[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
                        PROTECTING INVESTORS AND
                      FOSTERING EFFICIENT MARKETS:
                       A REVIEW OF THE SEC AGENDA

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 25, 2006

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-97




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
RON PAUL, Texas                      JULIA CARSON, Indiana
PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
GARY G. MILLER, California           STEVE ISRAEL, New York
PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
MARK R. KENNEDY, Minnesota           JOE BACA, California
TOM FEENEY, Florida                  JIM MATHESON, Utah
JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
KATHERINE HARRIS, Florida            AL GREEN, Texas
RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
TOM PRICE, Georgia                    
MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina
JOHN CAMPBELL, California

                 Robert U. Foster, III, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 25, 2006.................................................     1
Appendix:
    May 25, 2006.................................................    59

                               WITNESSES
                         Thursday, May 25, 2006

Cook, Frederic W., Founding Director, Frederic W. Cook & Co., 
  Inc............................................................    44
Lehner, Thomas J., Director of Public Policy, Business Roundtable     9
Minow, Nell, Editor in Chief, The Corporate Library..............     6
Rees, Brandon J., Assistant Director, Office of Investment, AFL-
  CIO............................................................    40
Wood, Christianna, Senior Investment Officer, Global Public 
  Equity, on behalf of the California Public Employees' 
  Retirement System..............................................    42
Yerger, Ann, Executive Director, Council of Institutional 
  Investors......................................................     7

                                APPENDIX

Prepared statements:
    Baker, Hon. Richard H........................................    60
    Moore, Hon. Gwen.............................................    64
    Cook, Frederic W.............................................    66
    Lehner, Thomas J.............................................    74
    Minow, Nell..................................................    97
    Rees, Brandon J..............................................   100
    Wood, Christianna............................................   105
    Yerger, Ann..................................................   111

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    Moody's Investors Service study..............................   121


                        PROTECTING INVESTORS AND
                      FOSTERING EFFICIENT MARKETS:
                       A REVIEW OF THE SEC AGENDA

                              ----------                              


                         Thursday, May 25, 2006

             U.S. House of Representatives,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 1:05 p.m., in 
room 2128, Rayburn House Office Building, Hon. Richard H. Baker 
presiding.
    Present: Representatives Baker, Paul, Hensarling, Pearce, 
Price, McHenry, Campbell, Rank, Kanjorski, Sanders, Velazquez, 
Watt, Ackerman, Hooley, Sherman, Lee, Moore, Hinojosa, Clay, 
McCarthy, Baca, Miller, Scott, Davis of Alabama, Green, 
Cleaver, Wasserman-Schultz, and Moore.
    Mr. Baker. [presiding] This meeting of the Committee on 
Financial Services will come to order. By prior agreement, 
Ranking Member Frank and I have agreed to limit opening 
statements to two to a side, and we will proceed with that 
unanimous consent agreement.
    Today we meet under the title of, ``Protecting Investors 
and Fostering Efficient Markets,'' actually a second day of 
hearings on the subject. Investor protection and fostering 
efficient market function are concepts that are not mutually 
exclusive, and can be both similarly attained.
    This Congress has a history of acting when identifying 
irregularities in the financial marketplace, whether it be the 
accounting matter, investment banking and analysts, Fannie Mae, 
all of the matters that have come before the Committee, we have 
found reason to act, and I believe in most cases, act 
appropriately.
    I wish to bring to the discussion today a new area of 
concern, because of its impact on our global competitiveness. 
Although I know some of the witnesses will speak to the 
concerns relating to executive compensation today, I wish to 
bring to the debate a discussion of the recent Department of 
Justice action relative to Milberg Weiss and class action 
litigation.
    The discoveries made in this indictment are, indeed, very 
troubling, enabling in excess of $11 million to be paid for 
basically straw men to file suit on behalf of an identified 
class. The fees generated from those actions exceeded $216 
million to the affected attorneys. The attorney general 
bringing the case is quoted as saying, ``This case is about 
protecting the integrity of our justice system, and class 
action attorneys and named plaintiffs occupy positions of trust 
in which they assume responsibility to tell the truth.''
    According to industry studies, the Milberg Weiss firm has 
been the lead, or co-counsel, in approximately 43 percent of 
class action suits from 1995 to 2005. And that chart is 
impossible to read, but trust me, that's what it says. The 
indictment confirms that this firm alone was responsible for 
about $6.5 billion in settlements, and raked in $1.7 billion 
more in fees and expenses.
    The indictment is troubling, but it brings to the clear 
forefront that our tort system is in need of significant 
reform. Our system is increasingly becoming a tool to be 
manipulated to generate huge cash settlements. Even a quick 
look at recent trends; the aggregate securities class action 
settlements skyrocketed from $500 million in 1997 to over $9 
billion in 2005, which the chart reflects.
    To put it in even more perspective, in 2004, the aggregate 
fees earned by attorneys was approximately $40 billion. The 
same year aggregate salaries, which is the subject of some 
discussion today, for the Fortune 500 in its entirety, was $5 
billion.
    In 2005, the average salary for a Forbes CEO had climbed to 
$10.9 million. The staggering consequence of the tobacco 
settlement in Florida resulted in any attorney who had anything 
to do with the litigation receiving $233 million. And that's 
not per firm, that's per participating attorney in the 
settlement.
    Ultimately, this money is paid by the corporation, which 
dilutes shareholder rate of return, and it is of consequence in 
our ability to compete globally. Firms are choosing to list 
overseas, and the amount of IPO's continues to flow out of the 
country to particularly the London market.
    Consequently, Congressman McHenry and I will be introducing 
legislation later in the week to bring about some reform to 
this abusive practice, principally in the context of a loser 
pays recommendation.
    I think we should examine compensation at all levels. We 
should appropriately rebalance equities from time to time. I 
think the hearing today will bring needed attention to these 
matters, and I look forward to all members' statements on this 
matter. Congressman Frank?
    Mr. Frank. Thank you, Mr. Chairman. And I would ask that 
all members be allowed to introduce their statements into the 
record today.
    Mr. Baker. Without objection.
    Mr. Frank. This hearing was called, this second day of 
hearings, pursuant to rule 11 of the Rules of the House of 
Representatives, whereby a majority of the minority can insist 
on a second day of hearings with the witnesses to be called by 
the minority. We had asked that this be done in the regular 
order, we were denied, and every member on the minority side 
signed a letter, the result of which is this hearing.
    It is the second day, technically, of hearings with the 
SEC, and the SEC, as people know, to the credit of Chairman Cox 
and his colleagues, has begun to move in the area of executive 
compensation. And those who have argued that there should be no 
government interference with the setting of compensation, have 
a quarrel with Chairman Cox and his colleagues if they act on 
the proposal that they have put forward, because they are the 
ones who have initiated this action.
    We agree with what they have done, as far as it goes, many 
of us on our side, and some on the other side. But there is an 
added element. The bill that I have introduced, and that we 
will be talking about today, is transparency of the sort that 
the SEC has asked for, with a few more specifics. But most 
importantly, giving the shareholders a right to vote.
    We are not talking about having the Congress, the SEC, or 
anybody else set any amount of money. If the stockholders of 
General Electric want to buy Mr. Welch's newspapers in 
perpetuity, they can do that. It's their money, if they are 
selling newspapers being published in 15 years.
    But we do think that they ought to vote on that. The 
problem we have is this; shareholders do not get to vote on the 
compensation. And indeed, people have said, ``Well, if they 
don't like it, they can get rid of the board of directors.'' 
No, they can't in many cases, because the board of directors 
have, in many cases, a very undemocratic form of election. I 
have heard it suggested that, ``Well, you know, if they don't 
like it, they can sell their stock.'' I guess I have said to 
the people who have said that, ``That's right. If you don't 
like this, you can move to Canada.''
    But the fact is that presenting shareholders with the 
option of either sell your stock or take whatever we do, hardly 
comports with the notion of shareholder democracy. And we do 
have a serious problem. The great majority of people who run 
corporations are honest, decent, hard-working people. But the 
great majority of Americans do not steal, murder, or commit 
arson. We still have laws against theft, murder, and arson. The 
fact that the great majority are well-behaved has never been a 
good argument against dealing with abuses.
    And in fact, under this law's mechanism that we are talking 
about, we would only deal with abuses. Stockholders of a 
company that is being very well run and whose CEO's and others 
are being fairly compensated, will routinely vote to ratify it. 
We don't have an example of excessive stockholder interference 
with what they shouldn't be doing.
    But there have clearly been abuses. Now, we have one--and I 
want to make the point, too, that what we are talking about 
here is macro-economically significant. A study at Harvard 
shows that in the period from 2003 to 2005, the amount of 
profits from corporations that went to the compensation for the 
top five officials was 9.8 percent. He had an earlier 
calculation of 10.3--I want to be accurate--we crossed out 
10.3; it's 9.8 percent. 9.8 percent of profits is pretty 
significant.
    And we are talking here about problems that this can cause. 
In Business Week for this week, it notes that Exxon Mobil has 
the largest unfunded pension obligation in America. And Lee 
Raymond has the largest compensation. The $40 million Mr. 
Raymond got would have made a dent, at least, in the unfunded 
obligation. The fact is that we have problems where pensions 
are underfunded, where health care is being cut back, where 
wages for working people are frozen, and yet we have some CEO's 
getting enormous amounts of money.
    And one of the problems we have is this. No study I have 
seen--and we have looked very hard--shows any correlation 
between CEO compensation and any conceivable metric of 
corporate success. There are some aggregate figures--this isn't 
an aggregate bill--we're not asking all stockholders to vote on 
the total amount of compensation, we're doing it company by 
company.
    What we also have--and I would ask that this be put in the 
record--from Moody's Investor Service July 2005, a study in 
which they say large positive unexplained bonus and option 
awards are predictive of both default and large rating 
downgrades. We have the problem of incentives that have 
operated as perverse incentives.
    I think what has been uncovered about Fannie Mae is 
disgraceful. But it is, unfortunately, not the only example in 
America of ambiguity in accounting, combined with various forms 
of incentives, leading to abusive practices.
    So, all we are saying is this; for the great bulk of 
corporations, where people think everything is fine, this 
wouldn't be a factor. But in many, many cases we have seen 
abuses.
    We have also seen, in my judgment, excessive incentive for 
people to merge and sell. When a corporation is sold to another 
corporation, and hundreds of thousands of people are laid off 
in consequence, and the seller, the CEO who sold, gets $100 
million, $150 million, that's not the way it ought to work.
    So, that's what this legislation is about. This hearing, as 
I said, was called at the request of the minority to deal with 
that, and I look forward to hearing from the witnesses.
    Mr. Baker. I thank the gentleman. By prior agreement, we 
were to have two statements on each side. I have no further 
statements on my side, so we go to Mr. Scott at this time for 
recognition. Mr. Scott?
    Mr. Scott. Yes, sir. Thank you very much. And I want to 
commend my colleague, Congressman Barney Frank, for taking 
leadership on this.
    Let me say at the outset that you find no greater 
capitalist than David Scott. I was trained at the citadel of 
capitalists, in the Warren School of Finance, so I am 100 
percent for profit and moving of our free markets and our 
system.
    And you know, my relationship with investing and the stock 
market goes back to the sixth grade. As our project, we went 
down, and I was in the sixth grade at Fox Meadow in Scarsdale, 
New York. Our project was to go down to the stock exchange and 
buy stock. I know the importance of it, and I know the 
importance of the market. It is the cornerstone of our 
capitalist system and our free enterprise system.
    But we've got a problem here. And that problem is the--
America's confidence in our markets, in our economic system, 
where we're going. And I submit to you that when we have 
consumers who are going out here, paying out the nose for gas 
at $3.25 a gallon, and then they look and read about Lee 
Raymond, who is making an exorbitant amount of money, in his 
compensation packages. And when that comes out to the amount 
that the New York Times has said that Lee Raymond made in one 
day in his compensation package, $144,873 a day, that's not 
profit. That's greed.
    That is why we are having this hearing here today. That's 
why this is important. It's important to look at this from a 
significant balance. We're not after putting any limit on how 
much anybody can make. But it is important for the sanctity of 
the markets, for the protection of our investors and our 
consumers, that we give some transparency.
    There is nothing wrong with presenting a way for--the 
legitimate owners of the business, the bosses of the business, 
should know how their managers of their businesses are arriving 
at their compensation package. And beyond that, there are 
earnings manipulations and unprofitable mergers and 
acquisitions.
    There are things going on in corporate America that put 
tremendous pressure on CEO's to, unintentionally sometimes, 
just out of their own normal behavior, when you have the CEO's 
concerned with the profit margins and how they arrive at it, 
they are also concerned and determined how they get their 
compensation package, we have nobody else looking at it, then 
we find these kinds of examples like Lee Raymond and others.
    We are not saying corporate America does not have anything 
to worry or to fear about what we're doing. But anybody with 
any stretch of common sense would know that what is happening 
in terms of the compensation packages of CEO's is alarming.
    Let me just share this one very vital statistic that comes 
from the corporate library's recent CEO pay survey. It said 
that the median total compensation received by CEO's increased 
30 percent in Fiscal Year 2004, with the average increasing 91 
percent, driven by 27 CEO's receiving compensation over 1,000 
percent greater than what they got the previous year. A 1,000 
percent--10 times 100 percent increase in 1 year. That's 
outrageous. It goes on to say that the 2004 increase comes on 
top of median increases of 15 percent of the fiscal year.
    Now, here is the other point, which is very dangerous, for 
where we're headed, because the middle class is getting 
squeezed in so many ways, almost out of existence. This 
disparity has grown significantly over the last few years. In 
1991, the average large company CEO received approximately 140 
times the pay of an average worker in his company. And then, 
just 12 years later, in 2003 that ratio jumped to 500 times as 
much as their average employee is making.
    Mr. Baker. Can you begin to wrap up for me, Mr.--
    Mr. Scott. I will.
    Mr. Baker. Thank you.
    Mr. Scott. So, I wanted to make sure everybody understood 
that there is great need for us to respond and come, and I 
think corporate America will be most appreciative of us taking 
a very good sobering look at this situation. It's out of 
balance, and we want to bring some balance and transparency to 
it. Thank you, Mr. Chairman.
    Mr. Baker. I thank the gentleman. It is now time to turn to 
our distinguished panel that we have been able to secure for 
today's hearing. And--
    Mr. Frank. Mr. Chairman, could I just--I appreciate what we 
have done, and you know, we want to have a balanced hearing. It 
was under the rules, the minority's right to invite.
    I would note that several people couldn't come. We did 
invite Professor Bebchuk, but he was out of the country. We 
invited Lynn Turner, formerly of the SEC, and he was unable to 
come. We invited the U.S. Chamber of Commerce, but they 
declined to send anyone. We appreciate the Business Roundtable 
being here. And we also invited Mr. Phil Purcell, Mr. James 
Kilt, and Mr. Lee Raymond. And for reasons I don't understand, 
they weren't able to come. Maybe that's just as well, because 
we would not have been able to afford their hourly rate.
    Mr. Baker. I think it was a travel budget issue.
    Mr. Frank. Well, we couldn't afford the hourly rate, but 
people do testify here for nothing. But we did invite some 
people who we thought would take the--and we do have, I think, 
a balance here, in terms of the witnesses. Thank you.
    Mr. Baker. I thank the gentleman. At this time, I would 
like to--well, our customary practice is that your formal 
statement will be made part of the record. We request that your 
comments be limited to 5 minutes, to enable members to ask as 
many questions as possible. And we do appreciate your courtesy 
in participating.
    Our first witness is Ms. Nell Minow, editor in chief of the 
Corporate Library. Please proceed as you like.

STATEMENT OF NELL MINOW, EDITOR IN CHIEF, THE CORPORATE LIBRARY

    Ms. Minow. Thank you very much, Mr. Chairman. And thank you 
all for your opening comments, which I think set the agenda 
beautifully.
    I wanted to associate myself, Mr. Chairman, with your 
concerns about the class action abuses, and welcome any 
proposals that you have for making legitimate shareholders the 
controllers of the process, rather than the trumped up 
plaintiffs.
    Mr. Scott, I particularly want to thank you for citing our 
report, the Corporate Library's report. And I have several 
family members who went to the Fox Meadow School, so I know you 
got a fine education there. And I appreciate your comments, and 
Mr. Frank's as well.
    You know, Marie Antoinette would be embarrassed at some of 
these numbers, perhaps, United Health Group--$1.6 billion with 
an additional $1 million being granted to the CEO. And yet, 
somehow the CEO's of America are embarrassment-proof.
    I agree that most people in most corporations and most 
boards of directors are honorable, decent people, but Warren 
Buffet said that even he has been embarrassed into approving 
excessive compensation packages. And if Warren Buffet cannot 
exercise control in the boardroom, then I think we do 
definitely have a problem.
    Back in the 1950's, John Kenneth Galbraith said, ``The 
salary of the chief executive of the large corporation is not a 
market award for achievement. It is frequently in the nature of 
a warm, personal gesture by the individual to himself.''
    If you look at the people in the top stratosphere of pay, 
it's a very, very small group at the top of the pyramid. You've 
got rock stars, movie stars, athletes, investment bankers, and 
CEO's. The other four are the ultimate pay-for-performance 
people. You can look in the paper every Monday and it will say, 
``Reese Witherspoon's last movie made this amount over the 
weekend, her asking price for the next movie has gone up to $20 
million,'' or it can go down. You can look at John Travolta's 
salary over the years; it has gone up and down, very much in 
accord with the box office returns. The same thing goes for 
athletes, as well as investment bankers. They could be waiting 
tables in a week, if a deal fell apart.
    The only exception to that rule, the only exception where 
pay and performance are not linked, is with CEO's. Why is that? 
Because CEO's pick the people who set their salary. If I wanted 
to pick the people who set my salary, I could put my mom and 
dad on the board, and believe me, my pay would go up. That is 
not a good system.
    The problem is that we've got significant impediments to 
the market working here. Like, Mr. Scott, I am proud to call 
myself a capitalist. I went to the University of Chicago, which 
is just as committed to capitalism as the Wharton School, and I 
like to see the market working. Right now, the consumers of CEO 
pay are the shareholders, and they do not get a chance to send 
the market that all-important response.
    The two key points that I want to make about CEO pay are 
these. The first one is that executive compensation has to be 
looked at like any other allocation of corporate assets. What 
is the return on investment for CEO pay? The answer, if you 
look at Rakesh Khurana's outstanding book, ``In Search of a 
Corporate Savior,'' is that we are competitive perhaps with a 
piggy bank, in terms of the return on investment that we get 
from CEO pay. We must be able to subject that to that same 
market test that we do for any other allocation of corporate 
resources.
    And the second point I want to make is that this truly, 
truly undermines the legitimacy of our capitalist system here. 
It is such an offense, that I think that the abuses of CEO pay 
are as much a reason for the offshore relocation of listed 
companies and IPO's as any other problem that you might name.
    I would like to reserve the rest of my time to answer 
questions, and I appreciate very much the opportunity to be 
here.
    [The prepared statement of Ms. Minow can be found on page 
97 of the appendix.]
    Mr. Baker. Thank you for your testimony. Our next witness 
is Ms. Ann Yerger, executive director, Council of Institutional 
Investors.
    Welcome.

