    [House Hearing, 114 Congress]
    [From the U.S. Government Publishing Office]

                       CORPORATE GOVERNANCE: FOSTERING A
                     SYSTEM THAT PROMOTES CAPITAL FORMATION
                        AND MAXIMIZES SHAREHOLDER VALUE

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

                                    HEARING

                                   BEFORE THE

                      SUBCOMMITTEE ON CAPITAL MARKETS AND
                        GOVERNMENT SPONSORED ENTERPRISES

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                               SEPTEMBER 21, 2016

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 114-102

     [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                            U.S. GOVERNMENT PUBLISHING OFFICE

    25-946 PDF                     WASHINGTON : 2018
    -----------------------------------------------------------------------
      For sale by the Superintendent of Documents, U.S. Government Publishing
      Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
             DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
                              Washington, DC 20402-0001

                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        JEB HENSARLING, Texas, Chairman

    PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking
        Vice Chairman                        Member
    PETER T. KING, New York              CAROLYN B. MALONEY, New York
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
    SCOTT GARRETT, New Jersey            GREGORY W. MEEKS, New York
    RANDY NEUGEBAUER, Texas              MICHAEL E. CAPUANO, Massachusetts
    STEVAN PEARCE, New Mexico            RUBEN HINOJOSA, Texas
    BILL POSEY, Florida                  WM. LACY CLAY, Missouri
    MICHAEL G. FITZPATRICK,              STEPHEN F. LYNCH, Massachusetts
        Pennsylvania                     DAVID SCOTT, Georgia
    LYNN A. WESTMORELAND, Georgia        AL GREEN, Texas
    BLAINE LUETKEMEYER, Missouri         EMANUEL CLEAVER, Missouri
    BILL HUIZENGA, Michigan              GWEN MOORE, Wisconsin
    SEAN P. DUFFY, Wisconsin             KEITH ELLISON, Minnesota
    ROBERT HURT, Virginia                ED PERLMUTTER, Colorado
    STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
    STEPHEN LEE FINCHER, Tennessee       JOHN C. CARNEY, Jr., Delaware
    MARLIN A. STUTZMAN, Indiana          TERRI A. SEWELL, Alabama
    MICK MULVANEY, South Carolina        BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             DANIEL T. KILDEE, Michigan
    DENNIS A. ROSS, Florida              PATRICK MURPHY, Florida
    ROBERT PITTENGER, North Carolina     JOHN K. DELANEY, Maryland
    ANN WAGNER, Missouri                 KYRSTEN SINEMA, Arizona
    ANDY BARR, Kentucky                  JOYCE BEATTY, Ohio
    KEITH J. ROTHFUS, Pennsylvania       DENNY HECK, Washington
    LUKE MESSER, Indiana                 JUAN VARGAS, California
    DAVID SCHWEIKERT, Arizona
    FRANK GUINTA, New Hampshire
    SCOTT TIPTON, Colorado
    ROGER WILLIAMS, Texas
    BRUCE POLIQUIN, Maine
    MIA LOVE, Utah
    FRENCH HILL, Arkansas
    TOM EMMER, Minnesota

                         Shannon McGahn, Staff Director
                        James H. Clinger, Chief Counsel
      Subcommittee on Capital Markets and Government Sponsored Enterprises

                      SCOTT GARRETT, New Jersey, Chairman

    ROBERT HURT, Virginia, Vice          CAROLYN B. MALONEY, New York,
        Chairman                             Ranking Member
    PETER T. KING, New York              BRAD SHERMAN, California
    EDWARD R. ROYCE, California          RUBEN HINOJOSA, Texas
    RANDY NEUGEBAUER, Texas              STEPHEN F. LYNCH, Massachusetts
    PATRICK T. McHENRY, North Carolina   ED PERLMUTTER, Colorado
    BILL HUIZENGA, Michigan              DAVID SCOTT, Georgia
    SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
    STEVE STIVERS, Ohio                  KEITH ELLISON, Minnesota
    STEPHEN LEE FINCHER, Tennessee       BILL FOSTER, Illinois
    RANDY HULTGREN, Illinois             GREGORY W. MEEKS, New York
    DENNIS A. ROSS, Florida              JOHN C. CARNEY, Jr., Delaware
    ANN WAGNER, Missouri                 TERRI A. SEWELL, Alabama
    LUKE MESSER, Indiana                 PATRICK MURPHY, Florida
    DAVID SCHWEIKERT, Arizona
    BRUCE POLIQUIN, Maine
    FRENCH HILL, Arkansas

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        September 21, 2016...........................................     1
    Appendix:
        September 21, 2016...........................................    39

                                   WITNESSES
                         Wednesday, September 21, 2016

    Copland, James R., Senior Fellow and Director of Legal Policy,
      Manhattan Institute for Policy Research........................     6
    Engler, Hon. John, President, Business Roundtable................     5
    Simpson, Anne, Investment Director, Sustainability, California
      Public Employees' Retirement System............................     8
    Stuckey, Darla C., President and Chief Executive Officer, Society
      for Corporate Governance.......................................    10

                                    APPENDIX

    Prepared statements:
        Copland, James R.............................................    40
        Engler, Hon. John............................................   119
        Simpson, Anne................................................   126
        Stuckey, Darla C.............................................   231

                  Additional Material Submitted for the Record

    Engler, Hon. John
        Written responses to questions for the record submitted by
          Representatives Hill and Hultgren..........................   248

                        CORPORATE GOVERNANCE: FOSTERING
                         A SYSTEM THAT PROMOTES CAPITAL
                            FORMATION AND MAXIMIZES
                               SHAREHOLDER VALUE

                                  ----------

                         Wednesday, September 21, 2016

                 U.S. House of Representatives,
                    Subcommittee on Capital Markets and
                      Government Sponsored Enterprises,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 3:06 p.m., in
    room 2128, Rayburn House Office Building, Hon. Scott Garrett
    [chairman of the subcommittee] presiding.
        Members present: Representatives Garrett, Royce, Huizenga,
    Hultgren, Schweikert, Hill; Maloney, Sherman, Scott, Himes,
    Ellison, Foster, and Murphy.
        Chairman Garrett. Good afternoon. The Subcommittee on
    Capital Markets and Government Sponsored Enterprises will now
    come to order, albeit 1 hour and 5 minutes late due to votes.
        Without objection, the Chair is authorized to declare a
    recess of the subcommittee at any time.
        Today's hearing is entitled, ``Corporate Government:
    Fostering a System that Promotes Capital Formation and
    Maximizes Shareholder Value.''
        I thank the members of the panel who are here, and I thank
    the members of the subcommittee who are here. And at this
    point, I yield myself 5 minutes.
        So today the purpose of this, and what the subcommittee
    will do, is continue our work to address and improve the laws
    and regulations impacting the governance of public companies in
    the United States and ensure that our capital markets remain
    what they are, the most robust and competitive in the world.
        And so for that reason, I welcome all of our witnesses to
    the hearing. I thank you all for your flexibility in appearing
    because we had to reschedule. And I am sure you are aware,
    Congressional scheduling is not always the most predictable
    with first about scheduling this meeting and now rescheduling
    it for an hour later.
        And so as we look into this, the Federal securities law,
    the bedrock, if you will, of our capital markets were put in
    place, when? Eight decades ago, and it was done so to promote
    transparency of security offerings and to mitigate and enforce
    against fraud in the markets. And it was created at the time
    the SEC to carry out this very important mission.
        As this committee is well-aware, the SEC mission is
    threefold, to protect investors, maintain fair and orderly and
    efficient markets, and to facilitate capital formation. So
    Congress and market participants have long understood the SEC's
    missions as such, the three, and they have recognized that the
    securities laws were not created and were never intended to be
    a vehicle to advance a social or a political or other unrelated
    public policy goals.
        In recent years, however, an increasingly number of
    activists, who are often well-funded and very powerful, have
    sought to turn the SEC's missions on its head and instead to
    advance their idiosyncratic agendas by the way of the security
    laws. And this has then resulted in consequences that range
    from minor nuisances to humanitarian disasters. Let me give you
    an example.
        As was explained in the devastating 2014 Washington Post
    article and subsequent testimony before the Financial Services
    Committee, the Dodd-Frank conflict mineral provision has only
    served to deepen the humanitarian crisis in the Democratic
    Republic of Congo, and has driven actually more people into
    destitution and poverty.
        Of course, the conflict mineral rule is just one extreme,
    but I think it is instructive in that it shows the type of
    folly that occurs when the security laws are used for purposes
    other than what they were intended for.
        Today one of the most common vehicles for special interest
    groups to advance their agendas is the shareholder proposal
    process governed under Rule 14a-8 of the Securities Exchange
    Act.
        And if you look at this, the mischief that has occurred
    under this rule, particularly in recent years, is caused by a
    combination of extremely low thresholds for eligibility, as
    well as the increasing tendency of the SEC to err on the side
    of proponents, or to the unpredictability in deciding whether
    issuers should be granted no-action letters and relief for
    excluding a proposal from their proxy.
        To highlight just one example, the sudden decision last
    year by the SEC Chair Mary Jo White to reverse a staff decision
    regarding shareholder proposal at Whole Foods has eroded
    confidence in the SEC's ability to administer an objective and
    predictable no-action process.
        What is even more troubling, however, is the increasing
    political and driven activism by public pension plans across
    the country. See, the overseers of many of these plans, who
    ostensibly actually owe a fiduciary duty to the plans'
    beneficiaries, they are increasingly aggressive in their use of
    shareholder proposals or other means to target industries or
    businesses that they simply do not like.
        Not only is this a distraction for companies and their
    investors, it can also actually harm the workers and retirees
    who actually rely upon the income generated by these plans.
        Why do I say that? Well, because a recent study shows that
    the more public pension plans engage in social or politically
    driven activism, the less likely they will achieve returns for
    their portfolio.
        Keep in mind, state and municipal pension plans around the
    country are woefully underfunded, not because companies don't
    disclose enough about things like climate change, but because
    the political elites who are supposed to be looking out for the
    public workers have overpromised on benefits while chronically
    underfunding the plans themselves. In fact, one recent study by
    the Hoover Institute earlier this year estimated that the
    unfunded liability has reached $3.4 trillion.
        So I hope today's hearing will allow us to explore ways to
    reform the shareholder proposal process administered by the
    SEC, while also ensuring that if a shareholder has a good idea,
    that it can garner support and that his voice is still heard.
        This hearing will also examine the impact of some of the
    politicized corporate government provisions in Dodd-Frank, as
    well as the SEC's ongoing disclosure effectiveness initiative
    and mandates under the FAST Act to simplify disclosure
    obligation.
        With that, I now yield to the gentlelady from New York for
    5 minutes.
        Mrs. Maloney. Thank you. Thank you so much for holding this
    hearing. Corporate governance issues are often overlooked, but
    they affect the day-to-day operations of every public company
    in the country, both large and small.
        The title of this hearing, Corporate Governance, Fostering
    a System that Promotes Capital Formation and Maximizes
    Shareholder Value, of course in order to raise capital from
    investors and thus promote capital formation, you can't
    constantly strip shareholders of basic ownership rights.
        If you prevent shareholders from having any real say on how
    the company is operated, then you will certainly make
    management's life easier, but you will make capital formation
    harder. Investors simply won't buy shares if they get no
    ownership rights in return.
        One of the specific topics that we are asked to address
    today, is the SEC's rule governing shareholder proposals, known
    as Rule 14a-8. This rule lays out when a public company is
    required to include a shareholder's proposal in its proxy
    statement that it sends out to all shareholders ahead of its
    annual meeting, and also when a company is permitted to exclude
    a shareholder's proposal.
        In my view, both companies and the SEC should always err on
    the side of including shareholder proposals. After all, it is
    the shareholders who are the owners of the company.
        Last year the SEC took an important step toward restoring
    shareholders' right to have their proposals voted on at annual
    meetings, when it reversed an earlier decision that would have
    allowed Whole Foods to exclude a shareholder proposal from
    their proxy just because it dealt with the same topic as one of
    management's proposals.
        The SEC wisely reconsidered the Whole Foods decision and
    concluded that management should actually not be able to
    exclude a shareholder proposal that it doesn't like simply by
    submitting a similar one, but more management friendly proposal
    on the same general topic.
        While this was an important step, I believe there is much
    more the SEC can do to encourage shareholder participation in
    the proxy process. For example, the SEC's overly expansive
    interpretation of when a shareholder proposal deals with
    ordinary business operations, still allows management to
    exclude a whole number of legitimate shareholder proposals.
        I believe the SEC should undertake a full review of the
    ordinary business exclusion, just like it did in the Whole
    Foods matter, in order to recalibrate this exclusion and make
    it more shareholder friendly.
        Finally, there has been a lot of debate on so-called
    universal proxy ballots recently. I think that this is
    important. Under current law, shareholders who vote by proxy in
    a contested director election have to vote either for the
    management's entire slate of candidates or the shareholder
    proponents' entire slate of candidates.
        They cannot vote for some candidates from the management's
    slate and some from the proponents' slate. But if a shareholder
    attends the annual meeting in person, they can pick and choose
    from the two slates. This makes no sense at all.
        Shareholders should be able to use the proxy voting system
    to do everything they could do if they were there in person. A
    universal proxy ballot would allow shareholders to do just
    that. It would be a single proxy card that would list both
    management's directors nominees and the proponents' nominees
    and would allow shareholders to vote for whatever mix of
    nominees they see fit.
        This really should not be controversial. It is a common
    sense thing to do. So I was pleased last year when Chair White
    announced that she had directed the SEC staff to develop
    rulemaking recommendations on a universal proxy ballot. And I
    hope the staff will deliver their recommendations soon.
        I would like to submit a letter on all of these topics from
    the Council of Institutional Investors for the record and ask
    unanimous consent to do so. I look forward to hearing the
    testimony of the witnesses, and I yield back.
        Mr. Sherman. I would ask the gentlelady to yield her last
    minute?
        Chairman Garrett. Without objection so ordered, if the
    gentlelady yields her remaining time?
        Mrs. Maloney. I certainly yield to the gentleman from the
    great state of California.
        Mr. Sherman. The most connected and powerful people in this
    country, the CEOs of the 1,000 or 2,000 largest corporations,
    anything that inconveniences them is branded as political,
    aggressive or a distraction.
        The fact is that we should be concentrating on how the laws
    of the state of Delaware prevent us from getting shareholder
    value by having everything rigged in favor of those CEOs and
    nothing in the interest of those shareholders who may want to
    see a change in management.
        And to say that investors are disadvantaged because they
    are given a chance to prevent themselves from investing in a
    company that is putting their money in Iran, in its oil fields,
    such a management is dumb and should be avoided and is
    financing the creation of nuclear weapons, which will have an
    adverse effect on corporate profits worldwide. I yield back.
        Chairman Garrett. Gentleman yields back.
        And with that we turn now to the panel, and again, I
    welcome all the members here for the panel. For those of you
    who have not testified before us, your complete record will be
    and has been submitted for the record officially.
        We will yield you 5 minutes. Somewhere in front of you
    should be a little clock that goes red, green--or rather,
    green, yellow and red. Green means that you have 5 minutes.
    When it comes up to yellow that means that is your one-minute
    warning, and then red means you are in overtime. So try not to
    do overtime.
        So with that, starting from left to right, Governor Engler,
    welcome, and you are recognized for 5 minutes.

