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35–402 PDF 2007

EMPOWERING SHAREHOLDERS

ON EXECUTIVE COMPENSATION:

H.R. 1257, THE SHAREHOLDER VOTE

ON EXECUTIVE COMPENSATION ACT

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 8, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–10

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MARSHA BLACKBURN, Tennessee 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

March 8, 2007 ................................................................................................... 1

Appendix: 

March 8, 2007 ................................................................................................... 59

WITNESSES 

THURSDAY, MARCH 8, 2007

Bebchuk, Lucian A., William J. Friedman and Alicia Townsend Friedman 

Professor of Law, Economics, and Finance, Director of the Corporate Governance Program, Harvard Law School ............................................................. 8

Castellani, John J., President, Business Roundtable ........................................... 11

Davis, Stephen M., Fellow, Yale School of Management, The Millstein Center 

for Corporate Governance and Performance ...................................................... 14

Ferlauto, Richard, Director of Pension and Benefit Policy, American Federation of State, County and Municipal Employees ............................................... 9

Kaplan, Steven N., Neubauer Family Professor of Entrepeneurship and Finance, University of Chicago Graduate School of Business ............................. 15

Minow, Nell, Editor, The Corporate Library ......................................................... 17

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 60

Carson, Hon. Julia ............................................................................................ 63

Gillmor, Hon. Paul E. ....................................................................................... 64

Bebchuk, Lucian A. .......................................................................................... 65

Castellani, John J. ............................................................................................ 90

Davis, Stephen M. ............................................................................................ 103

Ferlauto, Richard .............................................................................................. 111

Kaplan, Steven N. ............................................................................................ 120

Minow, Nell ....................................................................................................... 148

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Frank, Hon. Barney: 

Letter from the California State Teachers’ Retirement System (CalSTRS) 151

Statement submitted by the HR Policy Association ...................................... 154

Campbell, Hon. John: 

Statement submitted by WorldatWork ........................................................... 160

(1)

EMPOWERING SHAREHOLDERS 

ON EXECUTIVE COMPENSATION: 

H.R. 1257, THE SHAREHOLDER VOTE 

ON EXECUTIVE COMPENSATION ACT 

Thursday, March 8, 2007

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Present: Representatives Frank, Maloney, Watt, Sherman, Moore 

of Kansas, Capuano, McCarthy, Baca, Lynch, Miller of North Carolina, Scott, Green, Cleaver, Moore of Wisconsin, Davis of Tennessee, Ellison, Klein, Wilson, Perlmutter; Bachus, Castle, Paul, 

Gillmor, Manzullo, Biggert, Capito, Feeney, Garrett, Barrett, 

Pearce, Neugebauer, McHenry, Campbell, Bachmann, and Roskam. 

The CHAIRMAN. This hearing of the Committee on Financial 

Services will now come to order. The procedures that we worked 

out, the ranking member and myself, are that we will have 10 minutes on each side for opening statements. The 10 minutes will be 

divided on our side between myself and the gentleman from Georgia, Mr. Scott. The 10 minutes on the minority side will be divided 

as the ranking member sees fit. I will begin with my statement in 

a minute. 

This is a hearing on executive compensation, and I will begin—

I was struck as I came in with a document I was handed that says 

salaries should be set by market forces, not government regulation. 

I agree. And if anyone finds a bill where by government regulation 

we set salaries, call me. I will help you stamp it out. I would also 

try to stamp out absolutely misleading, false, and incorrect arguments, but the First Amendment intrudes, fortunately. I am a 

great believer in peoples’ right to say outrageously inaccurate 

things. We have an example of it here. 

There have been past efforts to have the government set salaries. 

That would be a mistake. What the legislation we are discussing 

today contemplates is enhancing the ability of shareholders to vote 

on the salaries of those they employ. I say enhancing, because I do 

want to make it very clear—this was called to my attention by 

some who have done a lot more work in this field than I—that the 

bill we hope to pass could be interpreted as somehow being limiting 

and preemptive in that it might provide one avenue for a vote to 

2

the exclusion of others. That is definitely not the case, and we will 

make that clear. 

It is often the case when one is legislating that people who disagree with a bill, but aren’t ready to fully articulate their reasons 

why they disagree with the bill as it exists, impute to the bill other 

things that it does not contain, and oppose it on that basis. And 

now that I’m chairman, I may have this generic amendment proposed for every piece of legislation, which will say: This bill does 

not do what this bill does not do. That is a more controversial subject than people might think. 

We will make it very clear as we legislate that nothing in this 

bill either adds to or subtracts from existing rights of shareholders 

under whatever laws they operate, whatever the rules are of those 

corporations. This is simply an additional channel. 

What it says is that the shareholders of a company should be allowed to vote on an advisory basis to the board of directors on the 

compensation of the CEO. Years ago, this would have presented a 

difficulty in deciding what it was that would be presented to the 

shareholders. I congratulate Chairman Cox, who intervened in the 

process. Chairman Cox, correctly in my judgment, led the Securities and Exchange Commission to set rules by which companies 

have to present compensation to the public, including the shareholders. 

Now by the standards that this bill is being judged, that’s an 

intervention. He is requiring private corporations and boards of directors to do what they otherwise would not have done, what presumably some of them didn’t want to do, because if they wanted 

to do it, no one was stopping them. So I implored Chairman Cox’s 

intervention into this process in a procedural way. 

It has also made it easier for us to go forward, because we will 

not have to have controversy about what it is people are being 

asked to vote on; they will be asked to vote on what the SEC has 

proposed. And so what we are left with is this proposition. I have 

listened to a lot of my colleagues talk about how well the private 

market works. I have listened to people describe the fact that collective wisdom is often better than individual judgment, and that 

the collective wisdom of those who buy stocks and own stocks, as 

reflected in the stock market, is a very good place to make decisions. 

I am puzzled, however, when people who tell me that the collective ability of shareholders to make these decisions, and that the 

wisdom that they collectively can bring to this process, somehow 

evaporates when it comes to paying the people whom they hire to 

run companies. I do not understand how people who are in so many 

ways so intelligent collectively become so stupid when the question 

is whether they do or don’t agree with the table that is presented 

from the SEC. We will, of course, be discussing that further, and 

I now recognize the gentleman from Alabama for as much time as 

he consumes, and he will divide the 10 minutes among his members. 

Mr. BACHUS. I thank the chairman. And let me start by saying 

that this is a hearing, and ‘‘hearing’’ is what I intend to do—to listen, and to try not to come into this hearing with any preconceived 

3

notions, other than the basic notions I have of government and its 

proper role. 

There is concern among the American people about the level of 

executive pay. That concern is for various reasons expressed to me 

by my constituents. Some of them, obviously, are just concerned 

with the size of executive paychecks, and they’re just envious. But 

for every one of those, there are probably five or six who at least 

are showing real—everything from disgust to concern. Let me highlight some of their concerns. One of their concerns is that a company that’s successful, that is doing well, that has this level of executive pay, are all employees of that company participating in it? 

You know, are employees down the line, not just the top executives, 

are they participating? And if they’re not, what does this do to company morale? What does this do to their loyalty to the company? 

They should have an expectation that they’re participating in the 

success of the company because their efforts are a part of that success. They’re concerned on occasions that boards and CEO’s and 

consultants that either the CEO hires or the board hires are sort 

of all in collusion, and they’re all taking care of each other, but in 

the process, the average employee is not being taken care of. I 

think the number of people who work and yet do not have health 

care benefits, they obviously, when they see these rich compensation packages, and they’re working hard every day, maybe for that 

same corporation, they wonder about the equity of it. 

Another concern that we’ve all seen expressed the widening gap 

between the rich and the poor, and they wonder if this is a part 

of it or this is a driving factor or a contributor to that. These inequities, inequalities concern them. 

I have some of those concerns, many of them. But I also have another concern. My concern involves when you compare the United 

States with other countries and what their executives make, and 

I certainly think that American companies by and large are more 

successful in competing with those companies. 

But you wonder if we are paying a larger percentage of our corporate profits in revenues than these companies, and how is it affecting our ability to compete with those companies? When we’re 

diverting money away from research, new equipment, job training, 

and recruitment of skilled employees, I wonder if that affects us 

long term? 

Yes, it may—short term, it may not affect the company, but long 

term, in fact, this Congress on any given day, we have industries 

that come to us and say we need a tax break so that we can spend 

money on equipment, or so that we can spend money on research 

or we can spend money on innovation. Or when we say something 

about their profits and someone proposes a tax increase, they say 

wait a minute. Those profits are plowed back into research. Those 

profits are plowed back into exploration if it’s an oil company. If 

it’s a drug company, they say these profits are being turned 

around, and they’re used to develop new drugs to save people’s 

lives. 

Well, our concern is that, is this money going into new research 

for new drugs when we see a drug company executive retire with 

a $200 million package? 

4

Now, having said all that, this distress that there is tremendous 

concern out there, I have an abundance of caution because of the 

government’s track record in ‘‘fixing things.’’ I do believe that disclosure and transparency ought to be a given, and the SEC, for the 

first time since 1992, has taken a major step in that direction. And 

now, perhaps for the first time, the average shareholder can go to 

those reports and see exactly what that executive is paid. And I believe that, in and of itself, may play out and address this in a 

major way. 

I also applaud companies like Aflac, who have voluntarily agreed 

to let their shareholders participate in these decisions. 

I’ll close simply by saying, as I said at the beginning of the hearing, that I’ll continue to listen, and I will listen knowing that even 

if this is a problem, there may not be a government solution that 

makes it any better. 

The CHAIRMAN. The gentleman from Georgia is recognized for 5 

minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman, and this is an 

extraordinarily important hearing, and a very timely hearing. I 

quite honestly believe that a very critical part of our economic 

foundation as a free enterprise system is at stake, and what we do 

with this very serious and real threat to confidence in our system 

with our stockholders, our investors, and the American public. 

Our investor system is a crucible. It is the glue that holds our 

free society together. And that confidence is being shaken because 

of this wide disparity within the pay structure. Executives with 

clearly, quite honestly, obscene pay packages of $2-, $3-, or $400 

million, when the average rank-and-file worker in our system is not 

making a sufficient amount of money to actually provide for his 

day-to-day care. 

I want to thank Chairman Frank for having the courage and the 

vision to provide transparency in the executive pay package, and 

for giving me a chance to work with him as a lead co-sponsor on 

this important issue. 

Now let me just start out by saying that I want to make it clear 

that I am a capitalist. I graduated from the Wharton School of Finance with an MBA. And as many of you know, Wharton is the 

citadel of capitalism. I’ve been a stockholder ever since grade 

school. But I think that corporate executives should certainly be 

adequately compensated, and especially if they perform well. However, I am concerned that executive pay has become dangerously 

outsized when compared both in historical pay to CEO’s and rankand-file employees. 

Rank-and-file employees are being left behind in pay. You look 

back over our recent history. As early as the 1960’s, it was more 

like 60:1 in ratio. Perhaps the corporate executives at the top were 

making maybe about 60 times as much. Now it’s hovering in the 

thousands times as much. This is dangerous. And that’s why I say 

that our economic system is being threatened. 

There was a great philosopher, his name was Sir Edmund Burke, 

and Sir Edmund Burke made this profound statement. He said 

these words: ‘‘The only thing necessary for the triumph of evil is 

for good men to do nothing.’’ And that’s what I see this committee—we’re a group of good people—trying to do something. 

5

We’ve had some sterling examples recently from my own home 

State of Georgia of some good people and some good corporations 

who are doing something and providing the leadership and the vision. And let me just talk about two of them. Delta Airlines, for example. Delta Airlines is probably going to be recognized as probably the greatest American business recovery story in the history 

of American business, and they did it because they were good people trying to do something to triumph over what was wrong. 

Not only did they—they looked very carefully at their pay packages. They cut pay up and down the line, and at the head of the 

line of cutting that pay were the top executives, and they’re rebounding. A great story in Delta. 

Another one is Aflac. Let us commend Aflac for stepping up to 

the plate, and they not only got a hit, they hit a home run, because 

they’re setting the curve. And we’re going to see other companies 

do the same thing. 

Now this legislation is very simple. It will allow shareholders to 

hold yearly advisory votes on executive compensation plans. Further, it would allow an advisory vote on so-called golden parachute 

pay packages when the company is going through ownership 

changes. Both votes are nonbinding. However, they are powerful 

tools for providing transparency and accountability to the process. 

This is not extreme. This is a very moderate, common sense approach to dealing with a very, very serious issue that is threatening the very fabric of our free economic system. 

Again, I thank the chairman for providing the leadership. I look 

forward to the hearing, and I yield back the balance of my time. 

The CHAIRMAN. I thank the gentleman. And the Chair will now 

recognize the gentleman from Alabama to distribute the remaining 

time. He has 6 minutes left. 

Mr. BACHUS. Thank you. I yield 1 minute to the gentleman from 

Delaware, Mr. Castle. 

Mr. CASTLE. Well, I thank the ranking member a great deal. And 

I agree with the tenor and tone of what we are doing here, although I’m a little concerned about the legislation. I think we do 

need transparency. I think we need total disclosure in terms of executive packages. I believe that the SEC has actually done a good 

job in this, and perhaps that’s where it should happen. Their new 

disclosure rules, I think, speak to it. 

As a stockholder and a woebegone investor myself, I will tell you 

that I’m not sure I’m really capable of judging fair compensation 

packages, and I worry about that a little bit. I worry about those 

mailings you get from companies and whether you really read them 

or pay attention to them and whether that’s a good way to do it 

or not. But my mind is open, and I will listen to the chairman on 

that. 

My greatest concern, though, is with terminated CEO packages. 

I don’t know if they fall within the bounds of the agreement or not. 

They seem to exceed it, as far as I can see. That’s what gets in the 

newspaper and that’s what we read a lot about. All of a sudden you 

have a CEO who’s getting a $10 million, or $20 million, or $30 million package to walk away from a business which has essentially 

failed. It’s sort of like a short stop who hits 240 and leaves his 

6

team and goes to another team and they both seem to get $10- or 

$20 million is the best comparison I can give. 

And I’m not at all sure that we have a proper telescope as far 

as that is concerned, understanding exactly what is happening with 

the failed executives in terms of some of those termination packages. I don’t think paying to get rid of somebody is something we 

should do if that person has not actually succeeded. 

So I’m pleased with the panel. I’m pleased to listen to the testimony, and I have an open mind to the legislation, but we’re certainly approaching a problem which I think needs to be addressed. 

I thank Mr. Bachus for yielding me the time, and I yield back. 

Mr. BACHUS. I yield 3 minutes to the gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. And I’d also like to 

thank the witnesses for your testimony that you’re about to give. 

I commend the chairman also for having this important discussion 

today, and I would like to begin my comments with just one small 

observation. It was just about a week ago, I guess last week, during this committee’s markup of the views and estimates that our 

esteemed chairman had such great things to say about Chairman 

Cox and also the SEC. 

But in regards to members’ concerns from this side of the aisle 

about Sarbanes-Oxley, he indicated how we all just needed to be 

patient and let the SEC do its job, how we needed to wait and see 

if the new regulations would fix the problem. Interestingly, the 

SEC has now just recently issued new disclosure regulations on executive compensation. However, these new rules have not yet had 

the opportunity to bear any results yet. 

So without giving any time to see if these new SEC rules will 

work, this committee now is rushing ahead to consider legislation 

to address the problem. You know, I might be more inclined to address executive compensation legislatively if our chairman would 

be inclined to consider Sarbanes-Oxley reform legislation that I 

have introduced just recently as well. 

But to address the issue of executive compensation, I do have a 

variety of concerns with legislating in this area. For instance, this 

legislation would now allow shareholders to take a nonbinding vote 

on executive pay. I’m really not sure why our friends from across 

the aisle have this fascination with nonbinding votes, but this appears to be a topic coming up quite frequently during their brief 

tenure in the majority. 

I’m also concerned with the road that this legislation might lead 

us down. To use an oft-used analogy, this appears to me to be possibly letting the camel’s nose under the tent. And I just wonder 

where we might go next. Might the chairman support the idea, for 

example, of allowing Boston Red Sox fans the right to have a nonbinding vote on whether or not the Red Sox management should 

spend over $100 million on a Japanese pitcher who has never even 

thrown a pitch in the major leagues. 

You know, when you think about it, with the exorbitant ticket 

prices for baseball games these days and the fact that lower- and 

middle-income families are basically getting squeezed out of the 

ballpark, this may be something that this committee should be 

looking into next. 

7

I believe that executive compensation is something that this committee can consider and monitor, but I do believe also that the 

SEC’s new rules should be given a chance to be looked at and given 

a chance to work. 

So, thank you, Mr. Chairman, and I yield back. 

Mr. BACHUS. Thank you. I yield the remaining 2 minutes to the 

gentleman from Texas, Dr. Paul. 

Dr. PAUL. I thank the gentleman for yielding. I was pleased to 

hear the chairman of the committee say that he is in favor of market forces setting salaries, so I think this is a good step in the right 

direction in debating this issue. 

As many of you know, I happen to advocate the position that all 

social and economic relationships should be voluntary, and I think 

where the fallacy comes here with the regulations that we’re talking about is the interference with the voluntary contract between 

stockholders and management. So, therefore, it is a violation of a 

free market, because in the free market, what would happen is if 

salaries got out of whack, the shareholders have an option. They 

can sell their shares. That’s the voluntary arrangement that they 

have, rather than individuals coming in and saying that we can 

regulate a fair system. 

And the one other factor that I think we tend to forget about is 

the inflationary factor. Salaries become outrageous because governments create credit loosely, and it gravitates to certain areas, so 

you will have bubbles form. You have bubbles form on Wall Street, 

you have housing bubbles form. They make too much money when 

they’re selling too many houses. 

Then you have government interfering in places like economics 

or education. So, we pump a lot of money into education, teachers’ 

salaries don’t go up, but the bureaucrats’ salaries go up. 

Once we interfere in the marketplace, salaries will go up, and we 

can’t control where the credit goes. So unless we deal with that, we 

can’t deal with the obscene salaries and bonuses given to one company on Wall Street of $16.5 billion. I consider that obscene, but 

it’s not because we lack interference in the marketplace. We have 

too much interference by government through monetary policy, so 

I am not very optimistic that regulating and abusing the privilege 

of voluntary economic arrangements is any better than interfering 

in social arrangements when we’d like to make people act better 

and behave better. 

My position is very clear that we should be advocating volunteerism both economically and socially. I think we would all be 

a lot better off. 

I yield back. 