    STATEMENT OF ANN YERGER, EXECUTIVE DIRECTOR, COUNCIL OF 
                    INSTITUTIONAL INVESTORS

    Ms. Yerger. Thank you very much. Good afternoon. The 
Council is an association of more than 300 investment 
organizations, including more than 130 public, corporate, and 
union employee benefit plans, with more than $3 trillion in 
assets. Council members are the ultimate capitalists. They have 
a very significant and long-term stake in the U.S. capital 
markets. The average council fund puts about 45 percent of its 
portfolio in U.S. publicly-traded stocks, and about 30 percent 
in bonds, U.S. bonds. On average, about half of their U.S. 
equity portfolios are passively managed.
    As long-term investors, our members have a vested interest 
in ensuring that U.S. companies attract, retain, and motivate 
the highest performing employees and executives. We, therefore, 
support compensating executives well for superior, long-term 
performance.
    However, headlines in recent years have highlighted a host 
of executive pay abuses and excesses at U.S. companies. Most 
recently, press accounts have identified how executives at a 
small but growing list of companies have benefitted by back-
dating stock option grants to take advantage of stock-price 
lows, to the disadvantage of shareowners.
    Council members and other investors are harmed when poorly 
structured executive pay packages waste shareowners' money, 
excessively dilute their ownership interest, and create 
inappropriate incentives that may reward poor performance, or 
even damage a company's long-term performance.
    Inappropriate, or ill-designed pay packages may also 
suggest a failure in the board room, since it is the job of the 
board of directors, and more specifically, the compensation 
committee, to ensure that executive pay programs are effective, 
reasonable, and rational, with respect to critical factors, 
such as company performance and industry considerations.
    The Council has long believed that executive pay issues are 
best addressed: one, by requiring companies to provide full, 
plain English disclosure of key quantitative and qualitative 
elements of executive pay; two, by ensuring that corporate 
boards are held accountable for their executive pay decisions; 
three, by giving shareowners meaningful oversight of executive 
pay; and four, by requiring disgorgement of ill-gotten gains 
pocketed by executives.
    In general, the Council believes that regulatory bodies are 
best positioned to address shortfalls or problems with these 
checks and balances, and we are very hopeful that the SEC's 
current initiatives will address the important disclosures 
raised by Representative Frank in H.R. 4291.
    Of note, we are currently studying the issue of shareowner 
approval of overall executive compensation programs, to 
determine whether and how to best require such an approach in 
the United States. And as a result, the Council has no current 
position on this particular provision of the bill. The Council 
does consider such approval a best practice.
    Good disclosure is the foundation of these checks and 
balances. The Council believes that disclosure should include 
qualitative and quantitative information about all elements of 
executive pay, including details descriptions and estimates of 
the value of stock-based pay, retirement benefits, and 
severance agreements.
    The Council, therefore, is very pleased to support the 
SEC's proposal to improve the executive pay disclosure rules. 
The Council believes the proposal will result in clearer and 
more complete quantitative and narrative disclosures of pay.
    The SEC proposal, however, falls short in some respects, 
including the failure to require companies to disclose key 
quantitative information about performance targets and 
thresholds, if such disclosure might be competitively harmful. 
The Council believes this approach provides far too large an 
exemption. The Council strongly encourages the SEC to give 
consideration to including in the final rule the important 
disclosures contained in H.R. 4291.
    The provisions requiring disclosure of short- and long-term 
performance measures used by companies in determining the pay 
of executives, and whether or not these measures were met 
during the preceding year, are essential to investors and the 
marketplace at large, in assessing performance-based executive 
pay. These disclosures are also consistent with the executive 
pay disclosures recommended in the Council's corporate 
governance policies.
    The Council looks forward to working closely with the SEC, 
this committee, and other interested parties, to ensure that 
investors in the capital markets are provided with the types of 
disclosures and other tools necessarily to properly evaluate 
the performance of company compensation committees, to assess 
pay for performance links, and to optimize the shareowner's 
role in overseeing executive pay and holding directors 
accountable. Thank you.
    [The prepared statement of Ms. Yerger can be found on page 
111 of the appendix.]
    Mr. Baker. Thank you for your testimony. Our next witness 
is Mr. Thomas J. Lehner, director of public policy, Business 
Roundtable.
    Welcome, sir.

