[Senate Hearing 111-641]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-641

 
                   SHORT-TERMISM IN FINANCIAL MARKETS

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                            ECONOMIC POLICY

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             SECOND SESSION

                                   ON

              EXAMINING SHORT-TERMISM IN FINANCIAL MARKETS

                               __________

                             APRIL 29, 2010

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                    Subcommittee on Economic Policy

                     SHERROD BROWN, Ohio, Chairman

         JIM DeMINT, South Carolina, Ranking Republican Member

JON TESTER, Montana
JEFF MERKLEY, Oregon
CHRISTOPHER J. DODD, Connecticut

                      Chris Slevin, Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        THURSDAY, APRIL 29, 2010

                                                                   Page

Opening statement of Chairman Brown..............................     1

                               WITNESSES

James E. Rogers, Chairman, Chief Executive Officer, and 
  President, Duke Energy Corporation.............................     3
    Prepared statement...........................................    24
Judith F. Samuelson, Executive Director, Business and Society 
  Program, Aspen Institute.......................................     6
    Prepared statement...........................................    26
Damon A. Silvers, Policy Director and Special Counsel, AFL-CIO...     8
    Prepared statement...........................................    29
    Responses to written questions of:
        Senator Vitter...........................................    32
J.W. Verret, Assistant Professor of Law, George Mason University 
  School of Law..................................................    11

              Additional Material Supplied for the Record

Statement of James P. Hoffa, General President, International 
  Brotherhood of Teamsters.......................................    33

                                 (iii)


                   SHORT-TERMISM IN FINANCIAL MARKETS

                              ----------                              


                        THURSDAY, APRIL 29, 2010

                                       U.S. Senate,
                           Subcommittee on Economic Policy,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Sherrod Brown (Chairman of the 
Subcommittee) presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. Welcome. The hearing of the Subcommittee on 
Economic Policy of the Senate Banking Committee will come to 
order. Thank you, panelists, for joining us. I know each of you 
is extraordinarily busy, and several of you had to rearrange 
schedules to be here, and I appreciate that very much.
    In an age of BlackBerrys and instant messaging and 
videoconferencing, we have become used to shrinking the 
distance between Points A and B, whether the goal is to gather 
information or resolve a problem or exploit an opportunity. 
What was once considered expeditious is now more or less 
considered the norm.
    In that same vein, there is a familiar business impulse--
and Government impulse, frankly--to generate short-term results 
no matter what the long-term cost. This is a subject, short-
termism, that we are considering this morning. It is a timely 
subject given that by hook or crook the Senate will reform Wall 
Street and will do it soon.
    One thing we have or should have learned from the events 
that led to our current situation is that if Wall Street 
wheeler dealers become blindly obsessed with short-term gains, 
their actions can potentially--and have--shatter the economic 
security of Americans and the Nation in which we live.
    Over the past year, I have chaired several hearings in this 
Subcommittee to examine the opportunities and the challenges 
facing American manufacturing. Chief among these challenges is 
the obsession with quarterly results, the short-term 
expectations from the world of finance, which too often 
sacrifice long-term economic growth and job creation. Short-
termism involves a tradeoff between long-term productivity and 
fast cash. Financial transactions supplement manufacturing as a 
means of growing the economy at the expense of our Nation's 
self-sufficiency--our ability to make the products we need, 
generate the energy we use, equip the armed forces upon which 
we all rely.
    Recent trends have transformed quarterly earnings into 
benchmarks for speculators to make bets. The rise of private 
equity and hedge funds has deepened that volatility.
    A couple years ago, the middle-class community of Tiffin, 
Ohio, a small town in northwest Ohio, experienced economic 
hardships that result when a short-term approach drives 
decisions. Tiffin was home to American Standard, the kitchen 
and bathroom fixture manufacturer whose products likely grace 
the home of many of you today. In late 2007, American Standard 
was bought by Bain Capital in cash. Bain then liquidated the 
assets, moved jobs offshore, and sold the controlling stake in 
the firm to another private equity firm. More than 200 
manufacturing jobs in Tiffin were eliminated--without warn 
notices, I might add--and the community was left with an empty 
plant of a longstanding, prestigious company.
    Last week, we avoided a similar situation in northeast Ohio 
when Hugo Boss, the German company, clothing manufacturer, made 
a decision to keep its last suit manufacturing plant open in 
Brooklyn, Ohio. Hugo Boss had, as I said, just this one plant 
left in the United States. But the situation with Hugo Boss and 
the private equity firm that has a controlling stake in its 
company raised several questions about short-termism and the 
ripple effects of a plant closing decision.
    This is just one example that illustrates the emphasis past 
Administrations and Congresses and the corporate titans of this 
country have placed on financial services at the expense and 
gross neglect of American manufacturing.
    Thirty years ago, manufacturing made up 25 percent of GDP; 
manufacturing was one-quarter--slightly more than one-quarter 
of our GDP; financial services made up less than half that, 
about 11 percent. By 2004, it had pretty much flipped. 
Manufacturing accounted for just 12 percent of our economy 
while financial services were 21 percent.
    In 2004, the financial industry accounted for 44 percent of 
all domestic profits. In 2010, even after a year-and-a-half of 
busts and bailouts, manufacturing--or, I am sorry, the 
financial industry accounts for more than 35 percent of 
corporate profits. So when people in the Administration or out 
of the Administration tell us that our Government should not 
pick winners, manufacturing, the answer is we already have the 
last three decades.
    We can see the effects of short-termism as we work on Wall 
Street reform today. Just look at the oversupply of toxic 
assets that clogged our credit markets. Too many mortgage 
lenders were so focused on booking revenue from loan 
transactions, they paid too little attention to true risks. Too 
many lenders actually encouraged borrowers to take on larger 
mortgages than they act could afford. We know that. Why? Those 
lenders earned a quick buck. This problem was made worse by 
bundling these mortgages into big packages, mortgage-backed 
securities, and selling them off to other investors, leaving 
aside the rating agencies and their role in this.
    In putting Wall Street aside, the problem was--putting Wall 
Street aside, there are some promising developments when it 
comes to risks and costs of short-termism. Fortunately, more 
and more large businesses recognize the problems caused by this 
myopia, if you will. Over the past few years, more corporate 
executives, more CEOs have done soul searching and more 
publicly traded companies are not playing the quarterly 
earnings game. Groups like the Business Roundtable and some of 
our best business schools are taking a critical look at the 
short-term business model. But if quarterly earning reports 
were to completely disappear as the primary metric of 
evaluating businesses, what replaces them? What is the 
appropriate measure of long-term value?
    I hope our witnesses today can think about this, offer 
their thoughts on this and other questions about this myopic 
sort of short-termism today. I thank our witnesses for joining 
us. I look forward to their statements. I will introduce each 
of you, then begin with Mr. Rogers, and you are to speak, you 
know, 5, 6, 7 minutes. Certainly you do not have to keep it 
right at 5 minutes.
    Jim Rogers is chairman of the board, president, and chief 
executive officer of Duke Energy. Mr. Rogers has more than 21 
years of experience as a CEO in the electric utility industry. 
He was named president and CEO of Duke following the merger of 
Duke Energy and Cinergy in Cincinnati in April 2006.
    Damon Silvers was the Chair of the Competition Subcommittee 
of the United States Treasury Department Advisory Committee on 
the Auditing Profession and a member of the Treasury Department 
Investor's Practices Committee of the President's Working Group 
on Financial Markets. Prior to working for the AFL-CIO, Mr. 
Silvers was a law clerk at the Delaware Court of Chancery for 
Chancellor William Allen and Vice Chancellor Bernard Balick.
    Judith Samuelson is founder and Executive Director of the 
Business and Society Program at The Aspen Institute. Founded in 
1998, the program employs dialog, teaching, and research to 
explore complex issues at the intersection of business and 
society. Ms. Samuelson's work experience spans the business, 
government, and nonprofit sectors. She joined the Ford 
Foundation in 1989 and served through 1996 as Director of the 
Office of Program-Related Investments.
    Professor J.W. Verret received his JD and MA in Public 
Policy from Harvard Law School and the Harvard Kennedy School 
of Government in 2006. While in law school, he served an Olin 
Fellowship in Law and Economics at the Harvard Program on 
Corporate Governance. Prior to joining the faculty at Mason 
Law, Professor Verret was an associate in the SEC Enforcement 
Defense Practice Group at Skadden, Arps in Washington, DC, and 
he has written extensively on corporate law topics.
    I switched the order of the middle two of you, but I will 
go left to right. So, Mr. Rogers, if you would begin, thank 
you.

    STATEMENT OF JAMES E. ROGERS, CHAIRMAN, CHIEF EXECUTIVE 
        OFFICER, AND PRESIDENT, DUKE ENERGY CORPORATION

    Mr. Rogers. Thank you. Mr. Chairman, I am delighted to be 
here today, and I want to thank you for holding this hearing 
and focusing on the importance of having a long-term 
perspective in our capital markets and focusing on what I would 
call cathedral thinking.
    Our industry is the cornerstone of the economy. We enable 
everyday living. We enable the growth of the economy, and if 
you think back to the 20th century, what was enabled by our 
deployment of capital in providing universal access to 
electricity in America. We are the most capital-intensive 
industry in the U.S. Job one for me is affordable, reliable, 
clean electricity 24/7/365, and to get that job done, I have to 
attract capital, I have to deploy capital in this most capital-
intensive industry. But said another way, my job is to bring 
capital to and create public policy solutions that are created 
by Congress. As Congress addresses energy and environmental 
issues, it is our job to attract the capital, to deploy the 
capital, and to carry out the mission of energy and 
environmental legislation in this country.
    Today, as an example, we are stimulating the economy, 
creating jobs, and cleaning up the air. We are building a 
number of plants--two coal plants, two gas plants, renewables, 
smart grid in Ohio. We have in the southern part of Ohio a 
clean park there where we could deploy up to $12 billion and 
create jobs in one of the counties where the unemployment is 
the highest in the State. But just with our building program 
today, we are employing over 6,000 people in the middle of this 
recession. Once we complete these plants, the jobs there will 
be the type of jobs that will rebuild the middle class in 
America, create a tax base which will fund the schools in each 
of these counties where we are building new plants.
    So we are by 2050 have to modernize our entire fleet. We 
have to modernize our transmission and distribution, and we 
need to attract patient capital to get that done.
    So we need investors with a long-term view. I have been 
part of the Aspen Institute and worked with Judy and really 
applaud what they have done because they have really led the 
way in thinking about these issues and trying to put in place a 
framework that will really encourage investors to take a long-
term view.
    From our company's perspective and in a broader sense from 
our industry's perspective, the dividend is really key. Very 
few companies pay dividends as high as ours. For instance, we 
pay out to our investors $1.3 billion a year, and the large 
part of our investors are retail investors. So they own our 
stock, and a lot of them are retired, and with more and more 
people retiring, with the baby boomers coming of age--a much 
older age, I might add, speaking as one--our stock is very 
attractive to them because of the dividend. But we need to 
attract capital even beyond, and we need to incent people to 
own dividend-paying stocks.
    So one idea that I would suggest to encourage holding our 
stock for long periods is really to tie the tax rate on 
dividends to how long you have held the stock. So the longer 
you hold the stock, the lower the tax rate on a dividend. So 
that would really encourage people to not just buy our stock, 
but to hold our stock over a very long period. And if you 
juxtapose that with the number of people retiring and living 
much longer than our parents or our grandparents did and the 
need to be able to subsidize Social Security, to augment 401(k) 
plans, a dividend-paying stock like ours does that.
    And so another way to think about this from a public policy 
perspective, this just is not about attracting capital to carry 
out the U.S. policy on energy and environmental issues; it is 
also about addressing the growing concern in this country with 
respect to the viability of Social Security and augmenting the 
earnings of our people over the next 10 to 30 years. At the 
same time, we really need to attract the capital to modernize 
our entire system and specifically our generation.
    Let me conclude my comments by spending a moment on 
cathedral thinking. You were right in your opening comments 
when you talked about we are really focused on the short term, 
and certainly we are under tremendous pressure to produce 
quarterly earnings. I know that very well because I am working 
on my earnings call for next week. And people look not just 
quarterly but annually, but we think in terms of decades.
    Take a nuclear plant. It takes us almost 10 years to build 
a nuclear plant. It takes 5 years to build a coal plant. You 
are deploying $5 billion, $12 billion. And we are building 
plants whether they are renewables--and we are one of the 
largest wind generators in the country, or solar like our 
program in North Carolina ``solar on the rooftop.'' Whether it 
is coal, whether it is gas, whether it is nuclear, all these 
facilities are going to last 30, 40, 50 years.
    So when I think about the future, cathedral thinking has 
got to be at the heart of what I think. And let me share with 
you what that means, because our country has forgotten it.
    If you go to Europe and you look at the great cathedrals of 
Europe, you recognize that they were built over 100 years, most 
of them. And at that time, given the life span of people, you 
are looking at three to four generations to build a cathedral. 
And so the people that worked on the foundations never saw the 
walls or the stained glass windows. Those that worked on the 
stained glass windows never saw the spires. The architect never 
saw it finished. And yet every generation they committed their 
time, their energy, their passion to getting it done.
    They did it because they had a vision. They did it because 
they believed in tomorrow. They did it for their children and 
for their grandchildren. And yet they never really saw it 
finished. They never saw all those things that have happened 
over the last 400, 500, 600 years in those cathedrals with 
respect to the lives of people that came after them. But they 
did it because they had this vision and faith in the future. 
And what we really need to do is structure policy, financial 
policy in this country that encourages people to have this 
cathedral thinking, because that is the only way in the 
manufacturing sector and the utilities sector that we have the 
ability to really rebuild the infrastructure of our country, 
rebuild the manufacturing sector in our country. We have to 
have that cathedral thinking. And in my judgment, if we do, we 
will make the tough decisions, and we will have the capability 
to attract the capital.
    In closing, I would simply say we need cathedral thinking, 
but we need to act in China time, and then the combination of 
the two will allow our country to get our mojo back. And now 
more than ever we need it.
    Thank you, sir.
    Chairman Brown. Thank you. Cathedral thinking, China time, 
get our mojo back. That was a quite interesting last paragraph.
    [Laughter.]
    Chairman Brown. Ms. Samuelson, thank you for joining us.

