[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



 
                        CORPORATE GOVERNANCE AND
                        SHAREHOLDER EMPOWERMENT

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       INSURANCE, AND GOVERNMENT
                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               ----------                              

                             APRIL 21, 2010

                               ----------                              

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-125

            CORPORATE GOVERNANCE AND SHAREHOLDER EMPOWERMENT
                        SHAREHOLDER EMPOWERMENT

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,

                       INSURANCE, AND GOVERNMENT

                         SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 21, 2010

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 111-125




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York         PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina       RON PAUL, Texas
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California             WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West 
WM. LACY CLAY, Missouri                  Virginia
CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
JOE BACA, California                 SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
AL GREEN, Texas                      TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
ED PERLMUTTER, Colorado              BILL POSEY, Florida
JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
JACKIE SPEIER, California            LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
 Subcommittee on Capital Markets, Insurance, and Government Sponsored 
                              Enterprises

               PAUL E. KANJORSKI, Pennsylvania, Chairman

GARY L. ACKERMAN, New York           SCOTT GARRETT, New Jersey
BRAD SHERMAN, California             TOM PRICE, Georgia
MICHAEL E. CAPUANO, Massachusetts    MICHAEL N. CASTLE, Delaware
RUBEN HINOJOSA, Texas                PETER T. KING, New York
CAROLYN McCARTHY, New York           FRANK D. LUCAS, Oklahoma
JOE BACA, California                 DONALD A. MANZULLO, Illinois
STEPHEN F. LYNCH, Massachusetts      EDWARD R. ROYCE, California
BRAD MILLER, North Carolina          JUDY BIGGERT, Illinois
DAVID SCOTT, Georgia                 SHELLEY MOORE CAPITO, West 
NYDIA M. VELAZQUEZ, New York             Virginia
CAROLYN B. MALONEY, New York         JEB HENSARLING, Texas
MELISSA L. BEAN, Illinois            ADAM PUTNAM, Florida
GWEN MOORE, Wisconsin                J. GRESHAM BARRETT, South Carolina
PAUL W. HODES, New Hampshire         JIM GERLACH, Pennsylvania
RON KLEIN, Florida                   JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                THADDEUS G. McCOTTER, Michigan
ANDRE CARSON, Indiana                RANDY NEUGEBAUER, Texas
JACKIE SPEIER, California            KEVIN McCARTHY, California
TRAVIS CHILDERS, Mississippi         BILL POSEY, Florida
CHARLES A. WILSON, Ohio              LYNN JENKINS, Kansas
BILL FOSTER, Illinois
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 21, 2010...............................................     1
Appendix:
    April 21, 2010...............................................    47

                               WITNESSES
                       Wednesday, April 21, 2010

Allen, James, Head of Capital Markets Policy, CFA Institute......    20
Brier, Thomas F., Deputy Chief Investment Officer and Director of 
  Corporate Governance, Pennsylvania State Employees' Retirement 
  System.........................................................    12
Cutler, Alexander M., Chairman and Chief Executive Officer, Eaton 
  Corporation, on behalf of Business Roundtable..................    14
Irwin, Hon. Steven D., Pennsylvania Securities Commissioner, and 
  Chairman, Federal Legislation Committee, North American 
  Securities Administrators Association, Inc. (NASAA)............     8
Rees, Brandon J., Deputy Director, Office of Investment, AFL-CIO.    16
Smith, Gregory W., Chief Operating Officer and General Counsel, 
  Colorado Public Employees' Retirement Association..............    11
Smith, Robert E., Vice President, Deputy General Counsel, and 
  Assistant Corporate Secretary, NiSource, Inc., on behalf of the 
  Society of Corporate Secretaries and Governance Professionals..    18

                                APPENDIX

Prepared statements:
    Kanjorski, Hon. Paul E.......................................    48
    Allen, James.................................................    49
    Brier, Thomas F..............................................    53
    Cutler, Alexander M..........................................    64
    Irwin, Hon. Steven D.........................................   300
    Rees, Brandon J..............................................   312
    Smith, Gregory W.............................................   319
    Smith, Robert E..............................................   339

              Additional Material Submitted for the Record

Kanjorski, Hon. Paul E.:
    Written statement of the Investment Company Institute (ICI)..   380
    Written statement of Carl C. Icahn...........................   391
    Written statement of Tom Gardner, CEO, The Motley Fool 
      Holdings, Inc..............................................   396
Castle, Hon. Michael:
    Written statement of various undersigned groups..............   399
Hensarling, Hon. Jeb:
    Written statement of the Center On Executive Compensation....   401
Allen, James:
    Addendums to written testimony...............................   407
Rees, Brandon J.:
    Additional information provided for the record...............   409


                        CORPORATE GOVERNANCE AND
                        SHAREHOLDER EMPOWERMENT

                              ----------                              


                       Wednesday, April 21, 2010

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                          Insurance, and Government
                             Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Paul E. 
Kanjorski [chairman of the subcommittee] presiding.
    Members present: Representatives Kanjorski, Sherman, 
Hinojosa, Baca, Maloney, Bean, Perlmutter, Carson, Adler, 
Kilroy, Kosmas, Peters; Garrett, Castle, Manzullo, Hensarling, 
Campbell, and Jenkins.
    Also present: Representative Ellison.
    Chairman Kanjorski. This hearing of the Subcommittee on 
Capital Markets, Insurance, and Government Sponsored 
Enterprises will come to order.
    Pursuant to the committee rules, each side will have 15 
minutes for opening statements. Without objection, all members' 
opening statements will be made a part of the record.
    I ask unanimous consent that Mr. Ellison, a member of the 
full Financial Services Committee, be allowed to participate in 
today's subcommittee hearing and to offer an opening statement. 
Without objection, it is so ordered.
    Good morning. Today, we meet to consider several thoughtful 
bills that seek by various means to correct the imbalance of 
power between investors and management. For far too long at too 
many public companies, corporate executives have had the upper 
hand.
    The financial crisis revealed at times vividly and 
shockingly how all too frequently corporate management and 
boards failed to consider the long-term interests of their 
shareholders. As a result, innocent investors incurred 
monumental losses, even while corporate chieftains escaped the 
inferno unscathed, usually by golden parachute.
    It is clear that the deck was stacked, especially when you 
consider that Wall Street bankers took home enormous paychecks 
while the taxpayers got stuck with the bill. We now need to 
chart a different course. Congress must act to democratize 
corporate governance rules so that investors have a greater say 
in the companies that they own.
    First and foremost, we ought to provide shareholders with 
easier means of getting directors nominated. Also, we should 
act to improve transparency by requiring many institutional 
investment managers to disclose how they vote on shareholder 
proxies.
    In the run-up to the crisis, excessive leverage and risk-
taking became the norm on Wall Street. These decisions flew in 
the face of financial stability and lacked a fundamental level 
of good judgment. We can fix this problem by requiring public 
companies to form independent risk management committees with 
prescribed functions and duties.
    While the ideas in each of the bills before us are well-
intended, we also need to carefully examine each proposal. As 
for the appealing idea of separating the role of chairman from 
that of chief executive officer, we should explore how such a 
policy will affect small companies.
    Requiring majority voting for uncontested directors also 
appears a worthy goal, but we must determine if it could 
produce inadvertent problems, especially if too few 
shareholders vote.
    As part of last year's debates on the Wall Street Reform 
bill, our committee has already acted to improve corporate 
governance laws. As passed by the House, H.R. 4173 contained 
important provisions on proxy access and executive pay. It is 
my hope that the Senate will act with all deliberate speed on 
its reform legislation so that these important corporate 
governance reforms can become law.
    In the meantime, we must advance the debate about how we 
can further enhance corporate governance through increased 
transparency, better executive accountability, and greater 
shareholder rights.
    In this regard, I look forward to the testimony today and 
thank the witnesses for appearing.
    I would also like to thank Congressman Peters, Congressman 
Ellison, and Congresswoman Kilroy for their hard work on these 
important policy matters.
    The gentleman from New Jersey, our ranking member, Mr. 
Garrett, is recognized for 4 minutes.
    Mr. Garrett. I thank the chairman. I thank all the 
witnesses today. An angle that I have taken to consider the 
multitude of pieces of legislation and proposals put forward 
since the recent financial crisis is how do each one of these 
proposals actually address one of the underlying causes of the 
financial crisis?
    So far, it has not been demonstrated to me convincingly 
that broadly speaking, the crisis was a result of corporate 
governance, a weakness in corporate governance, and more 
specifically, I remain to be convinced that the particular 
proposals put forward in Congressman Peters' bill and the other 
related proposals would have either prevented the current 
crisis or would in fact be a net positive for corporations 
going forward.
    Just as an aside, philosophically speaking, being the 
chairman and founder of the Congressional Constitution Caucus, 
I am really hesitant to over turn 150 years of precedent in 
which corporate governance has been decided at the State level.
    I am also very weary of the Federal Government taking on 
new tasks not envisioned by our founding fathers, especially 
when the States have shown they are basically perfectly capable 
to address these situations.
    The proposals that are being marketed by the supporters as 
remedies to the financial crisis, I think we really do need to 
keep in mind that they would apply to all companies, all public 
companies, big and small, financial and non-financial as well.
    Creating this one size-fits-all-mandate, for instance, with 
a proposal that mandates that every public company have a 
separate chairman and CEO, that is really not an appropriate 
so-called ``solution'' for many of the companies out there.
    The thing about practical examples of that, some of the 
great business leaders in modern times, people like Bill Gates, 
Warren Buffett, Sam Walton, they have all held the same role at 
the same time and they have done pretty well at it. They 
created billions of dollars for shareholder values while also 
creating literally millions of jobs for this country.
    Most companies, I think, are happy to provide a rationale 
for having the same person hold both positions, if that is what 
the particular board thinks is best for that company.
    Again, no mandate that each and every company must separate 
the two roles is going to be an appropriate policy solution for 
every company. Besides, many of the proposals being put forth 
are already being adopted, I guess you could say, organically 
by many of the companies out there. In some cases, a resounding 
majority of the stockholders of the companies out there are 
taking these views.
    We also need to remember that board members have a 
fiduciary duty to set corporate policy and make decisions based 
on creating long-term value for the firm, and with the recent 
corporate scandals now in the spotlight, pressures are on board 
members more than ever to do just that, and to do the right 
thing on behalf of the companies they serve.
    Giving increased powers to certain shareholders in a 
corporate policymaking process on the other hand, while it may 
be well-intentioned, I am sure, could actually have the 
unintended consequences of serving interests of more short-term 
goals while also introducing other agendas not directly 
associated with the best interest of that particular company 
into its corporate governance decision-making process.
    When you think about it, this would really be an ironic 
outcome indeed, since the focus would now be on short-term 
gains as often cited as a contributing cause of the recent 
financial crisis.
    In addition to the proposals contained in this legislation 
under consideration today, there are other areas, such as the 
role played by proxy advisor services, as well as proposals to 
increase retail shareholder voting, and direct communication 
with shareholders. I will be interested to hear from the panel 
before us later on.
    In conclusion, at a time when the number one priority of 
this Congress should be enacting policies that create jobs, I 
fear that many of the proposals put forth in the legislation 
under consideration at today's hearing, as I said before, that 
I am sure are well intended, will have the unintended 
consequences of hurting the long-term ability of firms to do 
just that, create jobs, to thrive, either because of 
inappropriate one-size-fits-all policymaking or increased focus 
on short-term goals.
    Finally, yet another increase in the Federal Government's 
role in our economy, especially at the SEC, which has really 
yet to demonstrate that it can perform its primary role of 
protecting investors, also does not seem to be the best 
prescription for fixing our economy's long-term health.
    With all that being said, I look forward to hearing all the 
witnesses today.
    Chairman Kanjorski. Thank you, Mr. Garrett. We will now 
hear from Mr. Peters from Michigan for 3 minutes.
    Mr. Peters. Thank you, Mr. Chairman. Thank you, Chairman 
Kanjorski, for holding today's hearing to discuss legislation 
that I believe would be not only important to improve corporate 
governance but also lead to a more stable economy as well.
    During the 111th Congress, this committee has held numerous 
hearings to investigate the causes of the collapse of the 
financial sector in the fall of 2008. While there were many 
contributing causes of the financial crisis, I believe that one 
significant cause was the failure of corporate governance of 
shareholders, including over 100 million Americans who own 
stock either in individual accounts or through a mutual fund, 
who have lost trillions of dollars in savings as a result.
    However, corporate governance is an issue that affects the 
entire economy, not just the financial sector. While some of 
the most egregious examples of excessive risk-taking and 
compensation have been found on Wall Street, there are plenty 
of other examples in other companies as well.
    I spent 22 years in the private sector and I believe the 
best and most effective regulation is self-regulation. That is 
why I believe we should empower shareholders, the company's 
true owners, to hold corporate boards and management more 
accountable and help them better align their priorities with 
long-term value.
    As Members of Congress, we are held accountable to our 
constituents through meaningful democratic elections. However, 
in many corporations, management slates run unopposed and large 
long-term shareholders lack the ability to nominate their own 
candidates. Even worse, these nominees are elected even if a 
majority of shareholders vote against them.
    The current system of electing boards of directors, holding 
executives accountable and overseeing executive compensation is 
rigged against shareholders and in favor of management. The 
balance of power simply must change.
    Last December, the House passed the Wall Street Reform and 
Consumer Protection Act, which contained a number of provisions 
that will improve corporate governance. For example, it will 
give shareholders a vote on corporate compensation packages, it 
has improved disclosure of performance targets, and also 
includes language that would give the SEC authority to 
implement its proxy access rules.
    Soon, the Senate will be taking up comprehensive corporate 
governance reform legislation on its own. This legislation 
introduced by Senator Dodd contains a corporate governance 
title which includes many of the provisions which are in H.R. 
2861, the Shareholder Empowerment Act.
    We all agree that our corporations and boards need to focus 
on building long-term value for our shareholders. I introduced 
H.R. 2861 because I strongly believe that it is the 
shareholders themselves who should have the power to oversee 
large complex institutions and hold corporate boards and senior 
management accountable for their mistakes and mismanagement.
    I look forward to hearing the testimony of the witnesses, 
and I would like again to thank Chairman Kanjorski for holding 
this hearing today, and I look forward to working with him to 
enact meaningful, comprehensive corporate governance 
legislation.
    Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Peters. Now, 
we will hear from the gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman, for holding today's 
hearing. Corporate governance is an important issue to me and 
to this committee. I appreciate the opportunity to review 
current proposals and hear from experts on the impact of 
altering existing corporate governance laws.
    Some believe that corporate governance should be examined 
in response to the financial crisis, while others have 
expressed their intentions to add these sweeping changes onto a 
legislative response to a recent Supreme Court ruling on 
campaign finance.
    I believe that regardless of the legislative vehicle being 
discussed to push these issues forward, we must be especially 
careful when considering proposals that intrude on the province 
of State laws without taking into account their long-
established histories and leadership on corporate matters and 
their ability to quickly respond to emerging issues.
    I understand that many of today's witnesses will be 
commenting on Mr. Peters' Shareholder Empowerment Act, which 
includes provisions to increase investor influence over 
corporate boards by allowing investors to dominate a candidate 
on the corporate proxy statement.
    The Peters' bill also deals with the issue of requiring 
directors to receive majority voting.
    I am interested in learning from today's witnesses their 
comments on the underlying concerns here that the proposed 
legislation is intending to respond to, and the efforts already 
under way to address some of these issues.
    For example, States have already begun to respond to the 
proxy access concerns by clarifying the authority of companies 
and their shareholders to adopt proxy access and proxy 
reimbursement bylaws.
    Similar changes are under consideration in the Model 
Business Corporation Act. Furthermore, shareholders already 
have the ability to place majority voting proposals on the 
proxy and 75 percent of boards now have some form of majority 
voting for directors.
    I look forward to the testimony of today's witnesses and I 
yield back the balance of my time, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Castle. We 
will now hear from the gentlelady from Ohio, Ms. Kilroy.
    Ms. Kilroy. Thank you, Mr. Chairman, for your leadership on 
this issue and for the hearing this morning.
    Today, we are taking a look at several proposals that will 
help strengthen corporate governance rules, an important 
undertaking, especially after what I learned yesterday at the 
hearing on Lehman Brothers.
    I look forward to hearing from the witnesses today, but I 
want to touch briefly on an exchange I had yesterday with Mr. 
Anton Valukas, the court-appointed examiner for the Lehman 
bankruptcy.
    I asked Mr. Valukas whether Lehman's board of directors had 
a responsibility to stop Lehman's senior managers from ignoring 
their own risk management system to pursue reckless and 
dangerous risks. Mr. Valukas replied that the risk management 
process Lehman had in place was good, although it was exceeded 
some 30 times in a short period of time, and thus, under the 
business judgment rule, Lehman could go forward with their 
risky bets.
    Mr. Valukas went on to say that it is the regulators' 
responsibility to step in when management is making a decision 
that could have such dire consequences for the larger economy, 
and I agree, but a first line of defense should come from the 
risk management directors and the boards of directors of these 
companies, who should have asked the right questions, who could 
have stopped management from taking those excessive risks that 
threatened the company and as we witnessed, the economy on the 
whole.
    For too long, the boards of these financial firms have 
rubber-stamped their managerial decisions and for too long, 
corporate governance rules have been skewed in a way to 
preserve the status quo, to prevent shareholders from having a 
greater voice in how companies do business.
    The proposals we will discuss today could enhance 
transparency, increase shareholder power, improve management 
accountability, and enhance corporate governance.
    Thank you, Mr. Chairman, for your leadership on this 
important issue. I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Ms. Kilroy. Now, 
we will hear from the gentleman from Texas, Mr. Hensarling, for 
4 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. Coming into this 
hearing, as I come into many other hearings, I recall the 
President's Chief of Staff, Rahm Emanuel's, infamous adage, 
``Never let a serious crisis go to waste; it allows you to do 
things that you could not previously do before.''
    I see so many different ideas and pieces of legislation, 
some of which may be meritorious, all trying to be shoe-horned 
in on the idea that somehow this will prevent the next great 
economic crisis.
    I have looked at the underlying causes. I respectfully 
disagree with the gentleman from Michigan. I am trying to 
figure out where the corporate governance issue is.
    I believe there are some very legitimate corporate 
governance issues that we need to discuss as a society. Having 
said that, I am not exactly certain that the Federal Government 
is somehow uniquely qualified to mandate best practices for 
corporate governance.
    I think occasionally, if we look at the record in the 
underlying causes of our financial debacle, frankly, it was a 
lot of Federal legislation and Federal regulators. Who was the 
one who came up with the brainchild of having Government-
Sponsored Enterprises, be able to privatize their profits, 
socialize their losses, and then give them affordable housing 
and tell them you have to loan money to people to buy homes who 
ultimately cannot afford to stay in those homes.
    Maybe it was the bright people who came up with the idea 
that we ought to create an oligopoly in rating agencies. We 
know where that got us.
    Maybe it was the fine regulators at OTS who could have 
stopped AIG but did not. They had the regulatory authority we 
learned yesterday. The SEC had full regulatory authority to 
have Lehman account for their Repo 105 transactions, they did 
not. The SEC could have stopped them. They could have had 
Lehman Brothers reserve more capital, and lower their leverage, 
but they did not do it. Maybe it was those Federal people who 
came up with those great ideas. Maybe it was the bank 
regulators who said if you will concentrate your statutory 
capital in Fannie Mae and Freddie Mac, all will be fine.
    My point is as one who has spent a number of years in 
private enterprise and a number of years in government, I have 
not found that people in government are somehow uniquely 
smarter or more insightful than those in private business.
    Again, I believe there may be some legitimate debates over 
certain aspects of these proposals. To think that at this time 
that number one, corporate governance issues are somehow at the 
heart or even a significant contributing factor to the economic 
crisis, I just have not seen the evidence. I have an open mind. 
I just do not have empty mind.
    Second, to somehow think that the Federal Government is 
best positioned to make these decisions, particularly at a time 
when the Nation still has high unemployment, still a 
generational high, here is one more great uncertainty, one more 
great cost, one more great mandate to be thrown on the job 
creating sector in America, that perhaps maybe the Federal 
Government ought to let it do its business and get about 
creating jobs, which I think most of our constituents would 
agree, job number one ought to be creating jobs.
    Instead, here is yet another Federal takeover. Here are 
more Federal mandates that are going to harm jobs. Again, if 
this was just restricted to Wall Street, I just question why is 
the proposal going to impact every single publicly held company 
in America?
    Again, it is a huge overreach that could have devastating 
unintended consequences yet again on an economy that is 
struggling to create jobs.
    I approach this particular proposal with a lot of 
skepticism. Mr. Chairman, I yield back the balance of my time.
    Chairman Kanjorski. Thank you, Mr. Hensarling. Now, we will 
hear from Mr. Baca for 1 minute.
    Mr. Baca. Thank you very much. I want to thank Chairman 
Kanjorski and Ranking Member Garrett for calling this hearing. 
I also want to thank all of the witnesses for being here today 
and offering your insights.
    Finally, I want to commend Mr. Peters, Mr. Ellison, and Ms. 
Kilroy for their hard work on this issue.
    The events of the past years demonstrate the flaws in 
corporate structure and its governance. Too often, decisions 
are made by a select few without paying any regard to the 
interests or views of the shareholders.
    While the arguments of corporate efficiency is offered as a 
justification for the way things are done, I would point simply 
to September 2008 and its aftermath to show what this narrow-
minded thinking can cause.
    Corporate boards find themselves in the position and are 
unresponsive to shareholders' demands. Even if the shareholders 
want to change the structure, proxy rules and the corporate 
election process are often too expensive to be able to 
accomplish anything.
    Last year, the committee and this chamber took major steps 
to enact some of these changes, and hopefully these will be 
able to pass financial regulatory reform law soon.
    During this hearing, I will be interested to hear the 
reforms we need with regard to proxy access and corporate 
accountability. I also am eager to talk about the increased 
diversity within the boardrooms, allowing for more accurate 
representation, not only of the shareholders, but the market in 
which these corporations operate.
    I want them to look like what America looks like as well, 
and we do not see that.
    Again, I want to thank the chairman and the ranking member 
for their leadership on this issue. It is about time that we 
had oversight and accountability, and if we did not have 
government intervention, then we would not be here right now if 
there was not too much greed.
    I respect the gentleman's comments. Yes, we do have higher 
unemployment, and we have had Federal mandates, but sometimes 
we need these Federal mandates to make sure there is 
accountability and oversight, and we are doing what is right 
for the American people.
    Thank you. I yield back the balance of my time.
    Chairman Kanjorski. Thank you very much, Mr. Baca.
    Mr. Ellison has not arrived yet, so we will try to reserve 
some of his time that can be expanded when he comes for 
questioning.
    Now, we will go to the panel, and I want to thank you all 
for appearing before the subcommittee today. Without objection, 
your written statements will be made a part of the record. You 
will each be recognized for a 5-minute summary of your 
testimony.
    First, we have the Honorable Steven D. Irwin, commissioner, 
Pennsylvania Securities Commission.
    Mr. Irwin?

