7   to take place for good reasons -- for good economic
 8   reasons and the governance tools are there to enable and
 9   we don't want rules that frustrate that. So, you know,
10   you'll see that the question of companies and activist
11   investors at times, CalPERS has very publicly and
12   vocally supported the company and at times we agree with
13   activists and sometimes we have a view of our own which
14   is somewhat different but that is entirely how the system
15   is meant to work.  We shouldn't put artificial barriers
16   to entry to prevent engagement which will ultimately be
17   good for the company's performance.
18             MR. CERNICH:  Two points I'd like to make in
19   this.  First, in response to David's suggestion that
20   creating a universal ballot might increase the number of
21   proxy contests and the number of nominees.
22             It's an interesting point.  We have a pretty
23   good test case which is Canada, activism being a growth
24   industry there in the last few years.  There are roughly
25   half the number of proxy contests that go to a vote in
0045
 1   Canada that there are in the U.S. and Canada allows you
 2   to use the universal ballot.  We've seen it once in the
 3   last five years.  We tried to go back ten years, still
 4   couldn't find another one.  There must be some reason
 5   that activists aren't doing it and I don't know if it has
 6   to do with disclosure or something else but it's not
 7   necessarily the case that creating universal ballot means
 8   there's going to be a flood of additional activists
 9   wanting to get on the ballot.  Whether that's a good
10   thing or a bad thing is a little bit beside the point. 
11   It doesn't seem like what David is predicting is actually
12   what's happened.
13             Back to your question, Michele, on nominee
14   qualifications.  One of the interesting things about a
15   universal ballot -- a true universal ballot -- and we've
16   written on three or four of them while I've been at ISS -
17   - is that it actually puts an awful lot more emphasis on
18   the qualifications going forward of each of the nominees. 
19   We don't usually see that.  We never saw that when there
20   were slate elections because it didn't matter who the
21   nominees were, it was go left or go right.  Once you get
22   rid of slate elections and you can pick and choose and
23   even with a majority dissident slate you can still pick
24   and choose even if there are other ballot effects, you
25   start to focus more on the qualifications but when you
0046
 1   get to a true universal ballot -- and I think of the
 2   Canadian Pacific example from two or three years ago --
 3   what a shareholder is required to do is say effectively,
 4   what's the right mix of skills and experience for this
 5   board at this moment and how do I pick them from there? 
 6   You're in some way replicating what a very good
 7   nominating and governance committee should do except
 8   you're doing it from the perspective of an investor not
 9   necessarily from someone who is in the board room and
10   you're required to do it.  
11             Every time there's a proxy contest for board
12   seats it should be an unusual event that shareholders are
13   asked to go into the board room and move people around
14   and it should only be because there's significant need
15   for that to happen.  So if shareholders are asked to look
16   real closely at the qualifications of each individual
17   nominee and the nominees themselves have to focus on
18   that, I think that's going to be one of the beneficial
19   effects of any universal ballot.
20             MS. ANDERSON:  Lisa.  Sure.
21             MS. FAIRFAX:  I mean I think the point that
22   David raises is an interesting one and certainly when you
23   think back and reflect on what the potential outcome of a
24   rule like this would be on elections, like is it the case
25   that what we're going to end up with is not only more
0047
 1   proxy fights but the potential to have situations where
 2   activists who aren't really qualified, who are
 3   potentially what many would consider a suboptimal
 4   candidate would somehow be able to gain a foothold and
 5   then end up on the board? And while I think that there is
 6   probably some risk that the universal proxy card if we
 7   don't have significant eligibility restrictions would
 8   create a card that's kind of cluttered; right, in many
 9   ways that we see our shareholder proposals -- you know,
10   we allow people to have -- and, you know, that might not
11   necessarily be a bad thing but I don't think it
12   necessarily means that those people will also then,
13   therefore, be elected. And part of that is going to be
14   careful planning on what does the ballot have to look
15   like, you know, because sometimes maybe people will get
16   inadvertently elected because their names end with "A"
17   and everyone is checking the "A."  
18             You know, so, you know, it may sometimes come
19   down to that, but I think what it's going to come down to
20   is making sure that people become educated in the process
21   about who the candidates are, how they appear, etc., and
22   that may have more of an impact on retail investors, for
23   example, than it would on institutions who already have
24   for the most part that kind of guidance. But I don't think
25   it necessarily means that we end up with people actually
0048
 1   on the board who we wouldn't want on the board and I
 2   think the other reason why that may not necessarily
 3   happen is something that I think Chris may have eluded to
 4   with regard to Canada which is one of the outcomes is
 5   going to be greater uncertainty about what the election
 6   outcome will be when we leave it up to shareholders and
 7   they can pick and choose and the fact that both activists
 8   and the company are going to be confronted with that
 9   potential uncertainty may mean that what they're going to
10   do is to negotiate in a different way and so it may mean
11   that we have less contests because neither side is
12   willing to go the distance because neither side wants to
13   take on that potential uncertainty.  
14             You know, so I think one of the reasons why you
15   may be seeing, you know, less of that is for potentially
16   that very reason that, you know, both sides are coming to
17   the table and negotiating.  Maybe that means actually
18   ultimately less choice for shareholders because they're
19   not voting at all or at least not kind of voting on what
20   the full range would be but, again, I think that's
21   another reason where we may not inevitably lead to a
22   place where we have more contests and potentially more
23   contests where there are people kind of, I guess,
24   "undesirables" or "suboptimals" that end up on the board.
25             MR. WOLOSKY:  I actually think it will lead to
0049
 1   more contests.
 2             Right now, between eighty-five and ninety
 3   percent of situations where a shareholder is sought to
 4   nominate either publicly or privately generally settle in
 5   each year and ten to fifteen percent go to a vote.
 6             I think that allowing universal ballot will, I
 7   think, lead to more contests.  I'm not worried about
 8   unqualified people being elected because there are very
 9   smart shareholders in this room and there are very smart
10   shareholders who vote and we're also forgetting the fact
11   that you need to solicit for your shareholders and it's
12   not just sending a ballot to people but actually going
13   and campaigning and speaking to institutions and getting
14   them to vote and that requires a substantial amount of
15   work and effort which will not change in that situation.
16             So I think that at the end of the day you'll
17   probably have more contests that go to a vote than less.
18             MR. HIGGINS:  We haven't heard -- Sarah?  
19   Charles?
20             MS. TESLIK:  Well, first, thank you, Chair,
21   Commissioners, Corp Fin.  I regret I'm representing the 
22   only issuer in the room but I'm grateful that I am here.  
23   I'm also grateful that we have not had an experience with
24   the universal ballot and I will not try to repeat or
25   duplicate or one-up any of the experts on that subject
0050
 1   directly but I think there are questions that precede the
 2   questions you're talking about that are worth raising
 3   because we here, at least, have to run a profitable
 4   business competing globally with whatever rules you come
 5   up with and that's a very different proposition for us.
 6             I think the starting point is what Commissioner
 7   Aguilar said -- AD says high, by the way -- which is and
 8   we believe it, if a vote is occurring we should all want
 9   a process that most accurately, fairly and inexpensively
10   reflects what voters want.  We're not afraid of
11   accountability where we learn from our shareholders.  I
12   don't think there's a company on the planet that engages
13   with its shareholders more than we do.  I do think that's
14   the starting point, that's the overall answer, it's the
15   simple one but it ducks the hard questions and I'll only
16   list three of them here since I know time is short.
17             Obviously, the Commission has a question before
18   it that none of us do which is how to spend your time,
19   how to prioritize, I know the things that are on your
20   plate and it doesn't strike me that we have an absence of
21   activism right now and need Commission help in having
22   more of it.  We have a proliferation of models and
23   contests.  It looks like about a thousand last year of
24   roughly 74 percent of which activists got part of what
25   they wanted and I'm not saying those are bad things, I'm
0051
 1   just not sure if that's Commission timeworthy.  I think
 2   that there's a preceding piece that may be worth the
 3   Commission's time that a couple of you mentioned and that
 4   is virtually every issue that gets addressed in a vote
 5   can before that vote, be addressed in a communication with
 6   the management or the directors and be solved without the
 7   contest if you get the people in the same room.  It
 8   certainly happens with us.  I don't know something, you
 9   can get us in the same room and we will work it out
10   cheaply, inexpensively and get a better answer.  There
11   are things that the Commission can do on that front that
12   are simpler and cheaper than anything on the universal
13   ballot. Simply requiring shareholder proponents to
14   disclose in their supporting statement whether they
15   called us first to try to talk would be a huge step.  It
16   is about as cheap as you get.  It's only disclosure, it's
17   one sentence.
18             So I'd just posit there's that set of questions
19   before the vote questions that have a huge chance of success
20   that are in the Commission's sweet spot that cost almost
21   nothing.
22             The second point related to that, just about
23   the only thing I remember from legislative drafting back
24   when I lived here thirty years ago and did it was that if
25   it's not elegant, it doesn't work. And you don't have to
0052
 1   sit here very long to say the universal proxy system,
 2   right now, is the opposite of elegant.
 3             I'm not saying that I know all the answers,
 4   although I think one set of them may be we are trying to
 5   take a telegraph in a telephone era. We're looking at
 6   what was fundamentally a paper-based model, our ballot,
 7   someone else's ballot and although we're adding some
 8   electronic whiz pieces to it, we're fundamentally in a
 9   twentieth century paper model, when whether it's five
10   years from now or ten years from now, we will move away
11   from that.  I, frankly, don't know what dissemination is
12   in a media era.  I don't know what a contest for control
13   is anymore because I don't know that a short slate
14   necessarily reflects that and I think it's worth stepping
15   back and saying, forget what your position is on this
16   issue, if it isn't elegant it won't work well.
17             The last piece, which is a little bit touchy
18   feely but I think it's worth highlighting, Commissioner
19   Gallagher highlighted it, and that is, there seems to be
20   an assumption under the focus of this hearing, especially
21   because we're not focused on other subjects, that if only
22   we can have more issues that are given to shareholders to
23   decide by vote, companies would be more accountable and
24   more competitive globally.  We believe in accountability. 
25   The vote matters.  You've got to watch us.  We are better
0053
 1   if you watch us but I'm not sure that it follows that a
 2   shareholder-centric model where we make fewer decisions,
 3   shareholders make more is better.  We are an oil company. 
 4   We have never been asked by a shareholder to have a
 5   longer term horizon than we do.  Our time horizons for
 6   virtually everything we do are longer than our
 7   shareholders hold the shares.
 8             You've all heard that argument and if on the
 9   shareholder's side -- and I used to be for twenty years -
10   - my assumption was, the company is trying to avoid
11   accountability.  Not true.  That's an important argument
12   but there's another one that isn't made that's just as
13   important and that is virtually every great company
14   started and got to where it is based on innovative
15   thoughts that no one else saw at the time and those are
16   very hard to have and very hard to maintain if you have
17   to have millions of shareholders agree with you regularly
18   before you proceed them. And I will read you seven
19   sentences that were from a certain company's proxy that
20   didn't make the cut that are about that subject but that
21   do in fact matter as we're making these balancings
22   because we all like the concept of innovation, we all
23   like the concept of being contrarian in theory, none of
24   us like it in practice.  
25             So here are the sentences:  "New ideas and the
0054
 1   people who assert them are rarely well received.  Some,
 2   like Socrates and Bruno, are executed.  Some, like
 3   Scopes, are convicted.  Some, like Galileo, are
 4   imprisoned.  Some, like Billy Mitchell, are demoted. 
 5   Some, like John Wycliffe are fired.  Some, like Warren &
 6   Marshal, are starved of funding.  A few lucky ones are
 7   merely ridiculed.  Secretary of State Henry Stimpson
 8   rejected pleas for more effective U.S. intelligence
 9   operations with the dismissive comment, `Gentlemen do not
10   read other people's mail.'"
11             Virtually every place that Apache operates,
12   when we first went there, was unpopular with our
13   shareholders and was ridiculed with our shareholders.  We
14   do need accountability but we do need to think about how
15   we can be competitive in a global world where virtually
16   every new issue is at first unpopular.  Again, I'm not
17   saying we shouldn't be accountable and if you have issues
18   with us I want to hear about it, our board wants to hear
19   about it and they will meet with you in person faster
20   than anyone. But I do think these things matter and I
21   think the time prioritization matters because the yield
22   from engagement is huge and the price is cheap.
23             Otherwise, on the universal proxy fund I -- I
24   mean, again, we have not had the direct experience.  I do
25   think it matters, as I said, that shareholders should be
0055
 1   able to vote for the candidates they want in a clear and
 2   efficient and inexpensive way.  How we get there Heaven
 3   help you.
 4             MS. ANDERSON:  Sarah, I appreciate those
 5   insights and I realize that those are sort of the
 6   preliminary issues before we even get into universal
 7   ballot.
 8             I'd love to hear from you, too, though on your
 9   perspective on, if there was an increase because of a
10   universal ballot in more sort of mix and match of
11   directors, what would that do to boardroom dynamics in
12   your view?
13             MS. TESLIK:  It's a fabulous question.
14             Every change in the board room, even a change
15   that comes about through the normal board refreshment
16   changes the dynamics.  It's certainly a good argument to
17   have board refreshment because you want to keep
18   experimenting with different ways the boards operate and
19   because boards don't tend to share with other boards what
20   works and what doesn't, the refreshment process in general
21   always changes board dynamics.
22             We've never had the experience of a dissident
23   director joining the board and probably the best answer
24   to your question -- go have dinner with David Batchelder. 
25   He can tell you twenty good stories of being that
0056
 1   director and how different boards react differently
 2   which, I think, is an important point.
 3             I do think there are risks.  Certainly, there
 4   are a number of companies where -- I think Teddy
 5   Roosevelt called it a "Kitchen Cabinet" -- where the
 6   board work gets done outside the board meeting to exclude
 7   the unwelcome directors and that obviously is a worrisome
 8   thing.  There's certainly the potential for "us versus
 9   them."  In my experience in talking to quite a few
10   companies that have had this experience and then people
11   who have been in that position of being not elected from
12   a company slate, it varies a great deal.  It's hard -- as
13   I've thought about that question here I thought I don't
14   think I have anything interesting to say that would help
15   you make a better rule. 
16             It makes great stories though.  Go have dinner
17   with David.
18             MS. ANDERSON:  I know there are a couple of
19   folks we still haven't heard from yet.
20             First, Charlie, I'd like to turn it to you. 
21   Being from JANA as an activist, what is your view on all
22   this?  Do you view universal ballots as being
23   advantageous to an activist?  When would an activist want
24   to use a universal ballot?
25             MR. PENNER:  Thank you for having me.
0057
 1             Well, actually, I'm usually on the other side
 2   of David Katz in these activist situations and we were e-
 3   mailing about one such situation this morning and so I
 4   said, "What am I supposed to think about the universal
 5   ballots?"  He responded, probably in jest, "That's easy,
 6   you're for them when they help you" which also happens to
 7   be true.  You know, from a narrow kind of activist
 8   perspective, I don't know that having universal ballots
 9   necessarily helps us.  There are plenty of situations
10   where it wouldn't help us.  You know, if you've got --
11   you're running, say, four people out of a twelve-person
12   board and you've got really, you know, two candidates you
13   know are going to be really strong and two others who may
14   not be as appealing to shareholders but, you know, you're
15   probably worse off with a universal ballot because you're
16   going to get fewer people on the board and particularly
17   given that short slates are kind of the norm these days,
18   that's probably more likely what's to happen.
19             From a just participant in the capital market's
20   perspective though, I think it on balance probably makes
21   sense.  It certainly makes it simpler and you avoid, you
22   know, the type of gamesmanship like that and that David
23   was describing and others have talked about. And also, as
24   Chris was saying, it encourages people to focus on the
25   right thing which is obviously picking the strongest
0058
 1   candidates and, you know, that's probably as it should
 2   be.