      STATEMENT OF THE HONORABLE JOHN ENGLER, PRESIDENT, BUSINESS
                               ROUNDTABLE

        Mr. Engler. Good afternoon, Mr. Chairman, Ranking Member
    Maloney, and members of the subcommittee. I am John Engler, as
    you have indicated, president of the Business Roundtable, an
    association of CEOs of major U.S. companies, such as
    Congressman Sherman just mentioned, that operate in every
    sector of the U.S. economy.
        And I want to thank you for the opportunity to provide the
    perspective of these U.S. business leaders and large employers
    on improving the regulatory environment that governs America's
    capital markets.
        We appreciate the committee's attention to these important
    issues. In particular, Chairman Hensarling's Financial Choice
    Act represents a serious effort to reform provisions in Dodd-
    Frank that Business Roundtable CEOs have identified as
    detrimental to their ability to invest, to hire and expand.
        I would like to focus on two issues today, the current U.S.
    public company disclosure regimen and the shareholder proposal
    process. First on disclosure, Business Roundtable believes the
    country needs a renewed commitment to the materiality standard,
    the bedrock principle for U.S. securities laws since 1933.
        SEC Chairman White, I should note, has been forceful in her
    support of materiality, and we thank her for that support. As
    we documented in a white paper last October, the materiality
    standard ensures that required disclosure provides investors
    with the information that is essential to making effective
    investment in proxy voting decisions.
        Unfortunately, the adherence to the materiality principle
    has eroded. Congress and the SEC have increasingly turned to
    the disclosure system to address social, political and
    environmental issues, issues more effectively addressed through
    other means and issues that certainly do not meet the
    materiality standard.
        The results are higher costs to shareholders and an ever-
    increasing complexity, and the amount of information that
    reasonable investors receive that is unrelated to investment
    and proxy voting decisions.
        America's business leaders strongly urge Congress to
    abstain from enacting new mandates and review earlier actions
    that are contrary to the materiality standard. We believe the
    Choice Act provides an opportunity to conduct such a needed
    review.
        The second point today, the U.S. shareholder proposal
    process. The current process is outdated and is being abused.
    This abuse imposes significant costs on companies, limits their
    ability to focus their resources on the long-term creation of
    value for shareholders that Mr. Chairman you mentioned in your
    opening comments.
        In too many cases, the current shareholder proposal process
    has been hijacked by corporate gadflies and political
    activists. These individuals often have insignificant economic
    stakes in target companies.
        Their proposals pursue idiosyncratic, social or political
    agendas unrelated to the interests of shareholders as a whole.
    They impose significant costs on the corporation, which then
    are passed on to ordinary investors, senior citizens, savers,
    retirees. We believe two factors are driving this negative
    trend.
        First, the threshold for submitting a proposal is too low.
    To be qualified to submit a proposal, a shareholder must own
    only $2,000 in market value, or 1 percent, whichever is less of
    a company's outstanding stock released one year. The $2,000
    threshold in particular falls well short of any reasonable
    material ownership standard for public companies.
        And second, it is difficult for a company to exclude
    proposals relating to general social issues. For several
    decades, the SEC permitted corporate managers to exclude
    proposals submitted ``primarily for the purpose of promoting
    general economic, political, racial, religious, social, or
    similar causes.''
        In 1970, however, the D.C. Circuit Court of Appeals ruled
    against the SEC and broadened the types of proposals that could
    not be excluded. The result? An influx of proposals on social
    issues.
        Last year, activist shareholders filed 479 social,
    environmental and political proposals. And this stream of
    proposals remains steady with more than 400 such proposals
    submitted for 2016 meetings.
        These kinds of proposals are rejected repeatedly, mostly by
    overwhelming margins, only to be submitted again next year. In
    the interest of time, we believe the SEC should bring that
    $2,000 holding requirement up to date. The current holding
    requirement for stockholders should be lengthened.
        We would also strength disclosure requirements for
    proponents of shareholder proposals and modernize the exclusion
    process so companies can focus on material issues.
        So thank you for the opportunity to be here today. We are
    committed to promoting an environment for U.S. capital markets
    that facilitates greater long-term value growth for our owners
    and investors, the employees and consumers.
        [The prepared statement of Mr. Engler can be found on page
    119 of the appendix.]
        Chairman Garrett. Thank you, Governor.
        Now next up from the Manhattan Institute, senior fellow and
    Director of legal policy, you are recognized for 5 minutes, Mr.
    Copland.

     STATEMENT OF JAMES R. COPLAND, SENIOR FELLOW AND DIRECTOR OF
         LEGAL POLICY, MANHATTAN INSTITUTE FOR POLICY RESEARCH

        Mr. Copland. Thank you, Mr. Chairman, Ranking Member
    Maloney, and members of the subcommittee. I would like to thank
    for the invitation to testify today. My name is James R.
    Copland and I am a senior fellow with the Manhattan Institute
    for Policy Research, a public policy think tank in New York
    City. I have directed the institute's legal policy efforts
    since 2003.
        The shareholder proposal process governed by SEC Rule 14a-
    8, has constituted a significant focus of my research. In 2011,
    I helped launch the Manhattan Institute's proxy monitor
    database, a publicly available catalog of shareholder proposals
    at the 250 largest publicly traded American companies. Over the
    past 5 years I have periodically authored reports on the
    shareholder proposal process.
        The SEC's Rule 14a-8 permits stockholders of publicly
    traded companies who have held shares valued at $2,000 or more,
    as the governor just said, for at least 1 year to introduce
    proposals for shareholders' consideration at corporate annual
    meetings.
        The SEC's process is ripe for reform. It has strayed far
    from the principal legal purpose authorizing the rule under the
    Securities Exchange Act. It has been used almost exclusively by
    a small number of investors with a focus potentially or
    actually centered on concerns other than maximizing share
    value.
        And it has actually operated to permit such a minority of
    shareholders to extract corporate rents or influence corporate
    behavior to the detriment of the average diversified
    shareholder. My written statement discusses these issues in
    more detail, as do two reports included in the record, both of
    which are available here in hardcopy today.
        I would like to emphasize the following facts drawn from my
    research. One, a small group of individuals, often referred to
    as corporate gadflies, repeatedly file substantially similar
    proposals across a broad set of companies.
        In 2016, six gadfly investors and their family members have
    sponsored one-third of all shareholder proposals. Typically, as
    the governor suggested, these individuals own very small
    percentages of a company's stock.
        For instance, John Chevedden, the most active sponsor of
    shareholder proposals dating back to 2006, has made
    substantially the same proposal at Ford Motor Company each of
    those years. In 2016, Mr. Chevedden owned 500 shares of Ford
    stock, which is equivalent to about 0.00001 percent of the
    company's outstanding float.
        Number two, a large percentage of shareholder proposals
    concern social or policy goals that may not be related or at
    least have an attenuated relationship to share value. In 2016,
    to date, half of shareholder proposals have related to a social
    or policy issue, which is an all-time high.
        Number three, these social and policy related shareholder
    proposals have consistently been rejected by most shareholders.
    Over the last 11 years, at Fortune 250 companies, 1,444
    shareholder proposals related to social or policy concerns had
    been presented to shareholders for a vote over board
    opposition. All but two of those failed to garner majority
    shareholder support.
        Number four, a large percentage of institutional
    shareholders vote their shares based on the advice of proxy
    advisory firms, whose power over shareholder voting is vast. A
    2012 analysis I authored for the Manhattan Institute found that
    a recommendation that shareholders vote for a given shareholder
    proposal by the largest proxy advisor firm, ISS, was associated
    with a 15 percentage point increase in the shareholder vote for
    any given proposal.
        My research also shows that ISS has historically been
    almost eight times as likely as the median shareholder to
    support a shareholder proposal, in particular, social and
    policy oriented proposals.
        Number five, over the last 10 years, 31 percent of all
    shareholder proposals were resubmissions of a preceding year's
    proposal. Under current SEC rules, any proposal that receives
    at least 10 percent shareholder support can never be excluded
    from a company's proxy ballot in future years for want of
    support.
        The current SEC rule means that a single proxy advisory
    firm, ISS, effectively serves as the gatekeeper for shareholder
    proposal resubmissions. If ISS supports a proposal, it can
    remain indefinitely on the ballot.
        And number six, the ultimate test of whether shareholder
    proposals are an effective tool is whether they enhance share
    value. Last year, the Manhattan Institute commissioned an
    econometric study on this issue by Tracie Woidtke, a professor
    at the University of Tennessee.
        Woidtke found that public pension funds' social issue
    shareholder proposal activism appears to be negatively related
    to firm value. As such, shareholder proposal activism intended
    to affect corporate behavior in pursuit of social or policy
    goals may be harming the financial interests of the average
    diversified investor as well.
        In conclusion, it is hard to argue that the 14a-8
    shareholder proposal process is functioning well. Rule 14a-8 is
    a longstanding rule that has some utility, but activists have
    seized upon the SEC's outdated and overly permissive standards
    to push policy agendas in an effective end run around Congress.
        Congress has an interest in addressing this situation and
    reorienting the SEC around its statutory obligation to promote
    efficiency, competition and capital formation. Thank you.
        [The prepared statement of Mr. Copland can be found on page
    40 of the appendix.]
        Chairman Garrett. And I thank you.
        Moving next, Ms. Simpson from California Public Employees'
    Retirement System, you are recognized for 5 minutes.