   STATEMENT OF THE HONORABLE STEVEN D. IRWIN, PENNSYLVANIA 
  SECURITIES COMMISSIONER, AND CHAIRMAN, FEDERAL LEGISLATION 
      COMMITTEE, NORTH AMERICAN SECURITIES ADMINISTRATORS 
                   ASSOCIATION, INC. (NASAA)

    Mr. Irwin. Chairman Kanjorski, Ranking Member Garrett, and 
members of the subcommittee, the single most important task 
which confronts legislators and securities regulators is 
restoring public faith and confidence in American financial 
institutions.
    Without a fair and honest landscape through which retail 
investors can work toward their financial goals, their activity 
will continue to suffer dramatic contractions.
    The loss of public confidence can be seen from our up-close 
and personal experiences with many who have withdrawn from the 
securities market.
    The Pennsylvania Securities Commission conducted nearly 500 
investor education presentations to residents in 62 counties 
during the last 2 years alone. Attendees related that they are 
worried about a secure retirement or paying for a child's 
education. Many complain about their losses because of 
decreasing value of stocks, and others indicate fear of getting 
involved in the stock market altogether. Those who pulled out 
their money in order to not subject it to any more risk remain 
afraid to get back in.
    Beyond anecdotal concerns, the data substantiate that 
investor distrust is an ongoing phenomenon. The 200 day moving 
average volume on the New York Stock Exchange now is 1.2 
billion shares. It is down nearly 25 percent from a year ago.
    As stock prices have risen over the past year, the lower 
volume of trading evidences that main street investors have 
largely stayed out of the market.
    Investors have not lost confidence because of a single 
event, but because of serial market abuses, from mutual fund 
timing schemes and misrepresentations concerning auction rate 
securities to Madoff's and Stanford's ponzi schemes.
    No one solution can restore investor faith and trust. 
However, this hearing builds on several significant steps 
already taken by this subcommittee and the full House in 
addressing the dangers to the U.S. economy.
    Businesses have evolved from a world where decision-makers 
as owners of their enterprises were responsible to theirselves 
and felt a sense of duty to their communities. Growth of 
enterprises and involvement of public investors led to a 
separation of ownership from control. From that separation, 
emerged disagreement over what constitutes fair compensation 
for management.
    Traditionally, government has not involved itself in the 
process whereby compensation is set. The present crisis has 
spotlighted a lack of input by shareholders into executive 
compensation in publicly held entities. Sadly, the line between 
fair and negotiated compensation and corporate looting and 
breach of fiduciary responsibility can be difficult to define.
    It has been a struggle to infuse good governance measures. 
Officers frequently can control board selection with compliant 
directors' approving compensation packages that are designed by 
friendly independent consultants. Under this circumstance, 
conflicts of interest are ripe.
    Executive compensation has long thirsted for objective 
scrutiny. It is a component of corporate governance that seems 
understandable to the less sophisticated retail investor for 
whom it serves as a barometer of internal restraints and 
effective stewardship.
    A lead position in management does not bestow entitlement 
to hoard profits from shareowners. Growth and productivity 
demand, of course, an abundance of inducements for creativity 
and high level of performance.
    At the same time, inducements must be tied to actual 
production of long-term value for shareholders, rather than to 
manipulation of financial results for the short-term.
    In this regard, we applaud the SEC's recent efforts to 
allow for greater shareholder access to information, 
particularly amendments to proxy rules that require disclosure 
of risks arising from compensation policies.
    In 2007, State securities regulators adopted a resolution 
on disclosure concerning executive compensation and conflicts 
of interest underlying the process by which it is approved.
    The person in the street sees salaries of corporate 
decisionmakers steadily increased to a level viewed as obscene, 
while at the same time, the companies paying these salaries 
diminish in value.
    Ultimately, the funds to pay managers come from the owners 
of the corporation, the shareholders. A dollar doled to the 
manager in the form of augmented salary, bonus or stock options 
is a dollar less in corporate assets.
    The balance sheet should reflect the addition of a dollar 
or more of corporate value before it is paid.
    The little power shareholders have to influence executive 
compensation lies now in their right to sell their shares. An 
effective counter weight must avail them legal strategies that 
will enable them to press the issue.
    In order to have any material bearing, shareholders must 
have relevant and complete information. Sunlight is a renowned 
disinfectant, but disclosure cannot be the sole remedy.
    Shareholders possessing the knowledge and skills to do so 
must undertake independent analysis and aggressively articulate 
their concerns. They cannot stick their heads in the sand and 
ignore compensation abuses.
    Even with an evolution in corporate governance, financial 
regulatory reform will not regain the trust of Main Street 
unless Congress embraces extending fiduciary duty to all 
professionals who provide advice to investors.
    Reform must prevent abuse of the process by which capital 
is raised by those more interested in soliciting funds than 
promoting legitimate enterprises.
    Straightforward disqualification of repeat offenders of the 
rules of the game is a logical deterrent to such abuse.
    In closing, the unique experiences of my fellow State 
securities regulators on the front lines of investor protection 
have provided the framework for my testimony this morning. We 
commit to continuing to work with the subcommittee to afford 
the investing public the needed security to return to our 
capital markets.
    Thank you, Mr. Chairman.
    [The prepared statement of Commissioner Irwin can be found 
on page 300 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Irwin.
    Next, we will have Mr. Gregory W. Smith, chief operating 
officer and general counsel, Colorado Public Employees' 
Retirement Association.
    Mr. Smith?