 3             You know, we were talking about the ability in
 4   Canada to use the universal ballot if you want to.  So
 5   Canadian Pacific, which someone mentioned, they chose to
 6   offer shareholders universal ballot and that was for them
 7   the right strategic decision because, you know, they were
 8   in a position -- they had really performed poorly and
 9   they knew they were going to lose some seats so it made
10   some sense for them to say, well, maybe we can kind of
11   mitigate the damage by using universal ballot.
12             We followed the next year with a proxy contest
13   in Canada which was to be blunt, kind of a tougher slog
14   for us and the company decided to take the risk to not do
15   it and try to go for the shutout and they got it for
16   reasons that we could talk about in a different forum.
17             So I think it would be kind of nice to remove
18   the gamesmanship from it and then the only thing I'd say
19   with respect to, you know, how you do that, I don't think
20   you'd see a huge flood of new -- you know, kind of new
21   entrants in the activist space if you did this.  I mean
22   the basic, barest interests are still going to be there
23   which are the time and the resources and not wanting to
24   be called, you know, nasty names in the newspaper. And I
25   would say, though, that if you're going to do it you have
0059
 1   to do it in a way that's uniform so that it kind of
 2   discourages again the kind of focus on gamesmanship as
 3   opposed to just putting up the best people.
 4             MS. ANDERSON:  Michelle, I'd be particularly
 5   interested to hear from you.  We've been talking about
 6   sort of what the outcome could be of a universal proxy
 7   ballot in our system.  Given the nature of your studies,
 8   what are your views on how the use of universal ballots
 9   might change either the frequency of contests or even
10   just the nature of director elections generally?
11             MS. LOWRY:  Sure.  So, first of all, to
12   reiterate what everybody said, thank you very much.
13             You know, there is unfortunately, I guess, no
14   direct academic evidence on universal proxies so we're
15   kind of stuck trying to pull from different fields
16   thinking about how it might affect everybody's
17   incentives, the costs and benefits of the whole process,
18   etc.
19             To the extent that clearly waging an activist
20   campaign is very, very expensive, I don't know that 
21   universal proxy affects the explicit costs of it that
22   much.  What it potentially does change is the probability
23   of certain directors winning and as Charlie said, in some
24   cases that might be on the management side, on some cases
25   it's likely to be on the shareholder's side.
0060
 1             So I think it's difficult to say overall one
 2   side would systematically get more seats.  I think that
 3   it -- you know, would it change the frequency of these
 4   proxy contests?  Again, there are so many factors at
 5   work.  Right?  If I think that I have a higher
 6   probability of winning I might be more likely to wage a
 7   contest but then take the other side; if the other side
 8   thinks I have a higher probability of winning I'm more
 9   likely to negotiate behind the scenes.  If I think
10   there's going to be more behind the scenes negotiating,
11   then maybe, I, as a director take my directorship job
12   more seriously and I'm a more diligent monitor/advisor
13   from the get go before this kind of ever gets off the
14   ground, what we kind of call the "ex ante effect." 
15             So I think trying to predict if we put in
16   universal proxy what's the end effect going to be in
17   terms of number of elections, I just think is incredibly
18   difficult to forecast.  So the way I think about it is
19   let's kind of come back more to the base question of what
20   we're interested in is a robust, democratic system,
21   that's presumably what corporate governance is after,
22   then what is the argument against giving shareholders the
23   flexibility to decide who they want?
24             In the current system you have management says,
25   "this is what we want," and an activist shareholder says,
0061
 1   "this is what we want."  That's two interests that are
 2   represented.  If you let all shareholders decide, then
 3   you should in theory get the sort of average across the
 4   ownership base of the company of what the owners of the
 5   company think is optimal and I think from an academic
 6   perspective, again, without any direct evidence on
 7   universal proxy, I think that's the closest that we can
 8   come to having an academic consensus on the issue.
 9             MS. ANDERSON:  Charlie.
10             MR. PENNER:  You know, just to the extent that
11   you're concerned or there's a concern at the Commission
12   that if you were to do this you would suddenly see, you
13   know, kind of a flood of names and, again, I don't think
14   you would because you have advance notice provisions
15   which if you've ever filled one out, you wouldn't do it
16   just for sport but, also, you know, the follow on time
17   and resources, again, I think would be -- but if you felt
18   like you needed to put some sort of kind of restriction
19   on it I, personally, just from kind of reading the
20   materials out there think something along the lines of
21   sending out your own proxy makes more sense than the
22   approach taken in the prior proxy access proposal to
23   limit it to people who are only seeking a certain number
24   of seats.  I can understand we're using kind of company
25   real estate and there's no real kind of costs to doing it
0062
 1   other than that that you would have some sort of
 2   restriction on it like that.  I think the problem with
 3   applying that in the universal ballot perspective is
 4   whether you're running for two seats or six seats or
 5   eight seats, the same issues with the non-universal
 6   ballot situation apply. And the other thing, just kind of
 7   more broadly as an activist we would say is, you know, I
 8   think the term "control" gets kind of tossed around very
 9   loosely.  
10             You never -- at least in my experience -- have
11   a situation where if there are twelve seats and you put
12   up twelve candidates -- the twelve people coming from
13   JANA or another fund -- and in that situation, you know,
14   you have shareholders before and after the contest, they
15   own the company and they've simply elected new
16   representatives and so to put in place a restriction that
17   treats the existing board as if they have kind of a
18   greater say or a greater entitlement to existing seats, I
19   don't think is the right thing to do.  So if you're
20   thinking of ways to put limits on it I think you kind of
21   have to look at who is actually doing the work to do
22   these things.  I also think that would probably be
23   minimally disruptive to the current system since that's
24   basically the restriction that's on it now.
25             MS. ANDERSON:  Bruce, you've been quiet and as
0063
 1   a proxy solicitor I'd love to get your perspective on the
 2   lay of the land here.
 3             MR. GOLDFARB:  Thank you, Michele, and thank
 4   you to the entire Commission and the staff for having us
 5   here today.  I think now everybody has thanked everyone
 6   so I'm glad to provide that role.
 7             As proxy solicitors, we help our clients in
 8   corporate election campaigns and we help our clients -- 
 9   whether they're corporations or investors -- understand how
10   other investors think and behave and we help them focus
11   on the investor response.  So in that context, when we
12   work on a campaign currently -- and it's been articulated
13   quite well by a number of the Commissioners -- that
14   investors vote with one proxy or the other in a contest
15   and there is some ability to choose, I should note that
16   as part of the process -- and many investors make use of
17   the fact that you can request a legal proxy -- you need
18   not actually attend the meeting in person, you can attend
19   through a proxy and we have seen more investors make use
20   of that process in recent election campaigns.  For
21   beneficial owners in general, you can split your vote. 
22   It's not easy to split your vote but splitting has
23   certainly become more common over time and part of our
24   role is to help investors understand how to navigate
25   through that process.
0064
 1             So it really is an issue of process and when we
 2   look at a universal ballot and we consider the universal
 3   ballot in terms of a process for facilitating voting, I
 4   think it's very important to go back to the concern of
 5   how you actually implement the card and how the card
 6   ultimately gets set up. And the mechanics become very
 7   important because even sophisticated investors have a
 8   hard time at times with situations with voting. Whether
 9   it's because of cumulative voting or just the issues and
10   the investors involved and in many instances as you
11   consider whether to implement a universal ballot I think
12   it's very important to look at the unintended
13   consequences, the issues that come up in political
14   elections as you go to vote or prepare a card, and as we
15   see in political elections, candidates and parties vie to
16   be on the top of the card.  
17             It's important sort of in terms of placement
18   and so setting out the rules of the road so that, for
19   example, Steve Zissu is somebody who may not win a
20   campaign because they end up at the bottom of a ballot
21   where it's pick fifteen or there's fifteen names and it's
22   pick six and you have to decide how those cards get
23   voted, who has the ability to determine what is a valid
24   card? How the votes are tabulated is significant and
25   sometimes keyed off of what the card actually looks like
0065
 1   and there is a difference and it's a significant
 2   difference in the concept of having a universal proxy
 3   between what the card looks like and how the card is set
 4   up as a voting instruction form. And getting to that stage
 5   where the voting instruction form will also reflect what
 6   is indicated in an agreed upon universal card. And what
 7   we've seen is a practical challenge in the few instances
 8   where people have attempted to try to use a universal
 9   card has been that the rules of the road haven't been
10   agreed to ahead of time. And I've actually worked on an
11   election campaign in Australia where they've had
12   universal ballots, they've had them -- this campaign was
13   2002 and so it's been quite some time where universal
14   ballots have existed outside of the United States and it
15   really became partly a situation where using the card was
16   -- or how you set up the card was a potential strategic
17   advantage and the cards were set out where the investor
18   was able to send out cards that were pre-checked, they
19   were able to send out cards with their names in bold and
20   the management side was able to do the same thing and you
21   would create some confusion, particularly for retail
22   shareholders.
23             So I think it's very significant as we go
24   through this process, not just what the form looks like
25   but, also, even how do you choose who wins if you submit
0066
 1   a ballot with too many names checked off?  Does the proxy
 2   committee have the ability to choose?  Is it at the
 3   bidding of an inspector of election?  Is there some
 4   process in state law will impact all of these issues?
 5             MS. ANDERSON:  I'd be curious if Rick has any
 6   response to that because we would want to get into sort
 7   of the costs and the risks if we were to go towards a
 8   universal ballot in terms of would there be possible
 9   voter confusion? Would there be a problem with over
10   voting? You know, could service providers have the
11   ability to process this?
12             But do you have any views on the state law
13   issue there, Rick?
14             MR. ALEXANDER:  Yes.  Again, a lot of this
15   happens before you get to the Delaware part because
16   you're working preceding putting their vote in through
17   their proxy but I think it would be very tricky to get
18   away -- whether you're operating under that system or
19   state law -- to get away from, you know, disposing of
20   over votes. Because once you have a situation where the
21   proxy holder is deciding what something meant, you know,
22   I think that's a real risk so, again, this is why I think
23   the situation is ripe for some sort of regulation.
24   Whether that comes from by-laws like advance notice by-
25   laws and things like that or whether it comes from here
0067
 1   or from state law, I don't know, but you just have to do
 2   something to make sure, I think, that things like over
 3   votes are not abused.
 4             MS. ANDERSON:  Sure.  David.
 5             MR. KATZ:  There have been a bunch of issues
 6   that have been hit on and I'll try to go through them.
 7   But, first, on the point of board room dynamics, I do
 8   think that's an important issue but I think that, you
 9   know, obviously it's a question of what advice a board
10   gets but the reality is if you exclude an elected
11   director from the process in the board room you're doing
12   so at your own risk and that director is going to be able
13   to voice their views. They have remedies under state law
14   to do that but, also, there's going to be an election
15   down the road and so, frankly, the answer is the board
16   room needs to work. Companies need to work at the end of
17   the day and, you know, much the same way as we've seen in
18   many settlements where people come on the board that
19   weren't elected by shareholders but people get together
20   and decide that they're going to add somebody, you need
21   to make it work. And I think that one of my big problems
22   with the universal card and the universal approach is
23   we're talking about a small part of the system, yet it
24   has major, major costs.  
25             To the extent that companies  now are dealing
0068
 1   with activists, I agree with Charlie, that you're not
 2   going to see a flood of new activists, that's not what
 3   I'm concerned about.  I'm concerned about more fights,
 4   more contests, that's a distraction.  You want public
 5   companies to produce value for their shareholders.  If
 6   they are dealing with proxy contests -- I mean, you know,
 7   whether we say it or not, staggered boards have a
 8   protective mechanism that you end up having a tendency to
 9   have less contests.  We've moved away from that.  The
10   shareholders have spoken but if you go too far towards a
11   shareholder-centric model in my view, you're going to
12   impose a real cost on companies, you're going to stifle
13   innovation, you're going to lose the public company
14   dynamic.
15             If you're going to fix this I think you need to
16   do a wholesale fix to the system and not just fix a small
17   piece of it and part of that goes to the fact that there
18   are institutional investors that control a vast majority
19   of the shares that are owned in public companies today
20   and so if JANA wants to go and talk to fifty percent of
21   the stock, twenty years ago they'd have to go and talk to
22   a huge number of investors.  Today, they can probably go
23   and talk to probably five, ten, fifteen investors and the
24   vote is done.  So when you talk about sending out, the
25   costs and everything else, you know, once you start doing
0069
 1   that it has an impact.
 2             The other piece of it is, you know, setting up
 3   a legal proxy works.  There are fixes that work today.
 4   They're not perfect but the system today isn't perfect
 5   and, you know, we can't just try to update a small piece
 6   of it.
 7             One of the things -- and it's going to be
 8   talked about in the next panel -- you know, electronic
 9   voting is great for institutions, okay, it makes things
10   much easier for them. Shareholders don't vote and when
11   you start talking about making a process more complicated
12   and more daunting, I don't think you're likely to get
13   those retail investors to vote and I really do worry
14   about the consequences of them.  The institutions have an
15   obligation to vote and they have to deal with that and if
16   they really think that the right thing to do in a
17   particular contest is to send a legal proxy or to split
18   the ballot there are mechanisms for them doing that.
19   They're not easy, they are somewhat cumbersome but it's
20   possible.
21             On the other hand, one of the things that you
22   need to think about is, we're not just talking about
23   large, public companies here and that tends to be what
24   people focus on.  There are thousands of smaller, public
25   companies that can't go out and hire a Bruce to help them
0070
 1   with soliciting, where they don't have a corporate
 2   governance professional in addition to a general counsel. 
 3   They really don't have the resources.  In a proxy
 4   contest, you know, a couple of million dollars to them
 5   may be the difference between the company having a profit
 6   or not having a profit that year and so activists,
 7   frankly, have learned that it's much easier to get seats
 8   on these companies because the costs of a fight are so
 9   great.  
10             If you then turnaround and make it, you know,
11   through universal ballot, easier for people to get elected
12   there's going to be less of an incentive to settle and,
13   frankly, I think that's also going to increase the costs.
14   And the bottom line is what's going to be best for the
15   United States in a competitive environment. And I very
16   much worry that this will help push the focus to even
17   more short-termism.  If you make the model too
18   shareholder-centric, shareholders make decisions based on
19   the here and now but we ask -- and we make investments
20   for companies based on the future and you've really got
21   to deal with that dynamic.
22             MS. ANDERSON:  Charlie, and then we'll go with
23   Anne after.
24             MR. PENNER:  I don't want to veer the
25   conversation off on a different topic but since it's been
0071
 1   raised both by David and by Commissioner Gallagher, the
 2   kind of concept of whatever you do here can have
 3   implications of encouraging or discouraging activism and
 4   what the implications of that would be.
 5             I just have to, for the record, respectfully,
 6   disagree with both as to the idea that there's any
 7   evidence to suggest that activism is either harming
 8   companies or delivering a push towards short-term value. 
 9   I think any decision the Commission makes would obviously
10   need to be supported by empirical evidence and it
11   certainly doesn't all go in the same direction but the
12   balance of it actually indicates that companies are more
13   productive, shareholders benefit not just in the short
14   term but over sustained periods even after an activist
15   has done what they need to do.
16             So I would just -- again, to the extent that
17   this is part of a record that the Commission will
18   consider, I think that needs to be looked at and the
19   evidence -- all the evidence supporting what I said and
20   what doesn't needs to be weighed.
21             The other thing I would say is -- and, again,
22   this is relevant because we're talking about kind of
23   shareholder input on these things -- to the extent that
24   we started proposing things that were bad in the long-
25   term for companies, as Anne pointed out, there's a very
0072
 1   easy mechanism to address that and it is the shareholder
 2   vote.  The CalPERS and CalSTERS and BlackRocks kind of
 3   run the shareholder world and they've made clear that if
 4   we're not proposing things that are in the long-term best
 5   interests of the company they're not going to support us.
 6             MS. SIMPSON:  Thank you.
 7             I fully agree with what David said regarding
 8   how difficult it is to split your vote; the complications
 9   of getting the legal proxy.