   STATEMENT OF THOMAS J. LEHNER, DIRECTOR OF PUBLIC POLICY, 
                      BUSINESS ROUNDTABLE

    Mr. Lehner. Thank you, Mr. Chairman, Congressman Frank, and 
members of the committee. Business Roundtable, as you know, is 
an association of chief executive officers of leading U.S. 
companies with over $4.5 trillion in annual revenues, and more 
than 10 million employees.
    Our companies comprise nearly a third of the total value of 
the U.S. stock market, and represent nearly a third of all 
corporate income taxes paid to the Federal Government. 
Collectively, they returned over $110 billion in dividends to 
shareholders in the economy in 2005.
    We have long been leaders in the area of corporate 
governance. We supported the Sarbanes-Oxley reforms in 2002, 
because we knew investor trust and confidence had to be 
restored to the marketplace. That same year, we also published 
our principles of corporate governance, and the following year 
we established the Institute for Corporate Ethics at the 
University of Virginia. And in 2003, we published, ``Executive 
Compensation Principles and Commentary.''
    And in those principles on executive compensation, we 
called for executive compensation to be closely aligned with 
the long-term interest of shareholders, and to include 
significant performance-based criteria. Furthermore, board 
compensation committees should be composed of entirely 
independent directors, and they should require executives to 
build and maintain significant equity investment in the 
corporation.
    Finally, companies should provide complete, understandable, 
and timely disclosure of compensation packages, and the SEC 
proposal, which we support, is consistent with our principles.
    In the current debate on executive compensation, a key 
question is how do you define performance? We believe there has 
been too much emphasis on short-term stock gain, and not enough 
recognition of other performance-based criteria. It is our 
belief that determining these criteria and setting overall 
compensation should properly remain a function of the board of 
directors and the compensation committee, as they are in the 
best position to set the standards and evaluate the performance 
of executives.
    Concerning the recent coverage of CEO compensation, there 
has been a great deal of misleading information promoted by 
critics and reported in the media. There are over 15,000 
publicly traded companies here in the United States. And if one 
believed even a few of the stories written, you would think all 
CEO's make tens, if not hundreds of millions of dollars each 
and every year. This is simply not the case, and we believe 
that this type of sensationalism is damaging to the debate, our 
corporations, and our shareholders.
    This is not the first time that the issue of CEO 
compensation has attracted so much attention. In the early 
1980's, when stocks were underperforming, reformers sought to 
limit the salaries of CEO's and tie their pay to the 
performance of the company. Congress obliged by placing tax 
consequences on annual salaries above $1 million, and CEO's 
were given stock options as incentives to perform.
    As the market has increased dramatically in the last 15 
years, so has CEO pay. Reformers got the system they wanted, 
but now ironically, many are critical of the results, and they 
claim that the CEO pay exceeds company performance.
    In fact, research that we commissioned does not support 
this. The Mercer 350 database shows that over a 10-year period 
from 1995 to 2005, median total compensation for CEO's has 
increased 9.6 percent, while the market cap has increased 8.8 
percent and total shareholder return has increased 12.7 
percent.
    This trend was confirmed in an article last week in the New 
York Times, that cited an NYU/MIT study showing a direct 
correlation between CEO compensation and the value of the top 
500 companies between 1980 and 2003. I have attached that 
article to my testimony.
    We have identified two flaws that contribute to the 
erroneous figures that inflame the debate. First, many of the 
statistics cited are averages, and not medians. And as we all 
know, these could be misleading, because the outlier skews the 
average for everyone.
    The second involves how stock options are counted. When 
options are exercised, they often represent a decade or mores 
worth of accumulated stock. And in the current debate, they are 
characterized as single annual amounts of compensation.
    We all agree that shareholders provide the capital and, in 
effect, own companies. But the key distinction is recognizing 
that shareholders don't run companies; shareholders invest in 
companies. They profit from their growth. And in exchange for 
not having any liability for company actions, decisionmaking is 
necessarily left to boards and CEO's.
    The U.S. corporate model has been the envy of the world. 
And in our view, legislative proposals calling for shareholder 
approval of compensation plans is unwise, and ultimately 
unworkable. If we adopted a system where a small group of 
activist shareholders use the process to politicize corporate 
decisionmaking, the consequences could very well be 
destabilizing.
    Some activist groups who disagree with corporate positions 
on social security reform, health care reform, and free trade 
policies, just as an example, seek to super-democratize 
corporations to the point of having shareholders remove 
directors, choose CEO's, and determine company policies and 
levels of pay. This is a slippery slope that we think should be 
avoided.
    If this model were applied to CEO's, then by extension, the 
investing public would have a hand in determining salaries for 
news anchors, movie stars, and athletes.
    Boards are not willing to pay a CEO more than they are 
worth, or more than the market price will bear. The performance 
metrics applied are not limited to just stock price. They also 
include annual profits, job creation, restructuring plans, 
remaining competitive in the global marketplace, and subjective 
factors such as company and community activities, crisis 
response efforts, and leadership.
    One telling statistic about CEO accountability comes from 
our own members. In 1985, the average CEO tenure was over 8 
years. Today's it's four-and-a-half. Many CEO's hired today are 
expected to produce in a short period of time. And while they 
are well-paid if they succeed, they are replaced if they fail. 
The Washington Post, also last week, cited a Booz Allen study 
that showed CEO turnover in 2005 was above 15 percent, the 
highest level in a decade.
    We cannot state what the appropriate level of CEO pay 
should be, nor can we answer the question how much is enough. 
That would require broader social debate on wealth in our 
society. But within the context of corporate governance, 
setting CEO pay is a function of the board of directors, and 
should remain that way.
    We do not believe in encouraging an environment where 
companies become gridlocked while executives pander to numerous 
shareholder constituencies. It is important to remember that 
these are private corporations designed to make a profit, and 
public investment in them is voluntary. We should not confuse 
the term ``public companies'' with the public sector.
    The key to this process is to give investors the 
information they need to make informed decisions to buy, hold, 
or sell their investments. This is the rationale behind the SEC 
initiative on compensation disclosures, and this is one of the 
reasons why we support it.
    In conclusion, we are sensitive to extreme cases of CEO 
compensation reported in the media, and we continue to develop 
and promote best practices for our members to follow. 
Independent boards and shareholders will deal with extreme 
cases, and we strongly believe that the current system has 
worked well and should not be changed by any historical 
measure. Shareholders have enjoyed enormous returns by 
investing in the marketplace, and that is the ultimate 
incentive for boards and CEO's to perform well.
    Thank you.
    [The prepared statement of Mr. Lehner can be found on page 
74 of the appendix.]
    Mr. Baker. Thank you, sir, for your testimony. And may I 
start with verifying what I think I heard you indicate, 
relative to a data set from 1995 to 2005, a study of executive 
compensation as cast against the market cap of the individual 
company, and as cast against the rate of return to 
shareholders?
    Mr. Lehner. Correct.
    Mr. Baker. And those numbers were a 9.6 percent increase 
over that period for CEO's--
    Mr. Lehner. An increase for CEO's of the 350 companies in 
the Mercer database, the large 350, 9.6--
    Mr. Baker. So those 350 represent Fortune 500's, basically, 
or--
    Mr. Lehner. Yes.
    Mr. Baker. And then the company also experienced about an 
8.8 percent net increase in market cap. And the--
    Mr. Lehner. Right.
    Mr. Baker.--shareholders rate of return was 12.7 percent.
    Mr. Lehner. Over a 10-year period.
    Mr. Baker. Okay.
    Mr. Lehner. That's right.
    Mr. Baker. I think I have another one of my delightful 
charts which demonstrates over a sort of similar period, my 
concerns about this class action litigation business, and the 
cost of doing business.
    We've really got two. We've got one that shows the domestic 
effect--mine is 1990 through 2004--and then the--concurrently, 
the comparable in the European environment, where we have our 
competitors, we are the column on the far right, as a percent 
of GDP. And France, for goodness sake, is, you know, less than 
half of our litigation cost. I am really concerned.
    I believe one of the witnesses indicated that compensation 
to CEO's was becoming a factor in whether you function 
domestically or in a foreign market. If that is true, then I 
can't see how this effect is not of equal concern in the scope 
of business decisionmaking.
    Mr. Lehner, your data, I think, goes to a median 
calculation. During that period, was there any time in which 
compensation went down, from year to year, or was it always an 
increase in your analysis?
    Mr. Lehner. I know that in the last year we've looked at 
it, it's gone down 1 percent, I think.
    Mr. Baker. So there are market factors that cause these 
reimbursement rates to go up and down, depending on business 
cycles?
    Mr. Lehner. That's correct. I mean, a lot of these things 
tend to be cyclical. And again, I know we all talk from a 
different set of facts up here, but you know, again, I want to 
demonstrate that we're sensitive to the issue. This is one 
corporate governance issue that drives all others. And--
    Mr. Baker. Do you support the current proposal of the SEC, 
relative to disclosure?
    Mr. Lehner. Absolutely. I mean, we have made a couple of 
suggestions to them about ways that we thought it could 
actually be improved. But as I said in my testimony, we think 
that the best thing to do here is to arm investors with as much 
information as possible. And we think that Chairman Cox, in 
their proposal, goes a long way toward doing that.
    Mr. Baker. Thank you. Ms. Minow, I want to engage you in a 
different subject, and make quite clear that my comment has no 
reflection on the Corporate Library's role or function.
    But I believe I have read comments attributed to you, 
relative to firms that are now involved in corporate 
governance, proxy voting, consulting services, where a rating 
can be given to a corporation based on those elements. And 
let's assume you get a 2 out of 10. Then that company can turn 
around and hire that firm that just did the rating to consult 
and tell you how to get it up to an eight. And amazingly, after 
you pay the consulting fee, you get the eight.
    And I think the quote that I read, which I very much like 
was, ``You cannot be an umpire and a pitcher in the same 
game.''
    Ms. Minow. Yes, sir.
    Mr. Baker. If that, in fact, is your remark, can you help 
me understand better how we can cure that particular market 
aberration?
    Ms. Minow. Yes, Mr. Chairman, that is my remark, and I do 
feel very strongly about that. And of course, my firm does not 
do any consulting with companies. And I believe that is exactly 
the kind of issue that is best resolved by the market. People 
know exactly what those ratings are worth, if they know that 
they can be changed as a result of consulting arrangements.
    Mr. Baker. But shouldn't there perhaps be some requirement 
for disclosure of that relationship?
    Ms. Minow. No question about it. And I believe that the 
company involved does disclose those relationships. And in 
fact, I know for a fact that they do.
    Mr. Baker. But the rating agency itself does not 
necessarily disclose that they are rating and consulting?
    Ms. Minow. Yes, they do.
    Mr. Baker. Oh, good.
    Ms. Minow. Yes, they do. And so, I believe that the market 
gives the appropriate weight to the rating, understanding that 
they do also have the consulting relationships.
    And as I said, my firm does not do that, and will never do 
that.
    Mr. Baker. Terrific. Ms. Yerger, my time is about to 
expire, but you made reference to the pending SEC proposal, and 
you do believe that it is advisable, and you had some further 
comment about other additional elements that might be included.
    Would it not be appropriate for the SEC to move forward 
with the pending matter, implement it, and see what reaction we 
may get in market function as a result of it, before proceeding 
further?
    Ms. Yerger. Well, we absolutely are very supportive of the 
SEC proposal, and we do want it to move forward, but we think 
it's important that the rule that is adopted and put in place 
is of high quality and has the important disclosures that we 
think that are necessary for the investors, to understand what 
is going on and to do--to perform their role, in terms of 
overseeing executive pay.
    And we think there are--by and large, we are completely 
supportive of the SEC proposal. But like the BRT, we think 
there are some elements that could be changed, tweaked, or 
added to improve that.
    Mr. Baker. Thank you. My time has expired. Mr. Frank?
    Mr. Frank. Let me first ask--Mr. Lehner gave an exposition 
of how corporations ought to work, and particularly denigrated 
as an effort to ``super-democratize'' corporate governance by, 
for instance, allowing the stockholders to deselect board 
members. I believe you gave that as one of your examples. I 
would be interested in Ms. Yerger and Ms. Minow's comments on 
that model.
    Apparently, the model--and I was surprised by it, to be 
honest with you--the model, you said, that shareholders are 
allowed to invest, but they shouldn't get into, really, and of 
the decisionmaking. And I am particularly troubled about the 
notion that they shouldn't have a great deal of discretion 
about the boards of directors. Because the alternative is, I 
think, the current situation, where the boards of directors are 
more self-selecting and picked by the CEO's, and that's one of 
the reasons why they're not a very independent check, it seems 
to me, on salaries.
    But I wonder, first, Ms. Minow and Ms. Yeager, what's your 
view of the role of shareholders and the governance of 
corporations?
    Ms. Minow. Yes, I agree, Mr. Frank. Certainly nobody better 
than the people in this room understand what the word election 
means, and yet we use that term in corporate matters where the 
CEO picks the candidates, no one runs against them, and 
management counts the votes. So that's more like an election in 
North Korea than it is in--
    Mr. Frank. And as I understand it, if you get any votes you 
win.
    Ms. Minow. That's correct. Under State law, which of course 
is governing here, if you get one vote--if you vote for 
yourself, you win, unless someone is running against you. I 
would be 100 percent happy to defer all matters of compensation 
to the board of directors if the shareholders had some way to 
elect the board of directors, or even to get rid of boards of 
directors that did a very bad job. And right now, that is not 
the case. I am--
    Mr. Frank. Ms. Yerger, your view on the role--I mean, it 
seems to me, at Business Roundtable Mr. Lehner describes what I 
would think is a very passive role for shareholders. What's 
your conception of the view shareholders ought to have in the--
    Ms. Yerger. One of the most basic rights assigned to owners 
is to elect the directors. And right now, there isn't a 
meaningful election.
    Mr. Frank. It's not.
    Ms. Yerger. And we believe the majority voting for 
directors is one of the most single most important reform, in 
terms of--
    Mr. Frank. Well, let me ask you, in the absence of any 
significant shareholder--what is the major influence in the 
selection of directors? Who--as a practical matter, since the 
shareholders don't pick the directors, where do the directors 
come from?
    Ms. Yerger. They come from the board. It's the nominating 
committee and the board that works on that.
    Mr. Frank. They nominate themselves.
    Ms. Yerger. Essentially--
    Mr. Frank. And what about the role of CEO's in the 
selection of directors?
    Ms. Yerger. Well, we hope that the CEO is not involved at 
all. Unfortunately--
    Mr. Frank. Well--
    Ms. Yerger.--in some cases--
    Mr. Frank. I hope I could lose 10 pounds in the next week, 
but I'm not buying any new clothes. I mean, I know what you 
hope. But what's the reality, in your view?
    Ms. Yerger. I think that, at some companies, it is a CEO-
dominated process, and--
    Mr. Frank. And in the CEO-dominated process of picking the 
board of directors, who sets the CEO's compensation?
    Ms. Yerger. The individuals the CEO has put on the board.
    Mr. Frank. Yes, I think that's the significant problem we 
have. So I--and I know people say, ``Well, if they don't like 
it, they can sell,'' and the problem is that it does not seem 
to me that's an appropriate choice for people to make. You can 
be locked in, etc. Mr. Lehner, one other question.
    Mr. Lehner. Sure.
    Mr. Frank. And that is I cited this Moody's survey about 
the incentives. And one of the things that we have in our 
proposal, I don't think, is fully involved in the SEC, even 
before you get to that super-democratization notion that the 
shareholders ought to be able to vote on the company, radical 
as that may be.
    But the issue is where incentives are given if certain 
targets are hit, and then the targets, it turned out, were only 
very temporarily hit. And I can see--I've said before, 
accounting for derivatives seems to me to range somewhere 
between alchemy and astrology in the degree of intellectual 
vigor that you can bring to it at this point.
    But--and one of the things that we have said is where 
targets were hit, and it turns out that was a very temporary 
hit, we want to know what the corporation does to get it back--
not that they have to do that, but we want to know the plan. 
But I have to ask the broader question, and that is this whole 
role of incentives.
    I am getting paid $7 million to run a corporation. Why do I 
need to have incentives to do my job? I don't know, maybe you 
get an incentive at the Roundtable. I don't get an incentive. 
Most people don't get incentives. You're hired to do a job, 
you're an honest person, you're conscientious, so you do your 
job. Why do the most highly paid people in America, who get 
very large salaries and have very nice working conditions then 
need to be given bonuses to do what they should have been doing 
in the first place?
    Mr. Lehner. Sure. Let me make two quick points. One is on 
the question you raised a minute ago on board elections. A 
number of our companies have voluntarily moved to a system of 
majority voting for directors.
    Mr. Frank. Do you think that they should all do that?
    Mr. Lehner. We have encouraged companies to do that, but to 
make that determination on their own. And another--
    Mr. Frank. Well, if it is a good thing, why does it have to 
be done on their own? If it's a good thing to do, why shouldn't 
there be some encouragement to do it?
    Mr. Lehner. We do not feel that it is necessary to have--
    Mr. Frank. But what if it was? I understand that, but that 
is not my--
    Mr. Lehner. Blanket change in State law and a one-size-
fits-all approach for everyone.
    Mr. Frank. I don't--there are 50 States, you're not going 
to have 1 State--but if you think it's a good idea, why 
shouldn't we try and have people do it?
    Mr. Lehner. We have encouraged our companies to think it's 
appropriate to go ahead and do so. It--
    Mr. Frank. But if it turns out 5 years from now that many 
of them haven't done it, do you think we should do something, 
or would you want to keep encouraging them?
    Mr. Lehner. I would keep encouraging them to make that 
determination on their--
    Mr. Frank. All right, hope springs eternal.
    Mr. Lehner. That's right.
    Mr. Frank. Heck of a policy. Go ahead.
    Mr. Lehner. With respect to incentives, you know, I think 
we are in agreement on this point. As I mentioned in my 
testimony, we think there has been too much emphasis on what we 
call short-termism, too much emphasis on short-term 
manipulation of stock gain. It's not just about the stock price 
in order to evaluate--
    Mr. Frank. I mean, what can we do about that? Is there a 
remedy, other than hope?
    Mr. Lehner. I think the important thing is that, you know, 
we all work to make sure that boards continue to do their job--
    Mr. Frank. I don't--
    Mr. Lehner.--and we've certainly seen, in our own surveys 
that we do every year, a dramatic increase in activity in 
board--
    Mr. Frank. I appreciate that, but I have to say that, based 
on experience, I think the road to excess is paved with good 
intentions. Thank you, Mr. Chairman.
    Mr. Lehner. We will agree to disagree on that one.
    Mr. Baker. The gentleman's time is expired. Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman. It certainly is a 
worthy topic that we undertake today. I certainly don't know 
what the optimal level of executive compensation ought to be. 
But I am very fearful, from hearing some of the comments of my 
colleagues, that we may be going down a path where the cure may 
be worse than the ill.
    Whatever ills there may be in the corporate board rooms, I 
am certainly not sure that I want the executive compensation 
committee to consist of 435 members of the House and 100 
members of the Senate.
    Ms. Yerger, I used to--I spent a small bit of time in the 
investment world prior to coming to Congress. And I recall that 
any time you had somebody representing CalPERS on the other end 
of the line, you paid very careful attention to what they have 
to say.
    It seems to me that institutional investors still have the 
opportunity to vote with their feet. And as I review your 
testimony, I certainly agree with the general thrust and 
philosophy that greater disclosure is certainly important. But 
explain to me the hurdles that prevent the other lead 
institutional investors from having a greater say-so in the 
marketplace, and saying, ``If this is the way you're going to 
compensate your executives, we're getting out, we're bailing 
out, we're not going to own 10 percent of your company, and 
we're going to go invest somewhere else.''
    Ms. Yerger. The Wall Street Walk really doesn't work for 
Council members. I mean, just by virtue of their incredible 
size, and the fact that they have such a significant strategy 
of passive investing--and that's broad passive, so I'm not 
talking about the S&P 500, but this would be Russell 3,000-plus 
companies--they really simply can't just pick up and leave, 
which is why paying attention to corporate governance is so 
important. And that is why we believe full, clear, plain-
English disclosure of these issues is so necessary.
    Mr. Hensarling. And speaking of producing results--and I 
think Chairman Baker alluded to this--on page 4 of your 
testimony, looking in 10 years--I believe trailing median total 
compensation for CEO's has increased 9.6 percent, total 
shareholder return has increased 12.7 percent. For anybody who 
doesn't know that, could you tell us the components of total 
shareholder return?