  STATEMENT OF GREGORY W. SMITH, CHIEF OPERATING OFFICER AND 
    GENERAL COUNSEL, COLORADO PUBLIC EMPLOYEES' RETIREMENT 
                          ASSOCIATION

    Mr. Gregory Smith. Thank you, Chairman Kanjorski, Ranking 
Member Garrett, and members of the subcommittee. Good morning.
    I am Greg Smith, chief operating officer and general 
counsel of the Colorado Public Employees' Retirement 
Association. I am pleased to appear before you today on behalf 
of Colorado PERA and our membership of over 460,000 current and 
past public servants of our State.
    Because Colorado is one of the first States to address the 
sustainability of its pension plan as a result of the 2008 
crisis, each and every one of our members has sacrificed 
through reduced benefits, including our retirees.
    We are responsible for investment over $34 billion in 
assets on behalf of our members for the exclusive purpose of 
providing retirement benefits.
    Our obligation to pay benefits extends not only to today's 
retirees but ultimately to those newly hired public servants 
who will work a 35-year career and then draw a monthly benefit 
for 20 or more years in retirement.
    As a result, our investment time horizon extends over 50 
years. We and our peers are the market's long-term investors, 
and the protection of a marketplace that promotes the creation 
of shareholder value for the long-term is imperative to the 
success of our mission.
    We should not be required to simply exercise the Wall 
Street walk and abandon our investment because management is 
undermining shareholder value or acting in their self-interest 
to the detriment of shareholders.
    We should be entitled as the owners who have put our 
capital at risk to insist that management be held accountable. 
This is not an unreasonable expectation, and the mechanism to 
accomplish this accountability is improved corporate 
governance, beginning with the creation of alignment between 
shareholder interests and the board of directors.
    As an owner of the Nation's largest and most prominent 
corporations, our fund is strongly aligned with corporate 
America. We have every interest in its long-term success and 
profitability.
    However, Colorado PERA firmly believes that the global 
financial crisis represents a massive failure of board 
oversight as well as regulation. Our members have paid a steep 
price for these failures.
    Clearly, boards of directors failed to adequately 
understand, monitor, and oversee enterprise risk and corporate 
strategy. Far too many boards structured and approved executive 
compensation programs that motivated excessive risk-taking and 
yielded outsized rewards for short-term results.
    These failures of board oversight are the most recent 
demonstration that too many boards are dominated by management 
and have lost sight of the obligation to shareholders.
    We respectfully suggest that at its core, this is the 
result of the fact that shareholders effectively play no role 
in the selection of directors and have no ability to remove 
directors.
    We are denied the basic tools that shareowners around the 
world, including countries with far less developed capital 
markets than ours, have long been provided. Rights such as 
requiring directors to be elected by a majority vote, giving 
investors an advisory vote on executive pay, and providing 
long-term owners modest vehicles to nominate directors on the 
company proxy card. Their absence significantly weakens the 
ability of shareowners to oversee corporate directors, their 
elected representatives, and hold them accountable.
    Turning to the content of the House bills advancing 
corporate governance reforms, we strongly commend the House for 
affirming the SEC's authority to provide proxy access in the 
Wall Street Reform and Consumer Protection Act of 2009.
    In addition to that affirmation, the government's 
improvements that Colorado PERA believes would have the 
greatest impact and therefore should be considered by the House 
include: requiring directors in contested elections to be 
elected by a majority of the votes cast; enhancing executive 
compensation disclosures; providing investors with an advisory 
vote on pay; ensuring compensation consultants provide 
independent advice; strengthening Federal clawback provisions 
for unearned pay, and requiring corporate boards to be chaired 
by an independent director.
    As the House considers steps to enhance corporate 
governance and empower shareowners, Congress must remember that 
boards are the first line of defense against the risks and 
excesses that led to the global financial crisis.
    Vigorous financial regulation on its own cannot solve many 
of the issues that contributed to the crisis. Regulators and 
investors must be given stronger market based tools to 
guarantee robust oversight and meaningful accountability of 
corporate managers and directors.
    House Bill 2861 consists of all of these provisions that I 
have identified, and we strongly support the principles set 
forth in that bill.
    Thank you for the opportunity to appear and we look forward 
to answering your questions.
    [The prepared statement of Mr. Gregory Smith can be found 
on page 319 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Smith.
    Next, we have Mr. Thomas F. Brier, deputy chief investment 
officer and director of corporate governance, Pennsylvania 
State Employees' Retirement System.
    Mr. Brier?

 STATEMENT OF THOMAS F. BRIER, DEPUTY CHIEF INVESTMENT OFFICER 
   AND DIRECTOR OF CORPORATE GOVERNANCE, PENNSYLVANIA STATE 
                  EMPLOYEES' RETIREMENT SYSTEM

    Mr. Brier. Good morning, Chairman Kanjorski, Ranking Member 
Garrett, and members of the subcommittee. Thank you for 
inviting us to appear at the committee this morning.
    Established in 1923, the Pennsylvania State Employees' 
Retirement System is one of the oldest and largest pension 
funds in the United States. We have over 220,000 members, and 
over the past 10 years, have paid out approximately $18 billion 
in benefits to workers in Pennsylvania and retirees.
    Like Colorado PERA and other pension funds, we are long-
term investors with significant passive investment strategies. 
As a result, we have been a long time proponent of good 
corporate governance.
    One common element in the failure of Lehman Brothers, AIG, 
Fannie Mae, and many other companies implicated in the 
financial meltdown was that the boards of directors did not 
hold management sufficiently accountable. They failed to 
control management's excessive risk-taking. They did not 
prevent compensation plans from encouraging a ``bet the ranch'' 
mentality.
    As famed investor Warren Buffett observed in his most 
recent letter to Berkshire Hathaway shareholders, ``A board of 
directors of a huge financial institution is derelict if it 
does not insist that its CEO bear full responsibility for risk 
control.
    ``If he is incapable of handling that job, he should look 
for other employment, and if he fails at it, with the 
government thereupon required to step in with funds or 
guarantees, the financial consequences for him and his board 
should be severe.''
    After describing the half a trillion dollars that investors 
lost in just these companies, Warren continued, ``CEOs and in 
many cases, directors, have long benefitted from oversized 
financial carrots; some meaningful sticks now need to be part 
of their employment picture as well.''
    SERS, like many other long-term investors, believe that two 
fundamental corporate governance improvements could provide, in 
Mr. Buffett's words, ``meaningful sticks,'' necessary to 
improve the oversight of CEOs by corporate boards, and 
therefore significantly reducing the likelihood of a repeat 
session like this.
    There are two improvements that we think do the heavy 
lifting going forward, and they are proxy access and majority 
voting. First, proxy access. Federal proxy rules have 
historically prohibited shareholders from placing names of 
their own director candidates on public company proxy cards for 
consideration by their shareholders.
    As a result, incumbent directors who fail in their 
oversight responsibilities have little reason to change their 
behavior because it is highly unlikely they can be replaced or 
even challenged by an alternate board of candidates.
    Fortunately, due to the extraordinary leadership of this 
subcommittee and the full Committee on Financial Services, and 
the SEC, proxy access will soon become a reality.
    As you may recall, in June of 2009, the SEC issued a 
thoughtful proposal providing for an uniform measured right for 
groups of significant long-term investors to place a limited 
number of nominees on the company proxy card.
    After very careful consideration of input received in 
response to two separate comment periods, the SEC appears 
poised now to provide a final uniform proxy access rule that we 
believe responds to the demands of long-term investors.
    Importantly, this subcommittee and the full Committee on 
Financial Services had the foresight to include a provision in 
the Wall Street Reform and Consumer Protection Act that 
reaffirms that the SEC has the unambiguous authority to issue 
their final proxy access rule.
    We again commend the subcommittee for their leadership in 
pursuing this provision. We are pleased the provision is 
strongly supported by the Administration and is a critical 
element of regulatory reform.
    The second corporate governance improvement we believe is 
necessary is the requirement that all public companies adopt a 
majority standard for director elections.
    Currently, most companies elect directors in uncontested 
elections using a plurality standard, by which shareholders may 
vote for but cannot vote against a nominee. Shockingly, a 
derelict corporate director can still win re-election by simply 
receiving one vote under a plurality standard, a single vote. 
They could actually vote for themselves.
    As a consequence, unseating poorly performing directors is 
virtually impossible. The Shareholder Empowerment Act of 2009, 
one of the bills referenced in connection with this hearing, 
includes a provision that requires the Commission to direct the 
stock exchanges to prohibit the listing of any security of any 
issuer if the company does not adopt majority voting. We 
generally support that provision.
    The benefits of requiring all publicly listed companies to 
adopt a majority vote standard are many. It would democratize 
the corporate electorial process and put real voting power in 
the hands of long-term investors, like SERS, and make boards 
more accountable to shareholders.
    On behalf of SERS and the tens of thousands of employees 
who depend on us for their retirement security, we respectfully 
request your support for prompt adoption by all public 
companies of both proxy access and majority voting.
    Thank you, Mr. Chairman, for inviting me to participate in 
this hearing. I look forward to answering any questions you may 
have.
    [The prepared statement of Mr. Brier can be found on page 
53 of the appendix.]
    Chairman Kanjorski. Thank you, Mr. Brier.
    Now, we will have Mr. Alexander M. Cutler, chairman and 
chief executive officer of Eaton Corporation.
    Mr. Cutler?

STATEMENT OF ALEXANDER M. CUTLER, CHAIRMAN AND CHIEF EXECUTIVE 
  OFFICER, EATON CORPORATION, ON BEHALF OF BUSINESS ROUNDTABLE

    Mr. Cutler. Thank you, Mr. Chairman, and members of the 
committee. Good morning. My name is Sandy Cutler, and I am 
chairman and CEO of Eaton Corporation. I am also chairman of 
the Business Roundtable Corporate Leadership Initiative.
    I have been chairman and chief executive officer of Eaton 
for 10 years, and I serve on 2 other for-profit boards, as lead 
director on one of those boards, and it is from this experience 
that I speak to you this morning.
    We at the Business Roundtable support an examination of 
both corporate governance and financial regulatory reform, but 
believe that each are important enough on their own merit to 
deserve separate consideration. Combining the two in the 
pending legislation permits public anger about the financial 
crisis to substitute for a fact-based examination of our 
corporate governance system.
    Substantial changes have indeed occurred during the past 
decade in corporate governance. Companies have taken a number 
of voluntary actions; and State legislatures, the SEC, and the 
New York Stock Exchange have adopted a number of statutory and 
rule changes.
    We are pleased that the Business Roundtable has been at the 
forefront of efforts to improve corporate governance through 
support of many of these initiatives.
    Just this week, we are releasing our most recent list of 
principles of corporate governance. These changes have resulted 
in more independent boards and board committees; improved board 
practices; and the adoption of majority voting by a large 
number of companies.
    As you know, the change in majority voting was facilitated 
by amendments to a Delaware corporate statute and the Model 
Business Corporation Act, which is followed by 30 States.
    Other important changes have included the New York Stock 
Exchange prohibition of broker voting in uncontested director 
elections effective at shareholder meetings after January 1st 
of this year, and the SEC's recent adoption of a number of 
disclosure enhancements that address several of the concerns in 
the proposed legislation, including those related to board 
leadership structure, risk management, and board oversight.
    I would like to focus my comments today on proxy access, as 
we view it as an ill-conceived attempt to improve corporate 
governance. Indeed, rather than empower shareholders, we 
believe it would deprive them of important choices and have 
serious potential adverse consequences.
    The proxy access provision of the Shareholder Empowerment 
Act would require the SEC to issue proxy access rules 
permitting shareholders owning as little as 1 percent of the 
company's securities for at least 2 years to nominate director 
candidates in the company's proxy materials.
    Clearly, director accountability to shareholders is 
extremely important, but a federally-mandated proxy access 
right is not the most effective way to achieve this goal.
    Moreover, a proxy access rule could exacerbate the short-
term focus that is widely considered to be a contributing 
factor to the financial crisis.
    The process of frequent election contests could cause 
directors to focus on structure and stock price rather than 
invest for the creation of long-term value. In addition, proxy 
access would permit shareholder activists with very limited 
stock holdings in the company to pursue special interest 
agendas to the detriment of the majority of the shareholders.
    Even if special interest directors do not get elected, the 
company and its shareholders will have been forced to bear the 
costs and suffer the distraction of a time-consuming and 
expensive proxy contest.
    Finally, a federally-mandated proxy access right would 
preclude companies and their shareholders from taking advantage 
of the recent State proxy access enabling statutes to adopt 
customized proxy access procedures that suit their needs.
    Today, contemporary boards of directors use a variety of 
tools and processes to see that qualified directors are 
presented to the shareholders for re-election.
    They strategically review skill matrices of current 
directors. They carefully assess forward-looking skill 
requirements on the board, such as audit committee financial 
experts. They see if the relevant knowledge is present to 
provide guidance, counsel, and oversight.
    They undertake vigorous evaluations of the board, its 
committees and individual directors, and they disclose to 
shareholders their criterion for board membership along with 
the qualifications and experience of nominated directors.
    It is difficult to understand how an outside process 
conducted without board involvement, as proposed under a proxy 
access regime, will not fall short of this thoughtful and 
informed process.
    Before closing, I want to mention three other issues 
related to proxy access that the proposed legislation does not 
address: concerns about the current shareholder communication 
system; the integrity of the proxy voting system; and the 
influence of the proxy advisory services. All of these have 
been addressed in more detail in my written testimony.
    We are pleased that the SEC is beginning a study of these 
issues, but they need to be resolved before a proxy access 
regime is implemented.
    In closing, let me emphasize that the Business Roundtable 
is committed to effective corporate governance practices. 
However, we must be careful not to impose one-size-fits-all 
solutions that undermine the ability of shareholders and their 
boards of directors to govern themselves effectively.
    We stand ready to work with this committee, and I would be 
happy to answer any questions. Thank you very much.
    [The prepared statement of Mr. Cutler can be found on page 
64 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Cutler.
    Now, we will hear from our next presenter, Mr. Brandon J. 
Rees, deputy director, AFL-CIO.
    Mr. Rees?