STATEMENT OF JUDITH F. SAMUELSON, EXECUTIVE DIRECTOR, BUSINESS 
              AND SOCIETY PROGRAM, ASPEN INSTITUTE

    Ms. Samuelson. Thank you. Good morning and thanks again. I 
want to add my thanks for----
    Chairman Brown. Is your microphone on?
    Ms. Samuelson. Can you hear me?
    Chairman Brown. No. Did you push the button?
    Ms. Samuelson. Is it on?
    Chairman Brown. Yes, that works.
    Ms. Samuelson. Good. Thanks for doing this. We think it is 
an important topic, obviously, and we are delighted to be a 
part of this.
    At the Business and Society Program at the Aspen Institute, 
our work is largely about working through dialog and through 
business education to align business with the long-term health 
of society. And, frankly, we have come to think it is all about 
timeframe. It is also about balance and judgment and vision, 
and it is about kind of recognizing that the results we have 
now are a result of this is the way the system is currently 
designed; and if we are going to have a different result, we 
are going to have to redesign the system.
    The ideas that we are presenting today come out of a dialog 
that began in 2003 but has literally engaged hundreds of people 
since then. And I might just start with the definition of what 
we think about market short-termism.
    If the common definition of sustainable development is to 
meet the needs of the present without compromising the ability 
of future generations to meet their own needs, then I think of 
short-termism as being kind of the antithesis of that. It is 
about making decisions to meet some benchmark today without 
regard for the needs of, or the costs imposed on, the future. 
Most often, the metrics employed are return on equity and share 
price, which fail to capture the most complex impacts of 
business that play out over the long haul.
    A significant stream of academic literature engages this 
question. Some of it points to the consequence of excessive 
focus on earnings per share or on perhaps the response to a 
large block of short-term holders, with the response being that 
a firm will cancel value-creating investments. One survey of 
400 CFOs suggests that up to 80 percent will cut discretionary 
spending--for R&D, for maintenance, for advertising--in order 
to avoid missing a quarterly forecast. And then a complementary 
study that came out of GW Law found that between 2004 and 2007, 
more than half of the S&P 500 spent more money on stock buy-
backs than they did on productive investments.
    The reason we do this work is because we are big believers 
in the extraordinary capacities of business. Another reason 
would be to avoid the kind of crises we have been seeing. But 
the reason we started this work in 2003 is because of the 
remarkable reach and distribution systems that business 
represents, research and management talent, and problem-solving 
skills. It is simply hard for us to imagine solving our most 
important problems domestically or internationally--whether we 
are talking about unemployment, poverty, climate change, you 
name it--without having business at the table in a big way. And 
it is also hard to imagine harnessing this same capacity of 
business for the public good as long as managers are moving 
from 90-day calendar to 90-day calendar.
    The productive capacities of business are complex and real, 
and they naturally think long term in the way that Jim has just 
described. But it is also true that finance and financial 
services, as you have been speaking to, now command a much 
bigger portion of the GDP, and that the average holding period 
of stock continues to fall and that corporate managers often 
focus on short-term performance because that is what many of 
their most powerful investors want them to do.
    Indra Nooyi, CEO of PepsiCo, who is one of our signatories, 
in a speech recently given at the Economic Club of Chicago 
captured it: Attention spans are short, time is money, and 
there is a premium on speed. At Pepsi, they are working on 
rewarding what she calls sustainable performance, and in this 
vein, in 2007 we released a set of guiding principles for 
business practice. They speak to having the right metrics to 
begin with, which we could potentially talk more about this 
morning, about stopping the practice of providing quarterly 
earnings forecasts, and also, of course, about long-term 
orientation in executive compensation.
    Six courageous companies actually signed on to that 
document, including the one to my right and Pepsi and Pfizer 
and Apache, Office Depot, and Xerox. But there is also much 
more that can be done within the control of managers and 
boards.
    But 2 years later, we turn to the question of policy. In 
September 2009, a working group finished the task of 
recommending public policy changes that would support the 
actions of these companies that are trying to stay long and 
focus attention on ``shareholder short-termism.'' In brief, 
they believe that with all of this discussion about investor 
rights also comes a question of investor responsibility.
    The principal recommendation of that working group, which 
has now been endorsed by 30 leaders from business and 
investment and labor in a widely circulated Call to Action, is 
to create market incentives that reward long-term investment. 
Jim gave one example of how this might be achieved. The group 
talked about an excise tax on trading or perhaps by skewing the 
capital gains tax to greatly favor long-term holdings. 
Individual signers have proposed things like moving the cap 
gains tax to 0 percent after 10 years, with a high tax at the 
short end of the investor continuum, which could be a revenue 
generator or be revenue neutral, depending on how it is 
designed.
    The drafters that participated in this policy release did 
not offer specifics, except to say that nontaxable entities, 
like pension funds, public pensions, also needed consideration, 
which might suggest some kind of modification to ERISA.
    Other recommendations in this Call to Action address the 
need for better definition of fiduciary duty, as it applies to 
financial intermediaries and also better disclosure to 
illuminate the borrowing and lending of shares and to make the 
actual position--short or long--of large holders transparent.
    The range of signatories behind these ideas and 
recommendations defies the usual alliances. Warren Buffett 
signed, but so did Richard Trumka of the AFL-CIO. Long-time 
investors like Peter Peterson and John Bogle, Lester Crown, Jim 
Crown, and Jim Wolfensohn signed on, as well as Steve Denning, 
who is the current head of General Atlantic Partners, a $15 
billion private equity fund. The former CEOs of IBM, Cummins 
Engine, Medtronic signed, as did the current CEOs of Alcoa, 
Duke Energy, and TIAA-CREF.
    I want to just also say a word about the business schools 
since you mentioned it.
    Last year, some 150,000 students graduated from this 
country's MBA programs, which is roughly the same number as 
sought teaching credentials. It far out-paced professional 
degrees in law, medicine, and engineering. Twice that many are 
choosing undergraduate majors in business, economics, and 
commerce each year--challenging both the colleges and 
universities to actually examine what constitutes a liberal 
arts education today.
    Students, both men and women, are choosing business because 
they want to be able to speak the language of business and 
because of the networks that business education creates, even 
if they are going into government or the nonprofit sector.
    Unfortunately, the dominant view--and there are exceptions, 
and there are business schools that are taking leadership here. 
But the dominance of finance and the kind of ``job train'' to 
Wall Street in many of these business schools means that the 
narrative about business purpose is stuck in the 1970s where 
Milton Friedman left it off. The result is a curriculum that 
actually is emphasizing the technical skills of analysis over 
judgment and long-term vision. The curriculum in way too many 
schools teaches students essentially to externalize their costs 
and discount the future--the opposite of what we need now.
    Let me just mention a conversation I had, in closing, with 
my Dad who died at the age of 93 last year. He had worked for 
the phone company his entire life, but he just loved the 
market. He spent his retirement years poring over his Value 
Line subscription on a daily basis. And as I tried to explain 
to him what the heck I did for a living, and I dropped all the 
usual buzz words of ``corporate social responsibility'' and 
``ethics'' and ``values'' and ``stakeholders,'' he said, 
``Aren't you really just saying that business ought to take a 
long-term view?''
    Chairman Brown. Smart father.
    Ms. Samuelson. Exactly.
    Chairman Brown. Thank you, Ms. Samuelson.
    Mr. Silvers.

  STATEMENT OF DAMON A. SILVERS, POLICY DIRECTOR AND SPECIAL 
                        COUNSEL, AFL-CIO

    Mr. Silvers. Thank you, Chairman Brown, both for calling 
this hearing and for all that you have done on these issues, a 
few of the things which you mentioned in your opening 
statement.
    I am honored to be here together with the AFL-CIO's 
partners in the Aspen Institute's work on short-termism. As 
Judy noted, President Trumka is a signatory to the call to 
counteract short-termism released by the Aspen Institute.
    I also am required to note that I serve on the 
Congressional Oversight Panel for TARP. I am not here on behalf 
of that Panel.
    The United States economy needs investment with long-term 
time horizons. We need investors to fund our $2.2 trillion 
infrastructure deficit, to finance our transformation to a low-
carbon economy, to finance upgrades to our workforce's skill 
set, and perhaps most importantly, to fund research and 
development work all across our business landscape that is 
essential if our companies are to remain competitive in a 
globalized economy.
    Instead, by measure after measure, our system of financial 
markets and financial institutions appears to have rapidly 
shortening time horizons.
    Now, there are multiple sources of short-termism in our 
capital markets: the rise of cheap credit for risky activity, 
funded by our trade deficits; the decline of defined benefit 
pension plans and the growth of a culture of short-termism 
among pension plan service providers like hedge funds and 
private equity, as you noted in your opening statement; the 
deregulation of our financial markets; the weakness of our tax 
system; and a corporate governance system that in recent years 
has come to be dominated by an alliance between short-term 
investors and executives that are incentivized by short-term-
oriented pay plans.
    And so what has the result of the tilt toward short-termism 
been for our capital markets? The 10-year rate of return on the 
U.S. equity markets is negative in nominal terms, and adjusted 
for inflation it is significantly worse. As for our economy, we 
have seen a period of jobless growth during the real estate 
bubble be replaced by a period of disastrous job loss. In the 
last 10 years, we have lost over 5 million manufacturing jobs. 
Workers' incomes were stagnant in real terms before the bubble 
burst, and now they have declined much further. Poverty rates 
have risen.
    So how can we return our capital markets and financial 
institutions to a long-term perspective?
    The AFL-CIO strongly supports the recommendations in the 
Aspen Institute letter released in September of last year and 
the Aspen Institute's prior document on executive pay 
principles. We also believe, probably important to note today, 
that the Wall Street Accountability Act of 2010 contains many 
significant steps that would encourage a more long-term focus 
in the capital markets and must be enacted.
    A key provision in this respect is the act's granting of 
clear jurisdiction to the Securities and Exchange Commission 
over hedge funds, a provision that must be expanded to cover 
private equity funds as well.
    However, rather than discuss each item in the Aspen letter 
or the details of the Wall Street Accountability Act, I would 
like to focus the remainder of my testimony on tax policy. 
Later today, AFL-CIO President Richard Trumka will be leading a 
march of more than 10,000 workers to Wall Street under the 
banner of ``Good Jobs Now, Make Wall Street Pay.'' I want to 
explain what we mean by Make Wall Street Pay and why, though it 
may sound a little odd, that if we make Wall Street pay for the 
harm the financial sector has done to Main Street in the right 
way, we will encourage Wall Street to return to its proper role 
of turning savings into investment.
    The AFL-CIO has a four-point program for reform in the way 
we tax the financial system. We support President Obama's bank 
tax proposal. We support repealing the capital gains treatment 
for carried interest, which is the way in which hedge fund and 
private equity billionaires pay a lower marginal rate than 
teachers and software programmers. And we support imposing 
special taxes on short-term-oriented bank bonuses, perhaps in 
the form suggested by Senator Webb in his bill.
    But the fourth item in our program is the most important 
and is essentially the first item in the Aspen Institute 
letter, and that is, either changes in capital gains taxes or 
an excise tax to discourage short-term speculation in the 
capital markets. This is the proposal Judy mentioned in her 
testimony. An excise tax to discourage short-term speculation 
is essentially what we call a financial speculation tax.
    A financial speculation tax is the very simple idea of 
assessing a very small tax on all financial market 
transactions--stocks, bonds, commodities, derivatives, futures, 
and options. The Congressional Budget Office estimates that 
this tax in the form proposed by Senator Harkin and 
Representative DeFazio would generate over $100 billion a year 
in revenue. There are studies by European economists suggesting 
that a smaller tax--not the 25 basis points that Harkin and 
DeFazio propose, but 5 basis points--would generate a much 
larger amount of revenue if applied evenly across the world's 
major economies, something on the order of 3 percent of global 
GDP; in the United States, that would be in excess of $300 
billion a year.
    A financial speculation tax has been endorsed by the 
governments of the leading economies of the world, including 
the United Kingdom, France, Germany, Japan, and Brazil. If the 
United States led in this area, it is clear we would have 
willing partners.
    But as important as the revenue implications of the 
financial speculation tax are at a time of vast unmet public 
needs and significant deficits, the true power of such a tax is 
what the Aspen letter seeks, which is a reorientation of our 
financial markets toward investing, toward long-term value 
rather than speculation.
    The tax that we are suggesting for people who are simply 
investing for the long term, as Mr. Rogers seeks to have his 
investors do, a 5-basis-point tax would be completely 
inconsequential. It is $5 on every $10,000 invested, which 
basically covers anything that a typical middle-class American 
might do in the course of a year. However, its impact on 
activities like high-speed trading of the type engaged in by 
Goldman Sachs would be quite significant.
    So on behalf of the AFL-CIO, I want to conclude by 
commending, Senator, the Subcommittee for holding this hearing. 
The question of capital markets time horizons is critical for 
our future as a Nation. As a result of the good work of Judy 
and her colleagues at the Aspen Institute-and I want to 
particularly note the leadership Judy has shown over the last 
10 years in this area; we would not be doing this without her 
work--Congress now has the benefit of a consensus among 
business leaders, labor, and institutional investors. The AFL-
CIO stands ready to assist you in acting in this area, and, 
again, we thank you for your leadership.
    Chairman Brown. Thank you, Mr. Silvers.
    Professor Verret, welcome. Thank you for joining us.

