[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                                                   S. Hrg. 102-000 deg.
 
      CAN U.S. COMPANIES COMPETE GLOBALLY USING AMERICAN WORKERS?

=======================================================================

                         FULL COMMITTEE HEARING

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                    WASHINGTON, DC, JANUARY 21, 2004

                               __________

                           Serial No. 108-50

                               __________

         Printed for the use of the Committee on Small Business


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                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania      FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina           ENI FALEOMAVAEGA, American Samoa
SAM GRAVES, Missouri                 DONNA CHRISTENSEN, Virgin Islands
EDWARD SCHROCK, Virginia             DANNY DAVIS, Illinois
TODD AKIN, Missouri                  GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia  ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania           ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado           MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona                DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania            JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire           MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado               LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana               BRAD MILLER, North Carolina
STEVE KING, Iowa                     [VACANCY]
THADDEUS McCOTTER, Michigan

         J. Matthew Szymanski, Chief of Staff and Chief Counsel

                     Phil Eskeland, Policy Director

                  Michael Day, Minority Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Kennedy, Mr. Allan, Writer/Researcher/Management Consultant......     5
Bagley, Ms. Constance, Associate Professor of Business 
  Administration, Harvard University.............................     9
Bassi, Dr. Laurie, CEO & Managing Partner, McBassi & Co..........    12
Wilkinson, Mr. Anthony, President & CEO, National Association of 
  Government Guaranteed Lenders..................................    26

                                Appendix

Opening statements:
    Manzullo, Hon. Donald A......................................    40
    Velazquez, Hon. Nydia........................................    46
Prepared statements:
    Kennedy, Mr. Allan, Writer/Researcher/Management Consultant..    48
    Bagley, Ms. Constance, Associate Professor of Business 
      Administration, Harvard University.........................    57
    Bassi, Dr. Laurie, CEO & Managing Partner, McBassi & Co......    63
    Wilkinson, Mr. Anthony, President & CEO, National Association 
      of Government Guaranteed Lenders...........................    67

                                 (iii)


HEARING ON: CAN U.S. COMPANIES COMPETE GLOBALLY USING AMERICAN WORKERS?

                              ----------                              


                      WEDNESDAY, JANUARY 21, 2004,

                  House of Representatives,
                                Committee on Small Business
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:06 a.m. in Room 
2360, Rayburn House Office Building, Hon. Donald Manzullo 
presiding.
    Present: Representatives Manzullo, Velazquez, Bartlett, 
Millender-McDonald, Udall, Chabot, Ballance, Christensen, Akin, 
Napolitano, Bordallo, Majette, Bradley, Beauprez.
    Chairman Manzullo. The Committee meeting will be called to 
order. While we have good news about an improved economy, we 
continue to have not so good news about Americans losing jobs 
to foreign competition.

    As a capitalist and as an ardent free trader, I can say 
with conviction that competition is good. It makes us a better 
nation, while improving the economies of those nations against 
which we are competing.
    There is a false argument, however, that anyone who dares 
question what is happening with off-shoring or the decimation 
of domestic manufacturing is somehow protectionist, as if there 
are no shades of gray between the two extremes of pure 
protectionism and no holds barred free trade.
    It is my contention that one of the key issues hidden from 
this debate is the tremendous pressure Wall Street puts on 
corporate America. I think if we peel back the onion, we will 
find that companies are unduly forced into doing anything and I 
mean anything, to drive up stock values in order to make their 
quarterly estimates.
    The decision to manage a company by managing stock price 
has monstrous effects on everyday America. For example, 
companies are shutting down entire domestic supply chains for 
the lure of cheaper labor overseas.
    I am not against international trade, but neither do I 
support the wholesale abandonment of small businesses by big 
multinationals. By looking long-term as opposed to short-term, 
I believe companies can put America's jobs first and still win 
in the global marketplace.
    Legislation is surely not the answer. There has to be a 
change in corporate culture and thus this hearing this morning.
    I realize we are dealing with highly competitive nations 
like India and China. The problem is we are giving away the 
store without giving up much on their end. India has one of the 
worst trading records with the United States. China simply 
refuses to comply with WTO obligations and we still keep the 
door open.
    What is interesting is that the semi-conductor industry is 
complaining that China is forcing them to give up technology 
secrets if they want to do business in China. What they are 
afraid of, what they know to be true, is that the Chinese 
companies will steal their intellectual property and the 
Chinese government will do nothing about it.
    We are not talking about manufacturing employment being in 
a decline because of better machinery. That is the classical 
definition of productivity. In fact, according to sources in 
the tooling industry, only about one-quarter of the 
productivity increases can be attributed to new machinery. The 
rest is off-shoring and the incorporating of cheap, foreign 
components with American components to come up with higher 
productivity.
    If the argument is that companies cannot be profitable 
using Americans, why are companies like IBM still sending jobs 
overseas, when they have had strong profits?
    In Monday's issue of the Wall Street Journal, a copy of 
which is on the table, it is reported that IBM plans to ship 
thousands of high paying programming jobs to China, India and 
Brazil. They even tell their managers not to be ``transparent 
regarding the purpose or intent'' of the off-shoring decision 
and cautions that the ``terms on-shore and offshore should 
never be used''. It is a startling and revealing article.
    That is not the worst of it. The poke in the eye is that 
IBM will have some of the foreign programmers come to the U.S. 
for on-the-job training by the very people whose jobs they will 
take over.
    I.B.M.'s chief financial officer said, ``Competitive price 
pressures in computer services are holding down 
profitability''. Well less than a week ago, IBM announced a 41 
percent increase in fourth quarter earnings per share the same 
period in 2002. They had a 42 percent increase in income 
compared to the same period a year ago.
    What about the CEO's exuberance in stating, ``This was a 
very good quarter for IBM and an encouraging end to a year in 
which we steadily gained momentum and posted record revenues. 
Our pretax earnings per share were up double digits for 2003 
and we ended the year with more than 7.6 billion in cash''?
    Is this what the IBM CEO meant when he said price pressures 
are holding down profitability? I cannot say he is blowing 
smoke, but it sure is an interesting definition of 
profitability.
    What is remarkable is that the National Science Board and 
the High Tech CEO Policy Group recently warned that the 
economic vitality of America is threatened by a lack of U.S. 
graduates in science and engineering. My question is: How can 
you get students excited about science and engineering when 
they see those same jobs be moved overseas for a fraction of 
the price?
    The National Science Board further concluded that U.S. 
strength in education and innovation is threatened by two major 
trends. First, global competition for science and engineering 
talent is intensifying. Second, the number of U.S. born 
graduates in these fields is likely to drop. I must add a 
third, the number of foreign born graduates from U.S. 
institutions going back home was increasing.
    So what does all this have to do with corporate earnings 
management? I think they are all connected to decisions made in 
the board room to find that extra penny per share at all and 
any costs.
    It is my hope that our distinguished panel of experts can 
shed some light on how companies can compete in the global 
market using American workers.
    For the purpose of the hearing, we have set it forth in two 
distinct panels. The first panel is dealing with essentially 
employees as human capital. It is going to be a very exciting 
conversation taking place.
    The second panel I have split off. The minority had 
requested a separate hearing on 7(a), and the second panel 
speaker is an expert on the 7(a) program that is totally 
unrelated to this. In fairness to the two separate topics, I 
have decided as Chair to split them into two separate panels.
    [Chairman Manzullo's statement may be found in the 
appendix]
    I recognize our distinguished ranking minority leader of 
the Small Business Committee, Congresswoman Velazquez.
    Ms. Velazquez. Thank you, Mr. Chairman. Today the drive on 
Wall Street for short-term profits has damaged our nation's 
consumers, workers and local communities.
    Unfortunately, such eagerness for rapidly rising profits 
has made headlines around the world as company after company 
has adopted shifty accounting techniques to appear more 
profitable than they actually are.
    From Enron to Worldcom, the desire to satisfy shareholders 
has pushed these companies over the edge. These type of 
scandals are not directly related to small businesses, since 
they have occurred in large publicly traded companies, calling 
into question the relevance of this issue for the Small 
Business Committee.
    Unfortunately, these type of governance issues are not 
solely limited to the private sector. Many times decisions that 
are made at the federal level serve to create the very 
complications that we try to stop.
    An example of this is a continuing crisis in the Small 
Business Administration's 7(a) loan program, which goes without 
shift and thorough Congressional scrutiny. This issue surfaced 
late last month when the SBA announced that it will impose 
another cap on the 7(a) lending program, but this looming 
crisis was actually foreshadowed much earlier in the year, 
during a Committee hearing when both Democratic members and 
industry leaders indicated that the SBA's budget will clearly 
fall short in meeting the small business demand for 7(a) loans.
    During that testimony and throughout 2003, the Bush 
administration maintained the program had enough funds. Then at 
the end of this year and to no surprise of some members on the 
Committee, the Bush administration announced the program ran 
out of money.
    The root of the current crisis is the Administration's 
budget requests. The funding request for this important program 
has steadily declined from President Clinton's budget request 
of $11.5 billion in 2001 to the Bush administration's most 
recent request of $9.3 billion in 2004.
    This decrease is inconsistent with the demand for 7(a) 
loans, which has increased to more than $12 billion in 2004. As 
a result of this inadequate budget request, the stage was set 
for the program to collapse.
    The first sign of this collapse was the Administration's 
December 23 announcement of a $750,000 cap on 7(a) loan size. 
This announcement caused a completely foreseeable run on the 
bank as lenders rushed their applications to the SBA for 
processing and approval.
    As obvious as this was, the Administration was caught 
completely off guard. Instead of managing its operation to 
account for this heightened demand, the Administration made the 
extreme decision on January 6 to shut down the 7(a) loan 
program and return all pending applications to our nation's 
small businesses.
    The Administration's current solution is hardly a solution 
at all. The SBA has continued its $750,000 cap on loans, banned 
the use of 7(a) loans in larger financing packaging and has not 
addressed the inequities suffered by those small businesses 
that had their application outright canceled.
    To top it all off, it is likely the program will shut down 
again before the end of January. Does this sound like a 
solution to you? It does not to me or my Democratic colleagues 
on the Committee.
    Small businesses in the United States drives job creation 
and contributes to positive economic growth. This is especially 
important now as recent reports confirm the economy is failing 
to add the number of jobs necessary to put America back to 
work. In fact, in December it just created 1,000 new jobs.
    A real commitment from this Administration to get the small 
business sector is exactly what our nation needs right now. 
Without this, the economy will be unable to make a full 
recovery because small businesses will be left out in the cold. 
Thank you, Mr. Chairman.
    [Ranking Member Velazquez's statement may be found in the 
appendix]
    Chairman Manzullo. Thank you very much. We have been 
waiting over a year for two of the three witnesses and 
conversations going on. I was challenged about two years ago by 
a CEO of a major corporation back in Rockford, Illinois to read 
a book called The End of Shareholder Value, Corporations at the 
Crossroads, by Allan Kennedy.
    It has become required reading for the members of my staff 
and I got my personal copy autographed this morning. We have 
been in contact with Mr. Kennedy I believe now for about a year 
and a half to try to coordinate his schedule to come here and 
speak.
    We are going to set the clock at eight minutes for each of 
the witnesses and I look forward to your testimony.
    Mr. Kennedy, if you want to pull the mike closer to you and 
push it down just a little bit there I think we might get a 
little bit better resonance.
    Mr. Kennedy. Fine.
    Chairman Manzullo. When you see the clock getting yellow, 
you have got about a minute to go more or less, but do not let 
it intimidate you. My understanding is that there will be no 
votes until at least past noon. So we should be in good shape 
on time. We look forward to your testimony.

