    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                            EMPOWERING SHAREHOLDERS
                           ON EXECUTIVE COMPENSATION:
                        H.R. 1257, THE SHAREHOLDER VOTE
                         ON EXECUTIVE COMPENSATION ACT

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

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 MARCH 8, 2007

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 110-10

                          U.S. GOVERNMENT PRINTING OFFICE
    35-402 PDF                    WASHINGTON  :  2007
    ---------------------------------------------------------------------
    For sale by the Superintendent of Documents, U.S. Government
    Printing Office Internet:  bookstore.gpo.gov Phone:  toll free (866)
    512-1800; DC area (202) 512-1800 Fax: (202)512-2250 Mail: Stop SSOP,
    Washington, DC 20402-0001

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
    CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
    LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
    NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
    MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
    GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
    JULIA CARSON, Indiana                RON PAUL, Texas
    BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
    GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
    DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
    MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North
    RUBEN HINOJOSA, Texas                    Carolina
    WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
    CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
    JOE BACA, California                 GARY G. MILLER, California
    STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West
    BRAD MILLER, North Carolina              Virginia
    DAVID SCOTT, Georgia                 TOM FEENEY, Florida
    AL GREEN, Texas                      JEB HENSARLING, Texas
    EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
    MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
    GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
    LINCOLN DAVIS, Tennessee             RICK RENZI, Arizona
    ALBIO SIRES, New Jersey              JIM GERLACH, Pennsylvania
    PAUL W. HODES, New Hampshire         STEVAN PEARCE, New Mexico
    KEITH ELLISON, Minnesota             RANDY NEUGEBAUER, Texas
    RON KLEIN, Florida                   TOM PRICE, Georgia
    TIM MAHONEY, Florida                 GEOFF DAVIS, Kentucky
    CHARLES WILSON, Ohio                 PATRICK T. McHENRY, North Carolina
    ED PERLMUTTER, Colorado              JOHN CAMPBELL, California
    CHRISTOPHER S. MURPHY, Connecticut   ADAM PUTNAM, Florida
    JOE DONNELLY, Indiana                MARSHA BLACKBURN, Tennessee
    ROBERT WEXLER, Florida               MICHELE BACHMANN, Minnesota
    JIM MARSHALL, Georgia                PETER J. ROSKAM, Illinois
    DAN BOREN, Oklahoma

            Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        March 8, 2007................................................     1
    Appendix:
        March 8, 2007................................................    59

                                   WITNESSES
                            Thursday, March 8, 2007

    Bebchuk, Lucian A., William J. Friedman and Alicia Townsend
      Friedman Professor of Law, Economics, and Finance, Director of
      the Corporate Governance Program, Harvard Law School...........     8
    Castellani, John J., President, Business Roundtable..............    11
    Davis, Stephen M., Fellow, Yale School of Management, The
      Millstein Center for Corporate Governance and Performance......    14
    Ferlauto, Richard, Director of Pension and Benefit Policy,
      American Federation of State, County and Municipal Employees...     9
    Kaplan, Steven N., Neubauer Family Professor of Entrepeneurship
      and Finance, University of Chicago Graduate School of Business.    15
    Minow, Nell, Editor, The Corporate Library.......................    17

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    60
        Carson, Hon. Julia...........................................    63
        Gillmor, Hon. Paul E.........................................    64
        Bebchuk, Lucian A............................................    65
        Castellani, John J...........................................    90
        Davis, Stephen M.............................................   103
        Ferlauto, Richard............................................   111
        Kaplan, Steven N.............................................   120
        Minow, Nell..................................................   148

                  Additional Material Submitted for the Record

    Frank, Hon. Barney:
        Letter from the California State Teachers' Retirement System
          (CalSTRS)..................................................   151
        Statement submitted by the HR Policy Association.............   154
    Campbell, Hon. John:
        Statement submitted by WorldatWork...........................   160

                            EMPOWERING SHAREHOLDERS
                           ON EXECUTIVE COMPENSATION:
                        H.R. 1257, THE SHAREHOLDER VOTE
                         ON EXECUTIVE COMPENSATION ACT

                                  ----------

                            Thursday, March 8, 2007

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10 a.m., in room
    2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Present: Representatives Frank, Maloney, Watt, Sherman,
    Moore of Kansas, Capuano, McCarthy, Baca, Lynch, Miller of
    North Carolina, Scott, Green, Cleaver, Moore of Wisconsin,
    Davis of Tennessee, Ellison, Klein, Wilson, Perlmutter; Bachus,
    Castle, Paul, Gillmor, Manzullo, Biggert, Capito, Feeney,
    Garrett, Barrett, Pearce, Neugebauer, McHenry, Campbell,
    Bachmann, and Roskam.
        The Chairman. This hearing of the Committee on Financial
    Services will now come to order. The procedures that we worked
    out, the ranking member and myself, are that we will have 10
    minutes on each side for opening statements. The 10 minutes
    will be divided on our side between myself and the gentleman
    from Georgia, Mr. Scott. The 10 minutes on the minority side
    will be divided as the ranking member sees fit. I will begin
    with my statement in a minute.
        This is a hearing on executive compensation, and I will
    begin--I was struck as I came in with a document I was handed
    that says salaries should be set by market forces, not
    government regulation. I agree. And if anyone finds a bill
    where by government regulation we set salaries, call me. I will
    help you stamp it out. I would also try to stamp out absolutely
    misleading, false, and incorrect arguments, but the First
    Amendment intrudes, fortunately. I am a great believer in
    peoples' right to say outrageously inaccurate things. We have
    an example of it here.
        There have been past efforts to have the government set
    salaries. That would be a mistake. What the legislation we are
    discussing today contemplates is enhancing the ability of
    shareholders to vote on the salaries of those they employ. I
    say enhancing, because I do want to make it very clear--this
    was called to my attention by some who have done a lot more
    work in this field than I--that the bill we hope to pass could
    be interpreted as somehow being limiting and preemptive in that
    it might provide one avenue for a vote to the exclusion of
    others. That is definitely not the case, and we will make that
    clear.
        It is often the case when one is legislating that people
    who disagree with a bill, but aren't ready to fully articulate
    their reasons why they disagree with the bill as it exists,
    impute to the bill other things that it does not contain, and
    oppose it on that basis. And now that I'm chairman, I may have
    this generic amendment proposed for every piece of legislation,
    which will say: This bill does not do what this bill does not
    do. That is a more controversial subject than people might
    think.
        We will make it very clear as we legislate that nothing in
    this bill either adds to or subtracts from existing rights of
    shareholders under whatever laws they operate, whatever the
    rules are of those corporations. This is simply an additional
    channel.
        What it says is that the shareholders of a company should
    be allowed to vote on an advisory basis to the board of
    directors on the compensation of the CEO. Years ago, this would
    have presented a difficulty in deciding what it was that would
    be presented to the shareholders. I congratulate Chairman Cox,
    who intervened in the process. Chairman Cox, correctly in my
    judgment, led the Securities and Exchange Commission to set
    rules by which companies have to present compensation to the
    public, including the shareholders.
        Now by the standards that this bill is being judged, that's
    an intervention. He is requiring private corporations and
    boards of directors to do what they otherwise would not have
    done, what presumably some of them didn't want to do, because
    if they wanted to do it, no one was stopping them. So I
    implored Chairman Cox's intervention into this process in a
    procedural way.
        It has also made it easier for us to go forward, because we
    will not have to have controversy about what it is people are
    being asked to vote on; they will be asked to vote on what the
    SEC has proposed. And so what we are left with is this
    proposition. I have listened to a lot of my colleagues talk
    about how well the private market works. I have listened to
    people describe the fact that collective wisdom is often better
    than individual judgment, and that the collective wisdom of
    those who buy stocks and own stocks, as reflected in the stock
    market, is a very good place to make decisions.
        I am puzzled, however, when people who tell me that the
    collective ability of shareholders to make these decisions, and
    that the wisdom that they collectively can bring to this
    process, somehow evaporates when it comes to paying the people
    whom they hire to run companies. I do not understand how people
    who are in so many ways so intelligent collectively become so
    stupid when the question is whether they do or don't agree with
    the table that is presented from the SEC. We will, of course,
    be discussing that further, and I now recognize the gentleman
    from Alabama for as much time as he consumes, and he will
    divide the 10 minutes among his members.
        Mr. Bachus. I thank the chairman. And let me start by
    saying that this is a hearing, and ``hearing'' is what I intend
    to do--to listen, and to try not to come into this hearing with
    any preconceived notions, other than the basic notions I have
    of government and its proper role.
        There is concern among the American people about the level
    of executive pay. That concern is for various reasons expressed
    to me by my constituents. Some of them, obviously, are just
    concerned with the size of executive paychecks, and they're
    just envious. But for every one of those, there are probably
    five or six who at least are showing real--everything from
    disgust to concern. Let me highlight some of their concerns.
    One of their concerns is that a company that's successful, that
    is doing well, that has this level of executive pay, are all
    employees of that company participating in it? You know, are
    employees down the line, not just the top executives, are they
    participating? And if they're not, what does this do to company
    morale? What does this do to their loyalty to the company?
        They should have an expectation that they're participating
    in the success of the company because their efforts are a part
    of that success. They're concerned on occasions that boards and
    CEO's and consultants that either the CEO hires or the board
    hires are sort of all in collusion, and they're all taking care
    of each other, but in the process, the average employee is not
    being taken care of. I think the number of people who work and
    yet do not have health care benefits, they obviously, when they
    see these rich compensation packages, and they're working hard
    every day, maybe for that same corporation, they wonder about
    the equity of it.
        Another concern that we've all seen expressed the widening
    gap between the rich and the poor, and they wonder if this is a
    part of it or this is a driving factor or a contributor to
    that. These inequities, inequalities concern them.
        I have some of those concerns, many of them. But I also
    have another concern. My concern involves when you compare the
    United States with other countries and what their executives
    make, and I certainly think that American companies by and
    large are more successful in competing with those companies.
        But you wonder if we are paying a larger percentage of our
    corporate profits in revenues than these companies, and how is
    it affecting our ability to compete with those companies? When
    we're diverting money away from research, new equipment, job
    training, and recruitment of skilled employees, I wonder if
    that affects us long term?
        Yes, it may--short term, it may not affect the company, but
    long term, in fact, this Congress on any given day, we have
    industries that come to us and say we need a tax break so that
    we can spend money on equipment, or so that we can spend money
    on research or we can spend money on innovation. Or when we say
    something about their profits and someone proposes a tax
    increase, they say wait a minute. Those profits are plowed back
    into research. Those profits are plowed back into exploration
    if it's an oil company. If it's a drug company, they say these
    profits are being turned around, and they're used to develop
    new drugs to save people's lives.
        Well, our concern is that, is this money going into new
    research for new drugs when we see a drug company executive
    retire with a $200 million package?
        Now, having said all that, this distress that there is
    tremendous concern out there, I have an abundance of caution
    because of the government's track record in ``fixing things.''
    I do believe that disclosure and transparency ought to be a
    given, and the SEC, for the first time since 1992, has taken a
    major step in that direction. And now, perhaps for the first
    time, the average shareholder can go to those reports and see
    exactly what that executive is paid. And I believe that, in and
    of itself, may play out and address this in a major way.
        I also applaud companies like Aflac, who have voluntarily
    agreed to let their shareholders participate in these
    decisions.
        I'll close simply by saying, as I said at the beginning of
    the hearing, that I'll continue to listen, and I will listen
    knowing that even if this is a problem, there may not be a
    government solution that makes it any better.
        The Chairman. The gentleman from Georgia is recognized for
    5 minutes.
        Mr. Scott. Thank you very much, Mr. Chairman, and this is
    an extraordinarily important hearing, and a very timely
    hearing. I quite honestly believe that a very critical part of
    our economic foundation as a free enterprise system is at
    stake, and what we do with this very serious and real threat to
    confidence in our system with our stockholders, our investors,
    and the American public.
        Our investor system is a crucible. It is the glue that
    holds our free society together. And that confidence is being
    shaken because of this wide disparity within the pay structure.
    Executives with clearly, quite honestly, obscene pay packages
    of $2-, $3-, or $400 million, when the average rank-and-file
    worker in our system is not making a sufficient amount of money
    to actually provide for his day-to-day care.
        I want to thank Chairman Frank for having the courage and
    the vision to provide transparency in the executive pay
    package, and for giving me a chance to work with him as a lead
    co-sponsor on this important issue.
        Now let me just start out by saying that I want to make it
    clear that I am a capitalist. I graduated from the Wharton
    School of Finance with an MBA. And as many of you know, Wharton
    is the citadel of capitalism. I've been a stockholder ever
    since grade school. But I think that corporate executives
    should certainly be adequately compensated, and especially if
    they perform well. However, I am concerned that executive pay
    has become dangerously outsized when compared both in
    historical pay to CEO's and rank-and-file employees.
        Rank-and-file employees are being left behind in pay. You
    look back over our recent history. As early as the 1960's, it
    was more like 60:1 in ratio. Perhaps the corporate executives
    at the top were making maybe about 60 times as much. Now it's
    hovering in the thousands times as much. This is dangerous. And
    that's why I say that our economic system is being threatened.
        There was a great philosopher, his name was Sir Edmund
    Burke, and Sir Edmund Burke made this profound statement. He
    said these words: ``The only thing necessary for the triumph of
    evil is for good men to do nothing.'' And that's what I see
    this committee--we're a group of good people--trying to do
    something.
        We've had some sterling examples recently from my own home
    State of Georgia of some good people and some good corporations
    who are doing something and providing the leadership and the
    vision. And let me just talk about two of them. Delta Airlines,
    for example. Delta Airlines is probably going to be recognized
    as probably the greatest American business recovery story in
    the history of American business, and they did it because they
    were good people trying to do something to triumph over what
    was wrong.
        Not only did they--they looked very carefully at their pay
    packages. They cut pay up and down the line, and at the head of
    the line of cutting that pay were the top executives, and
    they're rebounding. A great story in Delta.
        Another one is Aflac. Let us commend Aflac for stepping up
    to the plate, and they not only got a hit, they hit a home run,
    because they're setting the curve. And we're going to see other
    companies do the same thing.
        Now this legislation is very simple. It will allow
    shareholders to hold yearly advisory votes on executive
    compensation plans. Further, it would allow an advisory vote on
    so-called golden parachute pay packages when the company is
    going through ownership changes. Both votes are nonbinding.
    However, they are powerful tools for providing transparency and
    accountability to the process.
        This is not extreme. This is a very moderate, common sense
    approach to dealing with a very, very serious issue that is
    threatening the very fabric of our free economic system.
        Again, I thank the chairman for providing the leadership. I
    look forward to the hearing, and I yield back the balance of my
    time.
        The Chairman. I thank the gentleman. And the Chair will now
    recognize the gentleman from Alabama to distribute the
    remaining time. He has 6 minutes left.
        Mr. Bachus. Thank you. I yield 1 minute to the gentleman
    from Delaware, Mr. Castle.
        Mr. Castle. Well, I thank the ranking member a great deal.
    And I agree with the tenor and tone of what we are doing here,
    although I'm a little concerned about the legislation. I think
    we do need transparency. I think we need total disclosure in
    terms of executive packages. I believe that the SEC has
    actually done a good job in this, and perhaps that's where it
    should happen. Their new disclosure rules, I think, speak to
    it.
        As a stockholder and a woebegone investor myself, I will
    tell you that I'm not sure I'm really capable of judging fair
    compensation packages, and I worry about that a little bit. I
    worry about those mailings you get from companies and whether
    you really read them or pay attention to them and whether
    that's a good way to do it or not. But my mind is open, and I
    will listen to the chairman on that.
        My greatest concern, though, is with terminated CEO
    packages. I don't know if they fall within the bounds of the
    agreement or not. They seem to exceed it, as far as I can see.
    That's what gets in the newspaper and that's what we read a lot
    about. All of a sudden you have a CEO who's getting a $10
    million, or $20 million, or $30 million package to walk away
    from a business which has essentially failed. It's sort of like
    a short stop who hits 240 and leaves his team and goes to
    another team and they both seem to get $10- or $20 million is
    the best comparison I can give.
        And I'm not at all sure that we have a proper telescope as
    far as that is concerned, understanding exactly what is
    happening with the failed executives in terms of some of those
    termination packages. I don't think paying to get rid of
    somebody is something we should do if that person has not
    actually succeeded.
        So I'm pleased with the panel. I'm pleased to listen to the
    testimony, and I have an open mind to the legislation, but
    we're certainly approaching a problem which I think needs to be
    addressed. I thank Mr. Bachus for yielding me the time, and I
    yield back.
        Mr. Bachus. I yield 3 minutes to the gentleman from New
    Jersey, Mr. Garrett.
        Mr. Garrett. Thank you, Mr. Chairman. And I'd also like to
    thank the witnesses for your testimony that you're about to
    give. I commend the chairman also for having this important
    discussion today, and I would like to begin my comments with
    just one small observation. It was just about a week ago, I
    guess last week, during this committee's markup of the views
    and estimates that our esteemed chairman had such great things
    to say about Chairman Cox and also the SEC.
        But in regards to members' concerns from this side of the
    aisle about Sarbanes-Oxley, he indicated how we all just needed
    to be patient and let the SEC do its job, how we needed to wait
    and see if the new regulations would fix the problem.
    Interestingly, the SEC has now just recently issued new
    disclosure regulations on executive compensation. However,
    these new rules have not yet had the opportunity to bear any
    results yet.
        So without giving any time to see if these new SEC rules
    will work, this committee now is rushing ahead to consider
    legislation to address the problem. You know, I might be more
    inclined to address executive compensation legislatively if our
    chairman would be inclined to consider Sarbanes-Oxley reform
    legislation that I have introduced just recently as well.
        But to address the issue of executive compensation, I do
    have a variety of concerns with legislating in this area. For
    instance, this legislation would now allow shareholders to take
    a nonbinding vote on executive pay. I'm really not sure why our
    friends from across the aisle have this fascination with
    nonbinding votes, but this appears to be a topic coming up
    quite frequently during their brief tenure in the majority.
        I'm also concerned with the road that this legislation
    might lead us down. To use an oft-used analogy, this appears to
    me to be possibly letting the camel's nose under the tent. And
    I just wonder where we might go next. Might the chairman
    support the idea, for example, of allowing Boston Red Sox fans
    the right to have a nonbinding vote on whether or not the Red
    Sox management should spend over $100 million on a Japanese
    pitcher who has never even thrown a pitch in the major leagues.
        You know, when you think about it, with the exorbitant
    ticket prices for baseball games these days and the fact that
    lower- and middle-income families are basically getting
    squeezed out of the ballpark, this may be something that this
    committee should be looking into next.
        I believe that executive compensation is something that
    this committee can consider and monitor, but I do believe also
    that the SEC's new rules should be given a chance to be looked
    at and given a chance to work.
        So, thank you, Mr. Chairman, and I yield back.
        Mr. Bachus. Thank you. I yield the remaining 2 minutes to
    the gentleman from Texas, Dr. Paul.
        Dr. Paul. I thank the gentleman for yielding. I was pleased
    to hear the chairman of the committee say that he is in favor
    of market forces setting salaries, so I think this is a good
    step in the right direction in debating this issue.
        As many of you know, I happen to advocate the position that
    all social and economic relationships should be voluntary, and
    I think where the fallacy comes here with the regulations that
    we're talking about is the interference with the voluntary
    contract between stockholders and management. So, therefore, it
    is a violation of a free market, because in the free market,
    what would happen is if salaries got out of whack, the
    shareholders have an option. They can sell their shares. That's
    the voluntary arrangement that they have, rather than
    individuals coming in and saying that we can regulate a fair
    system.
        And the one other factor that I think we tend to forget
    about is the inflationary factor. Salaries become outrageous
    because governments create credit loosely, and it gravitates to
    certain areas, so you will have bubbles form. You have bubbles
    form on Wall Street, you have housing bubbles form. They make
    too much money when they're selling too many houses.
        Then you have government interfering in places like
    economics or education. So, we pump a lot of money into
    education, teachers' salaries don't go up, but the bureaucrats'
    salaries go up.
        Once we interfere in the marketplace, salaries will go up,
    and we can't control where the credit goes. So unless we deal
    with that, we can't deal with the obscene salaries and bonuses
    given to one company on Wall Street of $16.5 billion. I
    consider that obscene, but it's not because we lack
    interference in the marketplace. We have too much interference
    by government through monetary policy, so I am not very
    optimistic that regulating and abusing the privilege of
    voluntary economic arrangements is any better than interfering
    in social arrangements when we'd like to make people act better
    and behave better.
        My position is very clear that we should be advocating
    volunteerism both economically and socially. I think we would
    all be a lot better off.
        I yield back.
        The Chairman. The time for opening statements agreed upon
    has expired, and we will now listen to the witnesses. They are
    seated in order, which I believe is random. And that's probably
    the best way for us to proceed, and we will begin with
    Professor Lucian Bebchuk of Harvard Law School, who has done a
    lot of work on this subject. Professor Bebchuk, please.