    STATEMENT OF ANNE SIMPSON, INVESTMENT DIRECTOR, SUSTAINABILITY,
             CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM

        Ms. Simpson. Thank you very much, Chairman Garrett, Ranking
    Member Maloney, and other members of the subcommittee. Thank
    you very much for inviting us to testify at today's hearing. I
    am Anne Simpson. I am the investment director for
    sustainability at CalPERS.
        We greatly appreciate the subcommittee's focus on corporate
    governance and on ways to foster a system that promotes capital
    formation and maximizes shareowner value. This is a subject of
    vital importance to CalPERS, which is the largest public
    pension in the United States with over $300 billion in global
    assets.
        We own shares in over 10,000 companies worldwide and we are
    a fiduciary. We invest for our 1.8 million members, who include
    public servants such as the police, firefighters, judges, and
    others.
        For every dollar that we pay out in benefits to our
    members, fully 65 cents are generated by investment returns,
    which is why the topic of today's hearing is so important. Just
    as a sense of how important we are in our own local economy, we
    pay out close to $20 billion in retirement benefits every
    single year.
        So the topic of today is important to us because we are a
    significant provider of capital to U.S. financial markets
    which, as the Chairman rightly said, are the largest and the
    most dynamic in the world.
        We rely on the safety and soundness of those capital
    markets to advance our long-term investment strategy, which in
    turn we see supports the growth in the wider economy. The
    CalPERS principles are the framework by which we advocate for
    smart regulation that is designed to spur that economic growth
    upon which we rely and to ensure that our capital markets
    prosper.
        As you will be aware, the chaos of the financial crisis
    caused our fund to lose something in the order of $70 billion.
    We went into the crisis overfunded, and we believe it will take
    us 30 years to grow back to being fully funded. And we are
    still living with the impact of that catastrophe in the
    markets.
        The principles also guide how we execute our shareowner
    proxy voting responsibilities and a copy is attached to our
    written testimony. We believe that a system that operates with
    accountable and transparent corporate governance, which
    promotes capital formation to achieve the best returns for
    shareowners over the long term is the objective of today's
    hearing, which we fully support.
        Although my testimony does not capture all the elements
    that we think are important, I would like to call out a few
    elements which are considered today. The first is executive
    compensation. The second is corporate governance and
    transparency. These three are crucial to strengthening the U.S.
    financial system for the benefit of long-term investors like
    CalPERS.
        First, we advocate executive compensation which is fully
    disclosed and aligns interest between management and long-term
    owners. Accordingly, we strongly support the SEC rulemakings
    related to both say-on-pay, as it is known, executive
    compensation clawbacks, and also to pay ratio disclosure.
        Secondly, we firmly embrace accountable corporate
    governance. That is why we support the renewal of an SEC
    rulemaking for proxy access, which would allow long-term
    significant owners to nominate board candidates to the ballot.
        The use of Rule 14a-8, which by most large owners like
    ourselves was modeled on the vacated SEC rule, is a good
    example of how engaged owners can bring important reform into
    the market.
        We welcome the opportunity to vote on proposals put forward
    by fellow shareholders, whether they be large, like ourselves,
    or whether they be small. Often issues are raised, which is of
    interest and draw to the attention of other owners and of
    management. These small shareholders can be the eyes and ears
    of the company, if you like, a canary in the mine.
        We also want to ensure that proxy advisory firms are well-
    regulated and transparent. But with our view that regulation
    should be smart, we do oppose efforts to create an unduly
    burdensome regulatory regime.
        Third, our focus is on corporate financial reporting, which
    is vital. We want to ensure transparent and relevant
    information about economic performance and condition of
    businesses. And with the greatest respect, given that the
    reports are for the benefit of investors, we consider that it
    is investors who should determine the range and scope of what
    is material.
        Transparency is vital to us in all matters, and we consider
    that the current disclosure regime review of Regulation S-K is
    exceptionally helpful. We have provided detailed comments to
    the SEC.
        We do see great advantage in technology in spurring new
    areas of reporting, for example on new risks like those related
    to climate change. Finally, we urge full funding for the SEC in
    order that it can properly do its vitally important job. Thank
    you. I look forward to answering any questions you may have.
        [The prepared statement of Ms. Simpson can be found on page
    126 of the appendix.]
        Chairman Garrett. And I thank you.
        Finally last but not least, from the Society of Government
    Professionals, President and CEO Ms. Stuckey. You are
    recognized for 5 minutes.