10             What we're trying to do here is actually
11   achieve simplicity, I think what Sarah called "elegant,"
12   but simplicity here and that is to allow the owners of
13   the corporation with full care and determination decide
14   the team to be the directors. And we regularly face a
15   situation where we're very unhappy with a board.
16             The board is not talking to us, Sarah.  I mean
17   that's why you reach to the formal rights is because
18   there is no dialogue.
19             You're in that situation, the board is
20   unsatisfactory, an activist produces a slate but, guess
21   what, they found, you know, with all due respect, they
22   found people who they like and know and look like them
23   and think like them and, really, you may want -- and
24   often this is the case with us -- want to say, okay, we
25   need to ginger up this board with one or two people with
0073
 1   specific expertise that's lacking and have a couple of
 2   people replaced or to supplement the board, but you don't
 3   want lock, stock and barrel what you've got or what
 4   you're being offered.  You want to be a good fiduciary
 5   and think it through.
 6             So all we're talking about is allowing the
 7   proxy voter to have the same ability that that voter
 8   would have if they were to attend in person.  So we have
 9   some high-class problems like how to make sure that
10   people called "Aardvark" don't have some, you know,
11   advantage over people called "Zenith" but I think this is
12   within the realm of human ability to work out how to have
13   clarity and simplicity on the voting card. But right now
14   we can do all of this if only we attended the meetings
15   and that's just not practical.
16             MR. KATZ:  Why isn't it practical when you --
17   it's not like there's thousands of contests?  There are
18   people that can act as a legal proxy, there's ability to
19   do it when there's a contest.  You've got solicitors on
20   both sides who are going to help you do it and it's not
21   like we've got ten thousand contests.
22             MS. SIMPSON:  Well, I would say counter and say
23   what is the purpose of having a proxy?  The purpose is to
24   allow a level playing field so that people who are not in
25   the state, not in the country, may have a day job, may be
0074
 1   retired and unable to travel or may not have the
 2   resources to travel, the whole purpose of having a proxy
 3   is to level the playing field between all the providers
 4   of capital and what we're doing here is simply ironing
 5   out a wrinkle.  It's really not that difficult.
 6             MR. KATZ:  I guess the answer I would give is
 7   that that wrinkle has a lot of ripples and you have to
 8   think about what those ripples are going to be and I'm
 9   very concerned that by simply fixing a small piece of a
10   machine that's broken, it's going to have very significant
11   unintended consequences that will ripple and cause an
12   even greater concern.
13             If we fix the whole machine, then we're doing
14   something and, frankly, the staff has been working very
15   hard for years at trying to fix the machine and Congress
16   has helped in some ways and hurt in a bunch of other ways
17   by putting other priorities on the SEC's plate. But what
18   we need to do is fix the machine and simply saying, let's
19   deal with universal access on the card is not in my view
20   going to fix the machine.
21             MS. SIMPSON:  Well, I think it's a bit like
22   taking in your car, you know, you know you need to
23   replace the tires, the carburetor, you've got smoke 
24   pouring out the back and the steering wheel is dodgy, 
25   you do the priority things first; you get the brakes 
0075
 1   fixed, make sure you have your smog test and this is, 
 2   for us, like getting the brakes fixed.  If we can hire 
 3   and fire and hold boards accountable, that's a critical 
 4   piece in the governance system.
 5             MR. KATZ:  I think that the answer is, it's the
 6   governance system that we have to be focusing on and
 7   that's a question that Chairman Gallagher -- Commissioner
 8   Gallagher raised and Chairman White -- 
 9                           (Laughter)
10             COMMISSIONER AGUILAR:  Now, that's wishful
11   thinking.
12             CHAIR WHITE:  Only if I agree with him.
13             MR. KATZ:  But it's a real issue about the
14   governance system and the problem is that this has an
15   impact immediately on the governance system and maybe the
16   question is we should be looking more at the governance
17   system and how that should work together with the proxy
18   voting mechanism in it's totality, rather than just saying
19   fixing this little piece and you let the ripples happen
20   in the governance system.
21             MS. ANDERSON:  That sounds really easy. 
22   Thanks, David.
23             Steve, I know, you've been wanting to make a
24   comment and then Lisa next.
25             MR. WOLOSKY:  I'd like to take it down to some
0076
 1   of the mechanics in the unintended consequences because
 2   there's a lot of theoretical stuff being discussed and I
 3   agree with some of it and disagree with some of it.
 4             But to me, think about the fact that both sides
 5   are still going to have a card and you can't solicit a
 6   vote as a shareholder or as a company until you clear
 7   proxy material with the SEC.  So if the company clears
 8   proxy material first and it's mailing it's universal
 9   ballot to shareholders and the shareholder takes time to
10   clear his ballot a few days later and he mails it a few
11   days later, what ballot is a shareholder going to
12   receive?  What are they going to do?  How are they going
13   to vote?  Is Broadridge going to set up the ballot or DTC
14   going to set up the ballot so it's the ballot sent by the
15   company which lists all of the company's nominees on top
16   and lists all of the dissident nominees on the bottom and
17   has the company's nominees in twelve font and the
18   dissident's ballot in six font?  
19             Those things are really important when you get
20   down to implementation and I think if the staff is going
21   to think about and the Commission is going to think about
22   how to implement it, it really needs to think about
23   uniform rules that apply to all proxy contests; minority
24   slates, majority slates and ones that do not give, you
25   know, a company an advantage and when you talk about
0077
 1   costs. The board of directors, the company pays for the
 2   costs of their proxy material.  The shareholder has to
 3   pay out of his own pocket generally to run a proxy
 4   contest, sometimes gets reimbursed but has substantial
 5   expenses that are associated with it and the mechanism
 6   right now is set by the company in terms of the timing
 7   and the processing.  So when you think about how you deal
 8   with the actual implementation of the process I think
 9   there needs to be a focus so that, you know, dissidents
10   that aren't the size of JANA or shareholders that aren't
11   the size of JANA, that aren't $5 billion but, you know,
12   may own two percent of the company but are really -- that
13   may have a market cap of $100 million and  may be
14   concerned about what the company is doing and want to
15   nominate directors and, you know, they're not quick
16   enough out of the staff so that, you know, the ballot
17   that goes to Broadridge causes them to lose the election
18   before it started because of the way the universal ballot
19   is set up. 
20             So I think you need to think long and hard
21   about, you know, what the universal ballot looks like,
22   how it's mailed, when you can mail it, when you can
23   solicit and all the small items that go into a very big
24   process.
25             MS. ANDERSON:  The devil would certainly be in
0078
 1   the details.  I agree.
 2             Lisa, I want to give you a chance too. 
 3             MS. FAIRFAX:  I think I'm actually going to
 4   echo what Steve just said at the end and what you just
 5   said, that the devil is in the details. And I think that
 6   when you think through implementation I think it's
 7   actually extremely important to try to get, I think, to
 8   uniformity and to not have a situation where we're back
 9   where we started from where some people are doing
10   universal and some people aren't and now we've just
11   recreated the confusion. And I also think this question
12   about when the universal ballot gets sent, potentially
13   when you have to give notice in order to be a part of the
14   universal -- like all of that, I think, is very important
15   because you don't want to have a situation where you have
16   a company that sends out not a universal ballot and then
17   all of a sudden figures out that they're going to have to
18   and I think all of that gets also gets to something else
19   which I think is extremely important and which, I think,
20   Charlie mentioned it as well, which is I think what we're
21   trying to get at the end of the day is to a place where
22   the shareholders are making a choice that's really about
23   the choice they want to make and less about the voting
24   process being about some gamesmanship and about one side
25   trying to get a tactical advantage.
0079
 1             Now, of course, that's in many cases, you know,
 2   what most of it is about but we do want to kind of come
 3   back to that core principle but we're also trying to make
 4   sure that shareholders are able to make the choice that
 5   they otherwise could make and so a part of me gets a
 6   little -- I mean if it's the case that we are willing to
 7   allow people at least theoretically to vote by a ballot
 8   if only they could get somewhere, then I don't understand
 9   why we then can't say, okay, let's just create something
10   that approximates that ballot.  I know that is obviously
11   harder than it sounds but certainly there is, I think,
12   need for simplicity there.
13             I would also just want to finally echo what
14   Anne said about the importance of not thinking you have
15   to -- while the entire system has problems, I think this
16   is something that you could realistically take on and try
17   to work through; not, of course, without trying to think
18   carefully about the potential cost and benefits; not, of
19   course, without thinking through the mechanics of how
20   it's going to work, both mechanically in terms of the
21   ballot but, also, I think David is quite right about the
22   potential for board room dynamics.  You know, I think it
23   is the case, it's unpredictable, we don't know what
24   potentially is going to happen but that at least needs to
25   be a concern that you kind of think through because at
0080
 1   the end of the day we do want these companies to function
 2   and be able to govern effectively, you know, but having
 3   said that I don't think it's the case that you kind of
 4   have to kind of bite off -- you know, eat the whole apple
 5   in order to kind of take this kind of step that would, I
 6   think, be quite frankly responsive to what a lot of
 7   shareholders are looking to try to do.
 8             MS. ANDERSON:  Michelle, you had a response to
 9   that?
10             MS. LOWRY:  Yes.  I just wanted to come back --
11   in terms of the implementation issues, come back to an
12   issue that was brought up before and that's in terms of
13   making sure we have a level playing field between the
14   institutional investors and the individual investors.
15   Because I do think that's important particularly in light
16   of the next panel and some people brought up the issue
17   that with universal proxy maybe individual investors
18   would be at a disadvantage because of confusion, etc.,
19   and I would just like to point out that they are clearly
20   at a disadvantage now and I don't think we can disregard
21   that, right?  
22             I mean we -- sure, you can go to a shareholder
23   meeting and, you know, vote, pick and choose, mix and
24   match, but the individual investors are exactly the
25   people that are least able to do that now and maybe you
0081
 1   can sort of make that happen through mail but it's
 2   complicated, it's difficult, again, individual investors
 3   are at a disadvantage.
 4             MS. ANDERSON:  Chris and then Bruce.
 5             MR. CERNICH:  This is brief but thank you.
 6             The one thing I would say, there's an awful lot
 7   of discussion, particularly in the media, because it's
 8   good drama about who wins and loses in the proxy contest. 
 9   That is not how institutional investors -- which is the
10   group that I'm more familiar with -- thinks about these
11   things.  They think they're voting for what's the best
12   outcome for this company in which they're invested and
13   they are owners.  If the debate becomes, well, it's going
14   to give more advantage to one side or the other, it's
15   probably the wrong debate even though it is very
16   important how this is implemented.
17             As far as the discussion of who is going to go
18   first, is it going to be twelve point font and six point
19   font, some of that gets eliminated for institutional
20   investors when it comes through Broadridge anyway but we
21   have two examples in the U.S. where dissident nominees
22   were listed on a company ballot within the last three
23   years; one was a very small nanocap which had almost no
24   institutional investors, the other was about $100
25   million, also small, but it had institutional investors. 
0082
 1   In the second one, the nominating shareholder held 38
 2   percent of shares, probably not a surprise that all of
 3   their nominees were elected.  In the first one, the guy
 4   ran a series of bait shops.  He was not the last one on
 5   the ballot but he was elected to the board largely by
 6   retail shareholders and the person who was not elected
 7   was also not the lowest one on there. 
 8             These are great discussions to have but the
 9   real principle here is can shareholders vote the way they
10   think is best for the company in which they're invested? 
11   It's not really whether it's going to make it easier or
12   harder for the activist or whether activists are like
13   gremlins and we're talking about feeding them after
14   midnight or any of those issues.  It really comes down to
15   can the investors do the right thing for the company in
16   which they're invested and for the fiduciaries on whose
17   behalf they're acting?  I'm sorry, the shareholders.  The
18   investors -- can they do the right thing as fiduciaries
19   is what I meant to say there.
20             Thank you.
21             MS. ANDERSON:  Bruce, you're going to close
22   this out because we are out of time.  So go ahead.
23             MR. GOLDFARB:  All right.  Well, then I'll
24   focus my comment forward towards the retail participation
25   in the process and as we look at the concept of the card
0083
 1   and we think about how we do the outreach to get
 2   investors to respond, individual investors tend to be
 3   apathetic in many instances and it's about helping them
 4   take action.  One of the ways we can help that process is
 5   to consider giving the parties in these campaigns more
 6   access to all investors potentially looking at
 7   considering releasing the OBO forms in these campaign so
 8   investors are having ways to be informed other than
 9   potentially through the mail and I think that's a
10   significant concept, potentially, not just what the forms
11   look like but how we're having the ability to reach out
12   to people the way that institutional investors have an
13   informed decision because they do have the ability to be
14   part of the process.
15             MS. ANDERSON:  Well, thank you for that
16   excellent segue to the second panel.
17             Panelists, thank you very much for the very
18   intelligent and lively discussion that we just had.
19             We are going to take a little over a ten minute
20   break and we'll be back here at 11:30.
21             Thank you.
22                     (Pause in proceedings)
23             MS. ANDERSON:  I believe I was probably
24   supposed to say thank you to the Chair and the
25   Commissioners and I totally blew that, too, so thank you.
0084
 1             (Laughter)
 2             (A brief recess was taken.)
 3        PANEL 2:  RETAIL PARTICIPATION IN PROXY PROCESS
 4             MR. HIGGINS:  Welcome back.  We're about to
 5   convene on the second panel and let me turn it over to
 6   David Fredrickson, Associate Director and Chief Counsel
 7   in Corp. Fin., who is going to lead us through the second
 8   one.
 9             MR. FREDRICKSON:  Thank you, Keith.
10             State corporate law gives shareholders the
11   right to vote on certain corporate actions.  The
12   shareholder vote is the way in which shareholders
13   exercise their rights as owners of the corporation but
14   the system of holding shares and street name has helped
15   to make our markets the most liquid and efficient in the
16   world but one consequence of that system is that the vast
17   majority of shares are voted through the solicitation of
18   proxies.  The Exchange Act authorizes the Commission to
19   oversee that proxy season.  Our rules are designed to
20   promote, as people have mentioned, well informed voting
21   and to replicate to the extent possible physical
22   attendance at a shareholder meeting.
23             Some observers have expressed concern that
24   retail shareholders represent a decreasing percentage of
25   the shares held by the public and voted at meetings. 
0085
 1   This panel is designed to open up a discussion about what
 2   the causes of this phenomenon are and what are our
 3   response should be.  We'll try to understand the current
 4   state of retail shareholder engagement better and discuss
 5   a variety of approaches whether through disclosure,
 6   education, technology or voting mechanics to address the
 7   situation.  Throughout our discussion I'd like to focus
 8   on what is impeding, whether in our rules or otherwise,
 9   shareholder engagement.
10             Our panelists represent a variety of
11   perspectives on these issues and I'm very pleased to
12   welcome them all.
13             Starting over on my far left, Donna Ackerly,
14   senior managing director of Georgeson Incorporated; Reena
15   Aggarwal, who is the Robert E. McDonough Professor of
16   Finance at Georgetown University and a director of the
17   Georgetown Center for Financial Markets and Policy and
18   sits on a number of corporate boards; John Bajkowski,
19   president of the American Association of Individual
20   Investors; Alan Beller, senior counsel at Cleary,
21   Gottlieb, Steen & Hamilton; John Endean, president of the
22   American Business Conference; Lawrence Hamermesh, the
23   Ruby R. Vale Professor of Corporate and Business Law at
24   Widener Law Institute of Delaware Corporate and Business
25   Law.
0086
 1             On my right, Cornish Hitchcock, principal of
 2   Hitchcock Law; Niels Holch, executive director of
 3   Shareholder Communications Coalition; Jim McRitchie,
 4   publisher of CorpGov.net;
 5   Nell Minnow, co-founder of the Corporate
 6   Library and founder and former board member of GMI
 7   Ratings; Robert Schifellite, president of Investor
 8   Communication Services at Broadridge Financial Solutions
 9   and Darla Stuckey, president and chief executive officer
10   for the Society of Corporate Secretaries and Governance
11   Professionals.
12             Thank you all very much.
13             I thought I'd start with sort of the basics and
14   that is, you know, "why do we vote?" Or "why is voting a
15   necessary part of corporate law?" And to that I'll turn it
16   over to Larry.