     STATEMENT OF PROFESSOR LUCIAN A. BEBCHUK, WILLIAM J. FRIEDMAN
     AND ALICIA TOWNSEND FRIEDMAN PROFESSOR OF LAW, ECONOMICS, AND
    FINANCE, DIRECTOR OF THE CORPORATE GOVERNANCE PROGRAM, HARVARD
                               LAW SCHOOL

        Mr. Bebchuk. Mr. Chairman and distinguished members of the
    committee, thank you very much for inviting me to testify
    today.
        During the 2006 proxy season, roughly one quarter of the
    proposal that was submitted by shareholders focused on
    executive pay. Why does pay attract so much attention from
    investors? To begin with, the amounts that are paid are large,
    and they can have a large effect on investors' bottom line.
        In a study that Yaniv Grinstein and I did, we estimated
    that the aggregate compensation that was paid by public firms
    to their top five executives during the period 1993 to 2003,
    added up to about $350 billion. Adding the amounts that have
    been paid since then, aggregate compensation during 1993 to
    2006 is probably on the order of half a trillion dollars.
        Furthermore, and perhaps more importantly, closing pay
    arrangements have costs that go far beyond excess amounts that
    are paid to executives. And the reason is that such flows can
    dilute and distort the incentives of executives. To illustrate,
    let me just quickly mention several examples of practices that
    are likely to have adverse effect on incentives.
        First, firms often provide executives that are pushed out
    for failure with a soft landing.
        Second, firms don't use claw-back provisions to recoup
    compensation that is paid on the basis of results that are
    subsequently found to be incorrect.
        Third, equity compensation and bonus compensation are
    commonly designed in a way that rewards executives for market-
    wide and industry-wide movements that do not reflect
    executives' own performance.
        Fourth, firms commonly do not prohibit executives from
    engaging in hedging or derivative transactions that can undo
    the incentives that equity compensation is supposed to produce.
    And there are more examples that one could refer to.
        Another concern arises from the fact that public companies
    have provided compensation consistently in ways that made the
    amount of compensation, and the extent to which compensation
    was linked to performance, not transparent to investors. And
    although the recent disclosure reform is going to make
    compensation more transparent in the future, past efforts by
    companies to camouflage pay do raise significant concerns about
    how companies have been setting pay arrangements.
        And there is backdating as well. In a recent study that
    Grinstein and Payer and I co-authored, we estimate that about
    12 percent of public firms provided one or more grants at the
    lowest price of the month due to opportunistic timing. And
    although increased regulatory attention and investor attention
    would likely curtail such timing in the future, the widespread
    use of such timing in the past again raises significant
    concerns about the internal pay-setting processes that we have.
        Now as we all know, recognizing the intensity of investor
    concern about executive pay, the SEC adopted expanded
    disclosure requirements. But although those disclosure
    requirements are going to provide a lot of information to the
    marketplace, they cannot by themselves improve pay
    arrangements. For disclosures to improve matters, investors
    must have the ability to use the information that is going to
    be provided to them to influence the setting of pay
    arrangements. And this is where introducing advisory votes is
    going to help.
        Steve Davis is going to discuss later how advisory votes
    have had a beneficial effect in the United Kingdom, but I would
    like to stress that putting advisory votes aside, shareholders
    have much weaker rights in the United States than they have in
    the United Kingdom. And given the weakness of shareholder
    rights in the United States, providing shareholders with some
    tools to influence companies' pay decisions is especially
    needed.
        There are members of this panel who have much more
    favorable assessments of executive compensation than I do. But
    I want to stress that this committee does not have to make a
    choice between the panelists' alternative accounts. What
    matters most is not how Steve Kaplan or John Castellani or
    Lucian Bebchuk grade the performance of companies on this
    important subject, but how investors view this issue. There is
    no question that many investors have serious and legitimate
    concerns.
        And the board of a given company in the marketplace simply
    cannot infer from our analysis here how the shareholders of the
    company view the company's pay arrangement.
        The Chairman. Professor Bebchuk, we'll have to have you sum
    up fairly quickly.
        Mr. Bebchuk. Sure. So advisory votes are going to make
    shareholders' views clear, and that's what the issue is about,
    not choosing among competing accounts.
        [The prepared statement of Professor Bebchuk can be found
    on page 65 of the appendix.]
        The Chairman. Thank you, Professor. Next Mr. Richard
    Ferlauto, who is the director of pension and benefit policy for
    the American Federation of State, County and Municipal
    Employees. Mr. Ferlauto.

    STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF PENSION AND BENEFIT
      POLICY, AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL
                               EMPLOYEES

        Mr. Ferlauto. Thank you, Mr. Chairman, and members of the
    committee. I'm very pleased to be here, and what I'd like to do
    is orally summarize fairly extensive legislation.
        The Chairman. The Chair has been delinquent in not saying
    that without objection, all of your written statements and any
    supporting material, graphs, cartoons of members, or anything
    else you wish to put in, will be entered into the record.
        Mr. Ferlauto. Thank you very much, Mr. Chairman. Let me
    talk about AFSCME for a minute. AFSCME has 1.4 million members
    who work in public service. They have retirement benefits of
    assets over $1 trillion that are invested in the public
    marketplace.
        This investment through the public pension systems that
    they are involved in, because of the size of the investments
    and the long-term time horizons they have of 20 or 30 or more
    years that are required to pay retirement benefits over time,
    means that they have a long view. These investments are broadly
    diversified in their index. It means that we don't have the
    opportunity to buy and sell. Fiduciary duty requires that we
    hold companies for the long term and that the market
    opportunity of the Wall Street walk is not one that our large
    investment firms have an opportunity to engage with.
        That means for many years, we've been highly concerned
    about executive pay and the distortion that executive pay
    creates in the marketplace. Spiraling pay not based on
    performance at all tends to provide an incentive to manipulate
    earnings, to obfuscate financials, and unfortunately, in many
    cases, to cook the books.
        But probably the worst incentive is an incentive towards
    short termism, where a market does not make appropriate
    decisions regarding capital investment because the wrong
    incentives are in place for highly paid CEO's to cash out
    rather than do what's good for the long-term shareholders.
        Shareholders, these institutional shareholders, have tried
    for years to do something about this, and we've been rebuffed
    at every turn. Sure, we congratulate Chairman Cox for the new
    SEC disclosure rules, but those disclosure rules are necessary
    and not sufficient to do something about unaligned pay.
        The SRO's, the self-regulatory organizations, the
    exchanges, have the power to require an advisory vote on pay.
    But the conflicted regulatory scheme where they try to self-
    regulate means that we hold out little hope that the SRO's will
    take that power and use it to shareholder advantage.
        And finally, shareholders are actually disempowered
    compared to shareholder rights in much of the world. That is,
    we only have very blunt instruments of withholding votes from
    directors who aren't aligned with shareholders, and do not have
    effective tools to engage companies in a long-term conversation
    about what appropriate executive compensation means.
        The AFSCME fund began to look for solutions last year, and
    we looked at the United Kingdom and other European experience
    in this area, and we found that the advisory vote is a powerful
    and important tool that helps improve market.
        Last year, the AFSCME pension fund submitted seven
    shareholder resolutions, the first time ever that such
    resolutions appeared on shareholder ballots in the United
    States. Those resolutions got over 40 percent of a vote on
    average, the highest average vote of any first-time resolution
    ever, according to the large proxy advisory firm, ISS.
        Following that, this year, AFSCME and a broad network of
    institutional investors, public funds, international funds, and
    mutual funds, have filed over 60 of these proposals that will
    appear on company ballots this year.
        Those proposals led to two things. It has led to the
    creation of a working group of major companies and major
    investors to look at how an advisory vote might be applied in
    this country, and they've also led to the Aflac early adopter
    that a number of people talked about earlier.
        We find a number of things, that when an advisory vote is
    in effect, based on what we've learned from the United Kingdom
    and other countries, first of all, consultation with
    shareholders increases. It's early, it's intense, and it's
    detailed. Second, when you have consultations in place,
    performance becomes much better aligned with long-term
    shareholder value initiatives. When long-term shareholder value
    and performance alignment is in place, it means that there are
    incentives for the company to invest in and to execute its
    strategic plan. That's good for everyone.
        And finally, we find that disclosure many times actually
    can spiral up pay, as a CEO wants to be better than his or her
    payers, so that an advisory vote actually is an antidote to the
    tendency of disclosure leading to a ramp-up in pay.
        Finally, what I would like to say is that an advisory vote
    really is not effective unless it's paired with an increased
    shareholder right at the ballot box, and that is the ability
    for shareholders to replace and nominate directors who fail to
    be responsive to the advisory vote. Without proxy access, an
    advisory vote just becomes another moot voice for shareholders.
        We need both. We need to enjoy all the benefits that other
    international markets have through an advisory vote. We're
    actually falling behind the competitiveness of the European
    markets because they have this particular requirement, and that
    needs to be paired with the other international requirement or
    ability that shareholders have, that is to use their rights as
    owners of corporations to replace directors that have failed
    them on executive pay and other similar issues.
        Thank you very much, Mr. Chairman, and members of the
    committee. I'd be happy to answer questions.
        [The prepared statement of Mr. Ferlauto can be found on
    page 111 of the appendix.]
        The Chairman. Thank you, Mr. Ferlauto. And next, we're glad
    to welcome John Castellani, who has been a very constructive
    participant with us in a whole range of issues, the CFIUS bill,
    for example, and we welcome Mr. Castellani today. Please go
    ahead.

    STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE

        Mr. Castellani. Thank you, Chairman Frank, Ranking Member
    Bachus, and members of the committee. I'm pleased to be here
    today to provide you with the perspective of the Business
    Roundtable, who are 160 chief executive officers of America's
    leading companies.
        To put it in perspective, the Business Roundtable companies
    represent more than 10 million employees in the United States,
    nearly one-third of the value of the U.S. stock markets, and
    over 40 percent of all corporate income taxes that are paid.
    Collectively, they have returned $112 billion in dividends to
    the shareholders and to the economy in 2005.
        Our companies represent a substantial share of the U.S.
    economy, and as such, we have a vested interest in ensuring
    that the United States is able to compete in the worldwide
    marketplace. We are committed to promoting public polices that
    will foster economic growth, create American jobs, enhance
    investor confidence, and bring long-term value to all
    shareholders, including the millions of Americans who are
    invested in our markets through their retirement plans.
        The Roundtable has long supported efforts to improve our
    systems of corporate governance, and embed ethics within our
    companies. In 2002, we issued our Principles of Corporate
    Governance which provided the foundation for many of the ideas
    reflected in the Sarbanes-Oxley Act passed that same year.
    We've supported the law from the beginning, and we've worked
    closely with the SEC to improve upon the law while maintaining
    its spirit throughout implementation.
        In 2003, we issued our Principles of Executive
    Compensation, which I'll discuss in a moment. And in 2004, we
    created the Institute for Corporate Ethics, which conducts
    ethics research and helps to embed ethics training in the
    curricula of the leading U.S. business schools.
        In addition to the changes required by law, companies have
    responded to shareholders by moving toward more independent
    boards. According to our own 2006 survey, 85 percent of our
    member company boards are composed of at least 80 percent
    independent directors. Directors are also more active, as they
    should be. In the Roundtable survey, 75 percent of our
    companies reported that their independent directors meet in
    executive session without the presence of management at every
    meeting.
        In addition, many companies have made the voluntary change
    for their director election process, shifting to the system of
    majority voting. And currently, 52 percent of the S&P 500 has
    adopted some form of majority voting.
        Together these reforms have been meaningful, and the
    Business Roundtable remains committed to working with
    shareholders, this committee, other policy makers and the
    public to strengthen the role of corporate governance.
        Every Business Roundtable member understands that all eyes
    remain on corporate America today to ensure that the businesses
    are run with the highest ethical standards. And we recognize
    that the spotlight is perhaps brightest when it comes to the
    issues of compensation.
        Our own Principles of Executive Compensation set guidelines
    for independent boards to determine compensation for executives
    through a process that emphasizes transparency and
    accountability. Those principles underscore that the executives
    should be paid for results, and that compensation should be
    closely aligned with the long-term interest of shareholders and
    corporate goals and strategies.
        We believe that the best mechanism to set executive
    compensation and to hold CEO's accountable for company
    performance are those independent members of the companies'
    board of directors acting upon the recommendation of the
    compensation committees. These committees are subject to strict
    independence requirements, and the directors are accountable to
    all shareholders.
        We've supported the new rule that has been cited here at
    the SEC to make it easier for investors to understand exactly
    what executives are being paid. Increased transparency will
    benefit the marketplace and will give investors more
    information to make decisions.
        In addressing the question of whether or not additional
    reforms are needed in this area, and in particular whether
    shareholders should approve executive compensation decisions,
    it's vital to examine the existing structure of corporations, a
    structure that has worked very well throughout history.
        Corporations are, at their core, private entities. They are
    designed to create value for shareholders. Directors, who are
    shareholders themselves, have a legal obligation to act in the
    best interests of all shareholders and to not represent
    particular constituencies. While cooperation and consensus is
    critical for a board to function, effective directors maintain
    an attitude of constructive skepticism, ask incisive questions,
    and require honest answers.
        The role of the shareholders is equally important. They
    provide capital, elect directors, approve mergers and other
    significant actions, and they are the owners of the
    corporation. However, corporations were never designed to be
    democracies, and their decision-making process was not
    established to be run like a New England town hall meeting.
    While shareholders own the corporation, they don't run it. And
    unlike the management, they are not liable if something goes
    wrong. Management has both the responsibility and the risk, and
    that is the key to our discussion.
        Shareholders have different motivations and goals. Some
    seek immediate gain in their investment, and others look for
    long-term growth. They come in all sizes. Investment in
    corporations is voluntary and shareholders are free to invest
    elsewhere for any reason.
        The basic structure of American companies and shareholders
    has kept our capital markets viable for generations, and that's
    why we're concerned about the underlying issues in the
    consideration of this proposal.
        We think that any advisory vote could seriously erode
    critical board responsibility, and we think it runs the risk of
    turning the process into a process that could disrupt the
    board's ability to act in a cohesive way to make important
    decisions quickly to enhance shareholder value.
        There are also irregularities in the current voting process
    that have been identified that present problems. Hedge funds
    use short-term securities for empty voting. We have securities
    that are held by many shareholders that are voted by
    unregulated proxy advisory service, and indeed we do not have
    the ability to communicate with a large portion of shareholders
    whose shares are held in Street name.
        We want the boards to be able to communicate with all
    shareholders. We want boards to spend less time in the politics
    of elections and more time in planning product development,
    oversight and forwarding the value of the company.
        I would argue, Mr. Chairman, that the proposal that you've
    brought forward has the potential of being analogous to this
    body, the U.S. Congress, being asked to have a referendum on
    every decision it makes. Adversarial shareholder groups with
    divergent interests could form coalitions in an effort to
    influence the proxy outcomes and then dictate policies and
    operational decisions to boards and to the management. It is
    not a process that we think enhances shareholder wealth.
        There are problems with the U.K. system that I would be
    happy to go into in the questions, but I would conclude by
    saying that our boards are more independent than they have been
    in the past. They are working hard to align compensation with
    results. We must give our boards, whom we elect, the ability to
    be able to act quickly and to act in the interest of all
    shareholders.
        Thank you.
        [The prepared statement of Mr. Castellani can be found on
    page 90 of the appenidx.]
        The Chairman. Thank you, very much. And now, Dr. Davis, we
    very much appreciate your accommodating us, and please go
    ahead. I say that because we invited Dr. Davis on fairly short
    notice, and we appreciate his being available. Thank you.

