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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 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

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 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS AND GOVERNMENT SPONSORED ENTERPRISES

SCOTT GARRETT, New Jersey, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

RUBE ́ N HINOJOSA, Texas 

STEPHEN F. LYNCH, Massachusetts 

ED PERLMUTTER, Colorado 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

PATRICK MURPHY, Florida 

(V) 

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 

(1) 

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. 

2 

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 workVerDate Nov 24 2008 20:30 Mar 08, 2018 Jkt 025946 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 K:\DOCS\25946.TXT TERI
3 

ers 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. 

4 

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. 

5 

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. 

6 

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 

7 

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 largVerDate Nov 24 2008 20:30 Mar 08, 2018 Jkt 025946 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\25946.TXT TERI
8 

est 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. 

9 

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. 

10 

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. 

11 

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. 

12 

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. 

13 

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 longterm 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 pro- posals. 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 comVerDate Nov 24 2008 20:30 Mar 08, 2018 Jkt 025946 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\25946.TXT TERI
14 

pany, 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. 

15 

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 wellknown 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. 

16 

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 

17 

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, 

18 

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 

19 

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— 

20 

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. 

21 

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. 

22 

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. 

23 

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 cuVerDate Nov 24 2008 20:30 Mar 08, 2018 Jkt 025946 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 K:\DOCS\25946.TXT TERI
24 

riosity, 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— 

25 

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 

26 

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 

27 

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. 

28 

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 

29 

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. 

30 

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 

31 

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— 

32 

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? 

33 

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. 

34 

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 

35 

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 applesto-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. 

36 

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 

37 

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.] 

(39) 

A P P E N D I X 

September 21, 2016 

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