     STATEMENT OF DARLA C. STUCKEY, PRESIDENT AND CHIEF EXECUTIVE
               OFFICER, SOCIETY FOR CORPORATE GOVERNANCE

        Ms. Stuckey. Thank you, Chairman Garrett, Ranking Member
    Maloney, and members of the subcommittee. Thank you very much
    for the opportunity to testify. I am Darla Stuckey. I am CEO of
    the Society for Corporate Governance, which represents about
    1,000 public companies.
        U.S. public companies are bearing the brunt of a broken and
    outdated disclosure system. How did we get here? In the 1970s,
    social activists had no better way to disseminate their message
    broadly than to use a public company proxy.
        Today, however, we have the Internet. The need to use a
    corporate proxy statement as a public forum for social issues
    is now moot, yet the disclosure regulations have not kept up
    with the pace of this change.
        My testimony today will focus on abuses associated with
    corporate disclosure, in particular Rule 14a-8. The purpose of
    Rule 14a-8 is to foster communication between shareholders and
    companies, as well as among shareholders themselves on issues
    of importance.
        However, it has limits designed to protect a small minority
    of shareholders from burdening others. One of these limits is
    Rule 14a-8i12, the resubmission thresholds. A company can
    exclude a proposal if the proposal fails to receive 3 percent
    support the first year, six the second and 10 the third year.
        This means, as I think has been said by Jim, if a proposal
    receives 10 percent of support or more, it can be resubmitted
    each year indefinitely, or what some have called the tyranny of
    the 10 percent. In fact, Con Ed shareholders voted on the same
    executive comp proposal from Evelyn Y. Davis every year for 16
    years.
        The commission should raise these thresholds. They have not
    been changed since 1954 when President Eisenhower was in
    office.
        In 1997, the commission tried to raise them from the 3, 6,
    10 percent, to 6, 15 and 30 percent. However, they failed to do
    so because of serious concerns from special interest
    shareholders who were afraid that too many of their social
    proposals would be excluded.
        But times have changed. Given current voting patterns, 96
    percent of all proposals now pass the 3 percent threshold in
    the first year, so this is really not a meaningful threshold at
    all. Comparing the voting data in 1997 and 2015 shows that a
    failure rate under the 3, 6, 10 percent regime would compare to
    about 5 percent, 15 percent, 25 percent today. So at a minimum,
    we need to go back to where the commission tried to go in 1997.
        Second, the proposal process is being abused by non-
    shareholders. Rule 14-8b requires a proponent to hold at least
    $2,000 worth of stock for a year in order to submit a proposal.
    This means at a minimum the proponent must own the shares and
    have an economic stake in the company.
        Despite this rule, commission staff routinely allow
    individuals, advisors and others to submit 14a-8 proposals on
    behalf of shareholders without requiring them to have an
    economic stake. We call this proposal by proxy, and it should
    be stopped.
        A shareholder who has no interest in submitting a proposal,
    can lend his shares to someone who does and a company can't
    then deal with the actual shareholder. Companies have sought
    relief in Federal courts and won, even though the staff refuses
    to grant relief.
        We don't understand why this is the case since it
    undermines the purpose of the rule, which again is to foster
    communication between shareholders and the company or amongst
    shareholders themselves. We believe the right to submit a
    shareholder proposal is not freely assignable.
        There is one other limit on proposals known as the
    relevance rule. It provides that a proposal can be excluded
    when it relates to operations that account for less than 5
    percent of the company's total assets and net earnings and is
    not otherwise significantly related to the business.
        The staff interpretations of this exclusion have
    effectively eliminated the 5 percent economic thresholds in the
    rule. For example, assume a proponent doesn't believe Acme Corp
    should be doing business in Myanmar because of human rights
    concerns in the country.
        Even if Acme Corp's annual revenues from Myanmar are less
    than 1 percent, the company must include the proposal in its
    proxy because the commission staff has said that the issue of
    human rights is a significant policy issue.
        If a shareholder want to access the corporate proxy, he or
    she should demonstrate that the issues are relevant to at least
    5 percent of the company's business. That is the rule, but it
    is not being enforced.
        Turning to the materiality standard, we also believe that
    the standard in TSC v. Northway works and should be not be
    changed. We applaud the SEC for undertaking disclosure
    effectiveness. We just worry that it may open avenues to new
    special interest disclosure.
        Three things to remember, the SEC under your oversight and
    jurisdiction, is the agency responsible for public company
    disclosure. It should not let others who claim to be standard
    setters usurp that role. The SEC should write the rules.
        Number two, writing an actual materiality rule would be
    impossible as a practical matter. What is material for one
    company is based on the facts and circumstances of that
    company.
        And three, not every piece of information that is important
    to an investor is material, and not every piece of information
    that is important needs to be in a publicly filed document.
        Companies can and do communicate outside of 34f filings. In
    fact, a great deal of helpful sustainability reporting is on
    corporate websites and published reports.
        Apologies, I refer to the rest of my testimony. Thank you.
        [The prepared statement of Ms. Stuckey can be found on page
    231 of the appendix.]
        Chairman Garrett. That is fine. Thank you very much. I
    thank everyone for their testimony, and at this time, I will
    yield myself 5 minutes to begin the questions, and I guess I
    will jump around.
        Governor Engler, so you brought up, and Ms. Stuckey you
    ended it there, on the issue of materiality. Maybe not the most
    exciting discussion in the world, but let us just spend 30
    seconds or a minute on that. As was indicated by a couple of
    the panelists, and you yourself included that there is a push
    now to, what, redefine what materiality is?
        The SEC issued a concept released earlier this year that
    posed a question of whether if you change the definition to
    expand it, as you refer to in your testimony. Can you just
    spend 30 seconds addressing what the consequences of expanding
    the definition of materiality would be to include such things
    as sustainability and such things as climate change, or
    whatever else it could be expanded into?
        Mr. Engler. Thank you--
        Chairman Garrett. Yep.
        Mr. Engler. --Mr. Chairman for the question. I think that
    expanding it further would render it almost moot. The concept
    going back I think to--I mentioned to the beginning, 1933,
    really was what is essential for that investor to know?
        And there are an unlimited number of topics that we could
    ask a company to respond to, but many of those have little to
    do with the company and its operations and its worthiness as an
    investment.
        Chairman Garrett. And who--okay. And who should be defining
    then what materiality is? Is that the SEC? Is that Congress? Is
    that the investors?
        Mr. Engler. Well, it used to be the SEC. That is who we
    delegated the regulation of the, you know, the corporate sector
    to, and that is why we set up this commission. We thought it--I
    wasn't around in the 1930s when they were doing this, but I
    think that the thought was that the SEC would take on this
    responsibility.
        What has happened in recent years, there have been
    requests, some of it reflected in some of the testimony today
    from panelists about adding to that, for instance, political
    disclosures, duplicating that. That is covered--there are other
    laws doing that.
        Congress stepped in with CEO pay ratio, one of the more
    useless requirements that have come down in a long time.
        We have seen, you know, on conflict minerals, as you
    mentioned in your opening testimony, the adverse impact and the
    unexpected impact of some of this. And what we end up doing is
    overloading that proxy statement. We will get a proxy statement
    the size of a phonebook, I am afraid.
        Chairman Garrett. Is that isn't the case where sometimes
    too much information, that you lose the significance of it?
        Mr. Engler. That would be our position.
        Chairman Garrett. Right. And isn't it also the case,
    correct me if I am wrong, is the case some companies make some
    decisions unilaterally, I guess, outside the materiality issue
    to say we are going to address the issue of sustainability or
    what have you. And they have the ability and the right to do
    this, though, right?
        Mr. Engler. That is correct. And there are many companies
    who independent of any of their obligated reporting--
        Chairman Garrett. Obligated.
        Mr. Engler. --will issue sustainability reports. We at the
    Roundtable actually publish an annual sustainability report.
        Chairman Garrett. Well, there you go.
        And Ms. Stuckey, then you made mention on the resubmission
    thresholds, and actually, did I hear Ms. Simpson, did you say
    that one of the criteria should be long-term significant
    owners? Did I hear that correctly as far as--I am jumping
    around there I guess--as far as who should meet the threshold
    for proposing? Did I hear those terms, long-term significant
    owners in your testimony?
        Ms. Simpson. Yes. I--
        Chairman Garrett. Yep, yep, yep.
        Ms. Simpson. Excuse me. I didn't push the button. That is
    our view with proxy access--
        Chairman Garrett. Yes, right.
        Ms. Simpson. --because this is actually addressing a
    fundamental issue in the governance. Our view on the other
    issues which were mentioned--
        Chairman Garrett. No, let me just stay on that one. So a
    long-term significant owner because the rule is how long do I
    have to own it right now?
        Ms. Simpson. There isn't a rule--
        Chairman Garrett. Okay, and so when you say--
        Ms. Simpson. --it was vacated in court--
        Chairman Garrett. When you are suggesting long term, what
    should long term be?
        Ms. Simpson. For us it is a minimum of 3 years holding
    continuously.
        Chairman Garrett. Okay. And I see, Mr. Copland, you just
    popped your hand, so did you want to chime in on that? And then
    I will go to Ms. Stuckey.
        Mr. Copland. Oh, well, the rule is 1 year for shareholder
    proposals. That it has to be an ownership period for 1 year and
    $2,000 worth of stock.
        Chairman Garrett. Right. And is that satisfactory?
        Mr. Copland. Well, I tend to agree with the governor that
    the $2,000 is quite low. The direct cost that is imposed on the
    company, just the cost of printing, duplication, distribution
    substantially exceeds.
        Now the time period is a bit of a tricky question. And this
    is where I may not always agree with the corporate side to some
    degree on these because I am not--
        Chairman Garrett. But something longer than what we have
    right now?
        Mr. Copland. --adverse to things like hedge funds or things
    like that, that are coming in. If they have a big stake and
    they are trying to turn a company around--
        Chairman Garrett. Yes.
        Mr. Copland. --you know, to say they can't have a
    shareholder proposal if they are buying 9 percent of the
    company to me doesn't necessarily make sense.
        Chairman Garrett. And in my--okay. And in the last 13
    seconds as to where I was going to go, Ms. Stuckey, as far as
    the resubmission rate, those numbers in that area are
    surprising to me. Do you want to address what you were saying--
        Ms. Stuckey. What do you mean? Well, we think it should go
    at least back to where they proposed in 1997. Yes, we need to
    get it there because basically it is a sieve and everything is
    going through.
        Chairman Garrett. So basically no matter how many times--
    once you hit that threshold, no matter how many times you
    will--
        Ms. Stuckey. Once you hit 10 percent every year then you
    don't have to--you can put it in forever. And the purpose is,
    you know, there are a lot of good shareholder proposals. As Jim
    said, 50 percent of them are the social proposals. There are 50
    percent that are not.
        Also, I want you to know that a lot of good comes about,
    the communication between shareholders and companies when
    proposals get made.
        Chairman Garrett. Yes.
        Ms. Stuckey. In fact that is why they put a sustainability
    disclosure on their website. So we are not saying that they are
    all bad. We are just saying that the rules are not being
    enforced accurately by the SEC.
        The 10 limits one a little too much, a little too investor
    friendly, and we would like the timeframes and the thresholds
    to be readjusted.
        As far as the initial $2,000, it was changed from $1,000 to
    $2,000 in 1998. If you kept up with inflation now--
        Chairman Garrett. Yes, what is that?
        Ms. Stuckey. --it would be--sorry--it would be $3,000. It
    would be $3,000.
        Chairman Garrett. That is what I was going to say, it
    doesn't get that high. I would have thought it would be higher
    than that, but--
        Ms. Stuckey. I know.
        Chairman Garrett. --by inflation. Well, I guess we haven't
    had any inflation for the last 8 years because everything been
    flat under this administration, right? There is no economic
    growth so you don't have any inflation.
        So with that, I will now turn to the gentlelady form New
    York for 5 minutes.
        Mrs. Maloney. Thank you.
        Thank you Mr. Chairman.
        And I would like to ask Ms. Simpson, I would like to ask
    you about board diversity. And as you know, I have introduced a
    bill with bipartisan support that would require public
    companies to disclose the gender composition of their board in
    their proxy materials.
        And that they would send it to shareholders. Now, this
    would just not be any more paperwork. It would just be checking
    another box and telling whether or not you have gender
    diversity. And this came about because of organizations such as
    yours that was asking for this information, wanting to know
    more about it.
        And there were two studies that were reported in a GAO
    report that talked about companies that had gender diversity.
    It increased their bottom line profits by roughly 5 percent.
    Now, I want to thank you for the letter that you wrote in
    support of the bill, and that you have long been an advocate of
    even greater board diversity.
        I was focusing on gender because that was what the research
    had shown the differential on. But can you talk about the
    importance of board diversity from an investor's perspective?
    And is there evidence that greater boardroom diversity helps
    increase the company performance beyond the two financial
    services reports that were previously issued?
        Ms. Simpson. Thank you for the question. CalPERS has
    conducted a very extensive research of the evidence on such
    topics in a database that is freely available called the
    Sustainable Investment Research Initiative. We have over 2,000
    papers and you can search by topic if you would like to find
    the detail.
        The research that we have reflected on shows that diversity
    is good for two aspects of investment, both risk management
    because diversity challenge is group think. And you will recall
    that after the financial crisis, even the IMF said, group think
    was the corrosive common factor in boardrooms that led it to
    the brink of so much trouble. So group think is a problem.
        Different perspectives are important, particularly when
    companies are facing complexity and new issues for the long
    term. Climate change is a very good example. The other thing
    that we are finding though is that diversity is good for talent
    recruitment.
        If you confine yourself to the existing small, relatively
    well-known member of, for example, putting in criteria such as
    a former CEO of a Fortune 500 company, you will unfortunately
    be fishing in a very small pool.
        And if you throw the net more widely, then the talent that
    companies need for global competitiveness is more readily
    available. And that is why the CalPERS definition is
    multifaceted.
        We see gender, race, ethnicity and very interesting, we had
    a presentation from Credit Suisse to our board, which showed
    that for the LGBT community evidence that companies were
    inclusive in this regard was also associated with recruiting