    Mr. Lehner. Thank you. Yes. And Fred Cook, who is going to 
be on the next panel, is going to talk about this more, but you 
know, total shareholder return represents--certainly, as I 
understand it--the compounded amount of annual return that 
shareholders get over that period, when they have invested in 
the stock markets. You put your money in the bank, and you get, 
you know, 2-, 3-, 4 percent.
    But if you invested it in the market over that period, you 
would have a compounded return of 12.7 percent. Not a lot, if 
you invested $500, but if you invested a couple of hundred 
thousand, it might be a fairly significant amount of money. 
It's all proportional. But the point is that the rate of return 
tracks with the increases in the market cap, and the increases 
in what we have looked at as median CEO pay.
    Mr. Hensarling. During--I guess you would call it--part one 
of this hearing, which I believe took place last week, we heard 
testimony from the chairman of the New York Stock Exchange.
    And if I could quote from his testimony, ``The United 
States is losing listings''--alluding to the New York Stock 
Exchange --``because of the persistent concern surrounding the 
U.S. trial bar and the litigious environment in the United 
States. We need to recognize that the United States today has a 
reputation both at home and globally as an increasingly 
difficult place to do business. The possibility of being sued 
for huge sums or also bearing the high cost of legal defense 
has brought many companies to a moment of reckoning that 
mitigates against registering their securities in the United 
States.'' Do you agree or disagree with that sentiment?
    Mr. Lehner. Generally, I agree. I have seen studies that 
have been done. I mean, there are a number of listing entities 
around the world now, and it's a competitive marketplace.
    And you have people in the London Exchange and in the Asian 
exchanges, and they are going to companies and they are saying, 
you know, ``Come and list with us,'' the litigation risk is 
smaller, the amount of regulation is less, it's more attractive 
to be in these emerging markets, and it is no question that 
it's a competitive environment.
    Mr. Hensarling. I see my time has expired. Thank you.
    Mr. Baker. The gentleman's time has expired. Mr. Sanders?
    Mr. Sanders. Thank you, Mr. Chairman. Let me begin by 
applauding Ranking Member Frank for bringing forth this 
hearing, which touches an issue that I think gets nowhere near 
the kind of discussion it should be getting in Congress, or in 
the media, or in the United States of America in general.
    And while today we are looking at legislation dealing with 
the relationship between stockholders and CEO's and boards of 
directors, the truth of the matter is that this issue touches 
on a broader issue, and that is the growing gap between the 
rich and the poor in America, and the fact that many would 
argue that we are now moving toward an oligarchy in which fewer 
and fewer people have more and more wealth and more and more 
power, while people in the middle, working people, see their 
standard of living decline, while poverty in America decreases.
    Just in the last 5 years alone, we have seen 5 million more 
Americans slip into poverty. We have seen the wages of millions 
of American workers decline. Many people work longer hours for 
lower wages. And yet, the people on top have never had it so 
good.
    So, in a sense, what we are talking about today is not just 
CEO compensation, not just stockholder rights, but what kind of 
Nation we are becoming.
    And the fact of the matter is that today, the wealthiest 1 
percent own more wealth than the bottom 90 percent. The richest 
1/100th of 1 percent, 13,000 families, earn more income than do 
the bottom 20 million American families. And I think when 
ordinary people in rural States like my own, working people 
have to travel 50 or 100 miles to work and are now paying $3 
for a gallon of gas, read in the paper that former CEO's of 
companies like Exxon Mobil are now--Mr. Raymond--are now 
receiving $398 million in a retirement package, they are 
wondering about what goes on in the United States of America.
    Now, we hear a lot--and sometimes political campaigns are 
run on moral values. And when we talk about moral values, often 
it is associated with issues like abortion or gay rights, and 
so forth and so on. I want to ask Mr. Lehner a question about 
moral values.
    Mr. Lehner, do you think it is morally appropriate that 
CEO's in America today, for large corporations, now earn over 
400 times what their employees make? Do their needs--do they 
eat 400 times more? Do their kids need 400 times more 
education? Do they need 400 times more housing? What is your 
sense about what it means to America, in terms of our moral 
values, that so few have so much, and so many have so little, 
and that the gap seems to be growing wider?
    Mr. Lehner. Well, I think you raise a good point, and you 
know, I should point out that our CEO's definitely recognize 
that they have a much greater social and economic 
responsibility than those that came before them.
    I might point out that our companies give more than $7 
billion a year in charitable contributions, and that represents 
nearly 60 percent of total corporate giving.
    Mr. Sanders. Mr. Lehner, if I may, one of the reasons that 
people give more in charity is that we have more and more 
people in our country who are losing health insurance. Poverty 
is increasing, directly as a result of many policies made in 
this Congress by Members of Congress who receive huge campaign 
contributions from people in the Business Roundtable.
    So, when the Business Roundtable encourages companies to 
throw American workers out on the street, move to China, and 
poverty increases, then you come in and say, ``Gee, we increase 
money for charitable organizations,'' some of us are not deeply 
touched by that.
    Mr. Lehner. Well, my response to that is quite simply that 
I think there is a recognition that there are some who have 
less than others in this society, and I think our members have 
been very responsive--
    Mr. Sanders. What is the moral? I asked you a simple 
question. I understand that some of your CEO's and companies 
give money to charity, and I appreciate that. Morally, in your 
judgment, is it appropriate, is it a good thing that 13,000 
families earn as much income in America as do the bottom 20 
million families? Is it a morally good thing?
    Mr. Lehner. No.
    Mr. Sanders. Okay, thank you. What would you suggest that 
we do about that?
    Mr. Lehner. I would suggest that we all work together to, 
you know, lift the tide so all boats can rise.
    Mr. Sanders. Okay.
    Mr. Hensarling. Will the gentleman yield?
    Mr. Sanders. I would love to, but I just don't have a whole 
lot of time. If you will excuse me, let me ask the other people 
up there. Yes?
    Ms. Minow. Thank you. This is exactly what I was referring 
to when I said that this is undermining the entire system of 
capitalism. It takes away the credibility of our system if it 
is allowed to have such an outrageous, such an appalling, such 
an atrocious result. And we are risking losing a system which 
has created a lot of jobs, which has created a lot of goods, 
and which has created a lot of services and a very robust 
system.
    I worry very much about the beneficiaries of those pension 
funds who are members of the Council, institutional investors. 
Those are the working people whose retirement assets are at 
risk because of this atrocious behavior.
    Mr. Sanders. Ms. Yerger, would you comment on the moral 
implications?
    Ms. Yerger. Well, I can comment from a personal 
standpoint--the growing gulf between what the top paid 
executives are receiving and what average workers are--is 
astonishing and deeply troubling. And it's ironic for us that, 
at a time when many companies are freezing or eliminating their 
retirement programs--
    Mr. Sanders. Right.
    Ms. Yerger.--at the same time, frankly, that they are 
paying their executives so much, and indeed, providing them 
with quite lucrative retirements--
    Mr. Sanders. I mean, one of the points that I think Mr. 
Frank made earlier is that what you're seeing is that CEO's 
salaries soar in particular companies, these very same 
companies that are having growing obligations in terms of the 
pensions of their workers.
    And we know of instances where CEO's have been compensated 
in an incredible way, while at the same time they're cutting 
back on the pensions of their workers. I would yield to--I 
don't know how much time I have--
    Mr. Baker. You are over by about a minute already.
    Mr. Sanders. Okay, then. I am sorry.
    Mr. Baker. But I thank you for yielding, anyway. I will 
just go ahead and proceed to the next member, if I may. Let's 
see, Mr. Price?
    Mr. Price. Thank you, Mr. Chairman, and I want to commend 
you for addressing the important areas of cost of business in 
this total discussion. And I appreciate you bringing light to 
the class action suits and the cost of litigation, because I 
think it is a significant cost driver.
    Mr. Baker. Would the gentleman yield on that point? I just 
want to correct my record, if I may.
    Mr. Price. You want to stop my clock?
    Mr. Baker. Yes. I have been accused of doing that a lot.
    The figure that I used earlier, as to the settlement in the 
Florida tobacco litigation per attorney, I cited a figure of 
$233 million. The staff advised me that I was incorrect. It's 
actually $283 million, with the typical award to the injured 
party averaging a little over $300,000, just for the record. I 
thank the gentleman.
    Ms. Wasserman-Schultz. Would the gentleman yield?
    Mr. Price. Not at this point, thank you. I think that 
hearings on those specific issues would be very, very helpful.
    You know, I have oftentimes said that you can't pay for 
this kind of entertainment. And I don't mind being entertained. 
But I find it peculiar that we have begun a mocking and 
denigration of a system that has provided more prosperity and 
greater opportunity than more individuals ever on the face of 
the earth.
    I think that we need to be commending and attempting to 
assist in our system of capitalism, and not attempt to move 
down a road that I think would be the destruction of our form 
of not just commerce in society, but our form of government.
    We all believe that disclosure is important, without a 
doubt. And we look forward to assisting the SEC in coming up 
with appropriate rules and regulations.
    Ms. Minow and Yerger, I would appreciate your comments on 
the statement by Mr. Lehner that the total median compensation 
for CEO's over the past 10 years has increased by 9.6 percent, 
and that total shareholder return has increased by 12.7 percent 
over that same period of time, and market cap for the business 
has increased by 8.8 percent. Do you--are those numbers with 
which you agree, or disagree?
    Ms. Minow. I do not--we do not agree with those numbers. We 
have submitted our own report, which was cited by Mr. Scott 
earlier, showing that CEO pay in 2004 was up 30 percent, up 
this year, again; 11 percent just in the last 2 years.
    Mr. Price. Do you use average or median?
    Ms. Minow. We use average.
    Mr. Price. So you would agree that in using average, it can 
skew the number that you reach.
    Ms. Minow. Yes. However, so can using median. And with 
regard to the specific figures that you are citing, let me say 
that you have sort of an ``X'' equals ``X'' result, because 
since a large part of that pay was tied to total shareholder 
returns, of course it's going to rise with the total 
shareholder returns of the market as a whole.
    The problem with the current system of stock options is 
that 70 percent of those option gains are attributable to the 
overall market, and that's why we have these anomalous results.
    I am thrilled when Bill Gates makes money. I am thrilled 
when people earn a lot of money and get a lot of money. I am a 
capitalist. It's when the performance and pay are not linked 
that there is a problem. And that is the problem with the stock 
option payment, is that they just give millions and millions 
and millions of stock options, so that when the stock goes up a 
dollar, if you have 2 million options, you've made $2 million, 
whether the overall market or your company--
    Mr. Price. Incentives have been put on the table here as 
being something that is apparently bad, I guess. Do you think 
that companies ought to be able to offer incentives for their 
CEO's for--
    Ms. Minow. Of course. Listen, I run a business, and I hope 
my sales guy is the highest paid guy in my business, because 
that benefits me as a shareholder, and as an owner of the 
business.
    Mr. Price. Ms. Yerger--
    Ms. Minow. So, yes, I believe in incentives.
    Mr. Price. Ms. Yerger, do you want to comment on 
incentives, and then very briefly on whether or not you agree 
or disagree with the numbers that Mr. Lehner put on the table?
    Ms. Yerger. Well, first, we are very supportive of 
incentives, but we want executives to be incentivized for long-
term sustainable performance. So it's really about how those 
arrangements and programs are structured.
    Mr. Price. Would you agree that the average lifetime for a 
CEO in a major Fortune 500 company today, Ms. Yerger, is four-
and-a-half years? Is that correct?
    Ms. Yerger. I don't know the number, per se, but I do know 
it's shortened.
    Mr. Price. And how do you determine long-term performance 
in a four-and-a-half year period of time?
    Ms. Yerger. We think it has to do with the business cycle, 
and product cycle. We think 5 years is probably about right, 3 
for some companies.
    Mr. Price. So you reward them after they're gone?
    Ms. Yerger. No, you're rewarding them while they're there.
    Mr. Price. Where would--Ms. Minow and Ms. Yerger, where 
would you put the cost of executive compensation on the list of 
items that--in terms of the cost of doing business for a given 
company? Where does it fit?
    Ms. Yerger. I guess, if I could--
    Mr. Price. Go ahead.
    Ms. Yerger.--I would like to comment that, I mean, our 
testimony has nothing to do with numbers. The Council doesn't 
have a set magic number that we think executives should be 
paid. We really are about making certain that executives are 
appropriately paid for their performance, and we want to 
address those issues where there are abuses and problems with 
the system.
    Mr. Price. Would you--
    Ms. Yerger. So I kind of don't want to get hung up on 
numbers here.
    Mr. Price. Would you agree that areas like taxation and 
litigation and regulation are significant cost drivers for 
business, and may, in fact, result in more difficult 
performance for businesses than something like executive 
compensation?
    Ms. Yerger. I would think it probably is a line item issue. 
Executive pay is a very small number.
    We do think, though, that executive pay has corporate 
governance ramifications, it has a singling effect. I think it 
does drive performance and motivate certain behaviors. And 
that's why we think it's so important, from a corporate 
governance standpoint.
    Mr. Price. Ms. Minow, my time has expired, but I would love 
to hear your comments.
    Ms. Minow. Thank you. I think that, as I said, like any 
other asset allocation in the corporation, it has to have a 
competitive return on investment. And currently, under the 
current system, the return on investment for CEO pay is 
significantly less than other kinds of corporate allocation.
    Mr. Price. Where would you put executive compensation in 
the list of items as it relates to taxation or litigation or 
regulation, in terms of importance of cost drivers for 
business?
    Ms. Minow. In terms of cost drivers? I would say it's a 
very significant one, because I do believe in incentives, and I 
believe that if the incentives are poorly aligned in the pay 
package--one reason for this excessive turnover in CEO's is 
because the downside protection is so significant--then I think 
because it is a cost driver, it's very significant, certainly 
in the top 10.
    Mr. Baker. The gentleman's time has expired.
    Mr. Price. Thank you.
    Mr. Baker. I thank the gentleman. Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman. I tried to--or I 
fear to tread in this area, to tell you the truth, although I 
heard some remarks by my colleagues on the other side, and some 
of the responses, that I guess I have to get into.
    I didn't know that the Constitution said that we have a 
capitalist system. I understood that we have a Republic, and 
that the economic system we practice can be any type and still 
be the United States of America. I just wanted to make sure the 
record reflects that, to my knowledge, nothing in the 
Constitution guarantees a capitalist system.
    And going to capitalism, my observation is that we have 
failed to understand remuneration for capitalism, which really 
represents new, inventive ideas. And the reward of those ideas, 
ultimately, may grow into a great company. The Thomas Edisons 
of the world, the Henry Fords of the world, and the Bill Gates 
of the world have been very well-compensated for their novel 
contributions to the capitalist system that exists in America.
    One of the things that disturbed me, though, with the 
attention being paid to--and not being paid to--executive 
salaries is that how many great inventors and discoverers in 
our corporate world receive nothing for their great invention?
    And I remember reading, to my astonishment, that the 
inventor of aspirin--which is probably one of the most-used 
medications in our society, and creates tremendous profit for 
the multiplicity of corporations--the initial inventor of that 
never received one dollar of benefit for his great invention. 
It became the property of the corporation. And everyone has his 
right to, I guess, surrender by contract their right to reward, 
but that would be a contradiction to the idea of rewarding the 
inventor, or the creator of wealth and new ideas.
    What bothers me in this structure is, one, that we even 
have to inquire into it. It shows something has gone awry here. 
And two, you know, how much money do some people really need?
    I was reading the Exxon Mobil retirement pension, $400 
million, and I like to play with mathematics, so I calculated 
that, at 6 percent return--that's roughly $24 million a year--
so that that poor executive would only have $100,000 a day to 
live on. That's such a piddling amount, really, that we ought 
to get together here in the committee and come up with 
additional funds so that he can enjoy life in excess of 
$100,000 a day.
    Now, there is nothing immoral about that, I guess, to some 
people, but I just wonder, your experiences, how about our 
sister economies in the world, in the industrialized world? 
What is the proportion of executive salaries in England? In 
Japan? In Germany? To my best recollection in reading, we 
exceed them by such gigantic proportions, that it's almost 
embarrassing. Is that correct?
    Ms. Minow. It's hard to say, because they are not subject 
to the same disclosure rules that we are. There is a lot of 
hidden compensation. So that, for example, in Japan the salary 
is quite modest that is disclosed, but there are some 
undisclosed bonuses and benefits that ratchet things up quite a 
bit.
    There is also the case of Daimler Chrysler. Daimler merged 
with Chrysler and then replaced all of the American executives 
but kept the same pay scales but did not adhere to the 
disclosure rules. So it's difficult to say.
    But I think it is fair to say that in the United States the 
pay packages are much, much higher than anywhere else.
    Mr. Kanjorski. Is this perhaps a failure of the functioning 
process system of corporate life, that the control in corporate 
life is so vested in a limited number of executives that can 
influence the action, actually, of the compensation committee 
or the board, and because in very many instances they select 
the board nominees?
    Ms. Minow. I think that's the answer. I think because the 
CEO picks the board, and sets the pay of the board, and 
determines the tenure of the board, we shouldn't be surprised 
that the board rewards the CEO.
    In fact, at the Corporate Library, we have found that the 
single most significant indicator of excessive CEO compensation 
is how many other CEO's are on the compensation committee.
    Mr. Kanjorski. So, sort of you rub my back and I will rub 
your back, is that--
    Ms. Minow. Exactly. And then there is almost virus 
compensation, where you can trace a bad excessive compensation 
plan, going from one company to another, as the director brings 
it back to his own company.
    Mr. Kanjorski. What would be a reasonable solution that the 
Congress doesn't get involved in setting salaries, but we--I 
think that would be wrong.
    Ms. Minow. I think the last time Congress got involved--
forgive me--it was a mistake. I think by setting the cap, and 
dealing with it through the tax code, that was a mistake that 
had terrible unanticipated consequences. I think the most 
useful thing that Congress can do is the proposal that Mr. 
Frank has already addressed, giving shareholders the 
opportunity to vote no.
    Shareholders like the company, they've bought into the 
company, they want the company to succeed, and they want the 
CEO to succeed. But there has to be some kind of a stop-gap. 
And I don't worry about extremists, because by definition, 
extremists are not the majority. If 60 percent of the 
shareholders think that the CEO is overpaid, then I think it's 
fair to say he's probably overpaid.
    Mr. Kanjorski. So, transparency, is that--
    Ms. Minow. Transparency, but you know, you can provide all 
the information, and that's great, but you have to give the 
people who are getting the information the opportunity to act 
on it, otherwise it's not going to do any--
    Mr. Kanjorski. Don't you think investors may be greedy too, 
if their returns are extraordinary, and they don't really care?
    Ms. Minow. That's fine. Investors should be greedy, because 
as long as we're going to stick with the system of capitalism, 
that's part of what drives it.
    Mr. Baker. The gentleman's time is expired.
    Mr. Kanjorski. Thank you, Mr. Chairman.
    Mr. Baker. I thank the gentleman. Mr. McHenry?
    Mr. McHenry. Thank you, Mr. Chairman. I certainly 
appreciate the ranking Democrat insisting on this meeting. It 
has been a wonderful display of socialism versus capitalism, 
and I am proud to say I embrace capitalism.
    I didn't realize it was a revolutionary concept, until I 
started hearing members from the other side of the aisle talk 
about this, that this is a choice for America, that maybe we 
should be a socialistic republic. It's just amazing to me. It's 
absolutely amazing.
    A colleague who has unfortunately departed talked about 
contributions, that somehow corporate contributions or 
executive contributions have an influence on public policy. I 
would dare say that his side of the House should look at 
compensation that they receive, their contributions that they 
receive from the trial bar. I would say that's a far larger 
driver, in terms of shareholder health and the value that 
shareholders get and investors get from corporations, when you 
look at the pay-out to trial lawyers.
    If we can bring up chart number four, you can see, in real 
dollars, what is happening in the marketplace. Compensation to 
trial lawyers, $40 billion. Now, how many years is that? That 
is one year. Compensation to the Forbes 500 CEO's, all of them 
put together, everything--stock options, performance bonuses--
how much? $5 billion.
    Trial lawyers are the ones who are sopping up investor 
health in this country, and driving companies to delist in this 
marketplace and go to other places around the world.
    I would love to hear your comments, Mr. Lehner, in terms 
of--
    Mr. Lehner. You have no argument from me on that point.
    Mr. McHenry. That's a good answer. I suspect you don't 
believe in socialism, you believe in capitalism, maybe. Ms. 
Yerger? You look interested.
    Mr. Kanjorski. Will the gentleman yield for a moment, since 