The CHAIRMAN. The time for opening statements agreed upon 

has expired, and we will now listen to the witnesses. They are seated in order, which I believe is random. And that’s probably the best 

way for us to proceed, and we will begin with Professor Lucian 

Bebchuk of Harvard Law School, who has done a lot of work on 

this subject. Professor Bebchuk, please. 

8

STATEMENT OF PROFESSOR LUCIAN A. BEBCHUK, WILLIAM J. 

FRIEDMAN AND ALICIA TOWNSEND FRIEDMAN PROFESSOR 

OF LAW, ECONOMICS, AND FINANCE, DIRECTOR OF THE 

CORPORATE GOVERNANCE PROGRAM, HARVARD LAW 

SCHOOL 

Mr. BEBCHUK. Mr. Chairman and distinguished members of the 

committee, thank you very much for inviting me to testify today. 

During the 2006 proxy season, roughly one quarter of the proposal that was submitted by shareholders focused on executive pay. 

Why does pay attract so much attention from investors? To begin 

with, the amounts that are paid are large, and they can have a 

large effect on investors’ bottom line. 

In a study that Yaniv Grinstein and I did, we estimated that the 

aggregate compensation that was paid by public firms to their top 

five executives during the period 1993 to 2003, added up to about 

$350 billion. Adding the amounts that have been paid since then, 

aggregate compensation during 1993 to 2006 is probably on the 

order of half a trillion dollars. 

Furthermore, and perhaps more importantly, closing pay arrangements have costs that go far beyond excess amounts that are 

paid to executives. And the reason is that such flows can dilute and 

distort the incentives of executives. To illustrate, let me just quickly mention several examples of practices that are likely to have adverse effect on incentives. 

First, firms often provide executives that are pushed out for failure with a soft landing. 

Second, firms don’t use claw-back provisions to recoup compensation that is paid on the basis of results that are subsequently found 

to be incorrect. 

Third, equity compensation and bonus compensation are commonly designed in a way that rewards executives for market-wide 

and industry-wide movements that do not reflect executives’ own 

performance. 

Fourth, firms commonly do not prohibit executives from engaging 

in hedging or derivative transactions that can undo the incentives 

that equity compensation is supposed to produce. And there are 

more examples that one could refer to. 

Another concern arises from the fact that public companies have 

provided compensation consistently in ways that made the amount 

of compensation, and the extent to which compensation was linked 

to performance, not transparent to investors. And although the recent disclosure reform is going to make compensation more transparent in the future, past efforts by companies to camouflage pay 

do raise significant concerns about how companies have been setting pay arrangements. 

And there is backdating as well. In a recent study that Grinstein 

and Payer and I co-authored, we estimate that about 12 percent of 

public firms provided one or more grants at the lowest price of the 

month due to opportunistic timing. And although increased regulatory attention and investor attention would likely curtail such 

timing in the future, the widespread use of such timing in the past 

again raises significant concerns about the internal pay-setting 

processes that we have. 

9

Now as we all know, recognizing the intensity of investor concern 

about executive pay, the SEC adopted expanded disclosure requirements. But although those disclosure requirements are going to 

provide a lot of information to the marketplace, they cannot by 

themselves improve pay arrangements. For disclosures to improve 

matters, investors must have the ability to use the information 

that is going to be provided to them to influence the setting of pay 

arrangements. And this is where introducing advisory votes is 

going to help. 

Steve Davis is going to discuss later how advisory votes have had 

a beneficial effect in the United Kingdom, but I would like to stress 

that putting advisory votes aside, shareholders have much weaker 

rights in the United States than they have in the United Kingdom. 

And given the weakness of shareholder rights in the United States, 

providing shareholders with some tools to influence companies’ pay 

decisions is especially needed. 

There are members of this panel who have much more favorable 

assessments of executive compensation than I do. But I want to 

stress that this committee does not have to make a choice between 

the panelists’ alternative accounts. What matters most is not how 

Steve Kaplan or John Castellani or Lucian Bebchuk grade the performance of companies on this important subject, but how investors 

view this issue. There is no question that many investors have serious and legitimate concerns. 

And the board of a given company in the marketplace simply 

cannot infer from our analysis here how the shareholders of the 

company view the company’s pay arrangement. 

The CHAIRMAN. Professor Bebchuk, we’ll have to have you sum 

up fairly quickly. 

Mr. BEBCHUK. Sure. So advisory votes are going to make shareholders’ views clear, and that’s what the issue is about, not choosing among competing accounts. 

[The prepared statement of Professor Bebchuk can be found on 

page 65 of the appendix.] 

The CHAIRMAN. Thank you, Professor. Next Mr. Richard 

Ferlauto, who is the director of pension and benefit policy for the 

American Federation of State, County and Municipal Employees. 

Mr. Ferlauto. 

STATEMENT OF RICHARD FERLAUTO, DIRECTOR OF PENSION 

AND BENEFIT POLICY, AMERICAN FEDERATION OF STATE, 

COUNTY AND MUNICIPAL EMPLOYEES 

Mr. FERLAUTO. Thank you, Mr. Chairman, and members of the 

committee. I’m very pleased to be here, and what I’d like to do is 

orally summarize fairly extensive legislation. 

The CHAIRMAN. The Chair has been delinquent in not saying 

that without objection, all of your written statements and any supporting material, graphs, cartoons of members, or anything else 

you wish to put in, will be entered into the record. 

Mr. FERLAUTO. Thank you very much, Mr. Chairman. Let me 

talk about AFSCME for a minute. AFSCME has 1.4 million members who work in public service. They have retirement benefits of 

assets over $1 trillion that are invested in the public marketplace. 

10

This investment through the public pension systems that they 

are involved in, because of the size of the investments and the 

long-term time horizons they have of 20 or 30 or more years that 

are required to pay retirement benefits over time, means that they 

have a long view. These investments are broadly diversified in 

their index. It means that we don’t have the opportunity to buy 

and sell. Fiduciary duty requires that we hold companies for the 

long term and that the market opportunity of the Wall Street walk 

is not one that our large investment firms have an opportunity to 

engage with. 

That means for many years, we’ve been highly concerned about 

executive pay and the distortion that executive pay creates in the 

marketplace. Spiraling pay not based on performance at all tends 

to provide an incentive to manipulate earnings, to obfuscate financials, and unfortunately, in many cases, to cook the books. 

But probably the worst incentive is an incentive towards short 

termism, where a market does not make appropriate decisions regarding capital investment because the wrong incentives are in 

place for highly paid CEO’s to cash out rather than do what’s good 

for the long-term shareholders. 

Shareholders, these institutional shareholders, have tried for 

years to do something about this, and we’ve been rebuffed at every 

turn. Sure, we congratulate Chairman Cox for the new SEC disclosure rules, but those disclosure rules are necessary and not sufficient to do something about unaligned pay. 

The SRO’s, the self-regulatory organizations, the exchanges, have 

the power to require an advisory vote on pay. But the conflicted 

regulatory scheme where they try to self-regulate means that we 

hold out little hope that the SRO’s will take that power and use 

it to shareholder advantage. 

And finally, shareholders are actually disempowered compared to 

shareholder rights in much of the world. That is, we only have very 

blunt instruments of withholding votes from directors who aren’t 

aligned with shareholders, and do not have effective tools to engage 

companies in a long-term conversation about what appropriate executive compensation means. 

The AFSCME fund began to look for solutions last year, and we 

looked at the United Kingdom and other European experience in 

this area, and we found that the advisory vote is a powerful and 

important tool that helps improve market. 

Last year, the AFSCME pension fund submitted seven shareholder resolutions, the first time ever that such resolutions appeared on shareholder ballots in the United States. Those resolutions got over 40 percent of a vote on average, the highest average 

vote of any first-time resolution ever, according to the large proxy 

advisory firm, ISS. 

Following that, this year, AFSCME and a broad network of institutional investors, public funds, international funds, and mutual 

funds, have filed over 60 of these proposals that will appear on 

company ballots this year. 

Those proposals led to two things. It has led to the creation of 

a working group of major companies and major investors to look at 

how an advisory vote might be applied in this country, and they’ve 

11

also led to the Aflac early adopter that a number of people talked 

about earlier. 

We find a number of things, that when an advisory vote is in effect, based on what we’ve learned from the United Kingdom and 

other countries, first of all, consultation with shareholders increases. It’s early, it’s intense, and it’s detailed. Second, when you 

have consultations in place, performance becomes much better 

aligned with long-term shareholder value initiatives. When longterm shareholder value and performance alignment is in place, it 

means that there are incentives for the company to invest in and 

to execute its strategic plan. That’s good for everyone. 

And finally, we find that disclosure many times actually can spiral up pay, as a CEO wants to be better than his or her payers, 

so that an advisory vote actually is an antidote to the tendency of 

disclosure leading to a ramp-up in pay. 

Finally, what I would like to say is that an advisory vote really 

is not effective unless it’s paired with an increased shareholder 

right at the ballot box, and that is the ability for shareholders to 

replace and nominate directors who fail to be responsive to the advisory vote. Without proxy access, an advisory vote just becomes 

another moot voice for shareholders. 

We need both. We need to enjoy all the benefits that other international markets have through an advisory vote. We’re actually 

falling behind the competitiveness of the European markets because they have this particular requirement, and that needs to be 

paired with the other international requirement or ability that 

shareholders have, that is to use their rights as owners of corporations to replace directors that have failed them on executive pay 

and other similar issues. 

Thank you very much, Mr. Chairman, and members of the committee. I’d be happy to answer questions. 

[The prepared statement of Mr. Ferlauto can be found on page 

111 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Ferlauto. And next, we’re glad 

to welcome John Castellani, who has been a very constructive participant with us in a whole range of issues, the CFIUS bill, for example, and we welcome Mr. Castellani today. Please go ahead. 

STATEMENT OF JOHN J. CASTELLANI, PRESIDENT, BUSINESS 

ROUNDTABLE 

Mr. CASTELLANI. Thank you, Chairman Frank, Ranking Member 

Bachus, and members of the committee. I’m pleased to be here 

today to provide you with the perspective of the Business Roundtable, who are 160 chief executive officers of America’s leading companies. 

To put it in perspective, the Business Roundtable companies represent more than 10 million employees in the United States, nearly 

one-third of the value of the U.S. stock markets, and over 40 percent of all corporate income taxes that are paid. Collectively, they 

have returned $112 billion in dividends to the shareholders and to 

the economy in 2005. 

Our companies represent a substantial share of the U.S. economy, and as such, we have a vested interest in ensuring that the 

United States is able to compete in the worldwide marketplace. We 

12

are committed to promoting public polices that will foster economic 

growth, create American jobs, enhance investor confidence, and 

bring long-term value to all shareholders, including the millions of 

Americans who are invested in our markets through their retirement plans. 

The Roundtable has long supported efforts to improve our systems of corporate governance, and embed ethics within our companies. In 2002, we issued our Principles of Corporate Governance 

which provided the foundation for many of the ideas reflected in 

the Sarbanes-Oxley Act passed that same year. We’ve supported 

the law from the beginning, and we’ve worked closely with the SEC 

to improve upon the law while maintaining its spirit throughout 

implementation. 

In 2003, we issued our Principles of Executive Compensation, 

which I’ll discuss in a moment. And in 2004, we created the Institute for Corporate Ethics, which conducts ethics research and helps 

to embed ethics training in the curricula of the leading U.S. business schools. 

In addition to the changes required by law, companies have responded to shareholders by moving toward more independent 

boards. According to our own 2006 survey, 85 percent of our member company boards are composed of at least 80 percent independent directors. Directors are also more active, as they should 

be. In the Roundtable survey, 75 percent of our companies reported 

that their independent directors meet in executive session without 

the presence of management at every meeting. 

In addition, many companies have made the voluntary change for 

their director election process, shifting to the system of majority 

voting. And currently, 52 percent of the S&P 500 has adopted some 

form of majority voting. 

Together these reforms have been meaningful, and the Business 

Roundtable remains committed to working with shareholders, this 

committee, other policy makers and the public to strengthen the 

role of corporate governance. 

Every Business Roundtable member understands that all eyes 

remain on corporate America today to ensure that the businesses 

are run with the highest ethical standards. And we recognize that 

the spotlight is perhaps brightest when it comes to the issues of 

compensation. 

Our own Principles of Executive Compensation set guidelines for 

independent boards to determine compensation for executives 

through a process that emphasizes transparency and accountability. Those principles underscore that the executives should be 

paid for results, and that compensation should be closely aligned 

with the long-term interest of shareholders and corporate goals and 

strategies. 

We believe that the best mechanism to set executive compensation and to hold CEO’s accountable for company performance are 

those independent members of the companies’ board of directors 

acting upon the recommendation of the compensation committees. 

These committees are subject to strict independence requirements, 

and the directors are accountable to all shareholders. 

We’ve supported the new rule that has been cited here at the 

SEC to make it easier for investors to understand exactly what exVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
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ecutives are being paid. Increased transparency will benefit the 

marketplace and will give investors more information to make decisions. 

In addressing the question of whether or not additional reforms 

are needed in this area, and in particular whether shareholders 

should approve executive compensation decisions, it’s vital to examine the existing structure of corporations, a structure that has 

worked very well throughout history. 

Corporations are, at their core, private entities. They are designed to create value for shareholders. Directors, who are shareholders themselves, have a legal obligation to act in the best interests of all shareholders and to not represent particular constituencies. While cooperation and consensus is critical for a board to 

function, effective directors maintain an attitude of constructive 

skepticism, ask incisive questions, and require honest answers. 

The role of the shareholders is equally important. They provide 

capital, elect directors, approve mergers and other significant actions, and they are the owners of the corporation. However, corporations were never designed to be democracies, and their decision-making process was not established to be run like a New England town hall meeting. While shareholders own the corporation, 

they don’t run it. And unlike the management, they are not liable 

if something goes wrong. Management has both the responsibility 

and the risk, and that is the key to our discussion. 

Shareholders have different motivations and goals. Some seek 

immediate gain in their investment, and others look for long-term 

growth. They come in all sizes. Investment in corporations is voluntary and shareholders are free to invest elsewhere for any reason. 

The basic structure of American companies and shareholders has 

kept our capital markets viable for generations, and that’s why 

we’re concerned about the underlying issues in the consideration of 

this proposal. 

We think that any advisory vote could seriously erode critical 

board responsibility, and we think it runs the risk of turning the 

process into a process that could disrupt the board’s ability to act 

in a cohesive way to make important decisions quickly to enhance 

shareholder value. 

There are also irregularities in the current voting process that 

have been identified that present problems. Hedge funds use shortterm securities for empty voting. We have securities that are held 

by many shareholders that are voted by unregulated proxy advisory service, and indeed we do not have the ability to communicate 

with a large portion of shareholders whose shares are held in 

Street name. 

We want the boards to be able to communicate with all shareholders. We want boards to spend less time in the politics of elections and more time in planning product development, oversight 

and forwarding the value of the company. 

I would argue, Mr. Chairman, that the proposal that you’ve 

brought forward has the potential of being analogous to this body, 

the U.S. Congress, being asked to have a referendum on every decision it makes. Adversarial shareholder groups with divergent interests could form coalitions in an effort to influence the proxy outVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
14

comes and then dictate policies and operational decisions to boards 

and to the management. It is not a process that we think enhances 

shareholder wealth. 

There are problems with the U.K. system that I would be happy 

to go into in the questions, but I would conclude by saying that our 

boards are more independent than they have been in the past. 

They are working hard to align compensation with results. We 

must give our boards, whom we elect, the ability to be able to act 

quickly and to act in the interest of all shareholders. 

Thank you. 

[The prepared statement of Mr. Castellani can be found on page 

90 of the appenidx.] 

The CHAIRMAN. Thank you, very much. And now, Dr. Davis, we 

very much appreciate your accommodating us, and please go ahead. 

I say that because we invited Dr. Davis on fairly short notice, and 

we appreciate his being available. Thank you. 

STATEMENT OF STEPHEN M. DAVIS, FELLOW, YALE SCHOOL 

OF MANAGEMENT, THE MILLSTEIN CENTER FOR CORPORATE GOVERNANCE AND PERFORMANCE 

Mr. DAVIS. Thank you, Mr. Chairman, Ranking Member Bachus, 

and distinguished members. I appreciate the opportunity to appear. 

As the market has addressed the issue of advisory votes, there 

have been naturally important questions raised about the one market where there has been a track record of use of this process, and 

that’s Britain. And as a result, the Millstein Center at Yale, the 

School of Management, decided to put together a whitepaper which 

is titled, ‘‘Does Say on Pay Work? Lessons on Making CEO Compensation Accountable.’’ 

We’ll be presenting that in the spring, but it’s—what I’m pleased 

to do today is to give you a sense of what the conclusions are of 

that report, having just completed a very intense set of research, 

including roundtables in Britain talking to directors, shareholders, 

and a variety of players. 

As you can imagine, there is a lot of puzzlement about how the 

system works. But can I present to you and be clear what our conclusion is, having looked at the U.K. system, that advisory votes on 

executive pay policies are rational, they’re timely, they’re road tested, and they’re practical for use in the United States. 

In fact, one surprise that I think we encountered was how uniform among all market players, including directors, corporations, 

and investors in Britain, the feeling was that advisory votes have 

proven to be an important plus to the U.K. market. 

What I’ll do is just summarize some of the main points that we 

have discovered. One is that votes on compensation resulted in a 

dramatic increase in dialogue between corporations and investors. 

It, in effect, transformed the way compensation policies are constructed. We now have evidence that companies and shareholders 

that never used to talk to each other over these important issues 

are now in a constructive, not a hostile, but a constructive and regular annual dialogue on this important issue. 

The second thing that is evident from the United Kingdom is 

that while advisory votes have not proven to be a panacea in curbing the quantum increases in pay, they have had a dramatic inVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
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crease—or a dramatic effect on the way plans are framed and 

structured. The architecture of compensation is different today 

than it was before advisory votes. And the way they are different 

is in one principal effect, and that is that pay is tied much more 

strictly to performance, to real performance from the company. 

And the latest information that I’d refer to you is a recent 

Deloitte report that goes point by point showing how these changes 

have occurred. 

A third point that we came across is that the U.K. government, 

while they originally put this in place to fix the political problem 

of what they call fat cat pay, now sees advisory votes as critical to 

the competitive advantage of Britain as a marketplace and London 

as a capital market. In other words, what they argue is that if you 

create a level playing field for shareholders, it’s a winner for the 

capital market. It puts British companies in a better position because it makes them—keeps them in fighting trim when you have 

shareholders looking out for them. 