 STATEMENT OF J.W. VERRET, ASSISTANT PROFESSOR OF LAW, GEORGE 
                 MASON UNIVERSITY SCHOOL OF LAW

    Mr. Verret. Thank you, Chairman Brown, and thank you for 
the invitation. I want to express my appreciation for that. It 
is always a pleasure to be here.
    My name is J.W. Verret. I teach corporate and securities 
law at George Mason Law School. I am also a Senior Scholar with 
the Mercatus Center and the Director of Financial Regulatory 
Studies at the International Center for Law and Economics, a 
network of scholars that works on a variety of regulatory 
issues.
    My research is concerned with corporate governance and 
examining the incentives that guide corporate decisionmaking. 
Of particular concern to my research is examining incentives 
directed at the short-term performance of a company at the 
expense of its long-term value creation.
    I commend this Subcommittee for its focus on the causes of 
short-termism in today's capital markets. This is especially 
important for investors who are in it for the long haul. I 
will, however, warn that at times special interests might use 
the phrase long-term investing and have used that phrase as a 
cover for what are, in fact, in reality, purely political 
goals.
    There are two key drivers of short-termism I will discuss 
today: Politically motivated pressure from institutional 
investors and quarterly earnings predictions, and I want to 
express my agreement with some of the concerns that the other 
witnesses have expressed about quarterly earnings predictions 
and also with the concerns expressed by Mr. Rogers about a 
dividend policy, as well.
    One cause of short-termism is the Federal securities laws 
themselves, which encourage Wall Street's quarterly fixation. 
And by that, I expressly mean some of the elements of 
Regulation SK promulgated under the 34 Act. This is an example 
of some of the unintended consequences of regulation, as the 
quarterly reporting requirements of the securities laws can 
actually make the problem worse. Analysts predict quarterly 
earnings and companies feel pressure to meet those predictions. 
And I know the Aspen Institute has done a lot of great work in 
that area.
    Another cause of short-term thinking in corporate America 
is political short-termism. This happens when large investors 
pressure companies to pursue a special interest above the need 
to maximize shareholder returns. Institutional investors have 
frequently used their shareholder leverage to achieve political 
goals, such as the California Pension Fund's frequent 
insistence on environmental or health policy reforms at the 
companies they target.
    In this instance, laws that provide shareholders greater 
involvement in corporate decisionmaking actually facilitate 
short-termism. Public pension funds run by State elected 
officials and union pension funds are among the most vocal 
proponents of increasing shareholder powers. Provisions in 
Title IX of the Financial Regulation bill currently being 
debated on the Senate floor actually stand to significantly 
exacerbate this conflict. These special interests seek to 
achieve through corporate elections what they aren't able to 
accomplish through political elections.
    But the retirement savings of everyday Americans, already 
under severe strain, should not be used to fund these political 
objectives. The pensions of working Americans are most 
certainly in jeopardy. A recent study indicates that State 
pension funds are underfunded to the tune of over $1 trillion. 
This could cause pension funds to fail to meet their 
obligations for retirement funding, cost-of-living increases, 
and retiree health care benefits for teachers, firefighters, 
policemen, and other government workers. The most concerning 
conflict of interest occurs when these special interests cater 
to voters or to current represented workers at the expense of 
pensioners and retirees.
    Government leaders and business leaders are held 
accountable by different means. Government leaders are held 
accountable by their ability to get votes. Business leaders, on 
the other hand, are held accountable by their ability to obtain 
profits for shareholders like these pensioners and retirees. 
And the overwhelming majority of these profits for shareholders 
go to Main Street investors. Teachers, firefighters, policemen, 
and other working Americans depend upon this mechanism to fund 
their retirements.
    Special interests will often use the term ``long-term 
investing'' as a cover to substitute political discipline for 
market discipline when business decisions conflict with their 
ability to advance their special interest. For example, a 
business shutdown can be a traumatic event in the life of a 
community and the narrow interest of a particular employee 
representation group, but at times it is an entirely necessary 
event.
    If a private equity firm were to decide that the capital 
tied up in a particular business is more productive elsewhere, 
it has an obligation to its investors, like State pension 
funds, to sell or close that business and redeploy that 
capital. That will be an unpopular and difficult decision in 
the area losing the business, and especially to workers who may 
lose their jobs. However. Those costs can also be more than 
made up for with increased returns to pension investors and, 
for instance, in the particular private equity fund, lower 
costs for consumers, new businesses opened up in other 
jurisdictions, and the security of the pensioners' income.
    I thank you for the opportunity to testify today and I look 
forward to answering your questions.
    Chairman Brown. Thank you, Professor Verret, for your 
insight.
    Mr. Rogers, I assume that your cathedral thinking metaphor, 
this was not the first time you employed it. I would love to 
hear, what happens when you talk in those terms about cathedral 
thinking with CEOs and other leaders in the investor-owned 
utilities business and in a broader corporate context. What 
kind of reaction do you get?
    Mr. Rogers. I think more and more companies are 
recognizing, particularly at this point when we really need to 
rebuild our manufacturing base in this country, in a period 
where we need to rebuild our energy infrastructure, and those 
are specifically colleagues in the power sector as well as the 
gas sector, they recognize that it is critical that we have a 
long-term focus.
    And let me say it kind of another way. The notion of why do 
you run a corporation and who do you run a corporation for, 
historically, of course, you run it for the investors, both 
debt and equity, and that is a differentiation in itself. I 
believe more and more CEOs are thinking that they run their 
business for all the stakeholders. They run the business for 
the communities they serve, for their employees, for their 
customers, for their suppliers, for the environment, for our 
Government.
    And so we have to balance those competing interests, and 
that balancing of and in itself forces you to have a longer-
term focus than just profits tomorrow morning. It also, in my 
judgment, leads to what I see adopted by more and more CEOs to 
what I call sustainability in the broader sense of the word, 
not just limited to sustainability in the context of 
environmental issues.
    So in a sense, as you move from the GE-Welch approach of 
profit only to more of a stakeholder approach to more of a 
long-term view and to more of a sustainable organization over 
time, I think that translates in corporate America increasingly 
seeing their vision of their company and their role in society 
evolving.
    The unfortunate thing in this is--really the pivotal point 
today--is the financial community hasn't really embraced this 
long-term view, this concept of a sustainable corporation and 
this concept that you run the business balancing the 
stakeholder interest. And at the end of the day, over the long 
term, you will create more and better returns for investors if 
you run the business consistent with the stakeholder approach.
    Chairman Brown. Thank you. Your comment about China time 
brings to mind Zhou Enlai. The Chinese leader of three decades 
or so ago was asked once what he thought of--this was in the 
1970s, I think--what he thought about the French Revolution, 
and he said it is too early to tell.
    [Laughter.]
    Chairman Brown. I also get China time in the context that 
you used it. What is our future? When I see stimulus dollars 
being spent on buying windmills manufactured in China to 
install in Texas and other places, and while I expressed my 
alarm to the Administration on that, I also understand their 
push-back that our industrial capacity and supply chain has 
atrophied such in the last decade or two that we are not able 
to scale up the way we need to.
    How does the context of China time and short-termism and 
financing in an industry like yours get us where we need to so 
that we don't have to do that for much longer to buy any of 
these solar panels from Germany and wind turbines? How do we 
get these industries scaled up for the kind of production that 
we need to make in this country?
    Mr. Rogers. Well, first, with respect to wind turbines and 
solar panels, there is a worldwide glut, and so there is an 
oversupply today, and when I think about my mission of 
providing affordable, reliable, clean electricity, one of my 
missions is affordability, and so if I can buy the component 
parts at a lower cost and it allows me to achieve my clean 
objective, even though wind and solar doesn't allow me to 
achieve my reliability objective of 24/7, I feel compelled to--
obviously in a period where there is a glut now. That is not 
going to last.
    But here is, in my judgment, directly to your point from my 
sector's perspective. We have failed in this country to create 
energy and environmental policy. Those two policies are 
inextricably linked. We failed to provide a road map to a low-
carbon world. We failed to give clear signals with respect to 
future regulation of coal plants in this country in terms of 
sulfur dioxide, nitrogen oxide, et cetera.
    And the reason that China is number one in the production 
of solar panels today and wind turbines and they are building 
14 nuclear plants and we are not turning dirt on a single one 
in this country, they are building a coal plant every other 
week, they have an economic imperative because of the migration 
from rural to urban to build out this infrastructure, and by 
definition, they are going to create supply chains that are 
going to be lower cost.
    But I would say to you, sir, that we have a mandate in this 
country that has not yet been incorporated in our energy and 
environmental policy. In our sector, we have to retire and 
replace every power plant by 2050. If Congress would give us 
the road map, we would go to work, do the planning, and what 
that would mean is that would allow us to say, we are going to 
build a nuclear plant in Southern Ohio, as we have on the 
drawing boards, or we are going to put smart grid in our 
customers in Cincinnati as we are now doing. And those 
commitments that we would make would not only create jobs in 
the short term, but it would also, more importantly, allow the 
supply chains, the manufacturing base, to be rebuilt to allow 
us to build these facilities in the future.
    So my belief is, let us get the job done and the road map. 
We will rebuild the manufacturing base. We will make the 
commitments. We will raise the capital. But the key to raising 
the capital, as I said earlier, is getting the tax policy right 
so that we encourage people to buy and hold, because it takes 
10 years-plus, as I said, to build a nuclear plant, 5 years to 
build a coal plant. It takes a long time to get real earnings 
stream from these long-term investments.
    Chairman Brown. Transition: We are evolving into what you 
had said earlier, holding stock long-term and getting tax 
incentives, if you will, to do that. What do other countries, 
other rich countries like ours, do with investments when they 
tax investment income, dividends? Do they have a graduated tax, 
or graduated in the sense that you pay less if you hold it 
longer? Is that a new idea or is that something that other 
countries do to get people to hold investments longer?
    Mr. Rogers. I think that, to my knowledge, that is a new 
idea. I mean, we are--our corporate rates in the U.S. are 
probably higher than most of Western Europe today. A dividend 
tax is a tax on a tax almost. And so what we are encouraging--
the only way we get people to invest in our business, because 
we make long-term investments, is to pay a dividend. And so 
what we think, it would incent people to buy our stock if they 
knew they could buy it and hold it and get a lower tax rate 
over time by holding it over a much longer period. So I think 
this is a uniquely U.S. policy innovation that really addresses 
the needs in our country at this time.
    Chairman Brown. OK. Thank you. Thank you, Mr. Rogers.
    Ms. Samuelson, 150,000 M.B.A.s, you said, a year we put 
out. Do you know the number for engineers?
    Ms. Samuelson. A year?
    Chairman Brown. Half of that?
    Ms. Samuelson. Seventy-thousand and dropping. I am sorry--
--
    Chairman Brown. And dropping.
    Ms. Samuelson. Seventy-thousand, maybe, and dropping for 
engineers.
    Chairman Brown. Is the M.B.A. number going up or is it 
fairly constant?
    Ms. Samuelson. Going up.
    Chairman Brown. Going up.
    Ms. Samuelson. It has been north--it is north of 150,000. 
But growth in enrollments depends on the school.
    Chairman Brown. And that doesn't count marketing majors and 
business majors in college that don't go on to M.B.A.s.
    Ms. Samuelson. Undergraduate is roughly twice that many.
    Chairman Brown. And the engineering number for 
undergraduates----
    Ms. Samuelson. Declining.
    Chairman Brown. I guess you graduate with an engineering 
degree as an undergraduate.
    Ms. Samuelson. Yes. I think you can get a Master's in 
engineering, as well----
    Chairman Brown. But the 70,000 number you cited for 
engineers----
    Ms. Samuelson. Yes. It would be largely----
    Chairman Brown. ----includes undergraduates, mostly 
undergraduates.
    Ms. Samuelson. Correct.
    Chairman Brown. Which makes the differential even larger, 
correct?
    Ms. Samuelson. I mean, you have some schools in the country 
that are literally saying, do we need to cap the number of 
finance and management and business and commerce degrees 
because it is starting to take up such a large share of the 
noise on their campus that they literally are saying it is 
changing the dynamics of what the school feels like.
    Chairman Brown. What about in Europe? Do you know, roughly, 
those numbers?
    Ms. Samuelson. Europe has been kind of graduating to the 
M.B.A. They didn't--maybe 15 years ago, an M.B.A. was not very 
common at all. There were some schools that were modeling after 
the U.S. model. But the M.B.A. was really created in the United 
States in the 1960s and it is gradually being exported around 
the globe.
    India has 1,200 programs, at last count now, many of these 
are more informal, but 1,200 M.B.A. programs, believe it or 
not. China, I think, is approaching about 130 M.B.A. programs. 
Obviously, 10 years ago, they were called something else, but 
today, they are called M.B.A. programs. So it has kind of 
become the degree of choice and is capturing a lot of the top 
talent.
    Chairman Brown. Are business schools doing anything new? I 
mean, I am sure some are. Tell me about business schools' move, 
if it exists in any appreciable amount, to any appreciable 
degree, addressing the sort of the pitfalls of short-termism. 
Do you see interesting things that business schools are trying 
to do?
    Ms. Samuelson. Well, the business schools approach this a 
couple of different ways. The traditional way that they want to 
do it is put it in the ethics classroom, which, of course, is 
the wrong place to put it because the ethics classroom is the 
last thing that matters least in the M.B.A. hierarchy of what 
is going to help get them a job, unfortunately.
    So the traditional way has been to have within the domain 
of the ethics classroom, all of the discussion about the social 
and environmental impacts of the business. Ethics has a 
traditional philosophical basis that does not--that, in fact, 
is just totally drowned out by the fact that all the rest of 
the curriculum revolves around the theory of shareholder 
primacy, which is not something that is written into law, but 
is still holding forth in business schools and captures most of 
the noise.
    The dominant classroom in M.B.A.s is the finance classroom 
and the finance faculty are the most important faculty on the 
campus, and that is just the way that that is--that kind of 
dynamic is fully engaged and it is hard to work on.
    The innovators are doing a couple of things. They are 
either doing very comprehensive reform of the first year and 
saying, we need, for example--one example would be the Yale 
School of Management, which has completely revamped the first 
year experience and said, what we need to teach is the 
perspective of all of the different, what one might call, 
stakeholders of the business. So they actually spend time in 
modules understanding the perspective of the consumers, the 
supply chain, of community, et cetera, all of those that touch 
the business and that the business touches in the course of 
cycles of business.
    So they are doing different things. Other schools are 
putting design management in, design thinking, and using that, 
like Rotman University of Toronto. Stanford has put a lot more 
focus on what they call critical issues management or complex 
systems analysis.
    So some of these things are taking hold. Business schools 
tend to be fairly invulnerable to change because they are very 
well funded. They are the cash cows of their university. And 
they are supported by their graduates, who, of course, are the 
richest of all of the graduates, and so they tend to be self-
supporting in the sense that they kind of have a certain club 
mentality. But all of those things, there are positive things 
to say, as well.
    Chairman Brown. So the role of stakeholders, i.e., 
employees, the community, is--cathedral thinking takes a back 
seat always to the role of shareholders in most of these 
courses.
    Ms. Samuelson. Almost always. The simple metrics are the 
financial metrics. There is an elegance to them. The models 
taught, things like net present value, discounting cash-flows, 
those things tend to focus on very simplistic financial 
measures which, almost by definition, leave out the more 
dynamic and complex impacts of the business decision.
    So, for example, what you might do in a marketing class, 
and we have convened marketing faculty, for example, in that 
discipline for years, is that they would start to say, what is 
really the elements of long-term reputation and how does a 
business manage to that, and what are the hallmarks of 
businesses that do that well, and what are case examples of 
businesses that have had to balance and have faced reputational 
freefall and how that could have been avoided.
    So there is a lot more. We have a case site called 
CasePlace.org that has well over 1,000 teaching cases that you 
can search by all the different disciplines. So you can 
actually go in and say, what belongs in a marketing class or 
what belongs in finance.
    Clearly, finance today is our focus. We are starting to 
convene finance faculty who are at least willing to ask the 
questions about what is it that our students ought to be able 
to think about when they graduate, given the tremendous 
attention being paid today to business as an important social 
institution and the complexity of all the things we have been 
seeing over the last decade.
    So we are identifying very carefully those finance faculty 
willing to even ask the question and to start to convene them 
to say, how would we actually change the narrative about the 
purpose of business, because as long as we are teaching that 