you're going to make a comparison?
    Mr. McHenry. If I may finish with my questioning, I will do 
that at the end, Mr. Kanjorski.
    Ms. Yerger. First, there may be agreement on one thing, and 
that is that probably all lawyers are overpaid. I will comment 
that from Council members' perspectives, who again, are long-
term owners, they are owners of these companies before an 
alleged problem, during an alleged problem, and after an 
alleged problem, securities litigation is sort of the last step 
for them. I mean, that's a draconian measure at the most 
problematic companies. And we think it does play a role.
    There has been plenty of evidence that when institutional 
investors are the lead plaintiffs in these cases, and are doing 
their jobs, overseeing the case progress and negotiating the 
contracts with the plaintiffs' firms, the fees go down. And we 
think it's very important that the process be set up, as Nell 
said earlier, that these cases not be plaintiff driven, but 
are--or excuse me, lawyer-driven, but indeed be driven by 
meaningful plaintiffs.
    Mr. McHenry. So you would like to see some reform of that 
process?
    Ms. Yerger. I think it's worthy of a review, yes.
    Mr. McHenry. Well, that would be wonderful to come back and 
discuss the chairman's bill, the legislation that we're 
proposing.
    Incidentally, Milberg Weiss today--I think it would be a 
little overplay about the Enron guys going to jail, which 
certainly is a market-driven force, that their company went 
bust, and they went bust, and now they're going bye-bye, it 
shows that our laws work in this country, and bad people go to 
jail for bad performance and bad things that they did--but 
Milberg Weiss, big plaintiffs law firm, specializes in 
securities class action suits, again, a driving force in 
security litigation, the law firm, you know, they've been 
indicted, and some of their top lawyers--incidentally, large 
donors to the other side of the aisle--you know, they got 
caught giving $11 million in kick-backs for those in the class 
of shareholders that were part of the process.
    Now, that is certainly egregious, and they have been 
involved in 150 lawsuits. Certainly I would say that factor 
there should be what we should--should be our discussion today, 
not about executive compensation. Because as a shareholder, as 
I am in certain companies that I disclose, I have the ability 
to use the marketplace and walk. And I would say that the 
marketplace does have some strength in this. Would you agree, 
Ms. Minow?
    Ms. Minow. I think the marketplace--there are significant 
impediments to market forces, with regard to CEO pay. I share a 
lot of your concerns about the litigation, but I think with 
regard to the earlier chart that we saw with the spike in 
settlement amounts, you would have to recognize that we also 
had a spike in scandals, and I think that there is a 
correlation there.
    Mr. McHenry. There is a correlation? But you mentioned 
before that rating agencies--
    Ms. Minow. Yes.
    Mr. McHenry.--that market forces work--
    Ms. Minow. Yes.
    Mr. McHenry.--there.
    Ms. Minow. I am a capitalist. I--
    Mr. McHenry. So you're saying that market forces don't work 
in terms of shareholders moving their capital out of that 
company because they don't see it being governed correctly?
    Ms. Minow. Correct. We have talked about that earlier. Most 
of the large shareholders are essentially permanent investors. 
And when there is a pervasive problem, there is really no--the 
transaction costs are prohibitive. There is really nowhere for 
them to go.
    So, for me, the market impediment here is the inability of 
shareholders to provide any feedback, any oversight, with 
regard to this disclosure information, which is very valuable.
    Mr. McHenry. Mr. Chairman, I would love for you to call a 
hearing and discuss the impact of trial lawyers and the impact 
that they are having on investors today. And that huge, 
enormous cost to every investor across this country of out-of-
control lawsuits, especially with these securities litigations, 
and especially with this firm that has been indicted. I would 
certainly appreciate it, and I would certainly appreciate your 
leadership on creating legislation that will address this 
enormous problem.
    Mr. Baker. I thank the gentleman--
    Mr. Frank. Would the gentleman yield for 10 seconds?
    Mr. McHenry. I am out of time.
    Mr. Frank. If I could get 10 seconds, I just want to say we 
rarely have control over the hearings, but if the majority 
wanted to call that hearing, we would be glad to come. But I 
should make a note. The majority controls the hearings, we have 
very little to say about it.
    Mr. McHenry. You would support that, Mr. Frank?
    Mr. Frank. I just said I would. Maybe I talk too fast.
    Mr. McHenry. I'm from the South. We process a little 
slower.
    Ms. Minow. And I would be delighted to come back and 
testify on that point, because it's a matter of great concern 
to me. I have written about it a good deal.
    Mr. Baker. Thank you very much. The gentleman's time is 
long expired.
    Mr. Kanjorski. Mr. Chairman?
    Mr. Baker. I'm sorry?
    Mr. Kanjorski. May I have--I requested 30 minutes, and it 
wasn't available. I just wanted to correct, on the record--
    Mr. Baker. Seconds?
    Mr. Kanjorski. Yes, 30 seconds.
    Mr. Baker. Thank you.
    Mr. Kanjorski. The statistics offered by Mr. McHenry showed 
the Fortune 500 CEO's receiving $5 billion, and then he said, I 
think, the fees of the trial bar at $40 billion. And I have no 
reason to dispute those two figures, except I would like to say 
that there are probably 500,000 trial lawyers and only 500 
CEO's.
    And I think the first statistics should be let's take the 
top 500 litigators, or trial lawyers, and compare them to the 
salaries of the top 500 CEO's, and that would be more comparing 
apples to apples.
    Mr. McHenry. Mr. Chairman, I would say that, to address 
this, to be fair and simple about it, one law firm, one 
securities law firm, netted almost $2 billion over the course 
of 10 years by targeting investor classes. And so, let's put 
that up there, compared to CEO compensation. The trial lawyers 
are raking it in--
    Mr. Baker. If I can suggest, we need to get back to regular 
order, because we're going to be killing each other here in a 
minute. Mr. Watt?
    Mr. Watt. This is so bizarre, that I'm not even going to 
get in it.
    [Laughter]
    Mr. Watt. But I appreciate the offer. I thought we were 
having a hearing about executive compensation, but obviously my 
friend from North Carolina thinks that this is more about 
politics and beating up on trial lawyers. So, you know, that's 
bizarre. Maybe it helps his entry into the leadership, or 
whatever he thinks his ratings are publicly, but I think it's 
embarrassing to this committee. I yield back.
    Mr. Baker. I thank the gentleman for yielding back. Mr. 
Paul?
    Mr. Paul. Thank you, Mr. Chairman. I find the hearing and 
debate very interesting. I would like to start off by saying 
that recently Mises and Hayek was used to defend the position 
that protective tariffs on sugar was not a good idea, and I 
would like to suggest also that if you further read Mises and 
Hayek, they would argue the case that it is no business of the 
politician to deal with something as subjective as 
compensation.
    Excessive compensation is a purely arbitrary concept. There 
is no way that you can come up with an objective figure to 
measure anybody's compensation, except maybe the U.S. Congress, 
and if you took--went to the American people, they would 
probably endorse the idea that there is excessive compensation 
of Representatives.
    This whole idea that they don't deserve their pay, or a 
false incentive, what about the pay of a guy throwing a 
baseball, whether it's 90 miles an hour or 100? He has a 
tremendous incentive to work. And he makes $10,000 a pitch. I 
mean, who gets hysterical about that? What about somebody who 
gets on a stage and is on a stage for 30 minutes and makes $20 
million? That sounds excessive and abusive and obscene to me, 
but no, we don't attack that.
    So, I find this is misplaced. There are a lot of people in 
this Congress making sure government doesn't make a moral 
judgment on our personal behavior, our lifestyles and our 
habits, our drinking habits. And as far as I'm concerned, it is 
none of the government's business. But as soon as there are 
personal choices and personal decisions made regarding personal 
compensations, excluding trial lawyers and excluding movie 
stars and baseball players, they are fair game, because they 
are evil and monstrous, and we have to limit it, and we can't 
have the moral authority to defend the right of freedom.
    What about a Bill Gates? I mean, how much more money could 
he make? And who cares? I mean, if he has $10 billion or $100 
billion, he deserves it because he produces a product and he 
produces jobs.
    Now, there are some things that I would concede about this. 
I think there is abuse. Matter of fact, I agree with the 
comments from the gentleman from Vermont about the gap between 
the rich and the poor. But the market isn't the reason these 
problems exist. This is a natural consequence of what happens 
when a country destroys their money. You wipe out the middle 
class, and you create excesses in certain areas.
    What happened when we had the NASDAQ bubble? Were there 
excessive salaries? It wasn't lack of regulation. We had this 
abuse because there was so much money flowing in there, and so 
much speculation, and the people were swallowed up into it, and 
people made millions and millions, and a lot of little people 
lost their money.
    But it's a monetary phenomenon. It is not a lack of freedom 
phenomenon. And what we're doing here in this attack on freedom 
of choice and making a decision is because the market decided 
that somebody could make so much money, and if we could only 
limit the compensation, we're going to solve our problem. I 
will tell you, I think we're completely off the track.
    And I put in my vote for the market economy and for freedom 
and personal choices, and a sound economy where you don't have 
this distribution of wealth that comes about where the rich and 
the poor have a huge gap. And it's going to get a lot worse. 
And I will tell you what. When you come in with more 
regulations and decide about who is going to serve on boards 
and over-regulate corporations, let me tell you, things are 
going to get much, much worse, because you're dealing with 
symptoms, and you're not dealing with the cause.
    We need a stronger defense from the business community to 
defend liberty, to defend capitalism. It's a moral defense. 
It's a moral defense of freedom--with the restriction no fraud. 
But the greatest fraud is what we're doing with our monetary 
system, and that is created by us, here in the government. And 
that's what we have to deal with.
    And I yield to the panel, if you have any comments about 
this statement.
    Ms. Minow. I would like to speak. I associate myself with 
almost everything you said. I completely agree, it is not up to 
Congress to decide what somebody should get paid, and I have 
already spoken about my enthusiasm for Bill Gates's salary and 
also for the very, very market-driven system of setting 
salaries for athletes and performers.
    The problem is, as long as we're allowing CEO's to pick the 
people who set their pay, we have these anomalous results where 
the pay and performance are not linked, and that's what we're 
trying to address here, by putting that power--removing the 
market impediment to having the people who provide the capital 
having some say, either in the selection of directors or in 
capping excessive pay. So let's put that right back into the 
market. That's what I support.
    Mr. Paul. Any other comments?
    Ms. Yerger. I would just second what Nell says. Our--from 
the Council's perspective, the most important thing is to make 
certain that there is full transparency of these arrangements, 
so that the market can understand them and assess them.
    Mr. Lehner. I, too, would associate myself with a lot of 
your comments. As a general rule, I don't think it's a fair 
statement that every member of these boards just go ahead and 
rubber stamp what the CEO's want, or that the CEO's necessarily 
reach out and hand-pick all of their directors.
    I think boards have gotten much more vigilant the last few 
years. There are associations of boards that you can reach out 
and talk to. They have reams of information on nominating 
committees and boards, and I would encourage you to look at 
that, as well.
    Mr. Paul. Let me just take 1 second. I would say the market 
worked rather well, in spite of the fact that I believe the 
government created the financial bubbles, the market did 
eliminate the bubble, and those salaries came down. So there 
are market forces that can accomplish, I think, what we're all 
anxious to see. And I yield back.
    Mr. Baker. I thank the gentleman for yielding back. I would 
just point out for the record, since we have touched on 
athletics, the Yankees are paying A-Rod $25 million to bat 270. 
I think we ought to get that in the next--
    [Laughter]
    Mr. Baker. Mr. Miller?
    Ms. Minow. Let's have a hearing on that.
    Mr. Frank. Will the gentleman yield?
    Mr. Miller. I yield 10 seconds to Mr. Frank.
    Mr. Frank. Well, first, as to athletes--and let me just 
say, since it came up--if we went to a la carte cable pricing, 
and people didn't have to buy--because what's supporting 
athletes' salaries is the poor cable person. I would be willing 
to make that a la carte, and that's where that comes from.
    Beyond that, though, I would just say to my friend from 
Texas, since he was obviously alluding to--I think I'm the only 
one who quoted an Austrian economist, so he probably meant me--
I agree, it is none of our business to set things, to set 
salaries. All we are talking about is, first of all, it's the 
SEC, under our former Republican colleague, that is intervening 
to require corporations to give out more information. I think 
they are doing it correctly, as does the Business Roundtable, 
essentially.
    Beyond that, all we are saying here in this bill is let the 
stockholders do it. So I don't think anybody is advocating 
having Congress set anything at all, substantively. We are 
saying we do believe that the shareholders ought to be 
strengthened in what they can do.
    Mr. Miller. Mr. Chairman, I understand I now have 4 minutes 
and 50 seconds.
    Ms. Minow, I wanted to clarify a point that was raised in 
questioning earlier to Mr. Price's questions. I understood your 
report was that because there are 27 CEO's whose salaries from 
2003--or compensation increased from 2003 to 2004 by 1,000 
percent, that the average compensation increase for CEO's of 
public corporations went up by 91 percent. But the median 
compensation went up 30 percent. Is that correct?
    Ms. Minow. That is correct, thank you very much, sir.
    Mr. Miller. Okay. USA Today looked at the SEC filings of 
public corporations during the same period, and concluded it 
was 25 percent, but that was 25 percent to $14 million. Does 
that sound like about the right figure?
    Ms. Minow. Yes, it does. The reason that it is so hard to 
get an accurate figure is that there are different methods of 
computing the value of the option grants, and as has already 
been mentioned before, there is a little bit of a sort of 
elephant in the boa constrictor effect there, where the option 
grants are exercised in 1 year, and so people look at them in 
different ways. But yes.
    Mr. Miller. So there are some transparency issues.
    Ms. Minow. Yes.
    Mr. Miller. Mr. Lehner, you said that so much of the debate 
was about the outliers, and the public outrage, and we've got 
to look at the median, and not the average.
    Mr. Lehner. Right.
    Mr. Miller. And that the median--do you agree with USA 
Today's figure, that the median compensation for a CEO of a 
public corporation in 2004 was about $14 million?
    Mr. Lehner. No. Actually, the information that we looked 
at, using the Mercer 350 database, which is the one that is 
featured every year in the Wall Street Journal, as we read it, 
indicates that the median total pay for CEO's from 2004 to 2005 
declined slightly from $6.8 million--to 6.8 million from $7.0 
million.
    Mr. Miller. That's a pretty big difference.
    Mr. Lehner. I think Nell touched on something. I think 
you're probably looking at some options that were probably 
exercised. And that's not that they exercise those each and 
every year.
    Mr. Miller. So you did not count options as part of your 
total compensation?
    Mr. Lehner. Total return for every year, but if--again, if 
you're in a situation where options are exercised that may 
represent 10 years' worth of options, that is not to say that 
they get that amount each and every year.
    Mr. Miller. Okay. So, again, there apparently are some 
transparency issues in knowing exactly what CEO's are getting 
paid, or--
    Mr. Lehner. And I should say that I, you know, I think as 
we go forward, and the SEC presumably implements the rule next 
year, I think you will see less of this discussion about which 
set of numbers to use.
    Mr. Miller. Okay. A second point that I was intrigued by. 
You said that there needed to be--the compensation committees 
needed to be by independent directors. Now, we have dealt with 
that issue through mutual funds legislation.
    Mr. Lehner. Right.
    Mr. Miller. My impression was that it didn't really matter 
how many independent directors you had, because the problem was 
they weren't all that independent.
    We defined independent directors by what they're not. 
They're not employees, they're not family members. It doesn't 
mean that they're tough-minded skeptics, it just means that 
they don't have certain defined relationships. Is that what you 
mean when you say independent?
    Mr. Lehner. Generally, yes. I think the important thing for 
directors is that I think, especially in this day and age, most 
if not all of them realize that they have to approach these 
compensation packages with a healthy degree of skepticism.
    Mr. Miller. Okay. I think it was either Ms. Yerger or Ms. 
Minow--I don't recall which--but one said the greatest 
predictor of what a board was going to award in salaries was 
how many CEO's of other corporations sat on the compensation 
committee.
    And that, in fact, it had kind of a chain reaction that if 
the CEO of Corporation B sat on the compensation committee, was 
on the board and on the compensation committee of Corporation 
A, then they were inclined to vote for a very generous salary 
for the CEO of Corporation A. And then when Corporation B 
looked at--reviewed salary, they looked at what Corporation A 
had paid.
    Do you agree with--first of all, would the CEO of another 
corporation be an independent director, for purposes of your 
requirement, your proposed requirement, that--or recommendation 
that compensation committees be composed of independent 
directors?
    Mr. Lehner. They are independent by definition of the New 
York Stock Exchange, if they're not an employee of a company, 
or--
    Mr. Miller. Okay.
    Mr. Lehner.--or otherwise involved. I actually haven't 
looked at that data, but I would caution against guilt by 
association.
    Mr. Miller. Okay. One last question before it becomes red. 
I know there have been more philosophical discussions here than 
I have ever heard in Congress or perhaps in politics.
    Chairman Greenspan, a conservative Republican, has sat at 
that table many times. And if I may translate into English--I'm 
not sure that Chairman Greenspan would have been allowed to 
testify before this committee if the Senate immigration bill 
had passed by that time--but to translate into English, he said 
that for a society to work, it's got to be fair, and it's got 
to be perceived as fair by the members of that society.
    And the widening gap between the richest Americans and most 
Americans was very unhealthy for democracy. It undermined our 
faith in institutions, it undermined our sense that our society 
was fair, and it undermined our faith in democracy. Do you 
agree with Chairman Greenspan?
    Mr. Lehner. Well, I think we all have individual views on 
the widening gap, and I certainly, on a personal level, have 
agreed with a few of them. But I think the point of the 
discussion today--at least the point that we're trying to 
make--is you can't just apply that standard to CEO's. If we're 
going to have that discussion about a society, and what people 
get paid, and what kind of wealth they're allowed to 
accumulate, that's a whole separate set of discussions.
    Mr. Baker. The gentleman's time has expired. I thank the 
gentleman. Mr. Pearce?
    Mr. Pearce. Thank you, Mr. Chairman. The discussion is 
fascinating, I appreciate this. I hope, as you're talking about 
executive compensation and lack of productivity, and especially 
given Mr. Kanjorski's comments about how much do you need a day 
to live, I just dearly hope you're not including Congress. I'm 
not sure exactly what we do produce, but I do know that my 
constituents wonder if I need $454 a day to live. And so, we 
will slip by that without giving you all a comment. I'm afraid 
of what you might say.
    I would agree with the transparency, that the more 
transparent, the better we are. What about the effect--you're 
worried about the effect of the undermining of our capitalist 
system. What about the effect of our labor leaders, executives? 
Are they considered executives?
    In other words, in your concepts of transparency, are they 
considered executives, as far as performance, and as far as 
productive output, and as far as the compensation, and as far 
as compensation that is set by their peers, and as far as their 
ability to actually pick the people who set their pay? I see a 
lot of similarities.
    What damage does this do, when we have no transparency, and 
in fact, no ability to even go in and insist on seeing any of 
the records? And especially when they have maybe been taking a 
little bit from the till from their people that is not included 
in their compensation package? How about the damages of that, 
and have you measured that, and do you contemplate that 
alongside the executive pay packages?
    Ms. Minow. Well, sir, my expertise is in public companies. 
But my sense is that, with regard to labor and other private 
organizations, there is a very strong system of accountability 
there, as we have seen with the union having parts of the union 
break off, and start up new. And so it seems there is a very 
strong market system of accountability there.
    Mr. Pearce. Are there examples of the not-strong market 
system working? I think I see examples where members are 
forbidden--for instance, in the State of New Mexico, just this 
year, some of the labor, small labor organizations, were going 
to break off. And the Governor went in and said, ``We're going 
to put a 10-year moratorium on your ability''--they had already 
taken the votes.
    So, first of all, he wrote all labor into one labor union. 
So now, instead of 10 percent of your local, you had to have 10 
percent statewide for a 10-year moratorium. Now, that doesn't 
exactly sound like accountability and fairness. And this lack 
of fairness, I would appreciate my colleagues' comments on 
fairness and the society failing due to it. What do you say, 
Ms. Yerger, what about that situation that exists this year in 
New Mexico? It's not a pretense.
    Ms. Yerger. I have, honestly, no expertise in labor issues, 
and I actually--
    Mr. Pearce. No, I mean, it's just a matter of fairness, 
it's a matter of--it's just a moral question. You don't have to 
know labor, it's just--
    Ms. Yerger. But I think, from our perspective, we're 
representing investors in publicly-traded companies, and we're 
giving money to publicly-traded companies, and that is the 
focus.
    Mr. Pearce. Okay. What about the idea of fairness? Should 
we go in and--you remember the dot coms. You remember those 
companies that had no sales? They didn't yet have a product. 