17             MR. HAMERMESH:  Thank you, David, and
18   Commissioners, thanks for the opportunity to be here.
19             As Commissioner Aguilar may know, I haven't had
20   this much fun this morning since I was here in the
21   building five years ago working on the proxy concept
22   release.  So nice to be back.  I suspect we may be back
23   again.
24             In any event, what's the importance of voting? 
25   It was all over the first panel, I don't need to repeat
0087
 1   very much but state law, as you said, David, provides the
 2   foundation for a very important mechanism of
 3   accountability.  If corporate takeovers are important,
 4   then the voting mechanism as it's evolved at least under
 5   Delaware law makes shareholder voting a critical
 6   component of that process.  It's a critical component of
 7   the shareholder's ability to shape corporate strategy,
 8   financial policy and so forth and the conduct of mergers
 9   and acquisitions generally.  So in the same way that a
10   hospital emergency room is critically important to a
11   seriously injured patient, the voting process is
12   critically important to the issuers who have significant
13   problems.
14             I can't end there, though, without observing that
15   there is a limit -- I think there's a practical limit in
16   terms of how important the voting process is and that
17   there are diminishing returns, and I think it's important
18   for practical people to keep in mind what the net
19   benefits are of tweaks to the voting system; how much
20   effort is necessary, how much more do we want to
21   encourage voting? And why and where do we want to do that? 
22   What bang are we getting for the buck?
23             I'll leave it at that.
24             MR. FREDRICKSON:  Thank you.
25             Bob, so what can you tell us about what we know
0088
 1   about the current state of retail participation in
 2   voting?
 3             MR. SCHIFELLITE:  Okay.  Thank you and thank
 4   you all for the invitation as well.
 5             I'm going to start high level.  I have so many
 6   numbers here I'm even getting confused already and I
 7   haven't even articulated the first metric.
 8             Anyway, here's the way to think about it.  If
 9   you look at street shares versus registered shares,
10   right, so let's start there, generally the number is
11   about eighty-five percent on the street and fifteen
12   percent registered.
13             I think an "a-ha" moment came about a few years
14   ago when we started publishing with Pricewaterhouse the
15   mix between institutional shares and retail shares and
16   now I'm talking specifically about the street and the
17   numbers that we've published -- and my colleague has more
18   precise numbers but let me round it a little bit so,
19   Chuck, don't get mad at me -- think about it this way,
20   seventy percent of the shares on the street represented
21   by institutions, thirty percent represented by retail
22   investors and I think when we started talking about that
23   I think there were many companies, corporate secretaries,
24   IR, that were surprised that the retail shares were as
25   high as they are because when you look at a lot of the
0089
 1   websites and you talk to people -- I've won a lot of
 2   dinners and bets about what the actual shares because
 3   when it's reported on a website through some of the firms
 4   that do that reporting what they will do is they'll take
 5   an entity like Charles Schwab and say Charles Schwab.  
 6             All they're seeing is Charles Schwab has a
 7   million shares in XYZ company.  We, uniquely at
 8   Broadridge, have access to see those underlying
 9   shareholders and from there we can determine the mix
10   between retail shareholders and institutional
11   shareholders.  So seventy/thirty is the number.
12             If you now take it to voting that seventy
13   percent of the institutional represented shares are
14   voting at about a ninety percent rate and you take the
15   thirty percent of the retail shares, they're voting at a
16   thirty percent rate and the number is tweaking down
17   slightly even though there's a lot of things that have
18   been happening from a technology point of view and what
19   we believe if we continue to implement technology there
20   are ways that we can keep the retail investor engaged
21   and, hopefully, improve and I have more information on
22   that but I'll stop for now and see if there's any other
23   questions.
24             MR. FREDRICKSON:  Thank you.  Feel free as we
25   go along if there are numbers you have that can help
0090
 1   inform our discussion, feel free to pipe in.
 2             So let's turn to Reena and ask, so what can you
 3   tell us about why retail shareholders may vote at
 4   different levels than institutional and does it depend on
 5   the issues that may be presented.
 6             MS. AGGARWAL:  So a couple of things.  We are
 7   talking about how to increase retail participation but I
 8   think we also want to think about how to increase
 9   informed retail participation, not just increasing retail
10   participation for the sake of increasing the numbers and
11   so in my mind I think the two issues why retail investors
12   don't participate; one is information, they have lack of
13   information and there are some small things that can be
14   done to help with information flow.  So, for example,
15   mutual funds have to report -- via NPX -- their voting
16   records and if it could make it easier for retail
17   investors to access that, then at least they will have
18   some benchmark as to how others are voting and that might
19   serve as useful information. 
20             In some of our research we actually find that
21   the media plays a very important role, that the media
22   actually impacts how voting occurs.  So we're looking at
23   media in terms of compensation.  If there are lots of
24   articles about a company and compensation-related
25   articles, then you see more support for shareholder
0091
 1   proposals and if retail investors are paying attention to
 2   media that tends to be another source of information,
 3   good or bad, I won't comment on that.
 4             A third thing, I'd say, is not just a retail
 5   issue but also an institutional issue.  Proposals are not
 6   known well in advance; what is going to be on the ballot
 7   is not known on the record date quite frequently and so
 8   in one of our projects we're looking at recall of shares
 9   that are lent out -- this is mostly by institutional
10   investors -- challenges.  I don't know whether to recall
11   my shares because I don't know what's going to be on the
12   ballot.  I have some good idea based on last year but I
13   don't know what might be on the ballot, and I think
14   that's another very U.S.-centric issue that doesn't tend
15   to be a problem in other countries.
16             So the second group is retail investors think
17   they can't make a difference.  They think they can't make
18   a difference, institutions own a big chunk which is
19   actually very wrong thinking because we know that twenty
20   to thirty percent dissent votes can make a big
21   difference.  Again, in some of the work I've done we find
22   director turnover starts happening as soon as directors
23   are getting thirty percent dissent votes.  So you don't
24   have to have majority in order to actually have an
25   impact.  Just twenty/thirty percent dissent votes can
0092
 1   start making a difference.  So retail investors tend to
 2   vote more in mid-sized companies than larger companies I
 3   think, partly, because they think they can make more of a
 4   difference in mid-sized companies but I think it's about
 5   education, that twenty/thirty percent votes can make a
 6   big difference and the retail investor vote can make a
 7   difference.  So between the combination of getting retail
 8   investors informed and getting them to understand that
 9   even a few percentage can make a big difference is an
10   important way to be thinking about it and I'll come back
11   to some of the other statistics later on.
12             MR. FREDRICKSON:  Great.  Thank you.
13             Well, one of the things that's often said about
14   the importance of retail ... of all shareholder voting is
15   to obtain quorum and I was interested, Donna, if you had
16   a perspective on to what extent does the difficulty or
17   impossibility of obtaining quorum affect voting?
18             MS. ACKERLY:  Thanks, David, and thanks
19   everyone else for inviting us here.
20             We have experienced a number of our clients
21   facing difficulty achieving quorum and those clients
22   include companies with a large retail population, you
23   know, unlike what Bob was saying where you have a seventy
24   percent institutional investor base and thirty percent
25   retail, we have clients that are the flip side, seventy
0093
 1   percent retail and thirty percent institutional.  So it's
 2   often difficult achieving quorum in those situations and
 3   then there are other situations where you have companies
 4   that don't include auditors on the ballot so there's no
 5   retained proposal on the ballot really to measure the
 6   quorum so you're really relying on purely instructed
 7   votes, whether it be on directors, stock plans or
 8   whatever the case may be.
 9             So these are challenges that we face in helping
10   clients achieve quorums for the meetings.
11             MR. FREDRICKSON:  Can you discuss a little bit
12   about, you know, what do you do to identify the problem and
13   engage the problem when you realize there may be an
14   issue?
15             MS. ACKERLY:  Sure.  Well, some of the
16   strategies that we use to engage retail investors include
17   reminder mailings. And reminder mailings can be targeted
18   towards a certain population of the shareholder universe
19   or it could be everybody, it just really depends on what
20   the largest, as I call it, the bang for a buck that we're
21   going to get so we don't spend a lot of clients' money
22   unnecessarily.
23             We publish toll free numbers.  We set up toll
24   free numbers for inbound calls.  We make outbound calls. 
25   We utilize what we call our "TOVA" process which is a
0094
 1   unique tool that's utilized by proxy solicitors to help
 2   bring in the vote.  So essentially it works as we're
 3   engaged in conversation with the retail investor and we
 4   offer them the opportunity to vote on a recorded line. 
 5   We can then transmit that vote to the tabulator if it's
 6   for a registered shareholder or to Broadridge for street
 7   name shares.  So that has certainly helped.
 8             We started using robocalls, which is a recorded
 9   message by a member of senior management; the CEO or the
10   chairman that essentially says -- it goes out en mass to
11   a large number of shareholders that says, please vote,
12   your vote is really important, we need your help. 
13             Other things that we've done at certain times
14   in my career is we've held town hall forums to engage
15   with retail investors which sometimes work.  It depends,
16   again, who the audience is but I think that's more for
17   private companies rather than public companies.
18             Let's see, what other things have we done? 
19   We've done blast e-mails, we've set up websites with
20   links to the actual voting sites.
21             So these tools definitely work but, again, it
22   costs money and that's the biggest challenge that our
23   clients face.
24             MR. FREDRICKSON:  Thank you.
25             So following up on Reena's observation about
0095
 1   communication and also from Sarah's on the last panel
 2   that, you know, voting is sort of an episodic, once a
 3   year or special meeting. And I was interested, Darla, so
 4   what kind of effective strategies do companies use to
 5   communicate throughout the year?
 6             MS. STUCKEY:  Well, thanks again for having me.
 7             Right now, I don't know that issuers are doing
 8   a lot of communication outside the annual meeting
 9   process.  They would like to -- some would like to.  I
10   will say the vote is more important.  I think it gets
11   more important every year.  "Say on Pay" has created a
12   lot of interest and I agree with Reena that she's
13   absolutely right that a twenty or thirty percent makes a
14   difference particularly on a Say on Pay vote.  Companies
15   want to get those votes in so they do have a desire to
16   get to their retail holders more easily.
17             Some companies, I would say, very large cap
18   consumer oriented companies are interested in getting to
19   their shareholders who are also consumers of their
20   product maybe on social media, things like that.  There
21   is a desire, again, on some companies' part to talk to
22   shareholders, maybe on a quarterly basis, send a letter,
23   send some news probably most likely via e-mail.  I
24   haven't heard of anybody that's really doing a lot of
25   mail campaigns like they used to I think a long time ago. 
0096
 1             So I mean it is a tough problem for all the
 2   reasons people have already been speaking about but
 3   companies do want their retail holders to vote.  They
 4   also want them to be informed as Commissioner Aguilar
 5   said but they also want a process that's fair and as cost
 6   efficient as possible, particularly corporate
 7   secretaries, it's in their budget -- you know, the proxy
 8   statement, printing, mailing, those things are in their
 9   budget line so they're going to work to try to do that as
10   efficiently as possible.  So those are the competing
11   considerations.
12             MR. FREDRICKSON:  So interested on the investor
13   side, so what kinds of communications, John, would you
14   want or would you think investors want on a more regular
15   basis outside the proxy statement?
16             MR. BAJKOWSKI:  Well, our membership base,
17   we're a membership association of individual investors
18   that want to be active in the process and relative to
19   what Robert observed, about half our members indicate
20   that they vote regularly as far as their proxies go and
21   in reaching out to them -- we actually did a survey of
22   our members this past weekend, we sent out a survey to
23   get a feel for their proxy participation, their voting
24   and I mean we have members that associate themselves as
25   being more knowledgeable than a typical investor as well
0097
 1   and in looking at what kind of information they want
 2   their focus was really one of -- one word that actually
 3   came back was kind of interesting was English -- you
 4   know, when they get communications they want things to be
 5   simple.  They feel often it's in "legalese," written for
 6   lawyers but it comes down to "why," you know, "why should
 7   they participate?" And the overwhelming sensation I got as
 8   I was going through especially the open-ended responses
 9   to the questions was that, really, members don't vote
10   because they don't really feel like their vote matters. 
11   I mean one member here said, "I stopped voting regularly
12   because it has no affect on what the board does.  I
13   realize that I am part of the problem.  If I don't like
14   what the board is doing I simply sell the stock."  So I
15   think most retail investors vote with their feet; if they
16   like what the company is doing they hold on to the
17   shares.  Another member here said, "I vote about half the
18   time, most of the time I don't vote when I'm satisfied
19   with the board and when I think something is being
20   managed poorly, then I sell my shares."  I think that
21   seems to be the sentiment that's going on.
22             The relationship starts with the broker.  About
23   half of our members get their communications from their
24   broker electronically.  About half elect to get paper
25   communications and the voting kind of follows in that
0098
 1   line as well but a common thread that I saw was also
 2   people are more likely to respond if they get something
 3   in the mail.  They get a notice in the mail, they're more
 4   likely to stop what they're doing and actually react to
 5   it, whereas, we all get inundated with e-mails, it's
 6   quite easy to kind of pass that up. 
 7             So if you want to engage the investor, I guess
 8   mail seems to be -- at least for our membership -- a
 9   proposed method of getting it and somehow communicating
10   to them that their vote does matter.  I mean, people will
11   jump through hoops, go over walls or whatever it is if
12   they feel like what they're doing benefits them.  If they
13   feel like what they're doing has no impact they're more
14   likely to simply be quiet and step back.
15             MR. HIGGINS:  Any data on that, Bob, on mail
16   versus e-mail?
17             MR. SCHIFELLITE:  Yes.  Yes, I do.
18             So this is as it relates to shares; right?  For
19   retail shares, not positions but shares, the lowest
20   return of shares is from a paper notice as in notice and
21   access; right, so that's about eighteen percent of the
22   retail shares are returned if it's sent by paper notice. 
23   Next is "e" so if you deliver the information
24   electronically it's almost twenty-three percent.  So a
25   pretty significant up tic.  When you send a full package
0099
 1   through the mail that retail voting percentage rate is
 2   forty-one percent so it is a significant up tic.
 3             Now, I would say that typically what will
 4   happen is even in a notice and access distribution many
 5   companies, especially the larger companies are going to
 6   do a hybrid where based on share range they will mail
 7   full package to those retail investors and investors
 8   overall with more shares.  So you tend to see more voting
 9   from retail investors that have more shares and maybe
10   it's because they do feel it can make a difference, it's
11   more meaningful, they have a bigger investment in that so
12   that's what's happening as it relates to the vote and, of
13   course, you know, just to take up on a couple of things
14   that Donna had said, we are finding now -- especially
15   because of the realization that retail is bigger and
16   represents more than, I think, many thought and Donna is
17   right, you know, the smaller mid-cap's retail is higher. 
18   The numbers I gave are overall so even Fortune 1000
19   companies or 500, you're still seeing a seventy/thirty
20   mix or something close to that.
21             We've started experimenting with even Federal
22   Express to certain shareholders and I don't have enough
23   data to say it's validly accurate or statistically
24   accurate but it's amazing when you tell that investor you
25   care enough to send them a Federal Express or overnight -
0100
 1   - and many times with a return which is, I think, a pain
 2   in the neck because you have to go somewhere, you can't
 3   just put it in your mailbox -- the return rates -- again,
 4   limited sample -- is very, very high.
 5             We've also now -- issuers are coming to us and
 6   saying we want to change the package.  Everybody knows
 7   that blue polywrap.  Well, people are saying, we don't
 8   want the blue polywrap, let's figure out how we can do
 9   more of a marketing campaign, make it more appealing and
10   make it more likely that somebody will open it and do
11   something and take action.