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

    Mr. Rees. Thank you, Mr. Chairman.
    Corporate governance reform is absolutely needed in 
response to the financial crisis. Mandatory corporate 
governance rules benefit all publicly traded companies by 
enhancing investor confidence in our capital markets.
    Stock market investors have just suffered the worse decade 
since the Great Depression. During the past 10 years, the S&P 
500 companies' stock prices have declined 24 percent. Needless 
to say, the retirement savings of America's workers have been 
decimated.
    At the beginning of this lost decade, shareholders suffered 
the corporate accounting scandals at Enron, WorldCom, and 
hundreds of other companies. More recently, we have been 
battered by the collapse of Lehman Brothers, Bear Stearns, and 
the resulting financial crisis.
    Corporate governance failures are the primary cause of this 
lost decade for investors. We blame boards of directors for 
failing to focus management on the long-term, for failing to 
prevent malfeasance by executives, and for failing to properly 
manage risk.
    Nowhere is the breakdown in corporate governance 
accountability more apparent than on the issue of executive 
compensation. CEO pay has never been higher than in the past 
decade. Last year, S&P 500 CEOs received $9.25 million on 
average. Executive pay is the mechanism by which CEOs have 
become captive to short-term market forces.
    The collapse of Bear Stearns and Lehman Brothers provides a 
dramatic example of what is wrong with executive pay. Between 
2000 and 2008, the top 5 executives at Bear Stearns pocketed 
$1.4 billion in cash, bonuses, and equity sales. Lehman 
Brothers' executives took home $1 billion. Shareholders got 
nothing.
    As is required in other countries, American companies 
should give their shareholders a say on pay. An annual vote on 
executive compensation would encourage boards to be more 
proactive in seeking out shareholders' views.
    As a result, best practices in executive compensation would 
disseminate more quickly. Ultimately, it is the job of the 
board of directors to set fair executive pay packages, to 
prevent malfeasance, and to manage risk.
    We believe that boards of directors have been too 
complaisant in their duties. Existing corporate governance 
mechanisms simply fail to adequately hold boards of directors 
accountable.
    The election of directors is one of the fundamental rights 
of stockholders, but too often, withhold votes against director 
nominees are ignored. Last year, over 90 directors at 50 
companies failed to receive majority support for their 
election. Every one of these directors was seated despite their 
shareholder opposition.
    Replacing plurality voting with majority vote at director 
elections is valuable. However, majority voting alone cannot 
adequately reform the director election process.
    Half of all publicly traded companies are incorporated in 
Delaware. Under Delaware's hold over rule, incumbent directors 
remain on the board even if they are not re-elected by majority 
vote.
    To make director elections more meaningful, long-term 
shareholders need to have equal access to the proxy. Equal 
access to the proxy will set ground rules for shareholder 
democracy. It will limit the advantage of incumbents who now 
have unlimited access to the corporate treasury to finance 
their proxy solicitation.
    Equal access to the proxy will open up boards of directors 
to divergent viewpoints. Debate should be welcomed in corporate 
boardrooms, not feared.
    A director whose nomination depends on a backing of a long-
term institutional investor and not his fellow directors can 
play that role. That is the goal of proxy access.
    Now that the SEC is preparing to issue a proxy access rule, 
the opponents of reform have put forward the idea of voluntary 
proxy access. According to these so-called private ordering 
proposals, companies should be able to opt in or to opt out of 
equal access to the proxy. There are two major problems with 
such proposals.
    First of all, companies have stacked the deck to prevent 
shareholders from adopting proxy access. Nearly half of all 
companies in the Russell 3000 Index restrict the ability of 
shareholders to amend company bylaws or they have dual class 
stock voting.
    If proxy access is made voluntary, only those companies 
that already have good corporate governance will adopt proxy 
access. Those companies with entrenched boards will resist 
proxy access.
    Secondly, allowing companies to opt out of proxy access 
sets a dangerous precedent. Proxy access is about the Federal 
regulation of proxy solicitations, not about State corporate 
laws, and for the past 75 years, our Federal proxy solicitation 
regulations have been mandatory.
    Corporate governance reforms such as equal access to the 
proxy can be a potent tool to focus companies on sustainable 
value creation. For these reasons, director elections must be 
open to long-term investors through proxy access.
    Thank you, Mr. Chairman, for considering my views.
    [The prepared statement of Mr. Rees can be found on page 
312 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Rees.
    Now, we will hear from Mr. Robert E. Smith, vice president, 
deputy general counsel, and assistant secretary, NiSource, on 
behalf of the Society of Corporate Secretaries and Governance 
Professionals.
    Mr. Smith? That is quite a title, Mr. Smith.

 STATEMENT OF ROBERT E. SMITH, VICE PRESIDENT, DEPUTY GENERAL 
COUNSEL, AND ASSISTANT CORPORATE SECRETARY, NISOURCE, INC., ON 
 BEHALF OF THE SOCIETY OF CORPORATE SECRETARIES AND GOVERNANCE 
                         PROFESSIONALS

    Mr. Robert Smith. Thank you, Mr. Chairman.
    As stated, my name is Bob Smith, and I am vice president, 
deputy general counsel, and assistant corporate secretary of 
NiSource.
    NiSource is an energy holding company whose subsidiaries 
engage in natural gas transmission, storage, and distribution, 
as well as electric generation, transmission, and distribution.
    In my position at NiSource, I am responsible for the 
company's corporate group, which provides legal advice on 
general corporate matters, finance matters, securities matters, 
governance matters, and similar subjects.
    I also serve on the board of directors of the Society of 
Corporate Secretaries and Governance Professionals. The Society 
is a professional association founded in 1946 with over 3,100 
members who serve more than 2,000 companies.
    The Society's members are responsible for supporting the 
work of the companies' boards of directors and their committees 
and the corporate governance and disclosure activities of the 
companies.
    I am here today in my capacity as a director of the Society 
and I very much appreciate the opportunity to participate in 
this hearing and to provide input on behalf of our diverse 
membership, diverse across industry and diverse across market 
capitalization.
    The Society strongly believes in and has consistently 
supported good governance practices, which include the right of 
shareholders to have an effective vote in the election process 
and the ability to recommend persons for nominations to the 
board of directors.
    As potential governance legislation is contemplated, it is 
important that we recognize that we are currently in the midst 
of a corporate governance sea change.
    Over the past decade, this sea change is blatantly evident 
through the many leading practices that have trended toward 
mainstream or widely accepted adoption by public companies. 
These changes in governance practices have generally been in 
the form of enhancements to shareholder involvement, 
shareholder input, or shareholder information.
    It is important to note that these practices are empowering 
shareholders and have occurred without legislative involvement, 
as individual company shareholders have determined what is best 
and what is appropriate for their individual companies.
    Examples of this organic shareholder empowered governance 
evolution includes development in such practices as majority 
voting, independence of directors, policies regarding 
independent compensation consultants, elimination of poison 
pills, declassification of board member terms, clawbacks and 
incentive compensation plans, separation of chairman and CEO, 
and stock ownership guidelines for directors and officers.
    Adoption of governance policies addressing matters such as 
these clearly show that shareholders are having a voice in the 
governance of companies.
    Of equal importance is the observation that not all 
companies or shareholders have deemed it appropriate to adopt 
policies addressing these matters.
    This is the essence of true shareholder empowerment, the 
ability for shareholders to choose whether governance issues 
should be addressed and if so, how they should be addressed at 
their individual companies.
    This is in fact the great irony behind the various pieces 
of legislation now being proposed as they intend to empower 
shareholders, but they actually force all shareholders to adopt 
specific provisions in an identical way, whether the 
shareholders want it or not.
    This is why the Society hopes to ensure that the 
shareholder proposal process remains the vehicle for 
shareholder communication, for shareholder change, and for the 
promotion of shareholder choice, true shareholder choice, 
rather than forcing the hot reactionary issues of the day on 
all issuers and shareholders regardless of shareholder desire 
or need.
    It is also important to make sure that any legislative 
reaction should protect shareholder value through avoiding the 
creation of potential mismatches of influence by short-term 
investors with the long-term growth and value creation 
strategies of public companies.
    Looking at major provisions of the proposed legislation, I 
will just touch on a couple really quickly, majority voting, 
for instance. Without legislative regulatory requirements, the 
adoption of majority voting has been a significant trend.
    In fact, according to a CalPERS release last month, as of 
September 2009, approximately 71 percent of S&P 500 companies 
and 50 percent of Russell 1000 companies had already adopted 
some form of policy for director resignations or majority vote.
    This is a prime example of companies hearing shareholders' 
concerns and addressing those concerns utilizing the current 
proxy proposal and communication structures.
    To legislate majority voting when shareholders have in fact 
been empowered to address their concerns in this area is both 
unnecessary and would disempower the shareholders of companies 
that have determined that majority voting is not an issue they 
desire to address at their companies, by in fact voting against 
majority voting proposals.
    I would welcome the opportunity to discuss other issues 
that are in the legislation, but in conclusion, true 
shareholder empowerment allows all shareholders to choose what 
is best for their respective companies, not forcing 
shareholders to accept rigid schemes regardless of whether they 
want them or not.
    Legislation should be thoughtfully enacted only where there 
is clear consensus and empirical evidence that change is needed 
and that such change would support the long-term interests of 
all shareholders.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Robert Smith can be found on 
page 339 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Smith.
    Finally, we will hear from Mr. James Allen, head of capital 
markets policy, CFA Institute.
    Mr. Allen?