         STATEMENT OF STEPHEN M. DAVIS, FELLOW, YALE SCHOOL OF
     MANAGEMENT, THE MILLSTEIN CENTER FOR CORPORATE GOVERNANCE AND
                              PERFORMANCE

        Mr. Davis. Thank you, Mr. Chairman, Ranking Member Bachus,
    and distinguished members. I appreciate the opportunity to
    appear. As the market has addressed the issue of advisory
    votes, there have been naturally important questions raised
    about the one market where there has been a track record of use
    of this process, and that's Britain. And as a result, the
    Millstein Center at Yale, the School of Management, decided to
    put together a whitepaper which is titled, ``Does Say on Pay
    Work? Lessons on Making CEO Compensation Accountable.''
        We'll be presenting that in the spring, but it's--what I'm
    pleased to do today is to give you a sense of what the
    conclusions are of that report, having just completed a very
    intense set of research, including roundtables in Britain
    talking to directors, shareholders, and a variety of players.
        As you can imagine, there is a lot of puzzlement about how
    the system works. But can I present to you and be clear what
    our conclusion is, having looked at the U.K. system, that
    advisory votes on executive pay policies are rational, they're
    timely, they're road tested, and they're practical for use in
    the United States.
        In fact, one surprise that I think we encountered was how
    uniform among all market players, including directors,
    corporations, and investors in Britain, the feeling was that
    advisory votes have proven to be an important plus to the U.K.
    market.
        What I'll do is just summarize some of the main points that
    we have discovered. One is that votes on compensation resulted
    in a dramatic increase in dialogue between corporations and
    investors. It, in effect, transformed the way compensation
    policies are constructed. We now have evidence that companies
    and shareholders that never used to talk to each other over
    these important issues are now in a constructive, not a
    hostile, but a constructive and regular annual dialogue on this
    important issue.
        The second thing that is evident from the United Kingdom is
    that while advisory votes have not proven to be a panacea in
    curbing the quantum increases in pay, they have had a dramatic
    increase--or a dramatic effect on the way plans are framed and
    structured. The architecture of compensation is different today
    than it was before advisory votes. And the way they are
    different is in one principal effect, and that is that pay is
    tied much more strictly to performance, to real performance
    from the company.
        And the latest information that I'd refer to you is a
    recent Deloitte report that goes point by point showing how
    these changes have occurred.
        A third point that we came across is that the U.K.
    government, while they originally put this in place to fix the
    political problem of what they call fat cat pay, now sees
    advisory votes as critical to the competitive advantage of
    Britain as a marketplace and London as a capital market. In
    other words, what they argue is that if you create a level
    playing field for shareholders, it's a winner for the capital
    market. It puts British companies in a better position because
    it makes them--keeps them in fighting trim when you have
    shareholders looking out for them.
        The fourth point was that corporate boards have had to
    change the way they operate. They used to--the compensation
    committees used to have to persuade fellow board members about
    compensation. Now they have to persuade the broad shareholder
    base. It means stronger boards and stronger compensation
    committees, not weaker ones.
        Another point was that institutional investors have stepped
    up to the plate and done far more work in looking at these pay
    packages and expressing their views about what makes sense for
    a company and for their own long-term value.
        So if I could conclude with this general comment, advisory
    votes on pay are best introduced on a legislative basis. It's
    light touch legislation. It's actually gets to, as Mr. Scott, I
    think, said earlier, you know, we are all capitalists here, and
    what this really represents is giving shareholders, giving the
    owners the tools that they need to act as real owners of a
    corporation.
        Thank you very much, Mr. Chairman.
        [The prepared statement of Dr. Davis can be found on page
    103 of the appendix.]
        The Chairman. Thank you. And now, Dr. Kaplan, who's done a
    great deal of work on this, and we appreciate your sharing it
    with us. Please go ahead.

      STATEMENT OF STEVEN N. KAPLAN, NEUBAUER FAMILY PROFESSOR OF
      ENTREPENEURSHIP AND FINANCE, UNIVERSITY OF CHICAGO GRADUATE
                           SCHOOL OF BUSINESS

        Mr. Kaplan. Thank you, very much. Good morning, Chairman
    Frank, Ranking Member Bachus, and members of the committee.
        In the United States today, as you've heard, public company
    CEO's are routinely criticized for setting their pay and being
    overpaid. Boards are criticized for not paying for performance
    and for being too friendly to CEO's.
        I believe the critics are largely wrong. While CEO pay
    practices are not perfect, they are nowhere near broken. The
    typical CEO is, arguably, not overpaid. The typical CEO is paid
    for performance.
        Boards do fire CEO's for poor performance, and public
    company CEO's are leaving to run private equity-funded
    companies usually for higher pay. The proposed bill will
    generate little, if any, benefit, but will impose costs
    relative to the current system.
        So first, I want to put the U.S. economy in context. Over
    the last 15 years, the period in which CEO pay has been
    criticized, the U.S. economy and shareholders have done very
    well both absolutely and relative to other countries, including
    Europe. And many have benefitted from that good performance.
        Second, are CEO's overpaid today? While there have been pay
    abuses, the answer for the typical CEO is likely ``no.''
    Average CEO pay peaked in 2000 and has declined since. While
    CEO pay has increased since the early 1990's, and is quite
    high, other fortunate groups have increased their pay by at
    least as much.
        For example, hedge fund, private equity, and venture
    capital investors increased their fees by over 7 times since
    1994, and those increases have translated into very high pay.
        In 2005, the top 20 hedge fund managers earned more than
    all 500 CEO's in the S&P 500 put together. Pro athletes,
    investment bankers, and even lawyers also have benefitted
    greatly.
        So while CEO's earn a lot, they are not unique, and rising
    CEO pay appears to be part of not the cause of the increase in
    inequality that we've seen recently. The pay of the other
    groups has been driven by market forces, and this seems likely
    to be true for CEO's as well.
        Third, critics, and they're here, argue CEO's are not paid
    for stock performance, and that is just not true. The key
    question is whether CEO's who perform better earn more in
    actual pay, and the answer is ``yes.''
        CEO's in the top 10 percent of actual pay outperformed
    their industries by more than 90 percent in the previous 5
    years. CEO's in the lowest 10 percent of actual pay
    underperformed by almost 40 percent. So the typical CEO is paid
    for performance.
        Fourth, are boards too friendly to their CEO's? The
    evidence again suggests not. CEO tenures are shorter than
    they've been since at least 1970, and CEO turnover is strongly
    related to poor firm stock performance, again, at least as much
    as in previous periods.
        Fifth, and I hesitate to say this, good CEO's may even be
    underpaid at public companies. Last year a record volume of
    private equity transactions occurred.
        Andrew Sorkin of the New York Times reported, ``Chief
    executives are being lured by private equity-owned businesses
    which offer higher pay.'' I should add that private equity
    investors have strong incentives not to overpay CEO's, because
    such overpayment would reduce their profits.
        In other words, the regulation and criticism of CEO's have
    costs. Good CEO's can and do quit public companies. That leaves
    the U.S. economy with less transparency and leaves public
    companies with less able CEO's.
        Given that, what do I make of the proposed bill? Well,
    under current rules, as Mr. Ferlauto confirmed, when
    shareholders believe a company has CEO pay problems,
    shareholders can generate a vote. They're doing that.
        They can also generate adverse publicity for companies that
    resist, and the new SEC disclosure rules will make any
    remaining pay problems more transparent.
        On the other hand, when a company doesn't have any
    problems, nothing happens today, so the market is working under
    current rules.
        Under the proposed bill, companies with problems would have
    a vote and be identified. That's what happens today. However,
    companies with no problems will be forced to have a vote as
    well, and that is likely to impose unnecessary costs on good
    companies.
        In summary, the current system is not broken. The bill
    doesn't have appreciable benefits relative to the current
    system.
        The bill will impose costs, and on the margin the bill will
    further reduce the attractiveness of being a public company
    CEO, particularly for good CEO's, and that is not good for U.S.
    companies. It's not good for U.S. workers, and it's not good
    for the U.S. economy. So thank you for inviting me to present
    my views.
        [The prepared statement of Mr. Kaplan can be found on page
    120 of the appendix.]
        The Chairman. Finally, someone who has been a long-time
    worker in this area and has been, again, one who is quite
    willing to share the work of her and her organization with us,
    Nell Minow from The Corporate Library.