The fourth point was that corporate boards have had to change 

the way they operate. They used to—the compensation committees 

used to have to persuade fellow board members about compensation. Now they have to persuade the broad shareholder base. It 

means stronger boards and stronger compensation committees, not 

weaker ones. 

Another point was that institutional investors have stepped up 

to the plate and done far more work in looking at these pay packages and expressing their views about what makes sense for a company and for their own long-term value. 

So if I could conclude with this general comment, advisory votes 

on pay are best introduced on a legislative basis. It’s light touch 

legislation. It’s actually gets to, as Mr. Scott, I think, said earlier, 

you know, we are all capitalists here, and what this really represents is giving shareholders, giving the owners the tools that 

they need to act as real owners of a corporation. 

Thank you very much, Mr. Chairman. 

[The prepared statement of Dr. Davis can be found on page 103 

of the appendix.] 

The CHAIRMAN. Thank you. And now, Dr. Kaplan, who’s done a 

great deal of work on this, and we appreciate your sharing it with 

us. Please go ahead. 

STATEMENT OF STEVEN N. KAPLAN, NEUBAUER FAMILY PROFESSOR OF ENTREPENEURSHIP AND FINANCE, UNIVERSITY 

OF CHICAGO GRADUATE SCHOOL OF BUSINESS 

Mr. KAPLAN. Thank you, very much. Good morning, Chairman 

Frank, Ranking Member Bachus, and members of the committee. 

In the United States today, as you’ve heard, public company 

CEO’s are routinely criticized for setting their pay and being overpaid. Boards are criticized for not paying for performance and for 

being too friendly to CEO’s. 

I believe the critics are largely wrong. While CEO pay practices 

are not perfect, they are nowhere near broken. The typical CEO is, 

arguably, not overpaid. The typical CEO is paid for performance. 

Boards do fire CEO’s for poor performance, and public company 

CEO’s are leaving to run private equity-funded companies usually 

16

for higher pay. The proposed bill will generate little, if any, benefit, 

but will impose costs relative to the current system. 

So first, I want to put the U.S. economy in context. Over the last 

15 years, the period in which CEO pay has been criticized, the U.S. 

economy and shareholders have done very well both absolutely and 

relative to other countries, including Europe. And many have benefitted from that good performance. 

Second, are CEO’s overpaid today? While there have been pay 

abuses, the answer for the typical CEO is likely ‘‘no.’’ Average CEO 

pay peaked in 2000 and has declined since. While CEO pay has increased since the early 1990’s, and is quite high, other fortunate 

groups have increased their pay by at least as much. 

For example, hedge fund, private equity, and venture capital investors increased their fees by over 7 times since 1994, and those 

increases have translated into very high pay. 

In 2005, the top 20 hedge fund managers earned more than all 

500 CEO’s in the S&P 500 put together. Pro athletes, investment 

bankers, and even lawyers also have benefitted greatly. 

So while CEO’s earn a lot, they are not unique, and rising CEO 

pay appears to be part of not the cause of the increase in inequality 

that we’ve seen recently. The pay of the other groups has been 

driven by market forces, and this seems likely to be true for CEO’s 

as well. 

Third, critics, and they’re here, argue CEO’s are not paid for 

stock performance, and that is just not true. The key question is 

whether CEO’s who perform better earn more in actual pay, and 

the answer is ‘‘yes.’’ 

CEO’s in the top 10 percent of actual pay outperformed their industries by more than 90 percent in the previous 5 years. CEO’s 

in the lowest 10 percent of actual pay underperformed by almost 

40 percent. So the typical CEO is paid for performance. 

Fourth, are boards too friendly to their CEO’s? The evidence 

again suggests not. CEO tenures are shorter than they’ve been 

since at least 1970, and CEO turnover is strongly related to poor 

firm stock performance, again, at least as much as in previous periods. 

Fifth, and I hesitate to say this, good CEO’s may even be underpaid at public companies. Last year a record volume of private equity transactions occurred. 

Andrew Sorkin of the New York Times reported, ‘‘Chief executives are being lured by private equity-owned businesses which 

offer higher pay.’’ I should add that private equity investors have 

strong incentives not to overpay CEO’s, because such overpayment 

would reduce their profits. 

In other words, the regulation and criticism of CEO’s have costs. 

Good CEO’s can and do quit public companies. That leaves the U.S. 

economy with less transparency and leaves public companies with 

less able CEO’s. 

Given that, what do I make of the proposed bill? Well, under current rules, as Mr. Ferlauto confirmed, when shareholders believe a 

company has CEO pay problems, shareholders can generate a vote. 

They’re doing that. 

17

They can also generate adverse publicity for companies that resist, and the new SEC disclosure rules will make any remaining 

pay problems more transparent. 

On the other hand, when a company doesn’t have any problems, 

nothing happens today, so the market is working under current 

rules. 

Under the proposed bill, companies with problems would have a 

vote and be identified. That’s what happens today. However, companies with no problems will be forced to have a vote as well, and 

that is likely to impose unnecessary costs on good companies. 

In summary, the current system is not broken. The bill doesn’t 

have appreciable benefits relative to the current system. 

The bill will impose costs, and on the margin the bill will further 

reduce the attractiveness of being a public company CEO, particularly for good CEO’s, and that is not good for U.S. companies. It’s 

not good for U.S. workers, and it’s not good for the U.S. economy. 

So thank you for inviting me to present my views. 

[The prepared statement of Mr. Kaplan can be found on page 120 

of the appendix.] 

The CHAIRMAN. Finally, someone who has been a long-time worker in this area and has been, again, one who is quite willing to 

share the work of her and her organization with us, Nell Minow 

from The Corporate Library. 

STATEMENT OF NELL MINOW, EDITOR, THE CORPORATE 

LIBRARY 

Ms. MINOW. Thank you very much, Mr. Chairman, Mr. Bachus, 

and members of the committee. It’s an honor to be invited back to 

speak to you about this vitally important subject for the credibility 

of our capital markets. 

I will concede that Wharton is the citadel of capitalism, in fact, 

I’m speaking there to a group of corporate directors on Monday. 

But I will fight to the death for the right of my alma mater, the 

University of Chicago, as the citadel of the free market. 

So I have to begin by saying that I am a passionate capitalist, 

a passionate devotee of the free market. And what I know about 

the free market is this, that it depends on information and the ability to respond. And information we are now going to be getting better thanks to the SEC, but the ability to respond is equally important. 

You can have all the information, all the transparency in the 

world, but if there’s no way for you to respond, you’re not going to 

be able to have that all important market feedback. 

I am not here to ask anybody to interfere with the free market. 

I am here to ask you to remove one of the impediments to the free 

market that currently obstructs shareholders from responding on 

this critical issue. 

If I thought that high pay as it is currently structured resulted 

in better performance, I would stand up and cheer for it. You don’t 

hear anybody complaining here about Bill Gates’ pay or Warren 

Buffet’s pay. They are both just fine. 

It’s when pay and performance are not linked that we get very 

upset. I have learned that the only way to look at pay is to look 

at it, in University of Chicago terms, like any other asset allocaVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
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tion. What is the return on investment of that asset allocation? The 

same way that you would look at money that is spent on research 

or marketing or any other task. 

And the fact is that the return on investment for these CEO pay 

packages, as the ones that we saw late last year where Mr. 

Nardelli and Mr. McKinnell got $200 million pay packages for 

being fired, the return on those investments is less than a piggy 

bank. 

So what we need is we need a way to make sure that we get 

what we pay for. I appreciate and I agree with what my colleague, 

Mr. Castellani, said about boards doing a better job. There is no 

question about it. 

But let’s talk about independent directors for a minute. The fact 

is that management and the board itself still have too much control 

over who serves on the board. 

Warren Buffet, again, a big friend of capitalism, said that in his 

own experience he has been unable to speak out against what he 

knew were outrageous pay packages because, in his words, 

collegiality trumped independence. 

If Warren Buffet is too chicken to stand up in the board room 

and say we are paying this guy too much, then we have to give him 

some backbone. And the only way to do that is to give shareholders 

a chance to speak back. 

I want to commend this committee for staying away from the 

mistakes made by the other body, which is trying to solve the problem through the Tax Code. We have learned that is not a good approach; it does not work. 

The way to do it is a very modest step forward like the one proposed in this legislation, giving shareholders an advisory vote. The 

only objection that I have really heard to this idea is that the 

shareholders are too stupid to make good use of the information. 

That is simply not true. Our entire economy is based on the fact 

that shareholders can understand the footnotes to the financial reports; and when you see shareholders like that represented by Mr. 

Ferlauto, you see how thoughtful and intelligent and perceptive 

they are and how well they have responded. 

In the United Kingdom, do you know how many people have actually voted ‘‘no’’ on a pay plan since they got the right to vote on 

these advisory responses to pay? One. One company has had a ‘‘no’’ 

vote. What did they do? They revised the pay plan. Everyone else 

has engaged fully with shareholders. It has been a very, very productive experience. 

I am concerned that the current system that we have for pay is 

so excessive that it undermines the credibility of our economy. People will invest elsewhere. If we cannot solve this problem, then we 

will pay much too much for what we’re getting from the CEO’s. 

Thank you very much. 

[The prepared statement of Ms. Minow can be found on page 148 

of the appendix.] 

The CHAIRMAN. Thank you. We will begin the questioning. I am 

told that we may have votes at 11:15 a.m., but I believe we will 

be able to get some questioning in. We will break about 5 minutes 

into the vote, and we will reconvene immediately after. I apologize 

19

to the panel because they will have to sit through it, but they understand that. 

Before I start taking up my time, let me ask unanimous consent 

to put into the record 2 letters: one from the HR Policy Association, 

which is a public policy advocacy organization representing the 

chief human resources offices of 250 employers; and one from 

CalSTRs, the California State Teachers’ Retirement System. If 

there is no objection, I’ll put those in the record. 

And I will now begin my 5 minutes. The first thing I want to do 

is, the gentleman from New Jersey wondered whether we were 

going to now give Red Sox fans the right to vote. I have heard illogical analogies before, but a prize will go to anyone who can’t tell 

the difference between a fan who buys a ticket to a baseball game 

and a shareholder in a corporation. 

If the gentleman thinks that they ever have been in any way legally analogous, he knows a different legal system, indeed a different universe than I. There is, of course, no remote connection between someone who buys a ticket to a single event and a shareholder. 

And if the gentleman thinks that what rights shareholders now 

have should be given to the fans, then he would be calling for far 

more change in the law than I. A reasonable discussion we ought 

to have, but that simply makes no sense whatsoever. 

I do want to quote from someone, Warren Buffet, who in his 

newsletters in 2005 and 2006 was criticizing comp committee behavior. 

He wrote in 2005, ‘‘Getting fired can produce a particularly bountiful payday for a CEO. He can earn more in that single day than 

an American worker earns in a lifetime of cleaning toilets. Today 

in the executive suite the all too prevalent rule is that nothing succeeds like failure.’’ This is that notorious trasher of the capital system, Warren Buffet. 

‘‘Huge severance payments and average perks have often occurred because comp committees have become slaves to comparative data. The drill is simple. Three or so directors not chosen by 

chance are bombarded for a few hours before a board meeting with 

pay statistics that ratchet upwards. 

‘‘In criticizing comp committee behavior, I don’t speak as a true 

insider. I have served as a director of 20 public companies. Only 

one CEO has put me on his comp committee.’’ 

And then he said in 2006, ‘‘I mentioned I’ve been the Typhoid 

Mary of compensation committees. At only one company was I on 

the comp committee, and I was promptly outvoted. My ostracism 

has been peculiar considering I haven’t lacked experience in setting 

CEO pay. I’m a one-man comp committee for 40 significant operating businesses.’’ 

And he notes that, frankly, he is not one of the most lavish payers, and he has never has never lost a CEO. No CEO has ever gone 

into private equity from his firm or become a shortstop or a movie 

star or gone on to any other more lucrative forms of compensation. 

Here is the point I would ask people to comment on in the 2006 

newsletter from Warren Buffet: ‘‘Irrational and excessive comp 

practices will not be materially changed by disclosure or by ‘independent’ comp committee members. I think it’s likely that the reaVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
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son I was rejected for service is that I was regarded as too independent. 

‘‘Compensation reform will only occur if the largest institutional 

shareholders—it would only take a few—demand a fresh look at 

the whole system. The consultant’s present drill of deftly selecting 

peer companies to compare with their clients will perpetuate 

present excesses.’’ 

I should know that Mr. Buffet does not favor this bill, but he is 

far more optimistic than I. There are people who are more optimistic. I have colleagues here who, when we get into debates, are 

more optimistic than I that they will be able to reach the better 

nature of some on the other side. I quit early when it comes to hoping people will improve their behavior. 

Mr. Castellani, you said that the boards have gotten better. 

When did they get better? 

Mr. CASTELLANI. Dramatically they have been— 

The CHAIRMAN. As of when? 

Mr. CASTELLANI. I would say over the last 5 years. Very much 

so in the last 5 years. 

The CHAIRMAN. When they weren’t better, can you send me the 

critique that the Roundtable made of them when they were in their 

‘‘not better’’ phase? How critical were you of them for not being better when they weren’t better? 

Mr. CASTELLANI. In 1997, we did our first principles of corporate 

governance, and indeed it was critical. It set a high standard for 

how boards should operate. 

The CHAIRMAN. Were you critical on compensation? 

Mr. CASTELLANI. Pardon? 

The CHAIRMAN. I’d be interested if you would send me if you 

were critical on compensation. Mr. Kaplan, you said in the last 15 

years things have gotten so much better for American businesses. 

Would that include the last 5 years as well? Would the last 5 years 

be included in that improvement period? 

Mr. KAPLAN. I think I would say yes. 

The CHAIRMAN. Okay. I appreciate that. 

Mr. KAPLAN. We have seen productivity grow— 

The CHAIRMAN. I appreciate that. I thank you for that only because the last 5 years are the period in which we have had Sarbanes-Oxley. And I appreciate those nice words about SarbanesOxley. There have been people who have suggested it has been corrosive and, apparently, it is one of the reasons. 

But I would ask Mr. Castellani and Mr. Kaplan, would you comment on Mr. Buffet’s remarks? Mr. Castellani. 

Mr. CASTELLANI. At the risk of disagreeing with a national icon, 

I disagree with— 

The CHAIRMAN. Do you mean me or Mr. Buffet? 

Mr. CASTELLANI. With Mr. Buffet. 

The CHAIRMAN. Please continue. 

Mr. CASTELLANI. I disagree with Mr. Buffet. In fact, what our 

own information is seeing is that the comp committees have been 

much more independent. They are exclusively independent under 

the requirement of the listing standards and under SarbanesOxley. 

21

The best practices and their activities that we’ve seen across our 

member customer is they get their own— 

The CHAIRMAN. Sarbanes-Oxley has brought about improvement 

in the comp committees? 

Mr. CASTELLANI. I believe it has. 

The CHAIRMAN. Thank you. Continue. 

Mr. CASTELLANI. As a standard answer, Mr. Chairman, the Business Roundtable believes that Sarbanes-Oxley has been very— 

The CHAIRMAN. I appreciate it. If I could interject and give myself a few seconds, in the spirit of bipartisanship, I think someone 

ought to continue to say good words about Mike Oxley. He hasn’t 

been gone that long, and he doesn’t get a lot of nice words from 

the other side, so I want to continue to support his signal achievement in most regards. Please continue. 

Mr. CASTELLANI. To be fair, it can be improved on, particularly 

Section 404, but it can be done through regulatory process. 

The CHAIRMAN. Which is now going on, yes. 

Mr. CASTELLANI. And we support that. What we have seen and 

what compensation committees are doing now, and they are independent, is working very, very hard to tie compensation to performance. 

They are getting their own outside expertise. They are not relying on management’s consultants to set that pay, and that pay has 

been much more balanced in recent history than it was in the past. 

The CHAIRMAN. Thank you. Mr. Bebchuk, would you want to 

comment on Mr. Buffet’s remarks? 

Mr. BEBCHUK. I agree with this national icon. I wanted to comment on the general thrust of what was suggested here about the 

concerns that maybe CEO’s are actually underpaid. If one believes 

this, then one should really support advisory votes. Why? 

Because if CEO’s are underpaid, and there are good arguments 

for this, then shareholders would really vote for the existing packages, and companies would be able to raise the packages, and ignore what the media says, because shareholders would vote for 

them. 

So the only reason to be concerned that advisory votes would 

lead to reduction in pay is if one is assuming that the advisory vote 

would come out negatively, namely, that investors think negatively 

about what we have now. 

Similarly, it was suggested that companies right now cannot 

communicate with many shareholders because shares are held in 

street name. Again, this should lead one to support advisory votes, 

because this way we will hear from those shareholders. 

Again, the only reason why one might be concerned that advisory 

votes would lead to pressures on pay is if one is afraid that those 

advisory votes would come out to suggest that there are problems 

with existing pay packages. 

The CHAIRMAN. Thank you. The gentleman from Alabama. 

Mr. BACHUS. Thank you. Mr. Kaplan, this idea that a corporate 

board ought to function more like a democracy, you have written 

on that. Would you comment on what some of the dangers of that 

may be? 

Mr. KAPLAN. I will go back to part of what Professor Bebchuk 

said, and answer this question. Boards are elected today every 

22

year, sometimes every 3 years. More and more companies are putting in votes where directors have to receive a majority of the votes 

in order to retain their seats, and that is a good thing. 

In terms of this bill, where you have a requirement that you 

have a shareholder vote on every company for every year on pay, 

that is invasive. 

The point is not that I worry that pay will go down. The point 

is that under today’s system, shareholders are aggressively going 

after companies that have a problem. There are ways for them to 

do it. 

Carl Ichan has 1 percent of Motorola’s shares, and he is fighting 

against Motorola. So the companies where there is a problem are 

exposed today, and there are votes on them. It is the companies 

that are doing a good job where this bill will impose costs that I 

believe are unnecessary. 

Mr. BACHUS. Mr. Castellani, you mentioned the tenure of chief 

executives is going down, obviously, from 4.5 to—well, it was 8 

years in 1985. It was 4.5 in the last year we know of. 15 percent 

of them were replaced in the last year we have statistics. 

What does this indicate to you? 

Mr. CASTELLANI. Well, it indicates two things to me. One, first 

and foremost, is that boards are being very responsive. The boards 

do control who are the management of a company. They have demonstrated that by the rapidity in which they have changed the 

management. 