 STATEMENT OF JAMES ALLEN, HEAD OF CAPITAL MARKETS POLICY, CFA 
                           INSTITUTE

    Mr. Allen. Good morning. I want to thank Chairman 
Kanjorski, Ranking Member Garrett, and all the members of the 
subcommittee for asking us to come speak to you today.
    My name is Jim Allen, and I am head of capital markets 
policy at CFA Institute. For those of you who are unfamiliar 
with the CFA Institute, we are a nonprofit membership 
organization with more than 100,000 investment analysts, 
advisors, portfolio managers and other investment professionals 
throughout the world.
    Our members are generally involved, therefore, in investing 
the savings and retirement funds from millions of Americans and 
others worldwide.
    We are probably best known for administering the 3 year 
testing program that leads to the awarding of the chartered 
financial analyst or CFA credential. More than 5 years ago, as 
part of our education program, we incorporated corporate 
governance factors into those global exams, and more than 
100,000 candidates throughout the world have been tested on 
these issues ever since.
    At the CFA Institute, we have a fundamental belief that 
what is good for investors is good for financial markets in 
general. This view is inherent in our code of ethics and 
standards of professional conduct that applies to all of our 
members wherever they reside in the world, and it has also 
informed the positions we have advocated to regulators and 
legislators globally over the years.
    We have long supported strong corporate governance 
structures under the belief founded in research that well-
governed companies perform better over the long-term than those 
that are not well governed.
    While we want to ensure shareowners have an effective 
voice, we also do not want to interfere unreasonably into 
corporate boards. This requires a finely tuned balance of 
interests and reasonable restraints on both investors and 
corporate issuers.
    As noted in my written testimony, we believe that corporate 
governance failures on the part of financial institutions play 
an important but by no means exclusive role in the financial 
market paralysis that began in August of 2007.
    Senior executives, board members, and regulators alike 
failed to appreciate the potential risks coming from large 
concentrations of high-risk loans funded through highly 
leveraged structures and unreliable wholesale funds.
    I would like to note that many of the proposals made in 
these three bills deal with issues which we have long supported 
as needed to prevent these kinds of failures.
    Two such provisions are legislative efforts for majority 
voting and greater proxy access for shareowners. We believe 
these two changes are the most critical and most needed to 
ensure that shareowners have the ability to hold their board 
members accountable.
    Likewise, we support say on pay as a means of increasing 
board accountability. Nearly 81 percent of our members 
responding to an October survey said they support a non-binding 
vote on executive pay. This view is due in large part to how it 
has worked where it has been adopted.
    Indeed, our members in the U.K. and Australia say such 
provisions increased board attention to investor perspectives 
and helped reduce the rate of increase in executive pay by half 
in the first year after adoption by U.K. companies.
    We also believe that better and more relevant disclosures 
about executive pay will increase board accountability and have 
supported regulatory efforts in this regard.
    Looking ahead, we are working with the Blue Ribbon Panel to 
develop a template to guide companies as they write their 
compensation discussions and analyses in the future.
    Legislation to mandate chair independence, on the other 
hand, is something we do not support, as we are concerned that 
it may trade the knowledge and expertise of corporate insiders 
for a functional independent figure head. Rather, such matters 
are best left to boards and shareowners to decide.
    When a CEO is also chair, we believe that independent board 
members should have the opportunity to appoint a lead director 
to chair meetings of independent directors and address issues 
involving potential conflicts with management.
    Finally, we are uncomfortable with proposals to have the 
SEC certify every member of the board for each of the thousands 
of companies trading publicly. Such a monumental effort would 
divert valuable SEC resources from the Commission's existing 
mandate and could have undesirable effects on board membership.
    Mr. Chairman, I ask consent that in the record, these 
documents relating to items on corporate governance that we 
have published over the years be allowed to be entered into the 
record, and we also want to amend our written proposal to 
include the data from our member survey.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Allen. I thank you for your time, and I am willing to 
answer any questions that you may have.
    [The prepared statement of Mr. Allen can be found on page 
49 of the appendix.]
    Chairman Kanjorski. Thank you very much, Mr. Allen. Thanks 
to the entire panel. That was a lengthy panel, but certainly 
insightful.
    As usual, we are going to pick on the minority. Mr. Cutler, 
I am looking at you.
    [laughter]
    Chairman Kanjorski. No. I am impressed. First of all, let 
me tell you, I have always been a proponent of the idea of 
self-regulation, and hopeful that any type of organization 
could rely on its own internal values to guide its actions.
    I have seen, however, fundamental changes in the corporate 
structure and the ownership of the corporate structure, and by 
analogy, I would draw to the union movement. I am sure, as a 
capitalist, that gets your attention.
    As you recall, about 3 or 4 decades ago, there was at least 
across the land a cry that unions had lost their democratic 
processes, and therefore, there was a denial of the democratic 
process to the average union member, and this Congress, after a 
hesitancy, and a rightful hesitancy, finally did enact the 
Landrum-Griffin Act.
    The Landrum-Griffin Act could be criticized for some 
things, but clearly, it imposed upon the union movement 
democratic processes, that the members could be guaranteed they 
would have a right to meet at conventions. They would have a 
right to free speech. They would have a right to not be put 
upon for their actions or thoughts in regard to their union 
activities.
    Now, we have come to corporate activity. Up until now, we 
granted the presumption that corporations, shareholders, 
owners, directors, and management could be relied upon to act 
responsibly, but I would call to your attention two things that 
have changed significantly.
    Throughout the testimony, if you listened to the entire 
panel, they all talked about the shareholders. In so many 
instances, there are not any more single shareholders. These 
are conglomerations of agencies that represent pension funds of 
individual investors that are lumped together.
    The managers of these funds really are interested in the 
return on investment and are not particularly disturbed by 
democratic or non-democratic activities of American 
corporations. They could really care less if the return is 
sufficient to pay the pension or whatever else is necessary in 
that fund.
    There was a time in the 1929 crash that we could say look, 
it is your money, you can put it anywhere you want to, and if 
you want democratic processes, you can vote accordingly or take 
your money and get out of the corporation.
    Today, if I am part of a pension fund, as in the House of 
Representatives, I think it is Fund C, that has the common 
stock fund, I cannot vote my common stock. I do not even know 
who is voting it and I do not know what corporations they are 
putting it into.
    The only thing I get to be told is once a year whether or 
not I have made an increase in value or a loss in value. 
Usually, I do not pay a lot of attention to it. Of course, I am 
not in that fund because of my role here at the committee.
    You do give it attention at the end of the year if you get 
a 30 percent loss and suddenly you are asking the pertinent 
question, why did that happen? You may find out, as one witness 
described the Moody operation, when they made a presentation to 
the board of directors, they were inconsequential in terms of 
understanding what their role was, and just absent of all the 
suggested thought processes that you expect from responsible 
board members.
    If you had listened to the testimony yesterday of some of 
the chief executive officers and others and members of the 
board of Lehman Brothers, it was a little bit startling.
    We had a CEO who was paid a poor salary given today's 
monies. I think in 2007, he only received $72 million. You 
could not expect him to pay a great deal of attention to his 
job or attention to whether he was working for the benefit of 
the shareholders or not.
    He said he just did not know any of these things were 
happening. He was not aware they were doing repos, 105 repos. 
He was not aware of the fact that so many things were being 
done.
    Now, what I have concluded is really we are at the Landrum-
Griffin Act, if you will, with corporations. Are we going to 
impose here through government new standards, and granted, 
probably uniform standards as opposed to particularized rights 
of decision, how to run one single corporation over another?
    Are we going to do that or are we going to ignore the fact 
that there are a large number of American people who are 
investors and owners directly or indirectly in American 
corporations who do not feel they are getting adequately 
represented, where huge bonuses can be paid of billions of 
dollars, and no shareholder payments or dividends are paid out.
    We are not casting aspersions on your activities as a CEO. 
I am sure you are above and beyond any of those criticisms.
    Obviously, there is a percentage of corporate leadership in 
America that has failed. This committee, it seems to me, is 
called upon to decide where are we going.
    I have eaten up all 5 minutes. I am not going to get much 
of a chance to get an answer from you. I will try to pick it up 
in my next set of questions. I want to hear from my ranking 
member from New Jersey. I am sure he has the answer to some of 
my questions.
    [laughter]
    Mr. Garrett. Thank you. I can give you some answers. I want 
to thank the panel. I do appreciate the comments and the 
testimony here today. I share some of the concerns.
    Mr. Smith, you laid them out, and the others did, too, but 
I think you laid out some of the concerns we have about some of 
these things.
    Let me just throw out some things. One of the takeaways I 
get from this and the impression I get from a number of the 
panelists was that we are in this financial crisis situation 
and we can look to corporate governance as being a root cause 
of it. I, as you heard in my opening testimony, have a question 
on that.
    Let me go with this simple question. To the extent that 
business, Wall Street, was a cause of the problem, and of 
course, there is debate as to the extent of their cause and 
regulators being the other part of it, but to the extent that 
Wall Street was a cause of the problem, I note that the 
legislation that we are looking at would go much further than 
regulating with corporate governance Wall Street.
    Ninety-eight or 99 percent of public companies are non-
financial institutions. Answer this question, if we are trying 
to attack the problem, which is Wall Street, why are we also 
addressing the other 98 percent of the public companies with 
this legislation? Was I clear on that?
    Mr. Cutler. Could I make an attempt at that, and also the 
previous comments, and try to combine them?
    Mr. Garrett. No, go with mine.
    Mr. Cutler. These arguments, many of these arguments on the 
issues of corporate governance date back some 20 years. They 
have been around for quite a long time period.
    I think what is very important to keep in mind at this 
point is we have come through a terrible financial crisis but 
there has been no evidence in any country that you can regulate 
the economic cycle.
    I think we have to recognize there are cycles in economies. 
They are aggravated by different crises that have occurred 
around the world over time, but the heart of those is not 
corporate governance. It is the economic cycle.
    There are abuses that occur around the world at different 
times, but I would say the solution that we are trying to solve 
for here is we have two fairly distinct events: one, an 
enormous issue of international financial regulatory reform and 
it is not just in the United States; and two, a number of the 
corporate governance proposals that are being proposed did not 
stop, although they are in place in other countries, they did 
not stop the economic cycle and the financial regulatory reform 
from occurring in those countries.
    Mr. Garrett. Thank you. I only have 5 minutes.
    Mr. Rees?
    Mr. Rees. Yes, thank you. I would point out that it is not 
just Wall Street. For the past 10 years, the stock market, as 
measured by the S&P 500, has performed negatively. Investors 
lost money over 10 years. That is money that our pension funds 
depend on in order to pay for the retirement security of 
America's working families.
    Corporate governance was the root cause not just of the 
financial crisis, but the corporate accounting scandals, the 
stock option back dating scandals, a whole bevy of scandals 
over the past decade.
    We have to remember that corporate governance failures 
drove those scandals.
    Mr. Garrett. If you are telling me that the funds you are 
invested with have done poorly over the last 10 years, then I 
would have a question on your investment advice with regard to 
those funds. Up until the crisis that we have had just now, I 
think the markets have done amazingly well, if you look over 
time.
    The question that I have also is, do you find yourselves 
potentially in a conflicted situation here? I do agree with you 
on your point where you say we need to take a long-term look at 
these things.
    You are in a conflicted role when you are looking for the 
long-term interests of the stockholders in these things versus 
the short-term interests of your membership. Is that not 
correct?
    Mr. Rees. Absolutely not. Our members depend on companies 
to invest for the long-term to create jobs, and I am shocked to 
hear that other members of this panel think that shareholders 
who own one percent of the stock of companies should not be 
able to nominate their own directors.
    Mr. Garrett. That was not my question, but thanks.
    The question is, if you are out there trying to get jobs 
for your employees today, that may at certain times, I would 
think, run at cross purposes with the idea of increase in 
shareholder value over the long term.
    What about where those jobs are located? That thought just 
pops into my head, when it comes to the issue of creating jobs, 
is it maybe better for shareholder value in certain 
circumstances, nothing that I encourage by any means, but in 
certain circumstances, maybe it would be better for those jobs 
not to be in the neighborhood of where your particular union is 
in your State, for State funds and what have you, or out of the 
country.
    What happens then when it is an issue of local jobs versus 
long-term investment? Which side do you come down on, long-term 
shareholder value or the jobs for your union members?
    Mr. Rees. We come down on the side of long-term 
shareholders, because that is in the best interest of employees 
of those companies.
    Mr. Garrett. Even if those employees may no longer be here 
in the area of my State?
    Mr. Rees. We have a different view of how companies should 
be managed. We believe that it should be based on the long-term 
interests of the company and its stakeholders, including 
shareholders, and we are not getting that from the current 
system. We are not getting that.
    We are getting ``short-termism '', driven by excessive CEO 
pay and a focus on the short-term, not the long-term. That is 
why shareholders need to have a greater voice in corporate 
governance.
    Mr. Garrett. Do the membership of the unions have the same 
ability to have that interest and governance of the unions as 
far as executive pay and the other things we are looking for 
here in this legislation? Do they have that say?
    Mr. Rees. Yes. Our officers are directly elected by the 
membership of the organizations, unlike corporations where the 
CEOs are appointed by a board.
    Mr. Garrett. Is their compensation set by membership?
    Mr. Rees. It is fully disclosed.
    Mr. Garrett. I know. Does the membership get to vote on 
compensation? I do not know.
    Mr. Rees. Yes, they do.
    Mr. Garrett. In all instances, they vote on the 
compensation?
    Mr. Rees. They vote on the compensation policies through 
the democratic processes that the unions have established and 
are required to have under the Landrum-Griffin Act.
    Mr. Garrett. Thanks.
    Chairman Kanjorski. The gentleman from Colorado, Mr. 
Perlmutter.
    Mr. Perlmutter. Thanks, Mr. Chairman. I appreciate my 
friend from California letting me jump ahead. I have to get out 
of here.
    Mr. Cutler, my questions are simpler. In your company--I am 
not sure, what does your company do, Eaton?
    Mr. Cutler. We are a diversified manufacturer of electrical 
equipment, aerospace equipment, hydraulic equipment, and 
automotive and truck equipment.
    Mr. Perlmutter. How does your company go about choosing a 
member of its board?
    Mr. Cutler. Our board of directors' nominating committee 
and governance committee does that work. As I mentioned before, 
they put together skill matrices in terms of what the current 
skills on the board are. They look at the strategic plan and 
the issues facing the company as they see it over the next 
couple of years, and identify the skills that they then want to 
seek.
    They use an outside consultant to do the initial 
interviewing, and then they make the nomination and give it to 
the shareholders for election.
    Mr. Perlmutter. Do you or does your company require any 
kind of knowledge on the part of your director, either before 
he is nominated or once he or she becomes a member on corporate 
governance? Is there any kind of education class?
    How does your company go about making sure you have the 
best directors, some of whom may have to stand up to you on a 
decision or two that you want to make?
    I think in my experience, sometimes boards really play a 
very docile role.
    Mr. Cutler. My experience in serving on three boards 
currently, and acting as the lead director on one of them, is 
that is a view which is quite dated. A mass of changes have 
occurred in this area.
    I think if you simply look at what has happened to the 
tenure of CEOs, and BRT is one subset, it is about 4 years 
right now. This idea of entrenched management is a backward 
looking issue.
    If you look at board turnover, you would find last year, 
and I believe the number was over 60 percent, of our boards had 
at least one member turnover. I think it was just over 50, I 
would have to confirm that number, for two members.
    You are seeing turnover occurring on the boards. I can tell 
you from my own experience, my own directors at our company 
have no problem in not only standing up but taking very 
different views than those of management. It is a very healthy 
exchange.
    Mr. Perlmutter. Is there some kind of continuing education 
component that you have with your directors?
    Mr. Cutler. Yes, our policy is that our board does have a 
continuing education requirement through accredited education 
courses outside of the company. We also twice a year conduct 
