[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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