         STATEMENT OF NELL MINOW, EDITOR, THE CORPORATE LIBRARY

        Ms. Minow. Thank you very much, Mr. Chairman, Mr. Bachus,
    and members of the committee. It's an honor to be invited back
    to speak to you about this vitally important subject for the
    credibility of our capital markets.
        I will concede that Wharton is the citadel of capitalism,
    in fact, I'm speaking there to a group of corporate directors
    on Monday. But I will fight to the death for the right of my
    alma mater, the University of Chicago, as the citadel of the
    free market.
        So I have to begin by saying that I am a passionate
    capitalist, a passionate devotee of the free market. And what I
    know about the free market is this, that it depends on
    information and the ability to respond. And information we are
    now going to be getting better thanks to the SEC, but the
    ability to respond is equally important.
        You can have all the information, all the transparency in
    the world, but if there's no way for you to respond, you're not
    going to be able to have that all important market feedback.
        I am not here to ask anybody to interfere with the free
    market. I am here to ask you to remove one of the impediments
    to the free market that currently obstructs shareholders from
    responding on this critical issue.
        If I thought that high pay as it is currently structured
    resulted in better performance, I would stand up and cheer for
    it. You don't hear anybody complaining here about Bill Gates'
    pay or Warren Buffet's pay. They are both just fine.
        It's when pay and performance are not linked that we get
    very upset. I have learned that the only way to look at pay is
    to look at it, in University of Chicago terms, like any other
    asset allocation. What is the return on investment of that
    asset allocation? The same way that you would look at money
    that is spent on research or marketing or any other task.
        And the fact is that the return on investment for these CEO
    pay packages, as the ones that we saw late last year where Mr.
    Nardelli and Mr. McKinnell got $200 million pay packages for
    being fired, the return on those investments is less than a
    piggy bank.
        So what we need is we need a way to make sure that we get
    what we pay for. I appreciate and I agree with what my
    colleague, Mr. Castellani, said about boards doing a better
    job. There is no question about it.
        But let's talk about independent directors for a minute.
    The fact is that management and the board itself still have too
    much control over who serves on the board.
        Warren Buffet, again, a big friend of capitalism, said that
    in his own experience he has been unable to speak out against
    what he knew were outrageous pay packages because, in his
    words, collegiality trumped independence.
        If Warren Buffet is too chicken to stand up in the board
    room and say we are paying this guy too much, then we have to
    give him some backbone. And the only way to do that is to give
    shareholders a chance to speak back.
        I want to commend this committee for staying away from the
    mistakes made by the other body, which is trying to solve the
    problem through the Tax Code. We have learned that is not a
    good approach; it does not work.
        The way to do it is a very modest step forward like the one
    proposed in this legislation, giving shareholders an advisory
    vote. The only objection that I have really heard to this idea
    is that the shareholders are too stupid to make good use of the
    information.
        That is simply not true. Our entire economy is based on the
    fact that shareholders can understand the footnotes to the
    financial reports; and when you see shareholders like that
    represented by Mr. Ferlauto, you see how thoughtful and
    intelligent and perceptive they are and how well they have
    responded.
        In the United Kingdom, do you know how many people have
    actually voted ``no'' on a pay plan since they got the right to
    vote on these advisory responses to pay? One. One company has
    had a ``no'' vote. What did they do? They revised the pay plan.
    Everyone else has engaged fully with shareholders. It has been
    a very, very productive experience.
        I am concerned that the current system that we have for pay
    is so excessive that it undermines the credibility of our
    economy. People will invest elsewhere. If we cannot solve this
    problem, then we will pay much too much for what we're getting
    from the CEO's. Thank you very much.
        [The prepared statement of Ms. Minow can be found on page
    148 of the appendix.]
        The Chairman. Thank you. We will begin the questioning. I
    am told that we may have votes at 11:15 a.m., but I believe we
    will be able to get some questioning in. We will break about 5
    minutes into the vote, and we will reconvene immediately after.
    I apologize to the panel because they will have to sit through
    it, but they understand that.
        Before I start taking up my time, let me ask unanimous
    consent to put into the record 2 letters: one from the HR
    Policy Association, which is a public policy advocacy
    organization representing the chief human resources offices of
    250 employers; and one from CalSTRs, the California State
    Teachers' Retirement System. If there is no objection, I'll put
    those in the record.
        And I will now begin my 5 minutes. The first thing I want
    to do is, the gentleman from New Jersey wondered whether we
    were going to now give Red Sox fans the right to vote. I have
    heard illogical analogies before, but a prize will go to anyone
    who can't tell the difference between a fan who buys a ticket
    to a baseball game and a shareholder in a corporation.
        If the gentleman thinks that they ever have been in any way
    legally analogous, he knows a different legal system, indeed a
    different universe than I. There is, of course, no remote
    connection between someone who buys a ticket to a single event
    and a shareholder.
        And if the gentleman thinks that what rights shareholders
    now have should be given to the fans, then he would be calling
    for far more change in the law than I. A reasonable discussion
    we ought to have, but that simply makes no sense whatsoever.
        I do want to quote from someone, Warren Buffet, who in his
    newsletters in 2005 and 2006 was criticizing comp committee
    behavior.
        He wrote in 2005, ``Getting fired can produce a
    particularly bountiful payday for a CEO. He can earn more in
    that single day than an American worker earns in a lifetime of
    cleaning toilets. Today in the executive suite the all too
    prevalent rule is that nothing succeeds like failure.'' This is
    that notorious trasher of the capital system, Warren Buffet.
        ``Huge severance payments and average perks have often
    occurred because comp committees have become slaves to
    comparative data. The drill is simple. Three or so directors
    not chosen by chance are bombarded for a few hours before a
    board meeting with pay statistics that ratchet upwards.
        ``In criticizing comp committee behavior, I don't speak as
    a true insider. I have served as a director of 20 public
    companies. Only one CEO has put me on his comp committee.''
        And then he said in 2006, ``I mentioned I've been the
    Typhoid Mary of compensation committees. At only one company
    was I on the comp committee, and I was promptly outvoted. My
    ostracism has been peculiar considering I haven't lacked
    experience in setting CEO pay. I'm a one-man comp committee for
    40 significant operating businesses.''
        And he notes that, frankly, he is not one of the most
    lavish payers, and he has never has never lost a CEO. No CEO
    has ever gone into private equity from his firm or become a
    shortstop or a movie star or gone on to any other more
    lucrative forms of compensation.
        Here is the point I would ask people to comment on in the
    2006 newsletter from Warren Buffet: ``Irrational and excessive
    comp practices will not be materially changed by disclosure or
    by `independent' comp committee members. I think it's likely
    that the reason I was rejected for service is that I was
    regarded as too independent.
        ``Compensation reform will only occur if the largest
    institutional shareholders--it would only take a few--demand a
    fresh look at the whole system. The consultant's present drill
    of deftly selecting peer companies to compare with their
    clients will perpetuate present excesses.''
        I should know that Mr. Buffet does not favor this bill, but
    he is far more optimistic than I. There are people who are more
    optimistic. I have colleagues here who, when we get into
    debates, are more optimistic than I that they will be able to
    reach the better nature of some on the other side. I quit early
    when it comes to hoping people will improve their behavior.
        Mr. Castellani, you said that the boards have gotten
    better. When did they get better?
        Mr. Castellani. Dramatically they have been--
        The Chairman. As of when?
        Mr. Castellani. I would say over the last 5 years. Very
    much so in the last 5 years.
        The Chairman. When they weren't better, can you send me the
    critique that the Roundtable made of them when they were in
    their ``not better'' phase? How critical were you of them for
    not being better when they weren't better?
        Mr. Castellani. In 1997, we did our first principles of
    corporate governance, and indeed it was critical. It set a high
    standard for how boards should operate.
        The Chairman. Were you critical on compensation?
        Mr. Castellani. Pardon?
        The Chairman. I'd be interested if you would send me if you
    were critical on compensation. Mr. Kaplan, you said in the last
    15 years things have gotten so much better for American
    businesses. Would that include the last 5 years as well? Would
    the last 5 years be included in that improvement period?
        Mr. Kaplan. I think I would say yes.
        The Chairman. Okay. I appreciate that.
        Mr. Kaplan. We have seen productivity grow--
        The Chairman. I appreciate that. I thank you for that only
    because the last 5 years are the period in which we have had
    Sarbanes-Oxley. And I appreciate those nice words about
    Sarbanes-Oxley. There have been people who have suggested it
    has been corrosive and, apparently, it is one of the reasons.
        But I would ask Mr. Castellani and Mr. Kaplan, would you
    comment on Mr. Buffet's remarks? Mr. Castellani.
        Mr. Castellani. At the risk of disagreeing with a national
    icon, I disagree with--
        The Chairman. Do you mean me or Mr. Buffet?
        Mr. Castellani. With Mr. Buffet.
        The Chairman. Please continue.
        Mr. Castellani. I disagree with Mr. Buffet. In fact, what
    our own information is seeing is that the comp committees have
    been much more independent. They are exclusively independent
    under the requirement of the listing standards and under
    Sarbanes-Oxley.
        The best practices and their activities that we've seen
    across our member customer is they get their own--
        The Chairman. Sarbanes-Oxley has brought about improvement
    in the comp committees?
        Mr. Castellani. I believe it has.
        The Chairman. Thank you. Continue.
        Mr. Castellani. As a standard answer, Mr. Chairman, the
    Business Roundtable believes that Sarbanes-Oxley has been
    very--
        The Chairman. I appreciate it. If I could interject and
    give myself a few seconds, in the spirit of bipartisanship, I
    think someone ought to continue to say good words about Mike
    Oxley. He hasn't been gone that long, and he doesn't get a lot
    of nice words from the other side, so I want to continue to
    support his signal achievement in most regards. Please
    continue.
        Mr. Castellani. To be fair, it can be improved on,
    particularly Section 404, but it can be done through regulatory
    process.
        The Chairman. Which is now going on, yes.
        Mr. Castellani. And we support that. What we have seen and
    what compensation committees are doing now, and they are
    independent, is working very, very hard to tie compensation to
    performance.
        They are getting their own outside expertise. They are not
    relying on management's consultants to set that pay, and that
    pay has been much more balanced in recent history than it was
    in the past.
        The Chairman. Thank you. Mr. Bebchuk, would you want to
    comment on Mr. Buffet's remarks?
        Mr. Bebchuk. I agree with this national icon. I wanted to
    comment on the general thrust of what was suggested here about
    the concerns that maybe CEO's are actually underpaid. If one
    believes this, then one should really support advisory votes.
    Why?
        Because if CEO's are underpaid, and there are good
    arguments for this, then shareholders would really vote for the
    existing packages, and companies would be able to raise the
    packages, and ignore what the media says, because shareholders
    would vote for them.
        So the only reason to be concerned that advisory votes
    would lead to reduction in pay is if one is assuming that the
    advisory vote would come out negatively, namely, that investors
    think negatively about what we have now.
        Similarly, it was suggested that companies right now cannot
    communicate with many shareholders because shares are held in
    street name. Again, this should lead one to support advisory
    votes, because this way we will hear from those shareholders.
        Again, the only reason why one might be concerned that
    advisory votes would lead to pressures on pay is if one is
    afraid that those advisory votes would come out to suggest that
    there are problems with existing pay packages.
        The Chairman. Thank you. The gentleman from Alabama.
        Mr. Bachus. Thank you. Mr. Kaplan, this idea that a
    corporate board ought to function more like a democracy, you
    have written on that. Would you comment on what some of the
    dangers of that may be?
        Mr. Kaplan. I will go back to part of what Professor
    Bebchuk said, and answer this question. Boards are elected
    today every year, sometimes every 3 years. More and more
    companies are putting in votes where directors have to receive
    a majority of the votes in order to retain their seats, and
    that is a good thing.
        In terms of this bill, where you have a requirement that
    you have a shareholder vote on every company for every year on
    pay, that is invasive.
        The point is not that I worry that pay will go down. The
    point is that under today's system, shareholders are
    aggressively going after companies that have a problem. There
    are ways for them to do it.
        Carl Ichan has 1 percent of Motorola's shares, and he is
    fighting against Motorola. So the companies where there is a
    problem are exposed today, and there are votes on them. It is
    the companies that are doing a good job where this bill will
    impose costs that I believe are unnecessary.
        Mr. Bachus. Mr. Castellani, you mentioned the tenure of
    chief executives is going down, obviously, from 4.5 to--well,
    it was 8 years in 1985. It was 4.5 in the last year we know of.
    15 percent of them were replaced in the last year we have
    statistics.
        What does this indicate to you?
        Mr. Castellani. Well, it indicates two things to me. One,
    first and foremost, is that boards are being very responsive.
    The boards do control who are the management of a company. They
    have demonstrated that by the rapidity in which they have
    changed the management.
        The second, unfortunately, is that it demonstrates
    something that Mr. Ferlauto talked about that is a problem, and
    that is an obsessiveness we have in this country with very
    short-term results, particularly where those results are
    expressed in the share price.
        Mr. Bachus. I've heard people say this. In fact, I have
    seen it, I think, in Birmingham. The last time when we have
    done something which we thought was just a given, and that was
    disclosure of executive pay, we at least heard a lot that CEO's
    looked at what other CEO's made, and they said they wanted
    raises. It has actually increased the number of wage increases,
    kind of, ``He is making this, so I want it, too.''
        If it happened, and I think maybe it has, it is an
    unintended consequence of even the disclosures we have had.
    What would be some unintended consequences? I'm worried about
    that, too. Where does it go when you have CEO's leaving after 4
    years? Mr. Castellani or Mr. Kaplan, would you all speak on
    some maybe unintended consequences?
        Mr. Kaplan. The primary unintended consequences, and this
    is something that I think is mixed about Sarbanes-Oxley.
    Sarbanes-Oxley has done some good things.
        I think 404 has been overly invasive, and the unintended
    consequence of that, and the unintended consequence potentially
    of this bill is that you are driving CEO's and CFO's--generally
    the better ones--to private equity.
        That is a good part of the reason. It is not all. Financial
    markets have helped, as was mentioned earlier. But a good part
    of the reason for all this private equity activity is that good
    CEO's and CFO's say, ``I would rather be doing something
    else.''
        And John Calhoun, who was one of the top people at GE, ran
    a quarter of GE's business, and was well-regarded there,
    presumably would have been a desirable public company CEO at
    many public companies.
        What did he do recently? He left GE and a $47 billion
    business to run a company that was funded by private equity, a
    $5 billion business, and he is no longer working for GE.
        Mr. Bachus. And now shareholders cannot buy shares in the
    company he runs even though he is one of the most efficient--
        Mr. Kaplan. Well, they do, actually. Mr. Ferlauto can maybe
    answer that. At least the pension funds can invest in the
    private equity funds, but individuals cannot.
        Mr. Bachus. So if we drive the best executives into private
    equity firms and hedge funds, then the average middle class
    individual can't walk up and invest in a company they run?
        Mr. Kaplan. That would be correct.
        Mr. Bachus. All right. Mr. Castellani.
        Mr. Castellani. Another unintended consequence is not
    really on the executives themselves, but really on the board of
    directors.
        I don't want the conversation here to be misleading members
    of this committee that boards only spend their time on
    suspension. In fact, the preponderance of their time, and this
    is one of the concerns with Sarbanes-Oxley, should be spent on
    what is the company's strategic plan? What are their investment
    plans? How are they developing new products?
        What markets are they going into? Who are the management of
    the company now? How are they performing, and who will be the
    management of the future? And how do we develop them for the
    sake of shareholders and increasing shareholder values?
        One of the concerns we have is this proxy process is
    becoming very politicized. We see that with majority voting
    which is, quite frankly, something that we have been supportive
    of. But we also see that the politics of the campaigns become
    diverting of the attention of the board of directors.
        Just as I think we can make an arrangement that we have to
    be very careful that our boards don't overreact to Sarbanes-
    Oxley to become compliance officers, we're also very concerned
    that boards don't overreact to become, I am sorry to say this
    to the people in this room, professional politicians, because
    what they are there to do is to oversee the shareholder's
    investment and ensure that all aspects of the company
    contribute to increasing it.
        Mr. Bachus. I am going to make one comment, if I could,
    just in response to Mr. Castellani. The last thing you said
    recalls a quote of Adam Smith where he said, ``It is the
    highest impertinence and presumption therefore in kings and
    ministers to pretend to watch over the economy of private
    people and to restrain their expense. They are themselves
    always and without any exception the greatest spendthrifts in
    the society.''
        Having politicians run corporations is a scary thought
    indeed.
        The Chairman. I recognize the gentleman from North
    Carolina. I will just take 10 seconds from his time to say that
    I thought shareholders were private citizens. I agree that
    private citizens should run the corporations. That is what this
    bill is about. The gentleman from North Carolina.
        Mr. Watt. Thank you, Mr. Chairman. Thank you for holding
    this hearing. I have to say I have tried to come to these
    things and sort through the real differences between the people
    who are testifying and identify some issues that still remain.
        Mr. Kaplan, it is true that you answered a number of
    questions many of which, in my estimation, kind of beg the
    question. Whether the system is broken or not doesn't answer
    for me whether it can be improved.
        Whether CEO's are being lured into private equity companies
    might suggest that we ought to be looking at private equity
    compensation, but that doesn't necessarily mean that CEO's are
    not being overpaid.
        Whether we should speculate about the private capital
    markets becoming democratic I don't think really is a subject
    that any of us ought to worry about. They never have been, and
    I doubt they ever will be.
        The one question that you asked and answered in a way that
    I think is probably not in accord with what would be the case
    is whether the proposal would reduce the number of abuses.
        It seems to me that having this kind of advisory capacity
    that makes this process more transparent is likely to get at
    some of those very, very serious abuses.
        The question that you didn't pay much attention to that I
    want to ask Mr. Davis to enlighten us on a little bit, since he
    studied a system that is really in effect, is I keep wondering
    what is the cost benefit analysis if we assume that there are
    some benefits that could be derived from this bill?
        What are the actual costs of implementation? I am not
    talking about speculative cost, the unintended consequences.
    I'm talking about the actual dollar amount, the extra amount in
    a shareholder disclosure, or whatever would be required.
        Dr. Davis, did you do any study in England about what the
    actual cost of implementing this kind of advisory system would
    be?
        Mr. Davis. Thank you, Congressman. What we did do was to
    ask boards and executives, ``What extra did you have to
    undertake when the advisory vote process came into effect?''
        And there are a series of things, but, essentially, it
    boils down to consultation, arranging some meetings, having
    some more phone calls than you would otherwise have in the
    course of a year, and having a few more sit-down sessions with
    your major shareholders, so the costs were minimal.
        Mr. Watt. Are there actual paper costs associated with the
    additional disclosures? Are we talking about increasing the
    cost of the proxy process? Are there actual dollar amounts that
    we can put on these things?
        Mr. Davis. Well, the cost of disclosure is one separate
    matter in some ways, and we have already because of the new
    CD&A regulations are a pretty serious set of disclosure
    requirements on companies.
        In the United Kingdom, they have something less than that,
    actually. If we are to try to figure out whether there was any
    specific cost to it given a context of advisory votes, it is
    really just being able to frame those reports so that they
    appeal to the shareholders and not just to lawyers. It is not a
    compliance exercise, in other words, it is a persuasion
    exercise.
        Mr. Watt. Let me try to get in one other question really
    quick since my time is running out. The difference, it seemed
    to me, between the second and third witnesses, both of whom
    have difficult names to pronounce, so I won't try to do the
    that, seems to me to be whether there would be any
    accountability after this advisory process.
        Under this proposal, there is no real accountability after
    the advisory process takes place. Aside from that, Mr.
    Castellani, I didn't hear a lot of difference. Maybe you were
    being collegial like Mr. Buffet said folks were being in the
    boardroom.
        You did not seem to be really going after this proposal in
    a negative way. There seemed to be not much difference between
    you and the gentleman from AFSCME.
        Mr. Castellani. Well, there is a fair amount of difference
    between us and our positions. We did not support this proposal.
        Mr. Watt. You do not support it as much as you do not
    support the one in the Senate?
        Mr. Castellani. Well, the one in the Senate, I think, we
    can all agree on is that the best pay systems are ones that are
    driven by--
        Mr. Watt. No. Do you support this one less than you do not
    support the one--I'm asking the question as a relative matter--
    is the one in the Senate worse?
        Mr. Castellani. Both have serious negative consequences, in
    our view.
        Mr. Watt. You are being collegial again. Maybe you are
    being collegial to Senators who are not here today. If you had
    to make a choice between the Senate proposal and this proposal,
    which one would you choose?
        Mr. Castellani. I would oppose both.