The second, unfortunately, is that it demonstrates something 

that Mr. Ferlauto talked about that is a problem, and that is an 

obsessiveness we have in this country with very short-term results, 

particularly where those results are expressed in the share price. 

Mr. BACHUS. I’ve heard people say this. In fact, I have seen it, 

I think, in Birmingham. The last time when we have done something which we thought was just a given, and that was disclosure 

of executive pay, we at least heard a lot that CEO’s looked at what 

other CEO’s made, and they said they wanted raises. It has actually increased the number of wage increases, kind of, ‘‘He is making this, so I want it, too.’’ 

If it happened, and I think maybe it has, it is an unintended consequence of even the disclosures we have had. What would be some 

unintended consequences? I’m worried about that, too. Where does 

it go when you have CEO’s leaving after 4 years? Mr. Castellani 

or Mr. Kaplan, would you all speak on some maybe unintended 

consequences? 

Mr. KAPLAN. The primary unintended consequences, and this is 

something that I think is mixed about Sarbanes-Oxley. SarbanesOxley has done some good things. 

I think 404 has been overly invasive, and the unintended consequence of that, and the unintended consequence potentially of 

this bill is that you are driving CEO’s and CFO’s—generally the 

better ones—to private equity. 

That is a good part of the reason. It is not all. Financial markets 

have helped, as was mentioned earlier. But a good part of the reason for all this private equity activity is that good CEO’s and CFO’s 

say, ‘‘I would rather be doing something else.’’ 

23

And John Calhoun, who was one of the top people at GE, ran a 

quarter of GE’s business, and was well-regarded there, presumably 

would have been a desirable public company CEO at many public 

companies. What did he do recently? He left GE and a $47 billion business to run a company that was funded by private equity, a $5 billion 

business, and he is no longer working for GE. 

Mr. BACHUS. And now shareholders cannot buy shares in the 

company he runs even though he is one of the most efficient— 

Mr. KAPLAN. Well, they do, actually. Mr. Ferlauto can maybe answer that. At least the pension funds can invest in the private equity funds, but individuals cannot. 

Mr. BACHUS. So if we drive the best executives into private equity firms and hedge funds, then the average middle class individual can’t walk up and invest in a company they run? 

Mr. KAPLAN. That would be correct. 

Mr. BACHUS. All right. Mr. Castellani. 

Mr. CASTELLANI. Another unintended consequence is not really 

on the executives themselves, but really on the board of directors. 

I don’t want the conversation here to be misleading members of 

this committee that boards only spend their time on suspension. In 

fact, the preponderance of their time, and this is one of the concerns with Sarbanes-Oxley, should be spent on what is the company’s strategic plan? What are their investment plans? How are 

they developing new products? 

What markets are they going into? Who are the management of 

the company now? How are they performing, and who will be the 

management of the future? And how do we develop them for the 

sake of shareholders and increasing shareholder values? 

One of the concerns we have is this proxy process is becoming 

very politicized. We see that with majority voting which is, quite 

frankly, something that we have been supportive of. But we also 

see that the politics of the campaigns become diverting of the attention of the board of directors. 

Just as I think we can make an arrangement that we have to 

be very careful that our boards don’t overreact to Sarbanes-Oxley 

to become compliance officers, we’re also very concerned that 

boards don’t overreact to become, I am sorry to say this to the people in this room, professional politicians, because what they are 

there to do is to oversee the shareholder’s investment and ensure 

that all aspects of the company contribute to increasing it. 

Mr. BACHUS. I am going to make one comment, if I could, just 

in response to Mr. Castellani. The last thing you said recalls a 

quote of Adam Smith where he said, ‘‘It is the highest impertinence 

and presumption therefore in kings and ministers to pretend to 

watch over the economy of private people and to restrain their expense. They are themselves always and without any exception the 

greatest spendthrifts in the society.’’ 

Having politicians run corporations is a scary thought indeed. 

The CHAIRMAN. I recognize the gentleman from North Carolina. 

I will just take 10 seconds from his time to say that I thought 

shareholders were private citizens. I agree that private citizens 

should run the corporations. That is what this bill is about. The 

gentleman from North Carolina. 

24

Mr. WATT. Thank you, Mr. Chairman. Thank you for holding this 

hearing. I have to say I have tried to come to these things and sort 

through the real differences between the people who are testifying 

and identify some issues that still remain. 

Mr. Kaplan, it is true that you answered a number of questions 

many of which, in my estimation, kind of beg the question. Whether the system is broken or not doesn’t answer for me whether it 

can be improved. 

Whether CEO’s are being lured into private equity companies 

might suggest that we ought to be looking at private equity compensation, but that doesn’t necessarily mean that CEO’s are not 

being overpaid. 

Whether we should speculate about the private capital markets 

becoming democratic I don’t think really is a subject that any of us 

ought to worry about. They never have been, and I doubt they ever 

will be. 

The one question that you asked and answered in a way that I 

think is probably not in accord with what would be the case is 

whether the proposal would reduce the number of abuses. 

It seems to me that having this kind of advisory capacity that 

makes this process more transparent is likely to get at some of 

those very, very serious abuses. 

The question that you didn’t pay much attention to that I want 

to ask Mr. Davis to enlighten us on a little bit, since he studied 

a system that is really in effect, is I keep wondering what is the 

cost benefit analysis if we assume that there are some benefits that 

could be derived from this bill? 

What are the actual costs of implementation? I am not talking 

about speculative cost, the unintended consequences. I’m talking 

about the actual dollar amount, the extra amount in a shareholder 

disclosure, or whatever would be required. 

Dr. Davis, did you do any study in England about what the actual cost of implementing this kind of advisory system would be? 

Mr. DAVIS. Thank you, Congressman. What we did do was to ask 

boards and executives, ‘‘What extra did you have to undertake 

when the advisory vote process came into effect?’’ 

And there are a series of things, but, essentially, it boils down 

to consultation, arranging some meetings, having some more phone 

calls than you would otherwise have in the course of a year, and 

having a few more sit-down sessions with your major shareholders, 

so the costs were minimal. 

Mr. WATT. Are there actual paper costs associated with the additional disclosures? Are we talking about increasing the cost of the 

proxy process? Are there actual dollar amounts that we can put on 

these things? 

Mr. DAVIS. Well, the cost of disclosure is one separate matter in 

some ways, and we have already because of the new CD&A regulations are a pretty serious set of disclosure requirements on companies. 

In the United Kingdom, they have something less than that, actually. If we are to try to figure out whether there was any specific 

cost to it given a context of advisory votes, it is really just being 

able to frame those reports so that they appeal to the shareholders 

25

and not just to lawyers. It is not a compliance exercise, in other 

words, it is a persuasion exercise. 

Mr. WATT. Let me try to get in one other question really quick 

since my time is running out. The difference, it seemed to me, between the second and third witnesses, both of whom have difficult 

names to pronounce, so I won’t try to do the that, seems to me to 

be whether there would be any accountability after this advisory 

process. 

Under this proposal, there is no real accountability after the advisory process takes place. Aside from that, Mr. Castellani, I didn’t 

hear a lot of difference. Maybe you were being collegial like Mr. 

Buffet said folks were being in the boardroom. 

You did not seem to be really going after this proposal in a negative way. There seemed to be not much difference between you and 

the gentleman from AFSCME. 

Mr. CASTELLANI. Well, there is a fair amount of difference between us and our positions. We did not support this proposal. 

Mr. WATT. You do not support it as much as you do not support 

the one in the Senate? 

Mr. CASTELLANI. Well, the one in the Senate, I think, we can all 

agree on is that the best pay systems are ones that are driven by— 

Mr. WATT. No. Do you support this one less than you do not support the one—I’m asking the question as a relative matter—is the 

one in the Senate worse? 

Mr. CASTELLANI. Both have serious negative consequences, in our 

view. 

Mr. WATT. You are being collegial again. Maybe you are being 

collegial to Senators who are not here today. If you had to make 

a choice between the Senate proposal and this proposal, which one 

would you choose? 

Mr. CASTELLANI. I would oppose both. 

Mr. WATT. If you had to make a choice between the Senate proposal and this proposal, which one would you choose? That is the 

question. It would be nice if you would answer the question. 

Mr. CASTELLANI. Both have serious problems, and both have potential to cause— 

Mr. WATT. I hope you don’t approach me in conference and try 

to move us toward this system, as opposed to the Senate one with 

that response. 

The CHAIRMAN. I do take it that the Business Roundtable would 

be indifferent, then, if, as we moved it, instead of doing this bill 

we decided to substitute the Bachus bill, they would be indifferent 

as to that. I would not myself be, but I will acknowledge that. 

That was the question that was asked, and I am taking the answer is that you are indifferent as to which of the two we would 

do if we were to do one. I am surprised at that, but you are entitled 

to your answer. The gentleman from New Jersey 

Mr. GARRETT. Thank you, Mr. Chairman. What we are talking 

about today is whether salaries are excessive or abusive. Actually, 

I learned yesterday we can’t really clearly define what abusive is; 

I am not sure whether we can define what excessive is, either. 

Going to the issue that some of you on the panel say that pay 

should be tied to performance, I can, sort of, agree with that if we 

26

can agree what performance is. You are all shareholders in this 

great republic of ours in one way, shape, or form. 

And I wonder if anyone would hazard to give an advisory opinion 

on the level of performance and therefore of pay of Congress or the 

CEO of this committee and whether you would want to advise us 

in the correct direction. Are we excessive, or maybe should we be 

raising salaries? No. Okay. 

Ms. MINOW. I think it is a mistake to draw too many analogies 

between any government office and a public corporation or any private enterprise. The same issue of defining performance is pervasive no matter what organization you are looking at. 

Had you ever, I believe that there is no accountability standard 

that is higher than the one that is presented to each of you every 

other year. And therefore, I think that is adequate. 

Mr. GARRETT. Thank you. A follow-up question for you. If we go 

this way with the advisory opinion or even go, as some suggest, 

even further than that, as far as not requiring any sort of, and I 

don’t know how you would do it, liability on the very shareholders 

who are making that decision? 

Because right now all of the liability is on the compensation committees or on the directors, and if this decision is advisory or even 

further than that, does that limit my liability now? Because I am 

taking this and going in a different direction than previously I had 

taken in my fiduciary responsibility, I said this was the best way 

to go. 

Ms. MINOW. Congressman, I am really happy that you asked that 

question, because it, I think, is a very important one. I believe that 

the liability the shareholders have is expressed in the value of their 

stock price, which can go down to nothing if they did that wrong. 

Mr. GARRETT. But clearly there is a lot more liability on a CEO 

who violates his fiduciary responsibility. He has a share price, too, 

but he can go to jail if he violates that. 

Ms. MINOW. If he violates the criminal law, he can go to jail. If 

he violates a civil law, I think the record shows that in almost no 

case has a director or an officer had to pay out of his own pocket. 

It always comes out of the shareholder’s pocket. 

I also want to say that one point that we have noted is that excessive CEO compensation is the single best predictor of litigation 

and liability risk for the corporation, so shareholders have a very 

strong motive in terms of what is going to be coming out of their 

own pocket already in addressing this issue. 

Mr. GARRETT. Okay. Thank you. I think, Dr. Davis, you made 

some sort of reference about saying that for those companies that 

have already begun to adopt some sort of advisory capacity or 

interplay with their shareholders that there has been a positive effect of that. Am I hearing you right? 

Mr. DAVIS. That’s correct. 

Mr. GARRETT. Well, if that case is true, it is a positive effect as 

far as the overall performance of that company and overall performance of their stock as well? Is that the up-tick of what has occurred? 

Mr. DAVIS. Well, the positive aspects are multiple. It is much too 

early to decide if this specific thing has made a big difference in 

27

performance or stock price. It is very hard to, I’m sure my colleagues would agree, segregate out one aspect. 

But the fact is that the boards see it as a real positive in terms 

of their relationship with the owners, and the shareholders feel it 

gives them much lower risk when they are investing. 

Mr. GARRETT. Well, that brings up two comments. First, my 

opening comment saying that maybe we should just wait before we 

take any legislative action on this to see how it all shakes down. 

And second, if what you are saying actually comes to pass to be 

true that it does have a positive effect, wouldn’t then other companies look at that and say, well, those companies have done it. It 

has had a positive effect. Our company better go down the same 

road as well with or without this legislation. Wouldn’t the market 

sort of dictate that? 

Mr. DAVIS. The experience in the United Kingdom, in fact, and 

most markets could show that the good companies will do it, and 

the companies where there are real problems will stay well away 

from that. 

The other point about waiting is that Britain sees this, for instance, as a way to keep their company in fighting trim, to keep 

London markets strong. If we wait, we are giving them the lead. 

Mr. GARRETT. Okay. And that brings me to my last question. Dr. 

Kaplan, can you just give us some indications economically speaking—how is the United States doing versus the United Kingdom 

economically? 

If they are doing all of these great things, I assume their unemployment is lower than ours, that their GDP is going up faster than 

ours. Everything must be going better in the United Kingdom, in 

essence, versus where we are in the United States. Is that the 

case? 

Mr. KAPLAN. I am not perfectly certain of the U.K. numbers 

versus the U.S. numbers. However, it is certainly the case that the 

United States has done extremely well in terms of productivity 

growth since the early 1990’s when CEO pay took off, and I would 

gather at least as well as the United Kingdom. But I don’t have 

those figures at my fingertips. 

The CHAIRMAN. I recognize the gentleman from North Carolina. 

He will be the last one, and then we will break. I would ask the 

gentleman for 15 seconds to say that I do think that we are hearing, apparently, a refutation of the McKenzie Report. 

When we talk about Sarbanes-Oxley, we are told how much better it is to be in England. Now, apparently, it is better to be here. 

There is a lot of transatlantic travel here depending on which issue 

comes up. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. I 

actually want to ask questions similar to what Mr. Garrett just 

asked. 

It appears that we are in a distinct minority, the United States, 

in a distinct minority of developed market economies in that we do 

not have something similar to this. 

In fact, England has an advisory vote, as Mr. Ferlauto points out, 

with a consequence of a negative vote that is not taken to heart 

by the directors. 

28

Mr. Kaplan said that we risk driving CEO’s from American public companies if we make compliance with legal requirements too 

annoying. 

Mr. Davis, is there any evidence that there has been an exodus 

of CEO’s from European companies because of this requirement? 

Mr. DAVIS. There is no evidence that this particular requirement 

has done that. In fact, I think what I would argue is if we are concerned about private equity taking over more companies, the advisory vote system is exactly the right thing we ought to be looking 

at, because what we want to do is to equip our public shareholders 

with the kinds of tools that private equity investors already have; 

in other words, to act as real owners. 

Right now our laws, essentially, tie the hands of public shareholders so they can’t act like owners. 

Mr. MILLER OF NORTH CAROLINA. Ms. Minow. 

Ms. MINOW. I agree with Dr. Davis on that. I think that it is important to find out that if CEO’s feel that they are going to be less 

accountable to, say, Henry Kravis through private equity than they 

are to the public markets, then they have another thing coming. 

Mr. MILLER OF NORTH CAROLINA. In an earlier hearing in this 

committee, I asked the question of whether there is any evidence 

that European companies were in fact better led, better managed, 

more efficient, more profitable, perform better or less well, rather, 

because there were some restrictions, this modest restriction on 

corporate compensation, executive compensation. And the answer 

that I got was ‘‘no.’’ Mr. Kaplan? 

Mr. KAPLAN. This is where I can answer. The U.K. economy, I 

think, has done reasonably well, as has the U.S. economy. In terms 

of productivity growth, continental Europe has been far behind. 

Mr. MILLER OF NORTH CAROLINA. Well, that is not actually the 

question. The question was corporate performance. 

Mr. KAPLAN. Corporate performance, I believe, has been behind 

as well. In addition, the private equity question, it is the case in 

continental Europe and, I believe, in the United Kingdom that 

you’ve seen an exodus of good executives to private equity partially 

for the reason that the compensation packages are more attractive 

in the private equity arena. 

Mr. MILLER OF NORTH CAROLINA. Does anyone else have an opinion on that question, whether there is any real evidence that European companies are less well managed, less well-led, or perform 

less well because they aren’t getting the very best managers, because the very best managers don’t make as much as American 

managers make or CEO’s? Mr. Davis? Ms. Minow? 

Ms. MINOW. I would like to mention that earlier in my testimony, 

I said that in only one case in the United Kingdom was there a 

vote against the pay plan. 

And I’d like to point out that the company’s justification for that 

pay plan was they said that because they did so much business in 

America that they had to compete with American CEO levels, and 

they were really trying to imitate us, and they were able to arrive 

at some kind of a compromise. 

What I do see is that some of our worst ideas in terms of CEO 

pay are being imported, and I think the reason that it hasn’t gotten 

29

out of hand is that the other economies do have these very modest 

controls in place. 

Mr. MILLER OF NORTH CAROLINA. Is there any evidence that the 

management of European companies is not as good as the management of American companies? Mr. Davis. 

Mr. DAVIS. American companies, if we look at the individual 

skills of an American CEO against a European CEO, yes. They are 

going to be good. I mean, if they are top companies, there are, presumably, good folks running the companies. 

The issue here is about whether there is an alignment. After all, 

this really isn’t about, I think, in Britain or here, a crabbiness 

about how much money a CEO is making. 

It is about alignment, whether the structure is such that what 

the CEO does, how he or she uses those skills, whether those uses 

are put to the uses of the shareholders or the interests of management. 

And here is where we have a real problem with our structure, 

and this is not the panacea. It is one piece of the puzzle. Other 

pieces can be done by the marketplace. But this is an important 

light touch way in which we, effectively, make capitalism work. 

The CHAIRMAN. Mr. Bebchuk. 

Mr. BEBCHUK. I think there is really no evidence that the management of European companies is doing worse because of this requirement. 

I think the good performance of the U.S. stock market in the last 

15 years doesn’t really speak to this issue, because the main drivers of the comparative performance of Europe and the United 

States are not just difference in corporate governance but major 

macro economic differences. 

The Chinese stock market has done extremely well recently, and 

it is not because they have better corporate governance. 

The CHAIRMAN. The committee will recess, and then we will come 

back and keep working. Members can come and go for lunch, but 

it wouldn’t be fair to the witnesses to hold them. I will say that, 

depending on how quickly we move, we might even have a chance 

for a second round of questions. 

We will be gone probably for another 15 or 20 minutes, because 

there is a second vote following this one, so we will be in recess 

until then. 