12             So there's a lot of activity all of a sudden
13   and I think it's because of the comments that have been
14   made about it does make a difference now and getting more
15   investor participation is the right thing to do and
16   important for companies.
17             MR. FREDRICKSON:  Alan, it looked like you had
18   your finger on the button.
19             MR. BELLER:  Yes, I was just listening to all
20   of this and it seems to me that there are two
21   observations worthwhile to make based on what we've heard
22   so far; one is that the principal obstacle to getting
23   shareholders to vote is various aspects of the
24   communication problem if you will; whether it's getting
25   the materials versus electronic, versus paper, versus
0101
 1   FedEx and I may be partly to blame for some of this as
 2   some of you may know because E-proxy happened on my watch
 3   and we can come back to that because I actually have some
 4   thoughts about that but how do you communicate more
 5   effectively with shareholders and in terms of the staff
 6   and the Commissioners I guess I would say think about
 7   Securities Offering Reform, think about breaking down
 8   the barriers to communication.  Filing requirements may
 9   be barriers, E-proxy may be a barrier. 
10             I would submit that OBO/NOBO is a huge barrier. 
11   There's been ink spilled on that and I'm not going to
12   spend any more time on it, but I would submit that OBO/NOBO
13   keeps -- go back to your first panel; you've got these
14   very complicated ballots, I don't care whether they're
15   the current ballot or the universal ballot, and you can't
16   talk to -- neither proponent can talk to the OBOs on the
17   telephone and say, well, if you want to vote for Sam you
18   check this box and if you want to vote for Dorothy you
19   check that box, and that's a problem.
20             The second observation I would make is that I
21   don't think there are very many examples back in the old
22   days where the lack of retail participation was outcome
23   determinative and that's true to a large extent still
24   today.  If you've got a company that's in a proxy fight
25   they're going to find enough retail voters and there are
0102
 1   lots of examples and Bob and others can tell -- proxy
 2   soliciting firms are paid hundreds of millions of dollars
 3   to go find those retail investors when the company needs
 4   them and the activists are spending the same amount of
 5   money and doing the same thing so if somebody needs
 6   retail to get to 51 they're going to find them.
 7             What I think is changing is as some people have
 8   said, twenty or thirty is now an important number in
 9   terms of things.  You didn't have Say on Pay ten years
10   ago, you didn't have vote no campaigns ten years ago and
11   twenty to thirty is the new fifty, and I think what we're
12   seeing some of the developments of encouraging retail to
13   vote more and some of this retail catching on to vote
14   more is a recognition that, if outcome determinative is
15   twenty-five, retail is much more important than if outcome
16   determinative is 51 and that's a phenomenon that I think
17   we're seeing so that was what I wanted to throw out.
18             MR. FREDRICKSON:  Thank you.  We do appreciate
19   that and a good segue to Niels.
20             So how would you characterize or what would
21   your views on what barriers exist today on
22   communications?
23             MR. HOLCH:   Well, thanks very much, David, for
24   inviting me today and to the Commission and to the staff.
25             Shareholder Communications Coalition comprises
0103
 1   three associations; the Business Roundtable, the Society
 2   of Corporate Secretaries and the National Investor
 3   Relations Institute and we focus exclusively on
 4   shareholder communications and proxy voting.  It's sort
 5   of the voting mechanics of what former Chair Shapiro
 6   called "the proxy plumbing" and our view is -- and we
 7   would agree with Mr. Beller -- that the mechanical rules
 8   that were enacted back in the 1980s have really outlived
 9   their usefulness.  I think at the time the set up for
10   brokers and banks to control proxy distribution and to
11   have a paper based system and all of the ideas that went
12   into those rules made sense back in 1983, but obviously
13   since then there's been a huge change in the way our
14   society interacts with each other in the way technology
15   has evolved and also in the corporate governance
16   standards that companies have to address, and so we would
17   change the system.
18             You know, right now it's a bifurcated system or
19   at least I would call it a bifurcated system in which
20   companies know who their registered shareholders are
21   which would be fifteen to twenty-five percent probably of
22   their shareholder base typically.  Their transfer agents
23   communicate with those folks.  They do the proxy
24   distributions directly and tabulate the proxy cards and
25   then on the street name side which is 75 percent to 85
0104
 1   percent of the shareholders the companies have to deal
 2   with the OBO/NOBO system and are really not able to access
 3   those shareholders and there were certainly privacy
 4   concerns, I think, back then with giving people the
 5   ability to be anonymous and we think those privacy
 6   concerns just aren't the same set of issues today and so
 7   what we would suggest -- you know, our view is that the
 8   OBO/NOBO system really has outlived its usefulness.  We'd
 9   like to see companies have access to a list of their
10   shareholders so they can communicate with them directly
11   and we believe that you can build protections into those
12   concepts so that anybody who does want to remain
13   anonymous could remain anonymous and operate in nominee
14   form if they wanted to and we think that would open up
15   the system and so instead of having two different
16   entities communicating proxy material to shareholders in
17   a sort of paper based system you could move this more to
18   electronic; you'd have one shareholder list that you'd be
19   operating from and companies as well as investors could
20   communicate more effectively and it would also open up
21   the opportunity for lots of innovation and communication.
22             I mean our communication systems are changing
23   daily and the SEC rules are holding back that innovation
24   and we think the best way to get retail participation up
25   -- it will never be perfect but through robust
0105
 1   communication and simple systems that allow communication
 2   will really improve the system.
 3             Sorry to take so long.
 4             MR. FREDRICKSON:  No, no, no.
 5             MR. HOLCH:  It's a complicated subject.
 6             MR. FREDRICKSON:  It is.  I want to come back
 7   to you and find out what we know about sort of how --
 8   what we know about retail shareholders and the OBO/NOBO
 9   status but I wanted to explore a little bit about -- to
10   anyone -- you know, how often are NOBO lists requested
11   and how are they used and what kinds of communications do
12   you think would be different if there weren't the
13   distinction.
14             MR. HOLCH:  Well, Donna may be better at
15   answering that question about NOBO lists but companies
16   are not able to use the NOBO lists for proxy
17   distribution.  They have to use the street name system
18   for proxy distribution so the NOBO list really doesn't
19   add a lot of value, plus, a lot of companies want to
20   communicate with all their shareholders at the same time.
21   They don't want to just communicate with a subset of
22   their shareholders and the NOBO list is sort of an
23   artificial way of distinguishing shareholders -- NOBO v.
24   OBO -- and the way in which a shareholder gets to be an
25   OBO or a NOBO is somewhat opaque.  I think I'm an OBO at
0106
 1   one of my brokerage firms and I'm a NOBO at the other and
 2   I don't think I've ever been asked.
 3             So it's a distinction that isn't really helpful
 4   and I don't think companies find it useful even though
 5   they are allowed to get the NOBO list but Donna would
 6   probably be a better source for that question.
 7             MS. ACKERLY:   Thanks, Niels.
 8             It's true, we utilize NOBO lists probably in
 9   about fifty percent of our proxy campaigns and more often
10   where there's something that's challenging on the ballot
11   and the process that we utilize is what I mentioned
12   earlier is our Televote campaigns so it's an outreach by
13   telephone to the NOBO accounts with a targeted share
14   range and then we just keep calling until we get the
15   benefits that we need and get the vote that we need.  So
16   sometimes a very costly venture for companies but it has
17   to be done.
18             MR. FREDRICKSON:  Do you have a sense of how
19   often they are requested or the NOBO list is requested or
20   used outside of a proxy just for a regular --
21             MS. ACKERLY:   It's not -- they're rarely used
22   outside of a proxy.  I mean companies do request them but
23   I think it's more just to find out who their shareholders
24   are.
25             Some companies think that they probably get
0107
 1   more information from a NOBO list but, quite frankly, it
 2   really doesn't help much outside of a proxy campaign.
 3             MR. FREDRICKSON:  So, Bob, back to you.
 4             Oh, sorry. 
 5             MS. STUCKEY:  Can I make a couple of comments
 6   of that?
 7             MR. FREDRICKSON:  Yes, of course.
 8             MS. STUCKEY:  Donna, did you mean you use NOBOs
 9   in fifty percent of every -- even a garden variety annual
10   meeting?  You're talking about contests?
11             MS. ACKERLY:  It's not contests it's really
12   challenging shareholder meetings, whether it's a Say on
13   Pay vote, a stock plan or something that's unusual where
14   we need a high retail participation.
15             MS. STUCKEY:  Okay.  Right.  So then that is
16   consistent with the back of the envelope research that I
17   did with my members.  You know, they would say, two times
18   in the last eight years or one time in the last five
19   years I've done it.
20             I will say, though, that the work of the Proxy
21   Fee Advisory Committee helped because they are now
22   cheaper to get and you don't have to buy the entire list,
23   you can buy a piece of the list so it's cheaper.  So
24   companies are happy about that.
25             MS. ACKERLY:  But the biggest challenge, of
0108
 1   course, with NOBO lists is that it only gives you just a
 2   certain portion of the shareholder base so you're kind of
 3   relying on that to really give you some intelligence but
 4   then there's this unknown factor of the OBOs that we just
 5   have no insight on who they are.
 6             MR. FREDRICKSON:  What insight can you give us,
 7   Bob, on OBO/NOBO and retail?
 8             MR. SCHIFELLITE:  Well, I think it's
 9   interesting because I think the data suggests something
10   different than what was just being said. 
11             If you look at the split of OBOs and NOBOs, you
12   know, the OBO shares are probably -- and I haven't looked
13   at this recently but I'm going to still use my -- it's
14   probably around 75 percent of the shares are OBO, 25
15   percent are NOBO.  The OBO shares are the majority of
16   institutional investors and I'll say high net worth
17   investors.
18             We all know the default has always been you
19   become a NOBO by default.  You have to say, I want to be
20   an OBO.  I think there's been a trend of more individuals
21   of late saying, I want to be an OBO because of concern of
22   privacy and everything else that's going on in the world
23   but the interesting data is that so the OBOs, which is
24   the piece we say we can't communicate directly but we
25   can, they're voting at the very highest rate.  They're
0109
 1   voting at the institutional rate, they're voting at the
 2   ninety-something percent rate.  The NOBO is primarily
 3   retail, they're voting at the thirty percent rate and the
 4   lowest component of voting is from registered
 5   shareholders.  That is the lowest shareholder
 6   participation is from registered shareholders.  Now,
 7   there is a component of employees in certain of those
 8   registered accounts and we know employees vote even lower
 9   than normal registered shareholders.
10             So it's interesting what the data show versus
11   what some of the perceptions of communicating and being
12   able to communicate and not.
13             MS. AGGARWAL:  David, I'm going to ask the
14   group something.
15             It's interesting to look at the participation
16   rate between management sponsored proposals and
17   shareholder sponsored proposals.  Management sponsored,
18   it's been about 77 to 81 percent but shareholder
19   sponsored proposals, the participation rate is much
20   lower.  At least the studies I've done, it's more like 73
21   percent/74 percent, so several points lower than
22   management sponsored and I wonder how much of that is
23   driven by institutions and how much is driven by retail? 
24   So retail tends to vote with management so is a lot of
25   that difference really because of retail participation?
0110
 1             MR. SCHIFELLITE:  I hope you weren't looking at
 2   me because you stumped me on that one so I haven't looked
 3   at it that way but --
 4             MS. ACKERLY:  I would think that it's the
 5   retail participation makes the difference because
 6   institutional investors are pretty much -- depending upon
 7   what the issue is -- are going to support the shareholder
 8   resolution to a large extent if it's something that's a
 9   governance related issue.  Where if it's something sort
10   of garden variety I'd expect that they really don't care
11   about it and wouldn't vote on it.
12             MS. AGGARWAL:  Actually, there's something
13   pretty interesting there too.  Shareholder sponsored
14   proposals, the support rate, has gone up from sort of low
15   twenties to mid-thirties.  So even though participation
16   is less in shareholder sponsored proposals but the
17   support rate has gone up pretty dramatically in the last
18   few years and I think partly because they're being
19   written better and better proposals are coming up. 
20   That's probably one of the reasons.
21             MS. ACKERLY:  It could be but it's also, again,
22   the specific proposal itself whether it's a governance
23   related issue or if it's just something that sort of
24   garden variety people don't care about.
25             MR. FREDRICKSON:  I just wanted to circle back
0111
 1   to Jim on a question earlier of the current state of
 2   communications between companies and the shareholder
 3   base.
 4             What kinds of communications do you think
 5   companies are making that are useful to retail
 6   shareholders and what would you like to see?
 7             MR. MCRITCHIE:  From companies?  I guess I'm
 8   looking at it mostly from other activists or other
 9   shareholders.  From companies?  I don't know, it seems to
10   me that companies communicate to me pretty well about
11   what they want so I don't -- I want to talk about these
12   other things.
13             MR. FREDRICKSON:  We'll get to them.  I just
14   wanted to make sure that I hear -- I then wanted to ask
15   Nell, so in terms of what efforts are undertaken or
16   should be undertaken to educate retail investors about
17   their rights, their abilities to engage?  What do you
18   think works and what do you think some or all of us could
19   do better?
20             MS. MINNOW:  Well, nobody knows better than the
21   SEC that you can lead a shareholder to a lot of very
22   dense language but you can't make them read it and I
23   think you could -- the experiment has been tried many
24   times to put, you know, call this number and you'll get
25   $100.00 in the middle of some dense disclosure and no one
0112
 1   ever does.  So I don't think that disclosure is
 2   necessarily the reason.
 3             I'm very interested in Mr. Schifellite's idea
 4   of making better use of the packaging and really
 5   communicating the urgency and importance of the
 6   communication itself rather than anymore information
 7   about the pay plan or the shareholder proposal; just the
 8   very fact that it's expensive to the company if you don't
 9   vote, I think, will get people's attention.
10             You know, shareholders, as you know, and
11   individual shareholders are often referred to as
12   rationally apathetic because they can do a cost benefit
13   analysis.  These are sophisticated people -- a very small
14   percentage of investors who make their own buy and sell
15   decisions and they can tell that this is not really worth
16   their while and so it seems to me the most important
17   thing to communicate to them is that it is worth their
18   while and that it does cost them money if they don't vote
19   but you can't really change their idea of the benefit. 
20   The fact is that there is a huge collective choice
21   problem in any kind of a shareholder vote and any effort
22   that they spend is going to be greater than any marginal
23   effect that they get in terms of the cost or in terms of
24   approval of the substance of the item.  
25             So what you really have to do is deal with them
0113
 1   on the cost side and there, I think, the greatest
 2   improvement would come from either following the Folio FN
 3   example.  Folio FN, of course, created by former
 4   Commissioner Steve Wallman.  I have a lot of -- not a lot
 5   of in terms of dollar value but a lot of different stock
 6   in a lot of different ways including stock certificates
 7   in a safe deposit box and, overwhelmingly, the easiest
 8   way to vote shares is through the Folio FN model.  So if
 9   they could do it, then Schwab and everybody else can do
10   it too.
11             So that's what you want to do is really
12   communicate with them that it's cheap.  Even individual
13   investors, even retail investors generally don't have
14   stock certificates in their safe deposit box because they
15   want to be able to trade and so they're doing it through
16   some entity and if Steve Wallman can do it, then
17   everybody else can do it, too, and you want to also give
18   them access to information.  They're understandably
19   skeptical to what the company has to say to them, what
20   the executives have to say to them about the benefits
21   from their proposals and so you want to make them feel
22   comfortable that they know what they're doing and you
23   have to reduce the costs of that and that means
24   independent assessments of the kinds that the
25   institutions get from ISS and the other proxy advisory
0114
 1   firms.
 2             So the way to do that is that people like
 3   Schwab and Folio FN and E*Trade should be able to let you
 4   link into what CalPERS is doing, what other independent
 5   people are doing and then at least you've got some kind
 6   of an assessment, you feel like you're seeing both sides
 7   and you can vote those shares knowing that you've made a
 8   thoughtful decision.