   STATEMENT OF ALLAN KENNEDY, WRITER/RESEARCHER/MANAGEMENT 
                           CONSULTANT

    Mr. Kennedy. First of all, thank you Chairman Manzullo and 
Ranking Member Velazquez and other members of the Committee for 
inviting me here. It is really an honor to testify in front of 
Congress and I appreciate it.
    My name, as you know, is Allan Kennedy. I am testifying as 
an individual. I have no affiliations with anyone. My 
background is I spent about 30 to 35 years as a management 
consultant, primarily to big business.
    Of course while I was doing that, I was running a small 
business called A Consulting Business and for a while I ran a 
software company. I have had a foot, therefore, in both big and 
small business for a number of years.
    I do bring a bias to the table, even though I do not 
represent anyone. I really care passionately about the future 
of business, big and small. I think it is the engine that makes 
for a better life for all people in America and it is really 
critically important to get it right. That is why I wrote the 
book and that is why I am testifying today.
    So let me briefly skip over some of the background and then 
end hopefully with some comments about things I think can be 
done. I do not have any easy answers, but I think there are 
steps that can be taken in the right direction.
    First of all, the phenomena of the short-term orientation 
of large corporations or big business needs to be put in 
context and the most important part of that context is that big 
business all started as small business. Companies do not just 
grow up as big businesses. They are almost all family 
enterprises originally or quasi-family enterprises that just 
were successful and grew into being big businesses.
    After the Second World War, a lot of people outside of a 
family context began to see launching a business as a darn good 
way to get rich. So you had a whole new set of corporations 
emerge, where the real intent of launching those corporations 
was in fact to make money. Famous names like Intel are examples 
of that kind of a corporation.
    Along the way and certainly by the 1950's and 1960's, 
professional managers had for the most part replaced family 
members as the senior managers of these increasingly large 
business enterprises and of course their interest was strongly 
to begin to share the wealth that accrued from building the 
business, since they were not the founding families.
    As it happens, around the end of the 1970's and the 
beginning of the 1980's, when buy out firms such as Kolbert 
Kravitz and people like that came along, they start arguing 
that management was not in fact pursuing adequately shareholder 
value. That is where the phrase began to arise.
    They were not maximizing their returns to shareholders and 
management was not being held accountable enough to produce 
results. So they started putting pressure on managers, the 
threat of being bought out by a buy out specialist to become 
more accountable.
    Now in response to that and in response to dramatically 
increased competition from overseas, most large businesses 
started to incorporate performance measures into their 
compensation to tie managers' interests more closely to the 
interests of shareholders.
    In particular, they developed a lot of stock based 
compensation schemes so that managers would cash in if the 
stock of the corporation went up. In fact, the byproduct of 
those schemes, was the managers began to cash in at totally 
unprecedented levels, because of their stock option schemes.
    By the time 2000 came around and the bubble had burst, now 
I should note that I wrote the book, The End of Shareholder 
Value back in 1998 and 1999. It was published at the beginning 
of 2000, so pre-bubble.
    By the time the bubble burst, in fact the ethic of big 
business, was simply greed, get as much as you can, as fast as 
you can and that I think is the fundamental problem that is 
driving an awful lot of the problems in the business 
environment right now.
    Why is running a business for greed dysfunctional? Well it 
is dysfunctional for two reasons. First of all, the incentive 
schemes that managers have and that they are trying to optimize 
with their pursuit of their own personal greed, are financially 
oriented and very short-term in focus.
    Financially oriented, because it is easy to measure 
finances and short-term, because most managers have a fairly 
short-term perspective, unlike family members of family run 
firms.
    Also, they are heavily influenced by the stock market and 
even though most of the money in the markets is institutional 
money, long-term pension money, money managers are motivated to 
beat their comparables on a quarter-by-quarter and year-by-year 
basis so they are very short-term oriented in their outlook and 
they are churning their portfolios to produce marginal gains 
over their competitors in the money management business, all of 
which increases the short-term pressure on business.
    This short-term pressure leads managers to adopt techniques 
such as and we have all heard of them, downsizing, re-
engineering, outsourcing techniques to increase the short-term 
earnings of the business, often at the expense, not the 
intended outcome, but often at the expense of the long-term 
viability of the business.
    A nice example is there is a popular program called Six 
Sigma, which is really a quality control, quality improvement 
program. It is really a euphemism for cost reduction, because 
improved quality, quality costs less. It is the name of a 
famous book. Improved quality therefore streamlines operations 
and you can run at lower costs.
    Every manager I know in big business who launched the Six 
Sigma program managed it by turning to the managers who were 
implementing Six Sigma and saying, so how much are your costs 
coming down? Everything translated into short-term this way 
cost gain.
    Now why do we care if big business is being run? Why 
particularly in the Small Business Committee do we care if big 
business is being run on a short-term basis?
    Well, we care because small business, first of all, is 
tremendously important to the economy. We all know and I do not 
know what the statistic is, but virtually all of the job growth 
in the economy comes from the small business sector.
    Family firms tend not to be run for short-term profit. They 
tend to be run to preserve employment, often of family members 
and colleagues and neighbors and whatever and they are designed 
to build long-term wealth, which is very different from short-
term profit.
    Equally, unless they are ridiculously profitable, small 
businesses tend to be under capitalized. So anything that 
requires them to invest money short-term can be very 
problematic for a small business and you will see in a moment I 
will comment on why what big business is doing is creating 
pressure for small business in that respect, because most of 
what big business is demanding, which is lower costs from their 
suppliers, often small business suppliers.
    Lower costs now requires either immediate cost reductions, 
which of course flies in the face of the ethic of most small 
businesses, which is to retain the family environment of the 
business and to preserve the employment of their key employees 
or they require new systems and procedures like the movement to 
just-in-time inventories on the part of big business.
    Well, if you are a small business supplier, that means you 
have to upgrade your systems to be able to interface with big 
business, to be able to meet those requirements or simply the 
demand to lower your price in the things you are selling to big 
business. For example, by moving to offshore outsourcing to 
offshore manufacturing.
    If you are a small business, the whole business of trying 
to open a plant overseas is a monumental problem for you. You 
do not have the money to be flitting off to the Far East to try 
to figure out how to open a plant over there.
    All of these things place enormous and counterproductive 
pressures on small business. So the Small Business Committee 
has every reason to be concerned about big business' short-term 
focus on profits.
    What is specifically wrong and what can be done to put it 
right? Executive compensation has gone crazy. Executive pay is 
driven by an artificial marketplace, because it is set by 
committees of boards of directors, which are mainly comprised 
of other senior executives. So it is a closed club.
    It is a closed system, which is artificially setting the 
pay ever higher and if your pay goes higher, then my pay will 
go higher when it comes around to me. It is a non-market that 
has driven executive pay to levels that are just unsustainable. 
It is really just silly.
    Now we have the means of correcting that problem. The means 
are in the progressive taxation system and something needs to 
be done to bring the pay levels back to reasonable levels.
    It is totally unreasonable that a career employee, not 
matter how talented, I am thinking of someone like Jack Welch, 
who worked for General Electric, should be compensated a 
billion dollars for his 25 years in the company or 30 years in 
the company, because he was CEO at the right time and place, 
when a worker who spent the same 30 years at General Electric 
is probably struggling to make ends meet on his pension.
    That does not make sense and that should be corrected by 
putting really punitive tax levels on over compensation. I 
think we could correct this problem overnight. What is over 
compensation? Something like a blue ribbon commission needs to 
define that. It is much too tough for me to define, but 
hundreds of millions of dollars for running a company is over 
compensation when you are not the creator of the company, you 
are just the hired manager.
    Corporate governance is fouled up, because these things 
would not have happened to the extent they have happened, if in 
fact the governance of corporations had worked. There has been 
some progress with Sarbanes Oxley and other things, but you 
know the New York Stock Exchange pay package, I think I am over 
my time, mutual fund scandals indicate that we have not solved 
the problem.
    The minimum thing that is needed is requiring the boards of 
large corporations to have representatives of all their 
constituencies, employees, the major communities they operate 
in, their suppliers, that would begin to address the problem.
    I am going to skip ahead on the written testimony to just 
say----
    Chairman Manzullo. What I would suggest is in the time for 
questioning then you can bring in the last part of your 
testimony that talks about the small businesses and what they 
can do on it.
    Mr. Kennedy [continuing] Will do.
    [Mr. Kennedy's statement may be found in the appendix]
    Chairman Manzullo. I do not know if we have had witnesses 
on Capitol Hill that have made such interesting statements. As 
I read your book, I said, I do not know if this man is a 
Democratic or Republican, a Libertarian, vegetarian. I have no 
idea what your philosophy is, but your testimony here is as 
remarkable and startling as the comments that you make in the 
book and I want to thank you for your candor.
    This leads us to our next witness I was on a plane coming 
home and picked up a Harvard Business Review, took a look at it 
and I noticed an article by Constance Bagley, associate 
professor of business administration at the Harvard Business 
School and I read the article, reread it and then it dawned on 
me that here is somebody who has taken a look at human beings 
and employees as human capital and not as statistics.
    Included in that article was a chart of ethical 
responsibility as a diagram. Do you first determine if a 
decision is legal? If it's legal, then what is the impact that 
it has upon the employees?
    At that point, I saw somebody who was in an area where we 
find people, such as Andy Grove of Intel struggling. It is an 
astounding statement that he's torn with the choice of 
enhancing shareholder value on one hand and then laying off the 
people who made the company on the other hand just in order to 
outsource in order to increase shareholder value.
    I gave her a call on the phone. She is a former corporate 
securities partner in the 900 lawyer firm of Bingham McCutchen, 
the San Francisco office. Her practice currently centers on 
legal aspects of entrepreneurship and cyberlaw as well as 
corporate governance.
    As I said before, she is also an associate professor 
business administration at Harvard Business School. Professor 
Bagley, we look forward to your testimony.