internal training on specific functional issues, and to come 
back to your earlier question, part of the criterion that our 
board examines when they look at a man or a woman as a 
potential candidate as a nominee for our board is not only 
their breadth of business experience, but have they served on 
boards, do they have governance experience, have they been 
around these issues?
    Mr. Perlmutter. Thanks. I would like to ask the two Mr. 
Smith's the same question: Mr. Smith of NiSource; and then my 
friend, Mr. Greg Smith, from Colorado.
    Mr. Robert Smith. Thank you. I will speak on behalf of the 
Society members. The Society has noticed and we have seen as 
Mr. Cutler pointed out a big sea change in the governance 
arena, and the docile board connotation really does appear to 
be a thing of the past for most companies.
    There could be some examples of outliers in that area, but 
there is a much more active board. This is seen through a move 
to independence, if you look at the number of independent 
directors on public companies, that number has increased 
dramatically over the last 10 years.
    It comes as a result also even recently as a result of new 
disclosures that are being required. There are new disclosures 
that are being required by the SEC on executive compensation 
analysis. Is there excessive risk in the executive compensation 
plans of the company. It comes in the disclosure on risk 
management.
    Mr. Perlmutter. Let me stop you for one second. Do you have 
a corporate governance kind of education policy or anything 
like that at your company?
    Mr. Robert Smith. At our company, we do encourage the board 
members to obtain outside education.
    Mr. Perlmutter. Greg Smith, please.
    Mr. Gregory Smith. Thank you. We are always excited to hear 
when there are corporations, and we certainly acknowledge there 
are many corporations in corporate America who have adopted 
good policies and are taking up good practices.
    Unfortunately, they are not all that way. We think what 
they have demonstrated, these ones that do have good 
accountability, that have good corporate governance, is that it 
works well, and in fact, it does not make the sky fall. It does 
not make management fail in its role. It does not tie the hands 
of corporate America.
    In fact, it empowers both the corporations and their 
shareholders to advance toward greater shareholder value.
    In our organization, we certainly have education for our 
trustees who are in a similar role, and in our management, we 
certainly are focused on the constant education toward better 
corporate governance and better responsibility and 
accountability to our stakeholders throughout the State of 
Colorado.
    Mr. Perlmutter. Thank you. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you, Mr. Perlmutter. Now the 
gentleman from Delaware, Mr. Castle.
    Mr. Castle. Thank you, Mr. Chairman. I am concerned that 
the proposals that we are discussing here today and the 
legislation we are discussing today may exacerbate the problem 
of short-termism, and not mitigate it as all of you have 
indicated you would like to see happening.
    Just some statistics we have picked up: annual stock 
trading turnover on the New York Stock Exchange was 36 percent 
in 1980; 88 percent in 2000; 118 percent in 2006; and 123 
percent in 2007.
    This data, of course, suggests that trading speculating has 
replaced investing as the principal goal of stockholders or in 
other words, short-termism.
    Since some of your operations own so many shares, your 
pension funds might be responsible at least in part for the 
staggering increase in turnover. For those who are involved in 
that, Mr. Greg Smith, Mr. Brier, and Mr. Rees, I would assume, 
do you know the average turnover of your investments? if you do 
not have the data available, I do not expect you necessarily 
would here, but could you supply that to us in writing after 
this hearing?
    Do you have any comments on that, Mr. Rees?
    Mr. Rees. Yes. I would be happy to get you that 
information. I can say that union-sponsored pension plans tend 
toward long-term strategies and are passive Index investors.
    We agree that there is a short-termism problem on Wall 
Street and in the stock exchanges. We joined with the Business 
Roundtable to sign the Aspen Institute Principles for long-
termism, to encourage long-term investors.
    I would note that proxy access as currently contemplated by 
the SEC requires that shareholders to nominate directors must 
have held their shares for at least 1 year, and we have 
encouraged the SEC to consider a 2 year holding requirement.
    Mr. Castle. Let me go to the others, so I can ask some 
other questions, if I may. Mr. Brier, do you have a response to 
that?
    Mr. Brier. We would be delighted to supply that information 
for you also. We do get a large proportion of our exposure 
through the Index products, so we are permanent owners. We have 
our active management as well. We will be delighted to supply 
that.
    We are also cognizant of the fact that short-term trading 
is a problem. We are looking to the SEC when they address this 
issue, and they had two open comment periods--
    Mr. Castle. You are saying the problem is not something you 
have helped create; is that correct?
    Mr. Brier. Pardon me?
    Mr. Castle. The problem is not something that you, your 
operation, has helped create?
    Mr. Brier. I would supply the information on trading, but 
we have a tranche of permanent capital that we have in Index 
funds. We cannot really sell those shares. We have a very 
active corporate governance and proxy voting policies and we 
publish that on the Web and we try to be best practices as 
fiduciaries. Because of that permanent tranche, we are long-
term holders.
    Mr. Castle. Okay. Mr. Greg Smith?
    Mr. Gregory Smith. I will be happy to provide that 
information. I also am a co-chair on the Council of 
Institutional Investors, one of the largest accumulations of 
public pension plans, corporate pension plans, Taft-Hartley's 
in the world.
    Based on our examination of our membership, I would be 
extremely surprised if you found that pension plans are the 
source of short-termism.
    Mr. Castle. You will try to get me the information?
    Mr. Gregory Smith. Absolutely.
    Mr. Castle. That would be great, if you could.
    Let me ask Commissioner Irwin a question. For 150 years, we 
have had a State corporate law system that has allowed 
directors and shareholders to continually change the organic 
governance system for corporations.
    Over the past several years, we have seen three-quarters of 
the S&P 500 companies adopt majority voting, ending staggered 
boards in a large number, separating CEO and chairman roles, 
all without government mandates.
    If reforms are already happening at the organic level, why 
should we want to marginalize directors and shareholders and 
empower Washington bureaucrats?
    The decade has seen the entrance of government into 
corporate governance and the corresponding fall of public 
companies in the United States and a rise in public companies 
around the rest of the world.
    Are we legislating away our economic advantages to score 
short-term political gains? You are, of course, involved at the 
State level. I would be interested in your comments on that.
    Mr. Irwin. Certainly, Congressman Castle, it is a difficult 
question. I am not saying that--I believe that corporate 
governance issues were the cause of the crash and the melt 
down.
    Clearly, some of the things that we are talking about will 
instill a much greater sense of security and trust that will 
bring people back, the retail investor on Main Street back, to 
the capital markets.
    Mr. Castle. My question is, is this not happening anyway, 
so why do we need to do this as a Federal legislative mandate?
    Mr. Irwin. One reason, we have national exchanges, and you 
have heard from some members of the panel that they invest 
across an Index, so everybody who is listed on an exchange is 
going to have investment of substantial assets from people 
investing without any control by them individually, but by 
their pension funds.
    We ought to have a minimum level of expectations as to 
disclosure, as to such things as executive pay and other 
things, so that there is that kind of integrity and trust that 
will cause those investors to return.
    Mr. Castle. Unfortunately, my time is up. I yield back.
    Mr. Irwin. Obviously, we are the States. We do not really 
advocate preemption. We believe that whatever the rule is, we 
have to ensure that the States have the right to enforce the 
rule, even if it is a Federal rule.
    Mr. Castle. Thank you.
    Chairman Kanjorski. Thank you very much, Mr. Castle. Now, 
we will hear from the gentleman from California, Mr. Sherman.
    Mr. Sherman. I would also like to respond to the gentleman 
from Delaware. We have just had this great catastrophe, and in 
the wake of that, everybody has gotten religion. Everybody has 
reform and board members are going to classes.
    If we are lucky enough to go 10 years without a 
catastrophic crisis and scandal, all this will end. People will 
return to their old ways. That is why I think we have to 
institutionalize the lessons of the last 2 years, rather than 
expect that this wave of caution is going to persist.
    We have seen this after every bubble, everybody is really 
cautious a year or two after the bubble explodes.
    State law has traditionally governed such issues as how 
long a term can a director have, do you have staggered terms, 
do you have cumulative voting, do you mandate cumulative 
voting?
    What we have seen for the most part, and there are some 
exceptions to this, is a race to the bottom. Every State says 
ah, there may be franchise fees for us if we could just get 
those corporations to incorporate here, and then when they go 
bankrupt, we get to do the bankruptcy work, too.
    The question is, should we at the Federal level establish a 
floor of minimum rights for minority shareholders that have to 
apply to all publicly held companies.
    One of these issues is cumulative voting, a system where 
even if there is a group of shareholders that has 51 percent of 
the shares, they do not necessarily get 100 percent of the 
board seats. If there is a group that has 10 or 20 percent of 
the shares, they get a board seat.
    Mr. Rees, should we as a matter of Federal law compel 
cumulative voting so that a minority of shareholders, not a 
tiny minority but a 10 or 20 percent minority, can get 
themselves at least one seat on the board?
    Mr. Rees. The Federal Government, since the passage of the 
1934 Securities and Exchange Act, has set and regulated the 
proxy solicitation rules, and has clear authority to do that, 
and I believe can do things like proxy access through that 
authority.
    Your question regarding cumulative voting, cumulative 
voting is another means to empower shareholders to have board 
representation. I think it is something that is worthy of 
consideration. I would think it would need to be done through 
stock exchange listing standards because these are national 
exchanges.
    At this point, I think proxy access is the way that the 
Federal Government should set the ground rules for proxy 
solicitations.
    Mr. Sherman. I think there is a tendency for all of us to 
just buy into the traditional division between State and 
Federal and that is the Federal Government controls the proxy 
statement, the States control the corporations code.
    I am not sure that has worked all that well, certainly not 
over the last 2 years. It is the long-established tradition.
    Mr. Rees, how would we see corporation behavior change if 
we did have the kinds of proxy access rules that you are 
advocating?
    Mr. Rees. I strongly believe that just one independent 
thinker on a board of directors can have a profound effect on 
how well that board governs the corporation. I believe what is 
important is not the nominal independence of directors or the 
nominating committees that select those directors, but it is 
the independence and spirit and the process.
    The process that proxy access would provide is for a 
director to be nominated, not dependent on the goodwill of his 
fellow directors, but by the backing of a large institutional 
investor. I believe that is a very healthy process that needs 
to be implemented.
    Mr. Sherman. I think you just made the case for cumulative 
voting since you set forth the advantage of having a 10 or 20 
percent group of shareholders able to elect that one 
independent director.
    Mr. Irwin, I see you are the securities commissioner. I do 
not know if you are the corporations commissioner. How long a 
term of office can a director have if his corporation is clever 
enough to incorporate in the most lenient State? Any idea?
    Mr. Irwin. I am not the corporations director. I apologize. 
I cannot answer that question.
    Mr. Sherman. I have seen 3 years, I have not seen longer. I 
have seen 3 years with staggered terms. That is usually thought 
to be a defense against minority shareholders, that and the 
absence of cumulative voting.
    Mr. Chairman, I see my time has expired. I hope we set 
minimum national standards for empowering minority 
shareholders. I yield back.
    Chairman Kanjorski. Thank you very much, Mr. Sherman. We 
will now hear from the gentleman from Texas, Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. Before I begin my 
questions, I would ask unanimous consent that testimony from 
the Center On Executive Compensation prepared for this hearing 
be entered into the record.
    Chairman Kanjorski. Without objection, it is so ordered.
    Mr. Hensarling. Thank you, Mr. Chairman.
    I think it was you, Mr. Brier, or several of you who used 
the phrase ``excessive risk-taking'' in describing investment 
strategies or business strategies of certain failed firms. That 
was you? Can you define ``excessive risk-taking'' versus risk-
taking?
    Mr. Brier. I think American capitalism as a brand took a 
massive hit when the global financial system melted down and 
Lehman's demise. I think that is a case study of the entire 
investment banking industry failing to recognize the 
counterparty risk that was within the system.
    I think it is endemic to the entire financial services 
industry.
    Mr. Hensarling. What is the difference between risk-taking 
and excessive risk-taking?
    Mr. Brier. I would say an excessive risk is one that brings 
it to bankruptcy. I think it is clear that an excessive risk 
brought several--
    Mr. Hensarling. Is there a company that enters into Chapter 
11 today that engaged in excessive risk-taking?
    Mr. Brier. I would say if they technically defaulted on 
their obligations, they failed to manage risk properly. There 
are market forces as well.
    Mr. Hensarling. I have seen statistics from either SBA or 
NFIB that approximately 80 percent of all small businesses fail 
within 3 years. Does that mean they engaged in excessive risk-
taking because they failed?
    Mr. Brier. I think there are market forces in place. I 
think the concern here is the misalignment of executive 
compensation and risk-taking within the financial industry and 
other parts of the insurance industry.
    I think there is a failure to recognize. AIG is a case 
study on this. They had an unit based in London because there 
was no oversight that was literally--
    Mr. Hensarling. Let's talk about AIG for a moment here and 
some of these other firms. Again, the problem I am having here 
is trying to figure out--I am unacquainted with having a rate 
of return without having some risk attendant to it. It is when 
do we cross into that red area that says excessive risk-taking.
    To some extent, I am concerned are we as policymakers on 
the road turning over this definition of ``excessive risk-
taking'' ultimately to the Federal Government. Is that the road 
we are on?
    If so, was it excessive risk-taking by Members of Congress 
and Federal regulators, again, to set up Government-Sponsored 
Enterprises to essentially create a monopoly in the secondary 
housing market, and then give them ever increasing affordable 
housing initiatives that have now cost taxpayers $130 billion, 
and it continues to rise.
    Was it excessive risk-taking to have Federal bank 
regulators tell banks that they could concentrate their 
statutory capital in Fannie Mae and Freddie Mac paper, that 
they thought it was riskless and it turned out to be the most 
risky asset they had.
    The point I am making is I am not really sure there is a 
monopoly of wisdom here on exactly what is excessive risk-
taking.
    Let's talk about executive compensation. It seems to be 
Wall Street firms failed. Executives made obscene compensation 
packages, therefore, we must regulate compensation packages.
    There are a lot of obscene compensation packages out there. 
Again, I have an open mind, but I am looking for the evidence 
that of the Wall Street firms that did not fail, where is the 
distinction in the compensation packages?
    I have seen a study submitted that came out of Ohio State 
University that says, ``When we look at the subset of the 54 
banks that received TARP funding in our dataset, we find there 
is no statistically significant difference in the relation 
between dollar equity incentives and returns in the sub-samples 
of TARP and non-TARP recipients.''
    I have seen a paper from the American Enterprise Institute: 
``If bankers were being lured by their bank's compensation 
systems and acquiring risky but lucrative assets, they should 
never have bought AAA bonds, which they did.''
    I have a study coming out of George Mason University 
comparing the compensation of banks determined healthy enough 
to repay their TARP funds to compensation of banks likely to 
need additional injections of capital that reveals little 
difference in their executive compensation approaches.
    At least the academic studies I have seen do not make the 
case for the nexus, and even if it did, we have again 
legislation before us to impact every single public company in 
America, for which I do not quite understand the rationale.
    One quick last question for you, Mr. Rees, and your 
exchange with Mr. Garrett. Is there a Federal mandate that 
forces rank-and-file members to vote on the compensation of 
your union executives?
    Mr. Rees. There is not a say on pay mandate for union 
members to vote on executive compensation.
    Mr. Hensarling. Thank you.
    Mr. Rees. That being said, union executive compensation is 
not what helped cause the financial crisis and it is not what 
has caused 10 years of stock market underperformance that has 
damaged workers' retirement savings.
    Mr. Hensarling. The executive compensation at American 
Airlines, Dean Foods, and other large employers in Dallas, 
Texas did. Thank you.
    Chairman Kanjorski. The gentleman's time has expired. Mr. 
Ellison, since you were unable to make your opening remarks, we 
will attach an additional 3 minutes to your 5 minutes. Go 
ahead, sir.
    Mr. Ellison. Thank you, Mr. Chairman, for holding this very 
important hearing. I really appreciate it.
    Here is my statement which I will also submit. Chairman 
Kanjorski, Ranking Member Garrett, and members of the Financial 
Services Committee, thank you for holding this important 
hearing on corporate governance.
    Clearly, new financial regulations should focus on enhanced 
consumer protection, identification of systemic risks, and 
enforcement of rules by aggressive regulators, but we are here 
today to discuss another crucial element to our approach, 
corporate structural relationships among shareholders, 
officers, and directors that generate outcomes in areas such as 
profitability, risk creation, and compensation.
    Corporate governance changes seek to beneficially alter the 
nature of the corporate behavior and therefore address 