And yet, the stock market attributed to those people's 
exorbitant salaries.
    Should we curb the stock market from doing that? Should we 
go in and tell the stock market, ``You're not allowed to buy 
this stock, and you're definitely not allowed to inflate the 
stock from a $1 a share to $200 a share before it ever has a 
product.'' So how do you resolve these kinds of questions?
    Ms. Minow. Again, I think that's an ideal situation for the 
market to resolve. Anybody who is dumb enough to buy stock in a 
company that isn't making any money deserves exactly what they 
get when that company tanks.
    Mr. Pearce. So, why is it necessary, then, for us to speak 
about executive compensation when there is no performance. Why 
don't those stockholders deserve what they get for investing in 
a company where the CEO is over-compensated? I am not sure I 
follow the symmetry of your argument.
    Ms. Minow. Well, you are talking about two different 
things. One is an IPO. The other is a situation where most of 
the large investors, as we have said, are essentially permanent 
shareholders. If they want to sell out--
    Mr. Pearce. With all respect, let's step back 1 second.
    Ms. Minow. Yes.
    Mr. Pearce. Only the IPO's are affected. Once it's out on 
the market, there is no longer an IPO. It was as a stock that 
it was driven from $1 to $200.
    Ms. Minow. Right.
    Mr. Pearce. So, if you would stay on that particular 
point--
    Ms. Minow. Yes, but--
    Mr. Pearce. Why is that different from Exxon Mobil? The 
price--if you're willing to buy Exxon stock--we've got 
transparency, and I agree with that piece--
    Ms. Minow. Right.
    Mr. Pearce. Why shouldn't you be allowed to buy Exxon stock 
or not buy it, and you suffer the consequences of your action, 
exactly the way you would with a dot com? I'm not following the 
symmetry of your argument.
    Mr. Baker. That's the gentleman's last question--
    Mr. Pearce. Thank you, I appreciate that.
    Mr. Baker. But please respond.
    Ms. Minow. Okay, thank you. The answer is that right now, 
our system is predicated on a theoretical accountability to the 
market with the right of shareholders to respond to elect 
directors, and that theoretical ability is not, in fact, in 
place. And I think it creates these anomalies.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Baker. I thank the gentleman for yielding back. Mr. 
Scott?
    Mr. Scott. Thank you very much, Mr. Chairman. You know, 
this has been an interesting debate, and an interesting 
conversation. But I am reminded--and as I remind my friends on 
the other side of the aisle, who tend to want to make this a 
debate between socialism or capitalism--let there be no doubt, 
it might be wise for us to recall the words of Alexander 
Hamilton, where he said, ``Indeed, our capitalistic system is 
here, and is determined by the free force of supply and demand. 
However, from time to time, it takes a centralized government 
to make sure it endures through the ages.''
    Our history is replete with examples where there have been 
excesses, where those of us who have been concerned about the 
maximum preservation of our capitalistic system have had to 
provide the leadership to move to do so. Need I recount the 
depression? Need I recount ups and downs in our economy as we 
have moved forward?
    There are excesses here. This is not an attempt to 
undermine the capitalistic system. It is an attempt to protect 
and enhance it to make sure that it endures. We have situations 
here where executives out of greed--not all of them, but there 
are examples.
    Here is one. You have Mr. Lee Raymond. He's a good guy. I 
have nothing against Mr. Raymond. But here is Mr. Raymond, 
whose executive package totals a bonus of $100 million, while 
his company is underfunding the pension by $11 billion. Don't 
we owe something to those pensioners, to those workers, to 
those people who have invested their future in that company?
    Now, we have to respond to that. It's no mystery here. If 
we don't respond to these examples, our companies are sitting 
in clearly conflicting positions. Need I recall the merger and 
acquisition situation with RJR Nabisco? Maybe 10 years ago? But 
that CEO drove the company down, had a parachute, got 
extraordinary amounts of money, and the company took a nose 
dive as a result of that. That's just rank selfishness. And not 
all CEO's are like that. So how do we respond to that?
    This bill is simply a transparency bill. All it does is 
simply say that let's disclose to the shareholders the 
information of how the compensation packages are put together, 
so that we can have a better system in which people will have 
confidence. There is no debate here over socialism or 
capitalism. If anything, this is a debate to preserve and 
enhance our capitalism.
    Now, Ms. Minow, I would like to ask you if you could share 
with us how serious this pay-for-performance and equity and 
disparity is, and how devastating it is to our system at this 
time.
    Ms. Minow. Thank you, Mr. Scott. I would like to refer you 
to page two of my testimony, where we have a chart with some 
examples. And I am glad that you brought up the example of Lee 
Raymond, because it seems to me that that's a very good example 
of a company that should attract the attention of the U.S. 
Congress, because the profits of that company that supported 
his bonus really had nothing to do with his creating new 
products or coming up with better services, or even cutting 
costs. They were really the results of problems in the world 
economy with regard to oil practices and oil pricing, and he 
benefitted from that in a way that was, I think, detrimental to 
his company, his shareholders, his employees, and our economy.
    If you look at that chart on page two of my testimony, you 
will see some examples here of companies, showing the pay 
packages next to the 5-year total shareholder returns. So, you 
have the first one, AT&T, Mr. Whitacre getting $34.4 million 
with a company that had a 5-year total shareholder return of -
40.32.
    And I think, again, that this really severely undermines 
the credibility of our capitalist system. I don't know how we 
can expect shareholders to respond to pay anomalies like this 
if we don't give them the right either to elect directors or to 
vote down these pay packages.
    You look at Home Depot. Home Depot, I would like to bring 
up, had their annual meeting today, where not one director 
attended to hear the complaints of the shareholders, and where 
they cut off the power to the microphones when the shareholders 
got up to ask questions about the pay package there, which is 
an outrage. And there again, we had somebody on the 
compensation committee who also served on the compensation 
committees of the New York Stock Exchange and General Electric, 
with the famous retirement plan for Jack Welch.
    So, if we--we have to stop them before they pay again, 
basically. We have to find some way to replace directors who, 
over and over again, agree to excessive pay.
    Mr. Baker. The gentleman's time has expired.
    Mr. Scott. Thank you, sir.
    Mr. Baker. Thank you, Mr. Scott. Mr. Campbell?
    Mr. Campbell. Thank you, Mr. Chairman. First of all, I am 
pleased that, neither on the panel or the dais, are we talking 
about having the government try and figure this out. So that's 
good.
    So, what we are talking about here is connecting the owners 
of the company with the compensation somehow. And I guess I 
want to try and dig into that a little bit, because sometimes 
it's easy to talk about in theory, and much harder to make it 
work in practice.
    I mean, we currently have a system, where you get a proxy 
and it explains all this stuff, and you get to vote for the 
directors or not, and sometimes there are shareholder proposals 
on there, as well. Probably a lot of people throw those away, 
don't vote them. There are institutional shareholders, there 
are obviously mutual funds and pension plans, and so forth. In 
many cases, there will be large blocks owned by founding 
shareholders or whatever.
    I guess why isn't that working now? I mean, why, if--and 
maybe to Ms. Yerger first, and then whoever else wants to, 
why--if we believe that this isn't working, then why isn't it 
working now? I mean, I would like to hear what you all say.
    Ms. Yerger. The SEC pay disclosure rules were last 
substantially amended, I think, 13, or 15 years ago. And there 
have been, obviously, tremendous changes in executive pay over 
that period of time. We have heard the numbers. And the fact is 
that I think that companies have gotten--and compensation 
consultants have gotten--very good about identifying ways to 
pay without having to disclose it.
    So, we're in a situation right now, frankly, where the 
transparency is not adequate. And I think that the SEC 
recognizes that. And from what I am hearing here, that is one 
point of agreement, is that transparency of this is a good 
thing. So, I mean, one problem right now is that it's very 
difficult to understand clearly how much, and how executives 
are being compensated.
    Mr. Campbell. So, with adequate transparency, in your view, 
does the current system then of electing--shareholders, etc., 
proxies, and so forth, have the opportunity to work?
    Ms. Yerger. Well, as the Council's testimony notes, we 
think that it is very important that directors be accountable 
for these pay decisions. As a result, we are very, very, very 
strongly in favor of majority voting for directors, so there is 
a way to hold the directors accountable for these decisions.
    Mr. Campbell. Okay. Ms. Minow?
    Ms. Minow. I agree with the Council's position on that. 
Ideally, I would love a system where shareholders got an up/
down vote on executive pay, as they have in the UK. But for me, 
the primary priority is this adoption of the majority vote, and 
I would love to see the Business Roundtable push a little 
harder on the members who have not adopted it. Because if 
shareholders could vote no--
    Mr. Campbell. They would not have adopted what? I'm sorry, 
not--
    Ms. Minow. The majority voting for--
    Mr. Campbell. Majority vote, right.
    Ms. Minow.--so that directors couldn't serve unless they 
had a majority of the vote. Right now, for example, at AIG, 
there is a director serving who did not get a majority of the 
shareholder vote last year. At Blockbuster, there is a director 
serving who did not get a majority of the vote.
    Mr. Campbell. A majority of those voting, you're saying--
    Ms. Minow. Yes, yes.
    Mr. Campbell. Not a majority of the shares outstanding.
    Ms. Minow. That's correct.
    Mr. Campbell. Right, okay. And you know, the proposal of 
voting on compensation, the only thing is once you go down that 
road, I mean, you know, shouldn't--should shareholders vote on 
a business plan? Should they vote on the advertising budget? 
Should they vote on a union contract? Should they vote on 
pension plans that arguably go--you know, you could extrapolate 
that into a whole lot of other things, which becomes a little 
dangerous--
    Ms. Minow. I absolutely--
    Mr. Campbell.--initiatives in California--
    Ms. Minow. I absolutely agree with you, Mr. Campbell. I 
don't intend to turn corporations into referenda.
    Mr. Campbell. Right.
    Ms. Minow. And as long as shareholders have a say in who 
serves on the board, I will be happy.
    Mr. Campbell. Right. Okay, thank you. Mr. Lehner?
    Mr. Lehner. I think that I agree with a lot of the comments 
that Ann and Nell just made. I do take exception in some areas. 
Again, I think majority voting is, for the time being, a 
decision best left for companies to make.
    I do think that you would be setting a dangerous precedent 
if you had shareholders voting directly on compensation 
packages. There is a reason that--a historical and a legal 
reason--why that has not been the case. As I indicated in my 
testimony, shareholders are not liable for company actions. The 
board and the CEO's necessarily make those decisions.
    I think if you start getting into having shareholders make 
active decisions about who runs companies and what decisions 
they make and how they're going to get paid, you open 
shareholders themselves to litigation, and I certainly don't 
think the trial bar would be shy about going after large 
institutional shareholders if they felt like they could get 
some settlement money out of it. I don't think you want to go 
down that road.
    Mr. Campbell. Thank you very much. Mr. Chairman, I yield 
back.
    Mr. Baker. The gentleman yields back. Mr. Green?
    Mr. Frank. Would the gentleman yield to me for 5 seconds?
    Mr. Green. Yes, sir.
    Mr. Frank. Well, I might be prepared--we will take this 
under advisement, but if people on the other side from this 
bill would rather us--instead of acquiring a shareholder vote 
on compensation, would rather us substitute a bill requiring a 
majority vote on directors, I am in a conciliatory mood.
    So, you may have persuaded me with the substance, if not 
the specifics, and we will--when we get a mark-up, we will 
think about that. So that may be the alternative. We would be 
glad to think about that.
    Mr. Green. Thank you, Mr. Chairman, and I thank the ranking 
member for hosting this hearing. And I thank the members of the 
panel. We want to apologize for arriving a little late. I had 
some pressing business, an electronic town hall meeting that I 
had to attend.
    And many of those persons that I talked to, communicated 
with, I'm sure would agree with this principle, and it is that 
we live in a world where it's not enough for things to be 
right; they must also look right. We really do live in that 
kind of world.
    Now, it may be right for CEO's to receive approximately 140 
times the pay of the average worker, but I guarantee it doesn't 
look right to people in this country. People in this country 
are starting to question what we are trying to make 
transparent. And at some point, whether we like it or not, no 
matter how we justify it, people are going to rebel. They are 
not going to continue to allow this kind of business-as-usual 
to continue.
    People think that there are limits, and my suspicion is 
that there are some people here in Congress who think that 
there are limits, because we have imposed limits on some 
others. We have done this. This is not the genesis of imposing 
limits. This is not the genesis of investigating to the extent 
that we conclude that we want to make things not only be right 
but look right.
    So, my question will be simply this; what is wrong with 
transparency? Does someone have an indication from me as to 
what is wrong with putting all of the cards on the table, so 
that the persons who invest in corporations will know what's 
taking place, and how the money is being spent? What's wrong 
with transparency? Yes, sir?
    Mr. Lehner. Absolutely nothing. In fact, we support 
transparency. And I just--I might add that there was a question 
asked earlier by another member that ties very nicely into 
yours, and that is what is a reasonable solution? And my answer 
to you is the reasonable solution is to let the SEC do its job.
    They have put forward, I think, a very comprehensive 
proposal on disclosing the executive compensation and providing 
transparency. We have supported that, and I think that's going 
to go right to the heart of a lot of the questions that have 
been raised here today.
    Mr. Green. Now, if we have transparency, it has to be there 
for some reason. Once people are aware, they should be in a 
position to do something. What would you propose that 
shareholders be permitted to do, once they acquire this 
intelligence?
    Mr. Lehner. They then have the information to make informed 
decisions about where they want to invest their money.
    Mr. Green. And what would you propose that they do if they 
are of the opinion that their money has been used unwisely, and 
that there has been some abuse? What would you propose that 
they do?
    Mr. Lehner. Well, the first thing that I would tell them is 
to invest someplace else. I mean, CEO's and boards--
    Mr. Green. Well, it's easy to say invest it someplace 
else--
    Mr. Lehner. Right.
    Mr. Green. It's not--you know, it's not your money that 
is--that has been abused and been misused. Why can we not 
empower shareholders, so that they can do what we don't want 
government to do? Why can't we let these shareholders have some 
power, some influence on this process? Why would you not do 
that, now that they're intelligent, and they've been 
enlightened?
    Mr. Lehner. Sure. And it's not a question of not empowering 
them. I mean, I am also an investor, as I think are 83 percent 
of the American public.
    Mr. Green. But do we trust the American public?
    Mr. Lehner. Oh, I think we always have to trust people to 
make the best--
    Mr. Green. Well, if we trust them, why can we not allow 
them to acquire intelligence and to have some ability to do 
something with that intelligence, to act? Why can't we do that? 
What is wrong with giving shareholders the ability to act?
    Mr. Lehner. And I think you're right. I think the question 
is giving them the information and trusting them to determine 
for themselves what is best for them. I don't think government 
should be prescribing what kinds of decisions investors should 
be making. That's something that--investors should make that 
determination on their own.
    Mr. Green. Are they not making that determination on their 
own after acquiring the intelligence and making some decision 
as to how they want their money spent?
    Mr. Lehner. I really can't answer how individual investors 
respond, once they are given information. They have investment 
advisors available to them, and plan administrators, and so 
forth.
    Mr. Green. But no, let's talk about salaries.
    Mr. Baker. If we can talk about it briefly. Your time has 
expired, but please feel free to pose your last question, if 
you--
    Mr. Green. Well, let me just end with this. We had no 
problem, it seems--or, there were some problems, I'm sure--but 
we have regulated others. The genesis of this regulation is not 
this bill. There are others who have been regulated. And for us 
to today conclude that this is inappropriate, it's something 
that is beyond the pale, really goes beyond the pale itself. 
Thank you.
    Mr. Baker. And if I may make just a brief announcement, it 
is my intention to recognize Ms. Wasserman-Schultz for her 
questions, thank the first panel, and let them be excused, and 
notify the second panel that, pending several votes, we are 
going to be over there for a few minutes. We have four votes. 
It will be at least 30 or 40 minutes before we're able to get 
back for the second panel. Ms. Wasserman-Schultz--
    Mr. Frank. I apologize to the second panel. We didn't 
expect this. Many of us will be coming back. So if you can 
stay, we appreciate it, and we apologize.
    Mr. Baker. Ms. Wasserman-Schultz?
    Ms. Wasserman-Schultz. Thank you, Mr. Chairman. And I am 
glad that my good friend from North Carolina is still here, so 
I can profess my undying devotion to capitalism right in front 
of him. I knew he would be pleased about that.
    But I am also a supporter of the democratic process, and of 
allowing market forces to drive financial decisions like 
executive compensation. But you know, the comparison that 
Chairman Baker and Mr. McHenry have made, of--with trial lawyer 
awards in jury trials versus corporate board-decided executive 
compensation, is--it's comparing apples to licorice. I mean, 
it's not even oranges. They're not even in the same family.
    Juries, otherwise known as people who are a part of our 
democratic process, and the jury process, and the 
decisionmaking process about jury awards and trial lawyer 
compensation, are all rooted in the law, I mean, which we can 
change, here, as Members of Congress, so, unlike shareholders' 
ability to impact corporate board decisions on executive 
compensation.
    So, there is absolutely no comparison, and I think that 
should be noted publicly, and I would love to hear your comment 
on that.
    And also, Mr. Baker, with all due respect, I was in the 
State legislature in Florida during the Florida tobacco 
litigation, and voted on the law several times that allowed 
that litigation to go forward, also a part of the democratic 
process.
    We can note that there were 12 trial attorneys who did each 
make $250 million out of a $41 billion settlement. Combined, 
all 12 lawyers took 7.3 percent of the total settlement that 
the State of Florida received. That is far less of a percentage 
than most CEO's make as a total percentage of their 
compensation to all employees. And, although I can't give you a 
number, as a total percentage of the profits that each 
corporation makes. So, it is a political comparison, it 
appears, as opposed to a fair comparison.
    And then, the last thing I would just state and ask you to 
comment on is in the May 3rd hearing, what the SEC chairman 
commented on, and what his concern was over executive 
compensation, was that often CEO's make decisions about 
business deals because of the nature of their compensation 
package. The outcomes of the incentives that are provided in 
their compensation packages depend upon some of the decisions 
and the business deals that they make. And that's a completely 
unfair process to shareholders, who have no say in either that 
decision about the business deal, or about the compensation 
that the CEO receives, as a result of that decision.
    So, that's not the market driving that, those decisions. 
That is the compensation that, in many cases is excessive, 
driving that CEO's decision, which is unfair to shareholders. 
So I just wanted to see what you thought about that.
    Ms. Minow. Well, that was a very thoughtful statement. 
Thank you very much. With regard to the litigation point, I 
would just say that my concerns about excessive--about 
misaligned incentives with regard to litigation relate to 
settlements, and not to jury trials. And I think that that's 
where the real problems are.
    But I absolutely agree with you that we have had a lot--you 
know, whoever--I forget who said this was a wide-ranging 
philosophical discussion, but certainly a lot of tangential 
topics have come up, and I really appreciate your 
distinguishing them and putting the focus back on the one we're 
here to talk about.
    Mr. Lehner. I really have nothing to add. Thank you.
    Ms. Wasserman-Schultz. You don't have any comment on 
anything I have said?
    Mr. Lehner. No, I mean--
    Ms. Wasserman-Schultz. No opinion?
    Mr. Lehner. I generally agreed with what Nell said, and I 
probably couldn't say it any better. I share her concern about 
the litigation costs, and I am not privy to some of the deals 
that you were referring to, so I really couldn't comment on it.
    Ms. Wasserman-Schultz. Sometimes it's helpful just to get 
the facts on the table. Thank you, Mr. Chairman. I yield back 
the balance of my time, and I appreciate the consideration.
    Mr. Baker. I thank the gentlelady. I want to thank each of 
you for your participation here. I assume, going forward, that 
we will return to this topic in the future, and we look forward 
to having you back.
    Ms. Minow. Thank you, Mr. Chairman.
    Mr. Baker. Our committee proceeding will now stand in 
recess, pending the four matters of business on the House 
Floor.
    Mr. Lehner. Thank you.
    Mr. Baker. We will return shortly.
    [Recess]
    Mr. Baker. [presiding] In order to proceed, we need a 
Member on both sides for hearing purposes. And with Mr. 
Miller's return, I am authorized to go ahead and reconvene our 
hearing. And I understand that there will be other Members 
returning as they clear the Floor.
    So, let me welcome the members of the second panel, and 
express to you our appreciation for your patience and 
willingness to hang in there with us. As is the case for the 
first panel, we ask that you try to conclude your remarks in 5 
minutes, and we will make your official statement part of the 
record.
    And I turn first to Mr. Brandon J. Rees, who is the 
assistant director, office of investment, with the AFL-CIO. 
Please proceed as you choose, Mr. Rees.