   STATEMENT OF CONSTANCE E. BAGLEY, ASSOCIATE PROFESSOR OF 
       BUSINESS ADMINISTRATION AT HARVARD BUSINESS SCHOOL

    Ms. Bagley. Thank you very much, Mr. Chairman and Ranking 
Member and Committee members. It is a pleasure to be with you 
this morning.
    I teach in the entrepreneurship unit at the Harvard 
Business School and would echo the comments with respect to the 
importance of the issues we are discussing today for small 
business.
    Part of my work deals with venture capital, the private 
sources of funding. There is no question but that to the extent 
that the capital markets are shaken the way they have been in 
the wake of instances such as Enron and Worldcom, that the 
ability of young companies to get equity funding is 
substantially impaired by many of the misdeeds that we have 
seen in the larger companies.
    Again, I think that the Chairman's looking at this issue, 
although it may seem a little tangential, in fact is directly 
related to whether people that want to go from creating 
something into a garage to creating perhaps the next Hewlett 
Packard can get the capital they need in order to do that.
    What I want to focus my remarks on today is this whole 
notion of shareholder primacy. I want to basically just set the 
record straight on what the law requires, because frankly I 
think that there is a good amount of misinformation there.
    I have been astounded the number of times I have spoken 
with public company directors who have made decisions, such as 
closing facilities and the like, that they have anguished over 
but have basically come down on the side of saying, I did not 
want to do it. I felt terrible doing it, but I had no choice. I 
had to maximize value for my shareholders.
    That is not what the law says. In the state of Delaware, 
where more than half of the Fortune 500 companies are 
incorporated, the Delaware Supreme Court has taken pains to 
make it clear to directors that the responsibility of the 
directors of a corporation domiciled in Delaware is to act in 
the best interest of the corporation. That is broadly defined 
to include not only the shareholders, but also other 
constituencies including employees, suppliers, the community, 
factors such as that.
    The obligation of the directors to maximize shareholder 
value arises in the very narrow instance in which a change of 
control of the company has become inevitable.
    Even in that instance, the Delaware Court has defined it so 
narrowly that frankly it arises only when you are either 
literally dismembering a company, so that there is no future 
for anyone, or you are essentially transferring control of a 
publicly traded company to either a single shareholder or to 
another company with one or several dominant shareholders.
    To show you just how much power directors have as a matter 
of law, the Delaware Supreme Court held that it was fully 
appropriate for the Time directors to go ahead with a merger 
with Warner Communications, in the face of a hostile bid by 
Paramount Communications that was at a price that clearly the 
Time shareholders thought was superior to what they felt would 
be realized at least in the short-term, from the merger of Time 
and Warner.
    In fact, the deal initially was structured as a stock-for-
stock merger, requiring the approval of the Time shareholders. 
After Paramount made its all-cash offer, it became clear that 
that approval would not be forthcoming.
    In order to obviate the need for that approval, Time 
restructured the deal as a leveraged acquisition of Warner and 
proceeded on that basis. Paramount challenged it, saying wait a 
minute. You are not giving your shareholders an opportunity to 
get the highest value for their stock.
    The Delaware Supreme Court said that, the shareholders are 
not entitled to run the corporation. It is not as if we have a 
town hall meeting. They have elected representatives, the 
directors, and the directors have the fiduciary obligation to 
look out for all of the interests. Therefore it was held 
appropriate for the directors to continue with their strategic 
plan of going ahead with the deal with Warner. This is a stark 
example of the authority that in fact directors have.
    I believe that one of the failures that we have seen in 
corporate America has been the failure of our directors to 
assume the mantle of stewardship that comes with being the 
managers of these major engines of commerce in today's world.
    If you look at the percentage of people employed by 
corporations, the percentage of products manufactured by 
corporations, the services provided by corporations, there is 
no question but that these are the dominant economic forces in 
today's global marketplace. Yet there has been a tendency for 
directors and for frankly some of my fellow economists at 
Harvard and elsewhere to, at least in the past, they have back 
pedaled a bit now I think, but there has been a tendency to say 
that because of the potential conflict of interest a manager 
may have in terms of how they are running the company, the only 
way to make sure that the managers are not feathering their own 
nest is to require them to maximize shareholder value.
    The problem with this is several fold. First of all, you 
are saying to managers that even if a particular decision 
strikes you as being unfair, for example to a long-time 
employee that has been working with the company, to a community 
that may have built specialized infrastructure in order to 
accommodate a particular plant, to the people living down river 
in an overseas country that does not yet have environmental 
laws as strict as the United States, even in situations where 
morally you would say I am not comfortable if I were doing this 
individually, imposing this cost on others, managers must do it 
here.
    I had a rather stark example of that when I was teaching in 
the fiduciary college at Stanford Law School. We had I think 
roughly two trillion dollars of institutional money in a room 
that held fewer than 100 people.
    I raised the question with them of and gave them a quote 
from a CEO who said, `My responsibility as CEO is to maximize 
value for my shareholders. I cannot let my own sense of right 
and wrong get in the way.`
    I asked them: How many of you would invest in a company 
with a CEO stating that position? Few, if any, hands went up.
    A little bit later I said, let me give you a hypothetical. 
Do not fight my hypothetical. Let us pretend that you had the 
opportunity to invest in a company that has just been given 
exclusive drilling rights in a country with human slavery. You 
know that part of the proceeds of the drilling will keep the 
government in place that has this policy of human slavery.
    Would you invest in that company? Assume unrealistically 
there would be no adverse reputational effect to you or the 
company. That somehow you could keep this secret. Would you do 
it? A person raised their hand and said,`Do you mean me 
personally or do you mean me as a money manager?`
    We cannot afford to put on ethical blinders when we go into 
the board room. It becomes critical, in my judgment, for 
directors who are given the ultimate legal responsibility to 
run the corporation in the best interest of all the concerned 
parties, to look not only at whether something will maximize 
shareholder value, but also what will be the effect on other 
constituencies.
    A proposal that I made with my co-author Karen Page back in 
1999 tried to get at this issue by proposing that the 
Securities and Exchange Commission amend the requirements for 
annual reporting on Form 10-K to require companies to disclose 
the impact of their major decisions on not just the 
shareholders, what we see in the financial reports, but also 
on, for example, employees and the like.
    We have a situation now where a company that tries to do 
the right thing can be penalized, because the markets have no 
way of knowing they are doing the right thing. The information 
is not out there. It is not being measured. It is not being 
made public.
    I would argue that to the extent that we could require that 
information to be made public, most of the companies that are 
really working hard to both get good value for shareholders and 
to play fair by all the participants would get the credit they 
deserve and frankly to deter the would-be cheaters who would 
prefer to force their externalities on others and reap a 
marginal benefit in price that this disclosure would be a way 
to encourage the good behavior and deter the more damaging 
behavior.
    Clearly, we need to bring ethics back into the board room. 
There is no question but that there needs to be concern for 
shareholder value. I am not in any way suggesting that the 
capitalist system in our country will survive if we suddenly 
decide we do not need to worry about that. But in my judgment 
what great companies do is they figure out how to get a robust 
return for our shareholders, but not do it on the backs of 
treating unfairly the other participants?
    I would encourage this Committee to consider ways in which, 
whether it be through disclosure or an amendment to the Warn 
Act that would provide not only do you have to give warning, 
but you have to publicly disclose the rationale for closing 
this facility? What training options were given, what other 
things did you consider?
    That we really require the people in the board room to deal 
with these issues. Also make clear to them that they have the 
legal power to do what is right and really need to step up to 
the plate and have the moral courage to do it. Thank you very 
much. Be happy to answer questions later.
    [Ms. Bagley's statement may be found in the appendix]
    Chairman Manzullo. Thank you very much for that testimony. 
Our third witness, Dr. Laurie is it Bassi or Bassi?
    Ms. Bassi. Bassi.
    Chairman Manzullo. Bassi, CEO and managing partner for 
McBassi and Company. She is also chair of the board at 
Knowledge Asset Management, Inc.. She was a co-developer of the 
human capital capabilities scorecard.
    Prior to launching her company, she owned and managed a 
research based consulting firm and served as a research fellow 
at Accentures Institute for Strategic Change. Previously as the 
director of research for SABA, she focused on the economics and 
measurement of learning.
    Before joining SABA, she was VP and general manager at the 
American Society for Training and Development, where she was 
responsible for research and enterprise solutions.
    Her achievements there include creating internationally 
recognized standards for measuring and valuing firm's 
investments in education and training and a core set of 
benchmarkable indicators for measuring the effectiveness of 
knowledge management initiatives.
    Dr. Bassi spent the early years of her career as a tenured 
professor of economics at Georgetown University, where she has 
also served as co-founder of the graduate public policy 
program.
    In addition, she has served as staff director for several 
U.S. Government commissions, including the Commission Under 
Work Force Quality, which laid the early groundwork for the 
emergence of portable skills credentials.
    We look forward to your testimony, Doctor.
    Ms. Bassi. Thank you, Chairman Manzullo and----
    Chairman Manzullo. If you could pull that a little bit 
closer to you.
    Ms. Bassi [continuing] Thank you. Can you hear now?
    Chairman Manzullo. That is better. Thank you.