[Brief recess] 

The CHAIRMAN. The hearing will reconvene. Please, witnesses, 

take your seats. Going by the list that was presented to me by the 

ranking member, the next member to be recognized will be the gentleman from Florida, Mr. Feeney. Please, people take your seats. 

Mr. FEENEY. Thank you, Mr. Chairman. I want to thank all of 

our guests and witnesses for being patient. I had a colleague earlier from Wharton who quoted Edmund Burke, who happens to be 

one of my favorite philosophers of all time: ‘‘The only thing necessary for the triumph of evil is for good men to do nothing.’’ 

As a great fan of Edmund Burke, who I think was the greatest 

conservative philosophy since Plato, I would say that of the many 

things that he was known for, probably the most important was his 

ability to distinguish the potential for the democratic impulse and 

how it can undermine legitimate governance. 

30

Burke was one of the few people who supported in the parliament the American Revolution, but he opposed the French Revolution on the grounds that the American Revolution was designed 

to preserve traditions and successes and the rights of man, and the 

French Revolution was likely to lead to excesses of the democratic 

impulse. And that is exactly what happened. He was certainly prescient in that regard. 

I am concerned in the same way that a democratic vote is what 

we are in for if we are not careful. Ms. Minow seems to be the only 

person on the panel who thinks that this bill strikes the exact correct balance. 

The first couple of witnesses testified that they thought that this 

was a start, but that we needed more in order to correct the problem. 

Two of the witnesses have said that this is unnecessary and 

would be counterproductive. Ms. Minow does come from the University of Chicago, and I am big fan of their views, including that 

asset allocation ought to be the juxt of every decision. 

But we may know a little bit more about the way politics tends 

to unravel than the way economists would like things in an ideal 

world, and I would suggest that some of us do have a fear that the 

‘‘camel’s toe’’ problem is going to be a real and a significant one. 

Nobody seems to call for a democratic vote on what the appropriate level of Steven Jobs’ compensation or Bill Gates’ would have 

been, say, in 1975 or 1980 or 1985. One witness, Dr. Kaplan, has 

talked to us about the fact that given today’s rules under SarbanesOxley, and if we would adopt some of these advisory opinions or 

even mandatory pay votes by a democratic electorate of the shareholders, very likely Bill Gates would have stayed private. 

Steven Jobs would have stayed private, and hundreds of other 

successful entrepreneurs who have taken their companies public 

would have stayed private. 

The unintended consequences, some of them unforeseeable, and 

some foreseeable, are what concern me. Now, we have had talk 

about trusting the SEC, and I think Christopher Cox has done a 

great job. 

I would note that the chairman has defended the SOX initiative 

today. I am a big fan of Mike Oxley. It was not the House that included the nefarious Section 404 in the House bill. I wasn’t here 

at the time. It was the Senate who insisted on Section 404. 

And if we had stuck to House principles, I would tell the chairman, we would probably not be debating. 

The CHAIRMAN. Would the gentleman yield? 

Mr. FEENEY. I would be happy to. 

The CHAIRMAN. Was the gentleman under the impression that 

somehow that bill passed without the House concurring in Section 

404? 

Mr. FEENEY. Ultimately, the full House did. And by the way, I 

was not here for either the vote in the—I was not a Member at the 

time. 

But having said that, it is always fun to blame the Senate. And 

I think, in this case, we have a legitimate reason; nobody foresaw 

the consequences of 404. 

31

But even if SOX has been some wonderful reason for the success 

in the London markets, the truth of the matter is that if there is 

pay excess in the American economy it should have shown up for 

the last 15 or 20 years with very little governance. 

In fact, America was the premier capital market until roughly 

the time that we passed SOX. We are rapidly losing our preeminence in world capital market formation. Part of that is because 

the London market and others are advertising themselves as a 

SOX-free zone. They surely think it is a problem. 

Also part of it is because of the private equity issue. I would like 

to ask Dr. Kaplan and Mr. Castellani if they have any opinions. In 

the United Kingdom, while there are advisory opinions for compensation, so far there have not been advisory opinions required of 

shareholders for other forms of corporate governance. 

Should companies be forced to adopt pro environmental policies 

or pro labor policies? And we have a representative from AFSCME 

here who talked about investing for social and moral consciousness 

reasons. Personally, I want to make investments for my retirement 

that will guarantee a successful retirement. 

Dr. Kaplan and Mr. Castellani, do you see any reasons why the 

United Kingdom did not adopt advisory opinions for other issues, 

and are there any other unintended consequences we ought to be 

worried about in this proposal before us? 

Mr. CASTELLANI. Yes. Thank you. I think one of the things that 

underlies the discussion that we have been having about the U.S. 

system versus the U.K. system is the fact that there are some very 

substantial differences in U.S. and U.K. law. 

One that is the most significant is their system of civil justice 

and litigation. In the U.K. system, you have a system where the 

loser pays when they bring lawsuits, and the environment is not 

as conducive for lawsuits. 

So directors and boards are not as subjected to shareholder lawsuits as you see in the United States, for whatever reason. The rationale or the result is that boards in the United Kingdom can operate with less of a concern that they will find their actions being 

tested in court through civil litigation. 

In just a recent trip over there in London, and in a discussion 

in a forum with the Chartered Accountants Institute, that has been 

something that was pointed out very strongly, that even the fear 

of that caused them to change recent legislation to ensure that they 

were not increasing the opening for that because of their concern 

that board actions would be second-guessed by potential litigants. 

The second thing that is very different is that shareholders within the United Kingdom to be less activists where you see in our 

proxy process proxy proposals that range everything from ethical 

treatment of animals in research to whether or not a company supports nuclear power or is engaged in or supporting one aspect 

through the remediation of global warming. It is how the boards 

are structured. 

That is typically not something that is done by the U.K. shareholder—very different. 

The CHAIRMAN. Ms. Minow. 

Ms. MINOW. Thank you very much, Mr. Chairman. It is important to point out that shareholders have very much more robust 

32

rights in the United Kingdom and therefore don’t need to resort to 

shareholder proposals; 10 percent of the shareholders can call a 

special meeting; and 50 percent can throw the board out, so it’s 

hard to make comparisons there. 

If I may, I would just like to correct the Congressman on something that he said about IPO’s. If you look at the statistics on 

IPO’s, and you take out the fact that most companies prefer to 

have their IPO in their country of origin, the fact is that we continue to be the same primary place for IPO’s that we have always 

been. 

I think we should be indifferent about whether a company is private or public. Steve Jobs and Bill Gates both were in private companies, and, at the point where they felt they needed access to public capital, they went public. Hurray for capitalism. It worked very, 

very well. Shareholders have the opportunity to invest in private 

or public companies. 

Mr. FEENEY. I’d ask unanimous consent for 30 seconds to respond. Number one, with respect to the SOX issue about IPO’s 

abroad, I’d invite you look at the study by AEI and Brookings that, 

basically, called this a 1.4 regulatory tax, $1.4 trillion. 

And secondly, with respect to private equity has worked well, it 

did for Bill Gates and Steve Jobs, and it might even for AFSCME, 

who has access to private capital. 

But I represent some of the 53 percent of Americans who are individual shareholders, and we don’t get to participate in the next 

Microsoft— 

Ms. MINOW. Do they have pensions? Do they have pension funds? 

Do they have 401(k)s? 

The CHAIRMAN. The gentleman will suspend. I will say to the 

gentleman that we do plan to have a series of hearings on hedge 

funds and private equity. 

The committee does plan to address the question about whether 

or not there are public policy concerns about private equity, etc. 

This is a subject I would note that we do intend to explore. 

The gentleman from Georgia. 

Mr. SCOTT. Thank you, Mr. Chairman. First of all, let me just 

remark to Ms. Minow, I believe, that you are absolutely right about 

the University of Chicago being the premier free market institution 

and so legendarily embodied with your legendary leader, Milton 

Freedman, who was just a great example of the free market. 

Ms. MINOW. Thank you. 

Mr. SCOTT. Mr. Castellani— 

Mr. CASTELLANI. We could change it to Smith. 

Mr. SCOTT. Did I mess it up? 

The CHAIRMAN. Just for the record, I know there are not a lot 

of Italian Americans in some parts of the country. It is Castellani. 

Mr. CASTELLANI. Thank you. 

The CHAIRMAN. The gentleman is not alone. 

Mr. SCOTT. Absolutely. I apologize for butchering your name, Mr. 

Castellani. 

Mr. CASTELLANI. It is quite all right. It is done often. 

Mr. SCOTT. I want to respond to something you said. First of all, 

you made the statement that what we were up here doing as far 

as the corporate executive pay and this bill is tantamount to every 

33

time Congress makes a decision, they have to go get a referendum 

on it. 

I might just point out to you that we get that referendum every 

other year in terms of decisions that we make. 

You tend to support the status quo of where we are. Here is the 

status quo. The status quo is lavish compensation for executives 

that is totally unrelated to their performance. 

The status quo is a losing degree of confidence in our most cherished aspect of our free enterprise system, which is the stock market, which is investor confidence. It is lavish pay packages that not 

only don’t relate to performance, but even are given while their 

companies are struggling. 

While companies are going down, executives are making hundreds of millions of dollars. While they are laying off employees, 

corporate executives are getting these outlandish packages, when 

these same executives are reneging on billions of dollars in pension 

packages for their retiring workers that they’re not fulfilling. 

They are losing confidence. That is the status quo. What we are 

doing here is nothing draconian. There is nothing draconian about 

doing and giving the owners of the company, the shareholders, just 

a simple say in what they are paying the top employee who work 

for them. 

For us not to do this is a great threat under these circumstances 

to the future of all of this. There is no mandate here. There is no 

regulatory arm here. It is just simply saying the stockholders, the 

shareholders will have a say in these packages. 

As I mention one company that has done a very superb job, I 

want to read to you what this executive said, this CEO. This is 

from the Aflac chairman, CEO Dan Amos. He said these words: 

‘‘Our shareholders, as owners of the company, have the right to 

know how executive compensation works. My board’s action is in 

keeping with Aflac’s long-standing pay for performance compensation policy and our commitment to transparency at all levels. 

‘‘We believe that providing an opportunity for an advisory vote 

on our compensation report is a helpful avenue for our shareholders to provide feedback on our pay-for-performance compensation philosophy and pay package.’’ 

Now, if that makes sense, which I think you will agree certainly 

makes sense, then the question I would like to ask you, and certainly Ms. Minow and Dr. Davis especially to comment, I think you 

come from different points of view on this, what is holding back 

these other companies? 

If what CEO Amos is saying is correct, and it is, this transparency is going, what is holding back these other companies from 

doing this? 

And particularly in the face of what we are doing is nothing more 

with our bill, not draconian, but it is just encouragement for them 

to bring about transparency through the proper way of providing 

the people that own the company. 

When they pass out these $200- and $300 million packages, who 

has to stand for that? Shareholders should have a say. I think that 

this will make our economy much healthier and much stronger and 

certainly will build up the confidence in it. 

34

I would like for you to just comment on what is holding back the 

other companies. What is it that they fear, particularly in light of 

what this chief executive has said? Ms. Minow, Mr. Davis, and certainly Mr. Castellani and any of you others who would like to comment. 

The CHAIRMAN. We won’t have time for everybody. We can take 

a couple. 

Ms. MINOW. I think they fear having shareholders tell them they 

are making too much money. 

Mr. DAVIS. I think as soon as corporations learn more about this 

process, any fears and anxieties will go away, because this 

strengthens boards at the end of the day. 

The CHAIRMAN. Mr. Castellani. 

Mr. CASTELLANI. Ultimately, what the CEO of Aflac said in the 

beginning of his letter is absolutely something that all the members of the Roundtable subscribe to. It should be transparent. It 

should be tied to performance. 

If an individual company thinks that it should be voted on by 

shareholders, then that is a legitimate decision of the board of directors who are elected by the shareholders to make. 

The CHAIRMAN. Would the gentleman yield to me for a second? 

Mr. Castellani, if you are a member of a board, would you vote to 

allow a shareholder to vote in an advisory capacity? 

Mr. CASTELLANI. I would not. 

The CHAIRMAN. Thank you. I thank the gentleman for yielding. 

Mr. Kaplan. 

Mr. KAPLAN. I think the issue with the bill is that— 

The CHAIRMAN. Could you confine yourself to the particular question? We don’t have a lot of time. 

Mr. KAPLAN. For good companies, this is an annoyance, so there 

is a cost. They are doing things well, and by having this mandated, 

it will take time, it will take energy, and it will have no benefit. 

Bad companies today are already under siege and more so than 

ever with the hedge funds and the greater disclosure and shareholder advisory votes. 

So that is the sense in which on a cost/benefit basis there are 

costs. I don’t see big benefits. I would not do it. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Illinois. 

Mr. ROSKAM. Thank you, Mr. Chairman. In listening to the testimony today, it seems to me that what we are dealing with is really 

a continuum of a response. 

The first response is, essentially, to do nothing, and that would 

be to allow the SEC rule to be promulgated and put into place, 

which would maintain transparency. 

The next step would be to put it in statute the exact same SEC 

rule, take away the SEC’s discretion but to move to that next step. 

The chairman’s bill moves to a step beyond that which requires 

a non-binding referendum, and then we would move to a binding 

referendum presumably would be the next step after that. 

It just seems to me like there is wisdom in, sort of, going back 

to the admonition from old to creep, crawl, walk, and then run. 

Congress doesn’t really have that great of a reputation for coming 

in and fixing a whole lot of things, if you look in the totality of 

35

things and that there might be wisdom, Mr. Chairman, to slowing 

that down, essentially. 

And that is, obviously, the subject of this whole debate. I think 

that we have to be a little bit careful. The word ‘‘transparent,’’ 

which one of my colleagues on the other side of the aisle—I think 

the nature of his question made it seem like the system wasn’t 

going to be transparent. 

Well, it is going to be transparent. The question then is what do 

you do with that transparency? There was the comment on paying 

for failure in some of the earlier testimony, and I don’t think anybody wants to pay for failure. 

But isn’t it inherent in a system that we sometimes pay people 

to go away? Isn’t that the nature of, for example, litigation where 

you say, ‘‘Look, we are not admitting. We are not denying. We are 

not doing anything, but we will pay you a certain sum of money 

if you will go away.’’ 

And I would assume that a failed CEO is, sort of, in that place, 

that in exchange for their willingness to go away—bad leadership, 

bad stewardship, poor judgment—they are giving up certain rights 

that they may have had. 

I don’t think there is anything in this bill that makes that payment for failure that takes that away. 

I do have a question, and that is what I perceive to be the de minimis nature of a $2,000 ownership requirement. Am I right, Mr. 

Chairman? And I will yield to you. Is that the amount of money 

that a shareholder would have to have? Is it $2,000, or is it a percentage? 

The CHAIRMAN. It is an automatic vote. Any shareholder can vote 

in the percentage of his shares. There is no qualification. It is a 

shareholder vote. The way it works, as the gentleman knows, if you 

own so many shares, you get so many votes. 

Mr. ROSKAM. I get that. What does it take, though, to initiate the 

petition or to initiate the referendum? 

The CHAIRMAN. The way the bill works, and there have been earlier versions that the gentleman may be looking at, this takes what 

the SEC has required to be sent out and allows all shareholders 

to vote on it. It is an automatic advisory vote. The SEC has set the 

rules about what is in that form. 

Mr. ROSKAM. So you have, basically, turned the high beams on. 

You are between walking and running already, but it is, sort of, in 

the walk category. It is walking fast. 

The CHAIRMAN. I guess the gentleman would prefer that we stay 

in the creep stage, and I wasn’t too content there. 

Mr. ROSKAM. Touche. And I would be interested in maybe hearing from a proponent and an opponent. You know what? That is 

actually kind of surprising to me. 

I am more troubled than I was before, actually. I thought that 

somebody had to actually take the initiative to get this out before— 

The CHAIRMAN. Would the gentleman yield? 

Mr. ROSKAM. Yes. 

The CHAIRMAN. Because right now there is a great deal of uncertainty, frankly, with regard to SEC policy as to what happens with 

those initiatives. I think there is a certain amount of advantage in 

setting that. 

36

The SEC just ordered AT&T to do it. Others don’t know. It is a 

question of State law, etc. This notion that the government is involved is, of course, nonsensical. 

The government is involved when you set up corporations. The 

government decides that you can have a corporation. The government sets the rules for governing corporations. This notion that it 

is purely market without government is fantasy land. 

There is a debate going on. There are conflicting circuit court decisions, as I understand it, and the SEC has to decide on the whole 

proxy access question. The SEC just ordered AT&T to put such a 

referendum on the ballot and, obviously, under some statutory authority. 

Right now there is uncertainty in the law as to whether or not 

the SEC can or can’t order this petition to put this on the ballot. 

The board says no. People go to the SEC. And I think maybe others 

here who know more about this than I can answer it. 

It seems to me there is a certain lack of clarity at this stage in 

the law as to when they do or don’t have to go on the ballot. 

Mr. ROSKAM. Okay. Reclaiming my time, I thank the chairman 

for answering. 

The CHAIRMAN. That won’t come out of the gentleman’s time. 

Mr. ROSKAM. Are there other analogous organizations? For example, are labor unions required to disclose their compensation levels? 

Mr. FERLAUTO. Absolutely. The requirement for labor compensation is the most rigorous of any organization that I know of. 

Mr. ROSKAM. Is it an NLRB rule? 

Mr. FERLAUTO. Yes, it is. 

Mr. ROSKAM. Are changes done by referendum? 

Mr. FERLAUTO. Well, the salary levels are established democratically through votes of the union membership. 

Mr. ROSKAM. Okay. So the actual question of compensation 

comes before each union member? 

Mr. FERLAUTO. Each union operates differently. 

Mr. ROSKAM. AFSCME, for example. 

Mr. FERLAUTO. In AFSCME, we elect an executive committee 

that sets those. 

Mr. ROSKAM. Well, the executive committee is like the board of 

directors. Is that fair? 

Mr. FERLAUTO. That’s correct. Again, everybody is using analogies that are just significantly— 

Mr. ROSKAM. Anything with running and walking I am open to. 

Ms. MINOW. I have a hobbling example. 

Mr. ROSKAM. Hold up. I just want to finish this. So, basically, 

you’re saying, look, don’t trouble me with analogies about union 

compensation levels, because I don’t like the answer? 

Mr. FERLAUTO. No, because we don’t have money at risk. This is 

all about ownership of a corporation and about how the assets of 

that corporation will be best allocated to achieve long-term shareholder value. 

Mr. ROSKAM. Don’t you think union dues are at risk, and union 

members have an expectation that they will be used wisely? 