  STATEMENT OF BRANDON J. REES, ASSISTANT DIRECTOR, OFFICE OF 
                      INVESTMENT, AFL-CIO

    Mr. Rees. Thank you, Mr. Chairman. The AFL-CIO believes the 
Protection Against Executive Compensation Abuse Act is 
essential to reform CEO pay. Today, the average CEO of a major 
company makes 431 times the average worker's pay, up from 42 
times in 1980. Executive compensation abuse takes dollars out 
of the pocketbooks of shareholders, including the retirement 
savings of America's working families.
    The first problem with CEO pay is that CEO's are being paid 
too much relative to their individual contribution. No CEO is 
so talented that his or her compensation should be unlimited in 
size.
    The second problem is that executive compensation is poorly 
disclosed to shareholders. Many forms of CEO pay are under-
reported, and CEO pay-for-performance targets are hidden from 
shareholders.
    The third problem is that today's executive pay packages 
are creating improper incentives. For example, stock options 
can create a strong incentive to fraudulently manipulate 
companies' stock prices. That is the lesson of today's Enron 
convictions.
    Earlier this year, the SEC proposed new executive pay 
disclosure rules. The Commission and its staff should be 
commended for this proposal. However, the SEC's proposed 
rulemaking does not go far enough. Shareholders must be told 
what pay-for-performance targets are being established. 
Shareholders should also be told if directors have potential 
conflicts of interest.
    We believe that the investing public shares our view. 
Through the AFL-CIO's executive pay watch Web site, nearly 
20,000 individuals have commented on the SEC's proposed 
rulemaking, one of the highest totals in the history of the 
SEC.
    The Protection Against Executive Compensation Abuse Act 
will go further than the SEC's proposal in several important 
ways. This bill will require companies to disclose short- and 
long-term performance targets. Under this legislation, 
companies will be required to call back executive pay that is 
improperly awarded as the result of an accounting restatement.
    This bill will also require shareholder approval of 
executive compensation plans, and golden parachutes, an 
important safeguard against CEO pay abuse.
    I would like to focus on the biggest component of CEO pay 
that is hidden from shareholders: CEO golden retirements. Every 
American deserves a secure retirement. Yet increasingly, 
companies are terminating their employees' pension plans, and 
transferring the risk of saving for retirement on to their 
workers.
    At the same time, companies have turned their executive 
pension plans into CEO wealth creation devices. As a result, 
many companies have a two-tier retirement system: one for the 
CEO, and one for everybody else.
    Leading the list is Exxon Mobil CEO Lee Raymond, who 
accrued an annual pension of over $8 million. On his 
retirement, he opted for a lump sum cash payment of $98 
million. Meanwhile, Business Week has reported that Exxon's 
$11.2 billion pension funding deficit is the biggest out of all 
U.S. corporations.
    Let me give you more examples. At Pfizer, CEO Hank 
McKinnell will receive an annual pension of $6.5 million, or a 
lump sum of over $83 million. Meanwhile, Pfizer's stock price 
has fallen nearly 50 percent under his leadership.
    United Health Group CEO Bill McGuire will receive $5 
million a year in pension benefits. That is on top of his $1.75 
billion in stock options, many of which were improperly back-
dated to maximize their value.
    IBM CEO Sam Palmisano's pension will be worth $4.5 million 
annually, despite IBM's recently announced pension freeze for 
its workers. And Home Depot CEO, Bob Nardelli, will get $4.6 
million each year in retirement, while his employees do not 
even have a defined benefit pension plan.
    It is outrageous that the very same CEO's who are 
undermining the retirement security of America's working 
families will receive CEO supersized pensions. The Protection 
Against Executive Compensation Abuse Act and the SEC's proposed 
rulemaking on executive compensation disclosure will go a long 
way to expose these preferential executive retirement benefits. 
Thank you.
    [The prepared statement of Mr. Rees can be found on page 
100 of the appendix.]
    Mr. Baker. I thank you for your testimony, sir. The next 
witness is Ms. Christianna Wood, senior investment officer, 
Global Public Equity, on behalf of the California Public 
Employees' Retirement System. Welcome.

   STATEMENT OF CHRISTIANNA WOOD, SENIOR INVESTMENT OFFICER, 
   GLOBAL PUBLIC EQUITY, ON BEHALF OF THE CALIFORNIA PUBLIC 
                  EMPLOYEES' RETIREMENT SYSTEM

    Ms. Wood. Thank you. Mr. Chairman, Congressman Frank, and 
members of the Committee, I am pleased to provide the 
perspective of an institutional investor on the issue of 
executive compensation and the legislation before you.
    CalPERS is the Nation's largest pension system, with more 
than $200 billion in assets. I am here to support the 
legislation that would help investors and shareholders know how 
their capital is being used.
    We seek fuller disclosure and clearer communication about 
executive pay packages in simple English. We also want 
executive pay tied to performance, with clearly defined 
measures of success and failure in simple math. And we want 
companies to have a call-back policy for recapturing any form 
of incentive compensation that is unjustified. Executives 
should pay back incentive awards when it is found that the 
numbers used to justify the awards were inaccurate, requiring 
restatement.
    Too often, we are paying for failure and not for 
performance. Just this month, CalPERS urged other shareowners 
to support a resolution requiring Home Depot to adopt a non-
binding investor vote on its executive pay plan. That is partly 
because, over the last 5 years, Home Depot gave its chief 
executive over $190 million, at the same time that the total 
stock declined 12 percent.
    This last March, shareholders sued Hewlett Packard to 
contest a severance package of more than $21 million, after the 
chief executive resigned for poor performance, and now we are 
told that the severance package could be worth up to $42 
million, including stock and options.
    Opponents of today's bill say government shouldn't meddle 
in the marketplace that is working well, and that executive pay 
reflects honest competition for the best corporate leaders. 
Opponents say soaring executive compensation is merely keeping 
pace with corporate growth, and that pay packages appropriately 
reflect what the market will bear. We are told that supply and 
demand is what determines executive pay, much as it does Yankee 
shortstop Alex Rodriguez, who gets $25 million a year.
    However, supply and demand works better for ballplayers 
than it does for corporate executives. Baseball fans who find 
the price too high can vote with their feet; they can stay 
home. In the corporate world, shareowners can't stay home. If 
we sell our stocks, we are out of the game. If we're out of the 
game, we can't produce the investment returns that cover $3 out 
of every $4 of our people's retirement benefits.
    When a CEO gets millions of dollars for running a company 
into the ground, when an executive takes stealth payments that 
we can't trace, there is a big potential impact on the 
retirement prospects for millions of ordinary people. We are 
talking about the clerks, the custodians, the technicians, the 
safety officers, and the public employees who entrust their 
nest eggs to investors like us.
    And of course, taxpayers also pay more if corporate boards 
fall asleep at the switch. Taxpayers and CalPERS members 
typically don't attend company meetings, or even vote proxies. 
They rely on large, institutional shareowners and investors 
like CalPERS to watch their money. But we can't follow their 
money in executive compensation, as it stands now.
    Big companies may say that they want to--excuse me, they 
may say that they pay executives a pittance, compared to the 
billions of dollars in profits that they generate. In response, 
we have learned that runaway executive compensation indicates 
that corporate boards aren't minding the store. And we all know 
that bad things happen when corporate boards don't pay 
attention. Boards weren't paying attention on the accounting 
issue a few years ago, and they are in the same fix today, with 
the compensation issue.
    A few years ago investors testified here on behalf of what 
became the Sarbanes-Oxley law, which requires transparent 
accounting principles. That law has been good for the market, 
making it harder for the Enrons and the WorldComs of the world 
to cook the books, deceive investors, and jeopardize the life 
savings of millions of Americans. The bill before you today 
would bring that same kind of transparency and oversight to 
runaway executive compensation.
    In a perfect world, we wouldn't need government to call 
companies to account for the way that they pay their 
executives. Since this isn't a perfect world, we are seeking a 
rule of law not to set salaries, but to require companies to 
show us the money, to show those who own the companies what 
they are paying executives, and why.
    To sum up, we want more information than just corporate 
labels to tell us what's in the bottle. As owners, we have the 
right to know. Our financial health and the retirement security 
of 1.4 million members may depend on it. Thank you, and I 
welcome your questions.
    [The prepared statement of Ms. Wood can be found on page 
105 of the appendix.]
    Mr. Baker. Thank you for your comments. Our next witness is 
Mr. Frederic W. Cook, founding director of Frederic W. Cook & 
Co., Incorporated. Welcome, sir.