        Mr. Watt. If you had to make a choice between the Senate
    proposal and this proposal, which one would you choose? That is
    the question. It would be nice if you would answer the
    question.
        Mr. Castellani. Both have serious problems, and both have
    potential to cause--
        Mr. Watt. I hope you don't approach me in conference and
    try to move us toward this system, as opposed to the Senate one
    with that response.
        The Chairman. I do take it that the Business Roundtable
    would be indifferent, then, if, as we moved it, instead of
    doing this bill we decided to substitute the Bachus bill, they
    would be indifferent as to that. I would not myself be, but I
    will acknowledge that.
        That was the question that was asked, and I am taking the
    answer is that you are indifferent as to which of the two we
    would do if we were to do one. I am surprised at that, but you
    are entitled to your answer. The gentleman from New Jersey
        Mr. Garrett. Thank you, Mr. Chairman. What we are talking
    about today is whether salaries are excessive or abusive.
    Actually, I learned yesterday we can't really clearly define
    what abusive is; I am not sure whether we can define what
    excessive is, either.
        Going to the issue that some of you on the panel say that
    pay should be tied to performance, I can, sort of, agree with
    that if we can agree what performance is. You are all
    shareholders in this great republic of ours in one way, shape,
    or form.
        And I wonder if anyone would hazard to give an advisory
    opinion on the level of performance and therefore of pay of
    Congress or the CEO of this committee and whether you would
    want to advise us in the correct direction. Are we excessive,
    or maybe should we be raising salaries? No. Okay.
        Ms. Minow. I think it is a mistake to draw too many
    analogies between any government office and a public
    corporation or any private enterprise. The same issue of
    defining performance is pervasive no matter what organization
    you are looking at.
        Had you ever, I believe that there is no accountability
    standard that is higher than the one that is presented to each
    of you every other year. And therefore, I think that is
    adequate.
        Mr. Garrett. Thank you. A follow-up question for you. If we
    go this way with the advisory opinion or even go, as some
    suggest, even further than that, as far as not requiring any
    sort of, and I don't know how you would do it, liability on the
    very shareholders who are making that decision?
        Because right now all of the liability is on the
    compensation committees or on the directors, and if this
    decision is advisory or even further than that, does that limit
    my liability now? Because I am taking this and going in a
    different direction than previously I had taken in my fiduciary
    responsibility, I said this was the best way to go.
        Ms. Minow. Congressman, I am really happy that you asked
    that question, because it, I think, is a very important one. I
    believe that the liability the shareholders have is expressed
    in the value of their stock price, which can go down to nothing
    if they did that wrong.
        Mr. Garrett. But clearly there is a lot more liability on a
    CEO who violates his fiduciary responsibility. He has a share
    price, too, but he can go to jail if he violates that.
        Ms. Minow. If he violates the criminal law, he can go to
    jail. If he violates a civil law, I think the record shows that
    in almost no case has a director or an officer had to pay out
    of his own pocket. It always comes out of the shareholder's
    pocket.
        I also want to say that one point that we have noted is
    that excessive CEO compensation is the single best predictor of
    litigation and liability risk for the corporation, so
    shareholders have a very strong motive in terms of what is
    going to be coming out of their own pocket already in
    addressing this issue.
        Mr. Garrett. Okay. Thank you. I think, Dr. Davis, you made
    some sort of reference about saying that for those companies
    that have already begun to adopt some sort of advisory capacity
    or interplay with their shareholders that there has been a
    positive effect of that. Am I hearing you right?
        Mr. Davis. That's correct.
        Mr. Garrett. Well, if that case is true, it is a positive
    effect as far as the overall performance of that company and
    overall performance of their stock as well? Is that the up-tick
    of what has occurred?
        Mr. Davis. Well, the positive aspects are multiple. It is
    much too early to decide if this specific thing has made a big
    difference in performance or stock price. It is very hard to,
    I'm sure my colleagues would agree, segregate out one aspect.
        But the fact is that the boards see it as a real positive
    in terms of their relationship with the owners, and the
    shareholders feel it gives them much lower risk when they are
    investing.
        Mr. Garrett. Well, that brings up two comments. First, my
    opening comment saying that maybe we should just wait before we
    take any legislative action on this to see how it all shakes
    down.
        And second, if what you are saying actually comes to pass
    to be true that it does have a positive effect, wouldn't then
    other companies look at that and say, well, those companies
    have done it. It has had a positive effect. Our company better
    go down the same road as well with or without this legislation.
    Wouldn't the market sort of dictate that?
        Mr. Davis. The experience in the United Kingdom, in fact,
    and most markets could show that the good companies will do it,
    and the companies where there are real problems will stay well
    away from that.
        The other point about waiting is that Britain sees this,
    for instance, as a way to keep their company in fighting trim,
    to keep London markets strong. If we wait, we are giving them
    the lead.
        Mr. Garrett. Okay. And that brings me to my last question.
    Dr. Kaplan, can you just give us some indications economically
    speaking--how is the United States doing versus the United
    Kingdom economically?
        If they are doing all of these great things, I assume their
    unemployment is lower than ours, that their GDP is going up
    faster than ours. Everything must be going better in the United
    Kingdom, in essence, versus where we are in the United States.
    Is that the case?
        Mr. Kaplan. I am not perfectly certain of the U.K. numbers
    versus the U.S. numbers. However, it is certainly the case that
    the United States has done extremely well in terms of
    productivity growth since the early 1990's when CEO pay took
    off, and I would gather at least as well as the United Kingdom.
    But I don't have those figures at my fingertips.
        The Chairman. I recognize the gentleman from North
    Carolina. He will be the last one, and then we will break. I
    would ask the gentleman for 15 seconds to say that I do think
    that we are hearing, apparently, a refutation of the McKenzie
    Report.
        When we talk about Sarbanes-Oxley, we are told how much
    better it is to be in England. Now, apparently, it is better to
    be here. There is a lot of transatlantic travel here depending
    on which issue comes up. The gentleman from North Carolina.
        Mr. Miller of North Carolina. Thank you, Mr. Chairman. I
    actually want to ask questions similar to what Mr. Garrett just
    asked.
        It appears that we are in a distinct minority, the United
    States, in a distinct minority of developed market economies in
    that we do not have something similar to this.
        In fact, England has an advisory vote, as Mr. Ferlauto
    points out, with a consequence of a negative vote that is not
    taken to heart by the directors.
        Mr. Kaplan said that we risk driving CEO's from American
    public companies if we make compliance with legal requirements
    too annoying.
        Mr. Davis, is there any evidence that there has been an
    exodus of CEO's from European companies because of this
    requirement?
        Mr. Davis. There is no evidence that this particular
    requirement has done that. In fact, I think what I would argue
    is if we are concerned about private equity taking over more
    companies, the advisory vote system is exactly the right thing
    we ought to be looking at, because what we want to do is to
    equip our public shareholders with the kinds of tools that
    private equity investors already have; in other words, to act
    as real owners.
        Right now our laws, essentially, tie the hands of public
    shareholders so they can't act like owners.
        Mr. Miller of North Carolina. Ms. Minow.
        Ms. Minow. I agree with Dr. Davis on that. I think that it
    is important to find out that if CEO's feel that they are going
    to be less accountable to, say, Henry Kravis through private
    equity than they are to the public markets, then they have
    another thing coming.
        Mr. Miller of North Carolina. In an earlier hearing in this
    committee, I asked the question of whether there is any
    evidence that European companies were in fact better led,
    better managed, more efficient, more profitable, perform better
    or less well, rather, because there were some restrictions,
    this modest restriction on corporate compensation, executive
    compensation. And the answer that I got was ``no.'' Mr. Kaplan?
        Mr. Kaplan. This is where I can answer. The U.K. economy, I
    think, has done reasonably well, as has the U.S. economy. In
    terms of productivity growth, continental Europe has been far
    behind.
        Mr. Miller of North Carolina. Well, that is not actually
    the question. The question was corporate performance.
        Mr. Kaplan. Corporate performance, I believe, has been
    behind as well. In addition, the private equity question, it is
    the case in continental Europe and, I believe, in the United
    Kingdom that you've seen an exodus of good executives to
    private equity partially for the reason that the compensation
    packages are more attractive in the private equity arena.
        Mr. Miller of North Carolina. Does anyone else have an
    opinion on that question, whether there is any real evidence
    that European companies are less well managed, less well-led,
    or perform less well because they aren't getting the very best
    managers, because the very best managers don't make as much as
    American managers make or CEO's? Mr. Davis? Ms. Minow?
        Ms. Minow. I would like to mention that earlier in my
    testimony, I said that in only one case in the United Kingdom
    was there a vote against the pay plan.
        And I'd like to point out that the company's justification
    for that pay plan was they said that because they did so much
    business in America that they had to compete with American CEO
    levels, and they were really trying to imitate us, and they
    were able to arrive at some kind of a compromise.
        What I do see is that some of our worst ideas in terms of
    CEO pay are being imported, and I think the reason that it
    hasn't gotten out of hand is that the other economies do have
    these very modest controls in place.
        Mr. Miller of North Carolina. Is there any evidence that
    the management of European companies is not as good as the
    management of American companies? Mr. Davis.
        Mr. Davis. American companies, if we look at the individual
    skills of an American CEO against a European CEO, yes. They are
    going to be good. I mean, if they are top companies, there are,
    presumably, good folks running the companies.
        The issue here is about whether there is an alignment.
    After all, this really isn't about, I think, in Britain or
    here, a crabbiness about how much money a CEO is making.
        It is about alignment, whether the structure is such that
    what the CEO does, how he or she uses those skills, whether
    those uses are put to the uses of the shareholders or the
    interests of management.
        And here is where we have a real problem with our
    structure, and this is not the panacea. It is one piece of the
    puzzle. Other pieces can be done by the marketplace. But this
    is an important light touch way in which we, effectively, make
    capitalism work.
        The Chairman. Mr. Bebchuk.
        Mr. Bebchuk. I think there is really no evidence that the
    management of European companies is doing worse because of this
    requirement.
        I think the good performance of the U.S. stock market in
    the last 15 years doesn't really speak to this issue, because
    the main drivers of the comparative performance of Europe and
    the United States are not just difference in corporate
    governance but major macro economic differences.
        The Chinese stock market has done extremely well recently,
    and it is not because they have better corporate governance.
        The Chairman. The committee will recess, and then we will
    come back and keep working. Members can come and go for lunch,
    but it wouldn't be fair to the witnesses to hold them. I will
    say that, depending on how quickly we move, we might even have
    a chance for a second round of questions.
        We will be gone probably for another 15 or 20 minutes,
    because there is a second vote following this one, so we will
    be in recess until then.
        [Brief recess]
        The Chairman. The hearing will reconvene. Please,
    witnesses, take your seats. Going by the list that was
    presented to me by the ranking member, the next member to be
    recognized will be the gentleman from Florida, Mr. Feeney.
    Please, people take your seats.
        Mr. Feeney. Thank you, Mr. Chairman. I want to thank all of
    our guests and witnesses for being patient. I had a colleague
    earlier from Wharton who quoted Edmund Burke, who happens to be
    one of my favorite philosophers of all time: ``The only thing
    necessary for the triumph of evil is for good men to do
    nothing.''
        As a great fan of Edmund Burke, who I think was the
    greatest conservative philosophy since Plato, I would say that
    of the many things that he was known for, probably the most
    important was his ability to distinguish the potential for the
    democratic impulse and how it can undermine legitimate
    governance.
        Burke was one of the few people who supported in the
    parliament the American Revolution, but he opposed the French
    Revolution on the grounds that the American Revolution was
    designed to preserve traditions and successes and the rights of
    man, and the French Revolution was likely to lead to excesses
    of the democratic impulse. And that is exactly what happened.
    He was certainly prescient in that regard.
        I am concerned in the same way that a democratic vote is
    what we are in for if we are not careful. Ms. Minow seems to be
    the only person on the panel who thinks that this bill strikes
    the exact correct balance.
        The first couple of witnesses testified that they thought
    that this was a start, but that we needed more in order to
    correct the problem.
        Two of the witnesses have said that this is unnecessary and
    would be counterproductive. Ms. Minow does come from the
    University of Chicago, and I am big fan of their views,
    including that asset allocation ought to be the juxt of every
    decision.
        But we may know a little bit more about the way politics
    tends to unravel than the way economists would like things in
    an ideal world, and I would suggest that some of us do have a
    fear that the ``camel's toe'' problem is going to be a real and
    a significant one.
        Nobody seems to call for a democratic vote on what the
    appropriate level of Steven Jobs' compensation or Bill Gates'
    would have been, say, in 1975 or 1980 or 1985. One witness, Dr.
    Kaplan, has talked to us about the fact that given today's
    rules under Sarbanes-Oxley, and if we would adopt some of these
    advisory opinions or even mandatory pay votes by a democratic
    electorate of the shareholders, very likely Bill Gates would
    have stayed private.
        Steven Jobs would have stayed private, and hundreds of
    other successful entrepreneurs who have taken their companies
    public would have stayed private.
        The unintended consequences, some of them unforeseeable,
    and some foreseeable, are what concern me. Now, we have had
    talk about trusting the SEC, and I think Christopher Cox has
    done a great job.
        I would note that the chairman has defended the SOX
    initiative today. I am a big fan of Mike Oxley. It was not the
    House that included the nefarious Section 404 in the House
    bill. I wasn't here at the time. It was the Senate who insisted
    on Section 404.
        And if we had stuck to House principles, I would tell the
    chairman, we would probably not be debating.
        The Chairman. Would the gentleman yield?
        Mr. Feeney. I would be happy to.
        The Chairman. Was the gentleman under the impression that
    somehow that bill passed without the House concurring in
    Section 404?
        Mr. Feeney. Ultimately, the full House did. And by the way,
    I was not here for either the vote in the--I was not a Member
    at the time.
        But having said that, it is always fun to blame the Senate.
    And I think, in this case, we have a legitimate reason; nobody
    foresaw the consequences of 404.
        But even if SOX has been some wonderful reason for the
    success in the London markets, the truth of the matter is that
    if there is pay excess in the American economy it should have
    shown up for the last 15 or 20 years with very little
    governance.
        In fact, America was the premier capital market until
    roughly the time that we passed SOX. We are rapidly losing our
    preeminence in world capital market formation. Part of that is
    because the London market and others are advertising themselves
    as a SOX-free zone. They surely think it is a problem.
        Also part of it is because of the private equity issue. I
    would like to ask Dr. Kaplan and Mr. Castellani if they have
    any opinions. In the United Kingdom, while there are advisory
    opinions for compensation, so far there have not been advisory
    opinions required of shareholders for other forms of corporate
    governance.
        Should companies be forced to adopt pro environmental
    policies or pro labor policies? And we have a representative
    from AFSCME here who talked about investing for social and
    moral consciousness reasons. Personally, I want to make
    investments for my retirement that will guarantee a successful
    retirement.
        Dr. Kaplan and Mr. Castellani, do you see any reasons why
    the United Kingdom did not adopt advisory opinions for other
    issues, and are there any other unintended consequences we
    ought to be worried about in this proposal before us?
        Mr. Castellani. Yes. Thank you. I think one of the things
    that underlies the discussion that we have been having about
    the U.S. system versus the U.K. system is the fact that there
    are some very substantial differences in U.S. and U.K. law.
        One that is the most significant is their system of civil
    justice and litigation. In the U.K. system, you have a system
    where the loser pays when they bring lawsuits, and the
    environment is not as conducive for lawsuits.
        So directors and boards are not as subjected to shareholder
    lawsuits as you see in the United States, for whatever reason.
    The rationale or the result is that boards in the United
    Kingdom can operate with less of a concern that they will find
    their actions being tested in court through civil litigation.
        In just a recent trip over there in London, and in a
    discussion in a forum with the Chartered Accountants Institute,
    that has been something that was pointed out very strongly,
    that even the fear of that caused them to change recent
    legislation to ensure that they were not increasing the opening
    for that because of their concern that board actions would be
    second-guessed by potential litigants.
        The second thing that is very different is that
    shareholders within the United Kingdom to be less activists
    where you see in our proxy process proxy proposals that range
    everything from ethical treatment of animals in research to
    whether or not a company supports nuclear power or is engaged
    in or supporting one aspect through the remediation of global
    warming. It is how the boards are structured.
        That is typically not something that is done by the U.K.
    shareholder--very different.
        The Chairman. Ms. Minow.
        Ms. Minow. Thank you very much, Mr. Chairman. It is
    important to point out that shareholders have very much more
    robust rights in the United Kingdom and therefore don't need to
    resort to shareholder proposals; 10 percent of the shareholders
    can call a special meeting; and 50 percent can throw the board
    out, so it's hard to make comparisons there.
        If I may, I would just like to correct the Congressman on
    something that he said about IPO's. If you look at the
    statistics on IPO's, and you take out the fact that most
    companies prefer to have their IPO in their country of origin,
    the fact is that we continue to be the same primary place for
    IPO's that we have always been.
        I think we should be indifferent about whether a company is
    private or public. Steve Jobs and Bill Gates both were in
    private companies, and, at the point where they felt they
    needed access to public capital, they went public. Hurray for
    capitalism. It worked very, very well. Shareholders have the
    opportunity to invest in private or public companies.
        Mr. Feeney. I'd ask unanimous consent for 30 seconds to
    respond. Number one, with respect to the SOX issue about IPO's
    abroad, I'd invite you look at the study by AEI and Brookings
    that, basically, called this a 1.4 regulatory tax, $1.4
    trillion.
        And secondly, with respect to private equity has worked
    well, it did for Bill Gates and Steve Jobs, and it might even
    for AFSCME, who has access to private capital.
        But I represent some of the 53 percent of Americans who are
    individual shareholders, and we don't get to participate in the
    next Microsoft--
        Ms. Minow. Do they have pensions? Do they have pension
    funds? Do they have 401(k)s?
        The Chairman. The gentleman will suspend. I will say to the
    gentleman that we do plan to have a series of hearings on hedge
    funds and private equity.
        The committee does plan to address the question about
    whether or not there are public policy concerns about private
    equity, etc. This is a subject I would note that we do intend
    to explore.
        The gentleman from Georgia.
        Mr. Scott. Thank you, Mr. Chairman. First of all, let me
    just remark to Ms. Minow, I believe, that you are absolutely
    right about the University of Chicago being the premier free
    market institution and so legendarily embodied with your
    legendary leader, Milton Freedman, who was just a great example
    of the free market.
        Ms. Minow. Thank you.
        Mr. Scott. Mr. Castellani--
        Mr. Castellani. We could change it to Smith.
        Mr. Scott. Did I mess it up?
        The Chairman. Just for the record, I know there are not a
    lot of Italian Americans in some parts of the country. It is
    Castellani.
        Mr. Castellani. Thank you.
        The Chairman. The gentleman is not alone.
        Mr. Scott. Absolutely. I apologize for butchering your
    name, Mr. Castellani.
        Mr. Castellani. It is quite all right. It is done often.
        Mr. Scott. I want to respond to something you said. First
    of all, you made the statement that what we were up here doing
    as far as the corporate executive pay and this bill is
    tantamount to every time Congress makes a decision, they have
    to go get a referendum on it.
        I might just point out to you that we get that referendum
    every other year in terms of decisions that we make.
        You tend to support the status quo of where we are. Here is
    the status quo. The status quo is lavish compensation for
    executives that is totally unrelated to their performance.
        The status quo is a losing degree of confidence in our most
    cherished aspect of our free enterprise system, which is the
    stock market, which is investor confidence. It is lavish pay
    packages that not only don't relate to performance, but even
    are given while their companies are struggling.
        While companies are going down, executives are making
    hundreds of millions of dollars. While they are laying off
    employees, corporate executives are getting these outlandish
    packages, when these same executives are reneging on billions
    of dollars in pension packages for their retiring workers that
    they're not fulfilling.
        They are losing confidence. That is the status quo. What we
    are doing here is nothing draconian. There is nothing draconian
    about doing and giving the owners of the company, the
    shareholders, just a simple say in what they are paying the top
    employee who work for them.
        For us not to do this is a great threat under these
    circumstances to the future of all of this. There is no mandate
    here. There is no regulatory arm here. It is just simply saying
    the stockholders, the shareholders will have a say in these
    packages.
        As I mention one company that has done a very superb job, I
    want to read to you what this executive said, this CEO. This is
    from the Aflac chairman, CEO Dan Amos. He said these words:
        ``Our shareholders, as owners of the company, have the