Mr. FERLAUTO. Union dues are established by democratic votes 

of all the union members. 

37

Mr. ROSKAM. Okay. But the point is, I don’t think that this is an 

unfair characterization. Let me just make this point, and then I 

will yield to the chairman. 

Isn’t there merit to the argument that there is symmetry between a company and a union in that the union members are analogous to shareholders, the executive committee is analogous to the 

board of directors, and the leadership is analogous to the leadership? 

Mr. FERLAUTO. We could get into a long, long debate which I 

don’t think would be worth the committee’s time. 

Mr. ROSKAM. I already have a couple more minutes from the 

chairman, so go ahead. 

The CHAIRMAN. Will the gentleman yield to me? 

Mr. ROSKAM. Yes, sir. 

The CHAIRMAN. The analogy fails in the critical point of this 

hearing, salaries. I will ask the staff to prepare for me a comparative chart of salaries paid to the heads of unions and CEO’s. 

I think most unions would be delighted to settle for the requirement of this bill if they could get, like, about 10 percent of the CEO 

salary, most union heads. Of fact is that we are talking, in my 

judgment, about very different numbers. And that is one of the reasons why I think the analogy— 

Mr. ROSKAM. No question about it, reclaiming my time. No question about it that the numbers are different, but the governing 

principle is the same. And you have largely been arguing that it 

is that democratic principle— 

Mr. FERLAUTO. The governing principle that has been neglected 

to be discussed here is board accountability. The leadership of 

unions are democratically accountable to a democratically elected 

board. 

There is no accountability mechanism in a corporate board where 

the ability to nominate independently candidates to be members of 

the board is only controlled by the board itself, wherefore the vast 

majority of companies there is nothing that resembles an election. 

You can’t vote no. You can only withhold a vote. And still, despite some movement to that effect, there are still a minuscule 

number of publicly-traded companies where more than one person 

would be required to elect a member of the board of directors. 

Mr. ROSKAM. But the other situation is the shareholder in this 

case has the ultimate vote, don’t they? I mean, the ultimate vote 

is— 

Mr. FERLAUTO. Not our shareholders. Fiduciary— 

Mr. ROSKAM. Well, let me finish. 

Mr. FERLAUTO.—responsibility for institutional— 

The CHAIRMAN. Suspended. The gentleman from Illinois. 

Mr. ROSKAM. The ultimate vote is the sale of the share. The ultimate vote is to say we’re done. We’re not doing business with you. 

Mr. FERLAUTO. Let me explain to you the fiduciary responsibility 

of large institutional investors that are required by fiduciary responsibility to hold the market. And when you hold the market, 

when you have $20- or $30- or $100 billion to invest, it means that 

you cannot trade in and out of a company. My funds are highly, 

highly indexed. 75 percent of their assets are indexed. 

Mr. ROSKAM. Cannot go in and out of the marketplace? 

38

Mr. FERLAUTO. For 75 percent of our asset allocation within public companies are indexed to the market. 

The CHAIRMAN. Would the gentleman yield for one more— 

Mr. FERLAUTO. Yes. 

The CHAIRMAN. I have to say this, though. The analogy of saying 

to the shareholder, if you don’t like it, then sell your share, would 

be in the union situation, if you don’t like it, then quit your job. 

I don’t think either one ought to be the object. 

Mr. ROSKAM. Clearly. Look, I am not advocating that. I don’t 

think you are implying that. 

The CHAIRMAN. But, give me 30 more seconds and we’ll move on. 

The gentleman from Texas. 

Mr. GREEN. Thank you, Mr. Chairman, and I am most appreciative for your hosting these hearings and I thank the persons 

who are witnesses for giving us your time and your information. It 

has been most edifying. 

On the question of salaries, while I do not have the specific information that the chairman referenced with reference to CEO’s 

versus union officials, I do have something that I think merits consideration. 

According to the AFL–CIO, the average CEO in the United 

States makes more than 260 times the pay of an average worker, 

and other studies in 2003 indicate that the average, large company 

CEO made 500 times the amount of the average worker. 

I do not think that Congress, and I think most people agree, 

should determine how much compensation is too much compensation. I do not think Congress should do this, which is why Congress 

would never cap what lawyers make. Congress wouldn’t do it, because, we do not think that we should determine how much is too 

much. We want the market to set how much folk ought to receive 

as compensation. Thank God for Congress. 

Friends, and I will move specifically, if I may, to Mr. Davis. Mr. 

Davis you spoke of alignment and I would like to juxtapose, if I 

may, after the fact alignment with before the fact alignment. And 

I would like to with you, if you would, give me some indication as 

to whether it costs more to align after there has been a colossal 

mistake, or does it cost more to align before. 

It seems to me that what Chairman Frank is proposing is before 

the fact alignment. Give the people who have a vested interest in 

the business an opportunity to give an opinion as to what alignment is. Now, we can wait until after the compensation has been 

accorded, discover that it was inappropriate, and then align. 

The question becomes for me, which is more cost efficient? 

Mr. Davis, if you would? 

Mr. DAVIS. Well, thank you, Congressman. That’s a great question. And I would like to first, if I might, endorse your earlier point 

which is that Congress really does not have the job, as the gentleman said earlier, of determining what is pay for failure. In effect, what this bill does and what the legislation does in the United 

Kingdom is to empower the shareholders to make that judgment as 

to what is failure and what is success. Congress is stepping out. 

Mr. GREEN. In respect to your question, I entirely agree, and this 

is I think one of the reasons why, in the United Kingdom, they feel 

that the advisory vote is a boost to the marketplace, gives U.K. 

39

companies a competitive advantage, because you do not wait for 

the failure to happen. You don’t wait for the company to tumble off 

a cliff. You don’t wait for companies to have problems and then as 

we have in this country, lots of litigation occurring after the fact. 

So, if you can be proactive, and that’s what this bill does, this 

bill incentivizes the dialogue between investors and boards, so that 

boards can find out where the problems are early and so can investors, work them out, and do that before there is a catastrophe. 

My final comment, Mr. Chairman, is this. I heard talk of unintended consequences. We also have something in this world known 

as intended consequences. Intended consequences can consume a 

Board and place the Board at the mercy sometimes of the CEO. 

That sometimes is an intended consequence that will cause a CEO 

to have leverage above and beyond what may be in the best interest of the corporate personality. 

Mr. Chairman, I thank you for the time and I yield back. 

The CHAIRMAN. Thank you. The gentleman from California. 

Mr. CAMPBELL. Thank you, Mr. Chairman. There seems to be 

consensus on the panel, and I believe on the dais, which agree by 

the way that we are not talking about the absolute level of compensation here, whether it is executives, lawyers, baseball players, 

or whomever. But talking about the alignment between shareholder returns and executive compensation, I also believe there is 

consensus both in the panel and on the dais that there have been 

instances where that alignment has not occurred, where certainly 

in retrospect, at least, compensation has not been at all aligned 

with shareholder returns. 

That being said now, there is not consensus on the panel about 

the bill that is kind of before us or may be before us and we discussed in this committee. So I have questions for each side, if you 

will, on that. Where Mr. Ferlauto, Dr. Davis, and Ms. Minow, what 

we are talking about here is basically legislative issue-specific corporate direct democracy. 

Do you support that concept? 

Ms. MINOW. Mr. Congressman, we already have that concept. 

There are a number of issues put to a direct shareholder vote, including, for example, stock options, which are put to a binding 

shareholder vote, and so given that we currently have that structure, it seems to me that this is a legitimate item to add. 

Mr. CAMPBELL. Okay, then do you believe there are other items 

that ought to be added to that list? Because one could say, certainly make an argument that although excessive, and out of alignment, executive compensation can get you upset as a percentage of 

the overall expenses of any corporation or the overall debt, or whatever, of any corporation, it is probably a fairly small number, it is 

probably unlikely to bring the company down. 

So should there be other things that should have this kind of 

prescribed, direct democracy? 

Ms. MINOW. I am aware of the ‘‘camel’s nose’’ analogy and I am 

not interested in pushing the camel’s eyes, or eyebrows, or hump 

into their tent at this time. I have nothing else to add. 

Mr. CAMPBELL. This is the only thing. There is nothing else that 

you or Dr. Davis in an interview can stick in that you think deserves similar shareholder, direct democracy scrutiny than this. 

40

Ms. MINOW. I am a supporter of strengthening the ability of 

shareholders to nominate their own directors. 

Mr. DAVIS. That’s separate issues. That’s not being prescriptive 

as to the expenses and operations of a company, which is what this 

is doing. 

Ms. MINOW. I have nothing to add to that list. Yes. 

Mr. DAVIS. Either of the rest of you. Or, do you support the concept generally of corporate, direct democracy? 

Look, I think we call it private enterprise when you own a piece 

of your property, you should have some say over how it works and 

that is, in effect, what this bill is trying to return to our market. 

That’s the principle that this bill tries to address. I think in 

terms of legislation there is a lot of other work that could be done 

by shareholders and boards in the private sector. But in terms of 

legislation, this is the only thing we need to work on right now. 

And I think in the United Kingdom, and that’s where I am coming from in my findings, this has been the area where there has 

been the most egregious misalignment between how a board operates and how shareholders operate. 

Mr. CAMPBELL. Right, but there have been companies that have 

been brought down by too much debt, too much marketing, and by 

poor product allocation. 

Should we be putting those things? 

I am not aware of a company. Maybe you all are. You know more 

than I do on this subject, that has actually been brought down, in 

other words, gone bankrupt or whatever, because of excessive executive compensation. But I am aware of ones that have been 

brought down by a number of other expenses and factors. 

Yes, Mr. Ferlauto? 

Mr. FERLAUTO. If I may, other than again the proxy access right 

to nominate directors, the compensation issue stands of particular 

importance, because it flags and it creates incentive structures that 

impact widely on the way the company operates. 

Particularly, I can talk about succession planning issues and a 

whole variety of incentives that get misaligned. So I think that the 

only place where democracy—democracy is not the word—it is accountability, you have to hold boards accountable only on the pay 

issue. 

Mr. CAMPBELL. One question that you said if compensation then, 

should we go down the chain, should we include collective bargaining agreements? Should we include employee benefits to make 

sure they are aligned with the corporate objective? 

Mr. FERLAUTO. I am a strong believer in the business judgment 

world, John, so that only the five most highly compensated as required within the SEC disclosures. 

Mr. CAMPBELL. I am not sure why five is the magic number and 

why we should stop there and not go all the way through, but we 

will discuss it. 

Let me ask Mr. Castellani and Dr. Kaplan a question in my last 

couple of seconds. Only I would suspect that you guys do not believe in prescribed corporate direct democracy, whether it is for this 

subject or anything else. If you don’t, however, do you? 

Mr. Castellani, you talked about majoritarian voting. There is potential cumulative voting. Do either of you support other methods 

41

that where shareholders came through a board of directors express 

their displeasure with a company’s operations executive compensation, whatever. 

Mr. CASTELLANI. Absolutely. 

Mr. CAMPBELL. Could you tell me what those are? 

Mr. CASTELLANI. We have been very supportive and the SEC has 

promulgated regulations that enhance shareholder communication 

vehicles and mechanisms between the board of directors and the 

shareholders. There has to be input from the shareholders to the 

board of directors and that communication is something that we 

very much support. 

Mr. CAMPBELL. Dr. Kaplan? 

Dr. Kaplan. I would agree, I think, with everyone on this panel 

in supporting director majority votes, which seem to be happening 

through the market. 

And greater shareholder access to the proxy, which is something 

that I think is a much more complicated issue. But I would, just 

in general, repeat what I have said. The market and the scrutiny 

are working. You already, which had not been mentioned before 

but just came up, you already have shareholders having a required 

vote on stock options. 

So, there is already some binding vote on shares, and so putting 

this in again is going to have very little benefit and will add costs. 

Mr. CAMPBELL. Thank you. 

The CHAIRMAN. I am going to ask for just 20 seconds. I would 

just ask Mr. Castellani and Ms. Kaplan in particular, the SEC just 

ordered AT&T to let the shareholders vote on pay. 

Mr. Castellani, do you think the SEC decided that wrongly? 

Mr. CASTELLANI. I am not aware of that. 

The CHAIRMAN. Well, you don’t think I made it up. I mean the 

SEC told AT&T that they had to have a shareholder vote on compensation. 

Mr. CASTELLANI. Well within the context of the SEC decisionmaking process, no, that’s fine. 

The CHAIRMAN. So, the SEC can order them to do this. 

Mr. CASTELLANI. They can. 

The CHAIRMAN. Okay. The last I time I checked, the SEC was 

a government entity. Is that not the government ordering them to 

do that? 

So, in other words, Dr. Kaplan, what do you think about the 

SEC’s decision ordering AT&T to do what the board of directors did 

not want to do? 

Mr. KAPLAN. This is again something I said earlier. If shareholders identify company— 

The CHAIRMAN. No. I am asking not what the shareholders said, 

but what the SEC is ordering them to do. 

Mr. KAPLAN. The SEC must have looked at the situation and 

said a shareholder vote was in order. 

The CHAIRMAN. That was okay? 

Mr. KAPLAN. If you are identifying the bad guys, so this is the 

whole point where you want to go after the bad guys. 

The CHAIRMAN. AT&T are the bad guys? 

Mr. KAPLAN. They may be, but presumably, they may not be. I 

don’t know. 

42

The CHAIRMAN. I am sorry. 

Mr. KAPLAN. Could I clarify something? I believe the SEC ordered AT&T or directed AT&T to put a shareholder proposal on the 

proxy to allow— 

The CHAIRMAN. AT&T ordered them to do it. 

Mr. KAPLAN. Not to vote itself. 

The CHAIRMAN. But as a result, if the shareholders vote for that, 

they will then have that right. And, again, this is the government 

ordering the board of directors to do something. I am just wondering whether the objection is to Congress doing it rather than 

the SEC doing it. 

It is the gentlewoman from Wisconsin’s time. 

Ms. CARSON. Thank you so much, Mr. Chairman, and I want to 

thank this very distinguished panel for being patient with us 

through our votes and so on. 

I would love to ask each of you questions, but I know that my 

time is short. So I really want to direct my questions, I think, to 

Dr. Kaplan and to Ms. Minow. I want to start out with you, Dr. 

Kaplan. 

You had some very compelling testimony. You talked about our 

economy having grown over the last 15 years, but the executive 

compensation has risen, and how hedge fund managers, basketball 

players, and other compensation has grown as well. 

I guess I first of all would like you to juxtapose that particular 

observation against other testimony that we’ve heard in this committee from I guess, the great Wizard of Oz, Federal Reserve 

Chairman Bernanke, who really has sort of agreed that the growing inequity in compensation is very troubling, because he points 

to two indicators, consumption and productivity, as really blowing 

up our economy. 

And when you stop and think about a CEO making $84 million, 

he probably still only has one Rolex watch versus our ability to 

have thousands of people buy Rolex watches, which would keep the 

economy going. 

I see you are taking notes, so I guess I want you to respond to 

your long-term projection of where our economy will go, if we just 

have this little island of folks making a lot of money: basketball 

players, CEO’s, and everybody else being too poor to consume, 

while they are continuing to be more and more productive. 

You also made a couple of points that I would like to elaborate 

on, because they are a little bit underwhelming to me. You say that 

this bill will have costs, and you did not specify what those would 

be. Well, yes, there are costs to implementing new regulations. And 

then you seem to suggest that General Mills and other sort of public held companies would have no takers for CFO’s and CEO’s if we 

were to pass this legislation. 

They would all run to the private equity firms and, you know, 

that they would somehow just shrink away from these $40- and 

$50 million packages. And I guess I want you to respond to that. 

And then I want to ask Ms. Minow a question. She made a very, 

very provocative point that this legislation is necessary, because if 

we continue to have these kinds of disparities, people will not invest anymore. They will invest elsewhere. And I want you to expand on that and clarify that for me. 

43

Thank you, so much. 

Mr. KAPLAN. Thank you. There is a whole lot to talk about and 

I think those are very important issues. And I think the increase 

in inequality is a fact and it is a very difficult issue. I think that 

Federal Reserve Chairman Bernanke described what was going on. 

I don’t know that he had any prescriptions other than to say that 

it was a difficult issue. 

He did say that it was important to maintain equality of opportunity and that really means making sure that the less fortunate 

have access to opportunity and education. He also stressed that— 

Ms. MOORE OF WISCONSIN. He needed the opportunity to consume. 

Mr. KAPLAN. Well, he stressed that he said it did not mean 

equality of outcomes. 

Ms. MOORE OF WISCONSIN. But they have to be able to consume, 

though, to keep the economy going. 

Mr. KAPLAN. That’s correct. And again I can point to the economy over the last 15 years that has done very well. Incomes for everyone have gone up. But there is no doubt that they have gone 

up more at the high end. 

Now, the University of Chicago answer to give you is that competition will drive some of the extremes down. My preference is to 

allow competition to work. Over time, when people see a lot of 

money, that attracts entry which drives any excess profit down. 

Now, coming to your question about finding CFO’s and CEO’s, 

the numbers that have been bandied about with hundreds of millions of dollars are really the exception. This was in my testimony. 

It points out the median salary for the CEO of an S&P 500 company—who is managing over 20,000 people—is $8 million a year. 

So that’s a lot of money, but it is not $100 million, it is $8 million. 

And that CEO will make more money if the company does well. If 

the company doesn’t do well, then that CEO makes less money. 

There is a lot of pay for performance in the current system. 

Now, will CFO’s and CEO’s leave at that amount of money? And 

this is something that I know sounds very strange, and I hesitate 

to say it, but you see it in private equity deals, and you hear it in 

talking to CFO’s and CEO’s. With all the scrutiny, all the pressure, 

and all the regulation, CEO’s and CFO’s are thinking of doing 

other things. And it is the best ones. So, it is not my preference 

to say that, but that is how it is. 

Now, the last thing about the costs versus the benefits, I think 

there are very small or no benefits from this bill. I think the costs 

are not earth-shattering, so it is not as if the world is going to be 

destroyed if you put this in, but I think there are costs in terms 

of extra time, extra angst, dealing with political interest. 

And those costs actually hit the good companies, because the 

good companies are doing the right thing now, those are the ones 

that actually create the most value in this economy, and you will 

be imposing more costs on the good ones. So I hope that’s helpful. 

The CHAIRMAN. The gentlewoman has a minute left if she wishes 

to use it. 

Ms. MOORE OF WISCONSIN. I would love an opportunity for Ms. 