 STATEMENT OF LAURIE BASSI, CEO OF McBASSI & COMPANY AND CHAIR 
                 OF KNOWLEDGE ASSET MANAGEMENT

    Ms. Bassi. Good morning and thank you for your invitation 
for me to speak today. I am Laurie Bassi and a small 
entrepreneur and run several small businesses.
    My testimony today the focus will be that of a PhD 
economotrician. I am a very hard nosed person on evidence and I 
have spent many, many years asking the question: Are firms 
indeed making the right decisions so as to maximize shareholder 
value and the conclusion that I come up with is, they are not 
even doing a very good job of that.
    I have some public policy suggestions for improving both 
the attention to true shareholder value interest that would 
also promote the well-being of----
    Chairman Manzullo. Dr. Bassi, could you pull the mike a 
little bit closer there?
    Ms. Bassi [continuing] Yes. Thank you.
    Chairman Manzullo. Thank you.
    Ms. Bassi. Before I go to the substance of my remarks, let 
me please note--does that help? How is this?
    Chairman Manzullo. That is better.
    Ms. Bassi. Okay. I should note that in addition to being an 
economist, I am also a registered investment advisor personally 
and nothing that I am about to say should be construed as 
investment advice. I say this under counsel advice.
    What I am going to be talking about may sound like some 
very specific and narrow evidence, but I encourage you to think 
of it more broadly. What my colleagues and I have been working 
on for years and years and years is to look at firms' 
investments in their people and we can do that by looking at 
investments in employee education and training, employee 
development.
    Think of that as the tip of the iceberg. They are 
investments in developing people is really a proxy for 
investments in people more broadly and what we have is some 
very compelling economic evidence that firms and I am talking 
about publicly traded firms here, because those are the ones 
that we can most readily look at, firms consistently under 
invest in the development of people. Very bad thing from a 
societal perspective.
    What do I as an economist mean when I say they under 
invest? What that means is that they are passing up excellent 
investment opportunities that have a high rate of return. They 
are just not doing it to the extent that would be optimal from 
the perspective of shareholder value.
    How does she know this you might be asking? This is a 
research finding that has taken us many, many years. What we 
have done is we have systematically created databases on how 
much publicly traded firms are investing in employees. This is 
an important piece of information, as the Professor was saying, 
that should be publicly available and is not currently publicly 
available.
    So we have been gathering data on this and what we have 
found is those firms that make the largest investments in 
developing their people subsequently out perform comparable 
firms that make much smaller investments or no investments in 
their people.
    What that means is that firms that are making investments 
in people are being, as the Professor noted, dinged in the 
stock market in the short run, but they are being rewarded in 
the long run.
    Why is that so? Think of two comparable firms, Firm A and 
Firm B. Firm A is investing intensely in its people. Firm B is 
not.
    All the Wall Street analyst sees is that Firm A has 
inexplicably higher costs than Firm B and therefore, its 
earnings this quarter are lower. Firm A's earnings this quarter 
are lower than Firm B. Hence, it takes a ding on its stock 
market price.
    When the benefits of those investments ultimately show up 
in terms of higher productivity and higher profitability, that 
firm is ultimately rewarded by the same Wall Street analyst 
that penalized it in the short run.
    Now, if stock compensation, stocks, options are an 
important part of compensation, then the incentives of the CEO 
and the C level suite are exactly that of the analyst. They are 
focusing on this quarter's earnings to the detriment of 
shareholders' long-run value proposition.
    We have studied this, as I have said, over a period of 
about eight years now. We first did this hypothetically as a 
research initiative and we discovered that those firms that 
made the largest investments in their people subsequently out 
performed their competitors. Over that six-year period, their 
performance was 16.3 percent annualized rate of return in the 
stock market, versus 9.2 percent of comparable firms who were 
not investing in their people.
    For the last two years, we have been investing live funds 
under management, based on this simple finding and I do not 
want to run afoul of SEC regulations, which might interpret my 
testimony as advertising. Let it just suffice to say that we 
are doing very well.
    Essentially, we make money by taking advantage of Wall 
Street's shortsightedness. A shortsightedness that has very 
real negative implications for workers, employers, shareholders 
and society at large.
    Mr. Kennedy has spoken about the compensation issues that 
are apart of this. As he said, very complex set of issues. Not 
a set of issues on which I am an expert, but certainly there is 
much that can be done there.
    There is also a public policy fix and one of them is 
actually quite simple, I believe. The first thing that needs to 
be done I think it would be a huge step, not a final step, but 
a huge step in the right direction is to require that firms 
report how much they are investing in the development of their 
people, the education and training of their people, is 
currently the only form of major investment that firms make 
that is not publicly reported.
    Hence, think back to my example of Firm A and Firm B. Firm 
A, if a firm is investing in R&D, Wall Street's analysts know 
that. So while their costs are higher, they are not as severely 
penalized for having high costs as when they are investing in 
people.
    So there is a fix here that could take us some step in the 
right direction very consistent with that of the previous 
speaker and that is to require some disclosure here of very 
simple accounting disclosure is to report expenses on people, 
especially the investments made in them, as just publicly 
report them so analysts can know that those are in fact not 
costs, but investments.
    There are things that are being done in other countries 
that I think also should be replicated here in the United 
States. The European Commission and also countries in Asia now 
are beginning to put public monies into systematic study of 
what will it take to transform our industrial era accounting 
and reporting system into a knowledge era accounting and 
reporting system, one in which people are recognized as 
investments and assets, rather than simply costs? Thank you 
very much.
    [Dr. Bassi's statement may be found in the appendix]
    Chairman Manzullo. Very compelling testimony. I am going to 
start off the questions here and look forward to Mr. Kennedy. 
As I cut you off, you were just about ready to talk about what 
specifically could be done to decrease the pressure on small 
businesses. Is that where we left off?
    Mr. Kennedy. That is where I left off.
    Chairman Manzullo. Okay. I have five minutes on my clock. 
Hopefully we will have an opportunity to ask other questions. 
If you want to summarize that and what else, because all of 
your testimony is very good. Do you want to summarize that?
    Mr. Kennedy. Yes. Because it is small business, let me 
summarize that briefly and then comment on the bigger issue I 
had hoped you would address earlier.
    Chairman Manzullo. Okay.
    Mr. Kennedy. The pressure on small business is primarily to 
cut costs or to meet really tough requirements from big 
business that they are supplying. That is a direct 
manifestation of short-term cost pressure from big business on 
small business.
    What can you do to help out? Well I think there are two 
categories of things you can do in small business. One is to 
help level the playing field, particularly against offshore 
competition and the other is to try to build on strengths that 
small business has to make them more competitive in this 
marketplace.
    The options for leveling the playing field are to do 
something to eliminate dis-incentives for companies to shift 
jobs overseas. The way it works right now, if you are a large 
company and you decide to close a factory in, for the sake of 
argument Illinois, God forbid and shift those jobs over to the 
Far East, you will take a tax write-off against your profits 
for the costs of severance, the costs of closing that factory, 
all of the costs incurred and then you will open up with a 
lower cost of operation, sometimes subsidized by the government 
of the overseas country.
    That is the tax system encouraging you to close that 
factory in Illinois. In effect, large companies are not paying 
the social costs associated with them closing factories over 
here and that is almost a plumbing issue for the tax code to 
say what is an allowable deduction and what is not.
    I mean sure factories need to close, but when they are 
closing to transfer jobs someplace else, it seems to me we are 
subsidizing something that is not a public good.
    The other side of the leveling of the playing field is to 
try to force working conditions and job conditions to a higher 
level overseas. I am not quite sure how much you can do on that 
ground, but certainly in negotiating trade agreements, 
requiring minimum wage agreements, requiring working 
conditions, OSHA-like working conditions to be met in overseas 
factories is a step in the right direction, but unenforceable, 
it seems to me, from this side.
    Finally, a small thing that can be done to help level the 
playing field for small business is one-time grants to help 
small business cope with sourcing jobs overseas. I mean if you 
are a small business trying to figure out how to move to a low 
cost manufacturing location, it is really monumentally 
difficult and expensive, but a group of small businesses if 
they could apply for funds to help them try to figure out the 
optimum balance of where jobs should be that I think would help 
small business quite a bit.
    In terms of helping to building their strengths, grants to 
help them train their work force, even more generous than there 
are right now. The unique skills that are being lost are in 
fact the skills of the talented American workers and the more 
we can invest in those and the more grants there are for small 
business to train their workers, the better off we are going to 
be.
    Tax allowances or even accelerated depreciation to allow 
them to invest in systems that allow them to meet new 
requirements from big business, like just-in-time inventory 
requirements which require systems upgrades, which very often 
small business cannot afford. Simply too expensive for them.
    And/or special market development funds to try to create 
markets for the products that can be manufactured here, but 
that are being shifted overseas. Do not know what can be done, 
but short-term things to allow people to find new markets for 
their products, when they have lost their supply to large 
business would help. So those are some of the things for small 
business.
    A brief comment on the heart of the problem, which is very 
difficult to address, but I do not think we will really solve 
the problem until we address it. The real problem here is that 
the value system changed.
    All of a sudden greed became acceptable. Uncontrolled, 
unabashed greed became acceptable as a mode of behavior. Now, 
why did that happen? Well, a lot of things. You know the family 
broke down. We went to two earner households and so kids 
without parents at home when they came home from school were 
well aware that their parent was working because they wanted 
more money. That communicated a sense of getting more money is 
more important than probably a bunch of other things that a 
resident parent might have communicated.
    That is a fact. I am not making a value judgment about 
that, but the family system breaking down contributed to this 
change in ethic.
    The change in formal religion. Certainly the fact that 
people are not going to church as much, that ministers and 
priests do not have as much sway I think over the value systems 
of families probably contributes a great deal too.
    But there is no question that the value system changed and 
that none of the existing institutions in society, church or 
education or family are really countering this shift in the 
value system.
    I would like to argue that our political mechanism really 
should take on this task. That if nothing else, the bully 
pulpit that is afforded to elected members of Congress and 
other elected officials is a useful device for trying to offset 
the pressure that is growing in society to allow greed to be 
the dominant factor.
    What is an example? Well Dick Grasso is not a bad guy, the 
Chairman of the New York Stock Exchange, but his taking home 
the kind of pay he took home was a violation of public trust.
    It seems to me an awful lot of the things that are going 
on, I am not a lawyer so I am not qualified really, but a lot 
of things that are going on represent individuals violating 
public trust and we could develop a body of law that says if 
you, in fact, violate public trust you will be subject to 
penalties.
    It is not a hanging offense or something like that, but you 
certainly could pay large fines. You certainly could be banned 
from continuing in the business you were in.
    So for example, if CEO's of large public companies, not 
private companies, public companies take home really excessive 
amounts of compensation, that is a clear violation of public 
trust. It is something we all have an interest in and they 
could be subject to penalties under that, but I think that 
Congress should be addressing the issue of the value system. 
That is my fundamental point.
    Chairman Manzullo. All types of issues out there.
    Mrs. Velazquez, I was at seven and a half minutes so I will 
set the same for you.
    Ms. Velazquez. Mr. Chairman, I just want to thank the 
excellent presentation made by the witnesses and challenging 
presentation and I have no questions at this point.
    Chairman Manzullo. Okay. Dr. Bartlett?
    Mr. Bartlett. Thank you very much. Our manufacturing jobs 
of course have been fleeing this country for a long time now 
and now following the manufacturing jobs are jobs like 
software.
    Three things I think are driving this. You indicated a 
fourth here and that is greed, but I think that the limit to 