    right to know how executive compensation works. My board's
    action is in keeping with Aflac's long-standing pay for
    performance compensation policy and our commitment to
    transparency at all levels.
        ``We believe that providing an opportunity for an advisory
    vote on our compensation report is a helpful avenue for our
    shareholders to provide feedback on our pay-for-performance
    compensation philosophy and pay package.''
        Now, if that makes sense, which I think you will agree
    certainly makes sense, then the question I would like to ask
    you, and certainly Ms. Minow and Dr. Davis especially to
    comment, I think you come from different points of view on
    this, what is holding back these other companies?
        If what CEO Amos is saying is correct, and it is, this
    transparency is going, what is holding back these other
    companies from doing this?
        And particularly in the face of what we are doing is
    nothing more with our bill, not draconian, but it is just
    encouragement for them to bring about transparency through the
    proper way of providing the people that own the company.
        When they pass out these $200- and $300 million packages,
    who has to stand for that? Shareholders should have a say. I
    think that this will make our economy much healthier and much
    stronger and certainly will build up the confidence in it.
        I would like for you to just comment on what is holding
    back the other companies. What is it that they fear,
    particularly in light of what this chief executive has said?
    Ms. Minow, Mr. Davis, and certainly Mr. Castellani and any of
    you others who would like to comment.
        The Chairman. We won't have time for everybody. We can take
    a couple.
        Ms. Minow. I think they fear having shareholders tell them
    they are making too much money.
        Mr. Davis. I think as soon as corporations learn more about
    this process, any fears and anxieties will go away, because
    this strengthens boards at the end of the day.
        The Chairman. Mr. Castellani.
        Mr. Castellani. Ultimately, what the CEO of Aflac said in
    the beginning of his letter is absolutely something that all
    the members of the Roundtable subscribe to. It should be
    transparent. It should be tied to performance.
        If an individual company thinks that it should be voted on
    by shareholders, then that is a legitimate decision of the
    board of directors who are elected by the shareholders to make.
        The Chairman. Would the gentleman yield to me for a second?
    Mr. Castellani, if you are a member of a board, would you vote
    to allow a shareholder to vote in an advisory capacity?
        Mr. Castellani. I would not.
        The Chairman. Thank you. I thank the gentleman for
    yielding. Mr. Kaplan.
        Mr. Kaplan. I think the issue with the bill is that--
        The Chairman. Could you confine yourself to the particular
    question? We don't have a lot of time.
        Mr. Kaplan. For good companies, this is an annoyance, so
    there is a cost. They are doing things well, and by having this
    mandated, it will take time, it will take energy, and it will
    have no benefit.
        Bad companies today are already under siege and more so
    than ever with the hedge funds and the greater disclosure and
    shareholder advisory votes.
        So that is the sense in which on a cost/benefit basis there
    are costs. I don't see big benefits. I would not do it.
        The Chairman. The gentleman's time has expired. The
    gentleman from Illinois.
        Mr. Roskam. Thank you, Mr. Chairman. In listening to the
    testimony today, it seems to me that what we are dealing with
    is really a continuum of a response.
        The first response is, essentially, to do nothing, and that
    would be to allow the SEC rule to be promulgated and put into
    place, which would maintain transparency.
        The next step would be to put it in statute the exact same
    SEC rule, take away the SEC's discretion but to move to that
    next step.
        The chairman's bill moves to a step beyond that which
    requires a non-binding referendum, and then we would move to a
    binding referendum presumably would be the next step after
    that.
        It just seems to me like there is wisdom in, sort of, going
    back to the admonition from old to creep, crawl, walk, and then
    run. Congress doesn't really have that great of a reputation
    for coming in and fixing a whole lot of things, if you look in
    the totality of things and that there might be wisdom, Mr.
    Chairman, to slowing that down, essentially.
        And that is, obviously, the subject of this whole debate. I
    think that we have to be a little bit careful. The word
    ``transparent,'' which one of my colleagues on the other side
    of the aisle--I think the nature of his question made it seem
    like the system wasn't going to be transparent.
        Well, it is going to be transparent. The question then is
    what do you do with that transparency? There was the comment on
    paying for failure in some of the earlier testimony, and I
    don't think anybody wants to pay for failure.
        But isn't it inherent in a system that we sometimes pay
    people to go away? Isn't that the nature of, for example,
    litigation where you say, ``Look, we are not admitting. We are
    not denying. We are not doing anything, but we will pay you a
    certain sum of money if you will go away.''
        And I would assume that a failed CEO is, sort of, in that
    place, that in exchange for their willingness to go away--bad
    leadership, bad stewardship, poor judgment--they are giving up
    certain rights that they may have had.
        I don't think there is anything in this bill that makes
    that payment for failure that takes that away.
        I do have a question, and that is what I perceive to be the
    de minimis nature of a $2,000 ownership requirement. Am I
    right, Mr. Chairman? And I will yield to you. Is that the
    amount of money that a shareholder would have to have? Is it
    $2,000, or is it a percentage?
        The Chairman. It is an automatic vote. Any shareholder can
    vote in the percentage of his shares. There is no
    qualification. It is a shareholder vote. The way it works, as
    the gentleman knows, if you own so many shares, you get so many
    votes.
        Mr. Roskam. I get that. What does it take, though, to
    initiate the petition or to initiate the referendum?
        The Chairman. The way the bill works, and there have been
    earlier versions that the gentleman may be looking at, this
    takes what the SEC has required to be sent out and allows all
    shareholders to vote on it. It is an automatic advisory vote.
    The SEC has set the rules about what is in that form.
        Mr. Roskam. So you have, basically, turned the high beams
    on. You are between walking and running already, but it is,
    sort of, in the walk category. It is walking fast.
        The Chairman. I guess the gentleman would prefer that we
    stay in the creep stage, and I wasn't too content there.
        Mr. Roskam. Touche. And I would be interested in maybe
    hearing from a proponent and an opponent. You know what? That
    is actually kind of surprising to me.
        I am more troubled than I was before, actually. I thought
    that somebody had to actually take the initiative to get this
    out before--
        The Chairman. Would the gentleman yield?
        Mr. Roskam. Yes.
        The Chairman. Because right now there is a great deal of
    uncertainty, frankly, with regard to SEC policy as to what
    happens with those initiatives. I think there is a certain
    amount of advantage in setting that.
        The SEC just ordered AT&T to do it. Others don't know. It
    is a question of State law, etc. This notion that the
    government is involved is, of course, nonsensical.
        The government is involved when you set up corporations.
    The government decides that you can have a corporation. The
    government sets the rules for governing corporations. This
    notion that it is purely market without government is fantasy
    land.
        There is a debate going on. There are conflicting circuit
    court decisions, as I understand it, and the SEC has to decide
    on the whole proxy access question. The SEC just ordered AT&T
    to put such a referendum on the ballot and, obviously, under
    some statutory authority.
        Right now there is uncertainty in the law as to whether or
    not the SEC can or can't order this petition to put this on the
    ballot. The board says no. People go to the SEC. And I think
    maybe others here who know more about this than I can answer
    it.
        It seems to me there is a certain lack of clarity at this
    stage in the law as to when they do or don't have to go on the
    ballot.
        Mr. Roskam. Okay. Reclaiming my time, I thank the chairman
    for answering.
        The Chairman. That won't come out of the gentleman's time.
        Mr. Roskam. Are there other analogous organizations? For
    example, are labor unions required to disclose their
    compensation levels?
        Mr. Ferlauto. Absolutely. The requirement for labor
    compensation is the most rigorous of any organization that I
    know of.
        Mr. Roskam. Is it an NLRB rule?
        Mr. Ferlauto. Yes, it is.
        Mr. Roskam. Are changes done by referendum?
        Mr. Ferlauto. Well, the salary levels are established
    democratically through votes of the union membership.
        Mr. Roskam. Okay. So the actual question of compensation
    comes before each union member?
        Mr. Ferlauto. Each union operates differently.
        Mr. Roskam. AFSCME, for example.
        Mr. Ferlauto. In AFSCME, we elect an executive committee
    that sets those.
        Mr. Roskam. Well, the executive committee is like the board
    of directors. Is that fair?
        Mr. Ferlauto. That's correct. Again, everybody is using
    analogies that are just significantly--
        Mr. Roskam. Anything with running and walking I am open to.
        Ms. Minow. I have a hobbling example.
        Mr. Roskam. Hold up. I just want to finish this. So,
    basically, you're saying, look, don't trouble me with analogies
    about union compensation levels, because I don't like the
    answer?
        Mr. Ferlauto. No, because we don't have money at risk. This
    is all about ownership of a corporation and about how the
    assets of that corporation will be best allocated to achieve
    long-term shareholder value.
        Mr. Roskam. Don't you think union dues are at risk, and
    union members have an expectation that they will be used
    wisely?
        Mr. Ferlauto. Union dues are established by democratic
    votes of all the union members.
        Mr. Roskam. Okay. But the point is, I don't think that this
    is an unfair characterization. Let me just make this point, and
    then I will yield to the chairman.
        Isn't there merit to the argument that there is symmetry
    between a company and a union in that the union members are
    analogous to shareholders, the executive committee is analogous
    to the board of directors, and the leadership is analogous to
    the leadership?
        Mr. Ferlauto. We could get into a long, long debate which I
    don't think would be worth the committee's time.
        Mr. Roskam. I already have a couple more minutes from the
    chairman, so go ahead.
        The Chairman. Will the gentleman yield to me?
        Mr. Roskam. Yes, sir.
        The Chairman. The analogy fails in the critical point of
    this hearing, salaries. I will ask the staff to prepare for me
    a comparative chart of salaries paid to the heads of unions and
    CEO's.
        I think most unions would be delighted to settle for the
    requirement of this bill if they could get, like, about 10
    percent of the CEO salary, most union heads. Of fact is that we
    are talking, in my judgment, about very different numbers. And
    that is one of the reasons why I think the analogy--
        Mr. Roskam. No question about it, reclaiming my time. No
    question about it that the numbers are different, but the
    governing principle is the same. And you have largely been
    arguing that it is that democratic principle--
        Mr. Ferlauto. The governing principle that has been
    neglected to be discussed here is board accountability. The
    leadership of unions are democratically accountable to a
    democratically elected board.
        There is no accountability mechanism in a corporate board
    where the ability to nominate independently candidates to be
    members of the board is only controlled by the board itself,
    wherefore the vast majority of companies there is nothing that
    resembles an election.
        You can't vote no. You can only withhold a vote. And still,
    despite some movement to that effect, there are still a
    minuscule number of publicly-traded companies where more than
    one person would be required to elect a member of the board of
    directors.
        Mr. Roskam. But the other situation is the shareholder in
    this case has the ultimate vote, don't they? I mean, the
    ultimate vote is--
        Mr. Ferlauto. Not our shareholders. Fiduciary--
        Mr. Roskam. Well, let me finish.
        Mr. Ferlauto.--responsibility for institutional--
        The Chairman. Suspended. The gentleman from Illinois.
        Mr. Roskam. The ultimate vote is the sale of the share. The
    ultimate vote is to say we're done. We're not doing business
    with you.
        Mr. Ferlauto. Let me explain to you the fiduciary
    responsibility of large institutional investors that are
    required by fiduciary responsibility to hold the market. And
    when you hold the market, when you have $20- or $30- or $100
    billion to invest, it means that you cannot trade in and out of
    a company. My funds are highly, highly indexed. 75 percent of
    their assets are indexed.
        Mr. Roskam. Cannot go in and out of the marketplace?
        Mr. Ferlauto. For 75 percent of our asset allocation within
    public companies are indexed to the market.
        The Chairman. Would the gentleman yield for one more--
        Mr. Ferlauto. Yes.
        The Chairman. I have to say this, though. The analogy of
    saying to the shareholder, if you don't like it, then sell your
    share, would be in the union situation, if you don't like it,
    then quit your job. I don't think either one ought to be the
    object.
        Mr. Roskam. Clearly. Look, I am not advocating that. I
    don't think you are implying that.
        The Chairman. But, give me 30 more seconds and we'll move
    on.
        The gentleman from Texas.
        Mr. Green. Thank you, Mr. Chairman, and I am most
    appreciative for your hosting these hearings and I thank the
    persons who are witnesses for giving us your time and your
    information. It has been most edifying.
        On the question of salaries, while I do not have the
    specific information that the chairman referenced with
    reference to CEO's versus union officials, I do have something
    that I think merits consideration.
        According to the AFL-CIO, the average CEO in the United
    States makes more than 260 times the pay of an average worker,
    and other studies in 2003 indicate that the average, large
    company CEO made 500 times the amount of the average worker.
        I do not think that Congress, and I think most people
    agree, should determine how much compensation is too much
    compensation. I do not think Congress should do this, which is
    why Congress would never cap what lawyers make. Congress
    wouldn't do it, because, we do not think that we should
    determine how much is too much. We want the market to set how
    much folk ought to receive as compensation. Thank God for
    Congress.
        Friends, and I will move specifically, if I may, to Mr.
    Davis. Mr. Davis you spoke of alignment and I would like to
    juxtapose, if I may, after the fact alignment with before the
    fact alignment. And I would like to with you, if you would,
    give me some indication as to whether it costs more to align
    after there has been a colossal mistake, or does it cost more
    to align before.
        It seems to me that what Chairman Frank is proposing is
    before the fact alignment. Give the people who have a vested
    interest in the business an opportunity to give an opinion as
    to what alignment is. Now, we can wait until after the
    compensation has been accorded, discover that it was
    inappropriate, and then align.
        The question becomes for me, which is more cost efficient?
        Mr. Davis, if you would?
        Mr. Davis. Well, thank you, Congressman. That's a great
    question. And I would like to first, if I might, endorse your
    earlier point which is that Congress really does not have the
    job, as the gentleman said earlier, of determining what is pay
    for failure. In effect, what this bill does and what the
    legislation does in the United Kingdom is to empower the
    shareholders to make that judgment as to what is failure and
    what is success. Congress is stepping out.
        Mr. Green. In respect to your question, I entirely agree,
    and this is I think one of the reasons why, in the United
    Kingdom, they feel that the advisory vote is a boost to the
    marketplace, gives U.K. companies a competitive advantage,
    because you do not wait for the failure to happen. You don't
    wait for the company to tumble off a cliff. You don't wait for
    companies to have problems and then as we have in this country,
    lots of litigation occurring after the fact.
        So, if you can be proactive, and that's what this bill
    does, this bill incentivizes the dialogue between investors and
    boards, so that boards can find out where the problems are
    early and so can investors, work them out, and do that before
    there is a catastrophe.
        My final comment, Mr. Chairman, is this. I heard talk of
    unintended consequences. We also have something in this world
    known as intended consequences. Intended consequences can
    consume a Board and place the Board at the mercy sometimes of
    the CEO. That sometimes is an intended consequence that will
    cause a CEO to have leverage above and beyond what may be in
    the best interest of the corporate personality.
        Mr. Chairman, I thank you for the time and I yield back.
        The Chairman. Thank you. The gentleman from California.
        Mr. Campbell. Thank you, Mr. Chairman. There seems to be
    consensus on the panel, and I believe on the dais, which agree
    by the way that we are not talking about the absolute level of
    compensation here, whether it is executives, lawyers, baseball
    players, or whomever. But talking about the alignment between
    shareholder returns and executive compensation, I also believe
    there is consensus both in the panel and on the dais that there
    have been instances where that alignment has not occurred,
    where certainly in retrospect, at least, compensation has not
    been at all aligned with shareholder returns.
        That being said now, there is not consensus on the panel
    about the bill that is kind of before us or may be before us
    and we discussed in this committee. So I have questions for
    each side, if you will, on that. Where Mr. Ferlauto, Dr. Davis,
    and Ms. Minow, what we are talking about here is basically
    legislative issue-specific corporate direct democracy.
        Do you support that concept?
        Ms. Minow. Mr. Congressman, we already have that concept.
    There are a number of issues put to a direct shareholder vote,
    including, for example, stock options, which are put to a
    binding shareholder vote, and so given that we currently have
    that structure, it seems to me that this is a legitimate item
    to add.
        Mr. Campbell. Okay, then do you believe there are other
    items that ought to be added to that list? Because one could
    say, certainly make an argument that although excessive, and
    out of alignment, executive compensation can get you upset as a
    percentage of the overall expenses of any corporation or the
    overall debt, or whatever, of any corporation, it is probably a
    fairly small number, it is probably unlikely to bring the
    company down.
        So should there be other things that should have this kind
    of prescribed, direct democracy?
        Ms. Minow. I am aware of the ``camel's nose'' analogy and I
    am not interested in pushing the camel's eyes, or eyebrows, or
    hump into their tent at this time. I have nothing else to add.
        Mr. Campbell. This is the only thing. There is nothing else
    that you or Dr. Davis in an interview can stick in that you
    think deserves similar shareholder, direct democracy scrutiny
    than this.
        Ms. Minow. I am a supporter of strengthening the ability of
    shareholders to nominate their own directors.
        Mr. Davis. That's separate issues. That's not being
    prescriptive as to the expenses and operations of a company,
    which is what this is doing.
        Ms. Minow. I have nothing to add to that list. Yes.
        Mr. Davis. Either of the rest of you. Or, do you support
    the concept generally of corporate, direct democracy?
        Look, I think we call it private enterprise when you own a
    piece of your property, you should have some say over how it
    works and that is, in effect, what this bill is trying to
    return to our market.
        That's the principle that this bill tries to address. I
    think in terms of legislation there is a lot of other work that
    could be done by shareholders and boards in the private sector.
    But in terms of legislation, this is the only thing we need to
    work on right now.
        And I think in the United Kingdom, and that's where I am
    coming from in my findings, this has been the area where there
    has been the most egregious misalignment between how a board
    operates and how shareholders operate.
        Mr. Campbell. Right, but there have been companies that
    have been brought down by too much debt, too much marketing,
    and by poor product allocation.
        Should we be putting those things?
        I am not aware of a company. Maybe you all are. You know
    more than I do on this subject, that has actually been brought
    down, in other words, gone bankrupt or whatever, because of
    excessive executive compensation. But I am aware of ones that
    have been brought down by a number of other expenses and
    factors.
        Yes, Mr. Ferlauto?
        Mr. Ferlauto. If I may, other than again the proxy access
    right to nominate directors, the compensation issue stands of
    particular importance, because it flags and it creates
    incentive structures that impact widely on the way the company
    operates.
        Particularly, I can talk about succession planning issues
    and a whole variety of incentives that get misaligned. So I
    think that the only place where democracy--democracy is not the
    word--it is accountability, you have to hold boards accountable
    only on the pay issue.
        Mr. Campbell. One question that you said if compensation
    then, should we go down the chain, should we include collective
    bargaining agreements? Should we include employee benefits to
    make sure they are aligned with the corporate objective?
        Mr. Ferlauto. I am a strong believer in the business
    judgment world, John, so that only the five most highly
    compensated as required within the SEC disclosures.
        Mr. Campbell. I am not sure why five is the magic number
    and why we should stop there and not go all the way through,
    but we will discuss it.
        Let me ask Mr. Castellani and Dr. Kaplan a question in my
    last couple of seconds. Only I would suspect that you guys do
    not believe in prescribed corporate direct democracy, whether
    it is for this subject or anything else. If you don't, however,
    do you?
        Mr. Castellani, you talked about majoritarian voting. There
    is potential cumulative voting. Do either of you support other
    methods that where shareholders came through a board of
    directors express their displeasure with a company's operations
    executive compensation, whatever.
        Mr. Castellani. Absolutely.
        Mr. Campbell. Could you tell me what those are?
        Mr. Castellani. We have been very supportive and the SEC
    has promulgated regulations that enhance shareholder
    communication vehicles and mechanisms between the board of
    directors and the shareholders. There has to be input from the
    shareholders to the board of directors and that communication
    is something that we very much support.
        Mr. Campbell. Dr. Kaplan?
        Dr. Kaplan. I would agree, I think, with everyone on this
    panel in supporting director majority votes, which seem to be
    happening through the market.
        And greater shareholder access to the proxy, which is
    something that I think is a much more complicated issue. But I
    would, just in general, repeat what I have said. The market and
    the scrutiny are working. You already, which had not been
    mentioned before but just came up, you already have
    shareholders having a required vote on stock options.
        So, there is already some binding vote on shares, and so
    putting this in again is going to have very little benefit and
    will add costs.
        Mr. Campbell. Thank you.
        The Chairman. I am going to ask for just 20 seconds. I
    would just ask Mr. Castellani and Ms. Kaplan in particular, the
    SEC just ordered AT&T to let the shareholders vote on pay.
        Mr. Castellani, do you think the SEC decided that wrongly?
        Mr. Castellani. I am not aware of that.
        The Chairman. Well, you don't think I made it up. I mean
    the SEC told AT&T that they had to have a shareholder vote on
    compensation.
        Mr. Castellani. Well within the context of the SEC
    decision-making process, no, that's fine.