 9             MR. FREDRICKSON:  Thank you.  I have a couple
10   of people itching to join this conversation.  We'll start
11   with Con and then we'll go to Jim.
12             MR. HITCHCOCK:  Thanks, David, and thank you
13   for the invitation.
14             I want to pick up on the information point
15   because I think that's key and that the internet can be a
16   terrific tool for doing that and I think it's important
17   to ask where do retail investors get their information
18   from, well, where the institutional investors get their
19   information from.
20             There's a recent study out from Equilar, R.R.
21   Donnelly and Stanford says three major sources:  (1)
22   their own internal research, (2) proxy advisors and (3)
23   engagements with the companies.  Well, those options are
24   not really available to retail investors.  Maybe they
25   have an investment advisor or a broker they can talk to
0115
 1   but they have to get their information from somewhere
 2   else.  So where would they get it from?  The media are
 3   certainly one source.  Can they get it from proxies? 
 4   Well, Sarah Teslik quoted Henry Stimpson in the last
 5   panel, I will match with a quote from Dean Atchison, who
 6   once said that, "Memoranda are written not to inform the
 7   reader but to protect the writer."  Question, can the
 8   same be said of proxies?  I'll leave that to you.  But
 9   what value do proxies have?  What purpose do they have in
10   terms of advising retail investors?  
11             I would agree with Anne Simpson's comment
12   before, they provide a base line of uniform disclosures
13   across sectors, across industries that provide a
14   mechanism for third parties, be they journalists,
15   analysts, ten best list, Jim Kramer, you name it, to
16   focus on what individual companies are actually doing and
17   to provide that information and that is information that
18   people would find valuable and I agree with Nell a minute
19   ago, the question then is how do people get that
20   information.  The internet is a perfect source for that
21   because it does two things very well; aggregates
22   information, number one, and number two, let's you as the
23   user personalize a particular site.  So you can find
24   information there that's easy to access.  I worked with a
25   company called Moxy Vote for a couple of years that
0116
 1   sought to be -- it was founded by some entrepreneurs with
 2   tech and financial backgrounds that sought to be a source
 3   for retail investors.  They couldn't make it because of
 4   certain regulatory issues which I'll get to in a moment
 5   but in the short time they were up and running they had
 6   200,000 subscribers who were voting 30 million shares and
 7   they were getting a lot of the information from advocates
 8   of particular sources who wanted to post there because
 9   they figured this is a way -- the internet is a way to
10   reach retail investors.  It's the way that individuals
11   these days organize their activities. 
12             Now, what are the problems with having a site
13   like that that is neutral, that provides the information? 
14   Well, one thing is retail investors will not pay to vote. 
15   It's been empirically established that they will not pay
16   49 cents to vote.  How do we know that?  That's the cost
17   of a postage stamp and people do not put postage stamps
18   on the prepaid cards.  They don't pay to phone in their
19   vote to an 800 number.  They don't pay if they get a
20   control number and go to Proxyvote.com and vote in that
21   fashion.  So the cost issue is one.
22             But I wanted to talk a little more broadly
23   about -- and I'll come back to that in a moment -- a
24   major problem that we had from a business standpoint is
25   that not all brokers were willing to refer materials from
0117
 1   chitchcock@gmail.com to Moxyvote.com and the reason is
 2   they cited a New York Stock Exchange rule that says
 3   brokers deliver to one of two sources; the beneficial
 4   owner or a registered investment advisor, and in talking
 5   with brokers half of them went along, the other half
 6   said, oh, no, the SEC says we can't do that.  Well, okay,
 7   I mean I would suggest that's something to take a look at
 8   and we talked to FINRA and said, why is this, and someone
 9   from FINRA made a very astute observation, they said,
10   brokers don't want to do anything more than they have to.
11   Okay, so that was a problem that if it meant doing more
12   work in terms of just substituting an e-mail address for
13   another.  
14             It means one thing if you're dealing with an
15   RIA because there's a list of RIAs you as a broker can
16   look at and figure out, yes, this is a proper person to
17   forward information to.  So that's something that could
18   be addressed by rule-making but that's a very practical
19   problem for anyone who wants to be a neutral internet
20   advisor not managing money, not offering advice but
21   serving as a platform to give advice.
22             The second issue is really one of cost and the
23   Broadridge representative can talk about that but if I'm
24   an institution and I vote one million shares there's a
25   transaction fee.  If I am an individual and vote ten
0118
 1   shares it's the same transaction fee.  So if one wants to
 2   plug into the Broadridge system and act as an agent for
 3   individuals and you have 10,000 people voting 100 shares
 4   as opposed to one person voting a million shares there
 5   are problems there.  The cost issue is something that
 6   needs to be looked at.  If you're a Glass, Lewis or an
 7   ISS, yes, you're giving out advice, there's a monetary
 8   relationship, a business relationship, you know, costs of
 9   voting can be baked into the overall package but that's
10   not a situation if somebody wants to say, we want to
11   serve as a forum, we don't want to manage your money, we
12   don't want to tell you how to vote but we want to be a
13   forum where information is collected.  So that is
14   something that the Commission would need to look at, too,
15   in terms of a system that would be fair to Broadridge if
16   they're going to be processing this but also doesn't
17   discourage people because they'd have to pay 49 cents or
18   something else.
19             I want to emphasize one point in closing.  I'm
20   not here to suggest that the Commission should try to set
21   out to devise the perfect website for retail
22   participation but I think if some of the barriers we're
23   talking about could be addressed there would be an
24   opportunity for other entrepreneurs to come along and
25   say, let's find a way.  There was obvious interest in
0119
 1   this and I think it can only continue to grow.
 2             MR. FREDRICKSON:  Thank you.  Jim.
 3             MR. MCRITCHIE:  Thanks for coming back to me
 4   and thanks also for inviting me.  As an individual
 5   shareholder -- an individual retail shareholder it's a
 6   real pleasure to serve on this panel.
 7             I started my internet site twenty years ago to
 8   try to reach out to other individual retail shareholders
 9   and help them figure out how to vote and I have learned
10   something over the twenty years; one thing is that we
11   tried a lot of kind of pull technology because I kept on
12   sending people to Proxy Democracy which scraped the
13   predisclosed votes of CalPERS, CalSTERS, Florida SBA,
14   Calvert, about a dozen different -- maybe ten different
15   predisclosures or a couple of predisclosures that don't
16   want to be posted there but one of the problems is people
17   have to want to go to Proxy Democracy.  I mean people are
18   so apathetic -- well, first of all, they have to know
19   about it and there's only a few people that read my site
20   so they don't get shown the way but what we really need
21   is push technology.  We need these -- and I think Reena
22   hit the nail on the head is that if people see how others
23   are voting then that helps them to decide how to vote. 
24   The thing is, as we've made shareholders more powerful, in
25   a way, through having a vote on Say on Pay and whatever,
0120
 1   the proxy has grown larger and larger.  I mean I've got a
 2   hundred different companies that I have very small
 3   amounts of money in and I'm a fanatic but I don't read
 4   through a hundred different proxies all the way through,
 5   I look at little tidbits.  So what we really need is push
 6   technology so if we have predisclosers -- and we're
 7   getting more, I mean Norges Bank said they're going to be
 8   predisclosing on many things now where they think it can
 9   make a difference.  
10             People don't go to Proxy Democracy to figure
11   out how to vote but they do go to Yahoo Finance, they do
12   go to The Wall Street Journal, they do go to Seeking
13   Alpha, they go to several different sites to check on
14   their stock.  They're very interested in the stock price
15   and then they look -- when they go and check on the stock
16   price they look down and they see are there any news
17   feeds there and the news feeds they're usually looking at
18   -- the news feeds usually are about speculation as to
19   what's going to happen in the next week, the next day,
20   whatever to the stock price but what if the news feed had
21   a push from a site like Proxy Democracy that announced
22   the predisclosed votes and you looked down at the news
23   feed and you see, oh, I see CalPERS voted yesterday, let
24   me click on that button and see how they voted.  I think
25   that's going to make a world of difference to
0121
 1   shareholders and if it doesn't, you know, I think they'll
 2   click on that button to see how they voted and then
 3   they'll go, "well, I'm not sure," but if they come back
 4   tomorrow or the next day and they see, "okay, now it's
 5   CalSTERS voting or now it's Norges voting, now it's
 6   Calvert voting, you know, I'm coming to this site and I'm
 7   seeing how all these people are voting, maybe I should
 8   really pay attention to this."  So that's kind of step
 9   one.
10             Now, in step one it would be really, really
11   helpful if the SEC required XBRL coding of all the items
12   voted on the proxy so that you can compare these
13   predisclosed votes across platforms.  So that's step one. 
14   Step two --
15             MR. HIGGINS:  Just on the mechanics of it, does
16   putting an XBRL on a predisclosed --
17             MR. MCRITCHIE:  On all the proxies.
18             MR. HIGGINS:  Right.
19             MR. MCRITCHIE:  On predisclose --
20             MR. HIGGINS:  Right now the NPX picks up
21   historical --
22             MR. MCRITCHIE:  Yes, that's kind of late.
23             MR. HIGGINS:  Which is a little late; right.  I
24   don't think we have a requirement that anybody file a
25   predisclosed --
0122
 1             MR. MCRITCHIE:  No, no.  I mean well, they file
 2   their proxy and basically what it is is you've got a a
 3   requirement that they've got to file the NPX six months
 4   or whatever it is after the fact, okay, which doesn't do
 5   a lot of people a lot of good because six months after
 6   the fact, you know, people might have thought about it at
 7   the time, well, this is important but am I going to
 8   remember to look at six months after -- then, also, a lot
 9   of people own stocks through -- well, there's all kinds
10   of -- these things don't get passed through, okay, so if
11   you're in a retirement savings plan the fund may have to
12   report the votes but your retirement savings plan doesn't
13   have to report the votes and they don't have to create a
14   link back to the people that have to report the votes.
15             But anyway, if you require XBRL coding of the
16   proxy and the items in the proxy, then it's easy enough
17   for people to go out and scrape that data and show
18   comparisons to people and so the second step then would
19   be most institutional shareholders, they don't look
20   through the proxies either.  I mean I've got a hundred of
21   them, CalPERS has 3,000 of them or whatever.  They don't
22   go through every proxy and read all of the items.  They
23   basically set up a proxy voting policy and then they look
24   at the things that fall outside of the boxes so their
25   proxy voting policy might say, for example, we support
0123
 1   majority vote requirements.  So if someone has a proposal
 2   for majority vote requirements they're always going to
 3   vote for it.  It's the things that kind of -- you know,
 4   the contests and whatever, that's where they're going to
 5   spend most of their time.
 6             Well, an individual investor needs the same
 7   thing.  We can't look at all the -- read all the proxies
 8   and everything, we need to be able to have a system where
 9   we can answer a few questions and then a phone app or
10   something delivers to us prefilled out proxies based on
11   the questions that we answered and I think that we can do
12   this initially with a very few number of questions.  I
13   mean it's not going to be -- as we work this through the
14   years it can get more and more sophisticated so those who
15   want to fill out a survey like they would when they're
16   trying to find somebody to marry, you know, they might
17   fill out a very long survey, whereas, somebody else 
18   might --
19             MR. FREDRICKSON:  You're suggesting a match.com
20   for proxies --
21             MR. MCRITCHIE:  Well, yes, but I think we can
22   start it with just a very few questions, a very few
23   questions about values and that will help and so then you
24   would get kind of a predelivered proxy filled in and you
25   would then sit down with that and you'd go to a proxy
0124
 1   vote and you'd vote using that information and then the
 2   kind of third step is the client directed voting platform
 3   where you could actually just push the button and say,
 4   yes, I like this vote, or to automate it even further,
 5   you tell me how I voted based on my prefilled out --
 6             MR. FREDRICKSON:  It seems to be we're going to
 7   the Amazon --
 8             MR. MCRITCHIE:  Well --
 9             MR. FREDRICKSON:  -- if you like this book
10   you'll like this stock?
11             (Laughter)
12             MR. MCRITCHIE:  Well, but since the second --
13   you know, if you vote again that will cancel out the
14   first -- so if I get a message that says, okay, Jim,
15   here's how you voted based on your survey and we
16   prefilled the proxy for you and we actually voted for you
17   -- which was the case at Moxy Vote.  I mean you could --
18   they had a complicated default kind of a tiered system. 
19   I mean you could have all the different types of systems
20   based on questions, based on if-then possibilities, but
21   you know, a client directed voting platform, what we
22   don't want is the initial client directed voting proposal
23   which came out right after broker voting was eliminated
24   and the client directed voting idea that was put in there
25   was to basically recapture the broker voting.  So we
0125
 1   don't want that but basically, you know, then the third
 2   step is to then be able to push a button, see how you
 3   voted and then if you don't like how you voted, then you
 4   can override that and, then kind of the fourth step --
 5   and we're not ready to go there at all -- is basically
 6   shareholders actually having conversations about proxy
 7   issues through social media and whatever and there's some
 8   of that going on but not nearly enough.
 9             MR. FREDRICKSON:  Fantastic segues to at least
10   three or four different topics but Nell raised her hand. 
11   So before we go to the others I want to at least come
12   back to you.
13             MS. MINNOW:  I just wanted to address the issue
14   that came up about the XBRL being backward looking
15   instead of forward looking.
16             If you have somebody like the heroic Jim
17   McRitchie, who is filing shareholder proposals every
18   year, there's a certain consistency there and it should
19   be very easy.  It's just a shame there is no XBRL data. 
20   As I say, as somebody who has parsed a lot of those
21   reports and it's a nightmare and it's very expensive,
22   that would make it so easy to go back and say, well, what
23   kind of support did Jim McRitchie's proposal get last
24   year and does Vanguard support it versus Fidelity?  I
25   think that would be tremendously helpful.
0126
 1             I also want to endorse what Mr. Hitchcock said
 2   about Moxy Vote, it's a shame that didn't work and that
 3   was the wrong reason for it not to work because that
 4   would be an excellent way to get more retail investor
 5   involvement is just to say, here is a neutral website,
 6   you can vote with the Conservation Voters of America, you
 7   can vote with the NRA, you can vote with whoever you want
 8   and just tell us who you want to vote alongside and we
 9   will cast those votes for you, and I think that that
10   would be a really great way to get retail investors
11   involved.
12             Finally, I hope we get to the issue of other
13   kinds of retail investor involvement because it seems to
14   me that if you make it easier for more Jim McRitchie's to
15   get out there and file shareholder proposals you'll get a
16   lot more interest from other shareholders if they feel
17   like they can have a say but right now it is so
18   intimidating; the idea that John Chevedden would get all
19   these lawsuits against him next year -- that he got last
20   year is just horrifying.  That would be anybody's worst
21   nightmare that you would get hit with that and it seems
22   to me that the SEC should refuse to give no action
23   protection to anybody who tries to circumvent them in
24   that way and so I hope we can talk a little bit about
25   more retail shareholder involvement in initiatives as
0127
 1   well as just in voting for the board of directors and the
 2   auditors and some shareholder proposals.
 3             MR. FREDRICKSON:  The first segue I'm going to
 4   take is for client directed voting and I'll start with
 5   Alan to give an overview of what it is, what it promises
 6   to be and what are the difficulties in implementing it.
 7             MR. BELLER:  Well, it's different things to
 8   different people.
 9             At it's simplest and earliest -- the issue is
10   retail investors who hold in street name with brokers and
11   this was exacerbated by the uninstructed broker vote
12   limitations -- retail investors who don't fill out their
13   proxy cards, therefore, don't get their votes recorded
14   and their broker can no longer vote an uninstructed VIF
15   or proxy except for very routine things at this point;
16   the ratification of auditors, I guess, is the one that
17   mostly comes to mind and that's the one that's used to
18   produce quorums where you have it.  So the idea was,
19   well, can you give these retail investors the ability to
20   instruct their brokers ahead of time and the SEC in its
21   concept release actually referred to client directed
22   voting as the providing of advanced voting instructions
23   which is a good way to think about it and the earliest
24   examples were can a customer say to its broker, vote with
25   management all the time, vote against management all the
0128
 1   time or various types of mirror voting.