which greed can drive this is limited, because ultimately even 
without greed and even without being respectful to public 
trust, the three things that I think are driving jobs overseas 
will continue to drive jobs overseas.
    One is our tax climate in this country. Second is our 
regulatory climate in this country and the third, in the little 
Wall Street article here about IBM says it very clearly, you 
can divide these numbers by three or four, if you are talking 
about manufacturing, but you know the cost in China and it 
would be roughly the same in India, maybe a hair higher, $12.50 
an hour, $56 an hour here.
    I do not see these three things changing and unless we can 
change those three things, what is going to stop our jobs from 
going overseas and what we ultimately end up with are 
businesses here that just fill a niche market or manufacturing, 
where there is something really innovative and creative, but 
you cannot protect that forever in a world as transparent as 
our world is?
    So if you have something really creative and innovative 
that gives you a leg up in manufacturing for countries that do 
not respect intellectual property rights, won't they soon steal 
that, copy that, whatever?
    What is going to stop more jobs from leaving, if these 
three things are driving them overseas? I do not see any of 
those changing. Do you see the tax climate changing? Do you see 
our regulatory climate changing? Do you see this big, big 
disparity between wage costs changing? If they do not change, 
what is going to keep even more jobs from going overseas?
    Yes, ma'am?
    Ms. Bagley. I think that one of the factors we need to look 
at is what is the output from that worker in China earning that 
amount per hour, that worker in India versus the worker in the 
United States.
    Companies, such as Dell Computer and Delphi in the 
automotive parts area, have embraced information technology and 
used information technology, which certainly is expensive, to 
become very competitive and remain competitive.
    I think that the reality is that we do need to continue to 
innovate. It has been a tremendous source of growth in this 
country. It is why small business is so critical. Why 
entrepreneurship is so critical.
    We cannot rest on our laurels. I agree with you that 
technologies will change, various different supply chain 
mechanisms that are innovative today may not be ten years from 
now. But I think we need to do everything we can to keep things 
going in the pipeline of innovation and really try to figure 
out how can we look not just at the cost of the worker, but say 
okay for given an amount of cost, for the $50 an hour we are 
paying in the U.S., how can we restructure their job?
    How can we better train them? How can we form more of a 
team atmosphere? Maybe compress the structure in the company so 
that we get rid of the executive dining room and the reserve 
parking spaces and value people in a more effective way so that 
we are getting frankly more bang for the buck? We can afford to 
pay 50 bucks an hour, depending on what that worker produces.
    A number of companies have found in terms of outsourcing 
some of their customer support that it has not worked as well 
as they thought it would. That it turns out that in some areas 
customers are really not getting as knowledgeable an answer 
from their 24/7 call center based in Bangalore.
    In other situations, you have code being written overseas 
and it is turning out when you look at it, it is not the 
quality that we needed. So I think we need to look not only at 
the cost side, but what the output is from the workers and 
really be creative about ways we can increase that.
    I would commend to the Committee a book written by a former 
colleague of mine, when I taught at the Stanford Business 
School, Jeffrey Pfeffer. He is a professor of organizational 
behavior.
    He published a book in the mid 1990's called Competitive 
Advantage Through People, Unleashing the Power of the Work 
Force. He provides a number of excellent examples of companies, 
ranging from Lincoln Electric, the largest arc welding firm in 
the world that has beaten the GE's of the world, to smaller 
concerns like Southwest Airlines, that have accomplished this 
and really used the strength of our people as a competitive 
advantage instead of seeing the cost of our people as a 
competitive disadvantage.
    Mr. Bartlett. For the short-term of course that cannot keep 
us on the playing field. But ultimately, cannot other countries 
do those same things? As long as we are going to have these 
enormous disparities between the wage rates, what ultimately 
will keep the jobs from going?
    For the moment we can be more clever. We can be more 
innovative. We can be more creative. But you know we have not 
cornered the market on that in this country and ultimately they 
are going to learn how to do it just as well as we do it.
    I just do not see in the long-run, unless we change all 
three of those things, that we are going to stem the flow of 
jobs overseas. We are one person in 22 in the world. We have 25 
percent of all the good things in the world. You need to ask 
yourself: How did we get here and what do we have to do to stay 
here? Thank you, Mr. Chairman.
    Chairman Manzullo. Did you have a comment to that?
    Ms. Bassi. As an economist, I would say that nations 
advantages are driven by their comparative advantage and the 
only way you can have a comparative advantage in resources or 
in land or in people. We have had all of those things. That is 
why we have become so wealthy.
    But the path forward, I think, you can sort of think of as 
a high road and a low road to profitability. The low road is 
competing on costs and we are going to lose that. The high road 
to profitability is to compete on value and the only way to 
have that is to have it embedded in our people.
    That is why human capital is so important and why I look at 
the accounting and reporting that either encourages or 
discourages firms to invest in human capital, because we cannot 
maintain our lifestyle any other way.
    Now ultimately, in 100 years, the rest of the world could 
start to catch up with that, but then the world will be a 
richer place and we may not be so concerned about wage 
disparities as we currently are.
    I think the only sustainable path forward for us is the 
high road, where we compete through value added through people 
as opposed to the low road, where we treat people as costs. We 
will lose that.
    Chairman Manzullo. Thank you.
    Congressman Ballance, did you have any questions?
    Mr. Ballance. Mr. Chairman, I have no questions.
    Chairman Manzullo. Mr. Bradley?
    Mr. Bradley. Yes, thank you. It is interesting after 
hearing Dr. Bartlett's question that I had written down the 
same three issues: The differential of wage and benefits, tax 
policy and regulatory policy as really what I had thought the 
driving points were going to be in this morning's testimony.
    It is interesting there was an article in the Wall Street 
Journal maybe a month or six weeks ago about a study that had 
been done not just on the United States and manufacturing jobs, 
but on the productivity increase worldwide and I was taken by 
the fact that even China has lost manufacturing jobs to 
productivity increases.
    With the exception of Ms. Bassi's comment about disclosure, 
for the most part what it seems that we have heard today is 
that we need to limit executive compensation and the government 
should do that, not shareholders and that we need a new round 
of Sarbanes Oxley, which business leaders in my state are 
telling me has led to a restriction in the ability to take 
risks and move forward and try to grow the economy.
    I would like to return to what we can in fact set, which is 
tax policy and regulatory policy, because I think that if we 
are going to try to save manufacturing jobs or outsourcing of 
high knowledge jobs, that is where this Congress has to focus 
and I would hope that we can focus our efforts there.
    I would put that open to any of you.
    Mr. Kennedy. Just if I may comment on that and again, I am 
not a lawyer so I am not into the details of how you write 
these codes, but it seems to me that currently the tax codes 
subsidize companies that want to move jobs.
    They are not paying their share of the social costs 
associated with closing a factory and shifting jobs overseas 
and that a lot can be done.
    I worked for ten years in Europe and in Europe, you know 
the argument is the labor market is much more rigid. Well, it 
is much harder to lay someone off. You incur much higher 
contributions to the equivalent of the unemployment insurance 
fund or something like that if you lay off a worker.
    There is no reason why we cannot do things like that to 
slow down the progress until people think more carefully about 
where they are shifting those jobs and whether or not there are 
gains to be had.
    Mr. Bradley. But would you trade, if I can follow-up on 
that question, Mr. Chairman, would you trade Europe's lower 
growth, higher unemployment, higher social costs for numbers 
that I think are far better in this country, despite the fact 
that we have lost some ground over the last couple of years, 
given the rigidity in their labor markets and their higher 
labor costs?
    Mr. Kennedy. The answer is no, but I think at the margin 
there is a lot of room for maneuver that minor corrections on 
our side might help with the problem and that would involve 
moving slightly in the European direction, but you know for the 
lower growth in Europe things are not so dire in Europe.
    It does become a question of social, you know the lifestyle 
of the American people and that is in balance.
    Ms. Bagley. May I comment as well? I tend to disagree with 
the proposals by my panelist, because I think we forget the 
fact that one reason why inflation has not been an issue for 
this country is frankly we all are enjoying the value of low 
cost imports from China and other countries.
    So it is a system. To the extent that we fail to look at 
the whole system, we can end up with either protectionist 
policies or others that frankly in the long run are really not 
going to be to anyone's benefit.
    We saw this after the stock market crash when suddenly 
individual countries said, well we are going to up our excise 
tax and import taxes and the like. You know we do not want your 
goods coming in. It basically became a race to the bottom.
    I tend to agree with my fellow panelists here that we are 
not going to win this doing it based on our dollar per hour in 
terms of our workers. I do think the government can help. I 
think that if the government were to provide a tax credit, for 
example, in connection with employee education training that 
that could be very significant.
    I would caution, however, the Congress to be careful that 
that money is not spent primarily on higher level managerial 
professional staff. Historically it has often been the case 
that to the extent anyone gets training, it is not the low 
level person that is now losing the job, because a factory has 
closed.
    I think it is important to rifle shoot what we are doing 
here in terms of what we are going to be rewarding. It is not 
that we are going to reward people for going to executive 
programs.
    There are some specific things like that, but I think that 
if we are trying to artificially and unduly penalize what may 
be a rational decision, I do not know that that makes sense.
    I certainly do believe, however, that tinkering with the 
capital gains holding period is always helpful. Even Michael 
Jensen, who was one of the most vehement scholars at Harvard 
pushing for we have to maximize shareholder value, has now, in 
the wake of Enron and like, backed off and said, all right, we 
have to maximize long-term shareholder value.
    So to the extent that we are finding that pension managers 
and the like are being chosen based on their quarterly numbers, 
we can say to institutional investors the reality is that the 
tax is going to be such that you are going to be penalized if 
you are trading on a short-term basis. Maybe that means 
imposing tax if you trade too early, even on entities such as 
pension funds that otherwise would not be paying tax.
    The reality is we have 50 percent or more of the publicly 
traded stock in the hands of institutional investors and we 
need to ask: What considerations are they making when they 
decide to get rid of this fund manager and substitute another, 
and how can we give them an economic incentive to be the 
patient capital that we really need them to be? Thank you.
    Chairman Manzullo. Congresswoman Majette?
    Ms. Majette. Thank you, Mr. Chairman, but I do not have any 
questions.
    Chairman Manzullo. Congressman Akin?
    Mr. Akin. Thank you, Mr. Chairman. Just I guess one comment 
and then one over-arching question kind of along the lines of 
what a couple of other members have said.
    The first thing is, I am not as upset about a disparity in 
wage rates, per se and that is for a couple reasons. First of 
all, in manufacturing, the cost of labor relative to the 
overall cost of product is a part of it, but it is not 
everything.
    The second thing is to give you an example that I think you 
were referring to, but I do not know if you thought of it quite 
in this context and that is: I serve in the Armed Services 
Committee. There is a big difference between the American 
military and how they function and different foreign 
militaries.
    Many of the foreign militaries are so hierarchical that if 
anything is disruptive to that chain of command, they just 
literally stop running, whereas the American military for years 
and through many years have had the reputation that you knock 
off an officer and the Sergeant kicks in and it keeps going. 
You knock off the Sergeant and the Private raises himself to 
take command and to take over.
    I think that is something that is somewhat built into the 
psyche of our American way of doing things and our sense of 
freedom and our sense of leadership. I think that is something 
that is not easy to replicate and it is a big asset that we 
have.
    So that does not concern me as much, but on the other hand 
my sense is this: You have got to get to the real simple basics 
of things. The reason people move jobs is because it is a 
better deal to move them somewhere else, because there is an 
incentive to do it.
    If you do not want our jobs to be moved out of our country, 
it says we have to be more competitive and the things that we 
in government control and affect are a lot of the regulatory 
burdens, both in terms of reporting and in terms of OSHA and in 