Minow to respond. 

The CHAIRMAN. Go ahead. 

44

Ms. MOORE OF WISCONSIN. Thank you. 

Ms. MINOW. This relates also to Mr. Campbell’s question of a mo- ment ago. When Gary Wendt took a job, he insisted on a $45 million signing bonus and a lot of other protections against the consequences of poor performance. And later, when a very good offer 

to buy the company came in, he turned it down because he was 

doing just fine. 

It really didn’t matter how the shareholders did, and the company ultimately went into bankruptcy. People do not want to invest 

if the CEO is going to do fine, whether or not they do fine. People 

want an alignment of interest, and we will send investment dollars 

abroad. 

I am meeting a week from Monday with a group of international 

investors in American companies who are deeply concerned about 

this issue and who will take their money out of America if we do 

not solve it. 

The CHAIRMAN. I thank you. Let me thank the panel. If you can 

stay with us another half hour so we can get everybody, I appreciate your indulgence. 

The gentleman from North Carolina. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

I think this is a fascinating subject for us to discuss and the 

panel has been fantastic. I have watched it on TV. 

We have had the votes. We have been running around today, but 

I have caught most of your testimony. I wanted to follow-up for my 

colleague from Illinois, Mr. Roskam what his questions were earlier. 

Some of you on the panel actually have special, well, corporations 

in America have a special privilege granted to them by the government. In essence, they are dealt with as individuals and that is a 

special notion that the States have given them and our government 

has respected. Unions also have a special place, as well as universities, tax status and so forth. 

And, so, Mr. Ferlauto, I believe I am stating your name correctly 

or close enough. Who do you work with? 

Mr. FERLAUTO. I do not understand. 

Mr. MCHENRY. What is your business that you are employed by? 

Oh, it is AFSCME, the largest public employment service union in 

the country. 

Are you one of the top five paid individuals at AFSCME? 

Mr. FERLAUTO. No. I am not. 

Mr. MCHENRY. You are not? 

Do the top five most highly compensated individuals at your 

union, do you members vote on their salary and their compensation? 

Mr. FERLAUTO. Our members do not vote directly on their salary. 

Mr. MCHENRY. Do they have some sort of shareholder democracy 

by which they can state that? 

Mr. FERLAUTO. Our members directly elect those officers and if those officers actually use the union treasury to buy $15,000 dollar 

bottles of wine, to have huge birthday parties for their wives, to 

buy country club memberships, or to get loans other than for giving, those officers would be out on their ear in less than 30 seconds. 

45

Mr. MCHENRY. They might be in jail along with the corporate 

CEO’s that you are referencing. They might be in jail. 

Mr. FERLAUTO. Many of those things that we are referencing 

were actually not illegal to do. It was just immoral to use your 

treasury for those things. 

Mr. MCHENRY. So, your shareholders, your employers, if you will 

let me continue, they do not have an advisory vote of any sort on 

compensation packages. Yes or no. 

Mr. FERLAUTO. Not directly when there are compensation packages. 

Mr. MCHENRY. The answer is no. So, you know, I am trying to 

follow this and I also know that as a union, you have large investments that you invest for your members, do you not? 

Mr. FERLAUTO. We do through our pension funds. 

Mr. MCHENRY. Now, do your pension funds, where do they invest? 

Mr. FERLAUTO. They invest in the public markets and the private 

markets. 

Mr. MCHENRY. Okay. So, also in private equity funds as well. 

Mr. FERLAUTO. Sometimes, yes. 

Mr. MCHENRY. Sometimes, yes. 

And are you aware of the compensation packages in the private 

equity firms? 

Mr. FERLAUTO. As much as they are disclosed. 

Mr. MCHENRY. Does the union not have a policy about investing 

with these private equity funds? 

Mr. FERLAUTO. Actually, the direct AFSCME fund that I represent does not invest in private equity because of the disclosure 

and the fee issues and the high risk issues involved. 

There are other funds that involve our members that do, because 

they have the sophistication. They also invest and engage with 

those private equity principles around fee issues and other types of 

issues. 

Mr. MCHENRY. Okay. Certainly, I appreciate that. 

And so you are aware that CEO’s in these private equity funds 

make far in excess of what the publicly held company CEO’s make, 

adn yet, your union still invests with them. 

So what your testimony here before Congress is very much— 

Mr. FERLAUTO. My union does not directly invest. It is our members’ money invested in some. 

Mr. MCHENRY. Members’ money which you as a union are investing for them through your pension funds, correct? 

Mr. FERLAUTO. There are a number of different ways our members’ money gets invested: directly through our pension fund and 

then directly through the public pension systems that sometimes 

have all our members represented on their boards, so there is some 

slight difference. 

Mr. MCHENRY. Okay, Dr. Bebchuk, going to you, are you one of 

the top five most highly compensated individuals at Harvard? 

Mr. BEBCHUK. No. And I do not get to vote on the President’s 

compensation either. 

Mr. MCHENRY. Okay, and as a non-profit in a very elite school, 

your interest of course. I hope that one day you would be the most 

five highly compensated members at Harvard. 

46

But, nonetheless, do you think if you look at publicly traded companies, they also pay very high salaries and fees to entertainers, 

news anchors, and athletes, through endorsement deals, and some 

of these packages are far larger than what the CEO’s are making. 

Do you think these decisions should receive shareholder approval, 

since they are so large? 

Mr. BEBCHUK. I think not. And I think the key distinctions are 

the following. I do not have any problem about transactions—armslength contracting. When you have arms-length contracting, we can 

count on the market to produce good outcomes. 

Other examples about basketball players, private equity managers, and so forth, those are arms-length contracting market outcomes. The problem with executive compensation is that we do not 

have arms-length contracting and that is why you need some accountability mechanism, and the standard accountability mechanism is to have the owners have a say. 

Mr. MCHENRY. Okay. Mr. Chairman, just two very brief questions to wrap up here so we can keep the panel moving. 

To follow up with you Mr. Bebchuk, what you are saying is that 

the marketplace does not work with CEO compensation, and, bad 

CEO’s are not thrown out. Well, as it turns out the marketplace 

seems to be continuing to turn over CEO’s, and getting rid of 

CEO’s in the marketplace as Dr. Kaplan has referenced in some respects is very functional. 

My final question to Mr. Castellani and Dr. Kaplan concerns options versus salary. If you all could touch very briefly on the difference in compensation packages of straight salary that CEO’s receive versus the options, in essence saying that the growth and the 

benefits accrued to shareholders will also accrue to the CEO of the 

company. 

Therefore, if the CEO is successful, he will receive greater compensation. If he is not successful with the corporation, he will not 

receive greater compensation. 

The CHAIRMAN. We will have to get to the answers. 

Mr. KAPLAN. The options versus salary—that’s a very important 

point. Part of what has happened in the last 25 years was a big 

move from cash-based compensation to options and those options 

do tie the CEO’s wealth to shareholders and the data I gave you 

earlier—that said there was pay for performance—is driven by 

those options. 

The options are not worth anything if the stock price goes down. 

They are only worth something if the stock price goes up. If CEO’s 

performed well, their options are worth a lot, and if they performed 

badly, their options were worth little. 

The CHAIRMAN. Mr. Castellani? 

Mr. CASTELLANI. Only to add to that answer is that compensation should be balanced. Salaries should reflect an appropriate 

level for the basic job that the person is hired to do. Stock options 

should be a method or could be performance shares to tie a portion 

of that performance to the housing stock performance. 

But those systems should be balanced so that it is both tied to 

the stock, but also tied to other parameters that are important for 

corporate value creations such as sales, revenues, margins, cash 

flow, and the like. 

47

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLEAVER. Thank you, Mr. Chairman. My colleague was raising a lot of questions about labor unions that I was trying to find 

the reference in the bill. What I would like to do, Mr. Kaplan, is 

if you could just give me the ‘‘Readers Digest’’ answer. You mentioned earlier that you believe that some CEO’s were in fact underpaid. 

Can you name one? We do not have a lot of time because the 

chairman wants to stop, so can you name one CEO who is underpaid? 

Mr. KAPLAN. David Calhoun was at GE. He ran a $45- to $55 billion business, and, he left GE to run a private equity funded company with only $5 million in sales. 

Mr. CLEAVER. Okay. Can you tell me how much he had before 

he left? 

Mr. KAPLAN. I do not know. 

Mr. CLEAVER. Is it about $5 million? 

Mr. KAPLAN. I do not know, exactly. 

Mr. CLEAVER. Well then how do you know that he was underpaid? 

Mr. KAPLAN. Well, if he were overpaid there, why would he have 

left? 

Mr. CLEAVER. That is really bad theology. 

Ms. MINOW. Thank you, University of Chicago. 

[Laughter] 

Mr. KAPLAN. I can give these other examples, if you want a few. 

Ms. MINOW. So you are overpaid at the University of Chicago because you have not left? 

Mr. CLEAVER. I asked for one. You have not given me one, yet. 

Mr. KAPLAN. I did give you one—David Calhoun. Can I give you 

another? 

Mr. CLEAVER. No. You cannot just throw out names. I mean, if 

they are underpaid, tell it. 

Mr. KAPLAN. The CEO of SunGard. I can give you some details. 

Mr. CLEAVER. If they are underpaid, you need to say how much 

and you at least need to know how much they make, or you are 

incapable of saying that they are underpaid. 

That’s not hard. Now, I mean, you cannot answer the question, 

and that is fine. Someone mentioned earlier that it was a bad analogy. They said it is okay to give people large compensation packages, because it is like the settlement in a lawsuit to just get it to 

go away. 

Mr. Ferlauto, do you know a man or have heard of a man named 

Lee Raymond? 

Mr. FERLAUTO. Yes, he is quite well known, actually. 

Mr. CLEAVER. I would like to ask Mr. Ferlauto or Mr. Kaplan 

here, do you know Mr. Lee Raymond? Do you know who he is? 

Mr. KAPLAN. Yes. 

Mr. CLEAVER. Mr. Castellani? 

Mr. CASTELLANI. He is the former CEO of Exxon-Mobil. 

Mr. CLEAVER. Do you know how much money he was making a 

year? 

Mr. CASTELLANI. I do not know exactly. 

48

Mr. CLEAVER. I know, exactly—$38.1 million per year, and his retirement package was $400 million. Are you all right with that? 

Mr. CASTELLANI. Yes, sir, I am. 

Mr. CLEAVER. On top of the fact that we gave them a $10 billion 

tax break, which means they are siphoning off taxpayer money, 

and giving it to the CEO. 

The CHAIRMAN. If the gentleman was really good, that is what 

they were rewarding him for. 

Mr. CLEAVER. Are you all right with that—taking this taxpayer 

money? 

Mr. CASTELLANI. Yes, I am. Yes, sir. 

Mr. CLEAVER. Are you all right with it, Mr. Kaplan? 

Mr. KAPLAN. Yes. Now, I say that one thing that is an issue is 

the pensions. And to the extent that some of these pensions have 

been given on CEO’s pay that is not performance based, and in 

some cases the Board did not quite understand how big those pensions were, I think those should change and what will happen. 

My prediction is with the new SEC disclosure, where this is 

going to be disclosed more carefully and where boards will be looking at this more carefully. 

Mr. CLEAVER. And, if you do not have a problem with it. 

Mr. KAPLAN. You will see fewer of those kinds of CEO’s. 

The CHAIRMAN. The gentleman from Missouri? 

Mr. CLEAVER. If you do not have a problem with it, I mean, you 

cannot have a partial problem. You are saying you think it is going 

to be okay. 

Earlier, you said you did not have a problem with it, which 

means it does not need to change. It is already okay. And so, you 

are saying that these ‘‘walk on the water CEO’s’’ and ‘‘boardroom 

disciples’’ can manipulate even the taxpayer money in order to pay 

the CEO an exorbitant amount of salary because he or she is worth 

it, no matter what. And, so, my reservation is that this legislation 

is not enough of the ‘‘last supper.’’ 

I yield back the balance of my time. 

The CHAIRMAN. Well, I would point out—and this is one of the problems you have in the case of Mr. Raymond—his $400 million 

settlement in that year. I believe Exxon-Mobil failed to fully fund 

its pension, so we are not just talking about a lot of money in one 

place, but money that should have gone to another place. 

The gentleman from New Mexico. 

Mr. CAMPBELL. Mr. Chairman, I would like to ask unanimous 

consent to submit a prepared statement by WorldatWork for the 

record. 

The CHAIRMAN. Yes. It would be good and the Chair asks in that 

extent to apologize. I will probably get that. I put into the record 

something that was presented to me by the minority from the H.R. 

Policy Association, and I mistakenly stated that they were supportive, but I put it in the wrong pile. They oppose the bill. And 

this will also go in the record. 

Mr. CAMPBELL. Thank you, 

Chairman Frank. The gentleman from New Mexico. 

Mr. PEARCE. Thank you. This was an interesting panel. I appreciate all of your participation here. 

Mr. Castellani, how long does it take capital to flee? 

49

Mr. CASTELLANI. It can flee very quickly. 

Mr. PEARCE. Hours, days, months, years? 

Mr. CASTELLANI. If you look at the volatility of the market, it 

flees on an hourly basis. 

Mr. PEARCE. On when? 

Mr. CASTELLANI. An hourly basis. 

Mr. PEARCE. So, Ms. Minow, and also Mr. Davis, raised strong 

arguments that frankly it is—we are going to undermine the credibility, I think Ms. Minow said—that people will invest elsewhere. 

So a strong piece of the argument Mr. Davis declares in his item 

3 that it is actually an item of competitiveness. 

Tell me about the outflow of capital. And we will flee at a moment’s notice, within minutes literally, we saw the collapse of the 

Mexican economy, and we saw the collapse of the Thai economy. 

Tell me about the evacuation of capital because we are losing 

competitive edge. We are undermining the credibility. This process 

has been going on. I have been listening here. This process has 

been going on for 15 years, 20 years, overpay. 

Tell me about the evacuation of capital that can happen at a moment’s notice. Mr. Kaplan, if you would address, please, very briefly, the evacuation of capital. What are we seeing? 

Mr. KAPLAN. I am not sure I have a quick answer, other than 

you have to look at the economy, the stock markets. 

Mr. PEARCE. Our stock market is fairly solid. 

It is the British, we are led to believe, and according to Mr. 

Ferlauto’s testimony, the Netherlands, Australia, and Sweden, are 

doing it better. The United Kingdom is doing it better. Is capital 

evacuating to those markets? Are they seeing tremendous increases 

in their stock market, Mr. Kaplan? 

Mr. KAPLAN. Not over the long run. The United States has done 

quite well. 

Mr. PEARCE. Okay, and those markets, you are saying with respect to relative size that those markets are not significantly better? 

Mr. KAPLAN. No. 

Mr. PEARCE. Mr. Ferlauto, in your testimony you have on Page 

2 a discussion that many people have mentioned—relative pay, relative amounts—and, you do not really draw the conclusion about 

what is wrong with that. But, let’s say your union wants to bring 

in a keynote speaker for your national gathering. That happens. I 

have heard the number for Mr. Clinton, who has retired from the 

office down the street, $250,000 for a 1-hour speech. Is that something? Does your association bring in speakers that you pay anywhere from $30- to $40- or $50,000 per hour? 

Mr. KAPLAN. I do not believe so. 

Mr. PEARCE. Oh? I suspect I would like to see if you could provide me the programs of your last 10 annual meetings where you 

do bring speakers in. I suspect that we do have people who are 

very highly compensated and they are engaged or embraced by the 

hour. 

Ms. Minow, you have mentioned that the real frustration comes 

when pay is not linked with performance. Now as we are looking 

at competitiveness and we have testimony in front of the Transportation Committee that of the seven airlines that sat in front of us 

50

a couple of years ago, we are going to give a very large bailout, because all of the companies, all of the airline companies were not 

performing. 

Now, my question to them was at 100 percent utilization, you fill 

every seat, every day, every month, in every year, will you make 

a profit? Only Southwest is making a profit every month in a competitive environment. They all fly airplanes and look alike, made 

out of the same sheet metal, use the same sort of diesel, about the 

same amount. The only difference was the amount of days worked. 

Southwest pilots get about the same, $200,000 per year. 

But the six or seven airlines that are right at the fringe of bank- ruptcy, they work 3 days a month for their pay—$200,000 a year 

for 3 days a month. And if they work at the end of the month, they 

can get 3-day trips. And Southwest—they get 15 days a month. 

Now, I would agree they pay for performance, but we are not 

concentrating on the real competitive disadvantage that we are 

putting our companies up against. Because, if you take the 8,800 

pilots of American Airlines, and you put $100,000, that’s $880 million versus, we are talking these little $20 million or $30 million 

packages. But if you run them up, and I do not know what everybody gets paid, but I assume 100,000 pilots at $200,000 is $1.6 billion. And so I think we are grabbing at it by limiting it, we want 

to talk about competitiveness, but we really do not want to talk 

about competitiveness. 

We do not want to talk about the union structure that has that 

pay in place, and if we are really talking about competitiveness, 

Ms. Minow, I think that somewhere in your conversation you would 

have talked about frivolous lawsuits. Because that is where American Express told us 4 years ago in New York, that if we do not 

cure frivolous lawsuits, every major corporation in America is going 

to leave. 

I thank the chairman for his indulgence and appreciate the opportunity to make the points. Thank you. If anyone wants to respond, they are welcome to if the chairman— 

The CHAIRMAN. Well, if the gentleman has no objection, we will 

move on to the gentleman from California. 

Mr. SHERMAN. Thank you, Mr. Chairman, I have a number of observations. 

The gentleman from New Mexico may not fully understand 

Democratic Party politics. Ask me. Ask any Democrat, including a 

former President to go speak, we speak for free, including former 

Presidents. 

Mr. Ferlauto, I think, has made an eloquent argument in favor 

of the bill by pointing out that General Electric suffered terribly by 

the decision of its Board to underpay its CEO, and of course a 

shareholder vote giving advice to the Board might very well have 

resulted in the appropriate level of compensation, which you have 

argued would be higher. It is unprecedented in history that the 

bulk of the world’s capital is typically invested by giving it, putting 

it in the hands of strangers in faraway places. This has worked because corporate governments align shareholder interest with two 

strong pillars that control the money. 

The first of those pillars is management. The second is the board. 

Those are the twin pillars that assure what we are calling alignVerDate 0ct 09 2002 16:36 Jun 11, 2007 Jkt 035402 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 K:\DOCS\35402.TXT HFIN PsN: TERRIE
51

ment. But in the area of management compensation, those pillars 

are a little shaky. In the area of the pillar of management, obviously, you are at cross purposes with shareholders. So, you lose one 

pillar right away. The second pillar, the pillar of the Board, will 

keep in mind many people on the Board are there because in practice, management put them there. 