 2             Since then there have been a very significant
 3   number of proposals.  There were actually a flurry of
 4   them in 2010 around the Proxy Plumbing release.  Mr.
 5   McRitchie published a blog which had one which was part
 6   of the open CDV which we've heard some other elements of
 7   in the last ten minutes, I think, which is somehow
 8   provide retail investors with a menu of information, a
 9   menu of approaches and let them choose something that's
10   as unsophisticated or as sophisticated as they want and
11   make that part of the instructions to their broker and do
12   that ahead of time.
13             I think the legal impediment to client directed
14   voting has been in the proxy rules, 14a-4(d), for you
15   afficionados, which basically prohibits anyone but it
16   includes brokers from soliciting a proxy in advance of
17   the availability of proxy materials.  I mean that's not
18   exactly what it says but that is close enough to what it
19   means for this purpose so the purest form of client
20   directed voting, you have a problem with 14a-4(d) and you
21   have a philosophical problem which the Commission
22   identified in the Proxy Plumbing release and which we
23   also identified -- my colleagues and I -- we wrote a
24   white paper on client directed voting which, I think, is
25   referenced in the materials that was actually published
0129
 1   by the CII and the philosophical problem is we shouldn't
 2   have a system that promotes uninformed voting and so CDV
 3   should come along with some set of principles that allows
 4   retail voters to be informed as they are deciding what to
 5   tell their brokers.
 6             There are two sets of line drawing there that I
 7   think people ought to keep in mind in thinking about
 8   whether any of this conversation makes any sense.  I'm
 9   not sure it does.
10             The first one is -- my initial instinct is to
11   deny that this is true but I really believe after having
12   thought about it a long time, it is true -- there is a
13   tension between providing a system that encourages retail
14   investors to vote and the promotion of informed voting. 
15   You might not like that but I really believe it's true.
16   And some of the things that have been proposed seriously
17   that would encourage retail investors to vote, frankly,
18   either don't promote informed voting or in fact cut a
19   little bit the other way.  I'll give you an example. 
20   When we put in e-proxy we made a decision you wouldn't
21   send the card with the notice of availability of proxy
22   materials.  The proposal had it in, the final rule took
23   it out.  The final rule took it out because there was a
24   lot of commentary that that was going to promote
25   uninformed voting; people would just get the notice, get
0130
 1   the card, spend the 49 cents and put the card in the
 2   mailbox.  The Proxy Plumbing release suggested that that
 3   judgment ought to be revisited.  I agree that judgment
 4   ought to be revisited.  I'm not sure what the right
 5   answer is, but I think you would get more retail voting if
 6   you put the card in with the notice of availability of
 7   proxy materials.  There's no doubt in my mind that you
 8   would get more voting. And it would be consistent with
 9   what we do in other contexts of the securities laws.  We
10   don't make people certify they've read the S-1, we don't
11   even make people certify they've opened the envelope or
12   opened the e-mail before they make their investment
13   decision and so once we've -- the disclosure philosophy
14   of the federal securities laws is: you provide the
15   disclosure -- as Nell put it, you provide this
16   turgid, unreadable material and so long as you've done
17   that people can buy and sell to their heart's content. 
18   Well, it's worth thinking about whether people should be
19   able to vote to their heart's content.
20             Commissioner Stein said at the very beginning
21   of this program the proxy system ought to mirror going to
22   the annual meeting.  There's nothing in state corporation
23   law that says you have to be informed to vote your ballot
24   at the annual meeting.  There's just nothing there.
25             I'm not against informed voting.  Don't get me
0131
 1   wrong.  I absolutely believe that everything we've heard
 2   for the last ten or fifteen minutes is great, we ought to
 3   try to figure out how it happens.  I think if the demise
 4   of Moxy Voting was as a result of the regulatory problem
 5   that we've heard about, that's almost tragic.  I mean that
 6   should never have happened but we shouldn't use those
 7   developments in trying to strive for those developments
 8   to keep people from voting and that's an argument for -- 
 9   if an investor of sound mind wants to give an investment
10   bank or broker his or her vote and has access to all the
11   materials you were talking about and doesn't pay any
12   attention to any of them, what's the problem?
13             The second line drawing -- I'm sorry to be
14   going on with this -- the second line drawing which is, I
15   think, maybe going to make this discussion increasingly
16   irrelevant and that is there are two basic models for
17   retail investors to get their investment advice; one is
18   the brokerage model with or without discretion and you
19   pay your brokerage commissions and your broker tells you
20   or recommends or in a discretionary account acts to buy
21   or sell.  The second model is the same person in many
22   cases, is a fee for services investment advisor who gets
23   paid a fee, X percent/one percent a year, or whatever, of
24   assets and that can be either discretionary or non-
25   discretionary too. 
0132
 1             In the first case you're on the client directed
 2   voting side of the debate and you're on the broker
 3   uninstructed voting prohibition side of the debate.  On
 4   the other side of what I would argue is a meaningless
 5   line -- and, please, don't tell me that the second guy is
 6   a fiduciary and that makes all the difference in the
 7   world because nobody in this room believes that -- I can
 8   give and, indeed, I have given my investment advisor
 9   discretion to vote -- instructions to vote my shares. 
10   It's in the advisory agreement and not a brokerage
11   agreement but that's permitted so the advisor sitting at
12   the same desk, wearing the same hat as the broker has the
13   ability to vote my shares -- doesn't even send me the
14   proxy material.  That's a meaningless distinction and
15   since, as I understand it, the retail investor model is
16   going increasingly to fee for services I am -- and
17   trading in markets can tell us that -- I think it's true
18   anecdotally -- if that's true you have decreasing numbers
19   of retail customers who are enmeshed in the CDV broker
20   vote thing and you have increasing members -- numbers of
21   retail investors who are using advisors, who are voting
22   proxies in the same way that other investment advisors
23   are voting proxies and are actually outsourcing that vote
24   to proxy advisory firms in exactly the same way it's
25   being done for institutions and that is a very bizarre
0133
 1   set of parallel universes.
 2             MR. HIGGINS:  Different roundtable but on the
 3   information of the voting form is there some data on how
 4   many people actually open up the proxy -- in the
 5   electronic format open up the proxy material and even
 6   look at it before casting a ballot?
 7             MR. SCHIFELLITE:  I don't have an answer.  I
 8   don't know.  We don't track that do we?
 9                      (Pause in procedures)
10             MR. SCHIFELLITE:  Open the -- I mean the e-mail
11   but do you go to the material?  I don't know.  We know
12   there are standing instructions that are used by
13   institutions, that our Proxy Edge product has that
14   capability to enable you to say, I want to vote this way,
15   and it votes automatically that way so there is a
16   precedent for those -- and that's an institutional
17   investor -- to have what we'll call an equivalent to a
18   CDV or standing instructions.
19             If I can, since my microphone is on, I'll just
20   -- if I can, just thirty seconds so there were a couple
21   of comments, I just wanted to address what I think is
22   important.
23             You know, we talked about the brokers.  There's
24   the EBIP, right, that became rule as a result of your
25   study and your new rule which I think is a positive
0134
 1   development because it has caused more brokers to enable
 2   EBIP and to implement EBIP and the outcome of EBIP is at
 3   least more investors engage and sign up for electronic
 4   delivery and electronic delivery at least shows that you
 5   get more participation from retail investors by way of
 6   "e" versus a paper notice. 
 7             Second thing is we at Broadridge are doing a
 8   lot and making a lot of investments to go beyond "e."  I
 9   think somebody may have made the comment here that, you
10   know, you get so much -- you're inundated now in your "e"
11   in-box, right, so a lot of the stuff gets lost, I'll get
12   back to it later.  We're trying to do something where
13   we're engaging in other channels beyond "e" and putting
14   information where people go. So, for example, we're
15   working with the Evernotes of the world and the drop
16   boxes of the world and trying to say -- and the Amazons,
17   literally, of the world to say -- okay, if you go here
18   every day -- because you don't go to your broker's site
19   every day -- if you go here every day and we give you
20   here's all your pertinent financial information in one
21   place and if you have multiple brokers it could be there
22   in one place will you be more likely to do something and
23   take action and react.  So we're putting a lot of
24   investment in trying to understand that and make that a
25   reality.  We don't know if --
0135
 1             MS. MINNOW:  What about like Quicken and Motley 
 2   Fool and Yahoo Finance and all of those?
 3             MR. SCHIFELLITE:  I think it's unlimited
 4   actually, Nell, and I think it's a great concept.  I've
 5   even talked to those on Facebook and they said, well, you
 6   know, it would have to be behind your firewalls.  I said,
 7   yes, of course, it would always be behind our firewalls,
 8   but they said, you know, if you could make a game somehow
 9   out of voting, right, and your peers of voting --
10             MS. MINNOW:  Angry Shareholders.
11             (Laughter)
12             MR. SCHIFELLITE:  -- that would be a great
13   outcome, that you'll engagement from something like that
14   or points or something.  So we are definitely putting a
15   lot of investment in exploring that because we think, you
16   know, "e" has kind of plateaued a bit, it eeks up but can
17   you make it a much better experience and what else can
18   you do with the data -- you know, the XBRL -- can you do
19   something, can you make it more user friendly?  We're
20   exploring all those things with the hope that there are
21   ways to get retail investors better engaged.
22             MR. FREDRICKSON:  So, John, what has been your
23   experience or thoughts on these various platforms and
24   other ways of engagement through technology?
25             MR. BAJKOWSKI:  Well, in terms of our
0136
 1   membership base we ask them whether or not -- oh, I'm
 2   sorry.
 3             MR. FREDRICKSON:  We'll start with John -- I'm
 4   sorry, we'll start with John and --
 5             MR. ENDEAN:  Well, we'll let John go
 6   first.  
 7             MR. BAJKOWSKI:  My apologies. In terms of our 
 8   membership base roughly nineteen percent indicated that 
 9   they read the full disclosures before voting.  About 
10   seventy percent said they read some of it before voting 
11   and the biggest request was really to have summary data.  
12   They want, on one page, bullet points of all the issues and 
13   then almost a secondary document that goes into further 
14   detail for everything.  So that's really, I think, one of
15   the biggest threads I saw, one of the most common things I
16   saw was a request for summary information and the bullet
17   points, pros/cons, and then the ability to link and study
18   something in greater depth down the line.  The issue they
19   didn't really think was technology, the issue was just
20   having some feedback system, feedback and results on vote
21   statistics; what was my contribution to the process, how
22   did I matter in the voting area?  So those kinds of
23   things are determinable elements that they want feedback
24   on that their voting process has an impact.
25             One other element that kind of came up as far
0137
 1   as information that appears about the directors they're
 2   voting for.  I mean right now to them it feels as if
 3   they're looking at their resume and what they would
 4   really rather see more of is a mission statement so when
 5   they see a list of directors what is their vision for the
 6   company?  What is it they want to do?  Not so much where
 7   they went to college or who they played golf with, it's a
 8   question of what they want this company to do.  What is
 9   their dividend philosophy?  What are their thoughts as
10   far as CAPEX and what not.
11             So those are sort of the elements that came out
12   of what they would like to see when it comes to voting on
13   those elements.
14             MS. AGGARWAL:  Can I just ask John something?
15             I mean those -- now with my director hat on I'm
16   just worried about liability if directors start putting 
17   -- if that kind of vision starts getting put in there, 
18   then that's kind of forward-looking.
19             MR. BAJKOWSKI:  Well, I can't speak towards
20   liability but that's what the investors want.  I mean
21   they want -- they don't want necessarily just the facts.
22   They want to have a sense for if I'm voting for this
23   director, I mean, are they going to put dividends for us?
24   Are they going to, you know, try to build up the capital
25   base of the firm?  Why are they running as director? 
0138
 1   What is their thought process as far as what the company
 2   will be doing going forward?
 3             MS. AGGARWAL:  Okay.
 4             MR. ENDEAN:  It's my turn.  Okay.
 5             I thought that was a good summary but I think
 6   John is talking people who are more likely to vote than
 7   most retail shareholders.
 8             I think the most important take away from this
 9   very interesting session was Alan's point, that today the
10   retail shareholder's vote is more important than it ever
11   has been in the past and so it doesn't surprise me that
12   the institutions are, while giving rhetorical support to
13   having retail shareholders vote, are very resistant to
14   something like AVI because they assume the retail
15   shareholders are going to tend to vote with management.
16             I think we have to cut through that and just
17   admit that that's the case.  As somebody who represents
18   issuers I have exactly the same perspective but that's
19   why I like AVI and so let's just admit that there is an
20   ideological difference of opinion on this and go straight
21   to the merits of AVI.
22             To me, when I buy stock if I could have
23   standing instructions -- a form to put out my standing
24   instructions of how I wanted that stock -- my votes voted
25   that would be very handy for me provided I had the right
0139
 1   to change it and provided that when the proxy came out
 2   that I had a card that says, this is how you said you
 3   were going to vote on XYZ company, do you want to stick
 4   with this or do you want to change it?  I might say to
 5   myself, well, gee, this is a retail company and they're
 6   selling guns in Texas and I'm not too crazy about that. 
 7   Maybe I ought to take a look at whether there are any
 8   resolutions or any sort of informational things that
 9   would affect my standing instructions.
10             But I know of no political movement in the
11   history of the United States that began without people
12   first voting.  You want people to get to vote even if
13   they're not informed and I don't know what an informed
14   vote is.  An informed vote in my household is when my
15   kids tell me who they voted for and I don't agree with
16   them. 
17                (Fire alarm sounds at this point)
18             MR. FREDRICKSON:  I'm very sorry.  We'll have
19   to take this seriously.
20             Go out these steps and go out into the front.
21             Sorry for the interruption.
22                     (Pause in proceedings)
23             MR. HIGGINS:  So, John.
24             MR. ENDEAN:  I just want to finish by saying
25   that we all agree that we all want informed voters.  I
0140
 1   think the way that you inform voters is to get them
 2   directly involved in the process and for that reason I
 3   think there's much to be said for AVI, except for the
 4   name.  I never liked the name.  I always call it CDV. 
 5   When the Proxy Plumbing came out and they called it AVI
 6   it sounded like advanced instructions for a do not
 7   resuscitate but beyond that I don't know why people don't
 8   vote.  I don't think there's silver bullet.  Our members'
 9   companies are middle-sized companies that have for the
10   most part over fifty percent individual shareholders.  It
11   is a continuing problem communicating with them and
12   getting them to vote and from their perspective I think
13   standing instructions, provided people have an
14   opportunity to change --
15             MR. HIGGINS:  That was one thing I wanted to
16   follow up on. It would be premised on them getting a copy of
17   what it is they have, what is their advanced instructions 
18   have --
19             MR. ENDEAN:  Maybe access to the proxy but I
20   know -- the problem with this discussion is a lot like
21   when Obamacare was passed.  When you started talking
22   about healthcare it started out in theory and then
23   inevitably it ended up with somebody talking about their
24   knees.  You go from the general to the anecdotal. 
25   Anecdotally, for me, is an individual investor.  I would
0141
 1   like to know what my standing instructions are and I
 2   guaranty you that at least a few of the companies where I
 3   was invested I probably would decide to change them in a
 4   particular year if there was an issue that had come up or
 5   a resolution or something like that.
 6             So as long as people can change we would favor
 7   it.
 8             MR. HITCHCOCK:  Could I follow up on that?
 9             I mean this was what Moxy Vote negotiated with
10   the staff over these issues and that was precisely what
11   we ended up with where you could load your preferences on
12   to the page but the staff said when the proxy and so
13   forth comes in the first thing that shows up must be a
14   blank card which you can then populate individually or
15   populate with preferences and change and we also did
16   revocation and competing cards.  I mean all those --
17   those issues were all worked out and Larry will remember,
18   he was involved in those discussions back then, but I
19   think it's important for people to be able to load the
20   preferences in.  Institutional investors can do it.