        The Chairman. So, the SEC can order them to do this.
        Mr. Castellani. They can.
        The Chairman. Okay. The last I time I checked, the SEC was
    a government entity. Is that not the government ordering them
    to do that?
        So, in other words, Dr. Kaplan, what do you think about the
    SEC's decision ordering AT&T to do what the board of directors
    did not want to do?
        Mr. Kaplan. This is again something I said earlier. If
    shareholders identify company--
        The Chairman. No. I am asking not what the shareholders
    said, but what the SEC is ordering them to do.
        Mr. Kaplan. The SEC must have looked at the situation and
    said a shareholder vote was in order.
        The Chairman. That was okay?
        Mr. Kaplan. If you are identifying the bad guys, so this is
    the whole point where you want to go after the bad guys.
        The Chairman. AT&T are the bad guys?
        Mr. Kaplan. They may be, but presumably, they may not be. I
    don't know.
        The Chairman. I am sorry.
        Mr. Kaplan. Could I clarify something? I believe the SEC
    ordered AT&T or directed AT&T to put a shareholder proposal on
    the proxy to allow--
        The Chairman. AT&T ordered them to do it.
        Mr. Kaplan. Not to vote itself.
        The Chairman. But as a result, if the shareholders vote for
    that, they will then have that right. And, again, this is the
    government ordering the board of directors to do something. I
    am just wondering whether the objection is to Congress doing it
    rather than the SEC doing it.
        It is the gentlewoman from Wisconsin's time.
        Ms. Carson. Thank you so much, Mr. Chairman, and I want to
    thank this very distinguished panel for being patient with us
    through our votes and so on.
        I would love to ask each of you questions, but I know that
    my time is short. So I really want to direct my questions, I
    think, to Dr. Kaplan and to Ms. Minow. I want to start out with
    you, Dr. Kaplan.
        You had some very compelling testimony. You talked about
    our economy having grown over the last 15 years, but the
    executive compensation has risen, and how hedge fund managers,
    basketball players, and other compensation has grown as well.
        I guess I first of all would like you to juxtapose that
    particular observation against other testimony that we've heard
    in this committee from I guess, the great Wizard of Oz, Federal
    Reserve Chairman Bernanke, who really has sort of agreed that
    the growing inequity in compensation is very troubling, because
    he points to two indicators, consumption and productivity, as
    really blowing up our economy.
        And when you stop and think about a CEO making $84 million,
    he probably still only has one Rolex watch versus our ability
    to have thousands of people buy Rolex watches, which would keep
    the economy going.
        I see you are taking notes, so I guess I want you to
    respond to your long-term projection of where our economy will
    go, if we just have this little island of folks making a lot of
    money: basketball players, CEO's, and everybody else being too
    poor to consume, while they are continuing to be more and more
    productive.
        You also made a couple of points that I would like to
    elaborate on, because they are a little bit underwhelming to
    me. You say that this bill will have costs, and you did not
    specify what those would be. Well, yes, there are costs to
    implementing new regulations. And then you seem to suggest that
    General Mills and other sort of public held companies would
    have no takers for CFO's and CEO's if we were to pass this
    legislation.
        They would all run to the private equity firms and, you
    know, that they would somehow just shrink away from these $40-
    and $50 million packages. And I guess I want you to respond to
    that.
        And then I want to ask Ms. Minow a question. She made a
    very, very provocative point that this legislation is
    necessary, because if we continue to have these kinds of
    disparities, people will not invest anymore. They will invest
    elsewhere. And I want you to expand on that and clarify that
    for me.
        Thank you, so much.
        Mr. Kaplan. Thank you. There is a whole lot to talk about
    and I think those are very important issues. And I think the
    increase in inequality is a fact and it is a very difficult
    issue. I think that Federal Reserve Chairman Bernanke described
    what was going on. I don't know that he had any prescriptions
    other than to say that it was a difficult issue.
        He did say that it was important to maintain equality of
    opportunity and that really means making sure that the less
    fortunate have access to opportunity and education. He also
    stressed that--
        Ms. Moore of Wisconsin. He needed the opportunity to
    consume.
        Mr. Kaplan. Well, he stressed that he said it did not mean
    equality of outcomes.
        Ms. Moore of Wisconsin. But they have to be able to
    consume, though, to keep the economy going.
        Mr. Kaplan. That's correct. And again I can point to the
    economy over the last 15 years that has done very well. Incomes
    for everyone have gone up. But there is no doubt that they have
    gone up more at the high end.
        Now, the University of Chicago answer to give you is that
    competition will drive some of the extremes down. My preference
    is to allow competition to work. Over time, when people see a
    lot of money, that attracts entry which drives any excess
    profit down.
        Now, coming to your question about finding CFO's and CEO's,
    the numbers that have been bandied about with hundreds of
    millions of dollars are really the exception. This was in my
    testimony. It points out the median salary for the CEO of an
    S&P 500 company--who is managing over 20,000 people--is $8
    million a year. So that's a lot of money, but it is not $100
    million, it is $8 million. And that CEO will make more money if
    the company does well. If the company doesn't do well, then
    that CEO makes less money. There is a lot of pay for
    performance in the current system.
        Now, will CFO's and CEO's leave at that amount of money?
    And this is something that I know sounds very strange, and I
    hesitate to say it, but you see it in private equity deals, and
    you hear it in talking to CFO's and CEO's. With all the
    scrutiny, all the pressure, and all the regulation, CEO's and
    CFO's are thinking of doing other things. And it is the best
    ones. So, it is not my preference to say that, but that is how
    it is.
        Now, the last thing about the costs versus the benefits, I
    think there are very small or no benefits from this bill. I
    think the costs are not earth-shattering, so it is not as if
    the world is going to be destroyed if you put this in, but I
    think there are costs in terms of extra time, extra angst,
    dealing with political interest.
        And those costs actually hit the good companies, because
    the good companies are doing the right thing now, those are the
    ones that actually create the most value in this economy, and
    you will be imposing more costs on the good ones. So I hope
    that's helpful.
        The Chairman. The gentlewoman has a minute left if she
    wishes to use it.
        Ms. Moore of Wisconsin. I would love an opportunity for Ms.
    Minow to respond.
        The Chairman. Go ahead.
        Ms. Moore of Wisconsin. Thank you.
        Ms. Minow. This relates also to Mr. Campbell's question of
    a moment ago. When Gary Wendt took a job, he insisted on a $45
    million signing bonus and a lot of other protections against
    the consequences of poor performance. And later, when a very
    good offer to buy the company came in, he turned it down
    because he was doing just fine.
        It really didn't matter how the shareholders did, and the
    company ultimately went into bankruptcy. People do not want to
    invest if the CEO is going to do fine, whether or not they do
    fine. People want an alignment of interest, and we will send
    investment dollars abroad.
        I am meeting a week from Monday with a group of
    international investors in American companies who are deeply
    concerned about this issue and who will take their money out of
    America if we do not solve it.
        The Chairman. I thank you. Let me thank the panel. If you
    can stay with us another half hour so we can get everybody, I
    appreciate your indulgence.
        The gentleman from North Carolina.
        Mr. McHenry. Thank you, Mr. Chairman.
        I think this is a fascinating subject for us to discuss and
    the panel has been fantastic. I have watched it on TV.
        We have had the votes. We have been running around today,
    but I have caught most of your testimony. I wanted to follow-up
    for my colleague from Illinois, Mr. Roskam what his questions
    were earlier.
        Some of you on the panel actually have special, well,
    corporations in America have a special privilege granted to
    them by the government. In essence, they are dealt with as
    individuals and that is a special notion that the States have
    given them and our government has respected. Unions also have a
    special place, as well as universities, tax status and so
    forth.
        And, so, Mr. Ferlauto, I believe I am stating your name
    correctly or close enough. Who do you work with?
        Mr. Ferlauto. I do not understand.
        Mr. McHenry. What is your business that you are employed
    by? Oh, it is AFSCME, the largest public employment service
    union in the country.
        Are you one of the top five paid individuals at AFSCME?
        Mr. Ferlauto. No. I am not.
        Mr. McHenry. You are not?
        Do the top five most highly compensated individuals at your
    union, do you members vote on their salary and their
    compensation?
        Mr. Ferlauto. Our members do not vote directly on their
    salary.
        Mr. McHenry. Do they have some sort of shareholder
    democracy by which they can state that?
        Mr. Ferlauto. Our members directly elect those officers and
    if those officers actually use the union treasury to buy
    $15,000 dollar bottles of wine, to have huge birthday parties
    for their wives, to buy country club memberships, or to get
    loans other than for giving, those officers would be out on
    their ear in less than 30 seconds.
        Mr. McHenry. They might be in jail along with the corporate
    CEO's that you are referencing. They might be in jail.
        Mr. Ferlauto. Many of those things that we are referencing
    were actually not illegal to do. It was just immoral to use
    your treasury for those things.
        Mr. McHenry. So, your shareholders, your employers, if you
    will let me continue, they do not have an advisory vote of any
    sort on compensation packages. Yes or no.
        Mr. Ferlauto. Not directly when there are compensation
    packages.
        Mr. McHenry. The answer is no. So, you know, I am trying to
    follow this and I also know that as a union, you have large
    investments that you invest for your members, do you not?
        Mr. Ferlauto. We do through our pension funds.
        Mr. McHenry. Now, do your pension funds, where do they
    invest?
        Mr. Ferlauto. They invest in the public markets and the
    private markets.
        Mr. McHenry. Okay. So, also in private equity funds as
    well.
        Mr. Ferlauto. Sometimes, yes.
        Mr. McHenry. Sometimes, yes.
        And are you aware of the compensation packages in the
    private equity firms?
        Mr. Ferlauto. As much as they are disclosed.
        Mr. McHenry. Does the union not have a policy about
    investing with these private equity funds?
        Mr. Ferlauto. Actually, the direct AFSCME fund that I
    represent does not invest in private equity because of the
    disclosure and the fee issues and the high risk issues
    involved.
        There are other funds that involve our members that do,
    because they have the sophistication. They also invest and
    engage with those private equity principles around fee issues
    and other types of issues.
        Mr. McHenry. Okay. Certainly, I appreciate that.
        And so you are aware that CEO's in these private equity
    funds make far in excess of what the publicly held company
    CEO's make, adn yet, your union still invests with them.
        So what your testimony here before Congress is very much--
        Mr. Ferlauto. My union does not directly invest. It is our
    members' money invested in some.
        Mr. McHenry. Members' money which you as a union are
    investing for them through your pension funds, correct?
        Mr. Ferlauto. There are a number of different ways our
    members' money gets invested: directly through our pension fund
    and then directly through the public pension systems that
    sometimes have all our members represented on their boards, so
    there is some slight difference.
        Mr. McHenry. Okay, Dr. Bebchuk, going to you, are you one
    of the top five most highly compensated individuals at Harvard?
        Mr. Bebchuk. No. And I do not get to vote on the
    President's compensation either.
        Mr. McHenry. Okay, and as a non-profit in a very elite
    school, your interest of course. I hope that one day you would
    be the most five highly compensated members at Harvard.
        But, nonetheless, do you think if you look at publicly
    traded companies, they also pay very high salaries and fees to
    entertainers, news anchors, and athletes, through endorsement
    deals, and some of these packages are far larger than what the
    CEO's are making. Do you think these decisions should receive
    shareholder approval, since they are so large?
        Mr. Bebchuk. I think not. And I think the key distinctions
    are the following. I do not have any problem about
    transactions--arms-length contracting. When you have arms-
    length contracting, we can count on the market to produce good
    outcomes.
        Other examples about basketball players, private equity
    managers, and so forth, those are arms-length contracting
    market outcomes. The problem with executive compensation is
    that we do not have arms-length contracting and that is why you
    need some accountability mechanism, and the standard
    accountability mechanism is to have the owners have a say.
        Mr. McHenry. Okay. Mr. Chairman, just two very brief
    questions to wrap up here so we can keep the panel moving.
        To follow up with you Mr. Bebchuk, what you are saying is
    that the marketplace does not work with CEO compensation, and,
    bad CEO's are not thrown out. Well, as it turns out the
    marketplace seems to be continuing to turn over CEO's, and
    getting rid of CEO's in the marketplace as Dr. Kaplan has
    referenced in some respects is very functional.
        My final question to Mr. Castellani and Dr. Kaplan concerns
    options versus salary. If you all could touch very briefly on
    the difference in compensation packages of straight salary that
    CEO's receive versus the options, in essence saying that the
    growth and the benefits accrued to shareholders will also
    accrue to the CEO of the company.
        Therefore, if the CEO is successful, he will receive
    greater compensation. If he is not successful with the
    corporation, he will not receive greater compensation.
        The Chairman. We will have to get to the answers.
        Mr. Kaplan. The options versus salary--that's a very
    important point. Part of what has happened in the last 25 years
    was a big move from cash-based compensation to options and
    those options do tie the CEO's wealth to shareholders and the
    data I gave you earlier--that said there was pay for
    performance--is driven by those options.
        The options are not worth anything if the stock price goes
    down. They are only worth something if the stock price goes up.
    If CEO's performed well, their options are worth a lot, and if
    they performed badly, their options were worth little.
        The Chairman. Mr. Castellani?
        Mr. Castellani. Only to add to that answer is that
    compensation should be balanced. Salaries should reflect an
    appropriate level for the basic job that the person is hired to
    do. Stock options should be a method or could be performance
    shares to tie a portion of that performance to the housing
    stock performance.
        But those systems should be balanced so that it is both
    tied to the stock, but also tied to other parameters that are
    important for corporate value creations such as sales,
    revenues, margins, cash flow, and the like.
        The Chairman. The gentleman from Missouri.
        Mr. Cleaver. Thank you, Mr. Chairman. My colleague was
    raising a lot of questions about labor unions that I was trying
    to find the reference in the bill. What I would like to do, Mr.
    Kaplan, is if you could just give me the ``Readers Digest''
    answer. You mentioned earlier that you believe that some CEO's
    were in fact underpaid.
        Can you name one? We do not have a lot of time because the
    chairman wants to stop, so can you name one CEO who is
    underpaid?
        Mr. Kaplan. David Calhoun was at GE. He ran a $45- to $55
    billion business, and, he left GE to run a private equity
    funded company with only $5 million in sales.
        Mr. Cleaver. Okay. Can you tell me how much he had before
    he left?
        Mr. Kaplan. I do not know.
        Mr. Cleaver. Is it about $5 million?
        Mr. Kaplan. I do not know, exactly.
        Mr. Cleaver. Well then how do you know that he was
    underpaid?
        Mr. Kaplan. Well, if he were overpaid there, why would he
    have left?
        Mr. Cleaver. That is really bad theology.
        Ms. Minow. Thank you, University of Chicago.
        [Laughter]
        Mr. Kaplan. I can give these other examples, if you want a
    few.
        Ms. Minow. So you are overpaid at the University of Chicago
    because you have not left?
        Mr. Cleaver. I asked for one. You have not given me one,
    yet.
        Mr. Kaplan. I did give you one--David Calhoun. Can I give
    you another?
        Mr. Cleaver. No. You cannot just throw out names. I mean,
    if they are underpaid, tell it.
        Mr. Kaplan. The CEO of SunGard. I can give you some
    details.
        Mr. Cleaver. If they are underpaid, you need to say how
    much and you at least need to know how much they make, or you
    are incapable of saying that they are underpaid.
        That's not hard. Now, I mean, you cannot answer the
    question, and that is fine. Someone mentioned earlier that it
    was a bad analogy. They said it is okay to give people large
    compensation packages, because it is like the settlement in a
    lawsuit to just get it to go away.
        Mr. Ferlauto, do you know a man or have heard of a man
    named Lee Raymond?
        Mr. Ferlauto. Yes, he is quite well known, actually.
        Mr. Cleaver. I would like to ask Mr. Ferlauto or Mr. Kaplan
    here, do you know Mr. Lee Raymond? Do you know who he is?
        Mr. Kaplan. Yes.
        Mr. Cleaver. Mr. Castellani?
        Mr. Castellani. He is the former CEO of Exxon-Mobil.
        Mr. Cleaver. Do you know how much money he was making a
    year?
        Mr. Castellani. I do not know exactly.
        Mr. Cleaver. I know, exactly--$38.1 million per year, and
    his retirement package was $400 million. Are you all right with
    that?
        Mr. Castellani. Yes, sir, I am.
        Mr. Cleaver. On top of the fact that we gave them a $10
    billion tax break, which means they are siphoning off taxpayer
    money, and giving it to the CEO.
        The Chairman. If the gentleman was really good, that is
    what they were rewarding him for.
        Mr. Cleaver. Are you all right with that--taking this
    taxpayer money?
        Mr. Castellani. Yes, I am. Yes, sir.
        Mr. Cleaver. Are you all right with it, Mr. Kaplan?
        Mr. Kaplan. Yes. Now, I say that one thing that is an issue
    is the pensions. And to the extent that some of these pensions
    have been given on CEO's pay that is not performance based, and
    in some cases the Board did not quite understand how big those
    pensions were, I think those should change and what will
    happen.
        My prediction is with the new SEC disclosure, where this is
    going to be disclosed more carefully and where boards will be
    looking at this more carefully.
        Mr. Cleaver. And, if you do not have a problem with it.
        Mr. Kaplan. You will see fewer of those kinds of CEO's.
        The Chairman. The gentleman from Missouri?
        Mr. Cleaver. If you do not have a problem with it, I mean,
    you cannot have a partial problem. You are saying you think it
    is going to be okay.
        Earlier, you said you did not have a problem with it, which
    means it does not need to change. It is already okay. And so,
    you are saying that these ``walk on the water CEO's'' and
    ``boardroom disciples'' can manipulate even the taxpayer money
    in order to pay the CEO an exorbitant amount of salary because
    he or she is worth it, no matter what. And, so, my reservation
    is that this legislation is not enough of the ``last supper.''
        I yield back the balance of my time.
        The Chairman. Well, I would point out--and this is one of
    the problems you have in the case of Mr. Raymond--his $400
    million settlement in that year. I believe Exxon-Mobil failed
    to fully fund its pension, so we are not just talking about a
    lot of money in one place, but money that should have gone to
    another place.
        The gentleman from New Mexico.
        Mr. Campbell. Mr. Chairman, I would like to ask unanimous
    consent to submit a prepared statement by WorldatWork for the
    record.
        The Chairman. Yes. It would be good and the Chair asks in
    that extent to apologize. I will probably get that. I put into
    the record something that was presented to me by the minority
    from the H.R. Policy Association, and I mistakenly stated that
    they were supportive, but I put it in the wrong pile. They
    oppose the bill. And this will also go in the record.
        Mr. Campbell. Thank you,
        Chairman Frank. The gentleman from New Mexico.
        Mr. Pearce. Thank you. This was an interesting panel. I
    appreciate all of your participation here.
        Mr. Castellani, how long does it take capital to flee?
        Mr. Castellani. It can flee very quickly.
        Mr. Pearce. Hours, days, months, years?
        Mr. Castellani. If you look at the volatility of the
    market, it flees on an hourly basis.
        Mr. Pearce. On when?
        Mr. Castellani. An hourly basis.
        Mr. Pearce. So, Ms. Minow, and also Mr. Davis, raised
    strong arguments that frankly it is--we are going to undermine
    the credibility, I think Ms. Minow said--that people will
    invest elsewhere. So a strong piece of the argument Mr. Davis
    declares in his item 3 that it is actually an item of
    competitiveness.
        Tell me about the outflow of capital. And we will flee at a
    moment's notice, within minutes literally, we saw the collapse
    of the Mexican economy, and we saw the collapse of the Thai
    economy.
        Tell me about the evacuation of capital because we are
    losing competitive edge. We are undermining the credibility.
    This process has been going on. I have been listening here.
    This process has been going on for 15 years, 20 years, overpay.
        Tell me about the evacuation of capital that can happen at
    a moment's notice. Mr. Kaplan, if you would address, please,
    very briefly, the evacuation of capital. What are we seeing?
        Mr. Kaplan. I am not sure I have a quick answer, other than
    you have to look at the economy, the stock markets.
        Mr. Pearce. Our stock market is fairly solid.
        It is the British, we are led to believe, and according to
    Mr. Ferlauto's testimony, the Netherlands, Australia, and
    Sweden, are doing it better. The United Kingdom is doing it
    better. Is capital evacuating to those markets? Are they seeing
    tremendous increases in their stock market, Mr. Kaplan?
        Mr. Kaplan. Not over the long run. The United States has
    done quite well.
        Mr. Pearce. Okay, and those markets, you are saying with
    respect to relative size that those markets are not
    significantly better?
        Mr. Kaplan. No.
        Mr. Pearce. Mr. Ferlauto, in your testimony you have on
    Page 2 a discussion that many people have mentioned--relative
    pay, relative amounts--and, you do not really draw the
    conclusion about what is wrong with that. But, let's say your
    union wants to bring in a keynote speaker for your national
    gathering. That happens. I have heard the number for Mr.
    Clinton, who has retired from the office down the street,
    $250,000 for a 1-hour speech. Is that something? Does your
    association bring in speakers that you pay anywhere from $30-
    to $40- or $50,000 per hour?
        Mr. Kaplan. I do not believe so.
        Mr. Pearce. Oh? I suspect I would like to see if you could
    provide me the programs of your last 10 annual meetings where
    you do bring speakers in. I suspect that we do have people who
    are very highly compensated and they are engaged or embraced by
    the hour.
        Ms. Minow, you have mentioned that the real frustration
    comes when pay is not linked with performance. Now as we are
    looking at competitiveness and we have testimony in front of
    the Transportation Committee that of the seven airlines that
    sat in front of us a couple of years ago, we are going to give
    a very large bailout, because all of the companies, all of the
    airline companies were not performing.
        Now, my question to them was at 100 percent utilization,
    you fill every seat, every day, every month, in every year,
    will you make a profit? Only Southwest is making a profit every