the purpose of business is to maximize share price today, we 
are always going to be drowning out all of the important 
concepts and metrics and dialog that needs to take place about 
the more complex business that we know is on the ground, is 
operating. Boards have to manage to complexity all the time. 
The teaching theory is out of sync with the reality of how 
business is managed.
    Chairman Brown. One last question for you not quite related 
to that, but you had talked about the stock buy-back. Is that a 
long-term trend, more stock buy-back, less investment, and if 
so, what do you see in that happening in the next 10 years?
    Ms. Samuelson. I don't have data on that. I am sorry. All I 
have is the data from that 2000--the study that was done 
between 2004 and 2007. I don't know if----
    Chairman Brown. OK.
    Ms. Samuelson. I don't know if that is--and it might have 
been specific to the market at that time.
    Mr. Rogers. I think you have seen more stock buy-backs 
recently, primarily tied to the fact of a stock price falling 
so low. So you see more and more companies step up and buy 
stock back.
    I think it is an interesting irony, as I listen to Judy 
talk about this, and the interesting irony is we have more and 
more people graduating from business schools and yet the 
financial literacy of the average American is falling. So at 
some level, we need a more literate community of citizens in 
the future, and we clearly need more engineers in the future if 
we are going to rebuild the manufacturing sector, the energy 
sector, et cetera.
    Chairman Brown. Thank you.
    Mr. Silvers and Mr. Verret, let me ask you a question 
together, Mr. Silvers first. You had talked about the 
misunderstanding of fiduciary duties in the world of pension 
fund management. You both talked at some length about the 
pension issue and what that means for investors.
    I want to just briefly recount the Hugo Boss situation in 
Cleveland. It announced it would keep its last manufacturing 
plant open just recently in a Cleveland suburb, Brooklyn. The 
union spent the last 6 months after Hugo Boss announced it was 
closing its last America plant, production plant, and going to 
increase its American sales force, moving the production to 
turkey but trying to increase sales in their best market. The 
Governor and I had lengthy conversations with the company and 
others. Last Friday's announcement, in my view, was a big win 
where the company challenged the forces of globalization. The 
employees gave--not particularly well-paid employees, union, 
but making $12, a little more than $12 an hour, doing a give-
back of $1.50 to $2 an hour.
    Some interesting policy questions, though, about short-
termism and about the fiduciary duty of investment managers 
arose. Permira is the private equity firm that has a 
controlling stake in Hugo Boss. After Hugo Boss decided to 
close the plant--they announced it in December, just 4 months 
ago--the Ohio Public Employees Retirement System and CalPERS, 
also, and other pension funds with investments in Permira 
expressed concern about the decision.
    Before the announcement last week, this hearing was 
scheduled, in part, because we had planned to have Hugo Boss 
and Permira here, but given the new circumstances, we didn't 
see the need to so specifically dwell on their case.
    Each of you, give me your thoughts on the role of public 
pension systems in a situation like this. How does that affect 
the decisions of Permira and Hugo Boss? Is it appropriate? If 
you agree it is appropriate, do we engage public pension 
systems in more perhaps pressure tactics or not, but 
involvement in these situations? Mr. Silvers, you begin, and 
then Mr. Verret, I would like to hear your thoughts, too.
    Mr. Silvers. Well, Senator, let me first admit that I have 
a certain bias. I am wearing a suit made in that factory and I 
am not sure I would have purchased it if it didn't have the 
Union label----
    Chairman Brown. Except for Ms. Samuelson, you look better 
than anybody on the panel.
    [Laughter.]
    Mr. Silvers. Well, that is a rare achievement for me.
    Mr. Rogers. I have an American suit on, by the way.
    [Laughter.]
    Chairman Brown. Without commenting on the fact that--maybe 
I shouldn't say this, Mr. Rogers' collar doesn't match his 
shirt----
    [Laughter.]
    Chairman Brown. Without commenting on that fact, though, go 
on, Mr. Silvers.
    Mr. Silvers. My career began in the--one of my early jobs 
was for the Clothing and Textile Workers and I learned very 
early you had to get your collar to match and that kind of 
thing. They would laugh at you otherwise.
    [Laughter.]
    Mr. Silvers. Let us start with the Hugo Boss company is 
owned, as you know, by a private equity firm. The private 
equity firm doesn't owe fiduciary duties under ERISA to any of 
the pension funds that invest in it because of an exemption 
that was granted to private equity firms in the 1980s. And it 
is not entirely clear beyond the sort of common law duties what 
duties exactly such a fund owes to its pension fund investors. 
This is why it is important that private equity be included in 
the Wall Street Accountability Act.
    But the managers of pension funds owe fiduciary duties in 
the management of those assets, including, in general, the 
communications that they would make to service providers like 
private equity funds. The misunderstanding, I think, arises 
when looking at what does that mean, to owe a fiduciary duty--
what does acting in the interests of plan beneficiaries mean in 
a circumstance like the one you are describing?
    First, it is very clear, but not often understood, that 
fiduciary duty is to the long-term best interest of the fund 
and its beneficiaries and that it is to achieve returns to that 
fund on a long-term risk adjusted basis. So that means if 
someone comes along and offers you a proposition in which they 
say the up side is enormous, the question is, what is the down 
side? What is the likelihood of bad things happening versus 
good things happening?
    In relation to the matter you described, to the Hugo Boss 
matter, the real question is should Hugo Boss shut that 
factory? Should they have shut that factory? Should they have 
gone in search of cheaper labor, which is, I assume, what they 
thought they were planning to do. What would be the 
consequences for Hugo Boss's brand in its largest market?
    Now, under ERISA, making this type of decision obviously 
rests with the private equity fund. But the pension funds--and 
I should note, by the way, that public pension funds are not 
covered by ERISA, so it is a little different. But the pension 
fund has a right to express an opinion.
    Now, when it does so, it has to do so looking at the long-
term risk adjusted consequences of actions for the fund as an 
investor. And it also needs, and this is very relevant in terms 
of some of the issues Mr. Rogers is talking about in terms of 
energy and the environment, the pension fund has to look at the 
decisions it makes and the opinions it holds in the context of 
its full portfolio so that, for example, if I have a particular 
portfolio company that is making money hand over fist but it is 
doing so by creating a situation which is going to cause vast 
losses to everyone else in my portfolio--the behavior of the 
financial sector in 2006 and 2007 brings this thought to mind--
you have to take that into account in looking as a pension fund 
at how to--at what opinions to have, how to invest your assets, 
how to hold your money managers accountable.
    I think there is a pretty plausible argument. I have not 
looked over the spreadsheets involved in the Hugo Boss matter, 
but I think there is a pretty plausible argument that Hugo 
Boss, which is all about brand--it makes a nice suit, at least 
I think so, but it is really all about brand--that taking steps 
in this largest market that would raise questions both as to 
the impact of that firm on the United States' jobs crisis and 
potentially impacts, again, on the quality of the product might 
not be good for Hugo Boss's brand. It seems to me that is an 
opinion that a pension fund could logically express.
    Now, more broadly, and I think this is the key thing in the 
context of this hearing, the pension funds represent widely 
diversified patient capital with long-term time horizons. They 
should be the ideal partners for the type of business culture 
that Mr. Rogers has described to you today.
    The misunderstanding that I believe has occurred in 
relation to fiduciary duties is a misunderstanding that has led 
pension funds and their asset managers to increasingly think in 
terms of single companies, short-term cash-flows--perhaps 
short-term is quarterly--rather than what they actually are, 
which is investment funds with very long-term time horizons, 
fully diversified across the U.S. and the global economy.
    Thinking properly as fiduciaries, you end up in the place 
very much like where the Aspen Institute has ended up and where 
Mr. Rogers' testimony has ended up. That does not mean that 
pension funds shouldn't be holding businesses accountable for 
being loyal to their investors, for delivering shareholder 
value, for acting in the long-term best interests of the funds 
that invest in them. But it does mean that you have to take 
that concept of long-term seriously.
    Chairman Brown. Mr. Verret, I assume you do not agree with 
all that. I would like to hear your thoughts.
    Mr. Verret. Well, I certainly agree with some of it, but I 
would express some disagreement with some other things as well.
    One of the things I would note is that I think, frankly, 
that at times there is going to be an inherent conflict of 
interest, just an inherent, unavoidable conflict of interest 
between the interests of pensioners and the interests of 
represented workers.
    For instance, you know, today we are talking about short-
termism in capital markets. State pension funds are underfunded 
by about $1 trillion, the Pew Center estimates. In many ways it 
is the next disaster, it is the next crisis, and I think we 
have got to think forward ahead to it. And I think, you know, 
there are legitimate short-term interests, right? I mean, a 
pensioner needs to get that pension check next week. They 
cannot wait a year. They cannot wait 5 years or 10 years.
    So I think an argument about, you know, we are encouraging 
investors to think more long term, and maybe we will not be 
able to get you that pension check next week because of the $1 
trillion underfunding of pensions is not going to resonate well 
with that pensioner. They have got a short-term interest that I 
think is entirely legitimate. And I think we have to think 
about those conflicts as we empower institutional investors, as 
we have seen a number of the provisions in the current 
financial regulation reform bill try to do. And I think, 
frankly, there is always an inherent tension between 
sustainability goals, also called the sort of corporate social 
responsibility movement, and profit maximization.
    It is very difficult to link executive compensation and 
incentives to profit maximization alone. That in itself is 
difficult. As we add in very amorphous sort of goals, I think 
accountability becomes even harder, becomes even more 
difficult.
    So I like to stick to the general principle of make 
business leaders maximize profit and let us have Government 
leaders deal with environmental and health policy goals. Keep 
it clean, keep is simple, and we will be able to hold people 
accountable a lot better.
    And with respect to--if I could go to the last question for 
just a quick second, as a teacher, as a teacher of securities 
lawyers, I can say that, you know, my students are very excited 
about the Wall Street Reform Act. They think it is going to be 
a Securities Lawyer Full Employment Act. So it is a great time 
for financial rating agencies; in my own selfish interest, that 
is great for me. But I do worry about, you know, instead of 
engineers, we will have a lot more securities lawyers, and that 
might be a little bit of a scary prospect.
    Chairman Brown. Fair enough. Let me ask you one more 
question, Professor Verret, and then I want to ask each of you 
the same question to close, just your thoughts about taxing 
financial transactions. But I want to ask one question of Mr. 
Verret first.
    Tell me what you thought of Ms. Samuelson's observations 
about the number of MBAs and the way we teach MBAs. Does that 
disturb you? Do you like that? Are you agnostic on that? What 
were your thoughts as she was talking about training more MBAs, 
fewer engineers, and the way we do train MBAs, mostly in 
finance, not much about cathedral thinking or not much about 
the stakeholders other than the shareholders?
    Mr. Verret. Well, I think one observation I would offer is 
that there is a lot more we can do in terms of how to engage 
future business leaders in ideas of concern to stakeholders and 
to consumers and to the community that fit perfectly within 
profit maximization. And I think there is a lot more we can do, 
and we do not do enough, and I think we encourage students to 
think too short term. I would agree with that completely.
    I think in terms of the number of finance specialists we 
see coming out of MBAs, I think we are going to see that go 
down as a result of, you know, fewer employment opportunities. 
And I think that is going to lag the crisis, and I think we are 
going to see a readjustment there. But I think I would agree 
that we can certainly do more to teach future business leaders 
to think more long term.
    Chairman Brown. OK. Thank you. Thank you all. I will ask 
this last question, and let me just start with Mr. Rogers, if 
you would all give me your thoughts on it.
    Given the country's need for revenue, and Mr. Silvers 
pointed out what, I think he said, a 25-basis-point tax could 
do in terms of revenue, should we be considering taxing 
financial transactions? What does it mean to long-term growth? 
What does it mean to dampening speculation? What does it mean 
to accrual of capital for your company, Mr. Rogers, or any 
company as you all comment on it? We will start with you.
    Mr. Rogers. Yes, sir. Thank you. That is a tough question 
for me, and I have not studied the issue in the same way Damon 
has. But my judgment is taxing financial transactions is 
probably not the right way to go. That would be my visceral 
reaction.
    I think the better approach is really having a tax policy 
that encourages investors to hold stocks for longer periods of 
time, and I think that is something that would clear CBO, 
particularly given the current, for instance, tax rate on 
dividends. So I think, quite frankly, that type of tax policy 
makes more sense at this time in history.
    But my last comment is I wanted just to thank you, Mr. 
Chairman, for holding this hearing today, but I wanted to be 
very clear that the reason that I wore this shirt is because I 
am really a blue-collar worker, but felt like I had to appear 
as a white-collar worker in front of your Committee.
    [Laughter.]
    Chairman Brown. That is why guys like you get on ``60 
Minutes'' when you come up with answers like that.
    Ms. Samuelson, your thoughts.
    Ms. Samuelson. The working group that pulled together the 
policy recommendations, the term that they used and that was 
ultimately signed off on by these 30 business--leaders from 
business and investment was ``market incentives to encourage 
patient capital.'' I mean, my feeling is that, yes, a tax on 
short-term churning would, in fact, achieve an objective of 
bringing attention to the costs of short term versus long term, 
and that we feel would be achieved through that.
    The working group, however, was--you know, it was a 
controversial idea there as well, and a good number of them 
favored the cap gains tax, skewing the cap gains tax to reward 
long-term holders. And so I would say that this is light on 
detail here, so they were putting out that without talking 
about what some of the consequences might be of either of these 
approaches. We are doing a follow-up session next week at the 
Aspen Institute where we are pulling together tax experts from 
different--from Government as well as some of the nonprofit 
think tanks, to actually take apart these recommendations, both 
the cap gains recommendation and some kind of a trading tax and 
say can we play this out a little bit and how would we best 
achieve the objective of sustainable patient capital.
    So hopefully we will have more on this in a short period of 
time.
    Chairman Brown. Good. We would like to hear about that.
    Mr. Silvers.
    Mr. Silvers. Well, clearly from my testimony, you know my 
general view about this. I would just note that I think that 
what you hear from all the people involved in the Aspen effort 
is a common sense that we need our tax policy to incentivize 
real long-term investment and disincentivize speculation. Some 
of the business leaders that have signed on want to do this in 
a way that would either be revenue neutral or would effectively 
amount to tax breaks for longer-term investors.
    The AFL-CIO looks at our long-term public goods needs and 
the current deficits that we are running as we appropriately 
address the economic crisis, and we think that we need in the 
long term to have more revenue. So what you basically end up--
and that is a view, also, I think, fundamentally shared by some 
of the deficit hawks that signed on to the statement. Warren 
Buffett is an advocate of a financial speculation tax.
    I should note that in the last few weeks there have been 
several sort of major statements in relation to this. The 
International Monetary Fund in its report to the G-20 clearly 
states that what they called a financial transactions tax is a 
feasible method of raising revenues with some significant 
policy benefits. There are obviously some challenges in doing 
it.
    At a major economics conference at Cambridge University 
last month, the former head of the British chief financial 
regulatory agency concluded his keynote address by saying that 
the key learning that we should take away in terms of economics 
from the financial crisis is that liquidity is not in and of 
itself good in the financial markets, that liquidity driven by 
excessive leverage deployed through excessive trading volumes, 
inducing excessive volatility, is a threat to the financial 
system, and that the economics profession needs to reexamine 
financial transactions taxes as a way of addressing that 
threat.
    I think that from both the perspective of encouraging long-
term investment, discouraging systemic risk, and addressing our 
Nation's pressing needs in areas like infrastructure and 
education, the time has come to look seriously at a financial 
speculation tax.
    Chairman Brown. Thank you.
    Professor Verret.
    Mr. Verret. One of the concerns I would express is one that 
a number of others have as well, which is one result you would 
see would be a significant amount of capital flight, and a lot 
of trading would move to other jurisdictions. And so that would 
decrease the amount of revenue you could raise from it, and 
then certainly for the city of New York, a lot of its tax base 
comes from hedge funds, and I think New York loses a good bit 
of its tax base. It would lose some of its ability to fund 
social services, and the whole sort of cycle with--a lot of 
unintended consequences I think you might see. So I would just 
express that concern briefly.
    Chairman Brown. Good. Thank you. Thank you all.
    The record will stay open for 7 days if you want to add 
anything, if you want to amend any of your remarks or elaborate 
on any questions that were asked, if any of the information--I 
do not know if you said your conference sometimes happens in 
the next few days, we would love to see that, whether it is in 
the 7-day period or not, what comes out of that. But I thank 
you all for your participation and spirited discussion.
    The Subcommittee is adjourned. Thanks.
    [Whereupon, at 11:21 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