terms of EPA, in terms of taxes.
    All of these different things are essentially hurdles that 
make it more expensive for our business people to function in 
America. If we in government could drop that overhead, it makes 
us more competitive and it seems to me that is the main place 
where we should be functioning as a Committee and as 
Congressman. Respond, please.
    Ms. Bassi. I certainly agree that people are not acting 
irrationally. Decision makers are not acting irrationally when 
they choose to move jobs overseas or lay off folks.
    But, it is also the case that the pressures from Wall 
Street are focusing these decisions disproportionately on the 
short run so that it is not clear at all, to me as an 
economist, that these short-run decisions are consistent with 
long-run value creation.
    So I think a part of the inquiry needs to be precisely the 
questions that we were asked in the beginning is: What is 
behind the short-run focus, which is myopic and destructive to 
shareholder wealth creation in the long run and destructive to 
small businesses and employees and what might be done to unplug 
that?
    Some of it is the value process, which is very difficult to 
change, but there are tax implications and actions that 
Congress could take to help relieve this pressure that Wall 
Street is creating to focus myopically on the short run at the 
expense of the long run.
    Mr. Akin. It makes me nervous when you say that Washington 
is going to take action. I mean there are some companies in my 
district, some big employers in my district and I have talked 
to some of their top managers and I know how they are motivated 
and it is usually by the quarter or at the most by the year.
    It seems to me they should be looking five and ten years 
out and that short-term focus results in poor quality 
management, but my belief is that the system finds people like 
that out eventually and I am not sure the government, it is 
like trying to do eye surgery with something as blunt as a 
Crayon, the government is a pretty blunt instrument to try to 
get people to think in a longer term sense, it seems to me.
    Mr. Kennedy. If I may add to that, except in the context of 
short-term pressures from investors, in which case the 
government in fact does dictate the rules for capital gains to 
reinforce what one of my co-testifiers said.
    If, in fact, you were penalized for cashing in short-term 
gains and really forced to think hard about holding for a 
longer period of time and I don't know what the right period of 
time is, it might well change some of that short-term 
orientation on the part of management.
    Mr. Akin. Okay. I understand. Good point well taken.
    Ms. Bassi. And the point that I made earlier, that if 
investments in people were treated or at least reported as 
investments in people, rather than buried hidden costs that 
analysts then ding firms for, for having these hidden costs, 
that ultimately show up as benefits, that is a reporting issue 
that needs to be fixed. It would help change the focus of Wall 
Street.
    Mr. Akin. Thank you very much. Thank you, Mr. Chairman.
    Chairman Manzullo. I think Professor Bagley, did you have a 
response too?
    Ms. Bagley. I just wanted to mention two things. In 
addition to the capital gains holding period requirement, I 
think that to the extent that we are going to continue to have 
executives given equity as an incentive, looking at that 
holding period requirement for stock acquired pursuant to stock 
options in terms of when that can be taken as a capital gain 
versus ordinary income will become another one.
    I think, frankly, as a former securities lawyer, that is 
something we ought to think long and hard about modifying 
anyway so we cannot have the Ken Lay's of the world selling 
stock today and then having the house crashing down in three or 
four months. I think that is one specific one.
    In addition----
    Mr. Akin. Can I make sure I----
    Ms. Bagley [continuing] Yes, sir.
    Mr. Akin.--understand what you are saying?
    If you are going to give an executive, pay him partly in 
terms of stock of the company, which theoretically is designed 
to give him an interest in the company to do well, you are 
saying make sure that he has to hold that for some significant 
period of time so as a longer term perspective?
    Ms. Bagley. That is correct.
    Mr. Akin. Sounds like a good recommendation. Proceed.
    Ms. Bagley. The second point I would make, following up on 
what my co-panelist has said, is that we have precedent for the 
impact of disclosure on how companies are evaluated in the 
banking area.
    The controller of the currency for awhile now has required 
banks to disclose something called reputation risk. That 
follows from the fact that it has become clear that how a bank 
is perceived in the community, you know are they in fact red 
lining, are they being fair and that sort of thing, ultimately 
the chickens come home to roost, and that does have an effect.
    When you are able to give that information to the public, 
to the analysts, it becomes something that they can crank into 
recommendations, which will of course therefore impact the 
projections and the evaluation of the numbers. I think more 
information is helpful in that regard.
    Ms. Bassi. And may I add to that, if you go to the analyst 
community and ask if they want that, they will say absolutely 
not. It is actually not in their short-run interest to have 
more useful information disclosed, because they make their 
living by knowing things that nobody else does.
    So the analyst community will never tell you that they want 
this. In fact, they will tell you they do not want it, but more 
disclosure that allows people to make informed, rational, long-
run choices is clearly a part of the solution, but you will not 
hear that from Wall Street.
    Mr. Akin. Thank you. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman Manzullo. Congressman Napolitano?
    Ms. Napolitano. Thank you, Mr. Chairman. I apologize for 
being late. I have had some questions that have been answered 
with some of the gentlemen, my colleagues, that have asked it.
    The comment I would make is that we seem to forget that we 
continually lose jobs to foreign competition and while we feel 
that they can do a better job, I do not believe. They are 
learning how, but it is such a big world, especially in China 
that they are going to learn like we did, that the minute you 
start training good employees, somebody else is going to take 
them away from you and it is such a big country that they are 
going to have a long time before they begin to understand how 
it feels, like we have in this country.
    As far as my colleagues' comment in regard to cutting some 
of the expenses, the overhead if you will, well and good, 
except in this country that is what has made the United States 
the world's largest economy and California specifically is 
because we do have the train laborer that is paid well and 
spends the money. It is all relevant.
    You build up economy, you spend it locally and it builds it 
up. Thank you.
    Chairman Manzullo. Good. Question: First of all, this 
testimony is refreshing to see people speaking about the way 
things should be, sometimes given some very innovative, if not 
radical, answers as to what should be done, but what I 
appreciate about what you are doing is you are raising the 
issues, such as what Andy Grove did.
    You are asking the questions and making the comments about 
what is wrong and Dr. Bassi, you said ultimately you have to 
change the corporate culture. You have to change the way people 
think about the definition of profit, the value of stock.
    Ultimately, perhaps there may be some legal issues in 
there. For example, I never looked upon the holding period in 
long-term capital gains as being part of long-term planning, as 
opposed to three-month of planning now that we have on the next 
quarter.
    Ultimately, there has to be a change in the way business 
does business. I mean none of us wants to get involved and Mr. 
Akin expressed that quite well, with passing more laws and more 
regulations that could end up doing the adverse effect.
    But where do you start in changing the corporate culture? 
In the district I represent, the biggest city is at about 11 
percent unemployment. 11 percent. That does not count the four 
factories that have announced they are going to close, because 
those lay offs have yet to begin.
    In December, we lost 28,000 manufacturing jobs and the guys 
back home have a name for where the machinery is going. It is 
called black holing and they look on it and they figured out 
what the codes are. This machine is going to Mexico. That one 
is going to China. This one perhaps is going to Eastern Europe.
    The march continues and the shoe has yet to fall on the 
devastation and ultimate destruction of manufacturing in this 
country. This is the 54th hearing that we have held involving 
manufacturing and the way companies do business.
    No other Committee has got involved in manufacturing the 
way this Committee has and manufacturing jobs are gone. They 
are not coming back. What do you do? How do you start?
    Go ahead, Dr. Bagley.
    Ms. Bagley. One precedent that comes to mind is a 
government-private enterprise organization that was set up in 
Silicon Valley when the Valley was going through a slump in the 
1990's, there was something set up called Joint Venture Silicon 
Valley.
    I am not sure whether any of you are familiar with it, but 
it was a voluntary association of representatives from 
primarily the state government, from the cities, together with 
heads of a number of the major companies.
    One of the things they looked at was the question of 
regulatory burden on small business, on high tech companies. 
They were able, for example, to do something as straightforward 
as adopting more of a uniform building code and substantially 
reduced the expense of expanding some of the factory spaces and 
the like.
    So things that might not be first on your agenda, in fact 
can make a very real difference when you are able to look at it 
from that point of view.
    But really what they did is they also looked at things like 
infrastructure. You know what sort of transportation system 
makes sense, in terms of getting workers to San Jose, to 
Silicon Valley. There is always a common goods problem whenever 
companies are considering whether or not to spend money on 
education, roads and the like, because it is like I pay for the 
road, but then my competitor's workers drive on it.
    When we are able to get some of these cooperative 
organizations, I think it can help with some of those issues. I 
would suggest perhaps looking at that organization and some of 
the work that they did. I know from having done some research 
on it three or four years ago, I am not sure where they are 
now, maybe with tech back up they have put themselves out of 
business, but it was a collaborative effort where you had the 
best of the business and the best of the government saying, how 
can we do this hand-in-hand?
    Because I do not think it is going to be fixed by the 
government mandating all sorts of things and I do not think it 
is something that any one company is going to fix either, 
because you really do have this common goods problem and there 
are going to be free riders out there.
    So disclosure helps in terms of kind of outing the free 
riders, the cheaters, but I think that trying to get some of 
the best minds around to ask what is it that keeps us from 
creating the amount of value per worker that we would like to 
be creating?
    If it is changing a building code, let us change the 
building code. It does not mean we give up structural safety or 
anything else, but sometimes there are bureaucratic bumps like 
that in the road that no one has really focused on that once 
focused on can make a difference.
    Ms. Bassi. I think that is a brilliant framework to think 
about the question that you asked. Where are the common goods? 
Where are there issues that can and this is particularly acute 
for small business, where are there issues that they are 
struggling with that they cannot solve individually, but could 
solve collectively? And how can collective help be made to 
exist?
    I mean just calling these folks together is a struggle. An 
appropriate role for government is to facilitate that 
convening. I look at this from the perspective of investing in 
people.
    Many small businesses have a tremendously difficult time 
investing in their people, because their people are constrained 
by time and space. You know they have to be at a certain spot. 
They cannot go off to class.
    Electronic learning could help tremendously, because then 
you can access learning any time, any place. It is much more 
flexible, but small business cannot invest in electronic 
learning, because it is high fixed cost, low marginal cost, but 
high fixed cost. Collectively though, they can solve those 
problems.
    I think looking for where collective action would really 
make a big difference in helping organizations get over these 
high fixed costs in exchange for low marginal costs, that is a 
conceptual structure from which to view the problem that I 
think you will find some creative answers.
    Chairman Manzullo. Okay. I want to thank our first panel. 
You have obviously raised more questions than we have answers 
for, but that is good.
    This has been one of the finest hearings that we have had. 
You have really done a service to this Congress, especially to 
the members of the panel.
    I am also a member of the Financial Services Committee and 
so is Mrs. Velazquez and Nydia, are you in the Capital Market 
Subcommittee also?
    Ms. Velazquez. Yes.
    Chairman Manzullo. So we are both on the Capital Market 
Subcommittee, very much interested in working with you on these 
additional disclosures and we will be contacting you in the 
very near future, with regard to the specifics on those.
    It is good. Again, we thank you for coming. We are going to 
take a five-minute recess while we excuse the first panel and 
set up for the second panel.
    [Whereupon, a short recess was taken.]
    Chairman Manzullo. The first witness or the witness on our 
second panel is Anthony Wilkinson, President and CEO of 
National Association of Government Guaranteed Lenders and we 
will set the clock at eight minutes. We look forward to your 
testimony.
    Mr. Wilkinson. Thank you.
    Chairman Manzullo. I would advise there may be some votes 
coming. The four votes, that will probably wipe out about 40 
minutes and you could probably grab lunch during the interim if 
that happens.
    We look forward to your testimony.