21             I guess where I have concerns about client
22   directed voting is who is asking the questions and are
23   individual investors, perhaps, being pushed into a
24   direction they may not want to go?  I'd rather have a
25   situation where people can find their own information if
0142
 1   they don't feel that they know enough about a particular
 2   item on the ballot and they wouldn't vote on it but at
 3   least you've got them there in the first place and that's
 4   the key thing.
 5             MR. HIGGINS:  One question I have is how much
 6   curation did your site do as to who was allowed to post
 7   their recommendations?
 8             MR. HITCHCOCK:  They did and this was more in
 9   start up mode.  They had about thirty or forty advocates,
10   they were called, which were organizations that maybe
11   post -- maybe doing shareholder resolutions or something
12   of that nature.  We started with that because we wanted
13   to make sure that they all understood what the rules on
14   solicitations were, they had to sign papers saying they
15   understood and they would be responsible for any 14a-9
16   problems and that sort of thing.  The idea was to
17   eventually -- if you have a site that becomes a magnet of
18   information you will find others who want to participate. 
19   Companies may say this is a way to reach those investors
20   and you could build up from there.  So that's what we
21   were doing initially with the advocates and if you like
22   environmental issues you could poke around and find out
23   what the Sierra Club is saying, for example, and
24   hopefully, it would have grown much beyond that and,
25   hopefully, with a few rule changes the next company
0143
 1   would.
 2             MR. HIGGINS:  You could just imagine that some
 3   organizations that might be sort of beyond the pale, that
 4   you wouldn't want them on the site recommending to
 5   stockholders.  The ability to exclude someone might have
 6   some --
 7             MR. HITCHCOCK:  Yes.  I mean to deal with the
 8   liability issues -- and there was some screening that
 9   went on and it was not intended to be a chat room where
10   anyone can get on and rant and rave.  It's a neutral
11   platform where people who are experienced and know what
12   the rules are can post and say, this is what we're doing,
13   and I think Jim McRitchie's point, if there are
14   institutions, CalPERS and whoever, who put out, this is
15   how we are voting on the issues, I mean that's useful and
16   you aggregate it rather than have to go around a dozen
17   sites to find what other shareholders are thinking, that
18   has value.
19             MR. FREDRICKSON:  I wanted to have two open
20   discussion jump ball questions; (1) we've hinted around
21   notice and access and so just wanted to give anyone an
22   opportunity to say how is it working and how can it work
23   better? Or is it not working?
24             MS. ACKERLY:  Well, I'll take a first shot at
25   it. 
0144
 1             I know from our perspective notice and access
 2   certainly doesn't work for the retail investors.  Bob
 3   cited some numbers earlier which concluded that the
 4   results are down.
 5             We do know that in Canada they can actually
 6   include an actual voting mechanism, a voting card with
 7   the notice mailing, whereas, here in the U.S. we cannot
 8   do that.  So we find that the voting results have
 9   definitely declined.
10             So there's ways, again, as proxy solicitor that
11   we have to work around that to help increase the vote.
12             MR. HIGGINS:  Just so I understand, when you
13   say "it doesn't work for retail investors," do you mean
14   it doesn't work for companies trying to reach retail
15   investors or it doesn't work for the retail investor?
16             MS. ACKERLY:  It doesn't work for the retail
17   investors because of apathy.  It's just so prevalent. 
18   People are just ignoring it.  They don't really care.
19             MR. HIGGINS:  But is that rational apathy?  I
20   mean is that a choice?  Is the apathy a choice?
21             MS. ACKERLY:  Well, you know.  I agree.
22             MALE VOICE:  Could I --
23             MR. FREDRICKSON:  Just a second.  Alan.
24             MR. HITCHCOCK:  I think one of the reasons for
25   that -- I think I eluded to this before -- the process is
0145
 1   clunky -- that's a technical term -- but it's also not
 2   the way people go on the internet and make decisions and
 3   if it's a one time transactional thing where you've got
 4   to enter your control number and go through it, I mean,
 5   who needs it?
 6             MALE VOICE:  That's what we do --
 7                     (Pause in proceedings)
 8             MR. MCRITCHIE:  I mean just as a voter I mean
 9   basically if you get a card and you have to enter a
10   string of numbers, that's a lot more difficult than -- you 
11   know, so you've got the paper and then you've got to go to 
12   the computer.  If you get the "e" information you click 
13   on it, you're there, you know -- or the paper if that's what 
14   you're used to.  I mean one thing about the paper -- my paper
15   collects in the kitchen on a counter and, you know, if it
16   gets too high my wife yells at me.
17             MR. BELLER:  I mean, I've confessed here once,
18   I'm not going to do it again.
19             From an issuer point of view notice and access
20   is a great success.  It allows you to save money. And for
21   big companies with large retail populations that money is
22   eight figures.  So it allows you to save money, it allows
23   you to be flexible and so the people you think -- if you
24   think a paper set will encourage someone to vote and that
25   someone is a high net worth retail investor with 300,000
0146
 1   shares you can send that person a paper set.  So it gives
 2   a good deal of flexibility.
 3             The electronic mechanism is clunky, I agree,
 4   probably can be improved.  I think the fundamental
 5   decision to not include the card and make people go to
 6   the site before they got the card is, as I said, you
 7   know, I think the Commission and the staff should at
 8   least rethink that decision and see whether it was right. 
 9   You will not offend me if you decide that it was wrong
10   because I've had some doubts about it as we've seen
11   what's happened.
12             The only other thing I would say -- and this is
13   consistent with what a lot of people have said -- the
14   proxy statements, like the prospectus and the 10-K, it's
15   unreadable and one of the things you could think about if
16   you were revisiting the notice part of the notice and
17   access is some kind of a summary -- the bullet point
18   summary that you were referring to earlier.  In my heart
19   of hearts, I would add a provision that lawyers should not
20   be allowed to be involved in the preparation of that
21   summary for the reasons that we all know all too well
22   but, seriously, some kind of an executive summary, you
23   know.
24             We know there are people who read just the box
25   in the IPO prospectus and don't read anything else.  We
0147
 1   don't prohibit them from buying stock.  Some kind of a
 2   summary with a card is another way to think about making
 3   it more user friendly for the retail investor.
 4             MR. SCHIFELLITE:  Just for clarity sake, I
 5   guess.
 6             I think, Donna, your comment was, you know, not
 7   working for the retail investor it is resulting in the
 8   lowest voting participation rate when it is a paper
 9   notice so I think we've established that.  The savings, I
10   totally agree, I mean it's a huge savings for issuers and
11   I think we estimated it's three hundred something million
12   per year and there is flexibility, right, so you can do a
13   hybrid which many of the larger companies, in fact, do
14   take advantage of and then I think -- you know, to the
15   comment before, I think the problem is that it is a two-
16   step process.  You get that notice, you put it down and
17   when are you going to get to that computer or whatever
18   that you're going to take the next step.  I think that's
19   part of the problem.  I think everybody has the intent to
20   do it and think it's the right thing to do but everyday
21   life gets in the way.
22             MR. FREDRICKSON:  One last lightning round.
23             So we've talked about how to make disclosure
24   better, we've discussed summaries, bullet points,
25   tagging, and I just want to not leave anything on the
0148
 1   table.
 2             Are there other improvements on how to alert
 3   retail shareholders to issues that they're going to care
 4   about so that they will be more engaged?
 5             MS. MINNOW:  I think that the kind of people
 6   who want to make their own buy/sell decisions congregate
 7   at the kind of places that Mr. Schifellite was talking
 8   about, Motley Fool, Yahoo Finance, etc., and I think that
 9   there are a lot of things that issuers could do to
10   coordinate with those consumer oriented retail investor
11   sites to make information available that would not
12   contravene the exquisite detail of the disclosure
13   requirements that we all know so well.
14             So I think you want to go where they are and
15   this goes back to my overall point which is that, you
16   know, as John Endean very disarmingly admitted, it's
17   definitely in the issuer's interest to have blanket votes
18   cast blindly in their favor of incumbent management but I
19   don't think that that's what's best for companies and I
20   don't think that's what's best for investors and what we
21   want to do, therefore, is really focus on increasing
22   their perception of the benefits by making sure they
23   understand how important it is and that it's to their --
24   that companies will save money if they vote and
25   decreasing the costs by making not just company
0149
 1   information but independent sources of information about
 2   the votes available to them and I think that that will
 3   get them as interested in the voting decision as they are
 4   in the buy/sell decision.
 5             MR. ENDEAN:  I'm a very candid man but I wasn't
 6   that candid.  What I said was that there's an assumption
 7   shared by the institutional groups like CII, where you
 8   used to hang your hat, that those votes --
 9             MS. MINNOW:  I never hung my hat there but
10   thanks.
11             MR. ENDEAN:  -- right now would likely be cast
12   for management.  I don't think they're blind votes, I don't
13   think they're stupid votes, I don't think retail investors
14   are morons.  There's an assumption that if you buy a
15   share of stock you think it's a good investment.
16             What I tried to say before the alarm went off
17   is that as people vote through something like standing
18   instructions which the institutions now enjoy that will
19   serve as a kind of flywheel to leading to more curiosity,
20   more involvement.  If I'm getting feedback from my
21   broker, this is your standing instructions for company X,
22   do you want to keep them or change them, this is a hope,
23   this is aspirational.  People are going to say, do I want
24   to do this.  But I really have to take strong issue with
25   the way you depicted my remarks.
0150
 1             MS. MINNOW:  I appreciate the clarification.
 2             MR. ENDEAN:  I did not say -- I did not use the
 3   word "blindly" and as far as I know, in terms of informed
 4   investors there's nothing in the law that says that a
 5   vote has to be informed.  What I did say is I don't even
 6   know what that means and I would hope that CII and other
 7   groups which rhetorically say they want retail people
 8   voting would embrace something like AVI but that's not
 9   your problem.
10             MS. MINNOW:  I'm not representing CII in any
11   way.
12             MR. ENDEAN:  I didn't say you were.
13             MS. MINNOW:  No, but you said I used to hang my
14   hat there, which I did not, but I think we all, I hope,
15   agree that informed votes are good and that sometimes, as
16   Alan said, individual investors will make a decision that
17   it is not worth their time to become informed and,
18   therefore, not vote and we want to be, as Alan said, very
19   careful to make sure that, when we encourage people to
20   vote, we encourage them to do it in an informed way and
21   I'm delighted to hear you agree with me.
22             MR ENDEAN:  What is an informed vote?
23             MS. MINNOW:  What is an informed vote?
24             MR. ENDEAN:  How would you define "informed
25   vote"?
0151
 1             MS. MINNOW:  An informed vote is one that has
 2   involved at least one minute of thought before being
 3   cast.
 4             MR. ENDEAN:  That's a low hurdle.  I can go
 5   along with that.
 6             MR. BELLER:  Me too.
 7             One of the thoughts that -- part of this is the
 8   proxy rules are not so prescriptive that they would --
 9   they're worse than they should be in that regard but
10   they're not so prescriptive that they would get in the
11   way of the kind of marketing packaging, make it more
12   attractive to open what's now going to be a rainbow-
13   colored plastic wrap -- please read this immediately and
14   we'll give you $100.00 - just kidding.  So I think
15   there's some merit to thinking -- I don't think that's
16   regulatory action, I think it's regulatory encouragement. 
17   I don't think we're ever going to get to the point where
18   you're just going to file the proxy statement or portions
19   of the proxy statement on Edgar.  There's part of me that
20   says that's probably an okay idea and you send out a ten
21   page, really fancy, either on the internet or in paper, a
22   bullet point, glossy summary, written not by a lawyer,
23   independent of the notice and access -- I think you'd get
24   more votes if more companies did that.
25             MS. ACKERLY:  Just to Alan's point, I wanted to
0152
 1   say that sometimes we've actually been creative with our
 2   envelopes.  We'll put something on the envelope that says
 3   "open immediately it's from XYZ Company."  Just something
 4   that's really catchy that causes the shareholder to open
 5   up the package.
 6             MR. BELLER:  The last thing I do -- and I've
 7   suggested to both sides of the -- both the institutions
 8   and the issuers -- place limits on CD&A.  Essential.
 9             MR. FREDRICKSON:  Okay.  Last word.  Jim.
10             MR. MCRITCHIE:  Well, one of the questions --
11   talking about informed voting, one of the questions that
12   was put to the panel was to ensure that any client
13   directed voting system, that investors are making
14   informed voting decision and that voting is accurately
15   reflecting their views.  Okay, now when a mutual fund
16   votes for me or especially a collective investment trust,
17   which we're getting more and more of, which don't even
18   have to disclose their votes and aren't regulated by the
19   SEC, you know, they're not voting -- they haven't
20   surveyed me to find out what my views are and when I look
21   and see how they're voting -- I participate in a $10
22   billion savings plus program as an ex-state employee in
23   California -- well, if I look at and I actually dig out
24   how they're voting and they won't tell me but I can find
25   it out, they're voting against everything that I worked
0153
 1   for.  They're voting against transparency in political
 2   elections, they're voting against safety and health
 3   things.  I mean I worked for EPA -- anyway, they're
 4   voting against all of my interests.
 5             One of the very important things on the voting
 6   platform is independence.  I want a Moxy Vote platform. 
 7   I want someone who is independent, who is not trying to
 8   sell a retirement fund system to an employer because
 9   those people have a conflict of interest.  Moxy Vote
10   doesn't have a conflict of interest.  They take all
11   comers and put up views.  That's the kind of system I
12   want a voting -- to use for client directed voting.
13             I just want to mention one more thing here
14   since, I guess, I'm the last guy is that, I mean, here
15   we're so antiquated, we're voting on voter information
16   forms.  We have protections in the law with regard to
17   what is required of a proxy but only ten to fifteen
18   percent of all the shares voted are voted by proxy.  The
19   other 85 percent to ninety percent are voted by VIFs. 
20   VIFs don't have to meet all those requirements and one of
21   the requirements, I think, which is very important is to
22   have an objective label as to what you're voting about
23   but I've seen things where it says -- you know, they'll
24   give some two sentence -- a long string of words
25   basically saying that this is a shareholder proposal that's
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 1   been sponsored by someone, go inside the proxy and find
 2   out what it is, I mean when they could have said majority
 3   vote or something like that.
 4             So the idea that we have rules that protect ten
 5   percent of the people is absolutely absurd and we are
 6   going to find the same thing with these collective
 7   investment trusts.  More and more people are being
 8   funneled into those and you can't find out how they vote,
 9   they have no requirement.
10             MR. FREDRICKSON:  Thank you.
11             Commissioner Stein, did you have any questions?
12             COMMISSIONER STEIN:  No.  I'd just like to say
13   thank you to all of you again.
14             This has been very thought-provoking and it's a
15   nice, free-flowing conversation and I think it, for me,
16   stimulates some of the questions and you try to think
17   about, you know, answers.  None of this is easy.  That's
18   the other thing that you sort of get from everyone.
19             So I really appreciate the time that you've
20   taken to come here and I hope this will be a continuing
21   conversation going forward.
22             MR. HIGGINS:  Let me also add my thanks to all
23   the panelists for coming in for the earlier panel.  It's
24   been great.
25             The one thing I did -- thanks to David and
0155
 1   Michele -- but also there's some folks form Corp. Fin.
 2   who worked behind the scenes who weren't quite as visible
 3   but who really worked hard:  Tina Chalk, Ray Be, Jenny
 4   Riegel and Raquel Fox, thanks for your efforts and thanks
 5   for coming.
 6             It took a fire alarm to blast the Commissioners
 7   out of the room so you can tell how interested they were.
 8             So thanks again and we look forward to the
 9   continuing debate.
10             (Whereupon, at 1:22 p.m., the examination was
11   concluded.)
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