                 PREPARED STATEMENT OF JAMES E. ROGERS
         Chairman, CEO, and President, Duke Energy Corporation
                             April 29, 2010

    Mr. Chairman and Members of the Committee: I am delighted to be 
here today to share with you my thoughts on the need to build better 
investor recognition of--and incentives for--companies that effectively 
pursue long-term goals.
    Let me start by commending Chairman Brown for holding this hearing. 
I do not think the private sector is the only place where ``short-
termism'' is alive and well. I am sure that the Members of the 
Committee also face many instances where they are under pressure to go 
with short-term fixes for difficult problems that really need long-term 
solutions. The saying goes that ``in politics, the long term is the 
next election and the short term is the next poll.'' So Mr. Chairman, 
thank you for taking on this difficult yet vital long-term issue that 
applies to both the private and public sectors.
    As you noted in my introduction, I am the Chairman, CEO, and 
President of Duke Energy Corporation. Duke Energy provides electric 
power to more than 11 million people in five States: North Carolina, 
South Carolina, Ohio, Indiana, and Kentucky. Our diversified generation 
portfolio of 37,000 megawatts mirrors the mixture of supply in the U.S. 
as a whole with a blend of coal, nuclear, natural gas, and hydropower. 
We are also making sizeable investments into large scale renewables 
such as wind, distributed renewables such as our North Carolina ``solar 
on the rooftop'' program, energy efficiency, and the smart grid.
    The electric utility industry--my industry--is among the most 
capital-intensive in the world. We are a big-bet, long-term business. 
Capital is our lifeblood. For example, Duke Energy has a capital 
investment program of approximately $25 billion over the next 5 years. 
Access to capital allows us to modernize our power plants and 
transmission grid--reducing our impact on the environment, keeping our 
customers and communities competitive and putting people to work.
    Whether the analysts tracking our quarterly performance care or 
not, decisions we make today at Duke will still be impacting the 
company decades from now. The power plants we build today will operate 
for 30, 40, 50 years or more. While too many elements of the investment 
community may be looking for a quick rise or--quite frankly--a quick 
decline in our stock price, we are running a business where our 
decisions impact the company for decades. For Duke Energy to survive, 
we have to get these decisions right and we have to have investors who 
understand, appreciate, and share this long view.
    Unfortunately, I often feel that the current mindset of Wall Street 
conflicts with the longer time frames that are the reality of our 
business. In this hedge fund-driven world of instant earnings 
gratification, it's very difficult to justify projects that take years 
to complete, almost no matter what the payoff is. But think about it, 
many projects that the U.S. needs for its energy future--the build out 
of the smart grid, the construction of next generation nuclear power 
plants, new transmission lines to move renewable power to markets--
require years to complete. We are caught between the short attention 
span of investors and the long-term commitment to a course that these 
transforming energy projects require.
    Myron Steele, Chief Justice of the Delaware Supreme Court has 
talked about the concept of ``patient capital'' which bridges this gap 
between the long lead time that solutions may require and the instant 
return that too much of the financial world seems to demand:

        If we're going to compete nationally and internationally, we 
        have to focus on what some people have characterized as 
        `patient capital.' We have to develop a framework in which 
        investors can invest for the long term, and allow capital to 
        produce what is typically American--innovative products that 
        impact productivity, generate new ideas, and make our goods 
        marketable across the world. Ultimately, this great engine that 
        is the corporation is designed to enhance wealth for those who 
        invest in it.

    Last fall, I had the privilege of joining 28 leaders representing 
business, investment, government, academia, and labor of the Aspen 
Institute Business & Society Program's Corporate Values Strategy Group 
to endorse a call to end the focus on short-termism. In our statement, 
``Overcoming Short-termism: A Call for a More Responsible Approach to 
Investment and Business Management'' (attached to my testimony), we 
provided recommendations to focus attention and dialogue on the 
intricate problems of short-termism and what we believe are the key 
leverage points to return to a responsible and balanced approach to 
business and investment.
    Our work recognizes the need to focus on the whole system. We made 
recommendations in three areas:

    Market Incentives: Encouraging more patient capital;

    Fiduciary Duty: Better aligning interests of financial 
        intermediaries and their investors; and

    Transparency: Strengthening investor disclosures.

    I believe Judy Samuelson, the Executive Director of the Aspen 
Institute Business & Society Program, is going to address this report 
and the comprehensive set of changes that we recommend. I would like to 
focus on the first set of recommendations regarding investor incentives 
for patient capital.
    In the report, we identified several structural changes to enhance 
incentives to patient investors, including:

    Increasing capital gains discounts for greater holding 
        periods of stock;

    Removing deduction limitations on long-term capital losses; 
        and

    Enhancing shareholder rights for shareholders who meet 
        certain minimum holding period requirements.