STATEMENT OF ANTHONY R. WILKINSON, PRESIDENT AND CEO, NATIONAL 
          ASSOCIATION OF GOVERNMENT GUARANTEED LENDERS

    Mr. Wilkinson. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify today. I know that my topic is not 
totally germane to today's hearing, but for many small 
businesses across the country, my topic is a critical issue.
    As you know, the Small Business Act requires the SBA to 
give 15 days notice to the Small Business Committees when 
making a significant policy change. On December 23 at about 
five o'clock in the afternoon when most of Capitol Hill was 
gone, the SBA delivered to the Small Business Committees their 
notice to put a loan size cap in place and limiting the program 
to many small businesses across the country.
    Then before the 15 days is even up, on January 6, the SBA 
announced that it was shutting down the 7(a) program, injuring 
thousands of small businesses and lenders that had submitted 
applications for loans.
    One week later the Agency announced that it was restarting 
the program, but with a cap of $750,000 in place and a 
prohibition against the use of 7(a) loans in larger loan 
packages frequently called piggybacking or much like the 504 
loan structure.
    Together, these limitations will prohibit small businesses 
and lenders from accessing the capital they need to grow and 
expand their operations and on top of these restrictions, it is 
likely that this program will shut down again before the end of 
January.
    These actions have harmed thousands of entrepreneurs at a 
time when the nation's economy is struggling to create new jobs 
and move forward.
    Most disturbing about this occurrence is throughout 2003 
the Administration repeatedly ignored signs that loan demand 
was exceeding SBA available funds and chose not to act. 
Instead, delaying action until Congress was adjourned for the 
year.
    Rather than foreseeing and acting to prevent this crisis, 
one of the federal government's most important economic 
development programs has been destabilized.
    The SBA's recent action to reopen the program falls well 
short of what small businesses need and in fact, this program 
is closed to about 40 percent of those small businesses who 
would have used the program prior to SBA's recent actions.
    Two quick statistics I would like to offer up and then I 
would be happy to entertain some questions. First of all, this 
program is going to be funded this year at about $3 billion 
below demand. So if the omnibus bill had passed yesterday or if 
it passes today, there is going to be about $3 billion in 
demand that will go unmet.
    At one job for every $33,000 loan, that means we are going 
to miss out on the opportunity to create or retain 90,000 jobs 
simply because this program is under funded.
    Second, from bank call reports, we know that there are 
about $485 billion worth of loans to small businesses in this 
country. Only 20 percent of those loans have maturities in 
excess of three years. That puts it somewhere between 95 and 
$100 billion in lending to small businesses is done on a long-
term basis.
    The balance of the 7(a) and 504 loan programs is about $76 
billion. SBA is where small business gets its long-term capital 
and we need these programs up and running and fully funded.
    So Mr. Chairman and Ms. Velazquez, I hope that we can work 
together to find a solution. Let us get this program fully 
funded and operational so we can serve the small business 
constituents who need access to capital. Thank you.
    [Mr. Wilkinson's statement may be found in the appendix]
    Chairman Manzullo. Thank you very much, Mr. Wilkinson. When 
we had the hearing on the budget last year and our comments on 
the budget estimates, we expressed concern, both Republicans 
and Democrats, that the SBA loan programs were being woefully 
under funded.
    We are not prophets, but the chickens have come home to 
roost on this. If the omnibus passes, what is the scenario 
there?
    Mr. Wilkinson. The conference report in the omnibus bill 
has a program level of 9.55 billion that is going to be $3 
billion short of demand. If it passes, nothing is really going 
to change. There will still be a cap. There will still be 
program restrictions and there were still be a lot of 
businesses who do not get access to capital.
    Chairman Manzullo. I guess the practical question is: At 
what point do you judge demand, and then how do you factor that 
into the budget that the White House puts out? I mean are you 
working a year behind or working a year ahead? Do you 
understand my question?
    Mr. Wilkinson. Sure. It is a little tricky to in a February 
budget predict what loan demand is going to ultimately be at 
the end of the next fiscal year, but the Administration had 
several opportunities to amend their budget request.
    You know the omnibus bill to this day is not finished and 
there have been opportunities all the way until Congress 
adjourned for the holidays to take some action and they chose 
not to.
    Chairman Manzullo. Thank you.
    Ms. Velazquez?
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Wilkinson, when the SBA shut down the program in early 
January, it canceled all pending loan applications. This left 
many small businesses without any options for financing and 
unable to meet their immediate commitments.
    When the program restarted last week, how did the SBA 
handle these applications that were canceled or returned during 
the shutdown?
    Mr. Wilkinson. First of all, can you imagine the anxious 
moments that many of these small businesses went through who 
thought they had submitted their application in a timely 
fashion and that they were going to be able to meet the 
obligations that they had, be it a contractual closing date, to 
all of a sudden out of the blue have a program close and not 
know when it was going to reopen? Some very, very anxious 
moments and I am sure we have seen some of the press stories 
from around the country how this impacted a lot of small 
businesses.
    Many of the applications that were submitted and then 
returned were applications in excess of 750,000 that the SBA 
now claims they cannot process because it is above their loan 
cap.
    Even though applicants had spent time and money to put the 
applications together, they were in by the deadline and now 
they were rejected, which in my opinion is just a way to 
circumvent the Small Business Act's 15-day notice.
    Ms. Velazquez. You know here we are, Mr. Chairman, 
conducting a hearing about protecting our American jobs, but 
yet we shut down a program. We are impacting small businesses 
who make commitments and now they either might have to shut 
down their businesses and those jobs will be lost or they will 
not be able to grow their businesses. So at a time when in 
December we just created 1,000 new jobs, it is really 
outrageous.
    Mr. Wilkinson, in your opinion, how should have the SBA 
handled this situation so the small businesses would not have 
suffered so unfairly?
    Mr. Wilkinson. First of all, I want to start all the way 
back to the budget process and up through the time Congress 
adjourned. The SBA knew what its loan volume was all the way 
back in May, June, July. We were beginning to run at about a 
billion dollars a month in 7(a) loan volumes. So we have known 
quite some time what the 7(a) loan volume was.
    Given that, the SBA could have taken action as early as 
October 1, start of the fiscal year, to put on a loan cap, but 
that would have been admitting that they had made a mistake on 
their budget and for whatever reason, they chose not to do 
that, because the cap could have been much higher than 750 and 
we could have not impacted the applicants like we did, 
rejecting applicants' packages that had been submitted in a 
timely fashion.
    Ms. Velazquez. Thank you, Mr. Chairman. I just want to hold 
my other question and I would just want to allow my other 
members to be to ask their questions now.
    Chairman Manzullo. Thank you.
    Mr. Bartlett?
    Mr. Bartlett. Thank you very much.
    Mr. Wilkinson, as you know, at the end of the day there is 
no such thing as a federal dollar. Every dollar that the 
federal government spends, it took from the paycheck of some 
hardworking American or it took from the profits of some 
company that is trying to compete in a global marketplace.
    Actually, sir, in the final analysis, as you know you 
cannot tax a business. In a former life, I was a businessman. 
You could not tax me. That simply became a part of my cost of 
doing business and I passed it on to the consumer.
    So in the real world, sir, every dollar that the federal 
government has they have taken directly or indirectly from the 
pocket of some hardworking American.
    Now why should the government forcibly take money from 
Americans to loan back to Americans? The money that has not 
come into this program, is it not in the private sector, sir 
and is it not available there to lenders to lend to these small 
businesses? I do not see how taking money forcibly from our 
people at the government magnifies the value of that dollar.
    Are we lending money to people that private sector lenders 
would not lend to?
    Mr. Wilkinson. That is absolutely correct. These are the 
kinds of loans that the private sector does not make without 
the government guarantee.
    To steal a phrase that Mr. Kennedy used in the panel 
before, what this program does is level the playing field for 
small businesses who do not have reasonable access to long-term 
capital. They are not a General Motors who can go to the bond 
market.
    Mr. Bartlett. Sir, there are lots of venture capitalists 
out there looking desperately for small business. There is a 
lot of money out there looking for a home. An awful lot of 
money looking for a home, which is one of the things driving 
the stock market.
    I am just having some problems understanding why the 
government should assume that we are better able to make 
judgments as to what an appropriate loan is more than the 
business world, more than the private sector, since ultimately 
all of the money comes from the private sector.
    No such thing as a federal dollar. Nothing magic happens to 
it when we take it in. Well something does happen to it. We 
consume a whole bunch of it with a big bureaucracy, but other 
than that, nothing magic happens to the dollars.
    Chairman Manzullo. Would the gentleman yield for a 
question?
    Mr. Bartlett. Yes, sir.
    Chairman Manzullo. Roscoe, you are on the Science 
Committee?
    Mr. Bartlett. I am on the Science Committee.
    Chairman Manzullo. Do you believe the government should 
spend money on science or science research?
    Mr. Bartlett. This is different. The government should only 
do what the private sector cannot do and there is some big 
science things that----
    Ms. Millender-McDonald. Will the gentleman yield?
    Mr. Bartlett [continuing]--The private sector will not 
invest in and then the government then has to invest in that.
    Ms. Millender-McDonald. Will the gentleman yield?
    Mr. Bartlett. I am not sure that that is true of funding 
businesses.
    Mr. Wilkinson. But what we have seen is that the private 
sector is not willing to make the long-term kind of loans that 
the SBA guarantees allow a lender to do.
    In addition, applicants pay fees to obtain these loans and 
over the last decade, applicants have been paying in far more 
fees than they needed to.
    Mr. Bartlett. I know and we need to reduce those. The 
failure rate has been much smaller, which should incent the 
private sector to make these loans. The failure rate has been 
very much smaller than we anticipated so the fees are greater 
and a large amount of money has accumulated. These are not bad 
investments, sir. They have been good investments.
    Mr. Wilkinson. They have worked out fine, but these----
    Mr. Bartlett. They have.
    Mr. Wilkinson [continuing] Tend to be new business start-
ups and younger stage companies who need the credit enhancement 
until they can get to a point where they can borrow.
    Mr. Bartlett. As the private sector looks at this record, 
should they not be incented to loan this money? These have been 
very low risk loans. They have been so low risk loans that the 
small fee that we charge has now resulted in a big accumulation 
of money.
    We need to reduce the fee, because we should not be taking 
money from small business unnecessarily, which is what these 
fees have been doing, right? Wouldn't you recommend reducing 
the fees, because we now have a surplus?
    Mr. Wilkinson. With the help of this Committee, we reduced 
fees about a year ago I believe it was.
    Ms. Velazquez. That is correct.
    Mr. Bartlett. Yes, sir. Yes. So these are good loans.
    Mr. Wilkinson. They have worked out fine so far.
    Mr. Bartlett. They have worked out just fine. Don't you 
think the private sector can see that?
    Mr. Wilkinson. Thus far the answer has been no, they have 
not found a mechanism to do it.
    Mr. Bartlett. Somehow, Mr. Chairman, we need some kind of 
an incentive so the private sector can see that, because I do 
not think that we add any value to it and these have been very 
good loans. They have performed very well. The failure rate has 
been very low and so these fees then accumulated to a very 
large amount.
    Ms. Velazquez. Will the gentleman yield for a second?
    Mr. Bartlett. Yes, ma'am.
    Ms. Velazquez. For your information and this is numbers 
coming from Price Water data regarding how much money venture 
capital lent to small businesses, only two percent.
    Mr. Bartlett. Maybe that is because we took the money from 
them and they did not have it to loan.
    Ms. Velazquez. Well, well.
    Mr. Bartlett. Thank you very much, Mr. Chairman.
    Chairman Manzullo. Congressman Ballance. Yes? We have 
interesting hearings, don't we?
    Mr. Ballance. My goodness. Maybe we are finding out why 
this program was closed down. We are hearing some arguments 
against the whole program.
    Mr. Wilkinson, what are you hearing from the small business 
people about this whole crisis that we are talking about here 
today?
    Mr. Wilkinson. I will tell you what, we have heard from a 
lot of businesses across the country who are really upset. They 
got caught in a crisis when they did not know where they were 
going to turn to.
    Our lenders are calling daily with another story of how an 
applicant is unable to obtain the financing they need to 
adequately run their business. It is a tough time for many 
entrepreneurs.
    Mr. Ballance. Just as a follow-up to what was said earlier, 
I take it if small businesses could go to the local bank and 
get their loan, that is where they would go?
    Mr. Wilkinson. Absolutely. There are fees attached to these 
loans and if they can get a loan without paying the fees, they 
would absolutely do it.
    Mr. Ballance. All right. Thank you, Mr. Chairman. I am 
going to yield at that point.
    Chairman Manzullo. Congresswoman Majette?
    Ms. Majette. Thank you, Mr. Chairman and thank you, Mr. 
Wilkinson for being here this morning.
    My question has to do with this cap, the $750,000 cap that 
has been imposed. It is my understanding that the imposition of 
that cap will prohibit nearly one-third of small businesses 
that would have used the 7(a) program from using it and that 
would prevent small businesses that have greater capital needs 
from securing the funding that they need.
    In particular, can you address the issue of how that cap 
will affect manufacturers?
    Mr. Wilkinson. Well in particular for manufacturers, they 
have a requirement many times for high tech equipment, plant 
and facility and they tend to be larger loan requests that 
would be precluded now under the $750,000 loan cap. So they 
could be hit very hard.
    Ms. Majette. Do you have any idea about how many 
manufacturers would be affected by this?
    Mr. Wilkinson. I am not aware of what percentage 
manufacturers make up of the large loans that are made in the 
7(a) program, but I would guess that it is a significant 
percentage.
    Ms. Majette. What kind of notice was there given with 
respect to the imposition of the cap? The shutting down of the 
program and the imposition of the cap?
    Mr. Wilkinson. A notice was provided this Committee late on 
December 23. That notice did not provide an amount and I 
understand there was a subsequent e-mail that listed the 
amount.
    We were given the 15-day notice so that applicants who had 
already started the process would be allowed to finish what 
they had started, because many people put down down payments 
for contractual reasons, employ their attorneys, their 
accountants, et cetera to get the loan applications put 
together.
    Many applicants had spent thousands of dollars to get their 
application ready to submit. Then early in January the program 
was just closed, with no notice at all. Just closed.
    Those applications that were in were told too bad and 
especially those that were $750,000 or more, their application 
was returned and they were told they are not eligible, when in 
fact they had been in, in a timely fashion. Again, which is 
just a circumvention of the Small Business Act. They should 
have had their 15 days notice.
    The SBA should have processed those loan applications when 
funds became available. The fact that SBA waited way too long 
to take action, that cost should not be borne by the small 
business applicant who just was told too bad.
    Ms. Majette. I certainly agree with you and I know I have 
many constituents in my district who would agree with you as 
well, in particular one that I have been made aware of who had 
applied for a $150,000 loan, had signed a franchise agreement, 
had paid the franchising fee of $30,000, had signed a five-year 
lease, was relying on a letter of intent that had been given to 
him by a local bank and that was a business that would hire 12 
to 15 people and I suspect that it was not a Merry Christmas 
for him to find out at that point that the program was being 
shut down.
    We are still in the process of seeing how that is going to 
be resolved with respect to that particular situation, but I am 
sure that that has been----
    Mr. Wilkinson. There are examples just like that----
    Ms. Majette [continuing] Happening all over.
    Mr. Wilkinson.--all over the country.
    Ms. Majette. All over the country and frankly, I think if 
we are not going to have the program, then we need to say we 
are not going to have the program and give people sufficient 
time, due notice to let them know we are not going to have the 
program.
    But if we are going to have the program, then we need to 
make sure that we are treating people fairly with respect and 
understanding and appreciating the efforts that they are making 
to continue to grow their businesses and to make sure that we 
are strengthening this economy in the way that this 