    better talent and the result was better performance,
    particularly where financial services companies were concerned.
        Mrs. Maloney. Mr. Chairman, I ask permission to place in
    the record CalPERS' letter on gender diversity and corporate
    leadership, as well as a letter in support of my bill from the
    Chamber of Commerce.
        Chairman Garrett. Without objection, it is so ordered.
        Mrs. Maloney. Thank you.
        Ms. Simpson, as you know the SEC's rule on proxy access was
    overturned by the D.C. Circuit Court back in 2011. And while
    the SEC did not appeal that ruling, or re-propose proxy access,
    I understand that institutional investors such as CalPERS have
    still been relatively successful in engaging with companies in
    order to achieve proxy access to invigorate board elections and
    make boards more accountable.
        Can you discuss CalPERS' efforts on this issue since 2011?
        Ms. Simpson. Yes, thank you. I would be glad to. Again, it
    is important to know that this element of good governance is
    associated with better performance. You will have seen last
    year, the CFA, the Charter Financial Analysts producing a study
    which drew together the details here.
        Our view is that accountable corporate governance will
    underpin long-term creation of shareholder value. Because of
    the overturning of the SEC rule, which we and others supported,
    I have to say, it was important to be able to use Rule 14a-8
    to, if you like, have a do-it-yourself effort on something that
    is so important.
        We now have over 200 major companies where votes have been
    won to introduce proxy access. And I would like to applaud the
    leadership of New York City, which established a board
    accountability project.
        What is important here is an issue which once upon a time
    was viewed as rather innovative and perhaps on the sidelines of
    a minority interest is now winning significant support.
        Last year for example, over 60 percent of shareholders
    supported proxy access being introduced at Exxon, as an example
    of a company where we see a real potential for board
    refreshment. And now the owners of the company have the ability
    to engage in that dialog with the company.
        Mrs. Maloney. My time has expired. Thank you very much.
        Chairman Garrett. The gentlelady's time has expired.
        Mr. Huizenga is recognized for 5 minutes.
        Mr. Huizenga. Thank you, Mr. Chairman, and first I would
    like to welcome my governor, Governor Engler from Michigan. And
    it is good to see you here. I want to drill down a little bit
    on some recommendations that you have and explore a little bit
    about the conflict minerals and some of the pay ratio issues
    and those kind of things.
        I can't help but note my astonishment that we are talking
    about some of the issues that we are. I would have to note
    first and foremost, my mother has owned a business. My sister
    has owned a business. I have been involved in female-owned
    businesses for a long time and fully understand the benefits of
    diversity.
        The Wall Street Journal article recently talked about the
    benefits of having some gender diversity on boards and what
    that meant for the bottom line. I am a little confused though
    that gender is none of our business when people are using a
    bathroom, but suddenly it is very relevant if they are in the
    boardroom. So that seems an odd direction to go to me.
        But, Governor Engler, I do want to talk a little bit about
    the DRC and the conflict minerals provisions. That is something
    that my subcommittee, the Monetary Policy and Trade
    Subcommittee has dealt with it pretty extensively.
        And, you know, I believe that the rule really has not
    decreased violence or poverty in those nine countries
    surrounding the DRC, or I guess eight surrounding the DRC and
    nine with them.
        And Ms. Stuckey, you talk a little bit about some of those
    direct costs that are being incurred. And I wondered if you
    could just drill down a little bit on that, Governor Engler,
    and then maybe Ms. Stuckey, if you could follow up?
        Mr. Engler. I can respond to the question, Congressman,
    with perhaps more anecdotal than specific facts. I didn't come
    prepared to talk about that today. But what I have heard is the
    following.
        And we would be happy to try to follow up on this, but in
    some cases, the complexities of the supply chains of these
    major companies are such that literally decisions were made to
    try to avoid sourcing in that region completely.
        And so in that case, the idea was can we find any other
    alternative to bringing this into play.
        Mr. Huizenga. If I could interrupt one moment. The Minister
    of Mines from Rwanda sat right where you are and talked about
    this isn't about conflict-free, it is about Africa-free
    minerals. And that they are finding that as well, that people
    are leaving Africa and Central Africa to go find a different
    source for their minerals.
        Mr. Engler. That is consistent with what I have seen
    reported on, and as I said, have heard anecdotally. I can't
    document company by company or which even sector, but that has
    arisen.
        The second challenge that has been talked about is simply
    the sheer cost of trying to run down a supplier to a supplier,
    down that chain where the risk is such that it accelerates this
    trend to maybe even move off the continent someplace else
    because the risk of making a mistake is too great.
        And despite your best efforts, there might be a tier three
    supplier who suddenly has bought something in a market that you
    were not monitoring them. They were reporting to you but this
    is the challenge with this.
        And I think there is no one, certainly among the membership
    of the Business Roundtable who would knowingly do anything that
    would further violence in Africa. But at the same time, asking
    them to try to play this kind of a policing role is a very
    difficult challenge.
        Mr. Huizenga. Ms. Stuckey, do you mind?
        Ms. Stuckey. Yes, there is a new Tulane University and
    Accent Compliance Group study that says the cost of compliance
    with conflict minerals rule is now estimated to be about $710
    million.
        And when you read that against the GAO report from last
    month, you see that companies still, even at this cost,
    companies still can't tell whether they have minerals from the
    Congo or not.
        And I have heard the exact same things that Governor
    Engler's heard about, you know, people not going to Africa and,
    you know, there are issues with different mines all feeding
    into one smelter, and then there is the fact that you have to
    have it audited.
        You know, why would you take the risk that you are going to
    make a mistake, if this stuff--if you have to sign on the
    dotted line for it? Again, that is the problem with putting
    stuff in the 34 Act documents.
        Mr. Huizenga. Not to mention the fact that countries that
    were not big producers of many of these have now suddenly
    overnight become big producers where those minerals are coming
    out of even because the fall outside those nine defined
    countries.
        But with that, I know that my time has expired. And I
    appreciate the opportunity.
        Chairman Garrett. The gentleman's time has expired.
        The gentleman from California is now recognized for 5
    minutes.
        Mr. Sherman. Mr. Chairman, this has been an interesting
    week for corporate governance. We learned that one of the most
    respected institutions on Wall Street, countenanced 2 million
    bank fraud transactions committed by 5,300 people. And that the
    top corporate managers devised the system to put incentives and
    threats of firing on the lower ranking employees.
        That they maintained this system, knowing that there were
    at least 1,000 employees they had fired for fraud, and that
    they failed to monitor whether these accounts were actually
    authorized.
        And so in this week, when we find about 2 million criminal
    fraudulent transactions at just one big corporation, we are
    told that the only problem in corporate governance is that CEOs
    are annoyed having to talk about shareholder proposals.
        A real corporate governance hearing would not be one where
    we would consider a bill put forward by the chairman of the
    full committee that would eliminate the clawback provisions
    applicable to this case.
        Clearly those who left the company, or those who are
    staying with the company and got $100 million bonuses and
    incentive packages should be called to answer, but the SEC
    hasn't finalized the regulations.
        We are throwing around the term gadfly. And so I check with
    Jeff Foxworthy about what it means. If you care about conflict
    minerals, you might be a gadfly. If you don't want Iran to have
    a nuclear weapon, you might be a gadfly. If you get proxy
    advice rather than simply automatically signing whatever
    management wants you to sign, you might be a gadfly.
        If you fail to get your proposal adopted the first time,
    and have this stick-to-itivness to provide it to propose it
    again, you might be a gadfly. And if you believe that Wall
    Street values are not the sole determinant of human morality,
    you might be a gadfly.
        This is a hearing about whether we are going to have real
    capitalism, where the owners control the companies, or whether
    we are going to continue to have crony capitalism, which is so
    much more popular. The PACs that contribute to members of
    Congress are all controlled by the CEOs.
        And we have the crony capitalism that says whatever
    management wants to do they get to do, and the owners of the
    company have no right to stop them. Now, part of the attack on
    capitalism is to tell investors that it is virtually illegal
    for them to consider anything other than earnings per share in
    making an investment.
        That if they choose to care about not investing in Iran,
    that they are prohibited from doing so and they won't be given
    the information. I would say that it is the SEC's job to
    protect investors and that means all investors, including those
    who care about Iran's nuclear programs, about conflict
    minerals, about the money that is going from corporate
    treasuries to this end around our campaign finance laws.
        Investors who are deprived of the right to know basically
    have their money stole--well, taken from them. They can't make
    their own investment decisions.
        Ms. Simpson, we are here to protect shareholder value. Is
    it true that your organization controls--is the shareholder for
    far more shares than all the rest of the panelists combined?
        Does PERS have more than Mr. Copland's organization? How
    many billion are we talking about?
        Ms. Simpson. CalPERS is responsible for over $300 billion
    as a fiduciary for--
        Mr. Sherman. Okay. If anyone on the panel controls over
    $100 billion, can you please raise--no hands are going up. So
    we are here to protect shareholder value, but we only have one
    major shareholding organization testifying.
        Mr. Engler, you proposed that the $2,000 figure was too
    small. But then you said, it should be a longer holding period
    than 1 year.
        Our tax laws define long-term investor sometimes as 6
    months, at best 1 year. If we are going to say, that you are
    not a long-term investor for purposes of the proxy statement,
    shouldn't we take away your capital gains allowance as well on
    the same basis?
        Mr. Engler. Well, let me be clear. You are making some
    headway in your effort to regulate corporations. In 2000, we
    had 6,000 of them and you have it down to 4500 now. So there
    are fewer of these companies to be worrying about that are
    incorporated. I think that--
        Mr. Sherman. Mr. Engler, are you talking about publicly
    traded corporations?
        Mr. Engler. Publicly traded, yes.
        Mr. Sherman. Okay, so that you--
        Mr. Engler. That is what we are talking about I think,
    those regulated by the SEC, and there is a diminishing number
    of those, and I would submit that some of the regulatory
    overkill has something to do with that.
        Mr. Sherman. And then that part of it also is the corporate
    merger mania that occurs on Wall Street where one of those
    corporations buys another one of those corporations.
        Mr. Engler. And why do they do that?
        Mr. Sherman. Then we have a lot of private equities making
    a lot of money.
        Mr. Engler. Well, I--
        Mr. Sherman. Anyway, are you holding out for more than a 1-
    year period of time that somebody has to invest in a company in
    order to put forward a proxy proposal?
        Mr. Engler. I want to restore some balance to a process,
    and I think $2,000 ownership share, held for 1 year--
        Mr. Sherman. I am asking about the length of time.
        Mr. Engler. --is not enough.
        Mr. Sherman. Length of time. Are you arguing--I know you
    are arguing for more $2,000.
        Mr. Engler. Yes.
        Mr. Sherman. Are you arguing for longer than 1 year?
        Mr. Engler. I would personally make that a little bit
    longer, yes.
        Mr. Sherman. If we do the tax code as well, I will be with
    you.
        I yield back.
        Chairman Garrett. The gentleman yields back.
        Mr. Hultgren is recognized for--
        Mr. Hultgren. Thank you, chairman. Thank you all for being
    here. I have the privilege of representing Illinois, just west
    of Chicago. We have a number of outstanding public companies
    headquartered in Illinois. John Deere is one of the best
    respected brands in the country. It also employs thousands of
    people in Illinois and across the country.
        Farmers in my district absolutely depend on their products
    and my constituents own shares in the company and depend on its
    success for their retirement security.
        There was recently a shareholder proposal requesting the
    company generate a plan for it to reach net zero greenhouse gas
    emission status within the next 15 years.
        While I agree companies should be striving towards energy
    efficiency, it doesn't see to make sense that someone with an
    incredibly small stake in the company should be able to have
    such a powerful influence over its affairs. Some would describe
    this as tyranny of the minority.
        Governor Engler, in your testimony, you discussed the need
    for modernizing the current shareholder proposal process due to
    it being hijacked by a very small minority. I wondered, could
    you talk about the cost the current process imposes on public
    companies?
        Mr. Engler. Congressman, yes. I mean, we think the cost is
    substantial and it is worsened by the fact that even after that
    proposal with those minimal requirements is presented once and
    voted down, it could be resubmitted again the next year and the
    year after that. So these costs are accretive over time.
        We do think that looking at the company's financial
    reports, a company's performance and the material information
    is the way investors ought to make a decision on whether they
    own or not own a company.
        You know, this is a big challenge. You know, in Illinois
    with the public pension funds what kind of trouble they are in
    with the investments they have made and their performance isn't
    terrific.
        We would like to see, I think obviously, more growth in
    America so that we have an economic performance that is much
    greater than we have today. But we would also like to see U.S.-
    headquartered companies regulated by the SEC being able to
    perform better, with better results. And I don't have a
    specific dollar amount. It varies company by company.
        But as my colleague, Mr. Copland testified, when you are
    down to 0.00001 percent, you know, it is a pretty de minimis
    investment to create cost for a company and then those costs
    are borne by the investors.
        Mr. Hultgren. Yes, I would like to get into that a little
    bit just with the $2,000 ownership threshold for submitting a
    shareholder proposal. Do you know when that was originally put
    into place? From your testimony, it doesn't sound like you
    think this is really a reasonable threshold anymore.
        For example, John Deere currently has a market cap of about
    $26 billion, so a $2,000 investment would be about 0.000008
    percent stake, and yet being able to have that kind of sway.
    So--
        Mr. Engler. Wait, I can't answer, but Ms. Stuckey can.
        Mr. Hultgren. Okay.
        Ms. Stuckey?
        Ms. Stuckey. Hi--
        Mr. Hultgren. Hey.
        Ms. Stuckey. --1998 is when it went up from $1,000 to
    $2,000.
        Mr. Hultgren. Okay.
        Ms. Stuckey. I guess that $1,000 was probably the original
    number. And let me just--on a number for the cost of
    shareholder proposals just direct cost, $90 million a year.
        Mr. Hultgren. Wow.
        Ms. Stuckey. Doesn't sound like a lot, but it doesn't
    include the board's time and the other people in the