    I strongly believe that these changes are needed and will increase 
investor stability and patience. But, beyond these three 
recommendations, we need to ensure that all of our policies to promote 
long-term investments work in harmony. That leads me to highlight 
another current source of stability--favorable tax treatment of 
dividends for individual shareholders--that is in danger of being lost.
    Currently, dividend income for individuals is subject to only a 15 
percent tax rate, instead of the larger marginal tax rate that would 
otherwise apply. However, this treatment expires at the end of this 
year. Encouraging dividend payout through tax policy promotes investor 
stability and long-term holding in two ways. If that tax treatment 
expires, it will work at cross purposes with the goal of promoting 
long-term investor focus. Here's why:
    First, with dividends, investors do not have to sell shares to 
harvest the underlying company's profits; they share in that 
profitability directly through the dividend payout. Compare, say, Apple 
Computer--which may make billions in a year due to the introduction of 
its latest hot new gizmo. But, Apple has never paid out a dividend. 
There is only one way for an investor to gain access to these profits--
they have to sell the shares and secure the capital gain that the 
market has hopefully priced into Apple's shares. And by the way, when 
they sell after a modest hold, they secure a discounted tax treatment 
due to the long-term capital gains tax provisions.
    Second, and more importantly, dividend stocks create steady income 
vehicles for investors. And in a world of disappearing pensions and 
longer life expectancies, dividends can provide a vital source of 
income for retirees. An investor that is motivated by the dividend will 
generally be a loyal, long-term investor--so long as the Company 
performs.
    This has certainly been our experience at Duke Energy. Our 
outstanding shares of common stock are currently held equally by 
institutional investors and retail investors. And, just over 10 percent 
of our institutional shares are held by investors with an investment 
style oriented toward income (i.e., dividend payments). Our high retail 
ownership is supported by the relatively low volatility of our stock 
price and our consistent dividend distribution. 2010 is the 84th 
consecutive year that Duke Energy has paid a quarterly cash dividend on 
its common stock.
    This is not just true for Duke Energy. Nationally, we see the 
utility dividend providing needed income to retirees and the middle 
class. For instance, Ernst & Young studied tax returns in 2007 and 
noted the following characteristics of taxpayers claiming the dividend 
deduction:

    61 percent are from taxpayers age 50 and older,

    30 percent are from taxpayers age 65 and older,

    65 percent are from returns with incomes less than 
        $100,000, and

    36 percent are from returns with incomes less than $50,000. 
        (See, Ernst & Young report attached.)

    It will be a giant step backwards if we eliminate the incentives we 
now have for all investors regardless of their income level to hold 
stocks for the dividend payment. In this instance the public policy 
goal of encouraging individuals to hold dividend-paying stocks 
(especially utilities who are modernizing their aging infrastructure) 
for the long-term trumps the need to increase the tax rate on dividends 
and to have a progressive tax regime for dividends.
    In my judgment and experience, short-termism constrains the ability 
of a business to do the things that it must do to prosper: create 
sustainable goods and services, invest in innovation, take risks and 
develop human capital. We cannot create an economic recovery without 
financial policies that incent this behavior.
    Thank you for your attention and I look forward to your questions.
                                 ______
                                 
               PREPARED STATEMENT OF JUDITH F. SAMUELSON
   Executive Director, Business and Society Program, Aspen Institute
                             April 29, 2010

    Mr. Chairman and Members of the Committee, I am Judith Samuelson, 
Executive Director of the Business and Society Program of the Aspen 
Institute. The mission of the Business and Society Program is to align 
business with the long-term health of society.
    Thank you for the opportunity to present ideas about curbing short-
termism in business and capital markets. These ideas come out of 
dialogue that we began in 2003, building on the findings of a Blue 
Ribbon Commission convened by The Conference Board in 2002 that probed 
the rapid demise of Enron.
    My father passed away last year at the age of 93. He spent his 
career at Pacific Telephone but he always loved the market and spent 
many hours a day in his retirement years pouring over the stock pages 
and his subscription to Value Line. I tried once to explain what I did 
for a living; I tried various terms and buzz words to explain the work 
we do that is aimed at influencing business--corporate social 
responsibility, environmental consciousness, stakeholders, leadership, 
ethics, values--but nothing was sticking. After a long and awkward 
pause, he finally said, bluntly, ``Aren't you just trying to say that 
business ought to take a long-term view?''
    He was right, of course. It took me a few more years to change the 
mission statement of our organization, but I have come to believe it is 
all about time frame. It's also about balance, judgment, and restoring 
trust in business. It's about recognizing the reality that the system 
is perfectly designed for the results we have now. If we want a 
different result, we need to change the rules that govern business 
decision-making.
    Initially, the focus of the Aspen dialogue was on whether market 
short-termism exists, and if so, why it is a problem. It then moved to 
examine the sources of the behaviors and the solution space. Finally, a 
series of working groups were formed to build consensus across trade 
groups and individuals--including entities that rarely work together 
and don't often agree--to develop the ideas for extending time horizons 
that have the greatest potential leverage. The Aspen Corporate Values 
Strategy Group continues to tackle the problem through dialogue, 
research, and education. Both Duke Energy and the AFL-CIO are among the 
signatories of two rounds of recommendations, released in 2007 and 
2009, and I am pleased to present with them today.
    I personally believe the issue you are beginning to explore is 
critical for our country and, for the globe. In fact, I cannot think of 
anything more important. I am not trying to be dramatic here; but 
having spent about 10 years building this dialogue with hundreds of 
individuals and leaders across business, investment, academia, labor, 
and other trade associations and partners, I remain convinced that 
extending time horizons in business and capital markets is worthy of 
our time and resources, and of yours. And, importantly, there is 
opportunity now to make a difference.
    What do we mean by market short-termism? The UN Brundtland 
Commission in 1987 coined what has become the most common definition of 
sustainable development: meeting the needs of the present without 
compromising the ability of future generations to meet their own needs. 
Short-termism is the antithesis of sustainable development: it's about 
making decisions to meet some benchmark today without regard for the 
needs of, or the costs imposed on, the future. Most often, the metrics 
employed are the narrowest of financial measures, like short-term 
changes in return on equity and share price, which fail to capture the 
more complex impacts of business and investment as they play out over a 
longer term. For the purpose of the Aspen dialogue, we eventually 
settled on a 5-year time frame to constitute ``long term,'' but 
clearly, it depends on the nature of the decision or context.
    Is there a problem with market short-termism?
    Here is some of the evidence that short-termism is growing--and 
creating real problems: \1\
---------------------------------------------------------------------------
     \1\ See, ``Compelling Case for Change'', a publication of the 
Aspen Institute Corporate Values Strategy Group, for a summary of 
relevant research.

    The number of firms offering the market short-term or 
        quarterly forecasts grew from a handful--92 in 1994, according 
        to one McKinsey study, to over 1,200 by the time of the Enron 
        implosion in 2001. The fact that Enron and other firms with 
        fraudulent financials began their fall from grace by managing 
        earnings in order to ``beat'' these same quarterly earnings 
---------------------------------------------------------------------------
        forecast is evidence of the pernicious effect of this practice.

    A significant stream of academic literature suggest 
        deferred or cancelled R&D and Net Present Value (NPV) positive 
        projects within firms as a consequence of an excessive focus on 
        Earnings Per Share (EPS) as the most important metric for 
        judging firm performance and/or response to a large block of 
        short-term holders in a firm's shareholder base. \2\ One 
        stunning statistic from a survey of 400 CFOs suggests that 80 
        percent will cut discretionary spending--for R&D, maintenance, 
        advertising, etc.--to avoid missing a quarterly forecast.
---------------------------------------------------------------------------
     \2\ See the work of Graham, Harvey, and Rajgopal; Subramanyan, 
Chen and Zhang; and Bushee.

    Professor Lawrence Mitchell at GWU School of Law has found 
        that from 2004 to 2007, 270 (or 54 percent) of S&P 500 
        companies spent more money on stock buy-backs than on 
---------------------------------------------------------------------------
        productive investments.

    A January 2010 working paper by Filippo Belloc, researcher 
        at the University of Siena, found that ``countries with 
        stronger shareholder protection tend to have larger market 
        capitalization but also lower innovation activity.''

    Finally, participants in our dialogue talk about a growing 
        aversion to being a public company at all, at least in part 
        because of short-term pressures, although not exclusively for 
        that reason.

    And, we are not the only organization concerned with market 
        short-termism. We began collaborating with the CFA Institute, 
        Committee for Economic Development (CED), U.S. Chamber of 
        Commerce, and the BRT-funded Institute for Corporate Ethics in 
        December 2007, as all five organizations had published reports 
        on the issue in the prior 2 years.

    Although the fallout from Enron offered the hook to begin this 
conversation about curbing short-termism, and the financial crisis that 
continues to play out globally is certainly a convincing reason to stay 
at this work, it is not just about avoiding another financial 
catastrophe. Instead we began this work out of respect for the both 
ordinary, and extraordinary, capacities of business and how critical 
that capacity is to our success as a nation and in globally connected 
markets. We have all heard statistics that compare our largest business 
organizations to nation states. Behind that scale of operation lie 
remarkable reach and distribution systems, research and management 
talent, and problem-solving skills--not to speak of financial wealth 
and other resources. It is hard to imagine solving our most important 
problems as a country or a world without business at the table in a big 
way. But whether we are talking about climate change or poverty, it's 
equally hard to imagine harnessing this same capacity of business for 
the public good, as long as managers move from 90 day calendar--to 90 
day calendar.
    In spite of examples to the contrary of which we are all aware, 
most businesses naturally think long term. Long-term focus is inherent 
in the process of building and guarding the unique contributions and 
reputation of any enterprise. Companies with any degree of resilience 
are mindful of the myriad relationships that feed its success, from 
retention of top talent to the quality of relationships with customers 
and suppliers and the host communities that offer up the license to 
operate. But it is also true, that the world we now inhabit has changed 
as a result of investment, finance, and financial services representing 
a larger and larger share of GNP--growing steadily from less than 16 
percent of corporate profits in the 70s and 80s, to over 40 percent 
this decade. \3\ And the pressures to think and act short term in this 
sector are abundant, and are deeply influenced by fees and compensation 
systems driven by financial metrics and share price, as the financial 
crisis has ably demonstrated.
---------------------------------------------------------------------------
     \3\ ``From 1973 to 1985, the financial sector never earned more 
than 16 percent of domestic corporate profits. In 1986, that figure 
reached 19 percent. In the 1990s, it oscillated between 21 percent and 
30 percent, higher than it had ever been in the postwar period. This 
decade, it reached 41 percent. Pay rose just as dramatically.'' Cited 
by Simon Johnson of MIT, ``The Quiet Coup'', The Atlantic, May 2009.
---------------------------------------------------------------------------
    The statistics are pretty clear on this point. Even if you correct 
for technology enabled ``flash trading'' and day-trading, the average 
holding period of stock continues to fall. In 1960, the holding period 
for equities averaged about 9 years; by 1990, it had fallen to just 
over 2 years, and today, it is less than a year. And corporate managers 
often focus on short-term performance because that's what many of their 
most powerful investors want them to do.
    Indra Nooyi, CEO of PepsiCo, in a recent speech to the Economic 
Club of Chicago \4\ talks about the influence of ``real-time global 
news and financial updates'' and ``24/7 media that amplifies the 
smallest missteps forcing corporate leaders to be constantly on guard--
with precious little time to pause and think.'' The attention span of 
investors is playing out in the tenure of CEOs--which continues to 
fall: 40 percent of CEOs now last 2 years or less on the job. (No 
wonder they command outsized contracts that promise rewards on an early 
departure.) I quote Ms. Nooyi: ``Attention spans are short, time is 
money, and there is a premium on speed.''
---------------------------------------------------------------------------
     \4\ ``Short vs. Long-Term: Getting the Balance Right'', Indra 
Nooyi, April 12, 2010.
---------------------------------------------------------------------------
    In her speech she goes on to propose a number of important changes, 
including, the need to identify internal management metrics to reward 
what she calls ``sustainable performance''--that speaks to a broader 
definition of business success and intangible value that financial 
markets seem to ignore, or at least, undervalue in their obsession with 
quarterly results.
    In this vein, a set of Guiding Principles \5\ for business practice 
were released by the Aspen Corporate Values Strategy Group in June 
2007. They speak to voluntary measures that operating companies and 
investors can take to focus greater attention on long-term value 
creation and to create a defense against short-term financial 
pressures. The so-called ``Aspen Principles'' were drafted and endorsed 
by business, investors, labor, and corporate governance gurus. These 
include the Business Roundtable, the Council of Institutional 
Investors, the AFL-CIO and Change to Win labor federations, the Center 
for Audit Quality representing the accounting industry, and pension 
funds CalPERS, CalSTRS, and TIAA-CREF. The Principles focus on 
companies having the right metrics for judging success, driving a 
higher quality of communication with investors and long-term 
orientation in compensation of investment and business managers. It is 
not rocket science, but the agreement across this set of signatories 
was remarkable in itself. Six public companies added their names to the 
document as a signal to their peers and to their internal 
constituencies of the importance of moving in this direction, including 
Duke Energy, PepsiCo, and also Pfizer, Xerox, Apache Corporation and 
Office Depot. There is much more to be done that is well within the 
control of managers and boards.
---------------------------------------------------------------------------
     \5\ ``Long-Term Value Creation: Guiding Principles for 
Corporations and Investors''; released by The Aspen Institute Corporate 
Values Strategy Group, June 2007
---------------------------------------------------------------------------
    However, 2 years later in September 2009, a working group took the 
additional step of recommending public policy changes to support the 
actions of companies working to stay long, and to focus attention on 
``shareholder short-termism.'' Much attention has been paid of late to 
the rights of shareholders, but many in the working group believed it 
also important to recognize that with rights should come 
responsibilities. \6\
---------------------------------------------------------------------------
     \6\ For example, in January 2010 TIAA CREF released ``Responsible 
Investing and Corporate Governance'' that highlighted lessons learned 
over the past decade and among other things, encouraged investors to 
take a long-term orientation. Also see Benjamin Heineman, Jr., 
``Shareholders: Part of the Solution or Part of the Problem?'' The 
Atlantic, October 28, 2009.
---------------------------------------------------------------------------
    Both of these documents are available publicly and are incorporated 
here as part of my testimony.
    The principal recommendation of that working group, which has now 
been endorsed by 30 leaders from business and investment in a widely 
circulated Call to Action, \7\ is to create market incentives that 
reward long-term investment. For example, this might be accomplished by 
imposing an excise tax on trading, or by skewing the capital gains tax 
to greatly favor long-term holdings. Individual signers have proposed 
moving the cap gains to 0 percent after 10 years, with a high tax at 
the short end of the investor continuum. These taxes could be revenue 
generators or revenue neutral; neither tax is a new idea and both are 
controversial for different reasons. The drafters of the ``Overcoming 
Short-Termism'' statement did not offer specifics, except to say that 
nontaxable entities also needed consideration, which might come in the 
form of modifications to ERISA. \8\
---------------------------------------------------------------------------
     \7\ ``Overcoming Short-Termism: A Call for a More Responsible 
Approach to Investment and Business Management'' released by the Aspen 
Institute Corporate Values Strategy Group, September 2009
     \8\ ERISA managers need reassurance they are free to act in the 
long-term interests of their investors; that no legal mandate to 
maximize short-term returns exists. Further, given that ERISA 
investment gains are not taxed, it is necessary to apply a similar tax 
on gains, or on trading at the fund level of pension assets, in order 
to align incentives with long term. For example, managers that hold for 
less than 24 months could be subject to a modest transaction tax or 
penalty on the gains.
---------------------------------------------------------------------------
    Other recommendations in the Call to Action address the need for 
better definition of fiduciary duty, as it applies to financial 
intermediaries and also to strengthen investor disclosures to 
illuminate the borrowing and lending of shares in order to make the 
actual position--short or long--of large holders transparent.
    The range of signatories behind these ideas and recommendations, 
again, defies the usual alliances--Warren Buffet signed, but so did 
Richard Trumka of the AFL-CIO. Long time investors Felix Rohatyn, Peter 
Peterson, John Bogle, Lester Crown, Jim Crown, and James Wolfensohn 
signed, as well as Steve Denning, current head of General Atlantic 
Partners, a $15 billion private equity firm. The former CEOs of IBM, 
Cummins Engine, Medtronic signed, but so did the current CEOs of Alcoa, 
Duke Energy, and TIAA-CREF.
    And this is not the only thing that needs attention.
    Last year some 150,000 students graduated from this country's MBA 
programs--roughly the same number as those seeking teaching 
credentials--and far out-pacing professional degrees in law, medicine, 
and engineering. Twice that many are choosing undergraduate majors in 
business, economics, and commerce each year--challenging colleges and 
universities to examine what constitutes a liberal arts education. 
Students, both men and women, are choosing business because that is 
where the best paid jobs are, but also because they have grown up in an 
era that values the skill set offered. Even if a student is planning a 
career in nonprofits or government, they want to learn the language of 
business and enjoy the networks that business education offers to them.
    Unfortunately, given the dominance of finance and the ``job train'' 
to Wall Street in many business schools, the narrative about business 
purpose is stuck in the 1970s when Milton Friedman penned his famous 
article. The result is a curriculum that emphasizes the technical 
skills of analysis over judgment and long-term vision. The curriculum 
in too many schools teaches students to externalize costs and discount 
the future. Innovators and visionaries in business schools are starting 
to be heard and changes are beginning to take place, but much more work 
is needed.
    Thank you again for the opportunity to address the Subcommittee on 
Economic Policy.
                                 ______
                                 