administration claims it wants to. I will yield back.
    Chairman Manzullo. Congresswoman Millender-McDonald.
    Ms. Millender-McDonald. Thank you. Good morning, Mr. 
Chairman and the Ranking Member. Thank you so much for 
providing the leadership always on very provocative and 
interesting and timely hearings to the question of small 
businesses.
    I want the record to show that Congressman Bartlett left 
before I could rebuttal him, but we use the people's money for 
everything else on earth here and we are the people. So, we 
should be using, in order to keep the government running, we 
should be using the capital that is provided by the people. We 
are the people.
    But I say to you, Mr. Wilkinson, thank you so much for your 
very timely and very openly discussion on this issue, because I 
got the letter in December as well. It was not a good Christmas 
for small businesses.
    As I continue to say and as the President said in his State 
of the Union last night, small businesses that need to drive 
and will drive this economy and it is inconceivable to me that 
the Small Business Administration, which tends to like the 
leadership that these two fine leaders on this Committee tend 
to do, cannot see that.
    Is this a reasonable excuse for the shutdown of the 7(a) 
program for heaven's sake?
    Mr. Wilkinson. I cannot fathom a reasonable excuse for 
shutting down this program. This is where small business gets 
its long-term capital and the way this whole process has been 
mismanaged is just unconscionable, especially considering the 
damage it did to many, many small businesses who got caught in 
the mess.
    Ms. Millender-McDonald. I could not agree with you more. I 
had a hearing in my district toward the end of the last year 
and the small businesses were just yearning for more capital to 
expand their businesses, to go international markets and yet we 
cannot do that.
    Did you say to me, did you say to the Committee rather and 
to me too, that the 504 program and the 7(a) programs will 
yield $7 billion if in fact we kept those intact or what was 
your comments of the combination of the 504 and the 7(a) 
programs?
    Mr. Wilkinson. The correlation I was trying to draw was 
that from bank call reports we know that there's 485 billion in 
small business loans. Only about 20 percent of those have 
maturities in excess of three years. So, longer term loans.
    Of that 485, about 95 to $100 billion is long-term. Compare 
that to the fact that banks making 7(a) loans, first mortgage 
portion of 504's and the debenture portion of 504's, those 
three portfolios added together total about 75 billion. So 75 
of the 100. It is not a true apples-to-apples, but it is a 
close correlation.
    A big part of the long-term capital provided to small 
business is coming from the SBA 7(a) and 504 programs.
    Ms. Millender-McDonald. You know, Mr. Chairman and Ranking 
Member, there is a bill that is pending where the credit unions 
will provide loans to small businesses. Perhaps we need to 
engage in supporting that in light of the fact that these 
banking institutions and this SBA, which provides no leadership 
to the small businesses------.
    Chairman Manzullo. If the gentlelady would yield.
    Ms. Millender-McDonald. Yes.
    Chairman Manzullo. That was already done to allow the 
credit unions to give 7(a)'s.
    Ms. Millender-McDonald. I am sorry?
    Chairman Manzullo. The Administration by was it executive 
order? Just by regulation has allowed the credit unions to give 
7(a)'s.
    Ms. Millender-McDonald. That is great. We need to increase 
those, because we really need to. Also, Mr. Chairman and 
Ranking Member, I think we need to--also what? I am sorry?
    Chairman Manzullo. They are also out of money, too. So they 
are similarly affected.
    Ms. Millender-McDonald. I see. This is why the tax cut 
should not be permanent. Anyway, Mr. Chairman and Ranking 
Member, we should send a letter to the SBA administrator 
blasting them on this very untimely position that they took and 
we should send a letter to the President and ask him for a 
meeting with the Small Business Committee and talk with him 
about the urgency or hearing to provide the urgency with this 
whole notion of cutting off our nose to spite our face, for 
heaven's sake.
    I think there is a bill that is pending that has not quite 
come to the forefront with the credit union. So there is still 
another bill pending. I would like for us to look at that.
    I think it is urgent that we call the President into 
question and ask for a meeting with the President.
    Chairman Manzullo. Mr. Barreto will be here on February 11.
    Ms. Millender-McDonald. That is too late.
    Chairman Manzullo. For the budget hearings on it.
    Ms. Millender-McDonald. That is too late. We need to do 
that expediently, Mr. Chairman. Thank you.
    Chairman Manzullo. Congresswoman Bordallo.
    Ms. Bordallo. Thank you, Mr. Chairman. First, I would like 
to thank our witness, Mr. Wilkinson and of course both our 
Chairman and our Ranking Member for taking such a strong stand 
and always standing up for small businesses. I am always 
impressed.
    I have a couple of questions, Mr. Wilkinson. The SBA and 
others are suggesting that small businesses use the 504 program 
as an alternative to the 7(a) program. Is the 504 program a 
viable alternative for those that are shut out of the 7(a) 
program would you say?
    Mr. Wilkinson. Some of the 7(a) loans that will be shut out 
would be candidates for the 504 program, but according to 
NADCO, the trade association for the 504 program, they believe 
only about 25 percent and I believe that to be a good 
guesstimate, only about 25 percent of the loans shut out of 
this would be eligible for 504 financing.
    Ms. Bordallo. So that leaves----
    Mr. Wilkinson. There will be a whole lot of borrowers that 
still------.
    Ms. Bordallo [continuing]--75 percent. The other one is the 
export/import banks financing programs have also been suggested 
as an option to entrepreneurs.
    Mr. Wilkinson. Those are typically short-term transactional 
kinds of financings and they really would not fit what we do in 
the 7(a) program.
    Ms. Bordallo. So your answer------.
    Mr. Wilkinson. That is not------.
    Ms. Bordallo.--to both of these would be------.
    Mr. Wilkinson. That is not a viable option.
    Ms. Bordallo. Neither one would be viable, right? All 
right. Thank you, Mr. Chairman. Those were my two questions.
    Ms. Millender-McDonald. Mr. Chairman, may I just impose a 
question here?
    Chairman Manzullo. Sure.
    Ms. Millender-McDonald. There is a letter dated January 12 
of which the minority side of this Committee submitted a letter 
to the President inquiring about the inability to provide the 
7(a) loans. Is there something that we can do as a whole? 
Should not the complete Committee do this in light of the fact 
that we know the economy is not going to move until small 
businesses move?
    Chairman Manzullo. I do not know what more we can do. I 
agree that the program was woefully under funded in the first 
place. We worked together to knock down the fees for the 
program for the 7(a) and corrected the subsidy rate, which has 
helped bring in more money and Anthony, I do not know of 
anybody in this country that knows this topic better than you 
do.
    That is why when I found out you were coming, I put you on 
a separate panel to give you more prominence, more attention.
    Mr. Wilkinson. I appreciate that.
    Chairman Manzullo. In order to center in on the 7(a) loans.
    Mr. Wilkinson. Mr. Chairman, just a couple things off the 
top of my head. First of all, the SBA has the ability to do 
some minor reprogramming on its own. The appropriation bill 
from last year would allow ten percent of the 7(a) 
appropriation to be reprogrammed.
    So they could put I believe it is----
    Chairman Manzullo. But it still requires approval by the 
Appropriations Committee, is that not correct?
    Mr. Wilkinson [continuing]  I was under the impression that 
they had unilateral authority up to ten percent.
    Chairman Manzullo. Okay.
    Mr. Wilkinson. That is just my understanding. I am not an 
appropriations expert, but I have been told that they could do 
up to ten percent and to the best of my knowledge, those 
actions have not yet been taken.
    I do not know whether there is going to be a supplemental 
appropriations bill moving for us to fund an additional two and 
a half billion dollars or so. The amount of the appropriation 
is 25 to $30 million, which is not a lot of money.
    Ms. Velazquez. Mr. Chairman, can I just ask a question?
    Chairman Manzullo. Certainly.
    Ms. Velazquez. Mr. Wilkinson, don't you believe that maybe 
this Committee should push for a supplemental appropriation at 
this point?
    Mr. Wilkinson. I would work on any solution we can so that 
we can get access to capital to small business, be it a 
supplemental appropriation, be it reprogramming from other 
areas inside the SBA where the money is going unused. Something 
has got to be done so that the flow of capital starts back up.
    Chairman Manzullo. What I would be willing to do is if you 
want to send me a letter, just set forth the seriatim, you know 
capsulize the problem. Put forth your suggestions and we will 
take and send it over to the White House and also to the SBA on 
it.
    Chances are there may be another supplemental. If there is 
an amount of money that you think would be required, put that 
also in there, but give us a blueprint and we will send it 
over.
    Mr. Wilkinson. I do not mean to beat a dead horse, but 
there were applicants who have been treated very unfairly by 
the SBA. They had their applications in on time and now they 
have been told, too bad, after they spent time and money 
putting the application together and I believe------.
    Chairman Manzullo. But that would have been covered by the 
CR or not the CR, by the supplemental.
    Ms. Velazquez. No.
    Chairman Manzullo. Some of those up to 750.
    Mr. Wilkinson. That were submitted within the----
    Chairman Manzullo. Right.
    Mr. Wilkinson [continuing] Those applications should have 
just been held and then funded when additional monies became 
available. Never before has the Agency returned loan 
applications and said, start over.
    Before this particular instance, they have always continued 
to process loan applications up to the point where they put an 
SBA loan number basically fund the loan and this year they 
decided, we are just going to send them all back. That has 
never happened before.
    Ms. Velazquez. Mr. Chairman----
    Ms. Millender-McDonald. Mr. Chairman------.
    Ms. Velazquez [continuing] In listening to Mr. Wilkinson, 
it just occurred to me, it does not occur to me, we affirm my 
quest for a hearing where we could in depth analyze how this 
crisis, how much damage we are inflicting on these small 
businesses. They spent time. They make plans and now they are 
being told, look, the money is not there and it is your 
problem.
    But how could we, in this Committee, allow for this to 
happen and not bring in SBA administrator, OMB, the industry 
that is going to be impacted? Lenders. This whole crisis is 
calling into question the integrity and the credibility of this 
program.
    It is going to lead to force lenders to leave the program 
all together. So how could we be here conducting hearings 
saying how important small businesses are, they are the job 
creators and then we do not provide for a thorough 
investigation? How could SBA make an action, take an action 
like this without consulting with us, this Committee and then 
without allowing for the 15 days notice? It is just outrageous 
and we should be taking our responsibility more seriously.
    I will ask again, Mr. Chairman, this Committee has the 
responsibility to conduct a hearing on this and to bring all 
the stakeholders.
    Chairman Manzullo. Congresswoman Majette, do you have a 
comment?
    Ms. Majette. Yes, I do, Mr. Chairman and I would associate 
myself with the remarks of the Ranking Member and I really do 
think that this reflects terribly on this country. I mean the 
notion of fundamental fairness and due process and how we are 
conducting business for the SBA to have taken the action that 
it has taken and having an untold effect on so many people who 
are trying to grow this economy and for that to occur at a time 
when Congress was out of session and then we were coming up on 
the expiration of the unemployment benefits, which we did not 
address before we recessed and we have people who are prepared 
to offer other individuals employment, but the program was shut 
down.
    Mr. Chairman, I hope that we will take every opportunity to 
stand united on this issue and at least hold a hearing and make 
sure that we are acting in accordance with the notions of 
fundamental fairness, due process and common sense, which are 
the hallmarks of our government. I would yield back. Thank you.
    Ms. Millender-McDonald. Mr. Chairman?
    Chairman Manzullo. Ms. Millender-McDonald.
    Ms. Millender-McDonald. Thank you, Mr. Chairman. I am 
listening to this and more and more I see, in light of the fact 
that the small businesses have done their due diligence of 
submission of their application and gone through that necessary 
pre-loan process, that is the fair thing to do and that should 
be the impetus by which we go forward with hearings, with the 
letter that Mr. Wilkinson will submit to us, that we send to 
the President, but we should ask the President for a meeting so 
that he can see face-to-face the passion of you, the Ranking 
Member and all of the members in knowing that to improve upon 
the economy, the small businesses are the catalyst to do that.
    So it would seem to me like this should be our blueprint to 
go forward.
    Chairman Manzullo. Congressman Ballance and then we will 
conclude.
    Mr. Ballance. Well Mr. Chairman, I am sitting here. The SBA 
is not self-appointed. Have they explained to anybody this 
action?
    Mr. Wilkinson. No, sir, not at all.
    Mr. Ballance. Did they just run out of money or was it a 
bad investment? They did not get a notice from their bank?
    Mr. Wilkinson. The Agency knew full well the pace of 
lending that this program has been on all the way back until 
probably as early as May that our loan volume has been running 
at about a billion dollars a month. So they have known for 
quite some time.
    When the fiscal year started, I know for a fact that staff 
at the SBA had discussions with OMB about putting a loan cap in 
place on October 1 and OMB chose to wait until December 23 at 
five o'clock, when everybody had left the Hill, to announce a 
loan cap. Why they waited so long? You know again small 
business is paying the price for their mismanagement of the 
situation.
    Ms. Velazquez. Mr. Wilkinson, could you please explain what 
a piggyback loan is and how will this prohibition on the use of 
piggybacking affect small businesses?
    Mr. Wilkinson. Sure. It is a term where one loan piggybacks 
on the back of another identical to the 504 loan program, where 
a lender takes a senior lead position and then we come behind 
with an SBA loan in second position.
    For instance, a borrower may be able to qualify for 
conventional financing for a piece of the financing package, 
where they would get a conventional first mortgage and then the 
SBA would come behind in a second position, the piece that they 
could not get done conventionally. Again, it is identical to 
the 504 loan structure.
    Ms. Velazquez. When they imposed the cap the last time, 
were they able to piggyback?
    Mr. Wilkinson. Yes, this is the first time, which to me 
raises another question. That strikes me as another significant 
policy change where no notice was provided.
    Ms. Velazquez. I know last week was NADCO's board meeting. 
Has there been any talk of industry lay off as a result of this 
crisis?
    Mr. Wilkinson. Yes, ma'am. I can tell you that there are 
folks putting plans in place now. If this is an extended cap 
with an extended prohibition on piggybacking, that some members 
in the industry will begin lay offs.
    Ms. Velazquez. So the end result of this will be that an 
increased unemployment?
    Mr. Wilkinson. Absolutely. I have had two of my members 
tell me that they had stratified their portfolios and if they 
excluded loans over $500,000 their SBA operations were actually 
losing money. So without the larger loans in the mix, they 
would not be players for very long.
    Ms. Velazquez. Mr. Chairman, I just wish that you could 
answer my question. Can we hold a hearing on this matter?
    Chairman Manzullo. We have got a hearing going on right 
now. February 11 is two weeks from now.
    Ms. Velazquez. I am sorry that you feel that the small 
businesses----
    Chairman Manzullo. Mr. Baretta will be here.
    Ms. Velazquez [continuing] Can wait until February 11.
    Chairman Manzullo. I share your passion. I have got the 
high unemployment and people back there knocking on the doors 
too wanting to get it done.
    Anthony, let me ask you a question.
    Mr. Wilkinson. Yes, sir.
    Chairman Manzullo. The problem here is that the 7(a) and 
504 depend upon an annual appropriation.
    Mr. Wilkinson. 7(a) does.
    Chairman Manzullo. I am sorry. The 7(a) depends upon an 
annual appropriation.
    Mr. Wilkinson. That is correct.
    Chairman Manzullo. That is subject to the whim of Congress 
and to us getting in line and going up against the space 
program and I am sorry. Roscoe was sitting there. I was sort of 
rubbing him.
    But in terms of a long-term solution, would it not be 
better to have a government sponsored enterprise for 7(a)'s 
with a revolving fund so we do not have to go through this 
angst each year?
    Mr. Wilkinson. Mr. Chairman, you know how frustrating this 
is to go through this every year. We are open to suggestions.
    Chairman Manzullo. Okay.
    Mr. Wilkinson. We would be happy to sit down and visit on 
how we do not go through this exercise year after year after 
year. You know part of the problem is not are we at the whims 
of Congress, we are at the whims of the Office of Management 
and Budget, because as you know, we collected fees for many, 
many years we did not need to collect.
    Chairman Manzullo. I would be willing to pursue that, 
because Congresswoman Velazquez and I both sit on the Capital 
Markets Insurance and GSC Subcommittee on Banking.
    Ms. Velazquez. Maybe we can get a hearing on that, Mr. 
Chairman.
    Chairman Manzullo. I want to thank you for coming. I 
appreciate you coming at late notice.
    Mr. Wilkinson. Thank you for allowing me to testify today. 
Again, I know this is not totally germane.
    Chairman Manzullo. Thank you very much. The hearing is 
adjourned.
    [Whereupon, at 12:19 p.m., the Committee meeting was 
adjourned.]

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