    month in a competitive environment. They all fly airplanes and
    look alike, made out of the same sheet metal, use the same sort
    of diesel, about the same amount. The only difference was the
    amount of days worked. Southwest pilots get about the same,
    $200,000 per year.
        But the six or seven airlines that are right at the fringe
    of bankruptcy, they work 3 days a month for their pay--$200,000
    a year for 3 days a month. And if they work at the end of the
    month, they can get 3-day trips. And Southwest--they get 15
    days a month.
        Now, I would agree they pay for performance, but we are not
    concentrating on the real competitive disadvantage that we are
    putting our companies up against. Because, if you take the
    8,800 pilots of American Airlines, and you put $100,000, that's
    $880 million versus, we are talking these little $20 million or
    $30 million packages. But if you run them up, and I do not know
    what everybody gets paid, but I assume 100,000 pilots at
    $200,000 is $1.6 billion. And so I think we are grabbing at it
    by limiting it, we want to talk about competitiveness, but we
    really do not want to talk about competitiveness.
        We do not want to talk about the union structure that has
    that pay in place, and if we are really talking about
    competitiveness, Ms. Minow, I think that somewhere in your
    conversation you would have talked about frivolous lawsuits.
    Because that is where American Express told us 4 years ago in
    New York, that if we do not cure frivolous lawsuits, every
    major corporation in America is going to leave.
        I thank the chairman for his indulgence and appreciate the
    opportunity to make the points. Thank you. If anyone wants to
    respond, they are welcome to if the chairman--
        The Chairman. Well, if the gentleman has no objection, we
    will move on to the gentleman from California.
        Mr. Sherman. Thank you, Mr. Chairman, I have a number of
    observations.
        The gentleman from New Mexico may not fully understand
    Democratic Party politics. Ask me. Ask any Democrat, including
    a former President to go speak, we speak for free, including
    former Presidents.
        Mr. Ferlauto, I think, has made an eloquent argument in
    favor of the bill by pointing out that General Electric
    suffered terribly by the decision of its Board to underpay its
    CEO, and of course a shareholder vote giving advice to the
    Board might very well have resulted in the appropriate level of
    compensation, which you have argued would be higher. It is
    unprecedented in history that the bulk of the world's capital
    is typically invested by giving it, putting it in the hands of
    strangers in faraway places. This has worked because corporate
    governments align shareholder interest with two strong pillars
    that control the money.
        The first of those pillars is management. The second is the
    board. Those are the twin pillars that assure what we are
    calling alignment. But in the area of management compensation,
    those pillars are a little shaky. In the area of the pillar of
    management, obviously, you are at cross purposes with
    shareholders. So, you lose one pillar right away. The second
    pillar, the pillar of the Board, will keep in mind many people
    on the Board are there because in practice, management put them
    there.
        And, second, the inside directors form a large caucus that
    influences the compensation level and options of the outside
    directors. So, you are missing one pillar. As a matter of fact,
    it is at cross purposes. And the other pillar is pretty shaky
    as well. Perhaps you need to shore up alignment with a
    shareholder vote.
        I want to take a minute before I get to questions, though,
    to talk about this performance-based compensation. CEO's are
    not rock stars. They are not sports superstars. When the Lakers
    win, they only put five guys on the court and Kobe can dominate
    the game.
        When General Motors wins, they put 100-, 200-, or 300,000
    workers on the court. And to say that any one individual is the
    reason why they win begs the question: if you were to take out
    the CEO of many companies and put in just a journeyman CEO,
    they might do just as well. Different people could argue it one
    way or the other, yet no one who is a basketball fan would
    argue that you could take Kobe out, put in a journeyman or
    shooting guard, and the Lakers would do just as well.
        So, the idea that a huge percentage of corporate
    performance is related to the CEO misconstrues basketball
    business. Second, we could end up with short term thinking, the
    CEO doing something just in the short term, because I think
    many of our corporate decisions are too short term. And,
    finally, CEO's may take wild risks in the last year of their
    career. Heads he wins; tails the shareholders lose. Mr. Davis,
    we have seen the Secretary of the Treasury join government
    where he gets paid as little as we do, which is still quite
    sufficient for us, but little in the world of corporate
    finance.
        So, maybe he was being overpaid by his previous employer,
    but are British corporations able to get competent leadership?
        Has there been a sell-off in British stocks because they
    have this advisory vote?
        Has Aflac's stock tanked because they are going to have an
    advisory vote?
        Mr. Davis. Congressman, there is no evidence of any of that
    occurring.
        Mr. Sherman. So, we could institute this measure and we
    could probably find people willing to work for the $5-, $10-,
    or $20 million they are able to get running major, public
    companies, and there would not be a shortage of talent.
        Mr. Davis. Yes, I think that's correct. As a matter of
    fact, even if you look at BP, we were talking about Lee
    Raymond, earlier. BP's CEO is just leaving office, and after
    many years of successful performance, and the last couple of
    years a very poor performance, he is leaving with a total
    retirement package of approximately $29 million, which is, you
    know, significant, but it is nothing like the $400 million that
    Lee Raymond left with.
        Mr. Sherman. And do we see many top European business
    leaders coming across to the United States to be employed as
    CEO's of Fortune 100 companies?
        Mr. Davis. I think there has been a good flow, actually,
    back and forth. There is no one.
        Mr. Sherman. But it is not a one-way flow.
        Mr. Davis. No.
        Mr. Sherman. So, we pay our CEO's a lot more. We do not
    have an advisory vote, and we lose as many CEO's to Europe as
    we are able to recruit from Europe.
        Mr. Davis. There are a lot of Americans going abroad and
    running companies in Europe and Asia, everywhere.
        Mr. Sherman. I yield back.
        The Chairman. The gentleman from Colorado.
        Mr. Perlmutter. Thank you, Mr. Chairman, and I really thank
    the panelists for having the patience to be here with us all
    day. I am sorry I missed some of the early testimony, but quite
    frankly, I agree with a lot of what everybody is saying and I
    disagree with some of the things you have said and I disagree
    with my colleague, Mr. Cleaver, who was very upset about the
    compensation to the gentleman from Exxon.
        I mean, if that is what the company is prepared to pay,
    then they are prepared to pay it. I think that this bill has an
    elegance, and, Mr. Kaplan, I would have to disagree with you on
    this, Professor. There is an elegance here where you have, as
    Mr. Sherman was saying, you have management. You have the
    directors. You have the shareholders. And I think you said you
    thought there would be a lot of costs attached to this without
    much benefit in return and I guess my feeling is just having. I
    have represented management. I have represented boards of
    directors. I have represented shareholders in all sorts of
    contexts.
        Shareholders, if they take the time to read 10K's and 10Q's
    and different kinds of disclosures, are not ignorant people.
    They are smart. And they will, if given the opportunity,
    thinking management's performance does not fit with the
    performance of the company, they will shoot a shot across the
    bow, which the directors better take seriously.
        If the directors take it seriously, they are going to talk
    to management and they are going to say, you guys are out of
    line. So, but then, on the other hand, if they have a high
    performing company, you know, and Exxon was making zillions of
    dollars, they are going to reward their executives because they
    do not want to lose them.
        So, the shareholders are not going to act in a way that is
    contrary to their financial interest. At the end of the day, I
    think that the Federal Government also has an interest in this,
    not the Securities and Exchange, but I would come at it from
    the Pension Benefit Guaranty Corporation, because PBGC has so
    many pensions that it backs up that I have seen where the
    companies failed where the officers were getting tremendous
    salaries, and all of a sudden then the pensions that have
    invested it, you know, they turn out upside down and we are
    bailing them out.
        So, I mean, there is at the end of the day a role for the
    Federal Government. If you could, Mr. Kaplan, just again,
    because you really did get to the point. You thought the costs
    of this outweighed the benefits. And, you know, that is where
    we differ. If the shareholders are prepared to pay a fortune to
    their execs, God bless them. Go for it. But I think the
    shareholders should have an opportunity to say something.
        Mr. Kaplan. I think it is a legitimate issue and there are
    legitimate disagreements, so I very much appreciate that. I
    think the view I have taken is under the current system when
    the company is not doing a good job, shareholders have lots of
    ways to go after the company. There have been a number of
    compensation proposals that are on the proxies. When the
    company resists, they get a lot of publicity. So, that's a lot
    of advice to the directors that there is a lot of publicity.
        So, in addition, shareholders do have to approve increases
    and option plans. Actually, it is a binding vote on checking
    some of the compensation. So under the current system the
    companies that are bad do get attacked, and with hedge funds
    now and activist shareholders, they really do get attacked.
        The firms that are doing a good job are left alone, and I
    think this bill will not do very much different to the bad
    companies, but it will affect the good companies. And I would
    prefer to wait and see what the new SEC disclosure does and let
    the market work.
        Mr. Perlmutter. So, I mean, really to summarize, you think,
    and I might not disagree with this. On a company-by-company you
    know annual shareholder meeting, the shareholders do have an
    opportunity to say, whoa. Let's throw these bums out. Let's cut
    their salaries in half, you know, speak up at the shareholder
    meeting.
        Do they really have that kind of opportunity?
        Mr. Kaplan. They have the opportunity to speak up and to
    propose shareholder amendments or shareholder votes, yes.
        Mr. Perlmutter. Last question. There was all that
    conversation about capital fleeing. If I understand correctly,
    England already has a similar kind of process, but I just had
    some people in from the investment community yesterday
    concerned that all of a sudden a lot of companies are moving to
    the London Exchange, because they feel like they are treated in
    a better fashion.
        What is that all about?
        Mr. Davis. If that is directed to me.
        Mr. Perlmutter. To anyone.
        Mr. Davis. It was one of the points that I made. I think
    what has occurred in Britain is something of a grand bargain,
    if you will. And the bargain is we won't put a lot of red tape
    on the corporations, but at the same time we are going to give
    shareholders significant authority.
        I would disagree with my colleague. I do not think
    shareholders have anywhere near the authority that they should
    have in this country, and in Britain they have given
    shareholders more authority at the cost of lower regulation.
        So, in effect, the advisory vote bill that we are talking
    about here is providing shareholders with the kind of tools
    they need to make the market work.
        The Chairman. One more round of questions. You mentioned,
    Mr. Kaplan, that there has to be a binding vote on options. By
    whose authority?
        Mr. Kaplan. Yes, and again.
        The Chairman. No. It is a very straightforward question.
        Mr. Kaplan. You want to increase?
        The Chairman. Whose authority?
        Mr. Kaplan. It is a New York Stock Exchange listing
    requirement.
        The Chairman. Thank you. Sometimes when we are asking
    questions, we want factual answers. It is a New York Stock
    Exchange listing requirement. Did you oppose that New York
    Stock Exchange listing requirement?
        Mr. Kaplan. I think that has been there for a long time.
        The Chairman. Well, I understand that. I have been here for
    a long time. That does not mean people do not oppose me when I
    run again. What does one thing have to do with the other?
    Please answer directly. We are not playing games with you. Do
    you think that should be revoked?
        Mr. Kaplan. I honestly have not thought of that.
        The Chairman. Dr. Kaplan, you lose credibility with me
    here, because you cite something, frankly, which contradicts
    the principles you have stated. This is an exterior imposition
    on the corporation's board of directors. It falls on the good
    and the bad companies alike. And I must say, you have more
    ability to distinguish those clearly than most of us do.
        But, it rains on the good and the bad alike. It would
    appear to violate many of your principles. It is there because
    the stock exchange has the power and you say you do not answer
    it. And I think that is because if you were consistent to your
    principles, you would be opposed to it, but then you could not
    cite it.
        I just want to elaborate on Dr. Bebchuk's point and ask
    others. People have said, ``Well, you know the question was
    whether we want to get Mr. Campbell's nose under the tent'', to
    mispronounce the metaphor.
        Mr. Campbell. No one will get my nose under that tent,
    thank you.
        The Chairman. First of all, I just want to deal briefly
    with this notion of this is going to lead to that. Anyone who
    says that has never seen the Congress in action. Let us be very
    clear. Around here, Tuesday does not invariably lead to
    Wednesday. The notion that because we pass the bill that does
    one thing that is somehow going to lead to something else.
        That just does not make sense. It is an argument given by
    people who were opposed to something on its merits but do not
    want to say so. So they say, well it might lead to something
    else. And then the question is, well, how do you separate it?
    And Mr. Bebchuk gave the argument.
        I do not want to see stockholders voting on everything. But
    I do believe, and this is where I would differ with Mr.
    Castellani, he said, well, the boards of directors are getting
    better. But I do not remember a clear-cut admission that they
    were not very good before they started getting better from the
    corporate world.
        And I think it continues to be, and this is Warren Buffett
    as of 2006 saying it is still the case that the relationship
    between boards of directors and CEO's is so close that it
    justifies an exception, that you do not get the arms-length
    relationship there.
        The boards of directors do not have a relationship with the
    workers. We do not need shareholder votes on union contracts
    with suppliers, with others, but the CEO's still, to a great
    extent, pick the directors. They have this very close
    relationship and what many of us are saying is that you can
    single out the CEO-board of directors relationship.
        The other question I would ask you is this. Because people
    have said, well, you have analogized it to those of us in
    Congress. As I recall, there were companies--I remember when
    Mr. Eisner paid Mr. Ovitz $150 million to make him go away
    quietly, and there was frustration, but there was no way to
    nominate opponents.
        Let me tell you this, enact a Constitutional amendment so
    that it is impossible to nominate anyone to ever run against
    me, and enact a rule that if I get any votes I win, and I will
    be the most independent-minded Member of Congress you have ever
    seen.
        So let me ask the panelists. Do you believe there is a
    justification for some shareholder votes in this case only on
    compensation in those cases where there is not any realistic
    shareholder democracy on the board?
        Let me ask Mr. Castellani and Mr. Kaplan.
        In cases where, under various State laws and corporate
    rules, there is no way to nominate an alternative member of the
    board of directors and board of directors members can be
    reelected even if they don't get a majority vote. Do you still
    think that's enough and that we don't need to do anything else,
    Mr. Castellani?
        Mr. Castellani. I'm not sure that I completely understand
    the question.
        The Chairman. Well, then I'll restate it. I apologize.
    There are corporations, as I understand it, where the way in
    which the board is elected does not allow for outside
    nomination and does not require a majority vote. What's the
    argument there for not allowing shareholders to have an
    advisory vote on the compensation?
        Mr. Campbell. Will the gentleman yield?
        The Chairman. I'll yield.
        Mr. Campbell. I guess I would then ask the question why
    does--
        The Chairman. I'll get my answer first and then you can ask
    yours.
        Mr. Campbell. All right. We'll do that.
        The Chairman. Yes.
        Mr. Castellani. Mr. Chairman, it really is an issue of who
    decides and what they decide. In this case, we are talking
    about directors who are elected by the majority.
        The Chairman. Excuse me, Mr. Castellani. That just so
    directly distorts my question. There are corporations where
    they were not elected by a majority of directors necessarily
    and where no one could nominate a competitive director. In
    those cases, how does the justification work?
        Mr. Castellani. If the board operates correctly, this is
    not necessary.
        The Chairman. So that we don't--if you think that whatever
    the board of directors does, however it's constituted it's
    okay, then say so, but don't invoke, oh, there's
    accountability, because there are boards where we know there is
    no practical way for dissatisfied shareholders to do anything.
        Mr. Castellani. There's a very practical way.
        The Chairman. What's that?
        Mr. Castellani. They can not own the shares.
        The Chairman. Okay. Then that's the point that Mr. Ferlauto
    made. That's the point that says if you don't like the union,
    you can quit your job. The notion that you can ``not own the
    shares'', I think that's a pretty inhospitable answer for the
    business community to be giving shareholders. If you don't like
    it, sell your shares.
        Ms. Minow, do you have a comment on that?
        Ms. Minow. I agree with you. The only thing that I know
    about investing is that you're supposed to buy low and sell
    high. And when you are concerned that the stock is at a low
    because it's depressed because of these various factors, it
    seems to me not just inhospitable, but it seems to me
    disingenuous to say just sell the shares when it should be
    easier for you to stay in the company and make a change.
        The Chairman. I'll yield to the gentleman from California.
        Mr. Kaplan. Can I ask a question? It depends under what
    circumstances the shareholders bought the shares. For example,
    the New York Times is, I think, closely held by the family, and
    so that is exactly one company.
        The Chairman. And you knew that going in?
        Mr. Kaplan. You knew that going in. So if you knew it going
    in, I think it's different. If you didn't know it going in,
    that's different. I think having the director require a
    majority vote and if the director doesn't get it, he or she is
    thrown out, that's a good thing.
        The Chairman. That's a good thing, but you don't think any
    government should impose it? Should a government impose it? I
    mean do you think that's a good result; would it be okay for
    the government to impose it?
        Mr. Kaplan. You know, my preference, again, is to see if
    the market--
        The Chairman. I understand that's your preference. I
    understand. We all have our preferences, as in my case well
    known. Do you think--
        Mr. Kaplan. I would prefer right now, given all the
    circumstances--I think the system is working.
        The Chairman. I understand that, Mr. Kaplan. But you have
    to give straight answers in my business sometimes. Is there a
    principle that would be violated? Do you have something you
    think would be a good result, and some people do it and some
    people don't?
        You know, you said you'd talk about angst. Here's where I
    disagree and then I'm going to yield to the gentleman from
    California. You talk about angst. Saying that the best way to
    do it is to let the bad companies be subjected to all that
    Sturm und Drang and all that--oh, there will be bad publicity,
    etc.
        If it's a good result, why isn't the transaction costs of
    going through it by this public campaign, and Ms. Minow yelling
    at people, and Mr. Felanto bringing a picket line, and all
    these people doing that, wouldn't it be better if it's a good
    result to have a government agency just clearly say, here's
    what you should do?
        That was addressed to Mr. Kaplan.
        Mr. Kaplan. I would just say Section 404, and I'm going to
    then--there are unintended consequences.
        The Chairman. Section 404 is very different than a clear
    cut thing that says you have a majority vote. Section 404 was
    broadly worded. I agree with Mr. Castellani; it should be
    changed by regulation. I think it's being done. I yield to the
    gentleman from California.
        Mr. Campbell. Mr. Chairman, on the argument that you just
    made, if an issue is that corporations do not--that people do
    not have the ability to nominate alternate directors and
    there's not majoritarian voting, then why does this bill, why
    is not the proposal to have majority votes and the ability to
    nominate directors which would continue the path of allowing
    shareholders to--
        The Chairman. Does the gentleman want an answer?
        Mr. Campbell. I do.
        The Chairman. It would be even more intrusive, and I think
    that's the ultimate goal. I would say this; I hope that's not
    where we go to. I don't think it is where we will go to. If we
    were to have a series of advisory votes I would ignore it;
    people would build up to that. But this is less inclusive and
    it tries to--in general, my view is that the boards of
    directors, even those that have not been--were democratically
    elected, in most cases can be trusted at least not to have a
    conflict.
        I make an exception here because of what Mr. Bebchuk talked
    about, the mutually supportive relationship of the CEO and the
    board of directors. So if the gentleman is complaining that
    this is not more intrusive in the corporate governance, I'll be
    glad to listen to his amendment at this juncture.
        Mr. Campbell. And you're very likely to hear it. I'd be
    curious to see--
        Mr. Ferlauto. Mr. Chairman, I mean, to be quite frank, I
    would trade this for real shareholder empowerment through a
    vote that could replace directors. Unfortunately, the Congress
    does not have that power. It's a State right that's also
    regulated by the SEC. But we believe that ultimately proxy
    access, the ability for shareholders to nominate a director,
    will be a solution.
        But you don't want to use that willy nilly, so that the way
    this really operates most effectively is to have an advisory
    vote that is a warning signal to directors that if they don't
    change practice then the option is to be voted out.
        Mr. Campbell. Mr. Castellani, you seem anxious.
        Mr. Castellani. Well, I just wanted to make a point to the
    committee, and I hope that it's not lost here because it is
    common within this panel, and I think within the business
    community, and with the Congress.
        Nobody is forced to own or invest in U.S. or foreign
    corporations. It is in the mutual interest of boards, of
    management, and of shareholders to be an attractive place for
    people to invest their money for return. All of this is about
    being responsible.
        The Chairman. I appreciate that, Mr. Castellani. That's
    what Ms. Minow was saying, and what I'm saying. Please don't
    tell us that the answer is to sell the shares. Please, short of
    that, let's give them an alternative. An advisory vote on
    compensation seems to me to be far less of an intrusive way to
    deal with it than to tell people to sell their shares.
        And now that I stand accused of being insufficiently
    intrusive into the affairs of corporate America, this hearing
    is adjourned.
        [Whereupon, at 1:43 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 March 8, 2007

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]