                 PREPARED STATEMENT OF DAMON A. SILVERS
              Policy Director and Special Counsel, AFL-CIO
                             April 29, 2010

    Good morning Chairman Brown, Ranking Member DeMint, and Members of 
the Subcommittee. I am very pleased to appear before you today on 
behalf of the American Federation of Labor and Congress of Industrial 
Organizations to discuss the challenge of lengthening the time horizons 
of U.S. capital markets. The AFL-CIO has worked for a number of years 
with the Aspen Institute to foster a dialogue on this issue between 
business leaders, institutional investors, the labor movement and the 
academic community. That dialogue has led to both the Aspen Institute 
Principles on Executive Compensation and last fall's statement 
``Overcoming Short Termism: A Call for a More Responsible Approach to 
Investment and Business Management,'' signed by AFL-CIO President 
Richard Trumka and a number of leaders in the business and 
institutional investor community, including Warren Buffett and Pete 
Peterson.
    Capital markets and financial institutions' purpose is to transform 
savings into investment. Investment means new capital equipment and new 
software, developing employee skills, financing research and 
development teams. I can save money by putting it my mattress, and it 
has not been invested. I can also save money and use it to fund my 
visits to Las Vegas, and that is also not investment, even if I win at 
blackjack.
    The U.S. economy needs investment with long-term time horizons. We 
need investors to fund our $2.2 trillion infrastructure deficit, to 
finance our transformation to a low carbon economy, to finance upgrades 
to our workforce's skill set, and perhaps most importantly, to fund 
research and development work all across our business landscape that is 
essential if our companies are to remain competitive in a globalized 
economy. All these tasks require patient capital--capital willing to 
commit for the long haul.
    Instead, by measure after measure, our system of financial markets 
and financial institutions appears to have rapidly shortening time 
horizons. The average mutual fund holding period for investments in 
equities has shrunk to less than a year. A recent study of 991 equity 
fund managers by Mercer found that from 2006 to 2009, two-thirds 
exceeded their target turnover rates, with the average annual turnover 
rate at 72 percent. While data is not available, most market 
participants believe holding periods for the several trillion dollars 
invested in hedge funds is significantly shorter. Leveraged buyout 
funds, now renamed private equity funds, assert they are long-term 
holders because sometimes they make 5-year investments. And in the 
aftermath of the financial crisis, the large financial institutions 
that dominate our markets have turned to proprietary trading to make up 
for their losses in the credit markets. In the extreme, proprietary 
trading takes the form of high frequency trading, the use of computer 
algorithms to generate thousands of trades a day--a technique 
apparently pioneered by Goldman Sachs, which according to press reports 
has paid stock exchanges for the privilege of placing Goldman's 
computers literally in the same room as the exchanges' to get a little 
bit of a timing advantage--a practice called colocation.
    There are multiple sources of short-termism in our capital markets. 
The rise of cheap credit for risky activity, funded by our trade 
deficits, has made a variety of short-term strategies far more tempting 
than would have been true in the past. The decline of defined benefit 
pension plans has meant that both those pension plans that remain and 
individual workers trying to provide for retirement on their own have 
been forced to look for higher rates of return than are available 
through buy and hold strategies. The fact that these higher rates of 
return are illusory has not stopped both individuals and institutions 
from pursuing them.
    Deregulation of our financial markets has been a potent contributor 
to the rise of short-termism. We have deregulated the use of leverage 
in our equity markets--both directly and indirectly through the 
regulatory loopholes hedge funds operate in. We have allowed the 
development of a shadow credit and insurance system in the form of 
derivatives, without meaningful transparency and capital requirements, 
and we have allowed our major financial institutions to become short-
term actors in the securities markets, rather than providers of long-
term credit to productive enterprise.
    Our tax system also contributes to the short-term orientation of 
our capital markets. While capital gains taxes do have a time 
differential associated with them, it is a simple 1-year cliff, 
structure. The result is that billionaire private equity fund managers 
use the carried interest tax loophole to pay income tax rates lower 
than that paid by middle class Americans for the profits on investment 
strategies whose time horizon is shorter than a turn of the economic 
cycle. In addition, vast pools of capital devoted to retirement savings 
are properly tax exempt, so the tax system provides no incentive for 
long-term investment of those funds. Finally, and perhaps most 
importantly, the tax treatment of executive pay makes no distinction in 
giving tax preference to performance based pay between short-term and 
long-term performance-based pay.
    Finally, there has been a culture of misunderstanding of fiduciary 
duties in the world of pension fund management. Fiduciaries clearly 
have duties to maximize the long-term risk adjusted rate of return on 
their funds. But throughout the chain of investment management decision 
making, fund service providers have financial incentives to seek short-
term gains, often at the expense of the long-term health of the plan, 
or to look at investment decisions in isolation from the plan's overall 
portfolio and investment objectives. Actions by the Bush Administration 
in its waning days exacerbated these tendencies by issuing guidance 
letters that appeared to discourage fiduciaries from policing service 
providers or companies plan assets were invested in, or considering 
either plan's overall portfolios or their actual investment objectives.
    All these factors contribute to a corporate governance system that 
has tilted severely in the direction of short-term time horizons. The 
most radical version of this is the story of Countrywide Financial and 
its CEO Angelo Mozillo, over who took $400 million in total 
compensation out of that company during the real estate bubble, only to 
have the company go bankrupt. But though Countrywide is an extreme 
case, there was nothing unusual about the basic nature of its pay 
packages. Typical corporate pay packages provide for the vesting of 
stock based pay in 3 years, a time period short enough to be exploited, 
and a structure that allows, and in fact encourages executives to 
manage their firm with an eye toward a specific date, rather for the 
long-term health of the firm. A 2005 study of 400 public company 
financial executives found the majority would not initiate a positive 
net present value project if it negatively affected the next quarter's 
earnings.
    And so what has the result of the tilt toward short-termism been 
for our capital markets? The 10-year rate of return on the U.S. equity 
markets is negative in nominal terms--adjusted for inflation it is 
significantly worse. And for our economy--we have seen a period of 
jobless growth during the real estate bubble be replaced by a period of 
disastrous job loss. In the last 10 years we have lost over 5 million 
manufacturing jobs. Workers' incomes were stagnant in real terms before 
the bubble burst, and now they have declined much further. Poverty 
rates have risen. And our capital markets have simply failed to invest 
in the key long-term needs of our society--as evidenced by our $2 
trillion infrastructure deficit.
    So how can we return our capital markets and financial institutions 
to a long-term perspective, the kind of perspective necessary for those 
markets and institutions to return to their proper purpose of 
channeling savings into investment, rather than speculation?
    The AFL-CIO strongly supports the recommendations in the Aspen 
Institute letter. We also believe that the Wall Street Accountability 
Act of 2010 contains many significant steps that would encourage a more 
long-term focus in the capital markets, and must be enacted.
    However, rather than discuss each item in the Aspen letter, or the 
details of the Wall Street Accountability Act, I would like to focus 
the remainder of my testimony on tax policy--because the AFL-CIO 
believes capital markets tax policy is central to the future of our 
Nation. Later today, AFL-CIO President Richard Trumka will be leading a 
march of more than 10,000 workers to Wall Street under the banner 
``Good Jobs Now, Make Wall Street Pay.'' I want to explain what we mean 
by ``Make Wall Street Pay,'' and why though it may sound a little odd, 
that if we make Wall Street pay for the harm the financial sector has 
done to Main Street in the right way, we will encourage Wall Street to 
return to its proper function as an intermediary between savings and 
investment, which will be good for our financial system and good for 
our country.
    The AFL-CIO has a four point program for reform in the way we tax 
the financial system. We support President Obama's bank tax, The first 
item in the Aspen Institute letter is an item encouraging Congress to 
consider either changes in capital gains taxes or an excise tax to 
discourage short-term speculation in the capital markets. An excise tax 
to discourage short-term speculation is essentially a Financial 
Speculation Tax.
    A Financial Speculation Tax is the very simple idea of assessing a 
very small tax on all financial market transactions--stocks, bonds, 
commodities, derivatives, futures, and options. Senator Harkin and 
Congressman DeFazio have sponsored bills proposing a 25 basis point tax 
with an exemption for retirement plans. A broad coalition in Europe has 
suggested a 5 basis point tax. The Congressional Budget Office 
estimates the Harkin-DeFazio proposal would generate over $100 billion 
a year in revenue. Leading European economists have estimated a 5 basis 
point tax implemented across the major economies could generate 3 
percent of global GDP in revenue. A Financial Speculation Tax has been 
endorsed by the governments of the leading economies of the world, 
including the United Kingdom, France, Germany, Japan, and Brazil. If 
the United States led in this area, it is clear we have willing 
partners.
    But as important as the revenue implications of the Financial 
Speculation Tax are at a time of vast unmet public needs, the true 
power of such a tax is what the Aspen letter seeks--which is a 
reorientation of our capital markets toward investing, toward long-term 
value rather than speculation.
    On behalf of the AFL-CIO, I want to commend the Subcommittee for 
holding this hearing. The question of capital markets time horizons is 
critical for our future as a Nation. As a result of the good work of 
the Aspen Institute, Congress has the benefit of a consensus among 
business leaders, labor, and institutional investors. The AFL-CIO 
stands ready to assist you in acting in this area. Thank you.

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM DAMON A. SILVERS

Q.1. In your testimony you say, ``The 10-year rate of return on 
the U.S. equity markets is negative in nominal terms--adjusted 
for inflation it is significantly worse.'' Could you give the 
dates and index from which you found this information? Is this 
reflective of normal market conditions and return or was this 
number significantly impacted by the recession in 2008 and 
2009?

A.1. Answer not received by time of publication.

