[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
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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
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