    corporation's time that they have to deal with it.
        Mr. Hultgren. Okay. We talked a little bit about the 1-year
    holding period requirement for submitting a proposal. Do you
    think that 1 year is sufficient?
        Governor Engler, I will address this to you.
        Mr. Engler. Sure.
        Mr. Hultgren. Are we certain that these are investors who
    are interested in the long-term growth of the company? Again,
    if they only hold it for a year, do we have that long-term
    commitment?
        Mr. Engler. Well, I mean, I know we previously had an
    effort to kind of link this to tax law, but I think we are
    really talking about, you know, tax policy is tax policy. Right
    now we are in a big fight with the E.U. about some of their,
    what I think are wrong tax policy. But in this case, we are
    talking about management of a company, which, you know, is over
    many years.
        And we know that companies are bought and sold. Companies
    emerge and some become obsolete and go away. But for the longer
    term interest, I would think that a shareholder would want to--
    and we would want investors to be around for more than 360
    days. And that is what we are saying.
        We are not here to--we are actually working on a paper to
    kind of try to be even more granular about what we think might
    be a better idea. What we are saying, what we have today is
    clearly inadequate.
        Mr. Hultgren. Let me jump to one thing real quick. I just
    have a little bit left. Retirement security is an incredibly
    important issue for my constituents, as you have mentioned. I
    have championed the Encouraging Employee Ownership Act in the
    Financial Services Committee.
        And also recently co-sponsored the Empowering Employees
    Through Stock Ownership Act, which allows an employee to elect
    to defer income attributable to certain stock transferred to
    the employee by an employer.
        What I find really frustrating with some of the shareholder
    proposals is that they are clearly politically motivated
    instead of focusing on the company's growth. I wonder what this
    means for my constituents who depend on sound investments,
    especially if they are depending on their pension plan to
    uphold its fiduciary responsibilities.
        Quickly, Mr. Copland, can you give me a sense of how many
    shareholder proposals are submitted each year that don't
    contribute to beneficial information for investors, and instead
    just impose unnecessary costs on these investors?
        Mr. Copland. Well, if we are just focusing on the proposals
    that involve social or policy issues, this year that was 50
    percent, half of all proposals.
        And I would also like to refer the committee, as I
    mentioned before what we have included in the record is our
    study by Professor Tracie Woidtke, which shows specifically for
    public employee pension plans, that those public employee
    pension plans that have been pushing those social proposals
    through shareholder activism, it has associated negatively with
    firm value.
        So it is something that I would worry about as a
    policymaker there in Illinois, or in any other state.
        Mr. Hultgren. My time has long since expired. I yield back,
    but may follow up with written questions, if that is all right,
    just to get some more information from y'all. Thank you very
    much for your time. Appreciate it.
        Chairman, I yield back.
        Chairman Garrett. You are on, Mr. Scott?
        Mr. Scott. Yes, sir, thank you very much, Mr. Chairman. I
    would like to address this to the entire panel and maybe get
    your thoughts on this because, I think it is very important and
    deals with Section 13-F in the reporting requirements. And a
    recent petition to the SEC uncovered what I personally believe
    is a shortfall in today's disclosure requirements for
    institutional investors.
        And that is this. As written today, Section 13-F requires
    reporting requirements in the Securities Exchange Act. It
    requires that institutional investors report their long
    positions in companies within 45 days after each quarter. But
    not included in that disclosure are the short positions that
    they take.
        And we tried in Dodd-Frank to fix this by giving the SEC
    authority to require short position reporting. But the deadline
    for these reports was once every month. So you see, there is a
    mismatch here, one is 45 days, the other is 30 days. So I think
    it would be helpful for us to know from each of you, are you
    aware of this discrepancy in the first place?
        And then secondly, what is the impact of this disclosure
    and the inconsistency of it, and what will this impact be on
    the markets--45 days, 30 days.
        Ms. Stuckey. I can start if you want?
        Mr. Scott. Yes, Ms. Stuckey.
        Ms. Stuckey. And maybe you will--13-F is part of what is
    called the Beneficial Ownership Rules. It has 13-D, as well,
    which is a 10-day rule. We think that these rules, again, as an
    example of, they are outdated. The timeframes haven't been
    brought into the, you know, modern era.
        The idea about 45 days to put in your long positions I
    think was around because you needed the time to actually
    produce those numbers. Now those numbers can be produced in a
    day. So we don't need the 45 days.
        The short positions I am not as familiar with, but I will
    tell you what I do know, that the short positions aren't
    disclosed at all except in the aggregate amount by the
    exchanges. So that might be the 30 days you are talking about.
        We believe that the 13-F long positions are--that those
    timeframes need to be way shortened, and then the short
    position should match, whatever that is.
        Just to leave to you with this, corporate directors and
    officers have to disclose their holdings in 2 days, their
    purchase and sales in 2 days. Companies have to disclose what
    they do, anything that is of interest on an 8-K in 4 business
    days.
        Activist hedge funds who seek to buy up a lot of shares and
    then go after companies have 10 days, that is 13-D, and but
    investment managers have 45 days. So it doesn't quite seem
    fair. We think this needs to be looked at and needs to be--
        Mr. Scott. Yes. Okay. Yes, anyone else here?
        Ms. Simpson. Yes, thank you for the question. I think this
    is an excellent example of where the rules have completely been
    outdated by events. And we have highlighted in Regulation S-K
    disclosure the importance of making good use of technology. We
    are not arguing to go back to previous rules. We want to look
    ahead.
        I think the other emphasis for us is we want to ensure that
    the disclosure regime favors the long-term, and, you know, we
    have said elsewhere that the rules are designed for
    shareholders. But in reality, we have a regime where you have
    owners, you have traders and you have raiders.
        And on frequent occasion, CalPERS has stepped forwards to
    stand up for and run proxy campaigns against short-term
    activists to protect companies. We have done this at Apple with
    Carl Icahn. We have done it at DuPont with Trian. And we think
    that a lot of the short-term trading and activist pressure on
    companies is really detracting attention in companies from the
    long term.
        Short-term executive pay has just thrown fuel onto the
    fire. But really this disclosure regime does need trimming up.
    It is a piece of unfinished business from Dodd-Frank. And
    another good reason why the SEC needs to have the money it
    needs to complete the job it has been given.
        Mr. Scott. So do you see this as something that the SEC can
    do with how we move forward on this? Or is there something
    additional that this committee should be looking at to fix this
    situation, number one?
        Ms. Stuckey. There are two petitions for rulemaking in
    right now. My belief is that they, SEC, can act on them if they
    want.
        Mr. Scott. Good. Thank you.
        Chairman Garrett. Thank you.
        The gentleman from Arizona is recognized for 5 minutes.
        Mr. Schweikert. Thank you, Mr. Chairman. Part of this is my
    own curiosity, so some of this is the education of David. Is it
    Ms. Simpson? You are CalPERS, correct? Yes? I have actually had
    a curiosity, particularly haven't been around a number of the
    public pension systems.
        At least in Arizona, we had always had the discussion that,
    okay, return to principal and maximizing safe yield was, you
    know, our sort of fiduciary, and sort of moral, ethical
    obligation to our current members and our retirees that--and
    yet, I know around the country, we have had a number of public
    pension systems that have that sort of specialized sort of
    fiduciary relationship with their participants.
        And parts of their investment committee have gone on
    certain tangents. When you view the world and those special
    relationships and special requirements you have to maximize
    safety and maximize yield, don't you see sort of a conflict of
    chasing what may be perceived as a good cause, away from your
    obligation?
        Ms. Simpson. Thank you for the question. You are
    highlighting the single most important issue for all pension
    funds and that is fiduciary duty. CalPERS fiduciary duty is set
    out in the California constitution.
        Mr. Schweikert. Yes.
        Ms. Simpson. So it cannot be overwritten by special
    initiatives, proposals or the legislature.
        Mr. Schweikert. Well, but exactly to that point, because I
    don't mean to use CalPERS because I don't know enough about
    CalPERS. But let's say I have a system that is only funded the
    70 percent, so I have a substantial shortfall in my actuarial
    soundness. And sometimes when an investment board gets
    together, we often appoint people who may represent certain
    union groups or political groups or professional staff.
        And I get someone who has a, shall we say, a bug under the
    bonnet over certain social or societal issues. What happens
    when that starts becoming, either being woven into proxy
    fights, board seats, investment policy? How do you avoid that?
        Ms. Simpson. It is avoided by having the fiduciary set out
    at the highest law of the land. There is no room in California
    law for the situation that you just described to take place.
        Mr. Schweikert. Okay. So in that sort of situation--so
    would you ever consider that maybe those who is in financial
    services should consider maybe even a Federal additional
    shoring up of that fiduciary? That if we ever saw a
    particularly public pension system that actually had a
    shortfall, so they said, that if they were to violate that
    safety, soundness, yield sort of principle, that there might be
    penalties to be paid.
        I mean would that be a rational approach for us just to
    make sure that the fidelity to the fiduciary, if you can say it
    that way, is upheld?
        Ms. Simpson. My thought here is that you already have that.
    California constitution on fiduciary duty--
        Mr. Schweikert. No, no. I am thinking sort of across the
    land.
        Ms. Simpson. Then you are into a legal discussion about
    Federal versus state law rights. I do want to repeat, and I
    don't think you were here, sir. CalPERS went into the financial
    crisis over funded. We lost $70 billion.
        Mr. Schweikert. Well, we are actually--I know you say
    that--
        Ms. Simpson. And--
        Mr. Schweikert. --but I actually have a couple things in
    front of me that I should talk about there were some actuarial
    issues. Now, it wasn't actually CalPERS. It was your political,
    you know, some things done in the 1980s, some things done in
    the 1990s, some participation that would have done in your
    retirement curve. But that--
        Ms. Simpson. Yes, you can find all of that on our website.
    We are very transparent.
        Mr. Schweikert. Yes. No, no. And I actually love your
    website. And so--
        Ms. Simpson. Thank you.
        Mr. Schweikert. Okay, and I had two other questions, but
    Mr. Copland, you had something you wanted to share--
        Mr. Copland. Yes. Well, I just wanted to--
        Mr. Schweikert. --but I beg you to do it quickly.
        Mr. Copland. --point out to the committee that I also co-
    authored a report looking at this specific pension fund issue
    in February of this year with my Manhattan Institute colleague,
    Steve Malanga. It is noted in footnote 106 on page 30 of my
    written testimony. So you can check it out if you--
        Mr. Schweikert. I can't believe I missed that footnote.
        Mr. Copland. But it is--in fact, CalPERS has at least 111
    directives on environmental social governance, ESG issues. And
    in fact, in 2000, the board of CalPERS decided to invest in a
    lot of state and local real estate, doubled the exposure in
    real estate in the portfolio that CalPERS held over the next 6
    years.
        And that is one reason why their real estate portfolio
    dropped in half by 2009.
        Mr. Schweikert. Well--
        Mr. Copland. So I think these are real important things.
    And we flesh out a lot of the principles for governing.
        Mr. Schweikert. Forgive me because we are done, and I am
    going to steal another 15 seconds. Look, I always want to make
    a little difference between what are investment decisions and
    what are sort of societal passions of those who end up on an
    investment committee.
        You and I can argue about often where we place money, was
    it smart, did it meet the safety and soundness? This here sort
    of violates the concept of I need to put safety and soundness
    and yield.
        And if there is a second round, Ms. Stuckey, I have a
    fascination with also why we don't do a better job sort of
    using the Internet, electronic disclosure, harmonization of
    timelines, even down to, okay, set back those thresholds of
    something for a proxy fight, but have the participation of that
    be requested through a website.
        So you may be able to raise the thresholds, but it is a
    clear, cleaner, faster, easier way to get there and less
    costly.
        I yield back, Mr. Chairman. Thank you.
        Chairman Garrett. Yes, the gentleman yields back.
        Mr. Ellison is now recognized for 5 minutes.
        Mr. Ellison. I thank the chairman and the ranking member.
    You know, we have been talking quite a bit about corporate
    governance all week long, and I don't think anybody in America
    missed the situation in the Senate where John Stumpf, CEO of
    Wells Fargo was questioned and in the banking hearing yesterday
    by every senator.
        The CEO of Wells Fargo created a corporate culture that
    demanded low level bankers, folks making 12 to 13 bucks an hour
    to sell customers eight different products. You know, I guess I
    am not surprised, but it obviously led to a very difficult
    situation, 5,300 people selling over, making over 2 million
    fraudulent transactions.
        So to me, you know, I think that the real question should
    be how do we promote good corporate governance, protect the
    public? I guess I don't accept that the only legitimate
    corporate governance issues are accessing capital and providing
    shareholder value.
        You know, I think what some people might call, you know,
    their passions, I think there are a lot of other legitimate
    stakeholders whose interests should be brought into
    consideration in terms of corporate governance. Customers,
    community members, employees, the environment and, of course,
    shareholders, I think are all legitimate conversations and
    should be part of the overall question.
        You know, in Sarbanes-Oxley and in Dodd-Frank Wall Street
    Reform and Consumer Protection Act, we clarified what good
    corporate citizenship means. Obviously, it should not require
    staffers to open 2 million fraudulent accounts in order to earn
    a living wage.
        But it should be more than that. And when executives enable
    fraud there should be consequences. One of those consequences
    should be clawbacks of executive compensation. And we know who
    the people who would be responsible.
        And whether or not they admit to the responsibility that
    they bear in these over 2 million fraudulent transactions are
    not, when you are running the show, you can hardly deny that
    you were deeply implicated in it. And there should be some
    level of accountability.
        And I think that it is this single-minded pursuit of just
    shareholder value that probably leads to problems like this.
    And so I think it is good that we open up a broader lens.
        So, let me just ask a few questions. Ms. Simpson, does
    CalPERS support Dodd-Frank's clawback requirement?
        Ms. Simpson. Thank you, sir. We support the clawback
    provision in full. And prior to that there was a longstanding
    policy of CalPERS to ask companies to have a clawback provision
    because if someone is paid money that they have not earned,
    then you are transferring funds from the shareowners. And we
    have a sacred duty, a fiduciary duty to our members.
        And if money is being wasted, or distributed to those who