potential causes of economic injustice at a root level.
    The bill I introduced, H.R. 3272, makes several proposals 
designed to strengthen the rights of shareholders and mitigate 
corporate risks.
    As a preliminary matter, I would also like to emphasize 
that jurisdictionally, the bill also affects companies that 
issue securities subject to Federal regulation of the 
Securities and Exchange Act of 1934.
    The first element of the bill is the requirement that the 
chairman of the board be independent and not serve as an 
executive officer. The goal with this provision is to reinstate 
the traditional divide between directors and officers, with the 
hope that the divide will promote increased board oversight and 
scrutiny of decisions of officers.
    As we are all aware, many companies in recent years have 
fused the director and officer relationship, especially through 
the combined title of chairman of the board and chief executive 
officer. Separation of the chairman of the board from officers 
should promote independence.
    Later on, I will ask members of the panel to offer their 
views on this topic.
    The bill provides for the establishment of an independent 
risk management committee to oversee risk management policies 
and an independent compensation committee to oversee and review 
compensation practices.
    Related to risk management, the bill also creates a 
position of risk officer to establish, evaluate, and enforce 
risk management policies. I believe that a risk management 
committee and a compensation committee are crucial first steps 
that will force a company to approach these matters with the 
care, diligence, and scrutiny that they deserve.
    The hope is that companies will realize that risks within 
the company have the potential when aggregated with other risks 
from other companies to create broad-based risks that can 
further impact the company itself.
    Companies at the front line of business activities must be 
more vigilant about risks.
    With regard to compensation, my hope is that compensation 
committees will think about compensation practices throughout 
an entire firm and not just for upper level executives. The 
simple fact that we speak about compensation in terms of 
executive compensation and not compensation for everyone else 
probably suggests that we have a serious problem.
    As we are all acutely aware, upper level executives are 
paid at levels or orders of magnitude higher than average 
employees and the trend has become more asymmetrical over time.
    While the government is not in the business of setting 
wages, a legal requirement such as a compensation committee 
should inject additional scrutiny into a review of 
compensation.
    Additionally, in terms of compensation, the bill requires a 
non-binding shareholder vote to approve executive compensation 
when proxy solicitation rules require compensation disclosure.
    This is simply one of the many proposals currently on the 
table related to shareholder review of compensation.
    Shareholders, as the owners of companies, should have the 
right to ensure that their ownership stake is used to pay wages 
that promote the profitability of the company.
    Executives should not be able to drive companies into the 
ground and walk away with millions. The shareholders, if given 
the opportunity to review compensation, would not allow this 
practice to continue.
    Finally, H.R. 3272 provides that the SEC will study whether 
it should certify members of the board before they are able to 
join. Because some may view this as a drastic step, I would 
emphasize that this bill simply asks the SEC to conduct a study 
to determine the feasibility of such an approach.
    Thank you again, Mr. Chairman. Mr. Chairman, if I have any 
time left for a few questions, my first question is, I think 
certain members of our panel, I am not sure which ones, have 
recognized that there is a trend of separating the CEO from the 
chairperson of the board.
    If you regard this trend as actually happening, why do you 
account for it and do you think it simply should be the policy 
for publicly traded companies?
    Mr. Robert Smith. Thank you. I believe in my opening 
remarks I did mention there is an observable trend currently in 
our membership towards the separation of CEO and chairman.
    Having said that, and why that is occurring, I think it is 
occurring for the appropriate reasons, because as shareholders 
look at the individual policies and individual practices of 
their companies, they are determining a need at that company 
for a separation of the chairman and CEO.
    It comes through the proposal process. There is a dialogue 
that happens with the company. Then in the cases where a 
majority of the shareholders would then desire that, it is 
passed and implemented.
    Having said that, we feel strongly that it should not be 
legislated because that disempowers the shareholders to have 
that dialogue and it disempowers the shareholders to have the 
choice as to whether or not that is the appropriate thing.
    As for the example in Mr. Garrett's opening remarks 
regarding Bill Gates, under the current Peters' bill 
legislation, he would not be able to serve as the chairman of 
Microsoft, and it is incomprehensible how that would be in the 
shareholders' best interest.
    There are examples like that, new companies who are IPO'ing 
and coming out, and they have a CEO with a rich history of 
knowledge of the company and the industry, and to bring in 
someone with zero tenure and to have them then be the 
figurehead and the chairman of the company, it does not always 
make sense. Sometimes, it does. Sometimes, it does not. That is 
why we would recommend it not being legislated, but being a 
viable option.
    Mr. Ellison. Any other views on this topic?
    Mr. Cutler. Yes, I would just add that we agree with that 
position and really feel the SEC required disclosure on 
leadership structure last year is very appropriate and I think 
as you look at the proxies coming out in the 2010 season, you 
are seeing companies--the board--specifying what their 
leadership structure is and why they chose that structure. We 
think that is the appropriate level of disclosure on an annual 
basis.
    Mr. Gregory Smith. It is disturbing to us in Colorado in 
our pension fund that for some reason, the successes that have 
occurred across the country in reforming corporate America to 
adopt appropriate governance standards has now become the 
shield for corporations who have not adopted these standards 
and have not taken these progressive steps to say, oh, look, it 
is happening already without us being told and forced to do it, 
and they are being allowed to hide behind the good members of 
our corporate community.
    We would suggest that in fact what has happened is the 
corporations who recognize and acknowledge their obligations to 
shareholders have taken the appropriate steps and for that, we 
are thankful, but to suggest that therefore shields those who 
have not taken those actions from needing to or relieves the 
need for Federal legislation to impose appropriate tools for 
shareholders to enforce these principles, these core 
principles, it is just a travesty, and it needs to be looked 
through and not allowed to be successful in hiding these bad 
actors or these failures by other corporations.
    Mr. Ellison. That point is well taken. Going back to Mr. 
Cutler's point, the fact that some companies have taken the 
step, are you submitting to us that should somehow be evidence 
that the ones who have not taken it, that means they do not 
want it, there are not shareholders who would like to see that 
kind of action, but for some reason, are curtailed in some way?
    Mr. Cutler. I would just say very briefly that I think it 
is a little disingenuous, with due respect to my fellow 
panelists, to say people are hiding behind this. Many 
corporations have participated in advancing the feeling that 
there should be a leadership structure disclosure and the board 
should make that appropriate decision for what is right for 
that individual corporation in light of some of the factors 
that my fellow panelist, Mr. Smith, mentioned.
    It may also be an issue in terms of evolution, in terms of 
either a new executive or an executive who has is to provide 
tutorage for one year.
    Chairman Kanjorski. The gentleman's time has expired.
    Mr. Ellison. Thank you. I yield back the time I do not 
have.
    [laughter]
    Chairman Kanjorski. The gentleman from California, Mr. 
Campbell.
    Mr. Campbell. Thank you, Mr. Chairman. I may be unique on 
this committee in that I strongly support proxy access. 
However, I strongly oppose this particular bill.
    I would like to explore with the panel my concerns and see 
where you all fall. First of all, let me say that on the 
majority voting, I obviously support that. I think there is not 
a lot of controversy on that since about 50 percent of public 
companies have that now, and I think that is an important part, 
proxy access, for it to work.
    I also think that if you have these things, proxy access 
and majority voting, then shareholders have mechanisms through 
which they can express their displeasure with a company short 
of selling the stock, and therefore, I believe you do not need 
all these other things like executive comp and the chief risk 
officer and the board certification, all that kind of stuff.
    What I would like to focus on is the proxy access part. My 
first question is to those of you on the panel who support 
proxy access, my concern with this bill is that it allows the 
SEC to set the thresholds of proxy access, and they have 
indicated that 1 percent, 3 percent, and 5 percent roughly for 
large cap, mid-cap, and small cap companies, are the proper 
thresholds.
    I believe those thresholds are too low and could result in 
a greater problem than not having proxy access for this reason: 
if a single shareholder or a group of shareholders who have a 
very narrow interest have access to the proxy to express that 
narrow interest, then that is not in the best interest of the 
shareholders generally.
    I understand all the shareholders have to vote the director 
in. You could have shareholders that are a union, a supplier, a 
customer, or perhaps have an event coming up where although 
they are a long-term shareholder, they have a very short-term 
focus because they have a sale event that is imminent for some 
reason.
    Any of those things, particularly in a small cap company, 5 
percent share holding is not necessarily a big shareholder and 
is not necessarily a huge investment for a lot of particular 
institutional players.
    For those of you who support proxy access, do you share my 
concern, do you believe that larger thresholds, 5, 10, and 20, 
something like that, so you have to have an amalgamation of 
shareholders that would have to not represent a narrow interest 
but would still be not a huge percentage but something like 5, 
10, and 20, which is what I support.
    Whomever wishes to answer. Mr. Smith?
    Mr. Gregory Smith. We have done significant work on that 
very issue because we are concerned about exactly what you 
raised. As a public pension fund, we certainly see the risks 
associated with giving people access to a proxy and the need to 
then be informed about who we are voting for on those director 
votes.
    The realities of who owns shares and how many they own and 
how you get to these percentages is very important to 
understand.
    What we did was do an examination of the top 10 public 
pension plans in the country and their holdings in a range of 
10 different companies covering a spectrum of cap size.
    In that study, what we determined was that there were on 
average .86 percent of the shares were held by the top 10 
pension funds.
    Mr. Campbell. Combined?
    Mr. Gregory Smith. Less than 1 percent combining all 10 of 
them, the 10 largest had less than 1 percent of the shares. The 
highest they had in any of the companies that we examined was 
2.86 percent. That is all 10 of them combined. That is the 
biggest in the country, biggest in the world.
    Mr. Campbell. My time is wrapping up. I know Mr. Rees wants 
to say something. I will just ask my second question, which is 
for the opponents of proxy access. If thresholds are larger, 
does this soften your opposition or change your opposition to 
proxy access if there are larger thresholds?
    Mr. Cutler?
    Mr. Cutler. If I could, unmentioned so far is the position 
of hedge funds in corporations, and they are a considerable 
multiple of that figure. Obviously, the pressure from hedge 
funds for short-term actions to lever up a company to take 
actions that are not in the long-term interest of the 
shareholders, we believe, or the employees or the customers, is 
considerable.
    Higher thresholds would help, but our fundamental issue is 
that we believe it is an issue of State law, not Federal law.
    Mr. Campbell. Mr. Rees?
    Mr. Rees. I would make two points. One, that under the 
current proxy access rules, many boards of directors would not 
qualify because the directors themselves do not hold 1 percent 
of the shares outstanding to nominate directors.
    My other point would be that under the current proxy 
solicitation rules, it is only hedge funds and takeover funds 
that are doing proxy fights today. There were 40 proxy fights 
last year which were dominated by short-term forces.
    Mr. Campbell. I agree with your 2 year threshold, 
absolutely, but still, you can have a long-term shareholder 
with a narrow or even short-term perspective if the threshold 
is too small.
    I yield back. Thank you.
    Chairman Kanjorski. Thank you, Mr. Campbell. Now, we will 
hear from the gentlelady from Illinois, Ms. Bean.
    Ms. Bean. Thank you, Mr. Chairman. I have a question for 
Mr. Cutler. First, about majority rule. It is my understanding 
that in the last couple of years, 63 companies held shareholder 
votes on whether to institute a majority vote rule, which 
resulted in shareholders of 27 of those 63 companies voting 
against it. Other companies did choose to adopt it.
    If the purpose of majority voting is to empower 
shareholders, what would be some of the reasons that nearly 
half of shareholders would vote against requiring it?
    Mr. Cutler. I personally cannot speak for what their 
specific reasons were. I think the trend is the important one 
here. We are seeing a very high number of companies adopting 
majority voting, and while we think that is a decision that 
shareholders should be making for their individual 
corporations, there are situations where the preponderance of 
shares may be held by very few shareholders in some firms, 
often because they are smaller, and that is why we do not think 
there should be a Federal rule requiring it across the spectrum 
of all companies.
    Ms. Bean. My second question for you is some have suggested 
that the risk of proxy access is that it would empower short-
term holders, hedge funds, raiders, for example, to influence 
company decisions. Do you believe that could lead to more 
emphasis on short-term results as opposed to the creation of 
long-term shareholder value?
    Mr. Cutler. We do believe that proxy access with those 
pressures can exacerbate the pressures that are already out 
there, the short-termism, and do not come simply from this 
issue of corporate governance, but from the focus on short-term 
profits and short-term payouts of cash dividends, etc.
    Ms. Bean. Thank you. My next question is for Mr. Smith or 
Mr. Rees. If the majority of shareholders at a company did not 
want majority voting, is it your understanding the current 
proposal would reject that option for them?
    Mr. Rees. If I may, I believe that the proxy rules need to 
provide minimum standards for the election of directors. I 
believe that majority voting is one way to make director 
elections real accountability mechanisms.
    To the extent that shareholders have not voted in favor of 
those proposals this year, I expect that in future years, we 
are going to increase demand, but more importantly, you have to 
remember that many companies due to dual class voting 
arrangements, due to the bylaw restrictions that prohibit 
shareholders or require super majority votes to change the 
bylaws, shareholders do not currently have the mechanisms to 
implement reforms like equal access to the proxy or majority 
vote director elections.
    Ms. Bean. Would the short answer be yes, their views should 
be rejected even if they vote against it?
    Mr. Rees. The short view is that shareholders need to have 
their votes on director elections respected and that is why we 
need majority voting.
    Ms. Bean. My next question is, there was an example that 
came up, and I forget who mentioned it, that Bill Gates 
obviously had been CEO and later chairman of the board, and you 
did not hear a lot of folks at Microsoft uncomfortable with 
that.
    For those who think that this legislation, which would 
disallow that, is a good idea, can you explain why?
    Mr. Rees. With all due respect, most publicly traded 
company CEOs are no Bill Gates, and if they were Bill Gates, 
then I think there would be less of a concern about the fact 
that most companies in the United States have combined 
positions of chairman and CEO.
    Mr. Gregory Smith. I would also suggest that had Mr. Gates 
had a separate chairman as opposed to his CEO role, he would 
have probably functioned quite well within that arrangement, 
and he would have communicated well with his board. He would 
have disclosed his management objectives and strategy, and he 
would have worked with the board chair, an independent chair, 
to come up with an agenda that gave the directors the 
opportunity to address that strategy.
    Nothing would have tied Mr. Gates' hands by having a 
separate chair of the board.
    Mr. Cutler. What you do run the risk of is legislating out 
talent, and that is a danger.
    Ms. Bean. I would agree with you. Thank you. I yield back.
    Chairman Kanjorski. Thank you very much, Ms. Bean. Now, we 
will hear from the gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you, Mr. Chairman.
    Mr. Cutler, my father-in-law worked for Cutler Hammer for 
years, and last year he sent you the 50th anniversary brochure. 
It occurred several years ago. You kindly gave him a call and 
talked for quite a bit of time with him, and I want to thank 
you for taking that time just to spend on one of your former 
employees. That is very commendable.
    I have a big problem here. Is anybody proposing any 
legislation to determine when a corporation should incur a 
dividend or take that money and reinvest it into new structures 
or companies?
    Does anybody see a problem with the Federal Government 
making that determination? Or should the Federal Government 
simply determine the salaries of everybody at every level of 
the corporation, does anybody have a problem with that?
    I have a problem to the extent that the Federal Government 
that passes a health care bill that does not even know if its 
own Members of Congress are covered and has the chief spokesman 
going around the country saying nobody will lose their health 
insurance, that this august body is telling corporate America 
what is the best way to run your board of directors.
    Somebody has to come in here and say, if we had passed the 
Proxy Voting Transparency Act, the Corporate Governance Reform 
Act, and the Shareholder Empowerment Act, that this sage, this 
independent director would sit on the board of every major 
corporation and be there to stop any type of default on the 
part of a corporation.
    Can somebody answer that question?
    Chairman Kanjorski. Will the gentleman yield?
    Mr. Manzullo. Sure.
    Chairman Kanjorski. You are asking some interesting 
questions. We are trying to establish policies here that could 
protect the American people, and since your side of the aisle 