And, second, the inside directors form a large caucus that influences the compensation level and options of the outside directors. 

So, you are missing one pillar. As a matter of fact, it is at cross 

purposes. And the other pillar is pretty shaky as well. Perhaps you 

need to shore up alignment with a shareholder vote. 

I want to take a minute before I get to questions, though, to talk 

about this performance-based compensation. CEO’s are not rock 

stars. They are not sports superstars. When the Lakers win, they 

only put five guys on the court and Kobe can dominate the game. 

When General Motors wins, they put 100-, 200-, or 300,000 workers on the court. And to say that any one individual is the reason 

why they win begs the question: if you were to take out the CEO 

of many companies and put in just a journeyman CEO, they might 

do just as well. Different people could argue it one way or the 

other, yet no one who is a basketball fan would argue that you 

could take Kobe out, put in a journeyman or shooting guard, and 

the Lakers would do just as well. 

So, the idea that a huge percentage of corporate performance is 

related to the CEO misconstrues basketball business. Second, we 

could end up with short term thinking, the CEO doing something 

just in the short term, because I think many of our corporate decisions are too short term. And, finally, CEO’s may take wild risks 

in the last year of their career. Heads he wins; tails the shareholders lose. Mr. Davis, we have seen the Secretary of the Treasury 

join government where he gets paid as little as we do, which is still 

quite sufficient for us, but little in the world of corporate finance. 

So, maybe he was being overpaid by his previous employer, but 

are British corporations able to get competent leadership? 

Has there been a sell-off in British stocks because they have this 

advisory vote? 

Has Aflac’s stock tanked because they are going to have an advisory vote? 

Mr. DAVIS. Congressman, there is no evidence of any of that occurring. 

Mr. SHERMAN. So, we could institute this measure and we could 

probably find people willing to work for the $5-, $10-, or $20 million they are able to get running major, public companies, and 

there would not be a shortage of talent. 

Mr. DAVIS. Yes, I think that’s correct. As a matter of fact, even 

if you look at BP, we were talking about Lee Raymond, earlier. 

BP’s CEO is just leaving office, and after many years of successful 

performance, and the last couple of years a very poor performance, 

he is leaving with a total retirement package of approximately $29 

million, which is, you know, significant, but it is nothing like the 

$400 million that Lee Raymond left with. 

Mr. SHERMAN. And do we see many top European business leaders coming across to the United States to be employed as CEO’s of 

Fortune 100 companies? 

52

Mr. DAVIS. I think there has been a good flow, actually, back and 

forth. There is no one. 

Mr. SHERMAN. But it is not a one-way flow. 

Mr. DAVIS. No. 

Mr. SHERMAN. So, we pay our CEO’s a lot more. We do not have 

an advisory vote, and we lose as many CEO’s to Europe as we are 

able to recruit from Europe. 

Mr. DAVIS. There are a lot of Americans going abroad and running companies in Europe and Asia, everywhere. 

Mr. SHERMAN. I yield back. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. Thank you, Mr. Chairman, and I really thank 

the panelists for having the patience to be here with us all day. I 

am sorry I missed some of the early testimony, but quite frankly, 

I agree with a lot of what everybody is saying and I disagree with 

some of the things you have said and I disagree with my colleague, 

Mr. Cleaver, who was very upset about the compensation to the 

gentleman from Exxon. 

I mean, if that is what the company is prepared to pay, then they 

are prepared to pay it. I think that this bill has an elegance, and, 

Mr. Kaplan, I would have to disagree with you on this, Professor. 

There is an elegance here where you have, as Mr. Sherman was 

saying, you have management. You have the directors. You have 

the shareholders. And I think you said you thought there would be 

a lot of costs attached to this without much benefit in return and 

I guess my feeling is just having. I have represented management. 

I have represented boards of directors. I have represented shareholders in all sorts of contexts. 

Shareholders, if they take the time to read 10K’s and 10Q’s and 

different kinds of disclosures, are not ignorant people. They are 

smart. And they will, if given the opportunity, thinking management’s performance does not fit with the performance of the company, they will shoot a shot across the bow, which the directors 

better take seriously. 

If the directors take it seriously, they are going to talk to management and they are going to say, you guys are out of line. So, 

but then, on the other hand, if they have a high performing company, you know, and Exxon was making zillions of dollars, they are 

going to reward their executives because they do not want to lose 

them. 

So, the shareholders are not going to act in a way that is contrary to their financial interest. At the end of the day, I think that 

the Federal Government also has an interest in this, not the Securities and Exchange, but I would come at it from the Pension Benefit Guaranty Corporation, because PBGC has so many pensions 

that it backs up that I have seen where the companies failed where 

the officers were getting tremendous salaries, and all of a sudden 

then the pensions that have invested it, you know, they turn out 

upside down and we are bailing them out. 

So, I mean, there is at the end of the day a role for the Federal 

Government. If you could, Mr. Kaplan, just again, because you 

really did get to the point. You thought the costs of this outweighed 

the benefits. And, you know, that is where we differ. If the shareholders are prepared to pay a fortune to their execs, God bless 

53

them. Go for it. But I think the shareholders should have an opportunity to say something. 

Mr. KAPLAN. I think it is a legitimate issue and there are legitimate disagreements, so I very much appreciate that. I think the 

view I have taken is under the current system when the company 

is not doing a good job, shareholders have lots of ways to go after 

the company. There have been a number of compensation proposals 

that are on the proxies. When the company resists, they get a lot 

of publicity. So, that’s a lot of advice to the directors that there is 

a lot of publicity. 

So, in addition, shareholders do have to approve increases and 

option plans. Actually, it is a binding vote on checking some of the 

compensation. So under the current system the companies that are 

bad do get attacked, and with hedge funds now and activist shareholders, they really do get attacked. 

The firms that are doing a good job are left alone, and I think 

this bill will not do very much different to the bad companies, but 

it will affect the good companies. And I would prefer to wait and 

see what the new SEC disclosure does and let the market work. 

Mr. PERLMUTTER. So, I mean, really to summarize, you think, 

and I might not disagree with this. On a company-by-company you 

know annual shareholder meeting, the shareholders do have an opportunity to say, whoa. Let’s throw these bums out. Let’s cut their 

salaries in half, you know, speak up at the shareholder meeting. 

Do they really have that kind of opportunity? 

Mr. KAPLAN. They have the opportunity to speak up and to propose shareholder amendments or shareholder votes, yes. 

Mr. PERLMUTTER. Last question. There was all that conversation 

about capital fleeing. If I understand correctly, England already 

has a similar kind of process, but I just had some people in from 

the investment community yesterday concerned that all of a sudden a lot of companies are moving to the London Exchange, because they feel like they are treated in a better fashion. 

What is that all about? 

Mr. DAVIS. If that is directed to me. 

Mr. PERLMUTTER. To anyone. 

Mr. DAVIS. It was one of the points that I made. I think what 

has occurred in Britain is something of a grand bargain, if you will. 

And the bargain is we won’t put a lot of red tape on the corporations, but at the same time we are going to give shareholders significant authority. 

I would disagree with my colleague. I do not think shareholders 

have anywhere near the authority that they should have in this 

country, and in Britain they have given shareholders more authority at the cost of lower regulation. 

So, in effect, the advisory vote bill that we are talking about here 

is providing shareholders with the kind of tools they need to make 

the market work. 

The CHAIRMAN. One more round of questions. You mentioned, 

Mr. Kaplan, that there has to be a binding vote on options. By 

whose authority? 

Mr. KAPLAN. Yes, and again. 

The CHAIRMAN. No. It is a very straightforward question. 

Mr. KAPLAN. You want to increase? 

54

The CHAIRMAN. Whose authority? 

Mr. KAPLAN. It is a New York Stock Exchange listing requirement. 

The CHAIRMAN. Thank you. Sometimes when we are asking questions, we want factual answers. It is a New York Stock Exchange 

listing requirement. Did you oppose that New York Stock Exchange 

listing requirement? 

Mr. KAPLAN. I think that has been there for a long time. 

The CHAIRMAN. Well, I understand that. I have been here for a 

long time. That does not mean people do not oppose me when I run 

again. What does one thing have to do with the other? Please answer directly. We are not playing games with you. Do you think 

that should be revoked? 

Mr. KAPLAN. I honestly have not thought of that. 

The CHAIRMAN. Dr. Kaplan, you lose credibility with me here, because you cite something, frankly, which contradicts the principles 

you have stated. This is an exterior imposition on the corporation’s 

board of directors. It falls on the good and the bad companies alike. 

And I must say, you have more ability to distinguish those clearly 

than most of us do. 

But, it rains on the good and the bad alike. It would appear to 

violate many of your principles. It is there because the stock exchange has the power and you say you do not answer it. And I 

think that is because if you were consistent to your principles, you 

would be opposed to it, but then you could not cite it. 

I just want to elaborate on Dr. Bebchuk’s point and ask others. 

People have said, ‘‘Well, you know the question was whether we 

want to get Mr. Campbell’s nose under the tent’’, to mispronounce 

the metaphor. 

Mr. CAMPBELL. No one will get my nose under that tent, thank 

you. 

The CHAIRMAN. First of all, I just want to deal briefly with this 

notion of this is going to lead to that. Anyone who says that has 

never seen the Congress in action. Let us be very clear. Around 

here, Tuesday does not invariably lead to Wednesday. The notion 

that because we pass the bill that does one thing that is somehow 

going to lead to something else. 

That just does not make sense. It is an argument given by people 

who were opposed to something on its merits but do not want to 

say so. So they say, well it might lead to something else. And then 

the question is, well, how do you separate it? And Mr. Bebchuk 

gave the argument. 

I do not want to see stockholders voting on everything. But I do 

believe, and this is where I would differ with Mr. Castellani, he 

said, well, the boards of directors are getting better. But I do not 

remember a clear-cut admission that they were not very good before they started getting better from the corporate world. 

And I think it continues to be, and this is Warren Buffett as of 

2006 saying it is still the case that the relationship between boards 

of directors and CEO’s is so close that it justifies an exception, that 

you do not get the arms-length relationship there. 

The boards of directors do not have a relationship with the workers. We do not need shareholder votes on union contracts with suppliers, with others, but the CEO’s still, to a great extent, pick the 

55

directors. They have this very close relationship and what many of 

us are saying is that you can single out the CEO-board of directors 

relationship. 

The other question I would ask you is this. Because people have 

said, well, you have analogized it to those of us in Congress. As I 

recall, there were companies—I remember when Mr. Eisner paid 

Mr. Ovitz $150 million to make him go away quietly, and there was 

frustration, but there was no way to nominate opponents. 

Let me tell you this, enact a Constitutional amendment so that 

it is impossible to nominate anyone to ever run against me, and 

enact a rule that if I get any votes I win, and I will be the most 

independent-minded Member of Congress you have ever seen. 

So let me ask the panelists. Do you believe there is a justification 

for some shareholder votes in this case only on compensation in 

those cases where there is not any realistic shareholder democracy 

on the board? 

Let me ask Mr. Castellani and Mr. Kaplan. 

In cases where, under various State laws and corporate rules, 

there is no way to nominate an alternative member of the board 

of directors and board of directors members can be reelected even 

if they don’t get a majority vote. Do you still think that’s enough 

and that we don’t need to do anything else, Mr. Castellani? 

Mr. CASTELLANI. I’m not sure that I completely understand the 

question. 

The CHAIRMAN. Well, then I’ll restate it. I apologize. There are 

corporations, as I understand it, where the way in which the board 

is elected does not allow for outside nomination and does not require a majority vote. What’s the argument there for not allowing 

shareholders to have an advisory vote on the compensation? 

Mr. CAMPBELL. Will the gentleman yield? 

The CHAIRMAN. I’ll yield. 

Mr. CAMPBELL. I guess I would then ask the question why does—

The CHAIRMAN. I’ll get my answer first and then you can ask 

yours. 

Mr. CAMPBELL. All right. We’ll do that. 

The CHAIRMAN. Yes. 

Mr. CASTELLANI. Mr. Chairman, it really is an issue of who decides and what they decide. In this case, we are talking about directors who are elected by the majority. 

The CHAIRMAN. Excuse me, Mr. Castellani. That just so directly 

distorts my question. There are corporations where they were not 

elected by a majority of directors necessarily and where no one 

could nominate a competitive director. In those cases, how does the 

justification work? 

Mr. CASTELLANI. If the board operates correctly, this is not necessary. 

The CHAIRMAN. So that we don’t—if you think that whatever the 

board of directors does, however it’s constituted it’s okay, then say 

so, but don’t invoke, oh, there’s accountability, because there are 

boards where we know there is no practical way for dissatisfied 

shareholders to do anything. 

Mr. CASTELLANI. There’s a very practical way. 

The CHAIRMAN. What’s that? 

56

Mr. CASTELLANI. They can not own the shares. 

The CHAIRMAN. Okay. Then that’s the point that Mr. Ferlauto 

made. That’s the point that says if you don’t like the union, you 

can quit your job. The notion that you can ‘‘not own the shares’’, 

I think that’s a pretty inhospitable answer for the business community to be giving shareholders. If you don’t like it, sell your shares. 

Ms. Minow, do you have a comment on that? 

Ms. MINOW. I agree with you. The only thing that I know about 

investing is that you’re supposed to buy low and sell high. And 

when you are concerned that the stock is at a low because it’s depressed because of these various factors, it seems to me not just inhospitable, but it seems to me disingenuous to say just sell the 

shares when it should be easier for you to stay in the company and 

make a change. 

The CHAIRMAN. I’ll yield to the gentleman from California. 

Mr. KAPLAN. Can I ask a question? It depends under what circumstances the shareholders bought the shares. For example, the 

New York Times is, I think, closely held by the family, and so that 

is exactly one company. 

The CHAIRMAN. And you knew that going in? 

Mr. KAPLAN. You knew that going in. So if you knew it going in, 

I think it’s different. If you didn’t know it going in, that’s different. 

I think having the director require a majority vote and if the director doesn’t get it, he or she is thrown out, that’s a good thing. 

The CHAIRMAN. That’s a good thing, but you don’t think any government should impose it? Should a government impose it? I mean 

do you think that’s a good result; would it be okay for the government to impose it? 

Mr. KAPLAN. You know, my preference, again, is to see if the 

market— 

The CHAIRMAN. I understand that’s your preference. I understand. We all have our preferences, as in my case well known. Do 

you think— 

Mr. KAPLAN. I would prefer right now, given all the circumstances—I think the system is working. 

The CHAIRMAN. I understand that, Mr. Kaplan. But you have to 

give straight answers in my business sometimes. Is there a principle that would be violated? Do you have something you think 

would be a good result, and some people do it and some people 

don’t? 

You know, you said you’d talk about angst. Here’s where I disagree and then I’m going to yield to the gentleman from California. 

You talk about angst. Saying that the best way to do it is to let 

the bad companies be subjected to all that Sturm und Drang and 

all that—oh, there will be bad publicity, etc. 

If it’s a good result, why isn’t the transaction costs of going 

through it by this public campaign, and Ms. Minow yelling at people, and Mr. Felanto bringing a picket line, and all these people 

doing that, wouldn’t it be better if it’s a good result to have a government agency just clearly say, here’s what you should do? 

That was addressed to Mr. Kaplan. 

Mr. KAPLAN. I would just say Section 404, and I’m going to 

then—there are unintended consequences. 

57

The CHAIRMAN. Section 404 is very different than a clear cut 

thing that says you have a majority vote. Section 404 was broadly 

worded. I agree with Mr. Castellani; it should be changed by regulation. I think it’s being done. I yield to the gentleman from California. 

Mr. CAMPBELL. Mr. Chairman, on the argument that you just 

made, if an issue is that corporations do not—that people do not 

have the ability to nominate alternate directors and there’s not 

majoritarian voting, then why does this bill, why is not the proposal to have majority votes and the ability to nominate directors 

which would continue the path of allowing shareholders to— 

The CHAIRMAN. Does the gentleman want an answer? 

Mr. CAMPBELL. I do. 

The CHAIRMAN. It would be even more intrusive, and I think 

that’s the ultimate goal. I would say this; I hope that’s not where 

we go to. I don’t think it is where we will go to. If we were to have 

a series of advisory votes I would ignore it; people would build up 

to that. But this is less inclusive and it tries to—in general, my 

view is that the boards of directors, even those that have not 

been—were democratically elected, in most cases can be trusted at 

least not to have a conflict. 

I make an exception here because of what Mr. Bebchuk talked 

about, the mutually supportive relationship of the CEO and the 

board of directors. So if the gentleman is complaining that this is 

not more intrusive in the corporate governance, I’ll be glad to listen 

to his amendment at this juncture. 

Mr. CAMPBELL. And you’re very likely to hear it. I’d be curious 

to see— 

Mr. FERLAUTO. Mr. Chairman, I mean, to be quite frank, I would 

trade this for real shareholder empowerment through a vote that 

could replace directors. Unfortunately, the Congress does not have 

that power. It’s a State right that’s also regulated by the SEC. But 

we believe that ultimately proxy access, the ability for shareholders 

to nominate a director, will be a solution. 

But you don’t want to use that willy nilly, so that the way this 

really operates most effectively is to have an advisory vote that is 

a warning signal to directors that if they don’t change practice then 

the option is to be voted out. 

Mr. CAMPBELL. Mr. Castellani, you seem anxious. 

Mr. CASTELLANI. Well, I just wanted to make a point to the committee, and I hope that it’s not lost here because it is common within this panel, and I think within the business community, and with 

the Congress. 

Nobody is forced to own or invest in U.S. or foreign corporations. 

It is in the mutual interest of boards, of management, and of shareholders to be an attractive place for people to invest their money 

for return. All of this is about being responsible.

58

The CHAIRMAN. I appreciate that, Mr. Castellani. That’s what 

Ms. Minow was saying, and what I’m saying. Please don’t tell us 

that the answer is to sell the shares. Please, short of that, let’s give 

them an alternative. An advisory vote on compensation seems to 

me to be far less of an intrusive way to deal with it than to tell 

people to sell their shares. 

And now that I stand accused of being insufficiently intrusive 

into the affairs of corporate America, this hearing is adjourned. 

[Whereupon, at 1:43 p.m., the hearing was adjourned.] 

(59)

A P P E N D I X

March 8, 2007

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