    did not earn it, it is surely a matter of common sense, common
    economics. It is sad in a way that we have to request a rule to
    put something that obvious into effect.
        But it is a good example of where Dodd-Frank did help to
    strengthen the corporate governance framework. And it is only a
    matter of regret that the SEC hasn't had the time and the
    funding to complete the job.
        Mr. Ellison. You know, also Ms. Simpson, I would like to
    get your opinion, can you describe the importance of say-on-pay
    provisions? You know, there is a provision that would require
    companies to disclose a ratio of the compensation of its chief
    executive officer to the median compensation of employees.
        I guess one of the witnesses didn't think this was a
    meritorious idea. But I wonder if you would offer your views on
    what you think about this particular provision?
        Ms. Simpson. We found say-on-pay to be extremely beneficial
    because it has gotten companies' attention. I would say in
    CalPERS' experience in the 10,000 companies we invest in, as
    say-on-pay has become introduced into different markets,
    companies want to answer your phone call, because there is now
    a vote on something of great importance to the executives. So
    we have their attention. That is very important.
        Secondly, what it has done is give us a halfway step if we
    are unhappy with the board's decisions. I think that many
    investors worry if pay is going wrong, is this something where
    you should just vote against board members, the compensation
    committee?
        So I think many investors have found it is a very important
    signal. In other words, you can say no, but you can say it in a
    safe way. We typically have voted it against 20 percent of the
    proposals that have come our way.
        There is much in excess actually of the proxy advisory
    firms that were being discussed earlier as though they lead the
    investors by the nose. And I would say quite the reverse, so a
    good example of that.
        And also we have seen improvement as a result of investors'
    greater oversight, for example, lengthening of performance
    periods for pay plans. And that really gets at the heart of a
    real challenge in the capital markets, which is getting
    incentives aligned with the long term so that executives are
    thinking long term in the same way that we the owners are.
        Mr. Ellison. Thank you, Ms. Simpson.
        Chairman Garrett. Thank you. The gentleman yields back.
        Mr. Hill is recognized now for 5 minutes.
        Mr. Hill. I thank the chairman, and I thank the panel for
    being here this afternoon. Good discussion so far and one that
    certainly the committee's been interested in for the past year.
    I do want to start out talking about the proxy firms, ISS and
    Glass Lewis. And I haven't heard much discussion about them
    since I have been in the room.
        So I would like to have the panel comment on those. The
    question would be what are the feelings about them serving in
    this capacity as sort of the proxy advisor and vote
    recommender, and yet they sell services to the companies that
    they oversee.
        We will start with you Governor Engler?
        Mr. Engler. We stated on the record and have written to the
    SEC relative to our belief that there are conflicts that exist
    when you are on both sides of the transaction, where you are on
    one hand making recommendations relative to different aspects
    of corporate governance.
        And at the same time offering to sell to the company a
    strategy for them to solve those problems and then get their
    score higher. So we have encouraged some of the work that has
    been done, both in Congress and some of the work that is under
    way at the SEC to begin to address this.
        Mr. Hill. Is your problem with the fact that it is just on
    paper an obvious sort of conflict, or do you think that they
    are--you don't agree with the advice?
        Mr. Engler. Well, sometimes the advice is based on
    incomplete, inaccurate information. And one of the remedies
    that we have suggested is that before the proxy firms go out,
    and sometimes they go out very late in the process, and there
    is no time for the company to correct the record, that there
    ought to be, if you will, a draft report that at least the
    company has an opportunity to comment on and say, you are
    factually wrong.
        There have been these cases where it was discovered and
    corrected, but there have been other cases where it simply came
    too late and it was not able to be corrected.
        Mr. Hill. Yes. Ms. Simpson--I will return to you Mr.
    Copland, but let me ask Ms. Simpson about that, just
    representing from the pension side, your comments. You are
    certainly big enough, if you wanted to, you could not rely on
    proxy advisory firms. So what is your view on that?
        Ms. Simpson. Thank you for the question. We don't rely on
    proxy firms. As you rightly say, CalPERS has a very large,
    well-qualified staff. We engage with typically over 1,000
    companies a year directly talking, visiting them, them visiting
    us. And our primary source of information is the company. And
    that is extremely important to us.
        However, we do find it useful, as we do with all of our
    financial decisions, to have a wide range of different
    information. And you can see from CalPERS' proxy voting record
    that it doesn't reflect the advice of the proxy voting firms
    that we use.
        But on any investment decision we buy data, we buy
    information, Bloomberg, MSCI, Standard & Poor's, Moody's, a
    wide range of financial analysis. And we see this as helpful as
    going into the mix.
        Mr. Hill. What--
        Ms. Simpson. So we make our own voting decisions. That is
    essential.
        Mr. Hill. Yes. You can do that, and I think that is
    terrific, but a lot of people, like the rest of us, you know,
    can't. And so I am an economic investor. I am interested in
    maximizing the value long term of my retirement assets, for
    example. And so I, as a personal investor, I might not put a
    big premium on ESG-type proposals, personally, let us say.
        But don't I have to live with that because the 401(k) or
    the mutual fund companies that I use a lot of them, are using
    one of these two companies? So doesn't it take away a right
    maybe of an individual investor?
        Mr. Copland, what do you think on that?
        Mr. Copland. Yes, I do think that is a significant
    consideration. And I have done a fair amount of research on
    proxy advisory firms. It is available in Section--I think it is
    Section 4--no, Section 5 of my written testimony. And ISS has a
    hard job, as does Glass Lewis. I want to make that clear at the
    outset.
        I mean by its own estimation, it helps 1,600 clients
    execute 8.5 million ballots, representing more than 2 trillion
    shares annually. And to do that, it has an annual budget of
    about $120 million, as of 2 years ago when it was owned by a
    publicly traded company, with about 700 employees. So that is a
    very tricky job to execute.
        The problem is, as I stated before, but the problem is
    there is a misalignment between what ISS does and what the
    median shareholder wants. And ISS, nevertheless, has a
    significant impact on the percentage vote that you see on--
    because of smaller institutional investors. Big pension funds
    don't have to compete for capital. Mutual funds out there in
    the market do.
        And so they are doing everything possible to minimize their
    cost structure. What that means is being a more efficient voter
    isn't a smart strategy for them. A big company, like a Vanguard
    or a Fidelity can do it, but smaller mutual funds aren't going
    to do it. They are going to rely on the proxy advisor.
        And what that means is based on our econometric analysis,
    controlling for other factors, ISS acts as effectively a 15
    percent owner of the Fortune 250 when it comes to shareholder
    proposal voting. That is an enormous amount of influence that
    is placed into play.
        Now, it is not necessarily going to tip the ballots over.
    These social policy proposals that ISS is more likely to
    support, they are eight times more likely to support a
    shareholder proposal than the median investor is. That is what
    our research finds.
        So what it means though, is that ISS can be subject to
    capture by the institutional investors that have an interest in
    certain issues, be they social investing funds or be they
    public pension funds that are often led by, as New York's funds
    are, partisan elected officials.
        And in doing so, they can move ISS' positions away from
    that of the median shareholder. And precisely because of these
    very low resubmission thresholds that the governor and Darla
    talked about, it means ISS can effectively keep an item on the
    ballot indefinitely, even when 88 percent of shareholders are
    voting against it every year.
        Chairman Garrett. The gentleman's time has expired.
        I think we have been around one time and without objection
    we go around a second time as we wait. So I guess it is, as we
    go back and forth.
        Mr. Sherman. Oh, good.
        Chairman Garrett. I will go.
        Mr. Sherman. Ms. Simpson, obviously you make your own
    voting decisions--
        Chairman Garrett. Never mind. I will restart the clock. I
    was going to make my comment, but--
        Mr. Sherman. Okay. Not everyone has your large a staff.
    Would you prefer your fellow voters and shareholders get
    professional advice or just rubber-stamp whatever management
    tells them?
        Ms. Simpson. Independent advice is always a good idea. The
    interests of shareowners and management, they are usually
    pretty well aligned. You know, ultimately we are on the same
    side.
        Mr. Sherman. Yes.
        Ms. Simpson. We want companies to do well. We want
    prosperity. We want good returns. Unfortunately--
        Mr. Sherman. Okay. I represent a lot of your members. I
    couldn't agree more.
        Ms. Simpson. But unfortunately there are areas of conflict.
    Executive compensation is a great idea. And for a small
    investor to look at that executive compensation disclosure, so
    complicated, and working out how it has changed over time, how
    to compare it with other companies, how to relate it to the
    financial performance.
        Gee whiz, you need a Ph.D. in something to work that out.
    So I think that in the free flow of information in the
    markets--
        Mr. Sherman. Would you feel better as a major owner of
    Wells Fargo if they had a good clawback procedure that would
    make sure that any executive who perhaps left the company
    recently with over $100 million would have their compensation
    adjusted for what was really happening?
        Ms. Simpson. CalPERS has had a policy on clawbacks in favor
    of clawbacks, which is simply unearned rewards, which come out
    of shareowner funds. We have had that policy before Dodd-Frank.
        We will continue to have it and hope the SEC rulemaking is
    possible and, you know, it will all be finished and wrapped up
    soon. But it is an essential--
        Mr. Sherman. Yes.
        Ms. Simpson. --it is an essential principle of fairness, of
    common sense, of alignment of interests.
        Mr. Sherman. I would point out if Dodd-Frank had been
    promptly implemented, Wells Fargo executives might have the
    right incentives and Wells Fargo might have 2 million fewer
    accounts. But it has taken the SEC a long time. We hope they
    get there.
        I will also point out that if the chairman's legislation is
    passed, then all future corporations will not have the
    clawbacks that would have been relevant to Wells Fargo.
        Now, I have heard an estimate of $90 million as the cost of
    some level of shareholder democracy. One of the witnesses said
    that that was the cost of dealing with these proposals, didn't
    include board member time.
        How much shareholder value is lost because of crony
    capitalism, where boards prevent mergers, acquisitions that
    would have increased shareholder value but were not in the
    interest of the board members and especially not in the
    interest of the management that kind of selected them?
        Do you think that if every board decision on whether to
    agree to a merger was made in the shareholder interest that
    shareholders might be enriched by an amount, say, over $90
    million?
        Ms. Simpson. Looking at the numbers just on Wells Fargo, we
    have about $1 billion in that company, equity and debt. And
    then we have lost--
        Mr. Sherman. So you have lost--
        Ms. Simpson. --I would have to say about 11 percent.
        Mr. Sherman. Yes.
        Ms. Simpson. So something over $90 million, just in the
    one--
        Mr. Sherman. Just on that--
        Ms. Simpson. --reaction throughout the market that--
        Mr. Sherman. --one company just from one--
        Ms. Simpson. Yes.
        Mr. Sherman. --series of 2 million decisions that were not
    in the public interest. And there can, significant--you know,
    corporations choose to incorporate under the laws of whatever
    state does the best job of protecting management and furthering
    the goals of crony capitalism.
        Would CalPERS be in a better position if the corporation
    codes of all the states had the same level of shareholder
    protection that California does? At least as applicable to the
    two or--you know, the major publicly traded corporations?
        Ms. Simpson. Well, two of the shareowner rights that we
    think are most important are majority voting. That is the
    ability to vote no, as well as yes, on a directors' election,
    and proxy access, which gives us, the owners, the right to put
    forward candidates on to the ballot.
        And I am going to have to ask my learned colleagues. There
    are one or two states which have those provisions, but the main
    states where incorporation is popular, Delaware, California and
    more actually do not have that in the default--
        Mr. Sherman. Delaware is out there advertising, in effect,
    we will protect management. We will defeat efforts to enhance
    shareholder value. Incorporate here. And needless to say, that
    has caught the attention of management. We ought to have
    shareholder protections that are national in nature. I see the
    governor would like to comment, but I think I am--
        Chairman Garrett. Well, since we are already going over
    here a little bit.
        Mr. Engler. Well, I am amused at these questions and the
    aspersions being cast here that there are these boards of
    directors running amok, somehow doing something that is in a
    breach of their fiduciary duty. And I am also somewhat assumed
    at citing CalPERS. You have mentioned how many constituents. I
    am looking at the Bloomberg report.
        CalPERS last year earned a rousing 0.6 return and Ted
    Eliopoulos, the chief investment officer, said, you know, that
    is below the assumed rate of 7.5 percent. He said, ``That's a
    significant policy issue.''
        If I were worried about somebody's dad, I would be worried
    about somebody who is hoping to get a pension from CalPERS with
    that puny rate of return. And maybe it is crony capitalism that
    is doing it. Maybe it is investment strategy. I don't know,
    but--
        Mr. Sherman. Good Governor, not everyone can make a 7.5
    percent return in this particular economy.
        Mr. Engler. Zero point six.
        Mr. Sherman. And many, many investors lost a lot of money,
    last year. And she just lost--or rather the organization she
    represents, just lost hundreds of millions of dollars because
    of the bad corporate governance that we would like to see
    ended, by enforcing and passing the regulations for clawback,
    rather than supporting legislation that would eliminate this.
        Mr. Engler. I don't think that is factually accurate and
    is--
        Mr. Sherman. You don't think she has lost hundreds of
    millions of dollars on Wells Fargo stock?
        Mr. Engler. Nope.
        Mr. Sherman. As the stock price has--
        Ms. Simpson. I would be happy to--
        Mr. Engler. As of what date?
        Ms. Simpson. --share the numbers. No, it is that--
        Mr. Engler. As of when?
        Ms. Simpson. I am happy to follow up with the detail, and
    we can--
        Mr. Sherman. Anyone who owned a billion dollars, that level
    of corporate stock has lost an awful lot of money as the stock
    has declined by 10 percent--as we have learned that management
    can't prevent 2 million frauds.
        Mr. Engler. They did fire 5,300 employees that they found
    and that--
        Mr. Sherman. That they hired--
        Chairman Garrett. The gentleman's time--we are going down a
    different road here from corporate governance here. So--
        Mr. Sherman. Thank you.
        Chairman Garrett. So the gentleman's time has expired.
        I recognize myself for 5 minutes. And I wasn't going to go
    down this road, but Ms. Simpson, one of the previous questions
    was with regard to clawback provisions. And I am sort of