just a short number of years ago suggested that all the Social 
Security funds of the United States be invested in American 
corporations, then all the Social Security--
    Mr. Manzullo. Reclaiming my time, I am just making the 
statement that just because something goes wrong in the 
financial markets, or something goes wrong with the 
corporations, that Congress sitting here taking the position 
that putting someone independent--how do you determine who is 
independent?
    What if a creditor gets on the board and he is independent 
or he is on the board of another company to which the 
corporation owes money and says well, you should do things in 
order to prefer creditors first?
    I do not think you can get anybody who is truly 
independent. Several CEOs sit on other boards themselves. That 
is okay because you have collective wisdom. You have lots of 
years of people who have seen mistakes, made mistakes 
themselves, and wanted to make sure those do not occur again.
    I just have a problem with every time something goes wrong, 
Congress sitting here trying to make these micro decisions. 
Does anyone want to comment on this?
    Mr. Cutler?
    Mr. Cutler. I think as I mentioned before, the temptation 
coming out of any severe financial crisis like we just came 
through is the feeling that somehow it could have been 
prevented through different forms of corporate governance.
    I, myself, feel that we came through obviously a very 
damaging recession. We go through cycles, and we have been 
through them before, and the focus of financial regulator 
reform is that which gets at the core of the issue which caused 
the liquidity crisis.
    I personally have not seen evidence that the rest of the 
damage in the economy that came from that credit crunch came 
from poor corporate governance practices.
    I think the enormous revolution that has been occurring 
since 2000 in corporate governance is a trend that we should 
continue to see play out, the independent committees, the 
improved boards, the independent selection of board members, 
the vigorous evaluation on an annual basis of board member 
performance. These are all very positive issues, coupled with 
the SEC's new disclosures around leadership, around risk. These 
are important disclosures that are important for shareholders 
to have access to.
    Mr. Manzullo. When you look at what happened--you see in 
Mr. Paulson's book where he encouraged $20 billion worth of 
sales of stock of Fannie Mae and Freddie Mac, knowing full well 
that there would be a default on it, and a lot of community 
banks got stuck with it.
    The Federal Government's role in trying to be independent 
and protect the shareholder is not exactly exemplary. Thank 
you.
    Chairman Kanjorski. The gentleman from Indiana, Mr. Carson.
    Mr. Carson. Thank you, Mr. Chairman. This question is for 
Mr. Gregory Smith. Among your proposed executive compensation 
reforms, you recommend stronger clawback provisions in 
legislation.
    There is currently language in Sarbanes-Oxley that allows 
for clawbacks due to executive misconduct. The definition of 
``misconduct'' is really open to interpretation.
    Please talk about specific improvements to the language 
that could be included in legislation.
    Mr. Gregory Smith. The language that is contained in some 
of our policies related to clawbacks focus on whether those 
clawbacks would be related to misstatements of performance, 
misstatements of financials, the ability to claw back because 
in fact their performance had been misrepresented. I think that 
is really the core of our objectives from a legislative 
perspective.
    We do not claim to be able to identify exactly what 
compensation should be able to be clawed back in every case. 
That is going to be a company by company determination, and I 
think it is important to recognize that in none of our reforms 
have we asked for legislation to set what compensation is going 
to be, set a formula for what compensation is going to be, or 
set a formula for what compensation can be clawed back.
    What is really important is that we have the ability to do 
those clawbacks but even more importantly that the shareholders 
have a voice in the boardroom to make sure that happens, and 
frankly, that it be put in the contract at the outset with that 
CEO so that he knows it is going to be clawed back if is 
misperforms, he knows they are going to pull those dollars back 
if he does not accurately represent what the corporation has 
been doing and what the financial condition of the company is.
    Mr. Carson. Thank you. I yield back, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Carson. The 
gentlelady from Ohio, Ms. Kilroy.
    Ms. Kilroy. Thank you, Mr. Chairman. Mr. Irwin, in your 
testimony you indicated that sunlight is the best disinfectant. 
Do you think then it would be a good thing to require all 13-S 
institutional investors to disclose how they vote their proxy, 
knowing how pension funds, unions, hedge funds vote, to add 
some transparency to the corporate election process?
    Mr. Irwin. My comments today have been as the Federal 
legislation chair for NASAA, the North American Securities 
Administrators, and our focus has been on executive 
compensation.
    No one is asking today or NASAA is not, and the States are 
not, asking that there be a Federal determination by the SEC or 
anyone else or a review of wages or compensation in corporate 
governance.
    Rather, we suggest that there be review and disclosure so 
that shareholders--they are the best regulator of public 
companies--have access to the complete information.
    Ms. Kilroy. I was simply asking whether institutional 
investors should be required to show how they voted their 
proxies when there was a proxy vote.
    Mr. Irwin. I do not have a position on that, Congresswoman.
    Ms. Kilroy. Thank you. Mr. Smith, your group, the Colorado 
Public Employees' Retirement Association, I understand you have 
adopted a policy for your domestic proxy votes; is that 
correct?
    Mr. Gregory Smith. Yes, we disclose our proxy votes on a 
monthly basis on our Web site.
    Ms. Kilroy. Do you think it would make sense to require 
this of all institutional investors over a certain size, say 
over $100 million?
    Mr. Irwin. Obviously, my board of trustees believes that is 
an appropriate practice for public pension plans and it is one 
that we are proud to be a leader of.
    Ms. Kilroy. Mr. Rees, does the AFL-CIO support increased 
transparency by disclosure of proxy voting?
    Mr. Rees. Yes, we do. We disclose both our guidelines and 
our proxy votes, and we believe that all market participants, 
all institutional market participants, including hedge funds, 
investment managers, and mutual funds--mutual funds are 
currently required to disclose their votes--should be.
    More importantly, we believe that companies need to 
implement those votes when adopted by shareholders, and that is 
why we believe governance reforms like majority vote in 
director elections are so important.
    Ms. Kilroy. Thank you. Mr. Allen, CFA is the sponsor of an 
investor working group?
    Mr. Allen. Yes.
    Ms. Kilroy. Am I correct that the investor working group 
supports the central recommendation of the disclosure of proxy 
votes?
    Mr. Allen. I believe that is correct. I cannot recall 
whether that was one of the provisions of the IWG report, but I 
do know that is something that the CFA Institute does support; 
yes. You are talking about the investment firms disclosing?
    Ms. Kilroy. Disclosing how they vote; correct. Or unions or 
retirement funds.
    Mr. Allen. The idea is the investors in those funds need to 
understand how their managers are voting those shares so they 
can determine whether or not they want to invest in it.
    Ms. Kilroy. Thank you very much. Mr. Smith, some of the 
members have questioned whether there should be Federal 
regulation or we should have State-by-State determinations and 
State-by-State reforms.
    How would that affect a large fund like yours if you had 
State reforms to deal with?
    Mr. Gregory Smith. I have a two-part answer to that 
question, if I may. One is the burden placed upon us in 
understanding and getting a handle on 50 different States' 
rules, it would be burdensome. It would impact our ability to 
be effective in our votes, and to carry out what we believe our 
fiduciary duty is, which is to vote those shares and 
participate in the proxy process.
    The question, I think, is one that is extremely important 
and one that certainly Colorado PERA hopes to get improvement 
on through this process.
    Ms. Kilroy. Thank you. Mr. Brier, you were asked earlier to 
define ``excessive risk.'' Do you think it is appropriate for 
corporations to set up a risk matrix and have a professional 
risk manager but then repeatedly, over 30 times in 2 years, 
exceed those risk limits, and in fact, when they are exceeded, 
just simply increase them and fail to have that risk manager 
report to that corporate board?
    Mr. Brier. I think the most important answer to that 
question is that through a market-based solution of enabling 
investors to get access to majority voting and proxy access 
will enable them to get a voice in the boardroom. That voice in 
the boardroom will focus on long-term investors, like us, risk 
management.
    I do agree it is an area that one of the difficulties that 
long-term investors have is removing directors. You can know 
that something is wrong. You can have derelict directors. You 
can know that risk management is not under control. You cannot 
remove them.
    I think this market-based solution where long-term 
investors, long-term holders with a significant number of 
shares who get access to the proxy, who can use the proxy card 
of management who need to then go out and get a majority vote 
can get someone on the board to address this risk management 
issue.
    Chairman Kanjorski. The gentlelady's time has expired. Mr. 
Peters?
    Mr. Peters. Thank you, Mr. Chairman. Thank you to the 
panelists. It has been a very interesting discussion and an 
important issue as well.
    I just want to address briefly some of my colleagues on the 
other side who have used some of the rhetoric that this is 
somehow the Federal Government interjecting itself in the 
management of companies, I just want to remind my colleagues 
that this is far from that.
    In fact, it is about empowering the people who actually own 
these companies. I think we have forgotten who actually owns 
these companies, and that is the shareholders.
    To me, that is about as pure of a capitalistic system as 
you can have, that you say the people who actually own capital 
actually have a say as to how that capital is managed, and hold 
those managers accountable to manage it and to increase 
shareholder wealth.
    This is not about Federal Government takeover. It is not 
about the government mandating. It is about the people who 
actually own these companies.
    I know shareholders are very diverse, including people who 
are in IRAs and 401(k)s and pension funds, who are investing 
their hard-earned dollars hoping that they have some sort of 
security in the future, and want to entrust that their managers 
actually have their interests in mind and not any of the short-
term interests.
    I want to just touch on a couple of general themes that I 
have heard through the debate and then one that I heard from 
most of the panelists, that there has been a sea change in how 
boards are starting to govern their companies, and they have 
been standing up to CEOs and have been more active, and at the 
same time we are also hearing that more boards are also 
adopting many of the practices that are in this bill and in the 
Shareholder Empowerment Act, which I have authored.
    Those companies that are standing up to CEOs, are more 
enlightened, do understand that good governance also is 
correlated with good shareholder performance or good share 
performance, to me that seems as if it is pretty good objective 
evidence that what is in these bills as has been adopted 
voluntarily by companies, that have boards that are more active 
in overseeing and holding their management consistent, to me, 
that should be strong evidence that we should extend it to all 
companies because this is has proven good governance.
    No one particular panelist, is that a fair assessment of 
why it makes sense for us to move in this direction, because we 
actually have objective data from those companies that are 
doing it, that it does lead to better governance and better 
stock performance?
    Mr. Gregory Smith. Certainly, the evidence that we see and 
are pleased to have had enough success to be able to generate 
that data.
    Mr. Cutler. I would say there are selective elements that 
you are seeing broadly adopted. I think getting into areas such 
as a regulated solution to board leadership, a regulated 
solution to risk management, a Federal, not a State-based proxy 
access system, and then as we have talked about on another 
occasion, the need to address the efficiency and accuracy of 
the voting process, are really important concepts.
    Without that, we feel there are some additional problems 
with the proxy access proposal.
    Mr. Robert Smith. I would just add the movement towards 
good governance, there is a pervasive attitude to try to vilify 
current CEOs at companies, but my observation has actually been 
that CEOs within our membership organizations have been some of 
the proponents of these changes and of good governance.
    There is a trend towards good governance and many of these 
same provisions are being implemented and do empower 
shareholders, but again, to legislate it so it is a one-size-
fits-all on all companies, it seems to go beyond that, and it 
takes away from shareholders' ability to actually decide what 
is best for their company.
    Mr. Peters. I take a little different view, the fact that 
if shareholders should--every company should have the 
opportunity to make sure that the managers are caring for their 
interests and are looking out for their interests.
    It should not be just those companies that happen to be led 
by a more enlightened CEO. We are hoping that shareholders from 
every company have those protections. That is certainly what is 
the goal of this legislation.
    Mr. Cutler, we had a chance to meet earlier. I appreciate 
having that opportunity. You did bring up some concerns about 
the way elections could be hijacked.
    If you would just briefly touch on that, and I would like 
to have some response from some of the other panelists if they 
are equally as concerned.
    Mr. Cutler. The elimination of broker vote, which our best 
data would indicate that about 15 percent of our average 
companies are owned on a retail basis, it has the prospect 
without improvements in the communication process today that 
assures accuracy of both the communication and voting process 
of reducing a number of votes that would be cast in an annual 
election.
    That coupled with relatively low thresholds for majority 
vote and the ability to pool shares or borrow shares holds the 
prospect for consortiums of a group of voters coming together 
to advance a special interest conclusion.
    We are also concerned about the potential for borrowed 
shares not being counted accurately, i.e., being double-counted 
potentially. That is why we are very pleased, as I mentioned in 
my testimony, that the SEC is looking at these issues.
    The last issue is the very strong position of proxy 
advisory firms today. It is not a transparent process. There 
are some indeed conflicts in terms of understanding the vote, 
if you want to understand that from a company point of view, 
and that you end up paying a fee to get the information, and we 
think that consulting agreement is a conflict with the actual 
voting process, and the ability of 30 to 40 percent of the 
shares being controlled on an institutional vote by the 
recommendations--
    Mr. Peters. I know my time is expiring. Could I just have a 
couple of responses from other folks as to their concerns? Mr. 
Rees or the gentleman from Colorado, Mr. Smith?
    Mr. Rees. Yes. We believe that we need to have minimum 
standards in corporate governance to protect investors. 
Otherwise, you will have a phenomenon where only those 
companies that have good corporate governance are adopting 
reforms, like separating the chairman and CEO, majority voting 
and proxy access, and those that are entrenched in unresponsive 
boards will be the ones that resist those reforms.
    That is why we need minimum standards. Thank you.
    Mr. Gregory Smith. I believe also that the borrowed shares 
issue is one that has been and is being dealt with by the SEC. 
It does not present a threat. The hedge fund risk or the claim 
that the raiders will use proxy access to disrupt companies, I 
think that is dealt with both by the thresholds required, and 
the testimony I provided regarding really where those volumes 
of shares could be developed, as well as the holding period.
    I do not think there are raiders that want to wait around 2 
years for their opportunity to get one board seat. It is just 
not a realistic threat.
    Mr. Robert Smith. If I may, there are many opportunities 
where boards are faced with long-term capital investments that 
do not pan out in the short term, and if hedge funds and day 
traders and people who have access to corporate votes have the 
opportunity to get in and influence it, then that short-term 
time horizon can get in the way of those long-term objectives 
and change the strategy to an annual focus or something with a 
shorter time horizon than a strategic plan would have.
    Mr. Gregory Smith. Ultimately, they would require a 
majority of the vote in order to accomplish that. We would 
still be protected.
    Mr. Peters. I yield back. Thank you, Mr. Chairman.
    Chairman Kanjorski. Thank you very much, Mr. Peters. Thank 
you, Ms. Kilroy. The two of you have done really admirable work 
in this field of governance.
    The subcommittee chairman wants to thank you. I know the 
chairman of the full committee wants to thank you. We are 
looking forward to further hearings on this subject. Thank you.
    To the panel, we want to thank you for being here. I have 
one or two notes I have to make before we recess to dismiss 
you.
    The Chair notes that some members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions to these 
witnesses and to place their responses in the record.
    Before we adjourn, the following written statements will be 
made a part of the record of this hearing: Carl C. Icahn; Tom 
Gardner, on behalf of Motley Fool; the Investment Company 
Institute; and Susan F. Schultz, president, the board 
institute, Inc. Without objection, it is so ordered.
    Mr. Castle. Mr. Chairman, I have a letter which we all had 
received dated April 20, 2010, to you and Ranking Member 
Garrett from a series of entities in opposition to some of this 
legislation. I will not read them all: American Insurance 
Association; Americans for Tax Reform; Business Roundtable; the 
U.S. Chamber of Commerce, etc. I would ask that this be made 
with unanimous consent part of the record, if we may.
    Chairman Kanjorski. Without objection, it is so ordered.
    Any other submissions for the record? We have completed 
everything?
    [No response.]
    Chairman Kanjorski. I want to thank this panel. I hope we 
did not pick on anyone in particular, but I gained a lot of 
insight from you all. I am certain now we have more confusing 
time to spend to resolve this, but we will.
    Thank you very much for your public service. We really do 
appreciate it.
    Thank you and the subcommittee stands adjourned.
    [Whereupon, at 12:27 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             April 21, 2010


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