[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
__________
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Affairs
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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
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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\
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\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
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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.
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\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
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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.
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\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.
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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.''
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\4\ ``Short vs. Long-Term: Getting the Balance Right'', Indra
Nooyi, April 12, 2010.
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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\
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\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.
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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\
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\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.
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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\
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\1\ SEC Form10-K for Accuride (ACW), and 2005 Prospectus to
Investors (Form S-1).
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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\)
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\2\ Prospectus for 2005 IPO by Accuride, and following SEC
filings.
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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.
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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.
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\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.
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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\
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\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.
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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\
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\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.
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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.
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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.
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\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\
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\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.
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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.