Q.2. With the financial sector being one of the major growth 
industries in the U.S. economy, are you concerned that 
implementing a tax on all financial market transactions would 
severely stifle growth and innovation in the financial sector? 
How do you think this will impact capital formation and jobs?

A.1. Answer not received by time of publication.
              Additional Material Supplied for the Record

     STATEMENT OF JAMES P. HOFFA, GENERAL PRESIDENT, INTERNATIONAL 
                        BROTHERHOOD OF TEAMSTERS
    I am pleased to present the views of The International Brotherhood 
of Teamsters on short-termism in the financial markets. The Teamsters 
represent 1.4 million workers across North America. Teamster-affiliated 
pension and benefit plans together have more than $100 billion invested 
in the capital markets. As both workers and investors, we have 
witnessed the destruction wrought by the short-term, speculative 
orientation of our capital markets.
    Our members have directly experienced the near-destruction of 
profitable companies by short-term, profit-focused investors, 
specifically, private equity firms. We have encountered the tragic 
human cost of the short-term needs of private equity managers. Those 
costs include dangerous working conditions; lower wages, benefits and 
contract standards; massive layoffs; attacks on workers' fundamental 
rights; unsustainable speed-ups; and streams of plant closures.
    We have also paid a financial price for the short-term needs of 
private equity managers. Our pension and benefit plans, which represent 
the retirement security and health and welfare of Teamster members and 
retirees, are long-term investors that require sustainable returns. 
They suffered unprecedented losses from the economic crisis of 2000-
2002, when accounting scandals and corporate greed erased billions in 
shareholder value.
    These funds rely on dependable and sustainable returns over time 
that allow the funds to deliver benefits to plan participants as 
promised in collective bargaining agreements. After the dot-com bust in 
2000, institutional investors like us were again victimized when 
investment firms and vehicles' primary focus shifted to high-risk, 
short-term trading gains by exploiting the un- or under-regulated 
capital markets. The capital market deregulation of the past three 
decades has served investment firms well. It has, however, created 
unwelcome risk to long-term minded institutional investors such as 
Teamster-affiliated benefit funds.
    Deregulation made high-risk investment schemes the norm in the 
capital markets. It shifted corporations' goals and company executives' 
focus from long-term growth in shareholder value to meeting and 
exceeding quarterly targets. This shift in corporate dynamics led to 
the rapid growth of executive pay in the United States. Chief 
executives receive incentives by their boards of directors to meet 
quarterly or yearly benchmarks--whether or not that affects the long-
term health of the company. Further, the lure of riches for spending a 
short time on the job can lead to greater executive turnover without 
proper planning for executive succession.
    The costs of the shift to short-termism have been devastating to 
the U.S. economy. Managers seeking lean budgets for quarterly reports 
frequently start cutting costs by eliminating jobs. This process starts 
a downward spiral. With the loss of jobs, communities are hurt because 
working families can no longer spend in the local economy. Tax revenue 
dries up and public services are at risk. Local businesses, hurt by the 
drop in consumer spending, are forced to further tighten their belts. A 
company can no longer invest in its business and create jobs.
    The private equity model of management is a prime example of how 
short-termism can destroy a company's sustainability and, in turn, 
damage workers, communities, benefit funds, and the U.S. economy.
    Private equity firms dominated merger and acquisition activity 
during the 1980s, taking advantage of cheap and readily available 
credit. When the financial crisis hit and the credit markets dried up, 
companies were overburdened with debt and high fees to pay the private 
equity managers. These highly leveraged companies were also often 
saddled with management teams charged with meeting the short-term needs 
of the private equity managers over the company's long-term health. 
Following are two case studies that demonstrate how private equity has 
harmed workers, communities, and investors.
Accuride, a Case Study
    Accuride is a manufacturer of steel and aluminum wheels. It was one 
of the most diversified suppliers of commercial vehicle components in 
North America, with little foreign competition. A private equity firm 
drained it of cash and then sold it at a profit. Left behind was a 
damaged enterprise that had to seek bankruptcy protection, its shares 
trading for pennies and its workforce cut in half.
    Accuride was purchased in 1998 by one of the country's largest and 
most powerful private equity firms, Kohlberg, Kravis, and Roberts 
(KKR). KKR paid $468 million, putting down $108 million in equity and 
borrowing the rest. In 2005, KKR merged Accuride with ITT, which was 
owned by another private equity firm Trimaran Capital, LLC. In 2005, 
KKR launched an initial public offering (IPO) of the combined company 
on the New York Stock Exchange. The IPO's target price was between $17 
and $19 dollars, but Accuride's share price closed at around $9 the day 
of the offering.
    From then on, KKR simply waited for market conditions to improve. 
In the meantime, it cut costs by gutting workers' wages and benefits 
and avoiding reinvestment into the business.
    In the late spring of 2007, KKR sold its shares for about $14. KKR 
made a positive return on its investment but Accuride's workers and 
investors didn't make out so well.
    In 2006, Accuride employed over 4,400 employees. It has lost almost 
half of its work force, according to the latest figures. Accuride's 
share price took a nosedive and the company was delisted from the New 
York Stock Exchange. It filed for Chapter 11 bankruptcy reorganization 
in October and its share price was trading for 17 cents a share on 
February 19.



    Having gone through an entire cycle of private equity investment, 
Accuride shows the risks that KKR posed to investors and employees.
    1. Excessive debt. Interest expense in 2005 was $71 million, 36 
percent of EBITDA (earnings before interest, depreciation and taxes, a 
measurement of cash earnings). \1\
---------------------------------------------------------------------------
     \1\ SEC Form10-K for Accuride (ACW), and 2005 Prospectus to 
Investors (Form S-1).
---------------------------------------------------------------------------
    2. High ``management and advisory fees.'' KKR took $16.5 million in 
fees from Accuride by 2007 and Trimaran took out $5.7 million. (These 
are separate from the fees charged to investors in private equity 
funds, which usually are a fixed percentage of the fund. \2\)
---------------------------------------------------------------------------
     \2\ Prospectus for 2005 IPO by Accuride, and following SEC 
filings.
---------------------------------------------------------------------------
    3. Chronic underinvestment. Only after a machine breakdown severely 
undermined production did the company invest in new equipment at its 
wheels factory in Erie, Pennsylvania, and claimed to have stepped up 
maintenance; \3\
---------------------------------------------------------------------------
     \3\ ``Accuride Corporation Announces Aluminum Wheel Forging 
Presses Operating at Full Production Following Outages'', 6-3-06. 
Accuride Press Release.
---------------------------------------------------------------------------
    4. Disregard for unsafe working conditions. A floor collapsed in 
the GUNITE Foundry in Rockford on June 27, 2007. A worker took refuge 
on top of a dust collecting machine as the floor collapsed below him. 
\4\ OSHA had cited the foundry for violations of air quality standards 
in 1998 \5\ due to the persistent problem of silica dust.
---------------------------------------------------------------------------
     \4\ ``No Disruption at Gunite despite floor collapse''. 1/30/07. 
Alex Gary. Rockford Register Star.
     \5\ OSHRC Docket NOS. 98-1986 98-1987. Gunite Corporation.
---------------------------------------------------------------------------
    5. Undermining workers' jobs, wages, benefits, and standards. The 
company slashed its workforce and launched an aggressive drive to cut 
wages, benefits, and contract standards.
U.S. Foodservice, a Case Study
    U.S. Foodservice is the second largest broad-line food distributor 
in the United States with $19 billion dollars in sales. Of the 26,000 
workers at U.S. Foodservice, about 3,900 of U.S. Foodservice employees 
are Teamsters. It is these workers who are bearing the brunt of the 
enormous debt amassed by two private equity firms who took over the 
company.
    In 2007 KKR and CD&R, two of the largest private equity companies 
in the U.S., acquired control of U.S. Foodservice for $7.3 billion, 
with $2.3 billion of their own cash and $5 billion in debt. They 
borrowed nearly 70 percent of the purchase price, and pushed the newly 
acquired company to a very high debt load, with an estimated debt-to-
EBITDA ratio greater than 9.3. \6\
---------------------------------------------------------------------------
     \6\ ``Investors Starting to Choke on LBO Debt'', Yves Smith. 6-23-
07. Nakedcapitalism.com; Also see: ``Thompson Learning Shows Breaking 
Point for `Junk Debt' (Update 2)'', Caroline Salas. 6-22-07. 
Bloomberg.com.
---------------------------------------------------------------------------
    In 2007, analysts thought the $7.1 billion dollar valuation was 
excessive, having evaluated the company at $5.1 to $5.7 billion in 
2006. \7\ By 2009, the value of U.S. Foodservice had been severely 
marked down. \8\
---------------------------------------------------------------------------
     \7\ ``Royal Ahold to Sell U.S. Foodservice Unit''. Ylan Q. Mui. 
11-7-06. Washington Post.
     \8\ -20% shortfall in Fair Value relative to Cost, as recognized 
by KKR: ``KKR Investor Update, May 2009. KKR & Co. Provides Update to 
KKR Private Equity Investors' Investment Community'', Accessed at KKR's 
Web site on 6-12-2009.
---------------------------------------------------------------------------
    KKR and CD&R struggled to place the debt with investors who were 
growing wary of such a highly leveraged deal \9\ at the end of the 
cheap financing bubble on Wall Street and the beginning of a sustained 
global recession. Not surprisingly, KKR and CD&R had to complete the 
deal under more onerous loan terms, putting additional pressure on the 
two firms to meet their revenue goals with U.S. Foodservice.
---------------------------------------------------------------------------
     \9\ ``Buyouts in a Bind'', Grace Wong. 7-30-07. CNNMoney.com. 
Also: ``U.S. Foodservice Postpones LBO financing'', 6-26-07. 
Reuters.com.
---------------------------------------------------------------------------
    With such a mountain of debt and lower valuation for an eventual 
resale of U.S. Foodservice to the public, the pressure on U.S. 
Foodservice workers has been unrelenting:
    1. Abuse of workers. Repeated attacks on workers fundamental 
rights, including violations of U.S. labor law, illegal firings, 
intimidation, captive audience meetings, racial discrimination, 
discrimination on the basis of union sympathy; with the aim of 
undermining collective bargaining, wages, and benefits. \10\ In 
Arizona, the National Labor Relations Board (NLRB) charged U.S. 
Foodservice with almost 200 Federal labor law violations before, 
during, and after a 2008 union election involving 250 workers in 
Phoenix. That same year, the NLRB charged U.S. Foodservice with 
violating several Federal labor laws in its effort to crush an 
organizing drive at its Twinsburg, Ohio, facility. ``It seemed that 
they were targeting the minority workers'' said Al Mixon, Secretary-
Treasurer, Teamsters Local 507, in Cleveland.
---------------------------------------------------------------------------
     \10\ Private Inequity: A Case Study of KKR and CD&R's U.S. 
Foodservice. Fall 2009. Teamster Working Group on Financial Markets. 
Also see: U.S. Foodservice Workers United. For Unfair Labor Practices, 
visit National Labor Relations Board (NLRB) Web site.
---------------------------------------------------------------------------
    2. Unsustainable speed-up. Workers are stretched to do more with 
less, without being able to cooperate on solutions.
    3. Stream of warehouse closures. Unionized and nonunionized 
warehouses are being shuttered, with more than 1,400 warehouse jobs 
lost across the United States in 12 months. Overall we estimate U.S. 
Foodservice has shed more than 10 percent of its workforce in 3 years. 
\11\
---------------------------------------------------------------------------
     \11\ See, public domain sources for closure of each site; for 
overall job loss, U.S. Foodservice declared nearly 29,000 employees in 
2006, 27,160 in 2007 (see, Forbes The 35 Largest U.S. Private 
Companies, 2008) and now claims on its Portfolio list 26,108 employees 
at U.S. Foodservice (possibly a 2008 figure), See, http://www.kkr.com/
kpe/private_equity_portfolio.cfm as of 4-12-10.
---------------------------------------------------------------------------
    4. Management turmoil. KKR and CD&R are faced with a management 
crisis. U.S. Foodservice CEO, Charles Aiken suddenly resigned in 
December of 2009. KKR and CD&R have not replaced him as of the date of 
this testimony. According to one U.S. Foodservice worker: ``As it 
stands now, the worst enemy U.S. Foodservice drivers have in trying to 
do their jobs is the management themselves. Daily, I try to bring order 
out of the chaos that comes from routing, loads, and unsafe working 
conditions.''
Conclusion: Financial Reform Legislation
    Under current law, private investment vehicles such as hedge funds, 
leveraged-buyout and venture-capital funds function with virtually no 
oversight. Despite managing trillions of dollars and employing millions 
of Americans, they operate as a shadow financial system--free to make 
enormous bets in secret. Comprehensive regulation of private investment 
funds is essential to prevent the buildup of systemic risks and to 
protect investors.
    The Teamsters Union supports increased transparency and 
comprehensive regulation for all private investment funds--including 
hedge funds, private equity and venture capital funds, and fund 
managers. It is essential that the SEC have access to information about 
private investment funds and the authority to require them to provide 
disclosures to investors, prospective investors, trading partners, and 
creditors.
    The Teamsters Union supports H.R. 4173, the Wall Street Reform and 
Consumer Protection Act, and S. 3217, the Restoring American Financial 
Stability Act.