    growing in this field as far as clawback provisions.
        Because you look back at 2008 and the crisis of 2008, and
    you look at the larger financial institutions. You look at the
    management of those institutions at the time. And the collapse
    that occurred in them.
        You looked at the banking and financial institutions that
    were then bailed out by all of us, by the American taxpayers.
    But there was never any clawback in those cases, was there?
        Ms. Simpson. Yes--
        Chairman Garrett. Not to speak of.
        Ms. Simpson. No, we had a policy throughout those periods.
    And it was dubbed pay for failure.
        But Darla has a comment about Sarbanes-Oxley.
        Ms. Stuckey. Sarbanes-Oxley has a clawback provision for
    the financial institutions, and most all of the big finance--
    well, all the big financial institutions I can almost assure
    you have clawback provisions.
        Chairman Garrett. But we saw a number of the CEOs and the
    COOs getting fairly large salaries during that time and
    afterwards. And we saw those companies then basically fail or
    be wrapped around by the government. And I don't remember that
    I saw them, any clawbacks from their salaries. And then we also
    saw--
        Ms. Stuckey. What the reason why you might not have seen
    it, is because they don't always publish who they take money
    back from, and--
        Chairman Garrett. Well, I have asked some of them
    actually--
        Ms. Stuckey. Okay.
        Chairman Garrett. --these former COOs whether they were
    clawed back and they said no. And we also saw another thing, a
    phenomena that was called--what was it called, bureaucratic
    parachutes for some of these companies who then when their COOs
    or what have you, leave the companies and they basically get
    paid to go into government.
        But, heck, we see that our own secretary of Treasury, don't
    we? That they get paid lavish salaries. The company fails. And
    there are absolutely no clawbacks.
        Mr. Copland?
        Mr. Copland. Well, yes, I just want to shed some empirical
    light on this, because you have a number of shareholder
    proposals that involve executive claw backs or what are so-
    called golden parachutes that really change in control or
    government service types of provisions. They almost universally
    are voted down by a majority of shareholders.
        Part of the reason for that is I think that there is a
    concern, in terms of recruiting the right talent about that.
    Things like government service are things that a company's
    shareholders may want to have.
        And what they are usually are involving are situations
    where they have options that haven't vested and they will
    accelerate those so there is no conflict of interest for the
    executive when entering the government. But I just want to
    emphasize that--
        Chairman Garrett. Well, let me finish--
        Mr. Copland. --by and large shareholders vote against those
    proposals.
        Chairman Garrett. Let me just go to the Governor Engler
    here. And some--one of my opening comments, let us talk back
    again. This is the no-action letters by the SEC. Right? You saw
    them back in Cracker Barrel in 1997.
        I made reference to the one by Mary Jo White back in 2015,
    where she reversed course on that. Can you spend 30 seconds on
    that, of the process that the SEC currently uses. The reversal
    process that the SEC currently has engaged in.
        And so does the current no-action process, is it an
    effective method that they are using right now? Or is this
    creating uncertainty, as I guess they call it, a decentralized
    issue by issue process that is going on right now in the
    market?
        Mr. Engler. It certainly is issue by issue, but I would say
    it is the uncertainty is what is the problem in the--I am
    looking for my written--oh, there we go. Thank you. It was in
    the broader testimony, I didn't get a chance to speak this, but
    we had suggested revisions to the no-action letter process.
        And we said since it is done at the staff level, it kind
    of--we were arguing maybe it ought to come up to the actual
    appointees, the commissioners themselves, because they actually
    bear the ultimately responsibility. And when you get it down at
    the staff level, issue by issue, situation by situation, it
    leads to inconsistent guidance. And that is the difficulty.
        Chairman Garrett. And I keep going off of the previous
    comment prior to this as for--Mr. Copland, you were making
    reference, and I am trying to--I can't get your exact words,
    but I will throw it out and you can bring me back to it.
        So you are saying, some of these institutions or actually
    investment firms are, you know, politicized, if you say, as far
    as who is actually running them. They are politicians, and I
    don't think that was your exact words. Can you talk again about
    that? Because as their returns, their involvement, their
    position on the issues versus what you call the average?
        Mr. Copland. Yes, what Professor Woidtke's study which
    should be included in the record--
        Chairman Garrett. Yep.
        Mr. Copland. --showed was that the social issue investing,
    when that was the focus of the shareholder proposal activism by
    public pension funds--
        Chairman Garrett. Yep.
        Mr. Copland. --they had lower--it was associated with lower
    firm value than with those focused exclusively on other issues,
    or than private pension funds, which was really sort of the
    test case there.
        Chairman Garrett. And then you push that to who is actually
    making these decisions. And I thought you referred to, well,
    these are appointed people, elected officials?
        Mr. Copland. Well, that is certainly part of it. Part of
    the Copland-Malanga paper that I referenced that came out in
    February, is looking at the actual board governance of the
    pension funds.
        Chairman Garrett. Right. Right.
        Mr. Copland. They focus a lot on the board governance of
    corporations. But when you actually look at their board
    governance, it tends to be abysmal by the same standards they
    want to hold corporations to.
        And looking at, say, New York, where the sole fiduciary is
    an elected partisan official and then is filing most of the
    shareholder proposals--the funds are filing most of the
    shareholder proposals involving corporate political spending,
    we think that is an issue particularly where we have found an
    association between the likelihood that a Fortune 250 company
    draws a shareholder proposal involving corporate political
    spending and lobbying, and the propensity of that company's
    PACs and executives to give disproportionally to Republican
    candidates.
        Chairman Garrett. So is it fair to say the bottom line on
    that is that you see a poorer rate of return when these social
    issues are involved where, and it is truly the case of crony
    capitalism, but it is crony capitalism in the worst sense
    because it is connected to politics and the politicians being
    involved with it.
        Mr. Copland. Sure, sure. At the end of the day, the pension
    funds don't have to compete for capital. And at the end of the
    day, often there are constitutional backstops so the taxpayers
    will make up the deficits that the governor was talking about.
        Chairman Garrett. Got you. Thank you.
        Mr. Ellison? You are recognized.
        Mr. Ellison. Thank you. Now, I would like to just ask about
    what the potential impact of some of the provisions we are
    looking at regarding disclosure might be.
        Section 450 and 451 of the chairman's Wrong Choice Act
    would repeal the registration requirement for private equity
    fund advisors in Dodd-Frank and with it all the other
    protections in the Investment Advisors Act, aside from books
    and recordkeeping requirements that the SEC may impose.
        Similarly, we just considered H.R. 5424 on the House floor,
    which would have diminished the number of protections for
    investors in private equity funds, including basic disclosures
    like the change in ownership of advisor funds--a fund's
    advisor.
        And so I wonder if you all care to share any views on this
    issue? I would like to know what you think the importance of
    the current disclosures and other requirements that apply to
    private equity advisors and whether there is a need for even
    greater disclosure.
        Maybe we can go to other panelists but, I would like to
    start with Ms. Simpson.
        Ms. Simpson. Thank you for the question. Over half of
    CalPERS' portfolio is invested in public markets. But about a
    quarter is invested in private markets. And we have to
    understand that companies may begin in the private markets and
    graduate. And sometimes they are in the public markets and, you
    know, go back into the private markets.
        So for us, looking at the question of transparency and
    accountability, we are providers of capital into both public
    and private markets. So it is extremely important for us that
    the private equity universe matches our requirements for
    transparency and accountability. So this proposal is a matter
    of great regret.
        We don't think that it will assist with investors providing
    capital into this form of asset class. And it is one which is
    exceptionally important for our overall rate of return. So
    capital formation is just as important for companies coming to
    market as it is for those returning back to the private
    markets. And we need to see a level playing field.
        We think that is good for capital formation, and therefore,
    it is ultimately good for the companies, too. And if the
    companies do well, we do well. And that is how our investment
    returns will improve, is if the market returns improve, which
    is why the governance agenda is so important.
        Mr. Ellison. Any other panelists want to offer a view?
        Mr. Copland. Well, I will offer one, just in the sense that
    I think it is important to distinguish between a publicly
    traded corporation or a broad-based mutual fund and a private
    equity fund.
        I mean we have a system of securities laws that applies to
    publicly traded corporation under the premise that we are
    protecting small shareholders that may not be sophisticated,
    and so we want to make sure that enough information is getting
    out there to protect those small investors. Private equity
    funds are quite different.
        There is a reason why we are seeing more private equity,
    144A types of capital, being raised. They are raised from so-
    called sophisticated investors, qualified investors, tend to be
    high net worth individuals and often pension funds and other
    investors, mutual funds, et cetera, that can take positions in
    those companies. So those are more sophisticated investors.
        I don't think it is correct to say that there should be an
    apples-to-apples disclosure regime between the two, because
    they are two very different types of investment.
        Representative Sherman, who is standing up, made the case
    earlier that maybe it is the private equity markets and the
    vibrancy of private capital that partially explains the
    decrease, the significant decrease, we have seen in publicly
    traded corporations over time.
        That may or may not be true, but we certainly don't want to
    discourage that option by applying rules that are intended for
    small investors to qualified, sophisticated investors.
        Mr. Ellison. Thanks a lot.
        I yield back.
        Chairman Garrett. Thank you. The gentleman yields back.
        The gentleman from California will have the last word, I
    believe.
        Mr. Royce. Thank you very much, Mr. Chairman. Thank you
    witnesses for being with us today. And, you know, I guess one
    of the things that really weighs on us, since the amount of
    income per worker is partly dependent upon investment per
    worker, and that is dependent upon productivity, which is
    dependent upon the money in our capital markets that go in it,
    and were invested.
        And yet, if we looked at this trend, the U.S. has half as
    many publicly traded companies traded on exchanges today, as it
    did in 1996. That is a pretty precipitous drop. And that trend
    is particularly alarming for a Californian like myself because,
    you know, the startup capital of the world is out in our neck
    of the woods.
        And so firms that would otherwise go public have been
    deterred and arguably, if you listen to the firms, they say
    they are deterred by unnecessary hurdles on compliance, which
    what was it Aristotle said, balance in all things which are
    unbalanced?
        And the consequences of that is unrealized economic growth
    that might otherwise occur, and job creation that might
    otherwise be driven.
        So Governor Engler, the stockholder proposal resubmission
    thresholds have not been changed since President Eisenhower's
    term here, and clearly they are outdated.
        But Rule 14a-8, also allows shareholders who have held
    $2,000 of a company's stock for 1 year to submit a proposal to
    be included in a company's proxy statement. So looking at that
    in its totality, what are the consequences for companies and
    everyday shareholders of this seemingly arbitrary and
    relatively low $2,000 floor? And I am just thinking this
    through.
        For example, just 20 shares or 0.000000003 percent of
    Apple's worth then you have that included in the company's
    proxy statement. How will scaling this barrier of entry to a
    company's valuation benefit shareholders and how would it
    benefit public companies? How would it benefit the economy?
        Mr. Engler. Congressman, it is a great question. I think
    when there is additional cost, whatever is the reason for it,
    and this is a set of circumstances that do raise costs. You
    heard a $90 million number tossed out earlier, but depending on
    the company, it can be more or less substantial.
        There is reputation risk also that can be brought into
    play. That is hard to put a value on. But it raises costs, and
    I would argue then diminishes shareholder value. And that
    shouldn't be a desirable thing, especially when the other side
    of this argument is that the question, or the proposal in this
    case, might have been around the track two, three or more times
    and has very low likelihood of any success.
        Yet it does distract however much from management time,
    from legal time, and it adds also, I think, complexity to a
    proxy statement which ought to be focused, as I testified
    earlier, in the most material things that can help an investor
    decide do I want to own this stock, or should I sell it?
        Mr. Royce. So again, we have half as many publicly listed
    companies trading on the exchanges. So I will ask you Governor
    Engler also about no-action letter decisions from the SEC that
    have been arguably erratic and inconsistent, especially since
    the Whole Foods case.
        Mr. Engler. Right.
        Mr. Royce. How has the growing failure to dismiss
    immaterial proposals impacted shareholders? And is keeping this
    decision process at the commission staff level appropriate?
    What does--
        Mr. Engler. Well, I--
        Mr. Royce. --Congress do here? How could Congress help on
    this?
        Mr. Engler. Congressman, I think that the first step is can
    we get the SEC back to work on this and can the commission
    itself address this? They have it within their own rulemaking
    authority to handle this problem.
        It was really created, we felt, by the staff initially. We
    are surprised that it wasn't addressed. There is a division
    clearly in thinking over at the commission, and so they punted
    on it. But the punt ended up putting a lot more, I would say,
    proposals with relatively little merit before shareholders, and
    it was unnecessary.
        Mr. Royce. Well, I thank you. I thank the panel here and
    Mr. Chairman, I think my time has expired.
        Chairman Garrett. I am sorry. The gentleman yields.
        Mr. Royce. I yield.
        Chairman Garrett. The gentleman yields back. And with that,
    I thank you all again for your time and input and the answering
    of the questions. We obviously touched upon some things that
    were off where we thought we were going to go, But that is all
    good as well.
        The Chair notes that some Members may have additional
    questions for this panel, which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 5 legislative days for Members to submit written questions
    to these witnesses and to place their responses in the record.
    Also, without objection, Members will have 5 legislative days
    to submit extraneous materials to the Chair for inclusion in
    the record.
        And with that, I thank all the witnesses. And without
    objection, this hearing is adjourned.
        [Whereupon, at 4:58 p.m., the hearing was adjourned.]

                                A P P E N D I X

                               September 21, 2016

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                               [all]