 STATEMENT OF FREDERIC W. COOK, FOUNDING DIRECTOR, FREDERIC W. 
                        COOK & CO., INC.

    Mr. Cook. Thank you, Mr. Chairman, Mr. Ranking Member, and 
members of the Committee. It's a pleasure to be here. I will 
skip my background, except to say that I am an executive 
compensation consultant with about 33 years of experience in 
advising boards and managements on executive compensation pay 
issues.
    I will start by saying that the media has been flooded with 
a multitude of distorted, misleading, and often erroneous 
statistics given to portray U.S. CEO's and board governance in 
a negative light. In assessing what's right and wrong with 
executive compensation, it is important to start with a sound 
fact base.
    In my presentation, I will identify, and hopefully clarify, 
two important issues in executive compensation that have caught 
the public's attention: the CEO pay ratio to the average 
worker; and CEO pay increases.
    It is often cited in the press that the ratio of the 
average large company CEO's pay to the average American worker 
has grown threefold over the past decade from about 140 times 
to about 430 times in 2004. The calculations behind these 
statistics have been chosen to produce high CEO pay ratios for 
maximum propaganda effect.
    First, they include realized option gains, which are the 
pay-off for many years of grants and rising stock prices. They 
are not representative of a single year's compensation.
    Second, they focus on average CEO pay, not the median. 
Average pay is inflated above true compensation norms by a few 
outliers.
    Third, and lastly, they compare CEO pay to the average pay 
of production and non-supervisory workers who, unfortunately, 
have not benefitted from trends in the United States and global 
economy as much as other American workers.
    What might be a better way of calculating CEO pay ratios? 
We propose using the Mercer human resource consulting CEO 
compensation survey. This is a large, stable group of 350 
companies in diverse industries and sizes, and the data has 
been collected consistently for over 10 years, since 1992.
    With funding support from the Business Roundtable, we 
accessed this database on CEO pay and asked Mercer to calculate 
median CEO pay--not average--and break it down by component: 
salary, salary and bonus, annual pay, salary and bonus, and 
long-term, which includes stock options. But we had them 
compute stock options on the Black Scholes grant value, not 
realized gain. And I think you all know that the Black Scholes 
grant value will be, as part of the SEC's proposal, how options 
will be calculated and included in total pay, going forward. 
These numbers, we believe, better reflect the intention of 
board compensation committees in setting CEO pay levels, and in 
the new SEC definitions.
    For the average production worker, U.S. Census Bureau data 
provided the median annual earnings for individuals aged 25 to 
64, who worked full-time for the full year. That's a smaller 
group. This is more representative of the average American 
worker, blue collar and salaried, and it's more comparable to 
CEO's, who also work full-time and year-round.
    What was the result of these changes in calculation? The 
CEO pay ratio was 90 times in 1994, not 142 times, as reported 
by the pay critics, and it rose to 187 times in 2004, not 430. 
This is a two-fold increase over the period, not three-fold, as 
usually reported. The estimated pay ratio went down in 2005, to 
179 times. CEO pay is not always escalating upward; it does 
fluctuate with the market.
    The CEO pay ratio actually peaked in 2001, following the 
peak of the tech bubble. The fact that CEO pay has been 
trending below its peak level for 4 years running has not been 
reported in the press, to our knowledge. It is possible that 
the critics of executive pay levels and practices use pay 
statistics selectively, and only when it portrays CEO's in a 
bad light.
    Even the Wall Street Journal reported as fact last January 
that the average CEO's salary in the United States is 475 times 
greater than the average worker's salary. This is patently 
absurd. There are over 15,000 CEO's in the United States in 
public companies alone, and many more in private companies. The 
Wall Street Journal later corrected its errors by stating, ``A 
Towers Perrin study found that the total compensation of the 
average chief executives in the United States in 2005 was 39 
times the average worker.''
    Note the errors committed by the Wall Street Journal. They 
had used a statistic from a small sample of highly paid CEO's 
in very large companies, and they made the reader believe that 
all CEO's are overpaid. And they took the CEOs' total pay and 
called it base salary, having you believe that CEO pay is not 
at risk or variable with performance.
    There is other material in my presentation, but my light is 
red, so I will cede the floor.
    [The prepared statement of Mr. Cook can be found on page 66 
of the appendix.]
    Mr. Baker. I thank the gentleman for your testimony. And 
let me start, Mr. Cook, with your observations about this 
apparent cycling of CEO compensation, in that along with the 
tech bubble, we appear to have hit a bubble in compensation in 
2001. And in your view, from that point forward, speaking to 
the median, that there has been a slight decrease, and 
certainly not an increase in compensation levels, in respect to 
the 2001 figure.
    Do you have an opinion as to the proposal now pending 
before the SEC on additional disclosure? And do you believe 
that to be a helpful proposal, moving in the right direction?
    Mr. Cook. Yes, sir. I do have an opinion. I do believe it 
is a helpful proposal. We are in favor of enhanced disclosure, 
particularly of retirement benefits and perquisites that have 
been under-reported in the past. The--we favor the whole 
proposal.
    The inclusion of Black Scholes option grant values in the 
total compensation will, in fact, confuse things a bit, because 
what you are doing is combining compensation that has been 
received, like salaries and bonuses, with compensation that is 
only potential, they may never receive, and may be worth a lot 
more. But I'm not sure there is a better answer to it. So we 
favor the approach that they're proposing, yes sir.
    Mr. Baker. Thank you. Ms. Wood, I know you made reference 
to the proposal. I assume you have additional requirements you 
would like to see the SEC consider as it moves forward?
    Ms. Wood. There are very few modifications that we are 
suggesting to the SEC. We have provided a comment letter to the 
SEC, and have very minor suggestions. In general, we are very 
supportive of the rule.
    Mr. Baker. And Mr. Rees, did you have some comment on the 
SEC rule?
    Mr. Rees. Yes, sir. As I said in my testimony, we believe 
the SEC should mandate pay-for-performance targets disclosure 
for CEO's. We believe that is information that shareholders 
have a right to, and that will help correct the inequities and 
imbalances in executive compensation.
    We also believe that the SEC should retain or lower the 
disclosure threshold for directors' related party transactions. 
The SEC is proposing doubling the amount of business that the 
director could do with the company from $60,000 to $120,000. 
And we believe that that's just not right, that those types of 
transactions must be disclosed, in order to prevent conflicts 
of interest and self-dealing in the executive compensation 
process.
    Mr. Baker. Thank you. Mr. Cook, with regard to those 
outliers that are creating the basis for much of the public 
criticism on CEO compensation, I am concerned that much of the 
shareholders' interests are actually voted by large 
institutional investor pension fund groups. And there does not 
appear to be adequate disclosure in advance of how those large 
blocks may be voting.
    Is there any nexus between the shareholder expression of 
discontent, institutional block voting of large investor 
groups, and any potential reform there, that might help to get 
at these abhorrent actors? Certainly I'm not suggesting Mr. 
Frank's bill goes to the point of having shareholders approve 
compensation, I'm not going quite there. But shareholders can 
deliver messages in a number of ways. What can we do about 
those outliers, and does that offer any potential for us?
    Mr. Cook. Well, I think, sir, that that is already underway 
somewhat. CalPERS, I believe, will notify a company and ask to 
meet with them, and explain their compensation program with a 
view that if you don't like the response that you receive, you 
will withhold votes from directors, or put them up on the abuse 
list.
    So, the idea of institutional shareholders expressing their 
will beforehand, I think, is a reasonable idea and is underway.
    Mr. Baker. Well, in that light, then, if what the 
additional disclosures, which will be made available under the 
implementation of the SEC rule, with market forces using that 
information appropriately, Ms. Wood, don't you think that gets 
us where we need to be, if you, as a CalPERS representative 
expressed to the board of a company that you find 
dissatisfaction with their practices?
    Ms. Wood. We own 7,000 companies worldwide, and let me say 
that we--it would be virtually impossible to engage all of them 
to find out the kind of detail we would need, in order to 
withhold a vote in an extreme circumstance.
    Mr. Baker. Thank you. My time has long expired. I have been 
given this order for recognition. Mr. Sherman?
    Mr. Sherman. Thank you. I will try to use my 5 minutes the 
best way I can. I am surprised, first, that these hearings are 
focusing exclusively on executive compensation. We ought to be 
doing more to give investors the information they need, and 
that information needs to be definitive and audited and, in 
some cases, industry specific.
    And I will use these hearings as a chance to once again say 
that we need a lot more information than we are getting in the 
financial statements which, after all, only include the 
information thought relevant by investors over 150 years ago. 
The income statement, the balance sheet are the same documents 
as the horse and buggy era. Oh, we've got a funds flow 
statement, but that's just the same information shuffled 
differently.
    We need to know what the backlog is of a major 
manufacturer, what the employee turnover rate is, what the same 
store sales are, month after month or year after year, from a 
major retailer. And we need a system in which these and many 
other terms have a specific, clear, universal definition, that 
they are reported periodically, and that that information is 
audited.
    But since all we are talking about here is executive 
compensation, let me say that we have to get away from this 
bizarre cult of the CEO. To say that whether the Miami Heat win 
the playoffs depends upon Shaq is mostly true. To say that 
whether a Buick works depends to the same degree on the 
chairman of General Motors is to ignore the hard work, 
dedication, and skill of tens of hundreds of thousands of GM 
employees.
    It is simply absurd to say that the whole up or down in a 
company's stock is dependent upon the CEO, and that a huge 
share of that up of any increase should go to the CEO.
    We shouldn't be looking at just the fluctuation in the rate 
of pay of CEO's, it does go up or down. But we should note--and 
this is similar to what the third witness had to say, a little 
differently--that for the top 100 U.S. companies, it's 170 
times the average worker. Now, if you have--go to smaller 
companies, you get a somewhat smaller number. But compare that 
to Britain, where it's 22 times, Japan, where it's 11 times, 
the fact that it may fluctuate from 170 up to 190 and down to 
150 masks the overall, which is that we pay our CEO's rather 
well.
    This is--those who question this pay, though, give us this 
relatively absurd pay-for-performance idea. Sounds great. But 
look at what that does to how we run our companies. We are now 
going to say, ``Produce the way Shaq does. It's one series, 
seven games. There is no tomorrow, Shaq.'' We want to say that 
to our CEO's? Do we want to say it's all about one quarter, or 
at most, one season? We should say that to our basketball 
teams; I'm not sure that that's the message we want to get 
across.
    I would rather have a board of directors look at how the 
CEO is performing. Maybe he is doing a great job and they're in 
a bad industry. You know, if you're running a gold mining 
company these days, you could be dumber than a pound of gold 
and you would still be counted as a great CEO. It's absolutely 
absurd to have a formula-driven--short-term formula-driven--pay 
package for CEO's.
    But in order to have the board of directors determine that 
compensation, wouldn't it be nice if we had democracy? Tom may 
have called it, what, excessive democracy. What about a 
situation--now, look at the situation now. You can't run for 
the board of directors unless you're nominated by the 
nomination committee. I think, if that's a good system, let's 
bring it into politics.
    ``Why in the hell is somebody running against me on the 
November ballot? The committee didn't put his name on the 
ballot.'' If we just had the Sherman for Congress committee 
determine who could be on the ballot, that would be the end of 
excessive democracy in the 27th Congressional District.
    How about a system where it's a lot easier to run and a lot 
easier to get your information into the hands of shareholders? 
How about a situation where the re-election rate for boards of 
directors is at least as low as it is for Members of Congress? 
You know, we get criticized, we get re-elected, what, 96, 97 
percent? Would that the directors only get re-elected 96 
percent of the time. We would have some democracy.
    So I look--and the final point I want to make is Democrats 
have tended to be wary of national standards, particularly, for 
example, in the lending area. If we don't have national 
standards for the protection of minority shareholder rights, 
for the protection of shareholder democracy, then Wyoming and 
Nevada and Delaware can lead a race to the bottom that will go 
lower than the bottom. And we will end up with nothing but a 
take it or leave it approach. If you don't like how the company 
is run, you can't vote for a new board of directors, so you're 
stuck.
    But that means that if you don't like the board of 
directors at General Motors, you have to sell short its 
hundreds of thousands of hard-working employees. How dare you 
turn to the American people and say, ``You can't invest in the 
hard work of a group of 50,000 or 100,000 hard working 
Americans if you don't like the board, and you can't vote one 
way or the other against the board.''
    We need a system of national standards protecting 
shareholder democracy. And if we leave it to each State 
fighting for the right to have the most protection for the 
existing CEO's, then from time to time, companies will change 
their corporate domicile from Nevada to Delaware and back 
again, and--
    Mr. Baker. Your time has expired.
    Mr. Sherman.--we will thereby avoid excessive democracy. I 
apologize for not framing a question for the witnesses, and I 
yield back.
    Mr. Baker. I thank the gentleman.
    Mr. Frank. Would the gentleman yield just for 10 seconds, 
so we don't misquote the witness? The phrase I heard from our 
witness was super-democratize. We were told not to super-
democratize.
    Mr. Sherman. That would be the right phrase, yes.
    Mr. Baker. Ms. Hooley?
    Ms. Hooley. Thank you, Mr. Chairman. I have a question for 
any of the panel members. As we--hopefully, the adoption of new 
rules with more transparency, how is it going to work that it's 
going to be audited? How are we going to know that they really 
are transparent in their figures and their numbers?
    And the second question is, should we even have options for 
the top executives, if that confuses the issue?
    And third, how do we look at--how do we make compensation 
committees not have a conflict of interest? I mean, so often it 
is--even if you say there has to be some separation, it seems 
like there is still a very cozy relationship where, you know, I 
have you over to my house, or I fly your wife in my plane, or 
there seems to be some connection, even if you aren't serving 
on one another's boards.
    So, how do we get some--in the compensation committees, how 
do we get some independence for those committees? Any one of 
the panel members, or all of you. Yes?
    Mr. Rees. I would be happy to respond on those points. 
First, on the question of how can we ensure that proxy 
statement disclosure on executive pay is accurate, the SEC is 
considering in its rulemaking whether the compensation 
discussion and analysis portion of the proxies should be filed 
under Sarbanes-Oxley and certified by company CEO's, or 
furnished, meaning simply provided without that higher 
standard.
    The AFL-CIO strongly believes that the CEO pay disclosure 
should be filed and subject to the higher disclosure standard.
    Secondly, on the question of stock options, we believe that 
companies should be paid using performance shares, actual 
shares of stock, that would only vest meeting a performance 
benchmark, combining the goal of ownership with performance. 
The problem with stock options is that they can be back-dated, 
as we have seen at companies like United Health and two dozen 
other companies that are investigated by the SEC. They can also 
reward share price volatility, which is a measure of 
stockholder risk.
    Lastly, on the question of how can we make compensation 
committees more independent and provide vigorous oversight of 
CEO's, that's why we need, as the Executive Compensation Abuse 
Act has proposed, shareholder approval of executive 
compensation plans as a safeguard for shareholders.
    And then, secondly, as Nell Minow proposed in the earlier 
panel, we need director election reform. We need to require 
that compensation committee directors receive a majority vote, 
and we also need to empower shareholders to be able to nominate 
their own director candidates in what's known as equal access 
to the proxy.
    Ms. Hooley. The rest of you?
    Ms. Wood. Several points. First, on the point of audit, 
this is desperately needed. And the back-dating of stock 
options is a very timely item in the newspaper to remind us 
that the audit of compensation practices is currently quite 
poor.
    And this is--it gets to the heart of, also, why section 404 
of Sarbanes-Oxley is so important. If there was ever an item to 
demonstrate the need for companies to have better financial 
controls and internal controls, this would be the item.
    In terms of stock options, there is a decline in the use of 
stock options, and in preference for restricted shares, 
performance shares, etc. And that has come about as a result of 
the implementation of the stock option expensing. And in 
general, I think this is probably a good thing, but it 
demonstrates that there are many different ways to incent and 
award executives. Stock options is just one way to do it. And 
many companies are finding other methods. And actually, Mr. 
Cook is an expert on that, so I will let him opine on the 
plethora of ways in which boards give money to executives.
    On the conflicts issue, we are very concerned about 
conflicts on comp committees. We think that the standards for 
dependence need to be raised. We think that situations like 
Home Depot, where five of the six comp committee members are 
either sitting or retired CEO's, and the correlation of that to 
oversized pay needs to go away, and that, frankly, investors 
need to have more say in the composition of those committees. 
Absent majority voting, it's not likely that investors will 
ever get that right to really weigh in on directors, 
themselves.
    And I entirely agree with Mr. Rees on director election 
reform. Until we have that, really there is no teeth for 
shareowners in many of these initiatives. Thank you.
    Ms. Hooley. Mr. Cook?
    Mr. Cook. Well, we have had a lot of unanimity among our 
panelists today, let's try and stir things up a little.
    Ms. Hooley. Good. Okay.
    Mr. Cook. You know, Ms. Minow, who is not here now--but if 
she was, I would still say--CEO's don't select the members of 
the compensation committee, not in any committee or board that 
I know of. They are all independent, and they are chosen by the 
nominating committee of the board, without input from the CEO. 
They are independent of the CEO.
    Second, stock options are a great incentive vehicle. They 
are perhaps the greatest derivative instrument ever invented by 
man to align the interests of the employees with the 
shareholders who own the company but do not manage the company.
    Okay, can they be abused? Sure, they can be abused. They 
can be abused by making them too big, and they can be abused by 
back-dating them, which is a--if it isn't illegal, it should 
be. It's an immoral act, it's fraudulent, and it's robbery. 
Okay, that doesn't make you ban them. They have a role in many 
companies' compensation programs, and should be encouraged.
    Now, Mr. Rees's point about the SEC taking the compensation 
committee report, they want to take it away from the 
compensation committee and give it--and make it the 
responsibility of the CEO and the CFO, both of whom are 
excluded from the compensation committee executive sessions. In 
any comp committee that I attend, the CFO is never in there. So 
how can the CFO affirm to the accuracy of the committee's 
report, which won't even be the responsibility of the 
committee?
    If you want to make the committee independent, which we all 
do, let them keep the report under their signature, not under 
the signature of the CEO. Thank you.
    Ms. Hooley. Thank you.
    Mr. Baker. The gentlelady's time has expired. Mr. Frank?
    Mr. Frank. Mr. Cook, under the current practice, how much 
influence does the CEO have over the selection of members--
people to be members of the board?
    Mr. Cook. Sir, in honesty, I don't know. I advise 
compensation committees--
    Mr. Frank. Okay, if you don't know, then we could move on.
    Mr. Cook. I don't--
    Mr. Frank. But here is what I would say, is this. The fact 
that the CEO may not pick the particular members of the 
compensation committee wouldn't impress me if he or she has 
picked the pool from which they come. So, if I picked eight 
people, and three of them are going to be in the compensation 
committee, I don't much care which three it is.
    And I appreciate that you don't know. I will tell you that 
the information we have is that CEO's have a lot of influence 
over who picks the compensation committee. I mean, I am just 
reading about Disney now, when Mike Eisner got people kicked 
off the board.
    So, I think the problem is that while it may be the case 
that the CEO's don't pick which of their directors are the 
members of the compensation committee, they have created the 
pool out of which they come.
    The second question is I agree with options, particularly 
with regard to mid-level and over-level employees and workers, 
though I do want to again say, we were told that if we required 
companies to expense the stock options, the heavens would fall. 
We have done so. I saw heaven last night, it was still up 
there. I think this is one more case of alarmism.
    But here is the question. For the CEO, say that I am a CEO 
and I am making $6 million a year. And I've got a nice driver 
and a car, and I've got a pretty good set of compensations. Why 
in the world does somebody then have to do more to get me to 
align my interests with the company?
    I must say, it seems to me that you're describing a 
character flaw. I am the CEO of a company. I have got pride of 
craft. I really care about this company. I am getting a lot of 
money. Do we really need to then give them stock options in 
addition, to get them to do the job for which they are so 
highly paid?
    Mr. Cook. Well, I will try and answer it quickly. If we 
have a target compensation package of $6 million, let's say, 
that's--
    Mr. Frank. No, I am asking--please don't reframe my 
question. Suppose I've got a salary of ``X'' million, whatever 
it is, why do I need an incentive on top of whatever the salary 
is?
    Mr. Cook. To align your interests with those of the 
shareholders--
    Mr. Frank. So, in other words--
    Mr. Cook.--rising stock prices.
    Mr. Frank. In other words, you are making a stronger 
condemnation of CEO's than any I have heard from some of the 
most radical people. These highly paid influential people are 
not, on their own, going to align their interests with the 
stockholders, unless we give them extra money on top to do 
that. And I am appalled by that.
    I don't know about you, but I don't get an extra amount to 
align my interests with the voters and the taxpayers. The cab 
driver doesn't get an extra amount to get me where I'm trying 
to go. I mean, this notion that you have to bribe these people 
to do the job for which they are paid in the first place 
troubles me.
    I mean, without stock options, if we are paying someone 
several million dollars a year, we can't count on her to 
consider herself aligned with the people who are paying her 
salary?
    Mr. Cook. Stock options are included in the $6 million or 
$7 million--
    Mr. Frank. I'm saying if they are not. Why do you keep 
doing that? I'm saying can you not envision a situation in 
which there is a flat salary of ``X'' million dollars, and that 
should be enough so you don't have to give options to them?
    Mr. Cook. No client of mine, no public company in their 
right mind, would pay their CEO $6 million in salary and let it 
go at that.
    Mr. Frank. Well, I--why do you have to incentivize them to 
do what they're getting paid to do in the first place?
    Mr. Cook. It's called ``align their interest''--
    Mr. Frank. No, why do you have to do that? I know what it's 
called. You're not a dictionary.
    Mr. Cook. Because they're not an owner, they're an 
employee.
    Mr. Frank. Oh, the CEO is just another employee. Well, 
again, you have made the sharpest condemnation of CEO's, that 
the most highly paid and the most powerful people in the 
company have to be incentivized to do their job.
    Let me ask--you're a major investor. I was somewhat 
surprised to have the Business Roundtable tell me that 
shareholders who are dissatisfied have one option, as far as 
he's concerned, which is to sell the stock. As someone who has 
stock in a lot of operations, how would that affect what you 
do? What would--if, every time you were dissatisfied with a 
particular set of corporations, if your only recourse was to 
sell the stock, what effect would that have on your ability to 
produce for your--for the people with whose interests you are 
relying?
    Do you get a lot of options, by the way? Ms. Wood, do you 
get a lot of options?
    Ms. Wood. I have no options.
    Mr. Frank. Well, do you screw your people that you work 
for? Or do you align yourself with them? I mean, are you some 
special kind of person who doesn't need to be paid extra to 
align yourself?
    Ms. Wood. I enjoy working on behalf of the 1.4--
    Mr. Frank. Well, I wish more CEO's were like you. But 
please go ahead.
    Ms. Wood. Your question, I think, is very important. I have 
over 25 years of investment management experience, and a number 
of designations that give me the ability to say that it would 
be against our fiduciary duty to sell those securities and just 
walk away. We would lose our voice, and we would impair the 
returns of the fund.
    Ultimately, that burden would fall on the taxpayers. And as 
I said in my statement, three out of every four dollars of the 
benefits that we pay to our members come from the investment 
returns. They don't come from the taxpayers, they don't come 
from the employees that pay into the system; they come from the 
investment returns. It is our duty to manage that money, and 
that is why we are a permanent owner, and selling stocks as a 
result of these types of situations is not an option.
    Mr. Frank. Thank you. Let me just ask one more, if I could, 
if that's an all--the owners of stock being told, ``If you 
don't like it, sell it,'' what about workers who have 401(k) or 
other plans in which they were--and we may be changing that in 
the future--required to put some of their money into company 
stock?
    Are there workers who are, in effect, sort of captives of 
the company stock? What would their recourse be, if they were 
unhappy with corporate governance? Can everyone sell their 
stock freely, or did they make a free choice to buy it in the 
first place?
    Mr. Rees. Well, the problem is that if I wanted to screen 
the companies that I invested in, based on those that paid 
reasonable compensation, I would have a very difficult time 
finding enough companies to get a diversified portfolio.
    The problem is that this is a systematic problem of 
executive compensation, and that, on average, whether you think 
it's $6 million or $12 million, it's too high. And the 
practices that have resulted in these levels of compensation 
are--need to be reformed. And that's why we need greater 
accountability.
    Mr. Frank. This last question, there was some reference to 
union leaders' pay. How many union leaders get sort of 
incentive pay so they will do their job right? Are you familiar 
with the number?
    Mr. Rees. The--it's an interesting fact that every single 
employee of a union's compensation is disclosed at the 
Department of Labor. And yet, CEO's are arguing over whether 
the top five employees of a company should disclose their 
compensation or not. And if you go to the AFL-CIO's Web site 
at--
    Mr. Frank. But is it common to give them whatever the 
equivalent of options would be? I mean, do they get--
    Mr. Rees. We get no options.
    Mr. Frank. In other words, let me put it this way. If 
you're a union leader, and you sign up more members, do you get 
a percentage of the dues to incentivize you to align yourself 
with the people?
    Mr. Rees. No, we do--
    Mr. Frank. Okay.
    Mr. Rees. We represent working families, because we believe 
it--
    Mr. Frank. Well, I appreciate that. I guess what I am--I 
must say that I am disturbed to be told that there is--if one 
group of American CEO's who peculiarly have to be given extra 
incentive to do their job--and the fact that they are hired and 
highly compensated and highly respected is apparently not 
enough to get them to align themselves with the people they're 
working for. Thank you, Mr. Chairman.
    Mr. Baker. Mr. Miller?
    Mr. Miller. Thank you, Mr. Chairman. Just a couple of 
questions. It's late, and the TV cameras are gone. I think 
we're all tired.
    There have been--there was a lot of discussion earlier 
today in the first panel from the other side of the aisle about 
how those of us who are questioning CEO compensation just do 
not respect adequately the capitalist system, and the wealth 
that's being built. And the example that was being given 
repeatedly was Bill Gates and Microsoft.
    You referred, Mr. Cook, to the CEO as an employee. My 
understanding of the source of Mr. Gates's wealth is the equity 
he owns in Microsoft, not his compensation as the executive of 
Microsoft. Is that correct?
    Mr. Cook. That's correct. Mr. Gates never got a salary, I 
don't think, of more than $500,000 and a bonus of around the 
same amount. I don't think he ever got a stock option in his 
company. He was a founder. When we use the term CEO in these 
discussions, I think we are talking about a professional 
employee who did not found the company, who came in--
    Mr. Miller. So the story of Microsoft and Bill Gates is not 
pertinent to this discussion?
    Mr. Cook. Yes, sir.
    Mr. Miller. That was what I thought, too. A couple of other 
points. In the earlier panel, there was a remarkable difference 
between Ms. Minow, who agreed with a USA Today study of 2004, 
and Mr. Lehner--I got it right this time, I apologize for 
getting it wrong earlier--apparently looking at exactly the 
same documents filed with the SEC by exactly the same people, 
at exactly the same time.
    And Ms. Minow and USA Today concluded that the median 
compensation in 2004 for the CEO's of public corporations was 
$14 million, and Business Roundtable concluded that it was $7 
million. And both of them said, basically, that there were some 
elements of compensation that were kind of hard to value.
    Now, we have talked about the need for transparency, and 
everyone seems to agree with that. But not being able to tell 
whether the compensation is $7 million or $14 million strikes 
me as a pretty big problem with transparency.
    Mr. Cook, is that--do you think that difference is largely 
due to the transparency issues?
    Mr. Cook. No, sir. I don't think it's due to the 
transparency issue at all. I think it's a difference between 
counting option gains when they're realized, versus counting 
the Black Scholes value when they're granted.
    I think--I don't know, because I didn't see it--but I know 
that Ms. Minow at Corporate Library counts realized option 
gains, and that's where they come up with their number. And I 
think that's what the USA Today report should do. I think 
that's a very anomalous thing, because it takes many years of 
grants and lumps them into one year, and it also makes it 
subject to the rising market.
    If we have a good stock market for the rest of this year, 
then the proxy statement next year may show higher increases in 
pay, just because executives chose to exercise their options 
from a long time ago this year.
    Mr. Miller. Well, according to Ms. Minow's study and the 
USA Today study--first of all, that was median. They didn't use 
the average. Ms. Minow said the average for that year, the 
average increase, was not a 1 percent, because there were 27 
outliers that had increases of 1,000 percent.
    But based upon their earlier--it had gone up more between 
2003--than between 2002 and 2003 and 2001 and 2002. And 
immediately after Enron and WorldCom, it slacked back off to 
about 9 percent, and then it went up to a 15 percent increase, 
and then to a 30 percent increase. But increases that are 
substantially above what most Americans are getting is the 
norm, not a 1-year anomaly.
    Mr. Cook. I can explain that. The Corporate Library uses a 
very large database, about 3,000 companies that comprise the 
Russell 3,000, okay? They compute using stock option realized 
gains. And they do compute the median, that's what they focus 
on. They agree with us, that median is better than average.
    The median, under their database, went up 15 percent in 
2003--
    Mr. Miller. Right.
    Mr. Cook.--30 percent in 2004, and 11 percent on their 
preliminary data of 500 companies in 2005. They hadn't 
completed their full research yet. That uses realized option 
gains.
    We had been in a period of rising stock prices since the 
collapse of the tech bubble in 2000 and 2001. That's what is 
showing that up. They have a very large database, and they just 
computed using realized gains. This problem, I think, will 
disappear next year, when the SEC new rules go in requiring 
Black Scholes values, because I think everybody will shift to 
the Black Scholes value.
    Mr. Miller. Okay. One last question; I think the red light 
is about to go on. There has been some discussion about the 
need for an independent--for having compensation committees all 
be independent directors. And I questioned earlier what we mean 
by independent.
    Independent does not mean--tough-minded skeptics, it won't 
mean people who are going to take the CEO by the lapels, and 
challenge them. It means simply people who do not have certain 
legally-defined relationships.
    And the criticism of many, including, I think, Ms. Wood and 
Mr. Rees, is that they are not independent enough. Ms. Wood, do 
you believe that the compensation committees are sufficiently 
independent? And if not, how do we make them more independent? 
How do we make them more--how do we make them live up to their 
duty to the shareholders, to the owners, and not to the CEO's? 
And Mr. Rees, the same question to you, sir.
    Ms. Wood. Well, first of all, many of them reach the 
technical definition of independence. And you know, I mean, it 
is the case that--and I will just use Home Depot as an example. 
You know, there are relationships among the boards of these--
it's been well documented. But they all reach a technical 
definition of independence.
    And let me get to the second part of your question, which 
is how do we create more responsive compensation committees, 
more responsive to the needs of the shareowner, and the voice 
of the shareowner? I think there are a couple of things that 
can be done.
    One is, first of all, for shareowners to use the very blunt 
tool of withholding their vote, which is unfortunate, because 
that's the only tool we have right now.
    Second is to go down the path of the UK model, where 
shareowners get an up or down vote to approve the compensation 
committee report, and as a result, make a statement about the 
compensation of the company.
    And barring that, I think the only other thing is more 
election reform, and more majority vote proposals, such as I 
understand the majority vote proposal passed at Home Depot, for 
example.
    So, it is possible that, you know, if a majority of 
shareowners were to say--were to withhold their vote from a 
compensation committee chair at Home Depot, that next year it's 
very likely, if the majority vote were implemented, that that 
person couldn't be on the board any more, or that person would 
have to submit their resignation to the nominating committee, 
and that that person should get the message that they need to 
lead the board, that they haven't acted on behalf--in the best 
interest of shareowners.
    So there are a couple of things--there are a few things we 
can do, I think, to strengthen the voice of the owners.
    Mr. Frank. Was that a binding vote by Home Depot, or an 
advisory vote? You said a majority vote passed at Home Depot, 
was that binding or advisory?
    Ms. Wood. I believe it was not binding. Am I correct?
    Mr. Rees. That's correct.
    Ms. Wood. Yes.
    Mr. Rees. And if I could just add to your point about 
disclosure, the numbers that are publicized and the numbers 
that are disclosed to shareholders, and the methodologies that 
Mr. Cook was referring to, all of those exclude what is perhaps 
the single biggest component of CEO pay.
    Professor Lucien Bebchuk at Harvard Law School has 
estimated that the typical CEO receives over one-third of their 
total compensation in the form of retirement benefits. CEO's 
are receiving supersized pensions that have preferential terms 
that are not offered to other workers. And I think that's 
unconscionable, particularly at a time when companies are 
terminating their pension plans and returning them back to the 
government through bankruptcy.
    Mr. Frank. So we're aligning their interest with the 
workers once they have retirement? Maybe we're aligning their 
interests with their wives.
    Mr. Rees. Someone made the point that CEO turnover has 
increased over the years to just 4 years in office. And I would 
suggest that may be because we are paying them too much, and 
they have no more reason to work.
    Mr. Frank. They--
    Mr. Rees. They would rather retire to an island in the 
Caribbean, or to a ski slope in Aspen.
    Mr. Baker. And with that word, the gentleman's time has 
expired. Mr. Miller?
    Mr. Miller. Just one last point on the relatively short 
tenure of many CEO's. We have discussed the need for a longer-
term view by CEO's, and at the same time pointed to four-and-a-
half year average tenure, as evidence that they are being held 
accountable.
    In fact, those seem to push us in different directions, 
that if they're going to be judged by a standard that is that 
immediate, and their compensation is based on how they're doing 
right now, it is certainly going in a different direction from 
what Mr. Lehner suggested the Business Roundtable's position 
was, that they needed to be pushed toward a long-term view of 
how the corporation is doing.
    Mr. Baker. And I think, not to raise a new subject, but we 
ought to get away from quarterly earnings reports and talking 
heads impacting Wall Street, saying--
    Mr. Frank. Yes.
    Mr. Baker.--CEO ``X'' didn't meet Wall Street expectations, 
his stock goes in the tank, he gets fired, and it serves no 
one's economic interests.
    Mr. Frank. Or, let me say even worse, when I read in the 
paper that their stock went down because they only met 
expectations.
    Mr. Baker. Yes.
    Mr. Frank. And they're expected to exceed expectations, 
which isn't good English, and certainly isn't good corporate 
governance.
    Mr. Baker. I would even go so far as to say there might be 
people who utilize financial tools to meet expectations or 
exceed them when the economic reality was not the same.
    And so I think we've got a lot of homework here to do, and 
I want to--
    Mr. Miller. Mr. Baker?
    Mr. Baker. Yes.
    Mr. Miller. I can't help but notice that you waited to 
criticize the TV talking heads until after the Bloomberg and 
the--
    Mr. Baker. Oh, I will do it all the time. I have no--
    Mr. Miller.--cameras have left.
    Mr. Baker. I want to thank each of you for your 
participation. We will return, I'm sure, to the subject in 
future meetings. And Mr. Frank?
    Mr. Frank. Yes, I just wanted to particularly express my 
appreciation for waiting. But we've taken this seriously, and 
there were members here, and what you've said is heavy in its 
impact.
    So, we appreciate you being here, and it wasn't wasted 
time, although we apologize for the delay.
    Mr. Baker. Thank you again. Our meeting stands adjourned.
    [Whereupon, at 4:43 p.m., the committee was adjourned.]


                            A P P E N D I X



                              May 25, 2006


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